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1960
FEDERAL

RESER VE

ANNUAL

REPORT




BANK

OF

R IC H M O N D




FEDERAL RESERVE B A N K OF RICH M OND
A N N U A L REPORT
1960






To the Member Banks:
We are pleased to present the Annual Report of the
Federal Reserve Bank of Richmond for the year 1960.
This year's report features the entire Federal Reserve
System—its objectives, its structure, its policy tools, and
its monetary policy actions during the past year. We
hope that this presentation will help clarify the Federal
Reserve's role as the nation's central bank, and that
it will contribute to a better understanding of what the
exercise of the System's monetary and credit powers
may reasonably be expected to accomplish. In ad ­
dition, the report contains a summary of Fifth District
operations, a current list of officers and directors, and
comparative financial statements.
On behalf of the directors and staff, we wish to
express our appreciation for your cooperation and
support throughout the year.
Very truly yours,

Chairman of
the Board

President

C

O

N

T

E

N

T

S

The Federal Reserve at W o r k ................................. 4

System Policy O b je c t iv e s ................................. 4
Structure of the Federal Reserve System

.

.

5

Service F u n ctio n s..................................................7
System Influence on Economic Activity

. . .

9

Impact of Monetary P o lic y ................................. 11
The Policy-Making P r o c e s s ................................. 15
Federal Reserve Policy in 1960

......................

17

Limitations and Advantages of
Monetary P o l i c y ............................................ 22
Summary of Operations— 1 9 6 0

.....................

Comparative Statement of Condition

. . . .

26
28

Comparative Statement of Earnings
and E x p e n s e s ..........................................29
Directors and Officers— R ic h m o n d .................30
Directors and Officers— B a lt im o r e .................32
Directors and Officers— C h a r lo t t e .................32

THE FEDERAL RESERVE A T W O R K



THE FEDERAL RESERVE A T W O R K
“Federal Reserve Cuts Bank Rate
To Spur Lending”
“Fed Cuts Stock Margin Requirement
to 70 PC”
“ Vault Cash Added To Reserves”
“Fed Security Purchases Boost Bank
Free Funds”

T h e s e c a p t io n s f r o m
le a d in g

New

Y o rk

1 9 6 0 is s u e s o f

n e w sp a p e rs

c le a r ly

s h o w th e F e d e ra l R e s e rv e o fte n m a d e b ig
n e w s in 1 9 6 0 .
n u m e rou s
" W h a t is th e 'F e d '? "
e s t a b lis h

p o lic y ?"

" W h a t d o e s it d o ? "
"W h a t a re

its a i m s ? "

The "b ig

q u e s t io n s

" H o w d o its a c t io n s a ffe c t th e e c o n o m y ? "
"H o w

n e w s " b ro u g h t

fro m

th e
"H o w

e ffe c tiv e ly c a n it a c c o m p lis h its o b j e c t iv e s ? "

p u b lic .
does

it

A n sw e rs

to th e se q u e s t io n s lie a t th e h e a r t o f o u r n a t io n 's f in a n c ia l m e c h a n is m .

S Y S T E M POLICY O B JE C TIV E S
T h e F e d e ra l R e s e rv e S y s t e m is th e n a t io n 's ce n tra l b a n k .

L ike o t h e r ce n tra l b a n k s t h r o u g h o u t th e

w o r ld , its c h ie f r e s p o n s ib ilit y is to r e g u la t e th e f lo w o f m o n e y a n d c re d it in o r d e r to p ro m o t e e c o n o m ic
s t a b ilit y a n d g r o w t h .

It a ls o p e r f o r m s m a n y s e rv ic e f u n c t io n s f o r c o m m e rc ia l b a n k s , th e T r e a s u r y , a n d

th e p u b lic .
Its p o lic y is a im e d a t p r o v i d i n g

m o n e t a r y c o n d it io n s f a v o r a b l e to th e r e a liz a t io n o f th re e o b je c ­

tive s: a h ig h le v e l o f e m p lo y m e n t , s t a b ilit y in th e o v e r - a ll p ric e le vel, a n d a n e n v ir o n m e n t g e a r e d to a
g r o w in g e co n o m y.

A ll Sy ste m

p o lic y a c t io n s a r e c o n d u c te d w it h a ll th re e g o a l s in m in d e v e n t h o u g h

b u s in e s s d e v e lo p m e n t s a t tim e s a lt e r th e re la t iv e u r g e n c y o f th e th re e.

P o lic ie s o f re s t r a in t a n d e a s e

a re b u t t w o p h a s e s o f S y s t e m e ffo rt s to a c h ie v e th e se th re e a im s .
T h e th re e u lt im a te g o a l s
e m p lo y m e n t a n
n e ss

p ra c tic e s

econom y can
becom e

o f Sy ste m

p o lic y a r e

n e ith e r r e m a in

w a s t e f u l;

e c o n o m ic c o lla p s e m a y d e v e lo p .

s p e c u la t io n

in te rre la t e d

p ro sp e ro u s
re p la c e s

and

nor gro w .

p r o d u c t iv e




a c tiv ity ;

p e rsis te n t
and

W it h o u t

h ig h

in fla t io n ,

b u s i­

e x ce sse s

le a d in g

to

F in a lly , h ig h e m p lo y m e n t a n d a s t a b le p ric e le v e l p r o m o t e th e k in d

o f s a v i n g s , in c e n tiv e s, a n d e n t e r p r is e n e e d e d f o r e c o n o m ic g r o w t h .

4

in te rd e p e n d e n t .
W it h

H e nce , S y s t e m

p o lic ie s d e s ig n e d

to m a in t a in h ig h e m p lo y m e n t a n d fo s te r p ric e s t a b ilit y

a ls o

p ro d u c e

a

m o n e ta ry

e n v ir o n m e n t

con­

d u c iv e to lo n g -t e r m g r o w t h .

S T R U C T U R E OF TH E F E D E R A L R E S E R V E S Y S T E M
T h e S y s t e m h a s s e v e r a l im p o r t a n t p a rts: m e m b e r b a n k s , th e F e d e ra l R e s e rv e

B a n k s , th e B o a r d

of

G o v e r n o r s , th e F e d e ra l O p e n M a r k e t C o m m itte e , a n d th e F e d e ra l A d v i s o r y C o u n c il.

MEMBER BANKS

A t th e b a s e o f th e F e d e ra l R e s e rv e p y r a m id a r e th e S y s t e m 's 6 , 2 0 0 m e m b e r b a n k s .

A l l n a t io n a l b a n k s m u s t b e m e m b e r s , a n d S ta te b a n k s

m ay

jo in

if t h e y m e e t c e rt a in

re q u ire m e n ts .

M e m b e r b a n k s h o ld n e a r ly 8 5 p e r ce nt o f a ll c o m m e r c ia l b a n k a s s e t s a n d d e p o s it s a lt h o u g h le ss th a n
h a lf th e n a t io n 's c o m m e r c ia l b a n k s b e lo n g to th e S y s te m .
T h e re a r e th re e c la s s if ic a t io n s o f m e m b e r b a n k s .

T h e la r g e r N e w Y o r k a n d C h ic a g o b a n k s a re

c a lle d ce n tra l r e s e rv e city b a n k s , m o s t m e m b e r b a n k s in 4 9 o t h e r citie s a r e c la s s if ie d a s re s e rv e city
b a n k s , a n d a ll o t h e r b a n k s a r e c a lle d c o u n t r y b a n k s .
M e m b e rs h ip

conveys m a n y

p r iv ile g e s b u t a ls o

in v o lv e s o b lig a t io n s .

O b lig a t io n s

in c lu d e : h o ld ­

i n g s p e c if ie d r e s e rv e s a g a i n s t d e p o s its ; s u b s c r ib in g to c a p it a l sto c k o f th e d istrict F e d e ra l R e s e rv e B a n k ;
c o m p ly in g w it h v a r io u s r e q u ir e m e n t s o f F e d e ra l b a n k i n g

la w ; c o m p le t in g

n e c e ssa ry Sy ste m

re p o rts;

a n d in th e c a s e o f S t a t e m e m b e r b a n k s , b e in g e x a m in e d a n d s u p e r v is e d b y th e F e d e ra l R e s e rv e B a n k s .
A m o n g th e m o r e im p o r t a n t a d v a n t a g e s a b a n k re c e iv e s f r o m S y s t e m m e m b e r s h ip a r e th e p re st ig e
o f b e in g a m e m b e r b a n k a n d th e p r iv ile g e s o f b o r r o w i n g u n d e r c e rt a in c o n d it io n s f r o m th e F e d e ra l R e ­
s e r v e B a n k s , u s in g S y s t e m c h e c k c o lle c tio n a n d w ir e t r a n s f e r fa c ilitie s, o b t a in in g c u r r e n c y a n d co in fre e
o f t r a n s p o r t a t io n co sts, r e c e iv in g a n a n n u a l c u m u la t iv e 6 p e r ce n t d iv id e n d o n its F e d e r a l R e s e rv e B a n k
sto ck, v o t in g in th e e le c tio n o f s ix o f th e n in e d ir e c to rs o f th e d istric t F e d e ra l R e s e rv e B a n k , a n d re q u e s t ­
in g in f o r m a t io n a n d r e c e iv in g a i d o n v a r io u s p r o b le m s f r o m th e F e d e r a l R e s e rv e sta ff.

FEDERAL RESERVE BANKS
F e d e ra l R e s e rv e B a n k .
th e d istricts.

T h e c o u n t r y is d iv id e d in to

t w e lv e

F e d e ra l

R e s e rv e

d istric ts— e a c h

w it h

a

T h e re a r e a ls o 2 4 F e d e ra l R e s e rv e B a n k b r a n c h e s s e r v i n g p a r t ic u la r a r e a s w it h in

C itie s w it h F e d e r a l R e s e rv e h e a d o f fic e s a re : B o sto n , N e w Y o r k , P h ila d e lp h ia , C le v e la n d ,

R ic h m o n d , A t la n t a , C h ic a g o , St. L o u is, M in n e a p o lis , K a n s a s C ity , D a lla s , a n d S a n F ra n c isc o .

Th e se 3 6

R e s e r v e B a n k o ffic e s c o m p r is e th e s e c o n d le v e l o f th e p y r a m id .
T h e c o r p o r a t e s tru c tu re o f F e d e ra l R e s e rv e B a n k s r e s e m b le s t h a t o f c o m m e r c ia l b a n k s .
c a p it a l sto ck, h a v e b o a r d s o f d ire c to rs w h o elect th e ir o ffic e rs, h a v e
d e p a rt m e n ts , a n d

o b t a in

t h e ir e a r n i n g s

A l l iss u e

m a n y s im ila r o f f ic ia l titles a n d

la r g e ly f r o m in te re st o n lo a n s a n d in v e s tm e n t s .

T h e re a r e th re e m a in d iffe re n c e s , h o w e v e r , s t e m m in g f r o m th e R e s e rv e B a n k s ' r e s p o n s ib ilit ie s to
th e p u b lic .

First, th e p o w e r s o f R e s e rv e B a n k d ir e c to rs d if f e r c o n s id e r a b l y f r o m

b a n k d ire c to rs.

Second,

R e se rve B a n k s a re

th o s e

o f c o m m e rc ia l

n o t p ro f it -m o t iv a t e d , a lt h o u g h t h e y d o e a r n la r g e p ro fits.

E x p e n s e s a n d m e m b e r b a n k d iv i d e n d s a b s o r b s o m e e a r n in g s , b u t m o s t a r e t u r n e d o v e r to th e U. S.
T r e a s u r y a s " in t e r e s t " o n F e d e ra l R e s e rv e note s.
to th e T r e a s u r y r a n $ 8 9 7 , 0 0 0 , 0 0 0 .

In 1 9 6 0 d iv i d e n d s to ta le d $ 2 4 , 0 0 0 , 0 0 0 , a n d p a y m e n t s

T h ird , if th e R e s e rv e B a n k s s h o u ld e v e r b e liq u id a t e d , th e F e d e ra l

G o v e r n m e n t w o u ld re c e iv e a n y a s s e t s r e m a in in g a f t e r th e sto c k w a s p a id o f f a t p a r .
E a c h R e s e rv e B a n k h a s th re e C la s s A d ire c to rs, th re e C la s s B d ire c to rs, a n d th r e e C la s s C d ire c to rs.
M e m b e r b a n k s elect b o t h C la s s A

a n d C la s s B d ire c to rs b y

re s e n t a t iv e s o f th e m e m b e r b a n k s t o c k h o ld e r s a n d u s u a l ly a r e

b a llo t.

m u s t b e a c t iv e ly e n g a g e d in a g r ic u lt u r e , in d u s t r y , o r c o m m e rc e a n d
d ire c to rs, o r e m p lo y e e s .




T h o se

c o m m e rc ia l

in

C la s s A

b a n k e rs.

m ust be

C la s s

re p ­

B d ire c to rs

m a y n o t b e e ith e r b a n k o ffic e rs,

C la s s C d ire c to rs — o n e o f w h o m is d e s ig n a t e d a s c h a ir m a n a n d o n e a s d e p u t y

5

c h a ir m a n o f th e b o a r d — a r e a p p o in t e d b y
th e B o a r d o f G o v e r n o r s .

A C la s s C d ir e c ­

to r m a y b e n e ith e r a d ire c to r, o ffic e r, e m ­
p lo y e e , n o r s t o c k h o ld e r o f a n y b a n k .
In a d d it io n to th e ir r e g u l a r d u t ie s in
o v e r s e e in g

th e o p e r a t io n s o f th e R e s e rv e

B a n k s , th e b o a r d s o f d ire c to rs a l s o h a v e
c e rt a in

d u tie s

p o lic y .

in

th e

fie ld

of

m o n e ta ry

First, t h e y e s ta b lis h , su b je c t to th e

a p p r o v a l o f th e B o a r d
d is c o u n t

ra t e s

ch a rg e

on

b an ks.

o f G o v e r n o r s , th e

F e d e ra l

sh o rt-te rm

Second,

th e y

R e s e rv e

lo a n s
elect

to

Banks
m em ber

fo u r

of

th e

p r e s id e n t s o f th e F e d e ra l R e s e rv e B a n k s to
se rve
M a rke t

as

m em b e rs

of

C o m m itte e .

th e

F e d e ra l

T h ird ,

th e y

Open

p r o v id e

th e R e s e rv e B a n k p re s id e n t s a n d th e B o a r d
o f G o v e r n o r s w it h a n in v a lu a b le s o u rc e o f
" g r a s s r o o t s " in f o r m a t io n o n d istric t b u s i ­
n e s s c o n d it io n s.

BOARD OF GOVERNORS

A t th e p e a k o f

th e p y r a m i d is th e B o a r d o f G o v e r n o r s in
W a sh in g t o n .
a p p o in t e d
S t a t e s w it h th e a d v ic e a n d

c o n s e n t o f th e S e n a te .

B o a r d m e m b e r s a r e a p p o in t e d f o r f o u r t e e n - y e a r

te rm s a n d a r e in e lig ib le f o r r e a p p o in t m e n t a ft e r h a v i n g
m a y c o m e f r o m th e s a m e F e d e ra l R e s e rv e d istrict.

It c o n sis ts o f s e v e n m e m b e r s

b y th e P re sid e n t o f th e U n ite d

s e r v e d a fu ll te rm .

N o tw o B o a rd

m em b e rs

T h e C h a i r m a n a n d V ic e C h a i r m a n o f th e B o a r d a r e

a p p o in t e d b y th e P re s id e n t o f th e U n ite d S t a t e s fr o m a m o n g th e B o a r d m e m b e r s f o r a f o u r - y e a r te rm
a n d c a n b e r e a p p o in t e d .
O n e o f th e B o a r d 's im p o r t a n t d u tie s is s u p e r v is io n .

T h e B o a r d m u s t a p p r o v e th e s a la r i e s o f a ll

R e s e rv e B a n k p e r s o n n e l, th e a p p o in t m e n t o f R e s e rv e B a n k p r e s id e n t s a n d fir st v ic e p re sid e n ts , a n d th e
b u d g e t s o f R e s e rv e B a n k s .
c o m p lia n c e w it h

T h e B o a r d a ls o e x a m in e s R e s e rv e B a n k s a n d b r a n c h e s e a c h y e a r to e n s u r e

r e g u la t io n s a n d

e c o n o m ic r e s e a r c h a n d

d ata

p r o p e r c o n tro l o f e x p e n d it u r e s .

c o lle c tio n a n d

In a d d it io n , it c o o r d in a t e s S y s t e m

r e v ie w s a ll S y s t e m p u b lic a t io n s .

e s t a b lis h m e n t o f c e rta in m e m b e r b a n k b r a n c h e s , s o m e

bank

m e rg e rs, a n d

It m u s t a ls o a p p r o v e th e
c e rta in

o t h e r c o m m e r c ia l

b a n k a c tio n s.
T h e B o a r d 's p r im e fu n c tio n , h o w e v e r , is th e f o r m u la t io n o f m o n e t a r y p o lic y . In a d d it io n to p a s s i n g
u p o n p r o p o s e d c h a n g e s in th e d is c o u n t ra te , it h a s a u t h o r it y to c h a n g e m e m b e r b a n k r e s e r v e r e q u ir e ­
m e n t s w it h in

s p e c if ie d

lim its, to se t m a r g i n

r e q u ir e m e n t s f o r th e f i n a n c i n g

n a t io n a l s e c u rity e x c h a n g e s , a n d to se t m a x im u m
p o sits.

