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OF CENTRAL BANKING IN THE UNITED STATES Fiftieth Anniversary Federal Reserve Bank of Boston Annual Report 1 9 64 * B 4 a , / 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 4 P residen t m Central Banking Symposium November 13, 196 4 P age INTRO D U CTO RY REM ARKS George H. Ellis, President, Federal Reserve Bank of Boston 5 STRU CTU RA L CHANGES IN C EN TR A L BANKING Eli Shapiro, Professor of Finance, Harvard University 7 C EN TR A L BANKING IN R ELA TIO N TO GROW TH AND IN TERN A TIO N A L FIN A N C E Henry C. Wallich, Professor of Economics, Yale University 14 DISCUSSANTS James S. Duesenberry, Professor of Economics, Harvard University 20 Franco Modigliani, Professor of Industrial Management, Massachusetts Institute of Technology 24 James Tobin, Sterling Professor of Economics, Yale University 30 COM M ENTS AND SUMMARY The Honorable George W. Mitchell, Board of Governors of the Federal Reserve System 34 CONCLUDING REM ARKS George H. Ellis 38 A PPEN D IX 40 4 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 and few tables and chairs, a couple of “ cages,” three changing needs, opportunities and capabilities, the im portantly by self-initiated responses to 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 the 5 activities of 14,000 independent, privately A Critique of Central Banking ow ned, highly com petitive com m ercial banks. 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. 7 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 8 LIBR AR V 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 9 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 for four-year term s coterm inous with the 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 10 Structural Changes in Central Banking Board 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 establishing these requirem ents the to those o f the Com m ission. T here are two differ VII. 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 incorporating 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 to change the 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 11 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 12 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. 13 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 To 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.” Messrs. Friedm an, 1 can Patm an, say B runner is “ H appy and Fiftieth 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, 14 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 mix, 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. 15 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. 16 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 John H. W illiam s argued against 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 inflation. 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 17 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 18 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. 19 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 20 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. 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 21 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 to increase the volum e o f international lending under our enthusiasm for international lending. m aintain them . Perhaps we should reduce 22 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 23 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 I 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 24 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 supply will c ontain aggregate 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 25 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 26 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 27 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 28 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. 29 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 1940’s. 30 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, 31 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. 32 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. 33 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 insulated an official position in the Federal Reserve, w hat squabbles; it has outstanding staff resources and a from the 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 Federal 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 secondary 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. effects on Federal Reserve 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 of Reserve 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 substantial Federal 34 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 influenced by private Board f interests) perform 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 only 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 has suggested co ordination by 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 international 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 to attend O pen can financial be a b ro ad looking problem s, one can into be 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 The proposals heard this a fternoon largely 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 35 the 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 happened d eb t is n o t being utilized. In another sphere o f m oney supply, or w hat happened to bank credit. to 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 tend precedent and previous m ethods o f operation have m onetary environm ent in 1964 than in 1963. to indicate a som ew hat m ore to be rejustified in the light o f changing environ average But let me pass on to w hat I consider to be our m ajor problem — obsolescing m onetary theories. linkage between Federal Reserve 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 3.16 3.72 4.00 4.26 4.86 3.06 3.58 cratic inheritance! W hat is the 1964 W eekly averages 1963 m ent and changing techniques. Beware the b ureau restrictive 3.56 4.03 4.15 4.43 4.81 3.11 3.56 3.58 4.23 4.20 4.43 4.87 3.16 3.59 3.43 3.98 4.11 4.35 4.80 3.07 3.51 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 three different barom eters give three 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. 36 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 and em pirically — and 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. 37 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 the 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 theoretical possibility o f the Federal Reserve 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. and has developed a close relationship with 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 38 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 out. Only through 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. 39 . ADDGndlX 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? 40 Appendix 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 fluctuation. cretionary 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 greater insta 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 41 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. 42 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. 48,700,675.00 37,225,150.00 O th er C a s h ................................................................................... 8,894,321.74 9,181,862.48 D iscounts and A dvances......................................................... 18,790,000.00 1,576,000.00 U. S. G overnm ent Securities — System A c c o u n t......... 1,911,003,000.00 1,571.172,000.00 C ash Item s in Process o f C o llectio n .................................... 