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Fiftieth Anniversary
Federal Reserve Bank of Boston
Annual Report 1 9 64


B 4


, /




To the Member Banks of the
Federal Reserve Bank
of Boston

It is a pleasure to send you the 1964 A nnual R eport o f the Federal Reserve Bank o f B o sto n .
T his is the second o f tw o such R eports concerned with a significant A nniversary. As the 1963 A nnual R eport
recognized the Fiftieth A nniversary o f the Federal Reserve System ’s birth on Decem ber 23, 1913, so this R eport
com m em orates the G olden A nniversary o f the Federal Reserve Bank o f Boston, which opened its doors for
business on N ovem ber 16, 1914.
T o com m em orate its fiftieth birthday, the Boston Reserve Bank convened a C entral Banking Sym posium in
N ovem ber, 1964. Tw o o f the n a tio n ’s distinguished econom ists presented m onographs on issues o f concern to
the Reserve System. T hree o f their colleagues served as discussion leaders; while the H onorable G eorge W.
M itchell o f the Reserve System ’s Board o f G overnors com m ented on the views o f his predecessors on the p ro ­
gram . Because we believe th a t these papers represent a broad spectrum o f tho u g h t and opinion on contem porary
m onetary issues, and are therefore both significant and w orthy o f exam ination and study, we present the proceed­
ings o f the Sym posium as the m ajor portion o f this R eport.
T he final pages o f the R eport reflect a m easure o f the success with which the Boston Reserve Bank has pursued
its goal to increase the efficiency o f its operations while broadening its services to New E ngland. O ur D irectors
jo in me in extending gratitude to o ur officers and staff for their continued dedication, and to New E ngland’s
bankers and other business leaders for their generous cooperation.
F ebruary 10, 1965

P residen t


Central Banking
November 13, 196 4

P age

George H. Ellis, President, Federal Reserve Bank of Boston


Eli Shapiro, Professor of Finance, Harvard University


Henry C. Wallich, Professor of Economics, Yale University


James S. Duesenberry, Professor of Economics, Harvard University


Franco Modigliani, Professor of Industrial Management,
Massachusetts Institute of Technology


James Tobin, Sterling Professor of Economics, Yale University


The Honorable George W. Mitchell, Board of Governors
of the Federal Reserve System


George H. Ellis





Introductory Remarks
George H. Ellis
President, Federal Reserve Bank of Boston

O n N ovem ber 15, 1914, the Boston Sunday Globe

the other directors.

led its financial section with a three-colum n head ­

O n this Fiftieth A nniversary o f the opening o f

line, “ Boston Reserve Bank O pens T o m o rro w .”

the Boston Reserve Bank, let me quote one o f the

T he new institution, said the Globe som ew hat

m en present on opening day in 1914. As we dedicat­

grandiloquently, “ will in all probability prove the

ed o ur new building nearly forty years later, he

m ost powerful bank ever located in New England —

said: “ the Federal Reserve System seems to have

b u t there will be none o f the feasting, and ju b ila ­

been born in argum ent, n urtured in controversy and

tion, and social-gathering festivities which usually

m atured on criticism .”

attend the opening o f new ban k q u a rte rs.” The

T he correctness o f th at observation is witnessed

Globe continued, “ T he sign in large gilt letters —

by the fact th a t Congress has am ended the Federal

Federal Reserve Bank — is a b o u t all th at (citizens)

Reserve Act in som e way, m inor o r m ajor, in alm ost

will see o f the great financial institution which be­

every one o f o ur fifty years’ existence. And over

gins in the h eart o f the business district to m o rro w .”

those years, Congressional hearings on Reserve

T he Globe's w riter m ust surely have had a tele­

System m atters have resulted in publication by the

scopic eye, for there was little in the scene im m edi­

G overnm ent Printing Office o f over 28,000 pages o f

ately before him to w arrant the phrase “ great finan­

testim ony and exhibits. T his record flatly c o n tra ­

cial institu tio n .” The birth o f the Reserve Bank was

dicts the statem ent m ade in C ongress in January,

a hasty and decidedly hum ble affair. T he entire staff

1964, th a t “ m ore than thirty years have gone by

totaled 17 — three officers and 14 “ clerks.” T he

since the Federal Reserve System received any

“ banking house” consisted o f two room s, below

legislative a tte n tio n .”

street level, on the sam e corner where our front

Partly by form a] C ongressional changes, but also

d o o rs are now located. In the two room s were a


few tables and chairs, a couple of “ cages,” three

changing needs, opportunities and capabilities, the

im portantly





h atrack s, and a single telephone with an extension.

Federal Reserve has steadily evolved into the Sys­

T here were no vaults, and the b a n k ’s recently

tem as we know it today. And the m ore I participate

arrived capital and currently arriving reserves of

in the argum ents, controversy an d criticism sur­

m em ber banks were being held across the street in

rounding this process o f evolution the m ore I appre­

the subtreasury. V irtually the whole Reserve Bank

ciate the im portance o f m utual understanding and

w orking organization had been throw n together

a free-flowing interchange betw een the Federal

w ithin three weeks as a result o f a direct order to

Reserve and the public, particularly those who have

open on N ovem ber 16 given by Secretary o f the

a special need to know a b o u t the System.

T reasury M cA doo, w ho was also chairm an o f the

F o r m y part, 1 find it helpful to rem em ber that

new Federal Reserve Board, T he rental and furnish­

the F ederal Reserve m ust operate first as a service

ing o f the low-level banking quarters, and the em ­

organization. By its currency and coin, check clear­

ploym ent o f the m odest staff, were m ade possible

ing, wire transfer, fiscal agency, and other functions

only by a personal loan o f $5,000 from one o f the

it m ust knit together — integrate or federate —

d irectors secured by the signatures o f several of





14,000 independent,


A Critique of Central Banking
ow ned,


com petitive

com m ercial


W hile individual banks operate for profit, the ban k ­
ing system as a whole m ust operate for the general
public welfare.
Once the banking system is organized a n d ser­

prom ised an op p o rtu n ity to express a personal
conviction o r tw o a t the close o f the m eeting.
N ow , to provide a fram ew ork for the sym posium ,
let me quote from a new publication by the Federal
Reserve Bank o f M inneapolis:

viced so th a t it operates as a sm oothly functioning
system the F ederal Reserve m ust exercise its C on-

. .th e m ajor questions o f the day resolve

gressionally assigned responsibilities o f directing

them selves into a debate over the course and

m onetary policies in tune with fiscal and debt m a n ­

progress o f evolution — the evolution o f a

agem ent policies in search o f a grow ing but stable

central bank. T o oversim plify the debate som e­

econom y with a sound dollar.

what, we m ight describe two im aginary ‘p o la r’

T his is the point o f view th at led us to arrange

positions on th e subject o f change. Call the first

to d ay ’s sym posium , o f which you are a part. We

group the ‘H elp-Stam p-O ut-O ld-V estiges C lu b .’

seek to provide a fram ew ork in which N ew E ng­

T heir platform is sim ply this: We have seen the

lan d ’s academ ic authorities on m onetary m atters

direction o f institutional evolution, and we know

m ay express them selves in relation to the past fifty

it has em bodied the necessities o f o ur past ex­

years, the present, and the future o f central banking

periences. L et’s now carry it to its logical ful­

in our country during th e next fifty years.

fillm ent in one legislative swoop. A fully cen­

As your program tells you, tw o distinguished p ro ­
fessors will present prepared papers, one dealing

tralized, fully governm ent-controlled Federal
Reserve System is w hat we need.

with structural aspects o f the System, the other with

“ O ur second polar position is th a t o f the ‘H elp-

policy aspects. These papers have been subm itted

Preserve-O ur-H eritage C lu b .’ They argue: We

to three o ther professors, equally distinguished, who

have already evolved as far as we o ught to go.

will act as initiators o f the discussion. As anchor

The vestiges o f regionalism and m em ber-bank

m an we have invited G overnor G eorge Mitchell

voice in the System contribute positively to its

both to participate in the general discussion and

strength and effectiveness. T o proceed further

to present a form al com m entary o f his ow n a t the

tow ard a ‘pure central b a n k ’ would be to retreat

close o f the meeting.
I have accepted the role o f m o d erator-chairm an

back dow n the evolutionary scale from the
functional high-point we have now reached.

w ith som e reservation, because I should very m uch

“ These are, o f course, extrem e positions, and

like to participate in the discussion. A s a rew ard for

m ost o f the views encountered in practice m erely

abstaining from the general debate, I have been

‘ten d ’ tow ard one or the o th e r.”

Structural Changes
in Central Banking
Eli Shapiro
Professor of Finance, Harvard University*

T he Fiftieth A nniversary o f the Federal System

T he U nited States is not alone in enjoying the

will undoubtedly go dow n in the annals o f history as

fruits o f research into m onetary policy. The w orld

the m ost prepared-for G olden A nniversary on rec­

has w itnessed a reaw akening o f interest in m onetary

ord. I do n o t wish this statem ent to be m isunder­

policy and central banking structure. For in ad d i­

stood and lead M r. W right P atm an to a n o th e r

tion to the volum inous literature produced in this

searching exam ination and au d it o f the expense ac­

c ountry, we have had broad m onetary investiga­

counts o f the Federal Reserve System and the region­

tio n s in other countries. Probably the best know n,

al Reserve Banks. W hat 1 have in m ind is th at at

though n o t the only ones, being the Radcliffe C o m ­

this tim e we have the benefits o f a m assive a m o u n t

m ittee report in the U nited K ingdom and the recent

o f research and recom m endations stem m ing from

publication o f the Royal C om m ission on M oney

the extensive investigations into central banking and

and C redit prepared in C anada.

m onetary policy in the U nited States in the past
ten o r m ore years.

A t the risk o f saying too m uch by saying too little,
it w ould appear to me th at out o f this welter of

I do not include the predictable, annual exam ina­

investigations and research on the role o f and per­

tion o f m onetary policy on the occasion o f the re­

form ance o f m onetary policy, two basic them es

view o f the Econom ic R eport o f the President.

have been enunciated with respect to the stabilizing

R ather, I am referring to the results o f large scale

role o f m onetary policy.

C ongressional, private com m ission, and individual

O ne point o f view appears to argue th at m onetary

studies th a t have been concluded. F rom the C o n ­

policy c an n o t perform a short-run stabilization role.

gress, we have the benefits o f the so-called D ouglas

W ithin this view, one can distinguish two diverse

and P atm an reports, the Byrd investigation into the

strands. T he first o f these argues th at money is o f

financial system o f the U nited States, the Joint

secondary im portance in explaining the course o f

E conom ic C om m ittee efforts resulting in the h ear­

econom ic activity. A dherents o f this point o f view

ings and re p o rt on E m ploym ent, G row th and Price

w ould ten d to look to a variety o f non-m onetary

Levels an d , m ore recently, the hearings and report

m easures to insure short-run econom ic stabilization.

o f the Subcom m ittee on D om estic Finance o f the

The second strand, probably best represented by

H ouse Banking and C urrency C om m ittee. M ention

Professor M ilton Friedm an, holds th a t variations

should also be m ade o f the report and research

in the rate o f expansion o f m oney are one o f the

studies o f the C om m ission on M oney and Credit.

m ost im p o rtan t sources o f econom ic instability.

F inally, the long aw aited publication o f the m one­

But, because we know so little a b o u t short-run

tary history o f the U nited States by F riedm an and

econom ic stability, we m ust not use m onetary policy

Schw artz has added a challenging and provocative

for sho rt-ru n stabilization purposes. Because o f our

study to research into m onetary policy.

ignorance a b o u t short-run changes in econom ic
activity, the use o f m onetary policy for short-run

* 1 wish to express my thanks to Professor W. L. W hite of
M assachusetts Institute o f Technology and to Mr. K arl
Schriftgiesser and Dr. R obert Z. Aliber o f the C om m ittee
for Econom ic D evelopm ent for their help. The views ex­
pressed are solely my own.


stabilization purposes creates the risk o f exacerbat­
ing ra th e r th an stabilizing econom ic activity.
Because m onetary policy is a powerful tool, and

A Critique of Central Banking
its use for short-run stabilization tends to aggravate

can be im proved is to develop a m echanism through

instability, discretionary exercise o f m onetary policy

which closer integration o f m onetary and other

should be avoided. In its stead a fixed rule calling

stabilization policy m easures can be coordinated.

for a steady rate o f grow th in the m oney supply

T his leads me to stress the need for and desirability

should be substituted. T he adherents o f this policy

o f changing the institutional arrangem ents prevail­

prescription suggest th a t the provision o f a stable

ing in the central banking system in this country.

long-run m onetary environm ent for the econom y

Significant changes have taken place in o u r explicit

would provide the optim al environm ent for the

econom ic goals and in the array o f policy in stru ­

achievem ent o f grow th, price stability, and high

m ents available to attain these goals as well as

em ploym ent.

changes in the political setting. T hese developm ents

T he second m ajor view with respect to m onetary
policy and, in my judgm ent, the prep o n d eran t view

require th at we re-exam ine the organization o f the
governm ent’s stabilization agencies.

o f econom ists, is th at m onetary policy can exert an
im p o rtan t influence in the short-run on econom ic

Changing Goals and Instruments

activity. W hile there are still som e very large gaps
in o ur understanding o f how m onetary policy w orks,

A s an exam ple o f the changes in goals and in pol­

1 would expect th a t a ch aracterization o f the process

icy instrum ents to which I refer, when the Federal

would run som ething like this: M onetary policy

Reserve Act was passed in 1913, the only explicit

operating through the reserve base has a direct

goal o f econom ic policy was price stabilization.

influence on interest rates and credit conditions.

Since this was the only goal, and the only widely

C hanges in credit conditions or the financial vari­

accepted instrum ent for achieving this goal was

ables affect the volum e o f expenditures. But, although

m onetary policy, there was no conflict o f agencies

m onetary policy does have an influence on econom ic

and no need for integrating policy objectives. W ith

activity, o ur knowledge o f the m agnitude o f th a t in­

the passage o f years, however, a n o th e r m ajor o b ­

fluence and the time required to m ake it effective is

jective o f policy, nam ely full em ploym ent, was in tro ­

anything but perfect. But, because m onetary policy

duced into the body politic. D uring this sam e period

does lend itself to rapid action and can be finely

fiscal policy or the relationship betw een federal

a dapted to the degree o f tightness or ease which is

expenditures and revenues w as recognized as a

required, it is prospectively an im p o rtan t com ponent

m ajor co n trib u to r to the a tta in m en t o f these goals.

o f the kit o f short-run econom ic stabilization tools.

As the desire for econom ic grow th was added to the

I w ould classify m yself as belonging to th a t sec­

a rray o f goals, both sets o f instrum ents were seen

ond g roup of econom ists who believe th a t m onetary

to be useful in attaining these goals. How ever, the

policy can usefully be em ployed as a short-run

increase in the num ber o f goals gave rise to the

stabilization m easure. However, if p ast perform ance

possibility of conflicts am ong them . T here thereby

is to be im proved upon, it is im perative th at our

arose the need to m ake choices.

know ledge is im proved so th a t past sources o f erro r

Since policy decisions are m ade by different agen­

m ay be elim inated. F urther, changes in the institu­

cies an d since these decisions require trade-offs to be

tional arrangem ents surrounding the central bank

m ade am ong the various goals, our stabilization

and changes in m ethods o f m onetary m anagem ent

strategy requires coordination am ong th e agencies

are undoubtedly required if the sho rt-ru n stabiliza­

to ensure the pursuit o f a com m on end. If one

tion role o f m onetary policy is to be im proved. I

agency takes price stability to be the critical goal

confine my rem arks to these latter points,

and pursues policies a p propriate to th e attain m en t

ve th at one avenue through which the short-

o f th a t goal, while other agencies deem full em ploy­

lization perform ance o f m onetary policy

m ent o r econom ic grow th to be the m ore im portant


Structural Changes in Central Banking
objective o f policy, we will observe conflicting

the regional needs o f the c ountry were incorporated

policies which m ay indeed prevent the attain m en t

in the 1913 Act.

o f any o f these goals. F o r exam ple, if the central

In 1935, the only m ajor overhaul o f the Federal

bank, in its interest in price stability, m aintains a

Reserve System was enacted. In general, the 1935

m onetary policy which dam pens dem and, the fiscal

A ct centralized pow er in the Federal Reserve Board.

policy o f the governm ent in attem pting to offset

A t th e sam e tim e, T reasury representation on the

this policy will be forced to ru n larger deficits. W ith

Board was term inated. The Federal Reserve Board

a deficit o f sufficient size, it m ay be possible to offset

was given power to review changes in rediscount

this restrictive m onetary policy. However, we get

rates recom m ended by the regional Banks m ore

a larger deficit th an w ould otherw ise be necessary

frequently, and the B oard was given sole control

to achieve and m aintain full em ploym ent and also

over the variable reserve requirem ent th at was

reduce national saving. In addition, the restrictive

enacted. The O pen M arket C om m ittee, the m ost

m onetary policy results in higher interest rates and

influential body o f the Federal Reserve System,

by lessening investm ent results in a lower grow th

was to be com posed o f twelve m em bers — the

rate at th a t full em ploym ent level. I cite this ex­

seven Board m em bers and five Presidents o f the

am ple to m ake clear the fact th at the independent

regional Reserve Banks — o f which the New Y ork

pursuit o f different goals m ay m ake m ore costly the

Bank was to be a p erm anent m em ber.

attain m en t o f any one o f them .
Just as these goals an d instrum ents have changed

W hile further centralization o f central banking
was reflected in the 1935 legislation, the regional

over tim e, so too have our notions o f the a p p ro ­

Banks were still left with an im p o rtan t participation

priate structure o f the central bank in this country.

in the policy m aking role. T his review o f the evolu­

It is well to recall th a t the A ldrich C om m ission p ro ­

tion o f the central bank in this country is m eant to

posed a central banking system to be called the

suggest th at we have no idee fix e on w hat is the “ per­

N ational Reserve A ssociation, a corp o ratio n with

fect” structure for a central bank. A nd in practice,

capital subscribed by its m em ber banks and c o n ­

as o u r goals have changed, as o ur instrum ents o f

trolled by them . A m ong the issues fought in the

stabilization policy have been increased and as our

1912 cam paign was the question o f the form which

political notions have altered, the character o f the

central banking was to tak e in this country. W ith

central bank has been changed.

their victory in th at election, the D em ocrats, pushed
vigorously by President W ilson, passed the Federal
Reserve Act. T he party in pow er denied the com ­

What Degree of Independence?

mercial banks the right to be represented on the

C ontrol over the m oney supply o f the nation is a

Board and was responsible for m aking the Secretary

vital operating responsibility for stabilization in our

o f the T reasury the C h airm an o f the Federal Reserve

econom y. As such it is desirable th at the central

Board, th u s establishing the principle th at the

b a n k ’s activities should be h arm onious with the

m onetary auth o rity was a public body.

o ther stabilization activities o f the governm ent.