Even

o f s e c u ritie s t r a d e d

on

m e m b e r b a n k s 7 tim e d e ­

p a r t ic ip a t e in th e f o r m u la t io n a n d a d m in is t r a t io n o f o p e n m a r k e t p o lic y .

FEDERAL OPEN MARKET COMMITTEE
ta n t p o lic y - m a k in g




on

m o re im p o r t a n t , m e m b e r s o f th e B o a r d o f G o v e r n o r s a r e a ls o m e m b e r s o f th e F e d e ra l

O p e n M a r k e t C o m m itt e e a n d

6

in te re st ra t e s p a y a b l e

b o d y — is c o m p o s e d

T h e F e d e ra l O p e n M a r k e t C o m m it t e e — th e S y s t e m 's m o s t i m p o r ­
o f th e s e v e n m e m b e r s o f th e B o a r d p lu s th e p r e s id e n t o f th e

N e w Y o r k F e d e ra l R e s e rv e B a n k a n d f o u r
o t h e r R e s e rv e

Bank

p re sid e n ts .

Its m a in

r e s p o n s ib ilit y is to e s t a b lis h S y s t e m

open

m a r k e t p o lic y — th e e x te n t to w h ic h th e S y s ­
te m b u y s a n d se lls G o v e r n m e n t a n d o th e r
se c u ritie s.

It o r d i n a r i l y m e e ts e v e r y th re e

w e e k s b u t s o m e t im e s m o r e o fte n .
T h e C o m m it t e e 's p u r c h a s e s a n d s a le s
a r e c o n d u c te d b y th e " T r a d i n g D e s k " o f the
N e w Y o r k R e s e rv e B a n k .

G o v e rn m e n t se­

c u ritie s b o u g h t o u t r ig h t a r e t h e n p ro r a t e d
a m o n g th e t w e lv e R e s e rv e B a n k s a c c o r d in g
to a f o r m u la b a s e d o n B a n k size.

OTHER COMMITTEES

Se ve ral

o th e r c o m ­

m itte e s a ls o p l a y s ig n if ic a n t ro le s in S y s te m
o p e r a t io n s .

One

is th e t w e lv e - m a n

Fed­

e r a l A d v i s o r y C o u n c il c o m p o s e d o f b a n k e r s ,
o n e fr o m e a c h o f th e F e d e r a l R e s e rv e d is ­
tricts.

M e m b e r s a r e e le cte d b y th e b o a r d s

o f d ire c to rs o f th e R e s e r v e B a n k s o f th e ir
d istricts.

T h e C o u n c il m e e ts in W a s h i n g ­

to n

tim e s

fo u r

a

year

and

a d v is e s

the

B o a r d o n im p o r t a n t c u r re n t d e v e lo p m e n t s .
T h e C o n f e r e n c e o f P re s id e n t s a n d the C o n ­
fe r e n c e o f C h a ir m e n a ls o m e e t p e r io d ic a lly to d is c u s s
Syste m

c o m m itte e s c o n t in u o u s ly s t u d y S y s t e m

Syste m

p ro b le m s .

In

a d d it io n ,

se ve ra l

o th e r

o p e r a t io n s a n d p o lic y p ro b le m s .

S Y S T E M S E R V IC E F U N C T IO N S
L ike m o s t o t h e r c e n tra l b a n k s , th e F e d e ra l R e s e r v e p e r f o r m s m a n y s e rv ic e fu n c t io n s f o r the p u b lic,
th e T r e a s u r y , a n d c o m m e r c ia l b a n k s .

FISCAL A G EN CY FUNCTIONS
a ge n ts.

T h e t w e lv e F e d e ra l R e s e r v e B a n k s a ct a s th e G o v e r n m e n t 's p r in c ip a l fis c a l

T h e y h o ld th e T r e a s u r y 's c h e c k in g a c c o u n ts , re c e iv e a p p lic a t io n s fr o m th e p u b lic f o r th e p u r ­

c h a s e o f s e c u ritie s b e in g s o ld b y th e T r e a s u r y , a llo t s e c u ritie s a m o n g b id d e r s , d e liv e r se c u ritie s, collect
fro m

s e c u rity b u y e r s , r e d e e m

se cu ritie s, w ir e - t r a n s f e r se c u ritie s to o t h e r cities, m a k e

d e n o m in a t io n a l

e x c h a n g e s o f se cu ritie s, p a y in te re st c o u p o n s , a n d a s s is t th e T r e a s u r y a n d o t h e r G o v e r n m e n t a g e n c ie s in
m a n y other w a y s.

T h e R e s e rv e B a n k s re c e iv e n o c o m p e n s a t io n

f o r h a n d l in g

th e T r e a s u r y 's c h e c k in g

a c c o u n ts a n d r e d e e m in g its c o u p o n s , b u t t h e y a r e r e im b u r s e d f o r m o st o f th e o t h e r f is c a l a g e n c y w o r k
t h e y p e r fo rm .

D u r in g

1 9 6 0 th e S y s t e m

h a n d l e d f o r th e T r e a s u r y a b o u t 1 9 8 m illio n G o v e r n m e n t s e ­

c u ritie s v a l u e d a t $ 5 2 7 b illio n .

COLLECTION OF CHECKS A N D N O N CA SH ITEMS
q u a n t it ie s o f b a n k c h e c k s a n d
a n d b o n d co u p o n s.

D u r i n g 1 9 6 0 th e S y s t e m p r o c e s s e d o v e r 4 b illio n c h e c k s t o t a lin g m o r e th a n $ 1 .3

t rillio n a n d a lm o s t 3 8 m illio n n o n c a s h




F e d e r a l R e s e rv e B a n k s a ls o co lle ct f o r th e p u b lic v a s t

s u b s t a n t ia l a m o u n t s o f n o n c a s h ite m s su c h a s d ra ft s, p r o m is s o r y notes,
ite m s v a l u e d a t c lo se to $ 1 1

b illio n .

7

WIRE TRANSFER OF FUNDS
ta te s

p aym e n ts

by

T h e S y s t e m a ls o f a c ili­

m a k in g

a v a ila b le

to

m em ber

b a n k s a w ir e s e r v ic e th a t c a n b e u s e d to t r a n s f e r
f u n d s q u ic k ly f r o m
othe r.

o n e p a r t o f th e c o u n t r y to a n ­

F o r e x a m p le , a R ic h m o n d b u y e r w is h i n g to

pay a New

Y o r k s e lle r th e s a m e d a y c a n h a v e a

m e m b e r b a n k re q u e s t th e R ic h m o n d

R e s e rv e B a n k

to t r a n s f e r th e f u n d s to th e s e lle r 's b a n k .

T h e R ic h ­

m o n d F e d e ra l R e s e rv e B a n k d e d u c t s th e f u n d s f r o m
its m e m b e r 's

re s e rv e

a c c o u n t, a n d

th e

New

Y o rk

F e d e ra l R e s e rv e B a n k c re d its th e re s e rv e a c c o u n t o f
th e N e w Y o r k m e m b e r b a n k s o th a t it in tu r n c a n
c re d it th e s e lle r 's d e p o sit.

T h e t w o R e s e rv e B a n k s

th e n settle b y w ir e a t the e n d o f th e d a y t h r o u g h th e
Syste m

c le a r in g a g e n c y — th e In te rd istric t Se ttle m e n t

F u n d in W a s h in g t o n .

D u r in g 1 9 6 0 th e S y s t e m m a d e

a lm o s t 3 m illio n w ir e t r a n s f e r s to t a lin g a b o u t $ 2 . 4
trillio n .

HANDLING OF CURRENCY A N D CO IN

T h e F e d e ra l

R e s e rv e B a n k s a r e th e c h a n n e ls t h r o u g h w h ic h p r a c ­
tic a lly a ll c a s h

m o v e s in to a n d

o u t o f c irc u la tio n .

W h e n th e p u b lic w it h d r a w s c a s h fr o m

c o m m e rc ia l

b a n k s , th e b a n k s r e p le n is h th e ir s u p p ly b y o b t a i n ­
i n g s h ip m e n t s fr o m th e R e s e rv e B a n k s .

A s th e p u b ­

lic 's

re tu rn

need

fo r ca sh

s u r p lu s m o n e y a n d
a c c o u n ts.
c o u n te d

D u r in g

ta p e rs

off,

banks

th e ir

re c e iv e c re d its to th e ir r e s e rv e
1960

o v e r 1 4 m illio n

th e

Syste m

b ills a n d

re c e iv e d

and

c o in s v a l u e d

at

n e a r ly $ 3 3 b illio n .

NOTE ISSUE

A p p r o x im a t e l y

n a t io n 's " p o c k e t

85

per

m o n e y " is is s u e d

by

ce n t
th e

of

th e

F e d e ra l

R e s e rv e B a n k s in th e f o r m o f F e d e ra l R e s e rv e n ote s.
W h e n a F e d e ra l R e s e rv e B a n k n e e d s m o re c u r r e n c y
to m e e t th e d e m a n d s o f its m e m b e r b a n k s , it c a n
o b t a in F e d e ra l R e s e rv e n o te s b y p le d g i n g g o ld c e r­
tific a te s e q u a l to a t le a st 2 5 p e r cent o f th e v a l u e
o f th e n o te s a n d th e b a la n c e in G o v e r n m e n t s e c u r i­
tie s o r " e l i g i b l e " p a p e r .

C o n v e r s e ly , R e s e rv e B a n k s

c a n re tire th e ir n o te s a n d r e c o v e r th e ir p le d g e d g o ld
ce rtific a te s a n d s e c u ritie s b y r e t u r n in g th e n o te s f o r
c a n c e lla t io n w h e n th e d e m a n d f o r c u r re n c y d e c lin e s.

OTHER SERVICE FUNCTIONS T h e R e s e rv e B a n k s a n d
th e B o a r d
ty p e s

8



of

o f G o v e r n o r s a ls o
s e rv ic e

fu n c t io n s

p r o v id e

su c h

as

m any

o th e r

a n s w e rin g

re ­




q u e sts; d is t r ib u t in g
oth e r

m o n t h ly

p u b lic a t io n s ;

b u s in e s s

e x a m in in g

r e v ie w s

b an ks;

s p e a k e r s f o r v a r io u s o c c a s io n s ; a n d

and

p r o v id in g

upon

re q u e st,

a s s is t in g b a n k s in s o lv i n g p ro b le m s .

H O W D O E S TH E S Y S T E M
IN F LU E N C E E C O N O M IC
A C T IV IT Y ?
Syste m
a ff e c t in g

p o lic y

o p e ra te s

th e a v a i l a b i l i t y

of

p r im a r ily
bank

th ro u gh

c re d it a n d

th e

m o n e y s u p p l y a n d t h e r e b y th e v o lu m e o f s p e n d in g .
W h ile th e in itia l im p a c t is fe lt b y th e c o m m e rc ia l
b a n k i n g sy st e m , e ffe cts o f m o n e t a r y p o lic y s p r e a d
t h r o u g h o u t th e n a t io n 's e n tire f in a n c ia l m e c h a n is m
b e c a u s e o f th e c e n tra l ro le p la y e d

b y c o m m e rc ia l

b a n k s in m a jo r lo a n a n d s e c u ritie s m a rk e ts.

W HY COMMERCIAL BANKS ARE DIFFERENT

Com ­

m e r c ia l b a n k s p l a y a k e y ro le in m o n e t a r y p o lic y
b ecau se

th e y

a lo n e

am ong

can "c re a te " n e w m oney.

f in a n c ia l

in stitu tio n s

O t h e r f in a n c ia l in stitu tio n s

m e r e ly t r a n s f e r e x is t in g m o n e y to b o r r o w e r s w h e n
th e y m a k e

lo a n s o r in v e s tm e n t s .

T h e c o m m e rc ia l

b a n k i n g s y ste m , h o w e v e r , c a n in c re a s e the m o n e y
s u p p ly b y p a y i n g

o u t c a s h o r s e ttin g u p n e w d e ­

m a n d d e p o s it s w h e n it e x p a n d s its e a r n in g a sse ts.
Dem and

d e p o s it s

a re

by

fa r

th e

m o re

im p o r t a n t

o f th e tw o , c o n st itu t in g 8 5 p e r ce n t o f the total a n d
a c c o u n t in g f o r a b o u t 9 0 p e r ce n t o f a ll p a y m e n t s .
Of

c o u rse ,

not e v e ry

in c r e a s e

in

c o m m e rc ia l

b a n k e a r n i n g a s s e t s re su lts in a n e q u a l rise in th e
p r iv a t e ly - h e ld

m oney

s u p p l y — th a t

p o rt io n

of

m a n d d e p o s it s a n d c a s h h e ld b y th e p u b lic .

de­

Som e­

tim e s o t h e r t y p e s o f d e p o s it s su c h a s tim e, G o v e r n ­
m e n t, o r in t e r b a n k

ris e

in st e a d .

G e n e r a lly ,

how ­

e v e r, a n e x p a n s i o n in b a n k e a r n i n g a s s e t s in c re a s e s
th e p r iv a t e ly - h e ld m o n e y s u p p ly .
H e r e 's h o w th e p ro c e s s o f m o n e y c re a tio n w o r k s .
A s s u m e t h a t th e F e d e ra l R e s e rv e b u y s G o v e r n m e n t
s e c u ritie s f r o m

a

d e a le r , c r e d itin g th e re s e rv e a c ­

c o u n t o f th e d e a le r 's b a n k in p a y m e n t .

S in c e c o m ­

m e r c ia l b a n k s a r e p ro f it-m o t iv a te d , th a t b a n k w ill
th e n p r o b a b l y u s e its n e w re s e rv e f u n d s to e x p a n d
e a r n i n g a sse ts.

W h e t h e r it m a k e s lo a n s o r in v e s t-

9

m en ts, d e p o s its o r c a s h o u t s id e b a n k s w ill in c re a s e .

If th e b a n k m a k e s lo a n s , it w ill p r o b a b l y cre a te

th e n e w m o n e y b y c r e d it in g its b o r r o w e r s 7 d e m a n d d e p o sits.

If it p u r c h a s e s se cu ritie s, d e p o s it s w ill

rise w h e n th e s e c u rity d e a le r d e p o s it s th e f u n d s re c e iv e d fr o m the b a n k .
If th e se n e w d e p o s it s a r e c h e c k e d o u t to o t h e r b a n k s , re s e rv e s o f th e se b a n k s w ill in c r e a s e a n d
th o se o f th e d e a le r 's b a n k w ill d e c re a se .

T h e b a n k s h o l d in g th e se n e w d e p o s it s m u s t th e n se t a s id e

p a r t o f th e ir n e w re s e r v e s to m e e t r e s e rv e r e q u ir e m e n t s a g a i n s t th e ir a d d it io n a l d e p o s it s b u t w ill b e a b le
to lo a n o r in v e s t a p p r o x i m a t e l y th e r e m a in in g a m o u n t .

A s the y, too, e x p a n d e a r n i n g a sse ts, d e p o s it s

a n d p o s s ib ly p u b lic c a s h h o l d in g s w ill rise still fu rth e r.

A n o th e r

p art

of

th e

new

re se rve s

w ill

be

u s e d to m e e t r e s e r v e re q u ir e m e n t s a g a i n s t th e se a d d it io n a l d e p o sits, b u t s o m e e x c e s s re s e r v e s w ill still
b e a v a i l a b l e f o r fu r t h e r lo a n o r in v e s tm e n t e x p a n s io n .
rise to th e

p o in t th a t b a n k s

m u s t u s e a ll th e

new

E v e n tu a lly , the p ro c e s s e n d s w h e n

r e s e rv e s

in

m e e t in g

re se rve

d e p o s its

re q u ir e m e n ts .

By

th is tim e, h o w e v e r , d e p o s it s w ill h a v e in c r e a s e d b y s e v e r a l tim e s th e o r ig in a l a d d it io n to b a n k re se rv e s.

THE KEY ROLE OF M O N EY
f o r g o o d s a n d se rv ic e s .