643,757,723.43 741,814,143.44 Bank P rem ises............................................................................. 2,981,377.85 3,066,269.65 F oreign C u rre n c ie s.................................................................. 220.127.116.11 7,325,774.84 All O th e r....................................................................................... 13.272.655.87 11,736,347.59 T otal A ssets................................................................. $3,430,136,885.51 $3,183,796,255.63 $2,083,514,114.00 $1,925,992,915.00 M em ber Bank Reserve A cco u n ts................................... 653,333,820.74 690,566,660.86 U. S. T reasurer — C ollected F u n d s............................... 54,790,728.09 36,597,776.13 F o re ig n ..................................................................................... 10,560,000.00 7,680,000.00 O th e r......................................................................................... 5,281,174.65 4,614,958.49 T otal D eposits............................................................ $ 723,965,723.48 $ 739,459,395.48 D eferred Availability Cash Ite m s........................................ 542,283,828.56 443,665,162.87 O ther L iabilities.......................................................................... 30,670,419.47 3,829,282.28 T otal L iabilities.......................................................... $3,380,434,085.51 $3,112,946,755.63 $ $ ASSETS LIABILITIES Federal Reserve N otes (n e t)................................................... D eposits: CAPITAL ACCOUNTS C apital Paid In ........................................................................... 24,851,400.00 T otal Capital A cco u n ts........................................... S T otal Liabilities and C apital A c c o u n ts............. $3,430,136,885.51 49,702,800.00 23,616,500.00 47,233,000.00 24,851.400.00 S u rp lu s.................................................................... ..................... $ 70,849,500.00 $3,183,796,255.63 Comparative Statement of Earnings and Expenses 1964 1963 C u rren t E arnings: A dvances to M em ber B anks............................................ S 350,322.28 B 235,128.53 Foreign L oans on G o ld ..................................................... 10,483.64 Invested Foreign Currency B alance............................... 299,440.71 97,018.13 U. S. G overnm ent Securities — System A c c o u n t. . . 68,290,446.94 57,691,810.02 AM O th e r................................................................................. 16,628.18 15,031.04 T otal C urrent E arn in g s..................................................... 68,967,321.75 58,070,906.68 N et E xpenses......................................................................... 12,559,605.73 12,522,759.85 C urrent N et E arn in g s.............................................................. 56,407,716.02 45,548,146.83 31,918.96 A dditions to C u rren t N et Earnings: Profit on Sales o f G overnm ent Securities (n e t)......... 32,238.00 15,896.43 All O th e r....................... ........................................................ 34.508.95 34,152.63 T otal A d d itio n s.................................................................... 66.746.95 50,049.06 D eductions from C u rren t Net E arnings............................ 5,280.68 10,821.72 N et A d d itio n .................................................................. 61,466.27 39,227.34 N et E arnings before Paym ents to U. S. T re a su ry ......... $56,469,182.29 $45,587,374.17 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). 77,398,421.27 41,648,031.79 T ransferred to Surplus (from S urplus)............................... (22,381,600.00) 2,562,900.00 556,469,182.29 $45,587,374.17 44 Volume Figures for Years 1963 and 1964 Volume in Pieces or Units (Daily Average) 1964 1963 TRANSACTION Volume in Dollars (Annual Total) 1964 1963 D iscounts and A dvances........................... 1,406,625,000 1,206,233,000 Daily A verage O u tsta n d in g ................. 9,847,309 7,293,805 Purchases and Sales o f U. S. Securities for M em ber B anks................................. 13 12 456,045,100 468,996,450 C urrency Sorted and C ounted ................ 1,269,032 1,222,336 2,188,915,606 2,025,521,547 Coin C ounted and W rap p e d ................... 2,240,268 3,973,179 45,109,200 98,417,800 Check C ollection.......................................... 1,467,829 1,441,383 96,006,897,357 91,890,892,192 4,870 404,784,246 466,063,023 N oncash C ollection: N otes, D rafts, and C oupons (except U. S. G o v e rn m en t)........... 4,c Safekeeping o f Securities: Pieces Received and D elivered.......... 746 1,011 11,106,965,597 1,254,073,586 C oupons D etac h ed ................................ 2,479 2,134 49,426,403 48,462,868 T ransfer o f F u n d s ........................................ 706 602 140,617,869,064 124,419,468,279 Issues, R edem ptions and Exchanges: U. S. Securities (D irect O b lig a tio n s). 1,471 1,295 18,331,731,665 18,824,399,656 U. S. Savings B o n d s............................. 39,061 39,250 540,906,622 543,468,449 All O th e r................................................... 85 14 72,893,110 38,518,000 2,351 2,521 211,095,511 206,939,841 and Direct R e m itta n ce s....................... 3,518 3,443 2,377,404,940 2,469,036,110 C urrency Verified and D estroyed........... 205,642 189,829 61,224,000 63,165,000 578 590 8,276,148,075 8,275,390,616 U. S. G overnm ent C oupons Paid (D irect O blig atio n s)............................... Federal T axes: D epositary Receipts D eposits and W ithdraw als — T reasury Tax and L oan A cco u n ts...................... 45 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 Reserve increase in the System A ccount’s outright holdings certificates however was accom plished, continuing notes of $1 denom ination for silver 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. Foreign account. currency Activity under the reciprocal 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 helped in offsetting abnorm al and 46 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 with expanding business activity, 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 47 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 Erwin 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 1965. 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. M E M B E R OF A D V I S O R Y COUNCIL 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. D IR E C T O R S O n Septem ber 9, 1964, M ajor G eneral Jam es M cC orm ack, USAF (R et.), Vice President of M assachusetts Institute o f Technology, Cam bridge, OFFICERS R obert W. Eisenm enger, form erly D irector o f M assachusetts, was appointed a Class C Director Research, 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 was R. appointed M itiguy, Vice form erly President Bank and 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. 48 Federal Reserve Bank of Boston DIRECTORS Elected or 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 1959 W illiam W ebster, Deputy Chairman o f the B oard; Chairman o f the Board, New England Electric System, Boston, M assachusetts 1961 Jam es R. C arter, President, N ashua C o rp o ratio n , N ashua, New H am pshire 1962 O strom Enders, Chairman o f the Board, H artford N ational Bank and T rust C om pany, H artford, C onnecticut 1963 D arius M. Kelley, President, T he O range N ational Bank, O range, M assachusetts 1964 Jam es M cC orm ack, Vice President, M assachusetts Institute o f Technology, C am bridge, M assachusetts 1964 John R. Newell, President, Bath Iron W orks C orporation, Bath, Maine 1963 W illiam R. R obbins, Vice President f o r Finance, United A ircraft C orporation, E ast H artford, C onnecticut 1960 W illiam I. T ucker, President, V erm ont N ational and Savings Bank, B rattleboro, V erm ont 1965 MEMBER OF FEDERAL ADVISORY COUNCIL Law rence H. M artin, President, T he N ational Shawm ut Bank o f Boston, Boston, M assachusetts 49 Federal Reserve Bank of Boston OFFICERS 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 50