In the inevitable com prom ises a tten d an t on this

H ow this is done is perhaps less im p o rtan t than

conflict, a com plex structure called the F ederal

th a t it should be done. At one extrem e it m ay be

Reserve System was created. C om m ercial banks

suggested th at the central bank should be a part o f

were represented as ow ners o f the regional Reserve

the T reasury. O n the other hand, there are those

Banks. T he officers o f the latter, in tu rn , while

who would preserve the auto n o m y o f the central

elected by th e com m ercial banks, were subject to

bank from any governm ent pressure. O ur own cen­

approval by the Federal Reserve Board. T hus b a n k ­

tral bank occupies a position m id-w ay between

ing representation was assured and concessions to

these extrem es. It operates under a Congressional


A Critique of Central Banking
m andate w hich can be changed should the Congress

III. O ccupational and geographical qualifica­

be dissatisfied with the F ed's co n d u ct o f policy.

tions for B oard m em bers should be elim inated.

Since the C ongressional A ct is broad in scope and

Instead, the statute should stipulate th a t m em ­

provides wide discretion to the m onetary authority,

bers shall be positively qualified by experience

there rem ains a great deal o f latitude w ithin which

or education, com petence, independence, and

the Reserve System can operate. O ne o f the m ajor

objectivity com m ensurate with their responsi­

obstacles to the enactm ent o f these changes has been

bilities. Salaries o f top officials th ro u g h o u t the

the difficulty o f determ ining the ap p ro p ria te degree

governm ent should be sharply increased, and in

o f independence for the central bank. F o r it m ust

view o f the gravity o f their responsibilities, m em ­

be evident th a t co ordination reduces the inde­

bers o f the

pendence o f each o f the individual agencies charged

com pensated a t the highest salary level avail­

Board o f G overnors should be

with responsibility for stabilizing activities.

able for appointive offices in the governm ent.

It is precisely because o f this degree o f freedom
open to the central bank th a t we m ust strive to e ra d ­

IV. T he present statutory Federal A dvisory

icate any elem ents o f d o u b t a b o u t its responsiveness

Council should be replaced by an A dvisory

to the public will and the discharge o f its obligations

C ouncil o f twelve m em bers appointed by the

as a governm ent agency. A nd it is to this end th a t

Board from nom inees presented by the boards

I will now suggest som e changes in the present

o f directors o f the Federal Reserve Banks. A t

structure o f our central bank.

least two nom inations, not m ore than one o f

Because o f historical anachronism s, the present

them from any single sector o f the econom y,

structure o f our Federal Reserve System contains

should be presented by each Bank. T he Board

m any vestigial rem ains which positively do it no

should m ake its selection, one from each district,

good and, in point o f fact, lead to suspicion as to its

in such a m anner as to secure a council broadly

ultim ate m otivations. Precisely because 1 am in ter­

representative o f all aspects o f the A m erican

ested in m aintaining the presence o f the central bank

econom y. C ouncil m em bers should serve for

m id-w ay between the polar positions m entioned

three-year term s, not im m ediately renewable.

above, I support the follow ing recom m endations

T he Council should m eet with the B oard o f

on F ederal Reserve structure which were put forth

G overnors a t least twice a year.

by the C om m ission on M oney and C redit.
V. A n im p o rta n t internal source o f advice
should be further recognized and strengthened.
T he law should form ally constitute the twelve

Recommended Structural Changes

Federal Reserve Bank Presidents as a confer­

I. T he C hairm an and V ice-C hairm an o f the

ence o f F ederal Reserve Bank Presidents, to

Board o f G overnors o f the Federal Reserve

m eet a t least four tim es a year with the Board,

System should be designated by the President

and oftener as the Board finds necessary.

from am ong the B oard’s m em bership, to serve


term s

coterm inous



P resident’s.

VI. The d eterm ination o f open m arket policies
should be vested in the Board. In establishing its
open m arket policy the Board should be required

II. The Board o f G overnors should consist o f
five m em bers, with overlapping ten-year term s,
one expiring each odd-num bered y ear; m em bers
should be eligible for reappointm ent.

to consult with the twelve Federal Reserve
Bank Presidents.
T he determ ination

o f reserve requirem ents

should continue to be vested in the B oard. In


Structural Changes in Central Banking

m ission on M oney and Credit. On the issues o f

should be required to consult with the twelve

co o rdination o f econom ic policies, the views o f the

F ederal Reserve Bank Presidents.

m ajority o f the subcom m ittee appear to be sim ilar



requirem ents


to those o f the Com m ission. T here are two differ­

The present form o f capital stock o f the

ences which do tend to stress the thin line between

Federal Reserve Banks should be retired. In ­

independence and coordination. U nlike the C om ­

stead, m em bership in the System should be evi­

m ission on M oney and Credit, the Patm an m ajority

denced by a non-earning certificate for each

group w ants the Fed to file “ a statem ent o f reaso n s”

m em ber bank.

if its m onetary views and actions differ from those
recom m ended by the President, while the C o m ­

By incorporating the aforem entioned changes in

m ission on M oney and C redit would have the

the structure of the Federal Reserve System , we

President issue a supplem entary statem ent on in­

would confine voting on the O pen M arket C om ­

consistent use o f any o f the instrum ents. O ne does

m ittee to the sam e publicly appointed m em bers

w onder w hether the Fed would have any inde­

who have the only votes when reserve requirem ents

pendence if the subcom m ittee’s proposal th a t the

or rediscount rates are at issue.

sense o f C ongress should be expressed, “th at the

P ut differently, these recom m endations if enacted

F ederal Reserve operate in the open m arket so as

would be useful in accom plishing one or m ore o f

to facilitate the achievem ent o f the P resident’s

the follow ing purposes; to im prove c oordination

m onetary policy,” were enacted.

o f stabilization policy (principally item s I and VI),
to im prove perform ance (item s II, III, IV and V)
and to ullay any suspicions a b o u t the public role

Bank Examination and Supervision

o f the central bank (item V II and item s III and IV).
I note th at the recom m endations put forth will no

It has been suggested by m any thoughtful officials

d o u b t be described a t the w orst as nationalizing the

o f the Reserve System th a t the rem oval o f voting

banking system. A very slight im provem ent in

responsibility from the Reserve Bank Presidents

assessm ent would assert th a t the Fed has lost its

m ight result in their resignation from the System.

independence. I would not characterize these recom ­

The costs o f such an outcom e could be very high

m en d atio n s in either o f these ways. R ather, I would

since the training and stature o f m any o f these

say such arrangem ents should aid us in attaining

officials is extrem ely valuable. T herefore I would

m ore rational policy-m aking at the governm ental

urge a very deliberate evaluation o f the likelihood

level. In my judgm ent, coordination o f all econom ic

o f such a prospect before I would enact legislation

policies would be the direct responsibility o f the


Executive. And in this structure there is no role for

present structure o f the O pen M arket C om m ittee.

recom m endations




bank com pletely independent o f the

In order to free m em bers o f the Board o f G o v ­

elected Executive. This should not be m isunder­

ernors from the num erous dem ands m ade on their

stood to m ean a curb on the Federal Reserve

time, thereby enabling them to concentrate on the

au thorities b u t rather the m aintenance o f the F ed’s

p roper determ ination o f m onetary policy, I would

a central

independence in the Executive family subject to

urge consideration o f a suggestion m ade by G o v er­

the constraint o f coordinated decisions on goals.

nor R obertson. Bank exam ination and supervision

T he above generalizations m ay seem to be m ore

as well as issues pertaining to bank structure should

vague th an they are. It m ay be useful, therefore, to

be rem oved from the Board and given to a newly

contrast the P atm an subcom m ittee “ proposals for

form ed Federal Banking C om m ission which w ould

fu rth er consideration” with those o f th e C om ­

perform the functions now done by the Board o f


A Critique of Central Banking
G overnors, the C om ptroller o f the C urrency and

the upsw ing. In my judgm ent, this hesitancy to

the F D IC . T he latter organizations would disappear.

tighten the reserve positions o f the banking system

In addition to these recom m endations concerning

stem s from their concern a bout the response o f the

the organization o f the Federal Reserve System,

bond m arket to such action.

I w ould like to conclude m y com m ents with som e

As I see it, the prim ary function o f the Federal

suggestions concerning the execution o f the policy

Reserve System is to determ ine the ap p ro p riate level

decisions by the Board.

o f bank reserves. However, in a banking system
with 14,000 institutions, m any o f which are small

The ‘Right’ to Secure Reserves

unit banks, there should be a m echanism to assure
their liquidity. If the discount w indow were m ade a

The provision o f reserves available to the banking

right instead o f a privilege, this liquidity would be

system should be determ ined in a longer run con­

assured to the individual bank and the follow ing

text th a n appears to be th e case at the present tim e.

two advantages would result. By allow ing each bank

Preoccupation with the m inute variations in the

the right to rediscount, the Fed need no longer be

financial m arkets tends to cause erratic behavior on

concerned a b o u t tem porary losses o f liquidity to

the p art o f the Fed and subjects these m arkets to

individual banks as it pursues a policy o f reducing

uncertainties which in m y opinion are not helpful

the reserve base. The right to secure reserves m ight

either to the outcom e o f m onetary policy or to the

also have the effect o f encouraging m ore v enture­

effective functioning o f these m arkets.

som e lending on the p art o f com m ercial banks as

I believe th at the bond m arket is m ore viable than

they would now be protected from a reduction in

is suggested by the F e d ’s alm ost m inute concern

liquidity in the event th at som e o f these loans are

with it. M oreover, the concern with the state o f

not payable at m aturity for cyclical, local o r regional

the bond m arket appears to me to constrain the

causes. Insofar as this shifted the lending practices

Fed in pursuing m onetary policies which m ight

o f the n a tio n ’s com m ercial banks tow ards m ore

substantially affect bond prices. In this sense I agree

venturesom e loans, it may well con trib u te to m ore

with the C om m ission on M oney and C redit report

rapid econom ic grow th.

when it states “ the m onetary authorities should
m ake full use o f the fact th at m onetary m easures
can be varied continually in either direction and
reversed quickly a t their d iscretion.”
If, in fact, our econom ic system contains m ore

Concerns of the Next Half Century
However, as it is the responsibility o f the Federal
Reserve System to control the reserve base, any

rigidities than was true in the past, I believe a m ore

increm ent to reserves over the target established by

active response to projections in the rate o f change

the central bank would have to be offset by co rre ­

o f econom ic activity m ay be desirable. F o r if the

sponding open m arket sales. In retu rn for the right

Fed delays its action in the face o f an increasing

to rediscount, a penalty rate, conceivably progress­

num ber o f signs o f recession, and then later reacts

ing with the extent o f the rediscounting, would be

with an overactive policy o f increasing reserves, it

exacted. A n alternative m echanism to m aintain the

tends to get the w orst o f two w orlds. T h at is to say,

control o f rediscounting and to assure control over

unem ploym ent is larger th an it need be, and the

total reserves to the m onetary a uthorities would be

subsequent increase in econom ic activity tends to

to provide the right o f rediscount to a bank only if

be associated with m ore price rise th an is necessary.

its assets do not increase while it rem ains in debt

T he latter need not occur but as I view the postw ar

to the Reserve Bank.

record it has in fact occurred because o f the caution

It is my plaintive hope on this Fiftieth A nniversary

exercised by the Fed in putting on the brakes during

th a t when the 100th A nniversary com es a b o u t the


Structural Changes in Central Banking
speaker w ho will th en perform will be able to point

stantially im proved o u r know ledge o f the channels

with pride to the accom plishm ents o f the fifty years

through which m onetary m easures affect expendi­

ahead o f us now . I w ould hope th a t he could point

tures. T his is the jo in t responsibility o f the central

to a change from concern with daily m em ber bank

b a n k and financial econom ists. T here can be little

reserves, interest rates, and financial m arkets, to a

responsible com plaint with Federal Reserve co n ­

concern for longer-run m easures o f the perform ance

cerns and actions unless one has the knowledge of

o f the econom y, e.g. prices, em ploym ent and output.

which other concerns and actions would be m ore

F o r this to be true, it will be necessary to have sub­

ap p ro p riate under given conditions.


Central Banking in Relation to Growth
and International Finance
Henry C. Wallich
Professor of Economics, Yale University

The Federal Reserve Bank o f Boston is to be c o n ­

feel m ore secure and save less. But on balance I

gratulated on its choice o f a topic related to eco­

would conclude th at the central bank w orking for

nom ic grow th. T here are som e who believe th a t

stability is a disguised friend also o f em ploym ent

little love is lost between central bankers and

and growth.

grow th. But as I hope to show, the relation has not

Obviously there are enough uncertainties o f analy­

been as platonic as all that. C entral bankers have

sis here, to say nothing o f differences on policy.

been faithful to grow th, in their fashion.
Stability o f course has been central banking’s first

M onetary

policy’s m any dim ensions, m oreover,

provide the contending parties with a wealth o f am ­

and abiding love. A nd it seems useless to me to

m unition. If the m oney supply has moved a p p ro p ri­

hush up the fact th a t som ething o f a conflict exists

ately by one definition, it surely has n o t by another.

between grow th and stability. W hat one can claim

If the central bank has perform ed well in term s o f

legitim ately, I believe, is th at this is a short-run

the volum e o f credit, it m ay be judged not to have in

conflict which disappears in the long run.

term s o f interest rates. Here are opportunities for

In the short run, a little inflation will alw ays p ro ­

high level controversy, and the Federal Reserve has

duce a little m ore em ploym ent and o utput. The doc­

got m ore o f it th a n any other governm ent agency.

trine o f forced savings, and the structuralist theory


th a t holds sway in Latin A m erica, imply th at these

M eltzer . . . all

gains can be perpetuated. But in the long run, invest­

A nniversary.”