M o n e y is u n iq u e in th a t n o t h in g e lse is g e n e r a lly a c c e p t a b le

in

paym ent

O t h e r a s s e t s s u c h a s s a v i n g s d e p o s its , s h o rt-te rm T r e a s u r y se cu ritie s, a n d s a v ­

in g s a n d lo a n s h a r e s s o c lo s e ly r e s e m b le m o n e y t h a t t h e y o fte n p e r fo rm s o m e o f th e f u n c t io n s o f m o n e y .
N e v e rt h e le s s , su c h a s s e t s c a n n o t b e s p e n t d ire c tly .

T h e y m u st first b e c o n v e rt e d in to m o n e y if a h o ld e r

is to b u y s o m e t h in g in p la c e o f th e m .
R is in g e c o n o m ic a c t iv it y in v o lv e s in c r e a s in g e x p e n d it u r e s , a n d r is in g e x p e n d it u r e s re q u ir e e ith e r
a d d it io n a l m o n e y o r a h ig h e r m o n e t a r y v e lo c it y — th e ra te a t w h ic h m o n e y is s p e n t o n g o o d s a n d s e r v ­
ices.

If e x p e n d it u r e s f in a n c e d w it h e ith e r n e w m o n e y o r r is in g v e lo c it y in c re a s e fa s t e r t h a n th e f lo w

of good s a n d

se rv ic e s , in f la t io n

in s u ffic ie n t to p r e v e n t re c e ssio n .

re su lts.

If e x p e n d it u r e s d o n o t k e e p p a c e w it h th e flo w , d e m a n d is

T h u s, a s o u n d e c o n o m y re q u ir e s th e " r i g h t "

S in c e m o n e y p la y s s u c h a k e y ro le in th e s p e n d in g

a m o u n t o f s p e n d in g .

p ro c e ss, it is e s se n tia l th a t th e

b a n k in g

sy ste m

cre a te n e ith e r to o m u c h n o r to o little n e w m o n e y .

THE IMPORTANCE OF BANK RESERVES

To a

la r g e exte n t, c h a n g e s in th e v o lu m e o f b a n k

d e t e rm in e th e a m o u n t o f m o n e y b a n k s c a n crea te.
to a c q u ir e a d d it io n a l e a r n i n g

a sse ts, w h ic h

re s e rv e s

W h e n r e s e rv e s in c re a se , b a n k s h a v e a n in c e n tiv e

e x p a n d s d e p o s it s o r c a s h o u t s id e

ban ks.

C o n v e r s e ly , a

re d u c tio n in r e s e r v e s u s u a l ly fo rc e s b a n k s to cu t b a c k lo a n s a n d / o r in v e s tm e n ts , t h e r e b y r e d u c in g d e ­
p o sits a n d c a s h o u t s id e b a n k s .
T h e e x te n t to w h ic h b a n k s c a n e x p a n d th e p r iv a t e ly - h e ld m o n e y s u p p l y o n th e b a s is o f n e w re ­
s e r v e s v a r ie s a c c o r d in g to a n u m b e r o f fa c to rs.

N o r m a lly ,

th e

lo w e r

th e

re se rve

la r g e r th e e x p a n s i o n s in c e le ss r e s e rv e s a r e r e q u ir e d f o r e a c h d o lla r o f d e p o s its .
m o n e y " e x p a n d s , th e s m a lle r th e in c r e a s e s in c e b a n k s m u s t d r a w
th e ir c u sto m e rs.

dow n

re q u ir e m e n ts ,

th e

T h e m o re " p o c k e t

r e s e rv e s to o b t a in c a s h f o r

C h a n g e s in th e v o lu m e o f d e p o s it s th a t a r e n ot p a r t o f th e p r iv a t e m o n e y s u p p l y -

in te rb a n k , G o v e r n m e n t , a n d tim e d e p o s it s — c a n a ls o
r e le a s in g re se rv e s.

have

im p o r t a n t

e ffe cts

by

e ith e r

a b s o r b in g

or

In a d d it io n , s h ifts o f re s e r v e s a m o n g c la s s e s o f b a n k s a ffe c t c re d it c r e a t io n sin c e

d if fe re n t g r o u p s o f m e m b e r b a n k s h o ld v a r y i n g p e r c e n t a g e s o f r e s e rv e s a g a i n s t d e p o s its .

F in a lly , v a r i ­

a t io n s in th e v o lu m e o f e x c e s s re s e r v e s t h a t b a n k s c h o o s e to m a in t a in c a n in c r e a s e o r d e c r e a s e e x ­
p a n s io n lim its.
D e s p ite a ll th e s e v a r ia t io n s a n

in c r e a s e in th e v o lu m e o f r e s e rv e s g e n e r a lly re su lts in th e c r e a ­

tio n o f a d d it io n a l m o n e y , a n d a d e c lin e in r e s e r v e s u s u a l ly le a d s to a re d u c tio n in th e m o n e y s u p p ly .
C o n s e q u e n t ly , th e F e d e ra l R e s e rv e c a n a ffe c t in te re st ra te s a n d th e a v a i la b i li t y o f b a n k c re d it t h r o u g h
its c o n tro l o v e r th e v o lu m e o f b a n k re s e rv e s .

B e c a u s e th e b a n k i n g sy ste m p la y s s u c h a v it a l ro le in

th e c re d it m e c h a n is m , su c h e ffe c ts g e n e r a lly s p r e a d t h r o u g h o u t a ll c re d it m a r k e t s.

10



TH E IM P A C T OF M O N E T A R Y POLICY
M o n e t a r y p o lic y a ffe c ts e x p e n d it u r e s b y in f lu e n c in g th e b e h a v io r o f th re e d if fe re n t g r o u p s : le n d e rs,
b o rro w e rs, a n d n o n b o r ro w in g sp e n d e rs.
P r o b a b l y th e m o s t im p o r t a n t e ffe c t is its in flu e n c e o n th e a v a i la b i li t y o f le n d e r s ' fu n d s .
s o m e p e r io d s , f o r in sta n c e , th e S y s t e m

D u rin g

m a y o b s e r v e in f la t io n a r y p r e s s u r e s d e v e lo p in g a s th e p u b lic 's

d e m a n d f o r g o o d s a n d s e rv ic e s e x c e e d s th e a v a i l a b l e s u p p ly .

S in c e p a r t o f th is d e m a n d

is a l w a y s

f in a n c e d b y cred it, th e S y s t e m a t th e s e tim e s a d o p t s a p o lic y o f re s tr a in t to tr y to p r e v e n t the v o lu m e
o f lo a n a b le f u n d s f r o m in c r e a s in g a s f a s t a s th e d e m a n d s f o r c re d it rise.
D u r i n g th e se p e r io d s , le n d e r s m a y t a k e t w o t y p e s o f a c t io n to b a la n c e c re d it d e m a n d s w it h th e ir
a v a i l a b l e s u p p l y o f lo a n a b le fu n d s .

First, t h e y m a y in c re a s e th e ir p ric e s— th e in te re st ra t e s th e y c h a r g e .

In m a n y c a se s, h o w e v e r , in te re st ra t e s d o n o t rise e n o u g h to p r e v e n t b o r r o w e r s ' d e m a n d s fr o m o u t r u n ­
n in g a v a ila b le fu n d s.
m e a n s — r a i s in g
p e n s a t in g

T h u s, le n d e r s in a d d it io n o fte n

"r a t io n "

th e ir s t a n d a r d s o f c re d it w o r t h in e s s , r e q u ir in g

b a la n c e s in o r d e r to lim it th e ir a v a i l a b l e

r o w e r s c o n s e q u e n t ly c a n n o t e x p a n d

fu n d s

to

c re d it a m o n g

b o rro w e rs

by

v a r io u s

la r g e r d o w n p a y m e n t s , o r la r g e r c o m ­
th e

b e st

c re d it

risk s.

M a r g in a l

b o r­

th e ir s p e n d in g sin c e t h e y a r e u n a b l e to o b t a in a s m u c h c re d it

a s t h e y w a n t e v e n t h o u g h th e y a r e w il li n g to p a y e x is t in g in te re st ra tes.
O n th e o t h e r h a n d , th e F e d a t tim e s m a y c o n s id e r it a p p r o p r ia t e
c re d it to g i v e a b o o s t to to ta l e x p e n d it u r e s .

to in c r e a s e th e a v a i la b i li t y o f

T h is " e a s y m o n e y " p o lic y p r o v id e s le n d e r s w it h f u n d s to

a c c o m m o d a t e m a r g i n a l b o r r o w e r s p r e v io u s ly p a r t o f th e " u n s a t is f ie d f r in g e o f b o r r o w e r s " a n d a ls o e n ­
c o u r a g e s le n d e r s to re d u c e in te re st ra t e s to a ttra c t still m o re b o r r o w e r s .
B o r r o w e r s ' c re d it d e m a n d s a r e a ffe c te d in s e v e r a l w a y s .
n o b o d y k n o w s e x a c t ly h o w
s o m e m a r g i n a l projects.

W h e n m o n e y tig h te n s, s o m e d e m a n d s —

m a n y — a r e u n d o u b t e d l y cut b a c k b e c a u s e h i g h e r in te re st ra t e s d is c o u r a g e

T h e e x p e c te d d if fic u lt y o f o b t a in in g th e d e s ir e d c re d it a c c o m m o d a t io n a ls o

m a y d e t e r b o r r o w e r s w h o h a v e d o u b t s a b o u t b e in g a b le to o b t a in s u ff ic ie n t f u n d s to c o m p le te th e ir
p ro je cts e v e n t h o u g h in itia l f i n a n c i n g

is a v a ila b l e .

L e g a l in te re st ra te c e ilin g s o n G - l lo a n s a n d s o m e

S t a t e a n d lo c a l b o n d is s u e s a ls o c u t b o r r o w e r s ' d e m a n d s b y r e m o v in g p o t e n t ia l h o m e b u y e r s a n d g o v ­
e r n m e n t s f r o m th e m a r k e t w h e n p r e v a i li n g ra t e s e x c e e d th e a m o u n t s t h e y c a n le g a ll y p a y .
lo sse s, s u c h a s d e c lin e s in b o n d p ric e s r e s u lt in g f r o m
b o rro w e rs

fro m

u n d e r t a k in g

p roje cts.

h ig h e r ra te s, m a y

P o rt fo lio

lik e w is e d is c o u r a g e p o t e n t ia l

C o n v e r s e ly , e a s y m o n e y c a n s t im u la t e b o r r o w e r s ' d e m a n d s b y

lo w e r in g ra te s, b y f o s t e r in g e x p e c t a t io n s th a t f u n d s w ill b e m o r e r e a d il y a v a ila b l e , a n d

b y c r e a t in g

" p a p e r " p o r t fo lio p ro fits.
T ig h t a n d e a s y m o n e y c a n a ls o in flu e n c e th e a tt itu d e s o f s p e n d e r s w h o n e ith e r b o r r o w
An

n o r le n d .

e ffe c tiv e t ig h t m o n e y p o lic y m a y , f o r in sta n c e , d a m p e n in f la t io n p s y c h o lo g y a n d c a u s e th e p o s t ­

p o n e m e n t o f s o m e o u t la y s th a t m ig h t o t h e r w is e h a v e b e e n m a d e to g e t a h e a d o f th e p ric e rise s.
a d d it io n , it m a y c a u s e c e rta in s p e n d e r s to re d u c e e x p e n d it u r e s b y c a u s i n g
c u r it y h o ld in g s .

In

p o r t fo lio lo ss e s in th e ir s e ­

C o n v e r s e ly , e a s y m o n e y c a n s t im u la t e o u t la y s b y f o s t e r in g a "t h in g s - w ill- g e t - b e t t e r "

a t m o s p h e r e a n d b y c r e a t in g p a p e r p r o f it s in s p e n d e r s ' p o rtfo lio s.

THE TOOLS OF CREDIT POLICY

T h e S y s t e m h a s t w o ty p e s o f to o ls w it h w h ic h it c a n a ffe c t the le v e l o f

e c o n o m ic a c tiv ity : q u a n t it a t iv e o r g e n e r a l c re d it c o n t ro ls a n d q u a lit a t iv e o r se le c tiv e co n tro ls.

Q u a n t i­

ta t iv e c o n tro ls in flu e n c e th e v o lu m e o f b a n k r e s e r v e s a n d , t h r o u g h th e m , in te re st ra t e s a n d th e a v a i l ­
a b ilit y o f cred it.

Q u a lit a t iv e c o n tro ls, h o w e v e r , a r e d ire c te d a t a p a r t ic u la r k in d o f credit.

The S y s ­

t e m 's q u a n t it a t iv e to o ls a re : c h a n g e s in th e d is c o u n t rate, c h a n g e s in r e s e r v e re q u ir e m e n ts , a n d o p e n
m a r k e t o p e r a t io n s .

A t p re se n t, th e F e d 's o n l y q u a lit a t iv e c o n tro ls a r e c h a n g e s in m a r g i n re q u ir e m e n t s

o n s e c u ritie s liste d o n n a t io n a l s e c u ritie s e x c h a n g e s .




11

The Discount Rate

P e r h a p s th e best

k n o w n o f th e q u a n t it a t iv e to o ls is th e d is ­
c o u n t ra te — th e in te re st ra te c h a r g e d m e m ­
b e r b a n k s o n lo a n s f r o m F e d e ra l R e se rv e
B a n ks.

Mem ber

banks

tw o w a y s: b y g iv in g

can

b o rro w

th e ir o w n

in

s e c u re d

n o te s o r b y r e d is c o u n t in g d ra ft s, b ills o f
e x c h a n g e , o r n o te s f r o m th e ir p o rtfo lio s.
In p ra ctice , v ir t u a lly a ll b a n k s u se th e ir
o w n n o te s s e c u re d

b y G o v e r n m e n t o b li­

g a t io n s .
Changes

in

th e

d is c o u n t

ra te m u st

b e m a d e s e p a r a t e ly b y e a c h F e d e ra l R e ­
s e r v e B a n k s in c e th e B a n k 's d ir e c to rs in iti­
a te th e c h a n g e .

G e n e r a lly , a ll

R e se rv e

B a n k s a c t a t a b o u t th e s a m e tim e , h o w ­
e v e r, s in c e a ll m a k e th e ir d e c is io n s o n th e
b a s is o f th e s a m e s o r t o f e v id e n c e . D if f e r ­
e n c e s in t im in g re su lt m a i n ly f r o m v a r i a ­
tio n s in th e m e e t in g d a t e s o f th e tw e lv e
b o a r d s o f d ire c to rs.

T h e in itia l c h a n g e is

th e im p o r t a n t o n e , h o w e v e r , s in c e b u y e r s
a n d s e lle rs in th e m a r k e t g e n e r a lly e x p e c t
th a t o th e r R e s e rv e B a n k s w ill s o o n ta k e
s im ila r a c tio n s.
C e r t a in v it a l e ffe c ts o f c h a n g e s in th e d is c o u n t ra te a r e p s y c h o lo g ic a l.

S u c h e ffe c ts a r e p a r t ic u la r ­

ly im p o r t a n t w h e n o b s e r v e r s fe e l th e d is c o u n t ra te is b e in g u s e d b y th e S y s t e m to s ig n a l a s h if t in th e
d ire c tio n o f p o lic y .

In s u c h c a se s, th e f in a n c ia l m a r k e t s re a c t im m e d ia t e ly — s o m e t im e s e v e n in a d v a n c e

o f S y s t e m a c t io n s — w h e n th e m o v e is a n tic ip a t e d .

If th e ra te is in c re a s e d , in te re st ra t e s — p a r t ic u la r ly

th o se o n sh o rt-te rm s e c u ritie s — g e n e r a lly ris e a n d c re d it m a r k e t s tig h te n .

C o n v e r s e ly , a cut in th e d is ­

c o u n t ra te th a t c le a r ly s ig n a l s a n e a s in g o f p o lic y is

by

o r d i n a r i ly

f o llo w e d

e a s ie r

c o n d it io n s

in

th e

m o n e y a n d c a p it a l m a r k e t s. A t tim e s, h o w e v e r , th e S y s t e m n u d g e s cre d it m a r k e t s fir s t w it h its o p e n m a r ­
ket o p e r a t io n s a n d c h a n g e s d is c o u n t ra t e s o n l y to b r in g th e m in to lin e w it h o t h e r m o n e y ra te s.
changes have

Such

little im m e d ia t e e ffe ct o n th e m o n e y m a r k e t sin c e t h e y a r e d is c o u n t e d w e ll in a d v a n c e .

C h a n g e s in th e d is c o u n t ra te a ls o h a v e s o m e d ire c t e ffe c ts o n sh o rt-te rm in te re st ra t e s b y m a k i n g
b o r r o w i n g s fr o m th e C e n t r a l B a n k e ith e r m o r e o r le ss co stly.

W h e n th e d is c o u n t ra te is in c re a s e d , b a n k s

a r e m o re in c lin e d to a d j u s t t h e ir re s e rv e p o s it io n s b y s e llin g s h o rt-te rm G o v e r n m e n t se c u ritie s r a t h e r t h a n
t h r o u g h e x p a n d i n g th e ir b o r r o w i n g s a t th e Fe d.
c u rity p ric e s a n d

r a is e t h e ir y ie ld s .

Th e se

T h e in c r e a s e d s a le o f se c u ritie s te n d s to lo w e r s e ­

h i g h e r m a r k e t y ie ld s in tu r n te n d to p u s h u p lo n g e r-t e r m

in te re st rates.
O n th e o t h e r h a n d , if th e d is c o u n t ra te is lo w e r e d d u r i n g a n e a s y m o n e y p e r io d , b a n k s a r e lik e ly
to m a in t a in b o r r o w i n g s a t th e F e d 's d is c o u n t w i n d o w a t a h ig h e r le ve l t h a n w o u l d o t h e r w is e b e th e ca se .
T h is t e n d s to p u s h ra t e s lo w e r b y e n c o u r a g i n g b a n k s to h o ld la r g e r q u a n t it ie s o f G o v e r n m e n t se cu ritie s.

12



Open Market Operations O p e n m a r ­
ket o p e r a t io n s a r e th e S y s t e m 's m o s t im ­
p o r t a n t c re d it tool.

O p e r a t io n s a r e c o n ­

d u c te d p r im a r ily in G o v e r n m e n t se cu ritie s,
b u t th e S y s t e m a ls o b u y s a n d s e lls b a n k ­
e r s ' a c c e p ta n c e s .
m ay

be

under
th e

B o th k in d s o f se c u ritie s

p u rc h a se d

re p u rch a se

d e a le r s

to

e ith e r

o u t r ig h t

a gre e m e n ts

buy

back

or

r e q u ir in g

th e

se c u ritie s

w it h in a f e w d a y s .
S e c u r it y p u r c h a s e s a n d s a le s d ire c tly
a ffe c t th e v o lu m e

of

m em ber b an k

re ­

s e r v e s a n d , c o n s e q u e n tly , th e o v e r -a ll cost
and

a v a i l a b i l i t y o f credit.

Sy ste m

c h a s e s in c re a s e r e s e rv e s a n d
b a n k in g

s y st e m

m u ltip le

am o u n t.

to e x p a n d

p u r­

e n a b le the
c re d it b y

C o n v e rse ly ,

a

Syste m

s a le s re d u c e re s e r v e s a n d fo rc e b a n k s to
c o n tra c t credit.
Open

m a r k e t o p e r a t io n s a r e e ith e r

d e f e n s iv e o r d y n a m ic .

D e f e n s iv e o p e r a ­

tio n s a r e th o s e t a k e n to o ffse t o t h e r f a c ­
to rs th a t c h a n g e th e v o lu m e o f m e m b e r
b a n k re s e rv e s .
f l o w s o r in c r e a s e s in T r e a s u r y d e p o s it s a t th e Fed a r e

t e n d in g

to

re d u ce

If, f o r e x a m p le , g o ld o u t­

m em ber

bank

re se rv e s,

th e

S y s t e m m a y m a k e o ffs e tt in g G o v e r n m e n t s e c u rity p u r c h a s e s e v e n t h o u g h it is n o t t r y in g to e a s e cre d it
p o lic y .
re d u c e

C o n v e r s e ly , d u r i n g
re s e r v e s to o fa st.

t ig h t m o n e y p e r io d s, it m a y b u y s e c u ritie s if o t h e r fa c t o r s a r e t e n d in g to
T h u s , it is im p o s s ib le to tell fr o m a s a le o r a p u r c h a s e w h e t h e r th e S y s te m

is t ig h t e n in g o r e a s i n g u n le s s o n e k n o w s h o w o t h e r fa c t o r s a r e a f f e c t in g re se rv e s.
D y n a m ic o p e r a t io n s c o n sis t o f e ith e r c a u s in g o r p e r m it t in g c h a n g e s in b a n k s ' r e s e r v e p o s it io n s in
o r d e r to s tim u la t e e c o n o m ic a c t iv it y o r p r e v e n t in fla t io n .
o p e r a t io n s ,

it o fte n

m ust ta k e

d e f e n s iv e

Even

w hen

th e

Syste m

c o n d u c ts

d y n a m ic

m e a s u r e s a s w e ll s o t h a t th e d y n a m ic p o lic y c a n

p ro c e e d

s m o o t h ly .

Reserve Requirements

T h e S y s t e m 's to o l w it h th e m o s t im m e d ia t e a n d w id e s p r e a d im p a c t is the

B o a r d 's p o w e r to v a r y m e m b e r b a n k re s e r v e r e q u ir e m e n t s w it h in s p e c if ie d lim its.

O n tim e d e p o s its ,

th e lim its a r e 3 p e r ce n t to 6 p e r ce n t f o r a ll m e m b e r b a n k s . O n d e m a n d d e p o s its , th e y a r e 1 0 p e r cent
to 2 2 p e r ce n t f o r ce n tra l r e s e r v e a n d r e s e rv e c ity b a n k s a n d 7 p e r c e n t to 1 4 p e r ce nt f o r c o u n t r y b a n k s .
C h a n g e s in r e s e r v e re q u ir e m e n t s a ffe c t m e m b e r

bank

a c t io n s

in

tw o

w ays.

First,

th e y

e ith e r

d e s t r o y o r c re a te e x c e s s r e s e r v e s b y c h a n g i n g th e a m o u n t o f re s e r v e s re q u ir e d a g a i n s t e x is t in g d e p o sits.
R e d u c tio n s in re s e rv e re q u ir e m e n t s r e le a s e re s e r v e s a n d
p r iv a t e ly - h e ld

m oney

s u p p ly .

In c r e a s e s

in

in re q u ir e m e n t s a lt e r th e a m o u n t o f d e p o s it s a g i v e n




g e n e r a lly

b r in g

about an

r e q u ir e m e n t s h a v e th e o p p o s it e effect.

e x p a n s io n

in th e

Second, ch a n ge s

v o lu m e o f r e s e r v e s c a n s u p p o r t.

If r e s e rv e re ­

13

q u ir e m e n t s a r e
d e p o s its .

1 0 p e r cent, $ 1 , 0 0 0 , 0 0 0 in a d d it io n a l re s e r v e s c a n s u p p o r t u p to $ 1 0 , 0 0 0 , 0 0 0 o f n e w

If r e q u ir e m e n t s a r e 2 0

p e r cent, h o w e v e r , the a d d it io n a l r e s e rv e s c a n n o t s u p p o r t m o re t h a n

$ 5 , 0 0 0 , 0 0 0 o f n e w d e p o s its .

M argin Requirements

T h e F e d e ra l R e s e rv e B o a r d a ls o h a s th e r ig h t to se t m a r g in r e q u ir e m e n t s —

th e p e r c e n t a g e d o w n p a y m e n t r e q u ir e d
liste d o n

n a t io n a l e x c h a n g e s .

w hen

b o r r o w i n g to f in a n c e p u r c h a s e s o r h o l d i n g s o f se c u ritie s

T h e re a r e t w o s e p a r a t e

r e g u la t io n s — R e g u la t io n

R e g u la t io n T c o v e rs b r o k e r s 7 o r d e a le r s ' lo a n s to c u sto m e rs.

T and

R e g u la t io n

U.

R e g u la t io n U re g u la t e s c o m m e r c ia l b a n k

lo a n s to b r o k e rs , d e a le r s, o r o th e r c u sto m e rs.
M a r g in
chases a n d

r e q u ir e m e n t s a r e
h o ld in g s .

d ire c te d a t o n l y o n e ty p e o f c re d it— th a t u s e d to f in a n c e s e c u rity p u r ­

If e x p a n s i o n o f s e c u rity lo a n s

s e c u rity p rice s, re q u ir e m e n t s c a n

b e ra is e d .

a p p e a rs

to b e a

fa c to r in

undue

in c r e a s e s

in

A t o t h e r tim e s, w h e n th e re s e e m s to b e little d a n g e r o f

s p e c u la t io n , th e S y s t e m cu ts re q u ir e m e n t s sin c e it p r e fe r s n o t to in te rfe re w it h th e a llo c a t io n o f c re d it
a m o n g d if fe re n t se c to rs o f th e e c o n o m y .
C o o r d in a t io n

Am ong C r e d it C o n t r o ls

E x c e p t in th e c a s e o f d e f e n s iv e o p e n m a r k e t o p e r a t io n s , th e

F e d e ra l R e s e r v e 's c re d it c o n tro l to o ls a r e s e ld o m
tra ry , a ll a r e c o o r d in a t e d

e m p lo y e d in d e p e n d e n t ly o f e a c h oth e r.

t o w a r d th e s a m e e n d — th e

S y s t e m 's

c u r re n t

p o lic y

T o th e c o n ­

o b je c tiv e s.

T h u s,

it is

u s u a lly n o t m e a n in g f u l to s p e a k o f " o p e n m a r k e t p o lic y / ' o r " d i s c o u n t ra te p o lic y , " o r " r e s e r v e r e q u ir e ­
m e n t p o lic y . "

In st e a d , it is m o re c o rre ct to v ie w m o n e t a r y p o lic y a s a b r o a d p r o g r a m

th re e q u a n t it a t iv e c o n tro ls a n d m a r g i n r e q u ir e m e n ts a s w e ll.

e m b r a c in g th e

A c t io n w it h re sp e c t to a n y s in g le c o n tro l

is a l w a y s t a k e n in th e lig h t o f p r io r o r p la n n e d a c t io n c o n c e r n in g th e o th e rs.
In s e le c tin g v a r io u s c o m b in a t io n s o f p o lic y a c t io n s, th e F e d e r a l R e s e rv e c o n s id e r s b o t h p s y c h o lo g ­
ical a n d d ire c t e ffe cts o f its d e c is io n s .

If it is fe lt t h a t a p s y c h o lo g ic a l e ffe ct is n e e d e d to re in fo rc e th e

d ire c t e ffe cts, p o lic y m e a s u r e s m a y w e ll in c lu d e c h a n g e s in re s e r v e r e q u ir e m e n t s o r th e d is c o u n t ra te
sin c e th e se a c t io n s a r e s p e c if ic a lly a n n o u n c e d w h e r e a s o p e n m a r k e t o p e r a t io n s a r e not.
o f c o u rse , c a n n o t b e m a d e to o f r e q u e n t ly w it h o u t p r e j u d ic in g th e ir u s e fu ln e s s.

Su c h ch a n ge s,

T h is is e s p e c ia lly tru e o f

c h a n g e s in re s e rv e re q u ir e m e n t s b e c a u s e o f th e ir la r g e d ire c t e ffe c ts o n b a n k re s e rv e p o s itio n s .
lim it a tio n s o n th e u s e o f d is c o u n t ra te a n d

T h e se

r e s e r v e r e q u ir e m e n t c h a n g e s p la c e a g r e a t e r b u r d e n o n

o p e n m a r k e t o p e r a t io n s a s a to o l f o r a t t a in in g p o lic y g o a ls .
T h e r ig h t c o m b in a t io n o f p o lic y m o v e s n e c e s s a r y to a c h ie v e a g iv e n e n d d e p e n d s o n m a n y fa c to rs.
P o lic y m a k e r s m u s t c o n s id e r n o t o n l y d o m e s t ic e c o n o m ic d e v e lo p m e n t s b u t a ls o th e d ir e c tio n a n d s tre n g th
o f th e la st p o lic y a c tio n s, th e le n g t h o f tim e s in c e th e la s t m o v e s , th e d if fe r e n t ia l im p a c t o f a lt e r n a t iv e
p o lic y m e a s u r e s o n th e stru c tu re o f in te re st ra tes, a n d th e r e la t io n s h ip s b e t w e e n d o m e s t ic a n d f o r e ig n
in te re st ra te s.

T h e s e fa c t o r s a r e c o n s t a n t ly c h a n g i n g a n d , c o n s e q u e n t ly , th e o p t im u m p o lic y c o m b i n a ­

tio n f o r a c h ie v in g a g i v e n e n d v a r ie s f r o m o n e p e r io d to th e n e xt.

T h u s, m o n e t a r y a u t h o r it ie s

h a v e c o n s id e r a b le la t it u d e in th e e x te n t to w h ic h t h e y u s e th e v a r io u s to ols.
a lt e r n a t iv e p a t h s to a g i v e n

W h ile th e c h o ic e b e t w e e n

p o lic y g o a l is s e c o n d a r y to th e p r o b le m o f se ttin g g o a ls , it is a n im p o r ­

ta n t a s p e c t o f m o n e t a r y p o lic y b e c a u s e o f th e in t e r d e p e n d e n c e o f th e v a r io u s p o lic y to o ls.

14



m ust

T H E P O L IC Y -M A K IN G P R O C E SS
THE POLICY FORUM
p o lic y

fo ru m .

T h e re

T h e m e e t in g s o f th e F e d e ra l O p e n
b o th

v e lo p m e n t s a n d r e a c h a

B o a rd

and

Bank

M a rke t

C o m m itt e e

a re

th e

S y s t e m 's

m a in

r e p r e s e n t a t iv e s m e e t r e g u l a r ly to d is c u s s e c o n o m ic d e ­

p o lic y d e c is io n f o r th e w e e k s im m e d ia t e ly a h e a d .

In a d d it io n to m e m b e r s

o f th e B o a r d a n d th e f iv e p r e s id e n t s c u r re n t ly s e r v in g o n th e C o m m itte e , th e r e m a in in g R e s e rv e B a n k
p re sid e n ts , th e m a n a g e r o f th e o p e n m a r k e t a c c o u n t a n d o n e o f h is p r in c ip a l a s s is ta n ts , s e v e r a l s e n io r
B o a r d s t a f f m e m b e r s, a n d

th e s e n io r e c o n o m is t f r o m e a c h o f th e R e s e r v e B a n k s o r d i n a r i ly a tte n d .

In

th is m a n n e r , n o t o n l y C o m m itt e e m e m b e r s , b u t a l s o th o s e p r e s id e n t s w h o w ill s o o n s e r v e o n th e C o m ­
m ittee, th e c h ie f a d v is e r s to th e B o a r d a n d th e p re sid e n ts , a n d th o s e w h o im p le m e n t th e C o m m it t e e 's
d a y - t o - d a y o p e n m a r k e t p o lic ie s a r e a l w a y s w e ll in f o r m e d o n c u r re n t p o lic y a c tio n s.

C u m b e rso m e a s

th is m a y se e m , it n e v e rt h e le s s c o n stitu te s p r o b a b l y th e s m o o t h e s t a n d m o s t e ffic ie n t w a y o f u tiliz in g
th e u n iq u e c o n t rib u t io n s o f d iv e r s e p a r t s o f th e S y s t e m to r e a c h th e b e s t -in f o r m e d p o lic y ju d g m e n t s.

PREPARATION FOR THE MEETING

P r io r to th e m e e t in g , e a c h p a r t ic ip a n t a r m s h im s e lf w it h th e b e st

a v a i l a b l e d a t a o n b o th b u s in e s s c o n d it io n s a n d th e e ffe c ts o f c u r re n t F e d e ra l R e s e rv e p o lic y .
m e m b e r s a n d th e p re s id e n t s re c e iv e a s t e a d y f l o w o f in f o r m a t io n

and

a n a ly s e s fr o m

B o a rd

th e r e s e a r c h

de­

p a r t m e n t s o f th e B a n k s a n d B o a r d a n d th e ir p e r s o n a l c o n ta c ts w it h b u s in e s s , a c a d e m ic , G o v e r n m e n t , a n d
o t h e r s o u rc e s.
T y p ic a l o f th e in f o r m a t io n s ifte d a n d a n a l y z e d a r e sta tistics o n n e w o rd e rs , b u s in e s s in c o r p o r a ­
tio n s, c o n stru c tio n

c o n tra c t a w a r d s ,

re ta il s a le s,

u n e m p lo y m e n t ,

p e r s o n a l in c o m e , b u s in e s s f a ilu r e s , th e in t e r n a t io n a l

b a la n c e

e m p lo y m e n t ,

o f p aym e n ts,

in d u s t r ia l

p ro d u c t io n ,

in te re st ra te s, th e

m oney

s u p p ly , p rice s, G o v e r n m e n t re c e ip ts a n d e x p e n d it u r e s , m e m b e r b a n k re se rv e s, in v e n to rie s , S t a t e a n d
lo c a l g o v e r n m e n t b o r r o w in g s , b a n k

lo a n s a n d

in v e s tm e n t s ,

tio n s, th e t u r n o v e r o f d e m a n d d e p o s its , a n d n u m e r o u s

b u s in e s s

oth e r

and

in d ic a t o rs .

c o n su m e r
In

sh o rt,

s p e n d in g
by

th e

in te n ­

tim e

th e

C o m m itt e e m e e ts e v e r y p a r t ic ip a n t is w e ll p r e p a r e d to c o n trib u te to in te llig e n t p o lic y d e c is io n s .