Friedm an,
1 can

Patm an,

B runner

is “ H appy



m ent inflation often shifts to cost inflation, and in

W hat besides helping to m aintain cyclical and price

any case the econom y probably pays for its early

stability a t a high level o f em ploym ent can the cen­

gains with subsequently m isallocated resources, dis­

tral bank do for grow th? It is not given to general

oriented incentives, weakened savings habits, and

credit controls to becom e reallocators of resources,

m ounting balance o f paym ents trouble.

and th at is w hat grow th calls for. This is a jo b p ri­

Price stability avoids these troubles. M ore posi­

m arily for the tax system , assum ing, as I do, th at

tively, it reduces risks and presum ably lowers the

it is ap p ro p riate for a m arket econom y to im ple­

rate o f return investors require to com m it them ­

m ent a grow th policy through the political process.

selves. By itself, this should increase the rate o f

Selective credit controls m ay have som ething to

investm ent. If we lim it our sights to th at period for

contribute, although probably m ore in developing

which the golden-age m odel-builders will perm it

countries than in the U nited States, where the credit

us to say th at this added

investm ent increases

system already irrigates the entire econom y with

W hether stability also increases the rate o f saving

are engaging in a good deal o f selective credit c o n ­

grow th, we can say so.

liquidity pretty effectively. As a m atter o f fact, we

is perhaps m ore doubtful. A consum er survey seems

trol as it is, guaranteeing credit to hom e owners,

to show th a t consum ers save principally for a nest

insuring depositors, helping veterans, farm ers, and

egg or a rainy day, not for som e specific outlay. If

foreigners, but it is not done by the central bank,

the central bank im proves the w eather o f the future

and we do not call it m onetary policy.

by disspelling clouds o f uncertainty, consum ers m ay

The corporate incom e tax, as a practical m atter,


Central Banking in Relation to Growth
to d ay insures m arginal b a n k loans to the extent o f

have n o t had m uch luck with it.

a b o u t 50 percent o f their value. It m ight be w orth

It w as tried, after a m an n er o f speaking, in 1959

exam ining w hether this device could be given an

and 1960. But a t th a t tim e, th e balance o f paym ents

anti-cyclical twist. Banks th a t in slack periods suc­

deficit an d fear o f continued inflation were very

ceed in raising their total loans m ight be allow ed to

m uch in the foreground. T hus m onetary policy

a d d a higher percentage o f th e increm ental loans to

could not be as easy as the tight fiscal policy would

their valuation reserves. T h at w ould be a form o f

have required. Perhaps there were extenuating c ir­

m onetary policy, but also not by the central bank.

cum stances. T he pow erful investm ent boom o f the

Im provem ents in the credit m echanism can som e­

m iddle fifties and the early and vigorous up tu rn

tim es be prom oted by the central bank. I believe

from the 1958 recession m ade it possible to think,

th a t officers o f the Federal Reserve Bank o f Boston

up to mid 1960, th at the-econom y still possessed a

have played a role in establishing developm ent credit

strong tendency tow ard full em ploym ent at the

corp o ratio n s in the New E ngland states. G iven the

then existing full em ploym ent budget surplus. Per­

enduring financing problem s o f sm all businessm en,

haps the m agnitude o f th at surplus, then considered

o f college students, an d others, surely we have n o t

a rather nebulous variable, was underestim ated.

yet reached the end o f th a t road. But again, th a t is

But w hatever the reasons, the fact rem ains th at

n o t m onetary policy.

while inflation was scotched and ultim ate balance

By expanding the m oney supply, w ithin the limits

o f paym ents disaster avoided, full em ploym ent was

set by stability, th e central bank does in fact enable

not reached. The effort to speed up grow th by

the banking system to finance a given volum e o f

supplying additional savings through the budget

investm ent. How m uch o f this it can do depends on

foundered in the recession o f 1960.

the incom e velocity o f m oney, which tends to be
lower in countries with stable prices. In the U nited
States, with the m oney supply grow ing at the sam e

A New Tool of Monetary Policy?

rate as the econom y, and a G N P velocity o f about

Since th at tim e, the conception has not been given

4, the average annual am ount o f financing th at the

up, but the mix has been better adjusted to the

banking system can do through debt m onetization

circum stances o f the econom y. Fiscal policy m ost

is som ew hat larger than average a n n u al additions

o f the tim e still has m aintained som e full em ploy­

to inventories. W hether the desire o f firms and

m ent surplus, by the som ew hat over-precise stan d ­

households to hold a substantial fraction o f annual

ards o f th a t concept. If full em ploym ent were

incom e in the form o f m oney induces them to in­

reached, th e budget w ould accordingly generate

crease also their total saving is o f course hard to say.

some savings that presum ably would be applied to

By all these devices, the central bank can, and in

d eb t repaym ent. But these savings, which could

the U nited States surely do es, m ake a contrib u tio n

serve to increase full em ploym ent investm ent, would

to grow th. The m agnitude is im possible to specify,

be a good deal smaller. M onetary policy, while far

b ut one m ay perhaps conjecture that, if the co n ­

from tight, has been under balance o f paym ents

trib u tio n should greatly exceed one-tenth o f one

c onstraints and has not been able to co ntribute to

percentage point o f the grow th rate, Ed D enison

expansion as m uch as it m ig h t T he full em ploy­

w ould be surprised.

m ent grow th rate is som ew hat reduced by the new

M onetary policy becom es potentially m ore pow ­

mix, b u t the chances o f reaching and staying a t full

erful when it operates in harness jo intly with fiscal

em ploym ent have been im proved. In any event, we

policy. The notion o f the grow th-oriented


have been fortunate in experiencing certain m one­

bringing together tight budgets and easy m oney,

tary surprises th at have given econom ic grow th an

is a fam iliar one. But except during the 1920’s, we

unexpected boost.


A Critique of Central Banking
W hen R egulation Q was changed to perm it pay­

equilibrating instead o f rem aining a m ajor source o f

m ent o f up to 4 percent interest on tim e deposits,

instability. U nder such conditions, m onetary policy

balance o f paym ents considerations were in the

would indeed becom e prim arily a m eans o f c o n ­

foreground. T here was real fear o f a rise in other

trolling the international capital balance.

rates. T h at higher tim e deposit rates w ould bring

It is w orth rem em bering th at this is the area in

dow n m ortgage and bond yields was predicted by

which central bank policy first cam e into being

very few people, am ong them my colleagues Jam es

during the convertible 19th century. T he gold sta n d ­

T o b in and W illiam B rainard, whose m odel o f the

ard could be m ade to w ork because, w hatever m ight

behavior o f interm ediaries gave the right answer.

be happening to the cu rren t account, central banks

T he changed tilt in the yield structure, attrib u tab le

norm ally could control the capital account and so

to R egulation Q probably far m ore th an to O pera­

regulate their reserves. All the rest a b o u t central

tion Tw ist, helped both grow th and the balance o f

banks affecting dom estic activity m ay conceivably

paym ents a t a tim e when it w as hard to see how

have been the figment o f econom ists’ im agination.

th a t feat could be pulled off.

Recognizing this origin o f central banking th e­

W hether we have stum bled upon an u n su s­

ory and practice, 1 nevertheless feel confident th a t

pected new tool o f m onetary policy rem ains very

econom ists have not ju st altogether dream ed up

m uch to be seen. If tim e deposit ra te ceilings were

its dom estic effects. A nd even in a w orld th at in­

lifted again, w ould banks respond as quickly and

creasingly is becom ing one world for m oney, but

fully by raising these rates? W ould their tim e de­

m uch less so for goods, people, and securities, these

posits increase as vigorously? W ould they use them

dom estic effects are not going to vanish rapidly.

once m ore in a way calculated to squeeze the m argin

It would seem to me a great m istake, consequently,

betw een rates charged and rates paid? O ne suspects

to discharge central bankers from responsibility

th a t the process can n o t go on indefinitely. A t som e

for dom estic affairs.

point the new w eapon would have to be recharged,

I d o u b t th a t for the m ost p a rt they would w ant to

the deposit interest ceiling lowered. It is hard to see

be discharged. But when m oney and m arkets do

how this could be done on a cyclical basis.

not quite behave as one has tried to m ake them
behave, the tem p tatio n grows to claim th a t one’s

International Capital Balance

pow ers are weak. T he central b a n k ’s voice and
judgm ent are too m uch needed in the balance o f

M y com m ents so far have been focused on eco­

dom estic affairs to be at all dispensable, w hatever

nom ic grow th. Even so, I have not been able to ig­

its real pow ers m ay tu rn o u t to be. N o r, in the

n ore the balance o f paym ents, an d th a t seems to be

interests o f grow th and em ploym ent, w ould it be

th e outstanding characteristic also o f m onetary pol­

desirable for the central bank to co n centrate solely

icy today. Som e poeple go so far as to say th a t in a

on the balance o f paym ents on the grounds th at its

convertible w orld, balance o f paym ents m anage­

o perations had no dom estic repercussions.

m ent through control o f in ternational capital m ove­

W ithout d o u b t, however, central banks recently

m ents is all th at central banks can do. Differential

have been in the public eye m ainly in th eir inter­

interest rate policies, it is said, eventually will be­

national role. A lthough theirs is n o t always the

com e as difficult am ong nations as they are to d ay

principal voice in policy m aking, they are the m ost

am ong Federal Reserve D istricts.

visible op erato rs o f th a t m uch m aligned institution,,

T here is a grain o f tru th in this assertion, and I

the gold exchange standard. “ C entral bank co o p era­

w ould like to see th at grain grow. It would m ean

tio n ” is virtually a synonym for a p articular kind

th at confidence in exchange rate stability was in­

o f international m onetary system — the decentral­

creasing, th at capital m ovem ents were becom ing

ized gold exchange standard.


Central Banking in Relation to Growth
W ithin the F ederal Reserve, central b a n k c o o p ­

m ainly by tim e deposits, expanded rapidly. W ith­

eratio n has an honorable, intellectually exciting,

o u t the balance o f paym ents dilem m a, we m ight

policywise perhaps ra th e r controversial history. In

never have discovered the expansive effects o f eas­

the days o f M ontague N o rm an an d

Benjam in

ing R egulation Q. I suspect th at neither fiscal nor

Strong, it was virtually the only form o f m onetary

m onetary policy w ould have been totally different

cooperation available. In the days when A llan

w ithout the paym ents deficit, and th at the la tte r’s

Sproul an d



W illiam s argued


B retton W oods, central ban k co operation for a while

responsibility for unem ploym ent and slow grow th
can easily be exaggerated.

seemed to be a t irrem ediable odds w ith the In tern a ­
tional M onetary F und approach. M eanw hile it has
becom e clear th a t the two com plem ent each other

The Gold Exchange Standard

rath er effectively and this perhaps points the way

The E EC countries, in turn, are probably w rong

tow ard a future which I should be quite satisfied to

in blam ing m ore than a fraction o f their price p ro b ­

find, n o t better, b u t ju st as good m easured by the

lem upon inflation “ im ported” from the U nited

problem s o f its day as the post W orld W ar II gold

States. Any group o f countries th a t gets together to

exchange standard has been.

form a custom s union will, by discrim inating against

We are now told th at the years since Bretton

the rest, create a paym ents surplus for themselves.

W oods represent, not a period o f rem arkable finan­

O ther things equal, their accounts can come into

cial reconstruction, but a p art o f a fifty-year stretch

balance only at a higher level o f dom estic prices.

o f m onetary anarchy. W e are told, on one hand,

Surely this trade diversion effect, together with the

th at the gold exchange standard threatens us with

rapid grow th to which the form ation of the E EC

instability, th at it has seriouslyhurt th eU n ite d States

probably has contributed, are responsible for a good

(the E uropean Econom ic C om m unity countries say

p art o f the inflation the E uropeans are suffering.

them ) and, on the other, th a t if its im m ediate d e ­
fects are corrected, a liquidity shortage is ahead.

W hatever loss o f em ploym ent and growth the
U nited States sustained was chargeable in any case

T hese views, I believe, give quite excessive w eight

not to the gold exchange standard, but to the pay ­

to the experience o f the last few years, which have

m ents deficit. If the gold exchange standard had

brought us the troubles we all know ab o u t. We

been replaced in 1958 by one o f the schemes th at

have had a w arning, but we should not m isread it.

seek to elim inate the use o f dollars in international

The injuries th at often are blam ed on the gold

reserves, surely we w ould have been m uch worse off.

exchange standard — unem ploym ent in the U nited

We w ould have lost a source o f autom atic credit

States, inflation in E urope — in my estim ation are

which assuredly w ould n o t have been replaced on

for the m ost p art due to other causes.

anything like th a t scale by a reform ed IM F or other

T h at efforts to control the balance o f paym ents

devices. We w ould have had to m ake very drastic

have contributed to U.S. unem ploym ent I feel very

adjustm ents in ou r dom estic policies as well as our

sure of. T he budgets, particularly for fiscal years

international com m itm ents. The gold exchange

1960 and 1963, were clearly constrained by balance

standard, resting up o n the willingness o f foreign

o f paym ents considerations. Interest rates p articu­

central banks to hold dollars, has helped us im ­

larly in the short-term area were higher th an they

mensely. It is the E uropeans who, indeed, could

w ould otherw ise have been, and th e m oney supply

and do say th a t w ithout this international credit

did n o t grow rapidly. But public expenditures nev­

expansion, they w ould have h ad som ewhat less

ertheless expanded very rapidly after 1960, and taxes


were cut in 1963. On the m onetary side long-term

T h at U.S. deficits o f recent m agnitude have not

rates rem ained fairly low, while bank credit, fed

been a good way o f in ternational reserve creation


A Critique of Central Banking
can readily be agreed. But why does it follow th a t

m ore th an that. C entral banks have m ade a co n ­

the U nited States m ust reach full balance in its

trib u tio n to this firm ing-up by creating their swap

international accounts, thereby depriving the w orld

facilities, thereby d em onstrating incidentally th at

o f future reserve increm ents? T o som e extent, these

it is not necessary to have paym ents im balances in

deficits are a m atter o f definition, am ong which we

o rder to create reserves.

so far have chosen the m ost severe one. W hether
or not U .S. deficits o f any description are a p p ro ­

Known and Unknown Ills

priate if they generate the right volum e o f reserves,
depends m ainly upon w hether we nevertheless are

T he central b an k ers would probably be the first to

a net capital exporter, which we have been even

say th a t these swaps are not enough. In this they

during the period o f high deficits.

w ould agree with m any o f my academ ic friends, but

If the U nited States controlled its deficit better, it

it w ould be the only point o f agreem ent. F o r my

could continue to supply some p art o f the w o rld ’s

academ ic friends go on to say th a t the whole p a ra ­

need for grow ing reserves, thereby increasing its

phernalia o f swaps, R oosa bonds, m odest IM F

capacity to give foreign aid and sustain m ilitary

qu o ta hikes, and leisurely search for a new reserve

com m itm ents. If the flow o f new dollar reserves

asset are not enough. They w ould d ro p all thought

were interrupted by occasional surpluses, this w ould

o f building upon the gold exchange stan d ard . In­

not reduce world reserves, as is som etim es argued.

stead, they would disestablish the dollar as a re­

W orld reserves are asym m etrical — ours consist

serve currency and boldly strike o u t for an a lto ­

partly in the willingness o f other countries to hold

gether new solution.

dollars, and th at willingness surely would grow
while those countries were losing dollars.

W hen th e policy m akers and the academ icians
are so cleanly divided as they are on this issue, it is
well, as a first approxim ation to a rational choice, to

Currency Swap Facilities
O ne thing would be needed to m ake such a sys­

rem em ber the im m obilizing effects o f the burden
o f responsibility. F a r be it from m e to define central
bankers as the ex-officio defenders o f the status quo.

tem viable: better protection against w ithdraw als o f

But it is in the n ature o f their jo b to advance m ore

gold, in the form o f a stronger IM F and creation o f

slowly than they m ight. T hus the tem ptation is

additional reserve assets th a t would supplem ent

strong to array m yself with my colleagues in a d ­

gold and the dollar w ithout displacing the latter.

vancing tow ard solutions less com prom ise- and

G row ing dollar liabilities backed by a gold stock

traditio n -h au n ted th a n w hat is now in sight — if

th at grow s very little if at all do point tow ard in­

indeed the direction o f this advance were discernible.

creasing instability. But let it be rem em bered th a t

T h at u n fo rtu n ately is not the case. We do not

the th rea t to o ur gold reserves does not com e exclu­

encounter in this field a defined o rientation in the

sively o r even predom inantly from o ur foreign

econom ic profession, such as exists in favor o f

liabilities — dom estic balances can also be tra n s­

freer trade, or o f m ore com petition. E conom ists

ferred ab ro ad and becom e a source o f dem and for

unite in condem ning the gold exchange stan d ard ,

gold. The basic cause o f this instability is not the

but from there on they p a rt com pany. From the

gold exchange stan d ard , but convertibility itself.

sem i-autom atic gold sta n d ard to flexible rates to a

G row ing confidence in the stability o f exchange

w orld central bank to a decentralized reserve unit,

rates will in any case reduce the danger o f gold

all directions o f the econom ic and ideological com ­

w ithdraw als. But 1 would not feel very com fortable

pass are represented. Here as elsewhere, econom ists

unless our international liabilities, and our reserve

seem to refute H am let’s generalization th at we

position in general, could be firm ed up considerably

w ould rather keep the ills we have than fly to others


Central Banking in Relation to Growth. . .
th a t we know n o t of. Some o f those unknow n ills,

good to the U nited States. T o project its recent m is­

one ventures to conjecture, m ight tu rn o u t to be a

adventures into the indefinite future would be to

good deal worse th a n the gold exchange standard.

extrapolate from a single experience. The present

U n d e r these circum stances I feel considerable

system needs im provem ents, in the design and

sym pathy with the willingness o f central bankers

execution o f w hich central banks can play an im ­

and their peers to build upon the gold exchange

p o rtan t role. T h at is the direction in w hich, it

sta n d ard . T he gold exchange standard has been

seems to me, we o ught to move.