THE INTERCHANGE OF O PIN IO N
re c e n t d e v e lo p m e n t s a n d

C o m m itt e e

th e f o r m u la t io n

m e e t in g s g e n e r a l l y f a ll in to t w o p a r t s — a

o f p o lic y f o r th e p e r io d a h e a d .

d is c u s s io n o f

T h e m a n a g e r o f th e o p e n

m a r k e t a c c o u n t t y p ic a lly le a d s o ff, r e v ie w in g th e T r a d i n g D e s k 's e x p e r ie n c e in im p le m e n t in g o p e n m a r ­
k e t p o lic y sin c e th e la st m e e t in g .

S e n io r m e m b e r s

o f th e

B o a r d 's

s t a ff

th e n

s u m m a r iz e

im p o r t a n t

b u s in e s s a n d f in a n c ia l d e v e lo p m e n t s , s t r e s s in g p a r t ic u la r ly a n y n e w d e v e lo p m e n t s th a t m ig h t n o t y e t
h a v e c o m e to th e a tte n tio n o f C o m m itt e e m e m b e r s.
N e x t , e a c h B o a r d m e m b e r a n d p r e s id e n t g i v e s h is in te rp re ta t io n o f b u s in e s s c o n d it io n s a n d m a k e s
p o lic y

r e c o m m e n d a t io n s f o r th e

p e r io d

ahead.

P re s id e n t s

a ls o

c o n trib u te

s u b s t a n t ia l

a m o u n ts

of

" g r a s s r o o t s " in f o r m a t io n c o n c e r n in g r e g io n a l d e v e lo p m e n t s .
D u r i n g th e c o u rs e o f th e d is c u s s io n , p a r t ic ip a n t s f r e q u e n t ly e x p r e s s th e ir v ie w s a s to h o w a ll p o lic y
in s t r u m e n t s — n o t just o p e n m a r k e t o p e r a t io n s — s h o u ld b e u s e d .

N o f in a l a c t io n s o n o t h e r in st ru m e n t s

c a n b e t a k e n a t th e C o m m itt e e m e e t in g , o f c o u rse , s in c e C o m m itt e e a u t h o r it y c o v e r s o n l y o p e n m a r k e t




15

o p e r a t io n s .

T h e fre e d is c u s s io n o f a ll to o ls is q u it e h e lp fu l, h o w e v e r , in s e ttin g o p e n

m a r k e t p o lic y

a n d p r o v id e s v a l u a b l e a s s is t a n c e f o r th o s e w h o t a k e p a r t in o t h e r k in d s o f p o lic y a c t io n s.
A f t e r o t h e r p a r t ic ip a n t s h a v e s u m m a r iz e d

t h e ir p o s itio n s , th e C h a i r m a n

v ie w s a n d fo r m u la t e s w h a t h e b e lie v e s to b e th e c o n s e n s u s o f th e g r o u p .
c u s s io n o c c u rs in w o r k i n g o u t a C o m m itt e e p o s itio n .
p o lic y o b je c tiv e s in b r o a d

te rm s.

F ro m

o f th e B o a r d

sta te s h is

F re q u e n t ly , a d d it io n a l d is ­

F in a lly , a p o lic y d ir e c tiv e is a d o p t e d s t a t in g th e

th e p r e c e d in g d is c u s s io n , th e m a n a g e r o f th e o p e n

m arke t

a c c o u n t re c e iv e s h is in st ru c t io n s a s to w h a t o p e n m a r k e t a c t io n s h e s h o u ld ta k e o n b e h a lf o f th e S y s te m .

BETWEEN MEETINGS
T r a d in g

B e tw e e n m e e t in g s B o a r d

D e s k a t th e N e w

Y o rk

Bank.

m e m b e r s a n d p r e s id e n t s k e e p in d a i l y to u c h w it h th e

O n e im p o r t a n t m e a n s is a d e t a ile d p h o n e c a ll a r o u n d 11 A . M .

o n b u s in e s s d a y s b e t w e e n s e n io r m e m b e r s o f th e B e a r d 's s ta ff; s o m e t im e s th e G o v e r n o r s
th e m a n a g e m e n t o f th e o p e n
of th e C o m m itte e .

th e m se lv e s ;

m a r k e t a c c o u n t; a n d o n a r o t a t in g b a s is , o n e o f th e p r e s id e n t - m e m b e r s

A m o n g th e fa c t o r s d is c u s s e d a r e

d e v e lo p m e n t s

in

m arke ts

fo r

G o ve rnm e n t

and

o th e r se cu ritie s, th e to n e o f th e m o n e y m a rk e t, th e r e s e r v e p o s it io n s o f m e m b e r b a n k s , in v e n t o r ie s o f
G o v e r n m e n t s e c u rity d e a le r s , a n d th e p r o b a b le c o u r s e o f a c t io n

to

b e ta k e n

by

th e T r a d i n g

D e sk.

S h o r t ly a ft e r th e c o n v e r s a t io n , a s e n io r m e m b e r o f th e B o a r d 's s t a ff s u m m a r iz e s th e c o n te n t o f th e
c o n v e r s a t io n in a m e m o r a n d u m f o r B o a r d m e m b e r s a n d a t e le g r a m f o r p re sid e n ts .

T h u s, a n y m e m ­

b e r o f th e O p e n M a r k e t C o m m itt e e h a s a m p le o p p o r t u n it y to r a is e w it h th e m a n a g e r o f th e a c c o u n t
a n d o t h e r C o m m itt e e m e m b e r s a n y q u e s t io n s h e m a y h a v e c o n c e r n in g th e c o n t e m p la t e d a c tio n .
In a d d it io n , th e D e s k p r e p a r e s d a i l y w ir e s s u m m a r i z i n g c o n d it io n s a t th e o p e n in g a n d c lo s in g o f
th e s e c u ritie s m a r k e t s a n d

n u m e r o u s w ritte n m e m o r a n d a d e s c r ib in g the D e s k 's o p e r a t io n s .

th e se w ritt e n re p o rts a r e d a ily , s o m e w e e k ly , a n d s o m e le ss fr e q u e n t.

16



Som e of

F E D E R A L R E S E R V E POLICY IN 1960
How

d o e s F e d e ra l

R e s e rv e p o lic y w o r k

g o o d e x a m p le s s in c e S y s t e m
T he Sy ste m

in

p ra c tic e ?

T h e y e a r 1 9 6 0 p r o v id e s s o m e p a r t ic u la r ly

p o lic y sh ifte d c o n s id e r a b ly d u r in g th e c o u rs e o f th e y e a r .

u s e d a ll its p o lic y to o ls in

1 9 6 0 to m o v e c re d it in o n e d ir e c tio n — t o w a r d m o re e a se .

T h e to o ls e v e n in c lu d e d a s p e c ia l o n e a u t h o r iz e d b y C o n g r e s s in 1 9 5 9 a n d fir st u s e d in D e c e m b e r o f
th a t y e a r — th e p o w e r to a llo w

m e m b e r b a n k s to c o u n t s o m e o r a ll o f th e ir v a u lt c a s h a s le g a l re se rv e s.

In 1 9 6 0 th e S y s t e m a l s o a c te d u n d e r a s p e c ia l C o n g r e s s io n a l m a n d a t e to e q u a liz e r e s e r v e re q u ir e m e n t s
o f c e n tra l r e s e r v e city b a n k s a n d re s e rv e city b a n k s b y J u l y 1 9 6 2 , b y tw ic e r e d u c in g r e q u ir e m e n t s o f
c e n tra l r e s e r v e city b a n k s .
B u s in e s s c o n d it io n s a t th e b e g in n in g o f th e y e a r lo o k e d

s tro n g .

E c o n o m ic a c t iv it y a n d

e m p lo y ­

m e n t w e r e a t n e w h i g h le v e ls, a n d in te re st ra t e s h a d rise n to the h ig h e s t le v e ls in 3 0 y e a r s .
se ttle m e n t o f th e steel s trik e h a d r a is e d e x p e c t a t io n s fo r a re s u m p tio n o f th e 1 9 5 9 b o o m .
fo re c a s t s f o r th e fir s t h a lf o f th e n e w y e a r w e r e g l o w i n g l y o p tim istic.
d e m a n d s w e re stro n g .

B o th c o n s u m e r a n d in v e s tm e n t

W h o le s a le p ric e s w e r e sta b le , b u t c o n s u m e r p ric e s w e r e in c h in g u p , a n d f e a r s

o f in fla t io n w e r e w id e s p r e a d .
re stra in t.

R e ce n t

N e a r l y a ll

F o r m o re t h a n a y e a r

th e

S y s te m

had

been

M e m b e r b a n k b o r r o w i n g s a t th e F e d w e r e o v e r $ 9 0 0 m illio n , a n d

(m e m b e r b a n k b o r r o w i n g s m in u s e x c e s s re s e rv e s ) w e r e n e a r ly $ 4 0 0 m illio n .

f o l l o w in g

a

net b o rro w e d

p o lic y

of

re se rve s

M o n e y w a s " t ig h t / 7

TH E J A N U A R Y -M A Y PERIOD
C o n d it io n s b e g a n to c h a n g e v e r y s h o r t ly a ft e r the tu rn o f the y e a r .
m u c h s o o n e r t h a n h a d b e e n e x p e c te d .




Ste e l in v e n t o r ie s w e r e re b u ilt

Im p o r t e d a u t o m o b ile s w e r e t a k i n g a n in c r e a s in g s h a r e o f th e

17

m a rk e t.
ture.

S e v e r a l p e r io d s o f v e r y b a d w e a t h e r s lo w e d a c t iv ity a n d f u r t h e r c lo u d e d th e e c o n o m ic p ic ­

S a le s a n d

d e c lin e d .
d e c lin e .

new

C a p a c ity

o r d e rs o f m a n u f a c t u r e r s f a ile d to rise, in v e n t o r ie s m o u n t e d , a n d u n fille d o r d e r s

b e c a m e m o re t h a n a m p le .

S o o n p ro d u c t io n in m a n y h e a v y in d u s t r ie s s ta rt e d to

E m p lo y m e n t r e m a in e d h ig h , e v e n ro se a little w it h th e c o m in g o f s p r in g , b u t w e e k ly h o u r s o f

w o rk e a se d a n d

a v e r a g e w e e k ly e a r n in g s o f w o r k e r s d e c lin e d .

J a n u a r y a n d th e e n d o f A p r il.

S t o c k p ric e s fe ll 15 p e r ce nt b e t w e e n

T h e F e d e ra l G o v e r n m e n t , in s t e a d o f b o r r o w i n g a s in p r e v io u s y e a r s ,

b u ilt u p a s u b s t a n t ia l c a s h s u r p lu s w h ic h it u s e d to re tire d e b t.

D e m a n d f o r in v e s t m e n t f u n d s f r o m

s e v e r a l o t h e r s o u r c e s e a s e d a lso , a n d in te re st ra t e s b e g a n to d e c lin e s lo w ly .

M o n e y w a s d e f in it e ly

"e a s ie r."

OPEN MARKET OPERATIONS

T h e S y s te m f o llo w e d

th e se d e v e lo p m e n t s c lo s e ly f r o m

d a y to d a y .

It

s o o n d e c id e d th a t th e d a n g e r o f in fla t io n h a d p a s s e d , a t le a st f o r th e tim e b e in g , a n d th a t it c o u ld
s a f e ly m o d e r a t e its p o lic y o f re strain t.
o p e n m a r k e t o p e r a t io n s .
to $ 2 5 . 8

b illio n

S y s te m

T h is it d id b y g r a d u a l l y s u p p l y i n g a d d it io n a l re s e r v e s t h r o u g h

h o ld in g s o f U n ite d S ta te s se c u ritie s ro s e f r o m $ 2 5 . 3 b illio n in M a r c h

in M a y ; m e m b e r b a n k

b o r r o w i n g s d e c lin e d fr o m $ 9 0 5 m illio n in J a n u a r y to $ 5 0 2 m il­

lio n in M a y ; ne t b o r r o w e d re s e rv e s fe ll f r o m $ 3 6 1 m illio n to $ 3 3 m illio n in th e s a m e fiv e - m o n t h p e r io d .
A s r e s e r v e s s u p p lie d t h r o u g h th e o p e n m a r k e t in c re a s e d , m e m b e r b a n k b o r r o w i n g s d e c lin e d .
te rm s o f to ta l re s e rv e s , th e se a c t io n s te n d e d to c a n c e l

each

oth e r.

N e v e r t h e le s s ,

th e re

w as

a

In
net

e a s in g e ffe ct b e c a u s e m e m b e r b a n k s fe lt u n d e r le ss p r e s s u r e a s th e ir b o r r o w i n g s a t th e Fed d e c lin e d .

THE EC O N O M Y M O V ES SIDEWAYS

In th is p e r io d th e F e d a c te d e a r ly to m o d e r a t e its p o lic y o f re s tra in t

— p e r h a p s e a r lie r t h a n in a n y o t h e r c o m p a r a b le p e r io d .
o n l y s id e w a y s .

T h e in d u s t r ia l p ro d u c t io n

D e s p ite th is, th e e c o n o m y c o n tin u e d to m o v e

in d e x s e e s a w e d

T o ta l e m p lo y m e n t c o n tin u e d to in c re a se , b u t m a n u f a c t u r in g
o r d e r s fe ll.

P e r s o n a l in c o m e a n d

back

and

fo rt h

e m p lo y m e n t ,

re tail s a le s c o n t in u e d to rise.

b etw een

w o rk

109

w ee ks,

and

and

111.

u n fille d

T h e ra te o f in v e n t o r y a c c u m u la t io n

s lo w e d d o w n .

THE JU N E -SE P TE M B E R PERIOD
B y J u n e th e e x p e c te d s p r in g p ic k u p h a d n o t m a t e r ia liz e d
d o w n w a rd .

E c o n o m ic

a c t iv ity

and

e m p lo y m e n t

w e re

and

h ig h ,

th e e c o n o m y w a s

but

th e re

w ere

no

m o v in g
s ig n s

g r o w t h , a n d s e v e r a l a r e a s — su c h a s steel a n d re s id e n t ia l h o u s i n g — w e r e d e f in it e ly w e a k .
j o in in g th e la b o r fo rc e a t a ra te o f n e a r ly o n e m illio n p e r y e a r , a n d
th e m .

U n e m p lo y m e n t e x c e e d e d

5

p e r cent o f th e la b o r fo rc e .

v e r y s lo w ris e in th e c o n s u m e r p ric e in d e x .

th e re w e r e

of

s lig h t ly
n orm al

W o rk e rs w ere

n o t jo b s f o r a ll o f

P rice s r e m a in e d s t a b le e x c e p t f o r a

F e a r s o f in fla t io n w e r e b e in g r e p la c e d b y f e a r s o f re c e ssio n .

M o s t e c o n o m ic in d ic a t o r s w e r e e ith e r p o in t in g d o w n w a r d o r w e r e in d e t e r m in a te .
th a t th e tim e h a d c o m e f o r b r o a d e r a n d m o re v i g o r o u s c o rre c tiv e a c tio n .
m o v e th e la st v e s t ig e s o f re s tra in t a n d a d o p t a p o lic y o f e a se .

To

th is

It w a s
end

T h e S y s te m d e c id e d
now

r e a d y to re ­

it m o b iliz e d

so m e w h a t

h e a v ie r a rt ille ry .

DISCOUNT RATE

T h e d is c o u n t ra te o f th e 1 2 B a n k s h a d b e e n 4 p e r ce n t s in c e S e p t e m b e r 1 9 5 9 .

in J u n e a ll o f th e B a n k s re d u c e d it to 314 p e r cent.
th is tim e to 3 p e r cent.

E a r ly

A f t e r a n o t h e r t w o m o n t h s t h e y re d u c e d it a g a i n ,

In e a c h c a s e o th e r s h o rt -te rm in te re st ra t e s h a d f a lle n to o r b e lo w th e n e w

rate, a n d c h a n g e s w e r e m a d e to b r in g th e ra te in to lin e w it h o th e r ra t e s a n d to in d ic a t e th a t th e S y s ­
tem w a s a d o p t i n g a p o lic y o f g r e a t e r e a se .
p e r io d o f tim e .

18



In b o t h in st a n c e s a ll R e s e rv e B a n k s a c te d w it h in a s h o r t

M A R G IN REQUIREMENTS

In J u l y th e B o a r d o f G o v e r n o r s re d u c e d th e m a r g i n r e q u ir e m e n t o n s e c u rity

p u r c h a s e s f r o m 9 0 p e r ce n t to 7 0 p e r cent.

In v ie w

o f th e s u b s t a n t ia l d e c lin e in s to c k p ric e s w h ic h

h a d b e e n g o i n g o n ir r e g u l a r ly f o r s e v e n m o n th s , it w a s fe lt th a t m a r g i n re q u ir e m e n t s c o u ld b e s a f e ly
cu t w it h o u t s t im u la t in g u n d e s ir a b le s p e c u la t io n .

RESERVE REQUIREMENTS

A c t in g u n d e r th e C o n g r e s s io n a l m a n d a t e to e q u a liz e r e s e r v e r e q u ir e m e n t s o f

c e n tra l r e s e rv e a n d re s e rv e city b a n k s , th e B o a r d d u r in g A u g u s t cut r e s e r v e re q u ir e m e n t s o f c e n tra l re ­
s e r v e city b a n k s f r o m

1 8 p e r ce nt to 1716 p e r cent o f d e m a n d d e p o s its , e ffe c tiv e S e p t e m b e r 1, 1 9 6 0 .

T h e re q u ir e m e n t f o r r e s e r v e city b a n k s w a s th e n 1 6 !6 p e r c e n t .

It w a s e s tim a t e d th a t th e cut in c e n tra l

r e s e rv e city b a n k r e q u ir e m e n t s w o u ld fre e a b o u t $ 1 2 5 m illio n o f re s e r v e s f o r th e b a n k s a ffe c te d .

VAULT CASH

T h e le g is la t io n e n a c te d

c o u n t v a u lt c a s h

as

le g a l

in

1 9 5 9 a ls o a u t h o r iz e d the B o a r d to a l l o w m e m b e r b a n k s to

r e s e r v e s — s o m e t h in g

t h e y h a d n ot b e e n a llo w e d to d o sin c e 1 9 1 7 .

T o th e

e x te n t ih a t b a n k s c a n c o u n t su c h c a s h t o w a r d m e e t in g re s e rv e re q u ire m e n ts , t h e y c a n h o ld c o r r e s p o n d ­
in g ly s m a lle r d e p o s it s a t th e Fe d, th u s r e d u c in g th e a m o u n t o f n o n e a r n in g a s s e t s tie d u p a s re se rv e s.
C o n s e q u e n t ly , p e r m is s io n to c o u n t v a u lt c a s h a s le g a l re s e rv e s h a s th e s a m e e ffe c t a s a re d u c tio n o f
re s e rv e re q u ir e m e n ts .
S in c e D e c e m b e r 1 9 5 9 b a n k s h a d b e e n a llo w e d to c o u n t a s m a ll p a r t o f th e ir c a s h a s le g a l re ­
s e rv e s.

In A u g u s t 1 9 6 0 th e B o a r d is s u e d a n e w r e g u la t io n in c r e a s in g th e a m o u n t o f a llo w a b le c a s h

still m o re .

T h is a c t io n a n d th e re d u c tio n o f re s e rv e re q u ir e m e n ts w e r e e x p e c te d to re le a s e a to ta l o f

m o re th a n $ 6 0 0 m illio n o f re se rv e s.

OPEN MARKET OPERATIONS
th rou gh

open

D u r in g th e s u m m e r m o n th s

m a r k e t o p e r a t io n s .

Syste m

in M a y to $ 2 6 . 7 b illio n d u r i n g S e p te m b e r.

th e

S y s te m

c o n t in u e d

to

s u p p ly

h o ld in g s o f U n ite d S ta te s s e c u ritie s ro s e fr o m

r e s e rv e s

$ 2 5 . 8 b illio n

A s b e fo re , th is c a u s e d m e m b e r b a n k s to re d u c e th e ir b o r-

F E D E R A L R E SE R V E D IS C O U N T R A T E
1960
Par cent
4.0

L

3.5

-

3.0

____ I_______ I_______ I_______ L ______I_______ I_______I_______ I_______ I_______ I_______ l_____
J




F

M

A

M

J

J

A

S

O

N

D

19

r o w i n g s a t th e F e d — th is tim e fr o m $ 5 0 2 m illio n to $ 2 2 5

m illio n .

Net

b o rro w e d

re s e r v e s

d is a p p e a r e d

a n d fr e e r e s e r v e s ro s e to $ 4 1 4 m illio n .

A SLOW DECLINE

T h e S y s t e m u s e d a w id e a s s o r t m e n t o f to o ls a n d th e c re d it s it u a tio n e a s e d o v e r th e

s u m m e r m o n th s .

Bond

th e p r im e ra te c h a r g e d
w a s d e f in it e ly e a sie r.

y ie ld s d r o p p e d

s ig n if ic a n t ly , T r e a s u r y bill ra te s fe ll b e lo w

b y la r g e c o m m e rc ia l b a n k s w a s cut f r o m 5 p e r ce n t to
B u t b u s in e s s a c tiv ity s lid fu rth e r.

s o n a l in c r e a s e a f t e r L a b o r D a y w a s le ss th a n n o r m a l.

4Vi

p e r cent, a n d
p e r cent.

E m p lo y m e n t r e m a in e d a b o u t th e sa m e , w e e k ly

h o u r s o f w o r k c o n t in u e d to d e c lin e s lo w ly , a n d th e in d u s t r ia l p r o d u c t io n in d e x fe ll f r o m
In a d d it io n , th e g o ld

o u t flo w

in c re a s e d

C r e d it

T h e re w a s n o s h a r p d e c lin e , b u t th e s e a ­
1 1 0 to 1 0 7 .

s h a r p l y — in p a r t b e c a u s e o f th e e a s i n g a c tio n .

TH E O C TO B E R -D E C E M B E R PERIOD
D u r i n g th e la s t th re e m o n th s o f th e y e a r th e S y s t e m w a s t r y in g to s h a p e p o lic y to a c c o m p lis h t w o
s e p a r a t e o b je c t iv e s w h ic h w e r e in la r g e

p a r t c o n tra d ic to ry .

It w a n t e d to p r o v id e c o n t in u in g e a s e in

th is c o u n t r y a n d a t th e s a m e tim e a v o i d a g g r a v a t i n g th e g o ld o u t flo w .

In sh o rt, th e S y s t e m

h a d to

f o llo w b o th a d y n a m i c a n d a d e f e n s iv e cre d it p o lic y .
In W e s t e r n

E u r o p e e c o n o m ic a c t iv ity w a s s tro n g , a n d

in te re st ra t e s w e r e h ig h .

T h e d e c lin e o f

sh o rt-te rm in te re st ra t e s h e re led s o m e h o ld e rs o f sh o rt-te rm f u n d s to t r a n s f e r th e m to E u r o p e to t a k e
a d v a n ta ge

o f th e h i g h e r inte re st rates.

T h is a g g r a v a t e d th e g o ld o u t f lo w w h ic h , in tu rn , t e n d e d to

re d u c e b a n k re s e rv e s .

In a d d it io n , th e Fed w a s fa c e d

re s e r v e s to

h o l id a y c re d it d e m a n d s .

m eet p e a k

w it h th e

n e e d to s u p p l y

la r g e

q u a n t it ie s o f

E v e n t h o u g h c h a n g e s in th e re s e r v e s o f c o m m e rc ia l

b a n k s h a v e a m o r e im p o r t a n t e ffe ct u p o n m a r k e t ra t e s th a n S y s t e m t r a n s a c t io n s th e m se lv e s , th e F e d e ra l
R e s e rv e s o u g h t to m in im iz e a n y d ire c t e ffe cts its o p e r a t io n s m ig h t h a v e to d e p r e s s b ill rates.
tem th e r e f o r e m o d if ie d its u s u a l p o lic ie s in th re e m a in respects.

20



The S y s ­

OPEN MARKET OPERATIONS

D u r in g O c t o b e r a n d e a r ly N o v e m b e r th e S y s t e m c o n t in u e d to s u p p l y re ­

s e r v e s t h r o u g h o p e n m a r k e t o p e r a t io n s b o th to o ffse t th e h e a v y o u t f lo w o f g o ld a n d to m e e t s e a s o n a l
n e e d s.

H o ld i n g s o f U n ite d S ta te s s e c u ritie s ro s e fr o m $ 2 6 . 5 b illio n a t th e e n d o f S e p t e m b e r to $ 2 8 .1

b illio n th e w e e k o f N o v e m b e r 16, a ft e r w h ic h t h e y d e c lin e d a s th e m e a s u r e s d e s c r ib e d b e lo w b e g a n to
p r o v id e re s e rv e s .

T o a v o i d d e p r e s s in g sh o rt-te rm in te re st ra te s u n d u l y b y h e a v y b ill p u r c h a s e s , th e

S y s te m m a d e s o m e o f its p u r c h a s e s in th e f o r m o f ce rtifica te s a n d b o n d s w it h m a t u rit ie s o f le ss t h a n 15
m o n th s.

VAULT CASH

N e x t, th e B o a r d p r o v id e d that, e ffe c tiv e N o v e m b e r 2 4 ,

all m e m b e r b a n k s c o u ld c o u n t all

v a u lt c a s h a s p a r t o f th e ir le g a l re s e rv e s .

RESERVE REQUIREMENTS

F in a lly ,

th e

B o a rd

m a d e t w o c h a n g e s in r e s e r v e r e q u ir e m e n ts .

C e n t r a l re ­

s e r v e city b a n k s 7 r e q u ir e m e n t s o n D e c e m b e r 1 w e r e cut to 16!^ p e r cent o f d e m a n d d e p o s it s — th e s a m e
a s t h o s e o f r e s e r v e city b a n k s .

S e c o n d , re q u ir e m e n ts o f c o u n try b a n k s w e r e r a is e d f r o m

11 p e r ce nt

to 12 p e r c e n t o f d e m a n d d e p o s its a s o f N o v e m b e r 2 4 to o ffse t p a r t o f th e e ffe c ts o f th e r e le a s e o f
c o u n t r y b a n k v a u lt c a sh .

It w a s e s tim a t e d th a t th e a c tio n s o n v a u lt c a s h a n d

w o u ld r e le a s e a b o u t $ 1 .3 b illio n o f n e t a d d it io n a l re se rv e s, w h ic h w o u ld

go

re s e rv e

fa r to w ard

r e q u ir e m e n ts
m e e t in g

th e

b a n k s 7 s e a s o n a l n e e d s.

THE DECLINE CONTINUES

The Sy ste m

su c c e e d e d in s u p p ly in g re s e rv e s to o f fs e t th e g o ld o u t f lo w a n d

to m a in t a in e a s y c o n d it io n s in th e m o n e y m a r k e t w it h o u t u n d u ly d e p r e s s in g sh o rt-te rm ra t e s to s tim u la t e
fu r t h e r g o ld o u t flo w .

D e s p ite a g o ld lo ss o f n e a r ly $ 8 0 0 m illio n in O c t o b e r a n d N o v e m b e r , fr e e re ­

s e r v e s w e r e m a in t a in e d a b o v e $ 4 0 0 m illio n m o s t o f th e tim e a n d e x c e e d e d $1 b illio n in la te N o v e m b e r .
M e m b e r b a n k b o r r o w i n g s r e m a in e d b e l o w $ 1 0 0 m illio n t h r o u g h o u t D e c e m b e r.
fr o m $ 1 3 9 . 7 b illio n in A u g u s t to $ 1 4 0 . 5 b illio n in la te
s h o w e d a n e n c o u r a g i n g rise.

D e c e m b e r, a n d

oth e r

liq u id

A t n o tim e , h o w e v e r , d id the bill ra te f a ll b e l o w 2 p e r cent.

ra t e s o n lo n g -t e r m G o v e r n m e n t se c u ritie s, w h ic h d r o p p e d c o n s id e r a b ly f r o m
n o t d e c lin e fu rth e r.

T h e m o n e y s u p p l y ro se
sh o rt-te rm

a sse ts
In te re st

J a n u a r y to A u g u s t , d id

In fact, th e y ro s e s lig h t ly in O c t o b e r a n d N o v e m b e r , a n d a t th e e n d o f th e y e a r

w e r e a little h ig h e r t h a n t h e y h a d b e e n in A u g u s t .
B u s in e s s a c t iv ity c o n tin u e d to d e c lin e .
O ctob e r a n d N o ve m b e r.

E m p lo y m e n t w a s

to its c lo se th e re w e r e n o d e fin it e s ig n s o f a b u s in e s s
r e la t iv e ly s lo w .

dow n

and

u n e m p lo y m e n t

w as

up

in

M o s t b u s in e s s in d ic a t o r s c o n tin u e d to p o in t d o w n w a r d , a n d a s th e y e a r d r e w
re c o v e ry .

The

ra te o f d e c lin e ,

h o w e ve r, w a s

N o o n e k n o w s f o r s u r e w h a t w o u ld h a v e h a p p e n e d

in th e a b s e n c e o f th o s e S y s t e m

p o lic ie s, b u t it s e e m s q u it e lik e ly t h e y h e lp e d p re v e n t th e d e c lin e fr o m

b e c o m in g m o re s e r io u s in 1 9 6 0 .




21

L IM IT A T IO N S A N D A D V A N T A G E S OF
M O N E T A R Y POLICY
E s t a b lis h in g s o u n d m o n e t a r y p o lic y is a t a s k o f

h e r c u le a n

p ro p o r t io n s .

C e n tra l

b a n k e rs

cannot

fe e d d a t a in to a c o m p u t e r a n d e x p e c t to g e t a m o n e t a r y p o lic y t a ilo r - m a d e to fit a p a r t ic u la r e c o n o m ic
sit u a tio n .

N o m a t te r h o w rich th e e x p e rie n c e a n d ju d g m e n t o f th e p o lic y m a k e r s , h u m a n

p o s sib le .

A n d m is t a k e s , o n c e m a d e , m u st b e t a k e n in to a c c o u n t in f u t u r e p o lic y a c tio n s.

e a s y c re d it p o lic y c a n c a u s e in fla t io n w h e n e x p a n s i o n re su m e s .
to o s t r o n g c a n b r i n g a p e r io d o f e x p a n s io n to a p r e m a t u r e

e r r o r is still
A n o v e r ly

A n t i- in f la t io n a r y m e a s u r e s w h ic h a r e

h a lt.

T h u s,

c e n t ra l

b a n k e r s — lik e

m en

w a l k i n g t ig h t r o p e s in h ig h a n d s h if t in g w in d s — m u s t m a in t a in th e ir f o o t in g b y le a n in g fir s t o n e w a y
a n d th e n a n o t h e r in to th e w in d b u t n e v e r to o f a r in e ith e r d ire c tio n .

L IM IT A T IO N S OF M O N E T A R Y POLICY
W h a t t h e n a r e th e lim it a tio n s o f m o n e t a r y p o li c y ?
w o rk in g

in o p p o s it e d ire c tio n s.

P a rtly , t h e y a r e th e e ffe c ts o f p o w e r f u l fo rc e s

T o s o m e e x te n t t h e y re su lt fr o m th e lim ite d in flu e n c e w h ic h m o n e t a r y

p o lic y h a s o v e r f in a n c ia l m a rk e ts.

In p a rt, t h e y a r e

due

to

im p e rfe c t

k n o w le d g e

and

to

e rro rs

of

h u m a n ju d g m e n t .

PRICE-COST INFLATION
be.

The

m o re

c o m p e titiv e

th e e c o n o m y , th e m o re e ffe c tiv e m o n e t a r y p o lic y c a n

T h is is p a r t ic u la r ly tru e w h e n b u s in e s s a c t iv it y is r u n n in g a t n e a r - c a p a c it y le v e ls, a n d th e S y s t e m

is t r y in g to c o m b a t i n f la t io n a r y p re ssu re s.

A t su c h tim e s, m o n o p o lis t ic p r ic in g p ra c tic e s o n th e p a r t

o f la b o r o r b u s in e s s c a n p u s h p rice s u p fr o m th e s u p p l y

ra t h e r t h a n

fr o m

th e

dem and

s id e .

S u f fi­

c ie n tly s t r o n g m o n e t a r y p o lic y c a n u n d o u b t e d ly p r e v e n t s o m e in c r e a s e s o f th is k in d b y d a m p e n i n g in ­
f la t io n p s y c h o lo g y , b u t it is d o u b tfu l if it c a n c o m p le t e ly c u re th e p r o b le m
w it h

stro n g

m o n o p o lis t ic

p re ss u re s .

in a p r o s p e r o u s e c o n o m y

C o n v e r s e ly , c o n t in u e d m o n o p o lis t ic in c r e a s e s in w a g e s a n d p ric e s

d u r i n g re c e s s io n te n d to h in d e r th e a d ju s t m e n ts th a t le a d to b u s in e s s re c o v e ry .