Discussion 1
James S. Duesenberry
Professor of Economics, Harvard University

I suppose th a t a discussion a b o u t gold is a p p ro ­

lems— lack o f co-ordination o f policy, difficulties in

priate, particularly after H enry W allich’s paper,

forecasting, lack o f flexibility in fiscal policy. But

for the Federal Reserve Bank’s G olden A nniversary.

if we had general agreem ent on the role o f govern­

However, 1 d id n ’t notice so m uch talk a b o u t silver

m ent in m anaging aggregate dem and, we could

when it was the F ed ’s Silver A nniversary, probably

devise m uch m ore flexible and effective instrum ents

because there was to o m uch silver agitation at

for dem and control.

the tim e.
T here are two kinds o f discussants — those who

It would be possible to have a public discussion
on the role o f m onetary policy in relation to fiscal

discuss the paper, and those who d o n ’t. M ost o f

policy and in m anaging aggregate dem and and its

them say it was a very interesting pap er; few o f

com position and thereby we could get better co­

them discuss the paper itself. In this case, the papers

ordination. A t present, we haven’t th at kind of

were indeed interesting. They covered so m any

agreem ent, but we are m aking progress tow ard it.

topics th at I could hardly think o f any others

M eanwhile, in spite o f th at progress, there is a

myself. 1 c an n o t discuss all o f the num erous areas

large sector o f the business com m unity th at regards

which they have touched u p o n ; but 1 have selected

the Fed as a bulw ark against irresponsible policy

a few points from each o f the papers to develop

on the part o f the Executive. Every businessm an

a little further.

who returns from South A m erica tells h o rro r stories

I can begin by saying th at I agree with alm ost

a b o u t w hat happens w hen central banking is su b ­

everything in the first p a rt o f Professor Shapiro’s

servient to and lim ited by the Executive. If we were

paper as to the way in which m onetary policy influ­

to go all out and change the Federal Reserve's

ences the econom y. W hen we com e to the question

relation to the Executive, it w ould underm ine the

of the independence o f the Federal Reserve, I have

agreem ent and understanding th a t we have achieved

some disagreem ent with Professor Shapiro. I think

in m aking m onetary policy.

th at w hat he said a b o u t the problem s o f c o -o rd in a­

Professor Shapiro certainly is right on the techni­

tion is perfectly correct. It is true th a t the side

cal front, but if we go all out for a change in the

effects o f separate m onetary and fiscal policies

relationship o f the Fed to the Executive, we would

aim ed at different goals or based upon different

set off a big political battle which w ould underm ine

outlooks can create a situation which could be

the progress we have been m aking tow ard agree­

worse from both p arties’ points o f view than a

m ent and understanding o f the criteria for m aking

com prom ised but co-ordinated set o f policies. H ow ­

decisions on fiscal and m onetary policy.

ever, before we go all out for radical changes in the

I feel th a t Professor Shapiro is right in the direc­

structure o f the System , I think there are several

tion in which we should move in the long run. But

problem s to be covered. These problem s are not

I also feel th at there are problem s in the practical

entirely within the realm o f econom ics.

m anagem ent o f econom ic policy which prevent us

Let me p u t it this way. We have lots o f problem s

from m aking any strong m ovem ent in th a t direction.

in controlling dem and. O ur efforts to control de­

Finally there is the question o f w hether the p ro ­

m and are ham pered to som e extent by basic p ro b ­

posed changes would have m uch effect. My o b ­


Discussion 1
servation o f the federal governm ent is th at it is the

produce highly unstable speculative m ovem ents in

last stronghold o f feudalism . Any agency th a t has a

the bond m arket. T he problem o f individual bank

large scale clientele has considerable independence

losses could be solved by m aking unlim ited dis­

no m atter w hat its form al relation to the n a tio n ’s

counting a right, and m oving the discount rate over

president. I am not sure th at there would be so

a wider range or using a penalty rate. M ore use o f

m uch change as som e expect in Federal Reserve

the discount rate w ould be required in order to

behavior as a result o f form al changes in the

prevent banks from frustrating open m arket actions

System ’s structure.

by resort to the discount window.

Nevertheless, 1 do feel th at there is a real problem

Alternatively, Professor Shapiro says, the right

in co-ordination which arises from the m anner in

to borrow m ight be restricted to banks not increas­

which the Fed has chosen to conduct its m onetary

ing their total assets. It m ight be perfectly safe to

policy. T he F ed ’s general attitu d e — which grows

try w ithdraw als o f reserves on a larger scale than

partly o u t o f fear o f speculative m ovem ents in the

in the past. Should it becom e desirable, individual

securities m arket — has called for m onetary policy

banks experiencing difficulties could be accom m o­

to be conducted in a very cozy way, which results

dated a t the discount w indow in an ad hoc way

in little inform ation being given to the public as to

w ithout form al change in the present system.

w hat the System ’s analysis o f the situation is, w hat
the System ’s objectives are, w hat the System will
do under alternative sets o f circum stances. T his

British System of Discounting

reduces the financial com m unity to a b o u t the same

Before we begin changing the system, let me say

position as the K rem linologist. They m ust keep

th a t the developm ent o f negotiable certificates o f

reading every speech to try to detect the way the

deposit strengthens the System ’s power to cause a

System is going.

quick return to restraint. As long as R egulation Q

1 think it would be app ro p riate for the Federal

is held to present levels, a sm all rise in the bill rate

Reserve, on its own m otion, to m ake a logical

would induce corp o ratio n s to switch certificates o f

account o f its ow n policies in the sam e way th a t

deposit into bills; the banks would then have to

the Executive gives an account o f fiscal policy. The

sell off short-term securities in order to restore their

Federal Reserve m akes a lot o f statem ents a b o u t

position. This produces a rapid decline in bank

policy, b u t they have often been ra th e r cryptic.

liquidity and a quick swing from easy money to

I m ust say th a t 1 understand the reports of the

tight money.

Council o f E conom ic A dvisors m uch m ore clearly

In regard to the bond m arket, we know very little

than I understand som e speeches from Federal

about its stability. The 1958 episode had m any

Reserve officials.

features th at we d o n 't know m uch about. But we

N ow , let me pass to the second point which

do know th at the m arket absorbs large am ounts o f

Professor Shapiro raised a b o u t the problem o f th e

T reasury securities over a short period. M oreover,

reversibility o f m onetary

He questions

the 1958 episode show ed th a t even when a specu­

w hether Federal Reserve action to ease m onetary

lative spiral occurred, it can be checked by Fed


policy can w ork in reverse. It is said th a t once

action w ithout disasterous results. A speculative

banks get out o f deb t and acquire a strong position

episode th at happens like th a t results in quick and

o f liquidity, it would be difficult to achieve a tighter

sustained rise in rates, which, after all, is the object

m onetary condition should th at be desirable.

o f the game.

It can be argued th a t any substantial w ithdraw al

I agree, finally, th at m ovem ent o f nonborrow ed

o f reserves during an upsw ing in business would

reserves should be a two-way street; and th at

cause serious problem s for individual banks and

expansionary action should not be inhibited by


A Critique of Central Banking
fears o f irreversibility.

a regime o f fixed exchange rates is desirable. The

Since I have raised a question of using d isc o u n t­

final result o f free international capital would be a

ing, I m ight add th at, to the extent th at we are using

uniform exchange rate everywhere, or nearly uni­

m onetary restrain t to help with the balance o f pay­

form exchange rates analogous to the situation

m ents problem , we m ight also consider seriously

existing in the U nited States.

m oving in the direction o f the British system o f

Ideally, in a world o f fixed exchange rates and

discounting freely and letting discount rates move

flexible wages and prices, every country would have

over a wider range. I think we could get m ore

full em ploym ent; capital would flow from those

interest rate variation for a given am o u n t o f restric­

countries with capital surpluses to others. C o n ­

tion o f dom estic activity th an we have under the

ceivably, such a regime could w ork, as has been

present system.

suggested, with an upw ard m ovem ent o f wages
only, with prices m oving up or dow n according to

Inflation — Walking and Galloping

the changing relationship o f wages to productivity.
I d o u b t o u r ability to m aintain such a regime.

Now , let me tu rn to Professor W allich’s paper.

Even in the U nited States, with no barriers to the

I w ant to say a w ord on his com m ents on grow th

m ovem ent o f people, goods, and industrial loca­

and inflation. 1 think th at Professor W allich’s under­

tions, areas whose com petitive position declines

lying view o f inflation in relation to grow th is w hat

because o f the decline o f industrial specialties may

1 would call a pregnancy ap p ro ac h ; th at is, a little

rem ain depressed for a long time. A study o f the

inflation is im possible. I think it is possible to have

New England area show ed the difficulties New

a m oderate rate o f price inflation on an average

England had in adapting its wage levels to m eet the

over a num ber o f years.
I think it is pure speculation th at a creeping infla­

loss o f the textile and other industries. T h at is
true in the U nited States despite the fact th a t the

tion m ust ultim ately lead to a galloping inflation.

governm ent com es to the aid o f areas with very

T here is no single predeterm ined rate o f grow th.

deteriorating com petitive situations. The difficulty

1 think it is possible to use fiscal and m onetary

o f adjustm ent would be still greater if m ovem ent

policy to m ake the capital stock and o u tp u t grow

o f people and goods were restricted and if there

a little faster. In o rder to m ake th at com e a bout,

was no aid to depressed areas.

it will be necessary to have a little m ore inflation.
O bviously, som e com prom ise is necessary be­

Reluctant Lenders and Willing Borrowers

tween a grow th o f dem and th at produces too m uch
inflation, and raises the instability problem which

Just because a single currency is good on balance

Professor W allich w orries about, and one which

for us, it doesn’t follow th at the furthest extension

avoids any risk o f inflation. But we m ust m ake an

o f the currency area over a less hom ogenous area

active choice between the degree o f inflation and

would be desirable.
It is now com m only said th at free capital m ove­

the rate o f grow th o f output.
Professor W allich said quite a lot ab o u t the gold

m ent requires fixed exchange rates. The ap p recia­

exchange standard and the present financial posi­

tion o f the G erm an m ark is cited to show how

tion o f the U nited States. One o f the issues in th at

speculative capital m ovem ents arise from changes

area is the extent to which m onetary policy is to be

in exchange rates. But th a t exam ple shows how

dom inated by considerations o f international capital

dangerous it is to encourage international lending

m ovem ent. I think the view o f Professor W allich,

a t fixed exchange rates when you m ay n o t be able

and o f som e others, is th at the present tendency to


increase the volum e o f international lending under

our enthusiasm for international lending.

m aintain

them .

Perhaps we should



Discussion 1
In th a t connection, I think there is a discrepancy
betw een the U nited States trad in g position and its

building a whole system o f international lending
is dangerous.

capital position. O ne reason other countries do not

T he results o f a large volum e o f international

appreciate it is th a t they do not believe in reducing

debt m ight be disasterous. R eturning, then, to the

their own surplus. They are reluctant lenders to

question which I raised earlier — the possibility o f

the U nited States, while they are willing borrow ers,

conflict betw een dom estic policy and m onetary

because they c a n ’t think o f anything else to do.

policy directed tow ards controlling capital m ove­

M eanw hile policy is predicated on the notion that

m ents — I would say th a t we should not sacrifice

adjustm ents o f trading will ultim ately bring the

dom estic objectives in the interest o f developing

situation into balance.

a long-run free world capital m arket. If there is a

T his is an ad hoc solution for living with a diffi­
cult situation. T o use th a t solution as a basis for


conflict betw een free capital m ovem ent and dom estic
policy, we should go for the best dom estic policy.

Discussion 2
Franco Modigliani
Professor of Industrial Management
Massachusetts Institute of Technology

I find m yself in substantial agreem ent with P ro­
fessor S hapiro’s analysis and conclusions. I will

prices, and through the sam e basic process, nam ely,
by affecting the level of aggregate dem and.

therefore deal briefly with his pap er in order to e m ­

The distinction, if any, between the proper func­

phasize and expand som e o f his points and will then

tions o f fiscal versus m onetary policy lies elsewhere.

proceed to Professor W allich’s paper in which I

F o r my p a rt I am inclined to favor reliance on

can discover only a few significant points o f basic

m onetary policy for m aking the co n tin u o u s finer

disagreem ent.

kind o f adjustm ents which are necessary to achieve

T o begin with, I share Professor S h ap iro ’s co n ­

the short-run goal represented by the targ e t aggre­

viction th a t we should preserve the Federal Reserve

gate dem and. 1 w ould instead rely on fiscal policy

System roughly in its present fo rm at ra th e r than

first o f all to help achieve the desired long-run rate

replace it with a m achine th a t would m echanically

o f capital form ation (am ong the feasible ones) by

increase the m oney supply at som e once-and-for-all

aim ing at a cyclically balanced, surplus-or-deficit

fixed rate. This conviction is supported by the em ­

budget on cu rren t account; secondly, to create a

pirical evidence that I have reviewed in a recent

stable clim ate through “ built-in flexibility” reduc­

p a p e r1 which has led me to the conclusion th at the

ing to m ore m anageable p roportions the dim ensions

Fed has been able to use discretion to advantage,

o f the task left for m onetary policy an d other

m anaging the m oney supply m ore effectively than

ad hoc m easures; and thirdly, to intervene with

any o f the sim ple m echanical rules. T his w as true

ad hoc m easures in those extrem e situations in

at least in those periods w here its room to m aneuver

which the effectiveness o f m onetary policy threatens

was n o t cram ped by the need to support the m arket

to break dow n.

for governm ent bonds, or by balance o f paym ent

In the light o f the above task falling on m onetary

considerations. T o be sure, som e sophisticated rules

policy, it is clear th a t there m ust be basic agreem ent

m ight perform reasonably well som e o f the time,

am ong those charged with m anaging the various

an d m ay therefore prove useful, but only as a guide

tools as to w hat is the ap p ro p riate o r target level

and n o t as a substitute for discretion.

o f aggregate dem and th at is being aim ed for. T o


sim ilarly agree with Professor Shapiro on the

be sure, the task o f setting and even m ore that o f

need for effective coordination o f the use o f th e

achieving the target is a form idable one and fu rth er­

various toots o f econom ic stabilization. T his need

m ore, in the w orld o f rigid wages and prices in

becom es readily apparent when one recognizes the

which we live, there are serious and asym m etrical

fallacy o f the naive notion th at there is a neat separ­

costs associated with e rro rs in either direction. If

ation between the w orking o f fiscal and m onetary

the aggregate dem and turns out to o u tru n the p ro ­

policy, the first affecting the level o f real o u tp u t and

ductive capacity o f the econom y the result is rising

em ploym ent and the second the price level. In real­

prices, a largely irreversible process. If it tu rn s out

ity, o f course, both tools affect both o u tp u t and

to b e 'in a d eq u a te the effect tends to be unem ploy­
m ent and w asted productive capacity. T here is also

1 “ Some Em pirical Tests of M onetary M anagem ent and o f
Rules Versus D iscretion,” F. M odigliani, Journal o f Political
Econom y, June 1964.

the fu rth er com plication th a t prevailing price and
wage policies m ay be such as to generate upw ard


Discussion 2
pressure on prices even before a reasonably full

m uch concerned with details o f the m oney m arket

utilization o f resources is reached, although in my

a t the expense o f the bro ad er picture and hope th at

view the evidence on this p o in t is by no m eans

a tte n tio n will be given to various proposals, includ­

clear. A t any rate I can see no evidence from o ur

ing the one he reiterated today, aim ing in th a t direc­

postw ar record o f a sim ple m echanical relation be­

tion. H ow ever, I w ould like to add one m ore recom ­

tw een the rate o f utilization o f capacity and the rate

m endation o r expression o f hope, nam ely, th at in

o f change o f prices.

the years to com e the Fed w ould pay less attention

But w here should the responsibility lie for setting

to certain conventional m easures o f ease o r tight­

th e long-run as well as the sh o rt-ru n goal, such as

ness in m onetary posture, such as free reserves, and

the target aggregate dem and? In m y view this func­

pay m ore atten tio n to the behavior o f the money

tion and responsibility m ust be squarely placed on

supply itself. N o t th at I subscribe to the view that

elective officials and particularly the adm inistration,

there is a sim ple and highly predictable relation

and not left to the Federal Reserve System, as has

betw een the m oney supply and the level o f aggre­

ten d ed to occur explicitly o r im plicitly in the past.

gate dem and. O n the contrary, I view th at relation

W hile I can see very good an d convincing reasons

as a very com plex one, still very m uch in need o f

for allow ing the Fed am ple discretion in carrying

studying. M y recom m endation relies on the m ore

out the technical task o f m anaging the tools o f

m odest n otion that, by and large, containing the

m onetary policy to achieve stated goals, I can see

m oney

no satisfactory reason why the F e d should also be

while expanding it will norm ally — though not in

allow ed am ple discretion in setting the goals or

all circum stances— tend to increase dem and. Hence,

evaluating the co m p arativ e costs o f alternative types

w hen aggregate dem and is too large, a m onetary


will c ontain


dem and,

o f errors. In my view, o ur recent experience provides

p osture which does n o t result in a c ontainm ent o f

am ple evidence o f the dangers inh eren t in the pres­

the m oney supply is too loose, no m atter how tight

e n t setup. I am referring in p articu lar to the linger­

it m ay be in term s o f som e o ther and absolute scale;

ing unem ploym ent and low level o f utilization o f

w hen aggregate dem and is inadequate, if the money

capacity which have been w ith us since the end o f

supply co n tracts or fails to rise at an appropriately

1957. I attrib u te this problem in large m easure to

fast pace, m onetary policy m ust be judged as too

an overcautious m onetary policy dictated in turn

tight, no m atter how loose it m ight be by the

by to o m uch em phasis on the goal o f price stability

o th er criteria — except, possibly, under extrem e,

an d o f m inim izing the balance o f paym ents problem

depressed circum stances w here an already very

w ithin the existing institutional fram ew ork, a t the

large layer o f excess reserves insulates the m oney

expense o f the goal o f full utilization o f resources.

supply from actions open to the Fed.

T he problem has been further aggravated in my
view by the fact th a t som e Federal Reserve officials
have repeatedly denied the existence o f a conflict

Target Level of Demand

betw een the goal o f full em ploym ent and th a t o f

A parallel m ay be useful to illustrate the above

balance o f paym ents equilibrium , even with respect

distinction betw een absolute an d relative criteria o f

to m onetary policy. Such reassurances have in fact

m onetary posture. C onsider the case o f a m otor

reduced the pressure to look for alternative ways

b o a t in a channel whose task it is to be a t all times

o f taking care o f the balance o f paym ents problem

lined up w ith som e lan d m ark , but w here th e channel

which would n o t involve sacrificing the dom estic

is swept by a current o f varying speed. In this case

goal o f full em ploym ent.

an absolute m easure o f perform ance m ight be the

F inally, I share Professor S h ap iro ’s concern th at

a m o u n t o f gas given to the m otor. T he relative and

under the present setup the Fed tends to be too

relevant m easure would be w hat is happening to


A Critique of Central Banking
the boat relative to its targ e t; no m atter how m uch

p a rt and parcel o f such a m aster plan. But insofar

(or how little) gas is being supplied, we m ust still

as m onetary policy is concerned, the period from

say th at it is insufficient (or excessive) if the boat

1959 to the m iddle o f 1960 represents the era o f

fails to gain ground with respect to its target.

tightest m onetary policy in the entire postw ar

Finally, I would hope th a t in the years to come

period, in term s o f interest rate behavior and m ost

the m onetary authority will be able to pursue w hole­

o f the o th er conventional indicators o f tightness.

heartedly the aggregate dem and target w ithout hav­

N ot only w as m onetary policy tightest in term s o f

ing to be concerned and distracted all the tim e by

absolute standards, but it was also m uch too tig h t

balance o f paym ents considerations. A nd this n a t­

in relation to the full em ploym ent goal, as evi­

urally leads me to Professor W allich’s paper in

denced by the record o f em ploym ent and o u tp u t

which this issue is given som e attention. Since in

o f th a t period.

w hat follows I will be led to em phasize som e points
o f disagreem ent, 1 w ant to m ake it clear from the

Growing Flow of Capital Export

outset th a t I have found Professor W allich’s presen­
tation quite stim ulating and involving wide areas
o f basic agreem ent.

T he contraction o f 1960 th at term inated th a t e p i ­
sode also m arked the beginning o f th e era w hich

O ne first, though relatively m inor, point o f dis­

has not ended yet, in which m onetary policy was

agreem ent concerns his statem ent th at “ a conflict

significantly cram ped by balance o f paym ents c o n ­

exists between grow th and stability.” A ctually the

siderations. T h at problem is still with us, in spite

conflict, if one exists, is betw een full em ploym ent

o f the very substantial im provem ent o f the balance

and price stability. But not because “ in the short

on cu rren t account, because the real source o f

run a little inflation will alw ays produce a little m ore

difficulty lies not in the current account but instead

o u tp u t.” F ro m the record o f the U nited States and

in the large and grow ing flow o f capital e x ports,

o th er countries I can see very little evidence su p p o rt­

both short-term and long-term , and in the dan g er

ing th at proposition. I would suggest th a t the p ro b ­

th at an easier m onetary policy would have e n co u r­

lem arises instead from the difficulty in gauging and

aged yet larger m ovem ents by increasing th e differ­

enforcing w hat I have called the target level o f

ential betw een dom estic yields an d the re tu rn s

dem and.

Because o f this uncertainty, any course

obtainable in o th er countries. T hus, in the last

o f action runs som e risk o f creating either to o m uch

analysis the root o f the problem is th at, under

or to o little effective dem and. If greater weight is

present arrangem ents, th e central ban k has largely

assigned to the goal o f full em ploym ent relative to

lost the possibility o f pursuing the kind o f m onetary

th a t o f price stability, there will be a tendency to

and interest rate policy which is best suited from

assum e greater chances in the direction o f excess

the dom estic point o f view, or, as M r. W allich puts

ra th e r th an o f inadequate d e m a n d ; the result is

it, th a t “ differential interest rate policies [are b e ­

likely to be a higher average level o f em ploym ent

com ing] as difficult am ong nations as they are

but a t the expense o f a greater average increase in

today am ong Federal Reserve districts.” How ever,

the price level.

he goes on to say “ T here is a grain o f tru th in this

W hile I share with Professor W allich the view that

assertion and / would like to see that grain grow ”

capital form ation can be forced by an ap p ro p ria te

[italics mine]. It is precisely at this p oint th a t we

com bination o f tight fiscal and easy m onetary

m ost decidedly p a rt ways. I feel th a t one o f the

policy, I w ould take strong exception to his state­

m ost m om entous and pressing problem s o f the day

m ent th a t such a mix “ was tried after a m anner o f

consists precisely in finding suitable w ays o f m o d i­

speaking in 1959 and 1960.” Som e tightening in

fying the existing institutions, dom estic and in te r­

fiscal policy did indeed occur — w hether o r not as

national, in order to restore a substantial m easure


Discussion 2
of freedom o f action to the m onetary policy pursued
by a country.

level o f interest rates for all countries would indeed
have desirable conno tatio n s, for it would imply an

A dm ittedly, even in the one-interest world th at

optim al allocation o f capital am ong nations. But

Professor W allich relishes, countries would not

if the quality o f interest rates is bro u g h t a bout not

lose all m eans o f pursuing full em ploym ent. H ow ­

by way o f international transfers o f resources te n d ­

ever, having lost the tool o f m onetary policy they

ing to equalize yields, but by way o f budget surplus

would have to rely entirely, or at least prim arily, on

and deficits m odifying the rate o f capital form ation

fiscal policies. In essence, the goal o f fiscal policy

and the stock o f capital in each country until they

would becom e th a t o f absorbing an ap p ro p ria te

have the same m arginal yield, then I can see a b so ­

portion o f private saving via deficit, o r o f augm ent­

lutely nothing optim al or even desirable a b o u t the

ing private saving via governm ent surplus, to the

uniform ity o f yields.

extent necessary so th a t the resulting flow o f saving

Since I can see no chance o f achieving in the near

available for private capital form ation could be a b ­

future sufficient price and wage flexibility to m ake

sorbed at the interest rate level prevailing in tern a­

the gold standard w orkable o r any substantial d e ­

tionally. T here are a num ber o f reasons why reli­

gree o f world-wide integration o f m onetary and

ance on the above a pproach, though conceivable,

fiscal policies, I conclude th a t, at least for the

does not appear at all appealing. In the first place, if

m om ent, we need to w ork tow ard a system in

one were to rely on fiscal policies as the only stabili­

which each country has enough freedom to pursue

zation device in the sh o rter as well as in the longer

ap propriate dom estic m onetary policies even though

run, one would need an arsenal o f quite flexible

this m ight require the coexistence at any point of

instrum ents th at one could use ra th e r m inutely and

tim e o f quite different levels o f interest rates.

accurately. Obviously, a t least in the U nited States
today, such an arsenal does not exist and is hard to

Floating Exchange Rates

conceive. Federal revenues and expenditure p ro ­
gram s, in contrast to open m arket and other m o n ­

The m ost straightforw ard and obvious device for

etary policies, require C ongressional action. Such

achieving this goal consists o f course in the a d o p ­

action is slow and uncertain as to both size and tim ­

tion o f a floating exchange rate. U n d e r such a setup

ing, as the recent experience with the tax cut clearly

each country could pursue the m ost suitable do m es­

illustrates. Proposals to give the President stand-by

tic m onetary and fiscal policy w ithout having to

authority to m ake certain changes in taxes, such as

w orry about balance o f paym ents im plications;

were advanced by the C om m ission on M oney and

indeed, there could not be any such thing as a

Credit, have so far gotten now here and the pro g ­

balance o f paym ents problem , a t least in the sense

nosis is rather unfavorable.

in which such problem s exist today. Interest rate

In the second place, even if the above system could

differentials m ight well exist but would either be

be m ade to w ork I can see very little m erit in a

offset by an ap p ro p riate d iscount in the forw ard

one-interest world, unless there was at the sam e

rate, leaving no o p portunity for covered interest

tim e a com m on fiscal and m onetary policy such

rate arbitrage, o r w ould be accom panied by a real

as we have today am ong the various Federal Reserve

transfer o f resources.

districts; o r else all participating countries were on

But once m ore, for a n um ber o f reasons at least

the classical gold standard and wages and prices

som e o f which are fairly convincing, I can see little

were sufficiently flexible so as to bring about speed­

ground for holding th at in the near future the

ily the adjustm ents necessary for the m aintenance

present system o f fixed parities will be (or even

o f full em ploym ent. U nder such a gold standard,

should be) discarded in favor o f floating exchanges.

if it could be m ade to w ork, prevalence o f a com m on

The real problem , therefore, is how far, and in


A Critique of Central Banking
w hat ways, can we insure some m easure o f inde­

official parity. If, how ever, the range were increased

pendence to m onetary policy within the basic fram e­

to, say, 3 per cent o f official parity, then, by relying

w ork o f fixed exchanges an d a m inim um o f inter­

if necessary on official intervention on the forw ard

ference w ith the free international m ovem ent o f

as well as sp o t m ark e t, it would be possible to have

goods an d capital. As I see it the problem is by no

substantial differences o f som e d u ra tio n betw een

m eans insoluble, although it m ay som ew hat tax our

short-term rates w ithout the em ergence o f a signifi­

ingenuity. In seeking an answer it is useful to dis­

can t covered differential. F urtherm ore, the w ider

tinguish betw een differentials in short-term rates

range w ould also m ake it m ore im p o rta n t for those

and m easures to prevent such differentials from

prepared to exploit the interest differential to secure

bringing a b o u t large scale m ovem ents o f short-term

forw ard cover.

capital, and the problem o f long-term capital move­

should be increased to 3 per cent or to som e o th er

m ents, w hether portfolio or direct.

figure is a m atter o f detail which needs to be settled

Deviations from Official Parity

general principle o f increasing the spread suffi­

W hether the ap p ro p ria te range

by negotiations am ong the participants, but the
ciently to restore an adequate m easure o f inde­

W ith respect to the first problem , a fairly satisfac­

pendence betw een the short rates in different co u n ­

tory answ er is available with but m inor changes in

tries is som ething which we should proceed to

the p resent institutions. It consists sim ply o f increas­

explore right now , when there is no c u rre n t o r

ing the spread between upper and lower lim its of the

im m inent crisis confronting the dollar. Incidentally,

range o f perm issible deviations from the official

it should be m ade clear th at the reason we need to

exchange parity. U n d e r the present arrangem ents

perm it substantial differentials betw een short rates

countries which are m em bers in good standing o f

w ithout giving rise to large short-term capital flows

the In tern a tio n a l M onetary Fund are required to

is not th a t sh o rt rates per se have necessarily a very

intervene by buying o r selling their currency only

large influence o n aggregate dem and, b u t rath er

when the discount o r prem ium on the dollar exceeds

th a t a determ inate policy o f m onetary ease o r

1 per cent o f official parity. T hus the rate o f ex­

restraint becom es im possible if one needs to keep

change betw een the dollar and any other currency

the sh o rt rate w ithin a narrow range.

can deviate from parity at m ost by 1 per cent in

I believe th a t th e above very m inor reform w ould

either direction, while the exchange between any

go a good deal o f the way in the direction o f reestab­

two o th er currencies can deviate from parity by

lishing the needed freedom o f action in dom estic

2 per cent in either direction. In practice, the range

m onetary policies. F urtherm ore, the elim ination o r

th a t m any central banks have been willing to toler­

substantial red u ctio n in short-term capital m ove­

ate has been even sm aller. In particular, the range

m ents th a t the above m easure aim s to bring a b o u t

o f fluctuation o f the pound has been kept between

is achieved w ithout interfering with the freedom o f

$2.78 an d $2.82, or w ithin some tw o-thirds o f 1

action o f trad ers, or significant loss o f efficiency

per cent o f parity. T his range — o r even the binding

in the allocation o f resources. Indeed, as far as I

1 per cent range — is too narrow to perm it the

can see, short-term m ovem ents o f liquidity reserves

developm ent and m aintenance o f a spread between

in response to short-term yield differentials arising

the forw ard and the spot rate large enough to pre­

from the pursuit o f m onetary policies with different

vent the em erging o f a covered spread between

degrees o f tightness as required by dom estic c o n d i­

dom estic and foreign short-term rates. This is espe­

tions,* perform no useful function, except to m ake

cially true when the differential between the actual

it hard er for each central bank to pursue the a p p ro ­

rates is appreciable and likely to last for some

priate policy. T he country th a t is trying to expand

length o f tim e, and no change is anticipated in the

its m oney supply m ay find this a ttem p t thw arted


Discussion 2
by capital exports which are not accom panied by

mented by m ore direct controls such as licensing

a net transfer o f goods, and result instead in the

o f foreign issues floated in the A m erican m arket.

transfer o f a t least som e p o rtio n o f the expanded

Such actions pose m ore serious questions since they

m oney supply in the hands o f the central bank o f

involve m uch greater interference and m uch greater

the host country. A nd sim ilarly, the country trying

likelihood of significant m isallocation o f resources,

to hold dow n the m oney supply m ay find its attem pt

to the point where the cost m ay be deem ed even

to do so equally thw arted by a surplus in its balance

greater than th at o f tolerating som e unem ploym ent

o f paym ents.

for som e tim e and o f th a t o f occasional changes

It is conceivable th at elim ination o f incentives to

in the official parity.

international m ovem ents o f liquidity in response

W hether or not the elim ination o f short-term cap ­

to differentials in short-term yields m ay not be quite

ital m ovem ents through wider ranges o f perm issible

sufficient to provide the required elbow room . Long­

exchange fluctuations plus m inim al interference

term investm ents, especially portfolio investm ents,

m easures such as the interest equalization tax, and

are in principle also responsive to differences in the

am ple international liquidity w ould prove sufficient

long-term yields, in a clim ate in which the m ain­

to provide the needed freedom in dom estic policy

tenance o f the current parity is regarded as pretty

w ithout recourse to harsher m easures, is som ething

certain, and this m ight again interfere with central

th at cannot be easily foretold. But again, I w ould

bank policies endeavouring to affect long-term rates

feel that this is the tim e, while the whole issue o f

in the desired direction. U n d er these conditions it

international liquidity is under review, to study

m ay be necessary to place som e additional obstacles

carefully which institutions should be m odified and

to capital exports, such as o u r recent interest e q u al­

what remedial action should be open to particip at­

ization tax, or the pro p o sed legislation, which never

ing countries for the purpose o f reestablishing an

cleared Congress, to elim inate som e o f the present

adequate measure o f freedom to dom estic m onetary

tax advantages granted to incom e arising from direct
investm ents a broad. M easures o f this kind, th at

policy. As indicated earlier, I feel th at this, at least

involve relatively little interference with the freedom

pressing and m om entous econom ic issues o f the

o f choice o f individual op erato rs, can be supple­

current decade.


in the U nited States, is indeed one o f the m ost

Discussion 3
James Tobin
Sterling Professor of Economics, Yale University

T his sym posium is a welcome symbol o f good

A s Shapiro says, the role o f the Presidents o f the

relations betw een the Federal Reserve System and

Federal Reserve Banks presents a difficult problem .

the academ ic com m unity. It is no secret th at it was

These are certainly very able men, and p a rt o f the

not alw ays thus! T here was not so long ago an era

a ttractio n o f the jo b to able men is doubtless p a r­

o f bad feeling. T he System and the academ ic com ­

ticipation and voting in the O pen M arket C o m m it­

m unity each felt unappreciated by the other, and

tee. A nother p a rt o f the attractio n is the high salary.

each was suspicious o f the other. Recently there

Perhaps the Bank presidents should n o t have it

has been a sincere effort on both sides to improve

both ways. If they are to have votes on m onetary

com m unication — on both policy and research.

policy in the O pen M arket C om m ittee then they

The System, both the Banks and the Board of G ov­

should be Presidential appointm ents, with the sam e

ernors, is m aking great efforts to meet the needs o f

term s and salaries as Board m em bers. R epresenta­

the universities for help in statistical and historical

tive P atm an is right in wishing to rem ove all ap p ea r­

m onetary research. A t the same time, good basic

ance th a t the System is a self-regulating club

research is being done at the Banks and at the

o f bankers.

Board. G eorge M itchell deserves a good deal of
credit for m any o f these developm ents.

I agree also with Shapiro th at the Board should
get out o f the business o f bank regulation. A d ju d i­

1 tu rn now to the papers of Eli Shapiro and

cating m ergers and the like takes a great deal o f

H enry W allich. W ith what Shapiro said 1 agree al­

tim e from the central jo b o f m onetary control.

m ost com pletely. I would rem ind you th at President

Federal regulation, supervision, and exam ination

K ennedy proposed to Congress som e o f the reform s

o f banks should be unified. G overnor R o b e rtso n ’s

which the C om m ission on M oney and C redit recom ­

proposals on this score deserve serious attention.

m ended and still advocates. In particular, President

I com e now to the m uch discussed question o f the

K ennedy proposed to synchronize the term o f the

“ independence” o f the Federal Reserve System. It

C hairm an o f the Board o f G overnors with that o f

is unfortunate, I think, th at “ independence” has

the P resident; to shift the term s o f Board m em bers

becom e such an em otional slogan. Surely there is

to odd years; and to raise salaries o f Board m em ­

a great deal o f unreality on both sides o f this dis­

bers. T hese proposals were agreed to by the Board,

cussion, especially regarding the connection be­

but even so they were considered in som e circles

tween the form al legal structure o f the Federal

an a tta ck on the independence o f the Federal Re­

Reserve and its “ independence.” Some o f the legal

serve. T he only achievem ent so far is in the m atter

form alities and anom alies which suggest independ­

o f salaries, which were increased by the recent

ence, in the sense th a t the regulators and the regu­

Executive Pay Act. I hope th at these proposals will

lated are one and the sam e, are by no m eans as

receive serious atten tio n in the next few years.
Personally, 1 would like to go further along the

serious as the critics o f the System seem to believe.
On the other hand, conservative fears o f non-inde-

road charted by the C M C and advocated by Shapiro.

pendence seem to be based m ainly on the horrible

I favor shorter term s for m em bers o f the Board o f

consequences tho u g h t to have followed from the

G overnors and a sm aller Board.

pegged interest rate policy o f the late



Discussion 3
H ow ever, this policy occurred w ithin the present

may not be very im portant. In the last analysis,

legal structure, which evidently did n o t assure

the independence o f the F ederal Reserve, even in

“ independence.”

a legal sense, depends on the Congress. C ongres­

Since the A ccord there has been very little evi­

sional pressure was decisive in bringing the A ccord.

dence o f conflict between Federal Reserve and A d ­

And if opponents o f the present status o f the Federal

m inistration policies. T hrough thirteen years o f a d ­

Reserve, were really strong in C ongress, to d a y ’s

m inistrations o f both political parties the Federal

“independence” w ould not last long.