T o c o m b a t s u c h p r ic in g

p r o b le m s e ffe c tiv e ly , th e re m u s t b e a d d it io n a l m e a s u r e s d e s ig n e d to e n c o u r a g e c o m p e titio n .

DIFFERING FISCAL POLICY A IM S

If th e a im s o f f is c a l p o lic y — th e m a n n e r in w h ic h th e F e d e ra l G o v e r n ­

m e n t s p e n d s , ta x e s , a n d m a n a g e s its d e b t— r u n c o u n t e r to th o s e o f m o n e t a r y p o lic y , th e t w o c a n to s o m e
e x te n t o ffs e t e a c h

o th e r.

T h is is a lm o s t in e v it a b le a t tim e s s in c e th e a im s o f m o n e t a r y

p o lic y a r e

p u r e ly e c o n o m ic , w h e r e a s th o s e o f fis c a l p o lic y a r e o fte n p o litic a l o r s o c ia l r a t h e r t h a n e c o n o m ic .

In

a d e m o c r a c y it c o u ld n o t b e o th e rw ise , b u t n e v e rt h e le ss th e n et re su lt m a y b e a n e x p a n s i o n a r y b u d g e t
d e fic it w h e n m o n e t a r y p o lic y — r ig h t ly o r w r o n g l y — is m o v i n g in th e o p p o s it e d ire c tio n .
a le n g t h e n in g o f T r e a s u r y d e b t w h e n th e F e d e ra l R e s e r v e is c o m b a t in g re c e ssio n .

O r it m a y m e a n

In su c h c a se s, m o n e ­

t a r y a n d fis c a l p o lic y w ill p a r t ly o ffse t e a c h o th e r.

SLIPPAGES IN THE FINANCIAL M ECHANISM

E v e n u n d e r th e b e st c o n d it io n s, m o n e t a r y p o lic y m u s t c o n ­

te n d w it h t w o t y p e s o f " s l i p p a g e s " in th e f in a n c ia l m e c h a n is m .
m e d ia t e ly e x p a n d o r c o n tra c t e a r n in g a s se ts in r e s p o n s e

First, c o m m e rc ia l b a n k s m a y n ot im ­

to c h a n g e s

in th e a v a i l a b i l i t y o f re se rv e s.

S e c o n d , e v e n t h o u g h b a n k s a ct p ro m p tly , sh ifts in m o n e t a r y v e lo c it y m a y
m o n e y s u p p ly .
is o v e r r a t e d .

22



p a r t ly o ffs e t c h a n g e s in th e

B o th k in d s o f " s l i p p a g e s " c o m p lic a te th e t a s k o f m o n e t a r y p o lic y , b u t th e ir im p o r t a n c e

In c o m p le te u se o f a d d it io n a l b a n k r e s e r v e s c le a rly c a lls f o r la r g e r c h a n g e s in r e s e r v e s t h a n w o u ld
o t h e r w is e b e n e c e s sa ry .

T h is k in d o f s p e c ia l a c tio n is ta k e n q u ite f r e q u e n t ly .

D u rin g

I9 6 0 , fo r e x ­

a m p le , th e S y s t e m h a d to s u p p ly m o re r e s e rv e s t h a n w o u ld h a v e b e e n n e e d e d h a d c o u n t r y b a n k s re ­
s p o n d e d m o r e q u ic k ly to th e re le a s e o f v a u lt c a sh .

O n l y if b a n k s d id n o t r e s p o n d a t a ll w o u ld e ffe c ­

tiv e S y s t e m p o lic y b e im p o s s ib le .
A m o r e c o m m o n d if fic u lt y is th e in c re a s e in m o n e t a r y v e lo c ity o r d i n a r i ly a c c o m p a n y in g a re stric ­
tiv e m o n e t a r y p o lic y .

P e r h a p s th e m o s t im p o r t a n t c a u s e

G o v e r n m e n t se c u ritie s to m e e t r is in g lo a n d e m a n d s .
s in c e th e b a n k s m e r e ly su b stitu te o n e fo r m

is th e

liq u id a t io n

by

banks

o f sh o rt-te rm

T h is le a v e s the m o n e y s u p p l y v ir t u a lly u n c h a n g e d

o f e a r n in g a s se t s f o r a n o t h e r, b u t it d o e s te n d to in c r e a s e

v e lo c it y b y t r a n s f e r r in g b a n k b a la n c e s f r o m th o s e w h o p r o b a b l y w o u ld n o t s p e n d th e m a s q u ic k ly — th e
p u r c h a s e r s o f th e se c u ritie s— to th o s e w h o s p e n d th e m a lm o s t im m e d ia t e ly — th e n e w b o r r o w e r s .

F in a n ­

c ia l in t e r m e d ia r ie s , su c h a s s a v i n g s a n d lo a n a s s o c ia t io n s o r m u t u a l s a v i n g s b a n k s , a ls o c a n c o n trib u te
to in c r e a s e s in v e lo c it y b y r a is in g in te re st o r d iv id e n d ra te s to a ttra ct n e w f u n d s f o r le n d in g th a t m ig h t
o t h e r w is e n o t h a v e b e e n s p e n t a s q u ic k ly a n d b y le n d in g the p ro c e e d s o f G o v e r n m e n t s e c u rity s a le s to
b o r r o w e r s w h o s p e n d th e m im m e d ia t e ly .

F in a lly , v e lo c ity c a n

b e in c r e a s e d t h r o u g h

s e c u rity s a le s b y

n o n f in a n c ia l in stitu tio n s a n d t h r o u g h th e a d o p t io n o f v a r io u s w a y s o f e c o n o m iz in g o n b u s in e s s a n d p e r ­
s o n a l c a s h n e e d s.
S u c h in c r e a s e s in v e lo c it y m e a n th a t m o n e t a r y p o lic y m u st p e r m it th e m o n e y s u p p l y to e x p a n d
m o re s lo w ly , a n d a t tim e s to co ntra ct, in o r d e r to p re v e n t s p e n d in g fr o m r is in g a t a n i n f la t io n a r y clip.
It is s o m e t im e s a r g u e d th a t th e m o n e y s u p p l y c a n n o t

u n d e rgo

su c h

r e s t r a in t

w it h o u t

f e r in g w it h T r e a s u r y f i n a n c in g o p e r a t io n s o r u p se t tin g se c u ritie s m a r k e t s t h r o u g h

u n d u ly

sh arp

in te r­

in c r e a s e s in

in te re st ra te s.
In p ra ctice , h o w e v e r , th e se f e a r s h a v e n o t y e t b e e n re a liz e d .
a t tim e s b y T r e a s u r y f in a n c in g
d ire c tio n a n d
a c tio n s.

o p e r a t io n s ,

in te n s it y o f p o lic y .

b u t th e

S y s te m

has

N o r h a v e se c u ritie s m a r k e t s

S y s t e m a c t io n s h a v e b e e n d e la y e d
not

been

had

to

d is r u p t e d

a lt e r

a p p re c ia b ly

b y Syste m

th e

t ig h t e n in g

In c r e a s e s in in te re st ra t e s h a v e a c t u a lly b e e n ra th e r m o d e r a t e — to n o s m a ll d e g r e e

b ecau se

p o lic y a ffe c ts th e a v a i la b i li t y a s w e ll a s the co st o f credit.
In fa ct, in c r e a s e s in v e lo c it y in d u c e d b y a t ig h t e n in g

p o lic y

p e r fo r m

se ve ra l

u s e fu l

fu n c tio n s .

First, b y p r o v i d i n g a m e a n s f o r f i n a n c i n g o u t la y s t h e y act a s a s a fe t y v a l v e to p r e v e n t a n in a d v e r t e n t
o v e r t ig h t e n in g

o f th e

m oney

s u p p ly

fr o m

b e c o m in g se rio u s.

S e c o n d , s e c u rity s a le s r e s u lt in g

in i n ­

c r e a s e d v e lo c it y h e lp tr a n s m it c h a n g e s in th e co st a n d a v a ila b ilit y o f c re d it q u ic k ly t h r o u g h o u t th e e n ­
tire

c re d it

m e c h a n is m .

F in a lly ,

s h ifts

in

v e lo c it y m a k e cre d it p o lic y m o r e

e q u it a b le

s p e n d e r s to m a in t a in th o s e e x p e n d it u r e s w it h th e h ig h e s t p rio ritie s b y t r a n s m it t in g

b y e n a b li n g

th e e ffe cts o f th e

p o lic y to th e m o r e m a r g i n a l o u t la y s .

THE FORECASTING PROBLEM

M o n e t a r y p o lic y — lik e a n y d is c r e t io n a r y s t a b il iz in g p o lic y — n e c e s s a r ily i n ­

v o lv e s j u d g m e n t s b a s e d u p o n in c o m p le te e v id e n c e .

E rro rs c a n o c c u r f o r t w o re a s o n s .

First, d e la y s in

the a v a i l a b i l i t y o f im p o r t a n t b u s in e s s in d ic a t o r s m a k e it im p o s s ib le to k n o w e x a c t ly h o w th e e c o n o m y
is b e h a v in g a t th e m o m e n t.

S e c o n d , p o lic y m a k i n g in v o lv e s ju d g m e n t s a s to b o th th e c o u rs e o f b u s i ­

n e ss a c t iv ity in th e a b s e n c e o f ce n tra l b a n k in te rv e n tio n
c o m b in a t io n s .

and

the

p ro b a b le

e ffe cts

of

v a r io u s

p o lic y

E r ro r s o f ju d g m e n t c a n b e m in im iz e d th r o u g h e x p e r ie n c e a n d c a re fu l a n a ly s is , b u t t h e y

c a n n e v e r b e e lim in a t e d c o m p le te ly .




23

A D V A N T A G E S OP M O N E T A R Y POLICY
D e s p ite

its im p e rfe c tio n s , m o n e t a r y

p o lic y h a s s e v e r a l a d v a n t a g e s o v e r th e a lt e r n a t iv e m e t h o d s

o f s t a b iliz in g th e e c o n o m y — fis c a l p o lic y a n d

MONETARY POLICY IS IMPERSONAL

d ire c t c o n tro ls su c h a s r a t io n in g a n d p ric e co n tro l.

In o u r m a r k e t e c o n o m y , m o s t p r o d u c t io n d e c is io n s a r e m a d e in ­

d ir e c tly b y s p e n d e r s t h r o u g h th e ir d e m a n d f o r g o o d s a n d

se rv ic e s.

O n l y th o s e t h in g s th a t s p e n d e r s

w a n t w ill c o n tin u e to b e p ro d u c e d , o n ly the c h e a p e s t m e t h o d s o f p r o d u c t io n w ill last, a n d o n l y e ff i­
c ie n t p r o d u c e r s c a n

r e m a in

in

b u sin e s s.

C o n s e q u e n t ly , e x c e p t f o r c e rta in

in te rfe re n c e s, o u r

lim ite d

s u p p lie s o f la n d , la b o r , a n d c a p it a l g o o d s a r e u s e d to p r o d u c e m o s t e ffic ie n t ly th o s e t h in g s s p e n d e r s w a n t
m ost.
D ire ct c o n tro ls o b v io u s l y c h a n g e a ll this.
not do.

T h e y , in effect, d ic ta te w h a t c o n s u m e r s c a n a n d c a n ­

T h e re fo re , p r o d u c t io n d e c is io n s a r e m a d e b y th e a u th o ritie s , n o t b y th e m a rk e t.

F isc a l p o lic y is q u it e im p e r s o n a l c o m p a r e d w it h d ire c t c o n tro ls, b u t v a r ia t io n s in th e d ire c tio n a n d
v o lu m e o f t a x a t io n a n d s p e n d in g a lte r th e c o m p o s it io n a s w e ll a s th e o v e r -a ll le v e l o f p ro d u c t io n .
t h in g s th e G o v e r n m e n t b u y s w ill b e p ro d u c e d in la r g e r q u a n t it ie s t h a n
th e c a se , a n d

th o se

goods and

o t h e r w is e w o u ld

T h o se

have

been

s e rv ic e s t a x p a y e r s w o u ld h a v e b o u g h t w ill b e p r o d u c e d in s m a lle r

q u a n t itie s.
In
tu re s.

c o n tra st, g e n e r a l
A

m o n e t a r y c o n tro ls a r e

n e v e r u s e d to in flu e n c e p a r t ic u la r t y p e s o f e x p e n d i­

in g to o fa st.

It le a v e s it to th e m a r k e t to d e c id e w h ic h

a r e g e n e r a lly t h o s e t h in g s w h ic h c o n su m e rs a n d o t h e r
th e

total s p e n d in g f r o m in c r e a s ­
particular a c tiv itie s w ill b e c u rta ile d . T h e se

p o lic y o f re stra in t, f o r e x a m p le , is d e s ig n e d m e r e ly to p r e v e n t

t h in g s

th e y

w ant

m ost.

S im ila r ly , w h e n

sp e n d ers

w ant

le a st.

They

c o n tin u e

to

buy

e a s y m o n e y e n c o u r a g e s s p e n d in g , th e a d d it io n a l o u t ­

la y s t a k e w h a t e v e r f o r m s s p e n d e r s p re fe r.

MONETARY POLICY IS FLEXIBLE

M o n e t a r y p o lic y is m o r e f le x ib le t h a n

m o s t s t a b iliz e r s .

T h e re

a re ,

o f c o u rse , l a g s b e t w e e n p o lic y d e c is io n s a n d th e tim e th e a c t io n s b e c o m e e ffe ctive , just a s in th e c a s e
o f a n y s t a b iliz in g

p o lic y .

T h e re a r e o th e r l a g s

a f f e c t in g a ll t y p e s o f d is c r e t io n a r y sta b iliz e rs.
p o lic y - m a k in g m a c h in e r y is a d m ir a b le .

r e s u lt in g f r o m

th e la c k o f c u rre n t in f o r m a t io n — la g s

B u t w h e n it c o m e s to r e a c h in g a q u ic k d e c is io n , S y s te m

E v e r y th re e w e e k s — a n d s o m e tim e s m o r e o fte n — th e O p e n M a r ­

ket C o m m itt e e re a c h e s s o m e d e fin ite p o lic y d e c is io n a t its m e e tin g .
m a y d e c id e to act; b u t in a n y e v e n t it d e c id e s a n d

It m a y d e c id e to s t a n d

p at; it

in itia te s im m e d ia t e ly th e n e c e s s a r y im p le m e n t in g

ste p s.
D is c r e t io n a r y f is c a l p o lic y a c t io n s i n v o lv in g c h a n g e s in s p e n d in g a n d t a x a t io n d e p e n d to a la r g e
d e g r e e u p o n C o n g r e s s i o n a l a ctio n . S u c h d e c is io n s in a d e m o c r a c y su c h a s o u r s d e s e r v e a n d re c e iv e w id e
stu d y a n d
s o -c a lle d

d e b a te .

P r o p e r c o n s id e ra t io n

th u s r e q u ir e s

fis c a l " a u t o m a t ic s t a b iliz e r s " — p r im a r ily

tim e , a n d

f le x ib ilit y

in e v it a b ly

su ffe rs.

The

F e d e ra l in c o m e t a x e s a n d u n e m p lo y m e n t c o m p e n s a ­

tio n p a y m e n t s — th a t te n d to cre a te b u d g e t s u r p lu s e s d u r i n g b o o m a n d b u d g e t d e fic its d u r in g re c e ssio n
d o , h o w e v e r , a c t m o r e q u ic k ly . T h e se c le a rly c o n stitu te a v a lu a b le , p ra c tic a l a d ju n c t to m o n e t a r y p olicy .

MONETARY POLICY IS FREE FROM DAY-TO-DAY POLITICAL PRESSURES

In e s t a b lis h in g th e F e d e ra l

Re­

s e r v e S y s te m , C o n g r e s s w is e ly g a v e it su c h in d e p e n d e n c e a s to e n a b le it to a ct f r e e ly in th e b e st in te re sts
o f th e e c o n o m y .

It s p r e a d

th e

p o lic y - m a k in g

ro le t h r o u g h o u t th e S y s te m to a v o i d u n d u e c o n c e n tr a ­

tio n o f p o w e r ; it p r o v id e d f o r 1 4 - y e a r te rm s o f o ffic e

24



fo r

a p p o in t e d

B o a rd

m e m b e r s,

m ade

th e m

in e lig ib le f o r r e a p p o in t m e n t a ft e r a fu ll term , a n d s t a g g e r e d th e ir te rm s o f o ffic e ; a n d it p r o v id e d f o r th e
e le ctio n o f R e s e rv e B a n k p r e s id e n t s b y th e ir o w n b o a r d s
F e d e ra l R e s e rv e B o a rd .