Reserve and the T reasury have seen eye to eye, with

Nevertheless, there is, I think, a sense in which the

few exceptions. T heir disagreem ents have n o t been

Federal Reserve does have too m uch independence

larger in m agnitude than the norm al disagreem ents

o f the Executive branch. T here is an asym m etrical

am ong agencies within the Executive branch. It is

relation between the Federal Reserve and other

true o f course th at the Federal Reserve and the

econom ic policy-m aking and policy-advising offi­

T reasury together do not alw ays see eye to eye with

cials. Those agencies find it difficult to say anything

the rest o f the A dm inistration. Som etim es from the

or to do anything th at involves Federal Reserve

point o f view o f the Council o f Econom ic A dvisers

policy, either directly or indirectly, w ithout co n ­

I have been w orried th at it is the T reasury th at is

sultation or clearing with the Board o f G overnors.

too independent o f the Executive!

Both G overnors and Bank officials are, on the other

Seriously, I think it is a fact o f life th a t alm ost

hand, free to speak and act w ithout the counsel of

every agency o f the federal governm ent, even within

other agencies o f the governm ent. 1 d o n 't really

the Executive branch, has a certain degree o f inde­

think it would con tam in ate the O pen M arket C o m ­

pendent pow er stem m ing from its constituency —

mittee if the C hairm an o f the Council o f E conom ic

the people w ith whom it deals, and w hom in a sense

Advisers, and the Secretary o f the T reasury and

it represents. The power o f financial officials in

the U ndersecretary, were invited to sit in the C o m ­

governm ents, w hether in the central bank or in the

m ittee’s meetings, and to explain to the m em bers

Treasury, stem s from their constituency. The sam e

o f the C om m ittee w hat the A dm inistration eco­

is true o f the pow er o f m any other officials — the

nom ic outlook an d policy are. I do not o f course

Secretary o f A griculture in o u r governm ent, for

go so far as to suggest th a t these officials should vote!

exam ple. T he independence o f the Federal Reserve

A nother point o f agreem ent with Eli Shapiro is

com es from the political pow er o f the financial

suspicion th at the Federal Reserve often puts too

com m unity. H ow far can and will the President

high a value on socially trivial objectives. In particu ­

and the C ongress go in pursuing policies opposed

lar, the F ed’s solicitude for the technical health o f

by powerful and respected financial lenders? W hat

the bond m arket som etim es lim its the size o f inter­

if the financial com m unity loses confidence?

ventions in the m arket below the am ounts th at c u r­
rent m onetary policy w ould justify. Here again, the
peg o f unhappy m em ory is still casting a long sh a d ­

Independence and Technical Concerns

ow. Specifically, I think th at the Federal Reserve

In m any o th er countries the legal stru ctu re is dif­

could have prosecuted O peration Tw ist m ore vigor­

ferent, and the central bank appears to be clearly

ously if it had been willing to bid aggressively for

under the jurisdiction o f the C abinet or the M inister

long-term securities. A t other tim es the Fed could

o f Finance. But observation suggests th at central

have raised short-term rates — and these rates only

banks still retain a good deal o f independence.

— m ore easily had the Board been willing to indicate

I suspect, therefore, th at "independence” is based

th a t the long-term rate w ould not be allowed to

on m ore solid foundation than legal structure and

rise for a period o f tim e ahead. T his sort o f advance

th at w ithout these foundations the legal structure

indication would n o t be a peg in the w artim e sense,


A Critique of Central Banking
since it w ould n o t be a long-term com m itm ent to
buy a p articu lar security on dem and.
A m ain reason for stress on independence of the

is in the short run, at any rate, less saving an d less
investm ent. O ffhand one w ould think th a t m aking
m oney a less desirable asset is good for the dem and

Federal Reserve in conservative circles is concern

for capital. As for risks, d istortions and the like,

a b o u t the price level. It is felt th at the usual policy­

these are n o t necessarily greater a ro u n d a rising

m aking procedures an d personnel in the govern­

price trend than around a zero price trend. The

m ent c an n o t be tru sted to give stability of the price

m ore com plicated question asks how price stability

level the priority it deserves. I have several com ­

affects the propensity to save. So far as this is

m ents: First, the period o f the interest rate peg

influenced by the rates o f retu rn at all, all real rates

serves once again as the horrible historical example.

o f return, not sim ply those on assets o f fixed m oney

N ow the peg was a bad idea, but the record does

value, are relevant.

n o t justify the conclusion th at the policy was very

In recent years we in the U nited States have had

m uch responsible for the inflations o f 1948 an d

great reason to understand the need for price sta ­

1950. Second, for the political reasons that I have

bility in an open econom y in balance o f paym ents

already given, there will always be strong advocates

deficit. But, in a larger sense, this recognition merely

o f price stability, both within the Executive and in

transfers the question o f priorities am ong goals to

Congress. Indeed, I am not sure th at articulate and

an in ternational arena. A nd here, priorities am ong

interested advocates o f other goals — for example,

goals are being determ ined by som e very m ysterious

high em ploym ent and grow th — are built into the

and alm ost unconscious process, on which the inter­

governm ent to the sam e degree. T hird, one o f the

national banking and financial fraternity carries

things th a t I think was m ost responsible for some

great weight. Priorities am ong goals are decided in

academ ic distrust o f the System was the repeated

the course o f dividing responsibility for correcting

insistence o f its spokesm en th at there is no conflict

im balances o f paym ents between deficit and surplus

betw een price stability a n d em ploym ent and growth.

countries. T o the extent th a t the burden is placed

M any econom ists feel th a t there is such a conflict

o n deficit countries, the process is favorable to

an d th a t it should be squarely recognized and de­

stability in the world price level, but perhaps less

cided. M any feel it should be decided by the regular

favorable to em ploym ent, production, and grow th.

processes o f dem ocratic governm ent.

T o the extent th at surplus countries assum e the
burden o f adjustm ent, there is greater acceptance
o f w orld inflation in the interests o f high em ploy­

The Goals of Price Stability

m ent and higher grow th. We know th a t the m ain
b urden is placed on deficit countries.

T his topic leads m e to W allich’s paper. He repeats

T he balance o f paym ents c an n o t be used as a gen­

the view which I have ju st attributed to System

eral argum ent for price stability, as against other

spokesm en. It is interesting, by the way, that he

goals. It m erely transfers th e problem o f choice

explicitly identifies stability as price stability w ithout

am ong these objectives to a wider, m ore in te rn a ­

recognizing th a t price stability m ight be purchased

tional decision process. A nd in any case, balance

a t the expense o f stability o f other kinds, in particu­

o f paym ents considerations can n o t m ake price sta­

lar stability o f p roduction and em ploym ent. I do

bility the best course for all countries at all times.

not believe th a t there is any theoretical or statistical

I f it is a prim e objective for countries in deficit,

d em onstration o f W allich’s proposition th at long-

then it is not a good policy for countries in surplus.

run price stability is better for grow th or that it

In a fixed exchange rate w orld I do not know how

increases realized saving and investm ent. Surely if

adjustm ents are going to be m ade if prices in all

price stability is purchased by lower outp u t there

countries m ust be absolutely stable.


Discussion 3
In recent years m oney m arkets have becom e in­

inflation. The result is th a t as surpluses an d deficits

creasingly unified across national boundaries and

are passed a ro u n d from one country to an o th er,

th e a u tonom y o f national m onetary policies has u n ­

and as countries experience cycles o f inflation and

questionably been dim inished. C onsequently, the

deflation, the w orld m oves tow ard a generally

im p o rta n t question o f the m ixture betw een fiscal

tighter m onetary policy and a generally easier fiscal

an d m onetary policies is also being transferred to

policy. This has, I feel, a n anti-grow th bias.

the in ternational arena. A nd there too, I fear th a t

I do not think th a t the academ ic com m unity is as

the unsystem atic international decision process, to

m onolithic in its intern atio n al m onetary proposals

which I have been referring, has a bias against

as W allich suggested. H e is probably right th a t

econom ic grow th. It looks as if every c ountry th a t

recent reform s in the gold exchange stan d ard will

has an inflation, even if it is in balance o f paym ents

perm it it to w ork a little better for a little longer

surplus, ad o p ts a tight m oney policy, an d every

period o f time. But these reform s are in large p art

country th a t is in deficit, no m atter w hat its internal

due to the very criticism s from the academ ic co m ­

econom ic situation, is also forced to a d o p t a re la ­

m unity which W allich was condem ning. In this field

tively tight m oney policy. Fiscal policy necessarily

too, com m unication betw een academ ic econom ists

becom es the essential w eapon against econom ic

and governm ent financial officials has recently been

slack and unem ploym ent, while fiscal m easures are

greatly im proved, an d this observation re tu rn s m e

used to a m uch lesser degree as a policy against

to the happy note on which I began these rem arks.


Comments and Summary
The Honorable George W. Mitchell
Board of Governors of
The Federal Reserve System

President Ellis has been referring to me as a sort o f

have been easier for the A dm inistration simply

a n chorm an today, but 1 d o n 't have any idea where

to tell the Federal Reserve w hat its role was to be.

he w ants me to an ch o r the discussion. We have

But 1 think there are im p o rtan t advantages to

had a very delightful program critically dissecting

perm itting the Federal Reserve a quasi-independent

the Federal Reserve System , its operations and its

consultive role. It has a special expertise; it is

obligations. N ow I am asked, as one who occupies


an official position in the Federal Reserve, w hat

squabbles; it has outstanding staff resources and a



bias o f tran sito ry political

a bout all these criticism s? 1 feel a little like a

long record o f constructive cooperation within

patient who has been on the operating table for

governm ent. N o r do 1 think th at the integration o f

three hours while he has been poked, probed, cut,

m onetary policy w ithin the governm ent by c o n ­

and anesthetized with interm ittent doses o f gas, and

sultive m ethods involves to o g reat a strain on

is then asked to say som ething about the diagnosis.

policym akers’ positions and tem pers o r ingenuity.

T he procedure breeds a feeling that is at least
faintly hostile to c o operation.
Even so, som e

I am troubled by the alternative o f a Federal
Reserve w ithout som e degree o f independence.

o f the views expressed this

Clearly it should not be a p art o f the Treasury

afternoon I like to hear. W hat I will try to do is to

because the T reasury m ay have, at tim es, objectives

com m ent on a very sm all num ber o f pros and cons.

conflicting with those o f the Federal Reserve. The

1 will begin by referring to two criticism s o f the

T reasury should not be exposed to the constant


Reserve which

relate to its structural

tem ptation to use m onetary policy to m ake its

characteristics. The question is one o f indepen­

task easier. O n the other hand, the T reasury has

dence. O n the one hand, the Federal Reserve is


said to be too independent o f the governm ent.

through its debt and cash balance m anagem ent. A t

O n the other hand, it is said to be too dependent

tim es the T reasury appears to lead m onetary action

upon private interests, mainly comm ercial banks.

through the indirect consequences o f these policies.






N o t m uch was said o f the System ’s allegiance to

A t m ost, however, it seems to me th a t the inter­

private interests today but a good deal was made

action o f Federal Reserve and T reasury policies

o f the point th a t the Federal Reserve was too

and actions calls for c o o rdination rath er th an for

independent o f governm ent.

putting the T reasury in control o f the Federal

It seems to me th a t at the highest policy levels

Reserve System.

there is a clear recognition th at U. S. econom ic

Broadly speaking, the prim ary objectives o f the

policy m ust be, and is, integrated; m onetary policy

Federal Reserve and the T reasury are not different.

is not excepted from this integration. Evidence o f

A t a m ore operational level, however, concern for

this, ju st to take an exam ple, was the A dm inistra­

lesser objectives m ay at tim es lead to diverging

tion balance o f paym ents program in the sum m er

effects. M inim izing technical problem s of m anag­



ing the national debt tends to be a pervasive

participation. T his participation was negotiated

1963 involving

influence at the T reasury, as at tim es does the

within the governm ent. Some might say it would

m inim ization o f the interest cost o f carrying the




Comments and Summary
debt. O n the other side, it seems to me th a t the

m ost

Federal Reserve m ay, at tim es, be to o concerned

differently from








m em bers on the O pen

with short-run m oney m arket conditions; or its

M arket C om m ittee?

long-run goals m ay be too rigidly observed when

in the voting record o f the O pen M arket C om m ittee

do n o t find such evidence

they could be equally well achieved w ith som e

in the past two or three years. In a period when the

flexing in posture. In a very large establishm ent

C om m ittee was m oving tow ard

such as the federal governm ent, we can ordinarily

rates one finds m ore presidents th an Board m em ­

assum e th a t policy c oordination at the highest

bers dissenting from the policies a dopted by the

higher interest

levels is consistent with a secondary fidelity to

m ajority. O f course, it was the m ajority’s view th at

departm ental

the public interest required such action.

or agency goals which are


1 would su p p o rt the proposal to m ake the

tem porarily o r m arginally in conflict.
M r.

P atm an



co ordination


C hairm an’s term coincide w ith th a t o f the President.

having the Federal Reserve report to the chairm en

I would shorten the term s o f the Board m em bers.

o f the tw o banking and currency com m ittees. T his

I have no particular conviction ab o u t the “ best”

seems to me cum bersom e, a t best. T he present

num ber o f Board m em bers. T here are now seven.

system is not perfect, but it is w orking fairly well.

This m eans one

T he m ain thing we need is better com m unication


with the public. I believe o ur com m unication with

traveling in the U nited States, or m aking speeches

the rest o f the governm ent is satisfactory. Still 1

and there are still five left a t hom e to take care

see no great objection to asking the Secretary o f

o f the store — a reasonable rationalization for a

the T reasury or the C hairm an o f the Council o f

seven-man board.

E conom ic

A dvisors



O pen



be a b ro ad


problem s,




M arket

C om m ittee m eetings, should they find tim e to
do so.
N ow a w ord on the charge o f excessive solicitude
on the p art o f the Federal Reserve for the banking

Precedents, Procedures and Habits




a fternoon


em anate from the re p o rt o f the C om m ission on

industry. The Federal Reserve has a m ultitude o f

Money and C redit or the Patm an C om m ittee.

operating connections with banks, and, o f course,

W hat troubles me a b o u t this type o f advice for our

does have to stay constantly alert to insure th at

Fiftieth A nniversary is th a t I d o n ’t th in k th a t

these transactions rem ain at a rm ’s length. M oreover,

m uch o f it is very fundam ental or constructive. I

Federal Reserve operations affect interest rates,

believe the Federal Reserve has tw o basic dif­

hence the Federal Reserve is som etim es charged

ficulties today. O ne is a bureaucratic drag. We are

with controlling interest rates for the benefit o f

fifty years old and we are ju st like a bank, a govern­

com m ercial banks. O ther regulatory governm ent

m ent, a university, or a railroad o f like age. We

agencies have th e sam e general type o f problem ;

are encrusted w ith a lot o f precedents, procedures,

the Interstate C om m erce C om m ission, the Federal

and habits o f th o u g h t th a t we ought to get rid of.

Pow er C om m ission, etc. A b o u t all one can say,

F o r exam ple, the System , in term s o f its house­

except as the allegation is exam ined on a case by

keeping responsibilities, is a trem endous paper

case basis, is th a t all o f the regulatory agencies are

shuffler o f currency, checks and securities. It is not

in position to have an inform ed understanding o f

adequately using present day technology to reduce

the public and private interest in any given action

this paper shuffling w ith a consequent saving in

and should be accountable for steps taken.

cost and lubrication o f the entire transfer m ech­

presidents (those

anism. In part, progress is held back because the

m em bers o f the O pen M arket C om m ittee said to be

banking system is slow in m aking concom itant

Is there evidence th at



A Critique of Central Banking
changes, b u t the Federal Reserve is n o t aggressive

be accom plished.

in the leadership it could exercise; its present day

As a case in point consider 1964. We could say

knowledge on currency design and check processing

th a t Federal Reserve actions are a p p are n t in w hat

and on the issuance and redem ption o f public


d eb t is n o t being utilized. In another sphere o f

m oney supply, or w hat happened to bank credit.


interest rates, w hat happened to

activity it should be developing new money m arket

If we look at changes in interest rates, we would

instrum ents and extending the use o f the discount

find very little change du rin g the year but, general­

window. In all o f these regards and others the

ly, a higher level o f rates th an in 1963. T his would

Federal Reserve should be an institution where


precedent and previous m ethods o f operation have

m onetary environm ent in 1964 than in 1963.



a som ew hat m ore

to be rejustified in the light o f changing environ­

But let me pass on to w hat I consider to be our
m ajor problem — obsolescing m onetary theories.




action and spending in the real econom y? W hat
variables o r

Treas. 90-day bills
Treas. 3-5 yr. issues
Treas. long term
C orp. Aaa
C orp. Baa
State and local Aaa
State and local Baa

O c to b e r 30

1964 high

1964 low


cratic inheritance!

W hat is the

W eekly averages


m ent and changing techniques. Beware the b ureau­





proxies are suitable to trace the

reaction o f the econom y to m onetary moves and to

H ow ever, if we look a t the behavior o f money

observe the effects o f changes in the real econom y

supply, we would find th a t in the first five m onths

on m onetary variables? W h at are the time relation­

it grew very slowly, then it shot up m ore rapidly

ships in these reactions and interactions? A nd how

for a couple of m onths and subsequently rose

a b o u t the dosages o f m onetary creation — can we

less vigorously. T aking the year as a w hole, money

m easure the intake and o u tp u t?

supply has expanded a t an annual rate o f 4.2 per
cent right up to and th ro u g h O ctober, com pared

Indicators of Monetary Climate
T here is no lack o f speculation and theorizing

with 3.8 per cent in 1963. T his w ould indicate to
m ost m oney supply analysts th at m onetary policy
was easing in 1964.

a b o u t these m atters. T he product, however, has not

Finally, if we look at bank credit as an indicator

been very useful as an aid to m onetary m anage­

o f availability, we find th at in the first nine m onths

m ent. T he idea th a t changes in the money supply,

o f 1964 it rose at an annual rate o f 8 per cent per

however defined, precede changes in econom ic

year, ju st a bout the sam e as in 1963. F rom this

activity, however defined, is of limited usefulness

view point, Federal Reserve policy m ight be said to

until the n a tu re and extent o f the relationship, or

have been m ore or less unchanged from 1963.

its converse, if true, can be specified. I feel that both
the professional econom ists and the System have

T hus



barom eters



different readings as to the m onetary clim ate in

been seriously negligent in not developing a better

1964. The m oney supply grew faster th an in 1963,

docum ented m o n etary hypothesis. Professor Tobin

interest rates were higher, but bank credit expansion

referred to c u rre n t efforts in this area where the

was a b o u t the same. These differences in instru­

Federal Reserve and the academ ic fraternity are

m entation inevitably lead to differences in prescrip­

cooperating. But all o f us have too long taken the

tion for m onetary policy by adherents o f different

effects o f m onetary policy for granted w ithout an

m onetary theories.

adequate specification o f the effect sought, and

It m ay be possible, however, to reconcile the

w ithout an understan d in g o f how the result will

divergent m ovem ents in these im p o rta n t variables.


Comments and Summary
In place o f slavish adherence to one or the other

system atic analysis for seat-of-the-pants judgm ent.

o f these indicators o f m onetary clim ate, we need a

T hus there is m uch w ork to be done a t all

willingness to analyze these and other indicators

stages o f the process by w hich Federal Reserve

in term s o f and in relation to the behavior o f

actions are linked to ultim ate effects on spending.

various sectors o f the econom y.

The failure to fill these gaps in a way th a t is

In this process o f analysis, we w ould all benefit

satisfying theoretically


em pirically —


from a better understanding o f how m oney is used.

applicable to day-to-day policy decisions — is, I

W hether we are m oney supply o r credit condition

think, the m ost substantial criticism th at can be

t h e o r is ts , b e tte r s ta tis tic s a n d a n a ly s is o f b e ­

lodged against the Federal Reserve System, as well

havior, sector by sector, with respect to the use and

as against those who p u rp o rt to study, understand

turnover o f m oney w ould help us to substitute

and evaluate its actions.


Concluding Remarks
George H. Ellis
President, Federal Reserve Bank of Boston

A t the outset o f this sym posium , I described two

“ It is difficult for m e, ” he said, “ to conceive o f any

com peting view points; their descriptive labels read:

closer w orking relationships between tw o co o rd i­

“ H elp-Stam p-O ut-O ld-V estiges C lu b ” and “ Help-

nate agencies o f governm ent than those th at have

P reserve-O ur-H eritage C lub.”

characterized th e T reasury and the Federal Reserve

Since a Reserve Bank president — as a participant

during the past three years. T hat does not m ean

in m onetary policy form ulation — necessarily falls

th at our policy judgm ents always coincide — any

in the category o f an “ Old Vestige,” I can hardly

m ore than do, for instance, the policy judgm ents

qualify as representing an unbiased view!

o f the individual G overnors who sit on the F e d ­

However, at least three viewpoints expressed this

eral Reserve Board. But 1 believe th a t each agency

afternoon are h eard so frequently th at they seem

has been

to be cu rren t fashion am ong m onetary econom ists.

problem s and policies o f the other, and th at they

We are told, first, th at to guarantee coordination

have w orked closely together in coordinating their

on the use o f m onetary policy with fiscal and debt

fully inform ed

at all tim es on


separate actions.

m anagem ent policy the Federal Reserve m ust be

“T his process o f close consultation and c o o p era ­

centralized an d b ro u g h t “ within the executive fam ­

tion c an n o t be attrib u te d entirely to a happy acci­

ily an d subject to the constraint o f coordinated

dent o f congenial personalities or to a fortuitous co­

decisions on g oals.”

incidence o f objectives. Its foundation rests solidly

I should like to offer the observation th at whatever

upon the fact th a t the Federal Reserve is bound by

the central bank does, its operations m ust fit within

the sam e broad objectives, cited in the E m ploy­

the fram ew ork o f overall policy pursued by the

m ent A ct o f 1946, th at govern the o perations o f

natio n at a particu lar time. Several witnesses a t the

other governm ent agencies.”

recent P atm an hearings have testified as to the


o f the



W e are also told th a t the Board o f G overnors
should be reduced from seven to five m em bers who

directly opposing an d frustrating adm inistration

would hold all the powers o f m onetary policy, with

and C ongressional econom ic policies. The actuality

the O pen M arket C om m ittee abolished as an “ Old

is th a t since the “ A ccord” in 1951 the Federal

V estige.” Y ou will not be surprised th a t my own

Reserve has w orked well with succeeding adm inis­

view is som ew hat different. I would em phasize th at

trations. Follow ing his original appointm ent by

the fram ew ork o f policy-m aking bodies provides

President T rum an, C hairm an M artin in succession

m eans o f bringing increased knowledge and im ­

has gained the close confidence o f and been reap ­

proved ju d g m e n t to bear on final decisions in the

pointed by Presidents Eisenhow er and Kennedy,

public interest.








President Johnson.

Again I offer the view o f another m ore experi­
enced in this process, A llan Sproul, form er president

R ath er th a n rely on m y personal view on this sub­

o f the Federal Reserve Bank o f New Y ork, as ex­

ject, I offer you Secretary o f the Treasury D illon’s

pressed during the 1961 P atm an hearings on the

statem ent to R epresentative Patm an during the

R eport o f the C om m ission on M oney and C red it:

M arch, 1964, hearings.

“ T he Federal O pen M ark et C om m ittee has becom e


Concluding Remarks
the h eart o f the Federal Reserve System ; cut it o u t

tion to short-run and m eaningless details.

and you have a skeleton. It is a unique developm ent

Having sounded off as if I were a charter m em ­

in central banking which has evolved out o f the

ber o f “ H elp-Preserve-O ur-H eritage C lu b ,” now let

experience o f the System with the needs o f a country

me return to the earlier q u o tatio n ab o u t argum ent,

o f the size and character o f the U nited States. It is

controversy and criticism . W hile I firmly believe

m ade up o f m en having statu to ry responsibilities,

th at the present regional structure has m any aspects

who serve on the C om m ittee as individuals under

th at are o f positive value and should be retained,

law, and w ho are public officials and public servants

this position does not forestall further evolution.

in every real sense. Finally, the present constitution

T he System was born o f need. It will develop and

o f the Federal O pen M arket C om m ittee observes

thrive by adaptation to changing needs.

the card in al principle o f central banking th at those
who determ ine m onetary policy should n o t only

All o f which leads me to express three personal
convictions as a conclusion to this sym posium :

co ordinate their actions with the general econom ic

First conviction: In o u r dom estic free-enterprise

policies o f the governm ent, but should also have a

society both o ur ultim ate and interm ediate goals

direct contact with the private m oney m ark e t.”

o f econom ic and therefore m onetary policy are

A third view point we have heard today am ounts to

perpetually shifting and evolving in response to th e

an accusation o f incom petence — m uch like Pro­

environm ent in which we live, the problem s we

fessor M eltzer’s “ forgive them for . . . they know

face, and the alternative opportunities we develop.

not w hat they do .” We are accused o f being so

Second conviction: In this environm ent, national

preoccupied with the m inute variations in the finan­

welfare requires the exercise o f inform ed, carefully

cial m ark ets as to miss the longer-run fundam entals

reasoned, im partially m otivated ju d g m en t as to the

in setting policy.

determ ination and execution o f m onetary policy.

W e are hopeful th at the m orning session so illus­

There does not now exist a single form ula or set

trated the ranges o f considerations involved in

o f form ulas th at will autom atically produce the

m onetary policy decision-m aking th at the fallacy

right answers in all circum stances w ithout a sub­

o f such accusation is revealed. I m ake no apologies

stantial elem ent o f individual judgm ent.

for close attention to w hat recent witnesses before

T hird conviction: C ongress acted wisely in dele­

the P atm an C om m ittee have called m oney and

gating the execution o f its m onetary responsibilities

banking phenom ena. It arises out o f a prim e differ­

to the Federal Reserve System , an act th a t has re­

ence between the academ ic and the Federal Reserve

sulted in good m en m aking good decisions in the

o rien tatio n ; the fact th a t the Fed m ust translate

public welfare. Suggestions for change and im prove­

policy into action. The th ru st o f action m ust be

m ent in the present procedures by which these criti­

through m oney-m arkets and the banking system,

cal judgm ents are reached should be judged in light

w ith continuous checking to see how things are

o f w hether such changes m ay be reasonably ex­

w orking

m isunderstanding

pected to im prove the quality o f the present deci-

o r deliberate perverseness could one claim th at

sion-m aking process. As Secretary o f the T reasury




O pen M arket C om m ittee m em bers are not co n ­

Dillon testified before Representative Patm an, the

cerned with long-run goals and confine their a tte n ­

burden o f p ro o f rests on the innovators.




Som e o f the issues discussed in the preceding
pages were explored by M r. Ellis in a session o f
graduate students in economics held in the B ank on
the morning o f the Sym posium . H is earlier rem arks
are here appended.

O ne o f the attractio n s o f central banking as a pro­

cipate in form ulation o f policy by initiating changes

fession is the perpetual stim ulation th at arises from

in discount rates, but final a u th o rity to determ ine

a continuing need to analyze how best to im plem ent

rates resides firmly with the Board o f G overnors.

m onetary policy in th e context o f ever-changing

Second, the Reserve Bank Presidents participate in

p roblem s and opportunities. In such analysis we

yearly ro tatio n in Open M arket policy determ in a­

alw ays seek to enlist the intellectual lift th at comes

tion but by virtue o f a seven to five m em bership

from frequent contact with current academ ic think­

m ajority the Board o f G overnors d om inates and

ing in this area o f econom ics.

determ ines final action by the C om m ittee.

It would be com forting to believe that central
banking procedures are so understood by all th at the

T hird and finally, all other instrum ents o f policy
reside solely with the Board o f G overnors.

debate can be centered on alternative theories or

Q uite obviously the Board o f G overnors, clearly

alternative prospective courses o f action. W hat is

representing the federal governm ent, both in form

distressing is to uncover w hat seem to be large

an d in substance controls the form ulation o f m one­

divergencies in understanding how the central bank,

tary policy.

or m ore specifically the Federal O pen M arket C om ­
m ittee, goes a bout its business o f form ulating and
im plem enting current m onetary policy.

Three Basic Policy Questions

Since th e afternoon session o f this sym posium will

W ith such w idespread participation in policy

exam ine the stru cture o f the central bank and

form ulation, how is coordination actually achieved?

theories o f its long-run e volution, we conceived of

The answ er rests in the central policy position o f the

a m orning session devoted exclusively to the form u­

Federal O pen M arket C om m ittee. M eeting every

lation o f current m onetary policy. We propose to

three weeks, the C om m ittee acts as the policy forum

do this by inviting you to sit in as participating

for discussion o f all aspects o f m onetary policy. By

m em bers o f this ban k ’s credit policy m eeting as

m eans o f a so-called “ go-ro u n d ” each G overnor

held every three weeks.

and each President is required to express his views

In recognition o f the fact th at you are all graduate

on the three basic questions o f m onetary policy.

students o f econom ics it will not be necessary to

F irst: W hat is the current and prospective course

describe the whole structure o f the Federal Reserve

o f the n ational econom y in relation to the p a ra ­

System. Perhaps it will be helpful, however, if I

m o u n t goals o f m axim um sustainable grow th con­

review very sketchily the decision-m aking process

sistent with full em ploym ent o f resources and gen­

and dwell briefly on long-run objectives o f policy.

eral price stability?

Y ou have each received a single sheet th at dia­

S eco n d : W hat role can bank credit creation best

gram s the organization o f the Federal Reserve Sys­

play in the sho rt-ru n and long-run national interest?

tem with reference to instrum ents o f credit policy.

T h ird : W hat direction and m agnitude o f change

L et me m ake ju st three observations about it while

in the instrum ents o f m onetary policy will tend to

you exam ine th at chart.

influence the credit creation process tow ard the

F irst, it show s th a t Reserve Bank directors parti­

objectives judged best?


W hen each G overnor and President have ex­

sodes o f econom ic experience because cycles them ­

pressed them selves on these fundam ental questions,

selves are generated by a broad series o f forces o f

C hairm an M artin m ust express a consensus th at can

change. It follows th a t m o n etary forces m ust also

win a m ajority o f the votes o f the voting m em bers.

be changed. There seems to be at least tacit recogni­

O nce a consensus has been achieved, the C hairm an

tion o f this fact in the conflicting testim ony o f the

m ust receive m ajority approval o f a directive to the

econom ists before the P atm an C om m ittee. T he fact

m anager o f the O pen M arket account.

th at relationships am ong prices, incom e and em ­
ployment, and m oney and credit, do not stand in
a fixed relation to each o th er in term s o f a m ath e ­

Relationships of Various Goals
C oncerning objectives o f m onetary policy, the

m atical equation m akes reliance on sim ple rules
quite impossible. T he proposal o f Professor M ilton
Friedm an th at a fixed rule o f m onetary expansion

beginning o f w isdom is to recognize th at different

be legislated as a rigid obligation of the m onetary

weights are attached to different goals by different

authority assum es, am ong other things, th at the

groups a t different times. T his is alm ost by definition

dem and for m oney is a stable function o f incom e

inevitable in a dem ocratic, free-enterprise econom y.

on which evidence at the least is in conflict. Reliance

C onventional wisdom accepts th at the System is

on his rule or even th a t o f Professor H arry Johnson,

ecncerned with stim ulation o f real ou tp u t while

who recom m ended th a t a fixed rate o f m oney exp an ­

seeking m axim um sustainable grow th and m inim um

sion be established as a priority objective o f dis­



A basic tenet o f such a view o f policy is th a t price
stability, business stability, and econom ic grow th

policy, could

lead to



bility than reliance on the ju d g m en t process w ithout
such com m itm ent.

are interrelated. Stability o f production and em ploy­

Some o f the System ’s critics have becom e preoc­

m ent are not viewed in a static sense for if they

cupied with models. T heir arrangem ents seem to

persisted for any extended period it would m ean

suggest that we can, through use o f a proper m odel,

lost ground. By the sam e token, while some fluctu­

so direct m onetary policy as to achieve the optim um

ations m ust be expected or m ay be desirable in the

o f the price, incom e, and em ploym ent relationships.

interest o f efficiency and progress, overexpansion

1 would suggest the need to realize th at we are not

a n d subsequent c ontraction in basic areas o f the

going to have the best o f all o f these objectives in

econom y are harm ful to sustained growth. F u rth e r­

the practical w orld in the foreseeable future. We

m ore, overall price stability is believed to be c o n ­

cannot relieve ourselves o f the responsibility for

sistent with the objective o f sustained grow th.

m aking choices by pretending th at only one decision

Price fluctuations in various com m odities and serv­

can be “ rig h t.”

ices are necessary to aid in allocation o f resources.

Once the direction o f credit policy has been decid­

But substantial changes in the general price level

ed upon we m ust rely upon som e guides to m ake it

in response to general forces, w hether m oney or

effective. But we should rem em ber that, because the

som e other, serve no useful purpose and are in

influence of the System is indirect, the closer policy

fact harm ful.

guides are related to the ultim ate goals the m ore

In applying any and all o f the instrum ents used by

likely the guides will reflect factors beyond the scope

the central bank, judgm ent is essential both in

o f System influence. A nd the closer the guides are

determ ining the general policy and in the choice

to System operations the less likely they will incor­

o f m ethods o r their com bination to accom plish it.

porate reflections o f long-run events which the Sys­

Each cycle is a unique experience and the m onetary

tem wants to affect. System influence is concentrated

influence will never be the same in succeeding epi­

on the supply side o f the credit process; the dem and


A Critique of Central Banking
side is determ ined by a num ber of factors beyond

m any slips and leakages in the causal relationships

the System ’s control. T his of course is the classical

which m ake precise connections between w hat the

dilem m a o f c redit c ontrols and suggests their lim ita­

System does and its final im pact on financial m a r­

tion and the necessity for other form s o f econom ic

kets difficult to estim ate. The so-called operating

action w hich can be m utually reinforcing and

factors such as a rise in float or decline in T reasury

com plem entary.

balances m ay offset an open m arket sale o f U .S.

The focus o f effort in policy, then, is upon general

governm ent securities designed to restrain credit

control over the volum e o f m oney and availability

expansion. Experience show s clearly th a t it is never

o f credit. T he p articular variable over which the

possible to predict exactly the expansion o f bank

System exercises its m ajor influence through its

credit and m oney which will result from a given

general c redit policies is the total o f com m ercial

addition to total reserves. Realizing this, it follows

bank reserves — a fluctuating variable at the m a r­

th at the System should be guided in its policy by

gin o f the credit supply. M otivated by comm ercial

som e m easure o f reserve availability and that it is

bank desires for profitable use o f funds, the broad

necessary for the System to live an d w ork in the

chain o f causation runs from reserves to loans,

m arkets where developm ents can be observed.

investm ents and deposits. These variables in turn

Having dem onstrated so throughly the difficulties

affect decisions o f the general public to spend,

and im ponderables inherent in m onetary policy

invest, and save. A vailable credit is allocated am ong

form ulation, let m e cap the problem by explicit

users in the public and private sectors by the deci­

recognition th a t there is no acceptable escape from

sions o f the lending and investm ent officers of our

the im perative need to m ake choices, because a

several th o u san d com petitive com m ercial banks.

failure to act is in itself recorded as a no-change

In this process the price m echanism in the form o f

decision in a m atrix w here related variables c o n ­

the interest ra te plays a part. Obviously there are

stantly change.


Comparative Statement of Condition

December 3 1 ,1 9 6 4

December 3 1 ,1 9 6 3

G old C ertificate R eserves........................................................

$ 768,581,992.75

$ 800,698,707.63

Federal Reserve N otes o f O ther Federal Reserve Banks.



O th er C a s h ...................................................................................



D iscounts and A dvances.........................................................



U. S. G overnm ent Securities — System A c c o u n t.........



C ash Item s in Process o f C o llectio n ....................................



Bank P rem ises.............................................................................



F oreign C u rre n c ie s..................................................................


All O th e r.......................................................................................



T otal A ssets.................................................................





M em ber Bank Reserve A cco u n ts...................................



U. S. T reasurer — C ollected F u n d s...............................



F o re ig n .....................................................................................



O th e r.........................................................................................



T otal D eposits............................................................

$ 723,965,723.48

$ 739,459,395.48

D eferred Availability Cash Ite m s........................................



O ther L iabilities..........................................................................



T otal L iabilities..........................................................






Federal Reserve N otes (n e t)...................................................
D eposits:

C apital Paid In ...........................................................................


T otal Capital A cco u n ts...........................................


T otal Liabilities and C apital A c c o u n ts.............





S u rp lu s.................................................................... .....................




Comparative Statement of Earnings and Expenses



C u rren t E arnings:
A dvances to M em ber B anks............................................





Foreign L oans on G o ld .....................................................


Invested Foreign Currency B alance...............................



U. S. G overnm ent Securities — System A c c o u n t. . .



AM O th e r.................................................................................



T otal C urrent E arn in g s.....................................................



N et E xpenses.........................................................................



C urrent N et E arn in g s..............................................................




A dditions to C u rren t N et Earnings:
Profit on Sales o f G overnm ent Securities (n e t).........



All O th e r....................... ........................................................



T otal A d d itio n s....................................................................



D eductions from C u rren t Net E arnings............................



N et A d d itio n ..................................................................



N et E arnings before Paym ents to U. S. T re a su ry .........



D ividends P a id ..........................................................................

$ 1,452,361.02

$ 1,376,442.38

Paym ents to U. S. Treasury (Interest on F. R, N otes).



T ransferred to Surplus (from S urplus)...............................






Volume Figures for Years 1963 and 1964

Volume in Pieces
or Units
(Daily Average)


Volume in
(Annual Total)

D iscounts and A dvances...........................



Daily A verage O u tsta n d in g .................



Purchases and Sales o f U. S. Securities
for M em ber B anks.................................





C urrency Sorted and C ounted ................





Coin C ounted and W rap p e d ...................





Check C ollection..........................................








N oncash C ollection:
N otes, D rafts, and C oupons
(except U. S. G o v e rn m en t)...........


Safekeeping o f Securities:
Pieces Received and D elivered..........





C oupons D etac h ed ................................





T ransfer o f F u n d s ........................................





Issues, R edem ptions and Exchanges:
U. S. Securities (D irect O b lig a tio n s).





U. S. Savings B o n d s.............................





All O th e r...................................................









and Direct R e m itta n ce s.......................





C urrency Verified and D estroyed...........











G overnm ent

C oupons


(D irect O blig atio n s)...............................

T axes:

D epositary


D eposits and W ithdraw als — T reasury
Tax and L oan A cco u n ts......................


Summary of Principal Changes

Statement of Condition

tem porary pressures on the key currencies — the
dollar and the pound.

Over the year 1964, total assets o f this Bank rose

Accom panying substantial im provem ent in high

$246 m illion — a b o u t 8 percent — reaching a new

speed processing o f check clearings, uncollected

record high o f $3.4 billion. Some sizable fluctua­

cash items fell some 13 percent despite an increase

tions occurred during the year in both assets and

in both num ber and dollar volum e o f checks.

liabilities an d are reflected in the accom panying

Float, derived from “ uncollected item s” on the

statem ent.

asset side and “ deferred availability item s” on the

A m ong the assets, gold certificates declined $32

liability side o f the statem ent, was only a b o u t one-

million, o r 4 percent, as a result o f the region’s

third the am o u n t o f last year. Favorable w eather

net unfavorable balance in the interdistrict settle­

conditions for tran sp o rta tio n were also a factor.

m ent fund. A lthough heavy Treasury transfers o f

Federal Reserve notes o f this Bank in circulation

funds were m ade to New England for debt and

increased a b o u t 8 percent — about the sam e as the

o ther fiscal operations, these were m ore th an

rise in

offset by o u tw ard m ovem ents on private financial

record level o f econom ic activity characteristic o f

and com m ercial account to other parts o f the

the year 1964. Some further substitution o f Federal

1963. T his change largely reflected the

nation, and by this B ank's participation in the


increase in the System A ccount’s outright holdings

certificates however was accom plished, continuing




denom ination



o f U . S. governm ent securities. In part, the net

the policy begun late in 1963. Total deposits were

gold loss represented the district’s share in the

ab o u t 2 percent lower th an in 1963. Larger T reasury

n a tio n ’s gold outflow abroad.

deposits and foreign deposits were m ore th an offset

T otal holdings o f U. S. governm ent securities

by a $37 m illion, or 5 percent, d rop in m em ber

rose a b o u t $340 m illion, or 21 percent. O ther

bank reserve accounts in response to year-end

changes included a large increase in discounts and

adjustm ents, m ost o f which involved short-term

advances, chiefly a result o f cross currents in

transfers to other districts.

financial flows which were unusually strong last

The substantial increase in “ other liabilities”

holdings doubled

arose from the transfer o f $22 m illion from surplus

again this year, reflecting this Bank’s share of the

to this account pending paym ent to the U . S.

additions to currencies held in the System ’s invest­

T reasury during 1965. A new policy regarding

m ent

surplus accounts o f the Reserve Banks established

Decem ber.








currency agreem ents in effect between the System

by the Board o f G overnors reduces these surplus

and foreign central banks was greater this year

accounts from m aintenance at a level o f subscribed

th an last. In p art this stemm ed from the crisis in

capital (twice paid in capital) to a level equal to

sterling which developed in late N ovem ber and

paid in capital. The Board reached this decision

Decem ber. T he currency agreements were opened

after considering th at grow th in both capital and

early in 1962 and represent m utual credit facilities.

accum ulated surplus, along with grow th in net

They have

earnings, w ould perm it m eeting contingencies if


in offsetting abnorm al and


Summary of Principal Changes
surplus was m aintained a t the paid in capital level.

checks and 6.6 percent in dollar volum e. A m ount-

Paid in capital rose a b o u t 5 percent (a custom ary

encoded checks received for processing on electronic

am o u n t) and reflected additions to m em bership

equipm ent increased from a daily average o f 599

and grow th in capital and surplus o f m em ber banks.

thousand in January 1964 to approxim ately 877

T his B ank’s gold reserve ratio fell to 27.3 percent

thousand in Decem ber. T he to tal volum e o f checks

from 30 percent a year ago an d is closely in line

handled by electronic high speed equipm ent during

w ith the gold reserve ratio o f the 12 Federal Reserve

1964 was 229 m illion, com pared with 121 m illion

Banks com bined. A lthough the n a tio n ’s gold loss

item s in 1963. D ue to the increasing use o f electronic

w as the sm allest since 1957 the continued increases

equipm ent, the num ber o f staff m em bers in the

in Federal Reserve note circulation and deposit

Check C ollection D epartm ent decreased to an

liabilities for the System as a whole contributed

average o f 480 during the year, com pared with an

im portantly to the decline in th e ratio.

average o f 646 in 1963.
The volum e o f currency received, counted and
sorted by the Bank during

Earnings and Expenses

1964 continued its

steady, norm al increase. O n the other hand, the

T otal cu rren t earnings o f the ban k rose about

a m ount o f coin counted and w rapped decreased

$11 m illion and am ounted to $68.9 m illion. E a rn ­

substantially, reflecting the continuing acute sh o rt­

ings on U. S. governm ent securities accounted for

age o f coin th ro u g h o u t the country. A rm ored car

virtually all o f this increase. A verage holdings of

service for the pickup and delivery o f currency and

these securities, as well as average yields, were

coin was extended to serve a num ber o f additional

higher th an in 1963. M ost o f th e other earnings

banking offices and now, with 517 offices receiving

sources show ed relatively sm all increases.

this service, appears to be approaching the present

N et expenses rose only fractionally, about $36

practical limits o f this m eans o f transportation.

tho u san d — three-tenths o f 1 percent — in spite o f

The activities o f the Fiscal Agency D epartm ent in

substantial increases in volum e o f operation. This

1964 continued a t approxim ately the sam e level as

relatively small increase reflects growing efficiency

1963, both in dollar volum e and in num ber of

in operations, continued

o f tech­

units handled. A lthough cash requirem ents o f the

nological im provem ents in certain o perations and,

Treasury continued high, no new financing tech­

intro d u ctio n

in part, a reduced average num ber o f employees.
N et earnings after all adjustm ents totaled $56.4
m illion, alm ost $11 m illion above 1963. Just over

niques were introduced and the experim ent o f
offering bonds at auction to syndicates o f dealers
was not repeated.

$1.4 m illion was paid to m em ber banks as their

W ire transfer o f funds for m em ber banks again

statu to ry 6 percent dividend on F ederal Reserve

rose to new highs in 1964, increasing 18 percent in

Bank stock. All o f the rem ainder, a bout $55

num ber and 13 percent in total dollar value. M uch

m illion, was paid to the T reasury as an interest

o f the increase was in intradistrict transfers and

charge levied by the Board o f G overnors under

reflects m ore active trading in federal funds by

Section 16 o f the Federal Reserve A ct on Federal

sm aller country banks through city correspondents.

R eserve notes not secured by gold certificates.

C onsistent





continuing strong credit dem and, and som e relative

Volume of Operations

tightening in m onetary policy, use o f the discount
window increased m oderately in 1964. The discount

D uring 1964, m ore th an 383 m illion checks were

ra te , which was raised from 3 percent to 3 Vi

processed, am ounting to $98 billion — an increase

percent in July, 1963, was raised to 4 percent in late

over the previous year o f 4.8 percent in num ber o f

N ovem ber, 1964. Daily average borrow ings, which


A Critique of Central Banking
have increased for three consecutive years from a

B urlington, V erm ont who served as a D irector

low o f $3.8 m illion in 1961 to $9.8 m illion in 1964,

from 1959 through 1964. Jam es R. C arter, President

continued to be at a substantially lower level than

o f N ashua C o rp o ratio n , N ashua, New H am pshire,

th a t prevailing d uring the late 1950’s when the daily

was re-elected a Class B D irector for the three-year

average reached a high o f $38.8 m illion in 1957. In

term ending Decem ber 31, 1967.

1964 there was a leveling off in the trend of the


D. C anham , E ditor in C hief o f The

previous tw o years tow ard increasing concentration

Christian Science M onitor, Boston, M assachusetts,

o f borrow ing am ong a relatively small num ber of

was reappointed a Class C D irector o f the Bank for

the larger city banks. This trend was associated

a three-year term ending D ecem ber 31, 1967, and

with wider use o f federal funds by sm aller country

was redesignated C hairm an o f the Board o f D irec­

banks, and the slight shift in 1964 may be attrib u ­

tors of the Bank and Federal Reserve A gent for

table to occasional inability o f some o f these banks


to obtain federal funds from their city corres­
pondents as availability o f funds

has become

som ew hat tighter during the year.

W illiam W ebster, C hairm an and C hief Executive
Officer, New E ngland Electric System , Boston,
M assachusetts, was redesignated D eputy C hairm an

Over the year as a whole, the larger volume of

o f the Board o f the Bank for 1965.

w ork was carried on with a decrease in the num ber
o f em ployees. The staff averaged 1337 during 1964,
o f which 1226 were full-time em ployees and 111
were part-tim e em ployees.

Law rence H. M artin, President, T he N ational
Shaw m ut Bank o f Boston, Boston, M assachusetts,
was reappointed by the Board o f D irectors for a

Changes in Directors
and Officers

third year as the m em ber o f the Federal A dvisory
Council to represent the F irst Federal Reserve
D istrict for 1965.

O n Septem ber 9, 1964, M ajor G eneral Jam es
M cC orm ack,


(R et.),




M assachusetts Institute o f Technology, Cam bridge,

R obert W. Eisenm enger, form erly D irector o f

M assachusetts, was appointed a Class C Director


for the unexpired portion o f the term ending

D irector o f Research, effective January I, 1965.

D ecem ber 31, 1965. He succeeds Dr. John T, Fey,

H arry



M itiguy,


form erly



R elations

form erly President o f the University o f Verm ont

Officer, was appointed A ssistant Vice President,

and now President o f the University o f W yoming.

effective Jan u a ry 1, 1965.

In the annual election of D irectors o f the Bank,

Eugene M. T angney, form erly A ssistant C ashier,

W illiam I. T ucker, President and T rust Officer of

was appointed A ssistant Vice President, effective

V erm ont N atio n al and Savings Bank, Brattleboro,

Ja n u a ry 1,1965.

V erm ont, was elected a Class A D irector for the

Louis A. Z ehner, A ssistant Vice President in

three-year term ending Decem ber 31, 1967. Mr.

charge o f bank relations and agricultural credit,

T ucker succeeds W illiam M. L ockw ood, President,

retired on A ugust 31, 1964, after 19 years o f service

H ow ard N ational Bank and T rust C om pany of

with the Bank.


Federal Reserve Bank of Boston



January 1, 1965

A ppointed

Erwin D. C anham , Chairman o f the Board and Federal Reserve A gent; Editor in Chief\
The C hristian Science M onitor, Boston, M assachusetts


W illiam W ebster, Deputy Chairman o f the B oard; Chairman o f the Board, New England
Electric System, Boston, M assachusetts


Jam es R. C arter, President, N ashua C o rp o ratio n , N ashua, New H am pshire


O strom Enders, Chairman o f the Board, H artford N ational Bank and T rust C om pany,
H artford, C onnecticut


D arius M. Kelley, President, T he O range N ational Bank, O range, M assachusetts


Jam es M cC orm ack, Vice President, M assachusetts Institute o f Technology,
C am bridge, M assachusetts


John R. Newell, President, Bath Iron W orks C orporation, Bath, Maine


W illiam R. R obbins, Vice President f o r Finance, United A ircraft C orporation,
E ast H artford, C onnecticut


W illiam I. T ucker, President, V erm ont N ational and Savings Bank, B rattleboro, V erm ont


Law rence H. M artin, President, T he N ational Shawm ut Bank o f Boston,
Boston, M assachusetts


Federal Reserve Bank of Boston

January 1, 1965
G eorge H. Ellis, President
Earle O. L atham , First Vice President
D. H arry Angney, Vice President
A nsgar R. Berge, Vice President
R obert W. Eisenm enger, Vice President and Director o f Research
L uther M. Hoyle, Jr., Vice President
O scar A. Schlaikjer, Vice President and General Counsel
C harles E. T urner, Vice President
G. G o rd o n W atts, Vice President
P arker B. W illis, Vice President and Economic Adviser
Stanley B. Lacks, General Auditor
L aurence H. Stone, Secretary and Associate GeneraI Counsel
Jarvis M. T hayer, Jr., Cashier
Paul S. A nderson, Financial Economist
Lee J. A ubrey, A ssistant Vice President
C harles H. Brady, Assistant Vice President
W allace D ickson, Assistant Vice President
H arry R. M itiguy, Assistant Vice President
L oring C. N ye, Assistant Vice President
Eugene M. T angney, Assistant Vice President
R ichard A. W alker, Assistant Vice President
Daniel A quilino, A ssistant Cashier
John J. B arrett, Assistant Cashier
Ripley M. K eating, Assistant Cashier
R ichard H. R adford, Assistant Cashier