T h e ne t re s u lt is a

o f d ire c to rs su b je c t to th e

a p p r o v a l o f the

u n iq u e in stitu tio n a b le to b a s e its d a y - t o - d a y p o lic y o n

e c o n o m ic n o n p o lit ic a l g r o u n d s .
T h e S y s te m , o f c o u rse , m u s t a n s w e r to C o n g r e s s a n d h a s o n ly su c h p o w e r s a s F e d e ra l la w s g i v e it.
W it h in th e lim its o f its b r o a d

p o w e r s , h o w e v e r , th e S y s te m is fre e to u s e a n d d o e s u s e o n l y e c o n o m ic

c o n s id e r a t io n s a s g u id e s to p o lic y .
co n tro ls, w h ic h a r e a l w a y s

S u c h c a n n e v e r b e e n tire ly th e c a s e w it h

p a r t ly in flu e n c e d

by

fis c a l

p o lic y o r d ire c t

p o litic s in o u r ty p e o f d e m o c ra c y .

TH E N E T R ESU LT
W hen

a ll its a d v a n t a g e s a r e w e i g h e d a g a i n s t its lim ita tio n s, w h e r e d o e s m o n e t a r y p o lic y s t a n d ?

W h a t c a n it d o, a n d w h a t is it u n a b le to d o ?

P e r h a p s th e b est s u m m a r y is th e f o l l o w in g t e s t im o n y

g i v e n b y C h a i r m a n M a r t i n o f th e B o a r d o f G o v e r n o r s

b e fo re th e J o in t E c o n o m ic C o m m itt e e

on

Feb­

r u a r y 2, 1 9 6 0 :
".

. . It ( m o n e t a r y

p o lic y ) c a n n o t p re v e n t m o n o p o ly .

It c a n n o t a s s u r e th a t

th e f in a n c ia l n e e d s o f a ll s o c ia lly d e s ir a b le a c tiv itie s a r e m e t w it h o u t in t e rv e n t io n




b y G o ve rn m e n t.

It c a n n o t b e re lie d u p o n to c o v e r F e d e ra l d eficits.

A lo n e , it

c e rt a in ly c a n n o t a s s u r e e ith e r s ta b ilit y o r g r o w th .
" W h a t a co rre ct m o n e t a r y p o lic y c a n d o is to fo ste r c o n fid e n c e in th e d o lla r ,
s o th a t o u r p e o p le c a n a n d w ill s a v e a n d in v e s t in th e fu t u re w it h r e a s o n a b le
a s s u r a n c e th a t th e ir p la n s w ill n ot b e fru stra te d b y ir r e s p o n s ib le c h a n g e s in th e
v a lu e o f m o n e y ."

25

SUM M ARY OF OPERATIONS
N e a r l y a ll d e p a r t m e n t s a t th e R ic h m o n d R e s e rv e B a n k a n d

its B a lt im o r e a n d C h a r lo t t e B r a n c h e s

e x p e r ie n c e d in c r e a s e s in v o lu m e fr o m th e b u s in e s s a n d e c o n o m ic a c t iv it y o f th e Fifth D istrict d u r i n g 1 9 6 0 .
In its f o r t y -s ix t h y e a r o f o p e r a t io n th e B a n k re a c h e d th e $ 1 0 0 b illio n m a r k in c h e c k s c le a r e d — a l ­
m o s t $ 3 b illio n m o r e t h a n in th e p r e v io u s y e a r .

N e a r l y $ 1 3 4 m illio n o f c o in s w e r e re c e iv e d a n d p a id

o u t— a n in c r e a s e o f m o re t h a n $ 4 .5 m illio n fr o m 1 9 5 9 .

C u r r e n c y h a n d l e d t o p p e d $ 5 b illio n in b ills, a n d

t r a n s f e r s o f f u n d s re a c h e d a lm o s t $ 9 8 b illio n , a n in c re a s e , d u r i n g I 9 6 0 , o f a p p r o x im a t e l y $ 6 b illio n .
N e t e a r n i n g s b e f o r e p a y m e n t s to th e U n ite d S t a t e s T r e a s u r y in c r e a s e d b y o v e r $ 7 m illio n , t o t a lin g
$ 5 9 ,7 9 4 ,8 1 7 .4 1 .
t r a n s f e r r in g

M em ber

$ 2 ,9 9 2 ,4 0 0

banks
to

re c e iv e d

s u r p lu s

s ta tu t o r y d iv i d e n d s o f $ 1 , 0 8 3 , 4 2 9 . 2 5 d u r in g th e y e a r .

(s u rp lu s

A fte r

a c c o u n t is tw ic e p a id in c a p ita l), th e r e m a in in g n e t e a r n ­

in g s o f $ 5 5 , 7 1 8 , 9 8 8 . 1 6 w e r e p a id to th e T r e a s u r y a s in te re st o n F e d e ra l R e s e rv e notes.
O v e r $ 7 b illio n o f c re d it w a s e x te n d e d to m e m b e r b a n k s d u r i n g th e y e a r .
in g

t r a n s a c t io n s w it h
In

1960

crease d

158

c a p it a l stock, w h ic h

b y $ 1 ,4 9 6 ,2 0 0 .

T h is f ig u r e , re p r e s e n t ­

b a n k s , s h o w s a d e c lin e fr o m th e 1 9 5 9 to tal.
reflects in c re a s e s in th e c a p it a l a n d s u r p lu s o f m e m b e r b a n k s , in ­

T h is f ig u r e

re p re s e n ts 2 3 3 sto c k t r a n s a c t io n s .

In th e p a s t t w e lv e m o n t h s o u r B a n k d is t rib u t e d o v e r 1 8 2 , 0 0 0 p u b lic a t io n s m a d e a v a i l a b l e b y th e
S y s te m .

T h e m a jo r it y o f th is m a t e ria l w a s s e n t to c o lle g e s , u n iv e rs it ie s , a n d s e c o n d a r y s c h o o ls in th e

District.

F ilm s a v a i l a b l e f r o m th is B a n k w e r e s c h e d u le d f o r 6 3 9 s h o w i n g s , a n d th e a u d ie n c e s v i e w i n g

th e se a r e e s tim a t e d a t n e a r ly 2 2 , 0 0 0 .
m a ilin g

list, a n d

o t h e r in te re ste d

EMERGENCY PLANNING
D istrict.

B a n k e rs , b u s in e s s m e n , te a c h e rs , a n d e c o n o m is t s o n o u r r e g u l a r

in d iv id u a ls re c e iv e d o v e r 1 0 9 , 0 0 0 c o p ie s o f o u r

Monthly Review.

A c t io n s w e r e ta k e n to fu r t h e r th e e m e r g e n c y p r e p a r e d n e s s p r o g r a m

C h e c k a g e n t c irc u la rs w e r e iss u e d to a ll b a n k s

o u t lin in g

th e

p ro c e d u re

d u r i n g a n e m e r g e n c y , a n d a re v is io n w a s m a d e in o u r s e c u rity file s p r o g r a m

fo r

check

in th e

c o lle ctio n

c o n c e r n in g th e m a i n ­

t e n a n c e o f d u p lic a t e v it a l re c o rd s a t th e B a n k 's a lt e r n a t e lo c a tio n center.

MAGNETIC INK CHARACTER RECOGNITION
n itio n

p ro g ra m

m a d e g e n e r a lly f a v o r a b le

D u r in g its fir st fu ll y e a r th e M a g n e t i c In k C h a r a c t e r R e c o g ­
p r o g r e s s in th e F ifth F e d e ra l R e s e rv e District.

M em ber and

n o n m e m b e r b a n k s c o o p e ra t e d w it h th e A m e r ic a n B a n k e r s A s s o c ia t io n a n d th e F e d e ra l R e s e rv e S y s t e m
in m a k i n g h ig h - s p e e d e le ctro n ic p r o c e s s in g o f c h e c k s a re a lity .

O f th e a p p r o x im a t e l y 1 , 6 0 0 b a n k i n g

o ffic e s in th e D istrict, 2 7 p e r cent p a r tic ip a t e d b y h a v i n g th e ir c h e c k s r e d e s ig n e d a n d p r e p r in t e d w it h
th e r o u t in g s y m b o l- t r a n s it n u m b e r in m a g n e t ic in k.

NEW FUNCTION

A s a n e x t e n s io n o f o u r p o lic y o f u t iliz in g

new

and

im p r o v e d

m e th o d s , m a c h in e s ,

a n d e q u ip m e n t in a c c o m p lis h in g o u r w o r k , c o u p le d w it h a n a w a r e n e s s o f th e g r o w i n g u s e in b u s in e s s
a n d b a n k i n g o f e le c tro n ic e q u ip m e n t, a n e w d e p a rt m e n t, D a t a

P r o c e s s in g , w a s e s t a b lis h e d .

T h is d e ­

p a rtm e n t , w h ic h e n c o m p a s s e s th e w o r k f o r m e r ly p e r f o r m e d b y th e T a b u l a t in g D e p a rt m e n t , is r e s p o n s i­
b le f o r c o o r d in a t in g D a t a P ro c e s s in g a c tiv itie s t h r o u g h o u t th e B a n k .

NEW MEMBER BANKS

T w o Fifth D istrict b a n k s w e r e w e lc o m e d in to th e S y s t e m d u r in g th e y e a r .

On

A p r i l 2, th e B a n k o f A n n a n d a le , A n n a n d a le , V i r g i n i a , f o r m e r ly a n o n m e m b e r b a n k , c o n v e rt e d to a n a ­
t io n a l c h a r t e r u n d e r th e n a m e o f th e O l d D o m in io n N a t i o n a l B a n k .

T h e n e w ly - f o r m e d S e c u r it y N a ­

t io n a l B a n k , F a lls C h u rc h , V ir g i n i a , b e c a m e a m e m b e r o f th e S y s t e m o n J u l y 1.

BRANCH AUDITORS

D u r in g th e y e a r p e r m a n e n t a u d it o r s w e r e a s s i g n e d to th e B ra n c h e s .

Sam uel

I.

I r b y b e c a m e b r a n c h a u d it o r in B a ltim o re o n J a n u a r y 1, 1 9 6 0 , a n d O . L o u is M a r t in , Jr., w a s n a m e d to
th e s a m e p o s it io n a t th e C h a r lo tte B r a n c h o n M a y 1, 1 9 6 0 .

26



CHANGES IN OFFICIAL STAFF

D u r i n g 1 9 6 0 th e re w e r e m a n y c h a n g e s in th e o f fic ia l s t a f f o f the B a n k .

E a r ly in th e y e a r R o b e rt R. F e n tre ss, a s s is t a n t c a sh ie r, a s s u m e d

new

d u tie s a t th e C h a r lo t t e

B ra n c h .

B. U. R a tc h fo rd , f o r m e r p r o f e s s o r o f e c o n o m ic s a t D u k e U n iv e rsit y , b e c a m e v ic e p r e s id e n t in c h a r g e o f
th e R e s e a r c h

D e p a rt m e n t .

Edm und

F. M a c

D o n a ld w a s elected v ic e p r e s id e n t a n d b e c a m e th e o f fic e r

in c h a r g e o f th e C h a r lo t t e B r a n c h f o llo w in g th e r e s ig n a t io n o f T. I. Sto rrs.
J. G o r d o n D ic k e rs o n , Jr., a n d J o h n L. N o s k e r , f o r m e r ly a s s is t a n t v ic e p re s id e n ts , w e r e ele cted v ic e
p re s id e n t s in D e c e m b e r.
R o b e rt P. B la c k , S t u a r t P. F is h b u r n e , W i lli a m
a s s is t a n t v ic e p re sid e n ts .

W i lli a m

B. H a r r is o n , III, a n d J o s e p h F. V iv e r e t t e w e r e n a m e d

H. G e n t ry , Jr., a n d

R o b e rt L. M ille r b e c a m e a s s is t a n t c a s h ie r s, a n d

G . N . C a m p b e ll a s s u m e d th e o f f ic ia l p o s it io n o f a s s is t a n t g e n e r a l a u d it o r.
E. B. C o le m a n , a s s is t a n t c a s h ie r , a n d C h a r le s W . W illia m s , e c o n o m ic a d v is e r , re tire d f r o m th e F e d ­
e r a l R e s e rv e e ffe c tiv e S e p t e m b e r 3 0 a n d

CHANGES IN THE BOARDS OF DIRECTORS

D e c e m b e r 3 1 , re sp e c tiv e ly .
A l o n z o G . D e ck e r, Jr., p re s id e n t o f th e B la c k & D e c k e r M a n u ­

f a c t u r in g C o m p a n y o f T o w s o n , M a r y l a n d , w a s r e d e s ig n a t e d b y th e B o a r d o f G o v e r n o r s a s C h a i r m a n
o f th e B o a r d a n d F e d e ra l R e s e rv e A g e n t f o r 1 9 6 1 .

In J u l y 1 9 6 0 , W illia m H. G r ie r , p r e s id e n t o f th e R o c k

H ill P rin t in g & F in is h in g C o., R o c k H ill, S o u t h C a r o lin a , w a s a p p o in t e d b y th e B o a r d o f G o v e r n o r s a s
C la s s C d ire c to r, r e p la c in g D . W . C o lv a r d , f o r m e r d e a n o f a g r ic u lt u r e o f N o r t h C a r o l in a S ta te C o lle g e ,
R a le ig h , N o r t h C a r o l in a , w h o r e s ig n e d to b e c o m e p re s id e n t o f M is s is s ip p i S t a t e U n iv e r s it y .

E d w in H y d e ,

p re sid e n t, M i ll e r & R h o a d s , Inc., R ic h m o n d , V i r g i n i a , w a s d e s ig n a t e d to r e p la c e M r . C o l v a r d a s D e p u t y
C h a i r m a n o f th e B o a r d , a p o s it io n to w h ic h h e w a s r e d e s ig n a t e d f o r 1 9 6 1 .

M r . G r ie r w a s r e a p p o in t e d

f o r a t h r e e -y e a r te rm b e g in n i n g J a n u a r y 1, 1 9 6 1 .
In N o v e m b e r A d d i s o n H. R e e se, p re sid e n t, N o r t h C a r o l in a

N a t io n a l

B a n k , C h a r lo tte , N o r t h C a r o ­

lin a , w a s e le cte d C la s s A d ir e c to r to s u c c e e d D e n v e r L. M o r g a n , e x e c u tiv e v ic e p re sid e n t. T h e C h a r le s ­
to n N a t io n a l B a n k , C h a r le s t o n , W e s t V i r g i n i a ; a n d R o b e rt E. L. J o h n s o n , c h a ir m a n o f th e b o a r d a n d c h ie f
e x e c u tiv e o ffice r, W o o d w a r d & L o th ro p , Inc., W a s h in g t o n , D. C., w a s e le cte d C la s s B d ire c to r to s u c c e e d
R o b e rt O . H u f f m a n , p re sid e n t, D r e x e l F u rn itu re C o m p a n y , D re x e l, N o r t h C a r o lin a .

T h e ir te rm s b e g a n

J a n u a r y 1, 1 9 6 1 .
A t the B a lt im o r e B r a n c h th e B o a r d o f G o v e r n o r s a p p o in t e d H a r r y B. C u m m in g s , v ic e p re s id e n t a n d
ge n e ra l m a n a g e r, M e ta l

P ro d u c t s D iv is io n , K o p p e r s C o m p a n y , Inc., B a ltim o re , M a r y l a n d , to a th re e -

y e a r te rm b e g in n i n g J a n u a r y
R a ilw a y

C om pany,

B a ltim o re ,

1, 1 9 6 1 , r e p la c in g C la r e n c e R. Z a r fo s s , v ic e p re sid e n t, W e s t e r n M a r y l a n d
M a r y la n d .

The

B o a r d o f D ire c to rs o f th is B a n k r e a p p o in t e d J o s e p h N .

S h u m a t e , p re sid e n t, T h e F a r m e r s N a t io n a l B a n k o f A n n a p o lis , A n n a p o l is , M a r y l a n d , d ire c to r f o r a th re e y e a r te rm b e g in n i n g J a n u a r y 1, 1 9 6 1 .
G e o rge

H. A u ll, a g r ic u lt u r a l e c o n o m ist, C le m s o n C o lle g e , C le m s o n , S o u t h

C a r o l in a , a n d

a t th e C h a r lo tte B ra n c h , w a s r e a p p o in t e d b y th e B o a r d o f G o v e r n o r s f o r a t h r e e - y e a r te rm
J a n u a r y 1, 1 9 6 1 .

W . W . M c E a c h e r n , p re sid e n t, T h e S o u t h C a r o lin a

d ire c to r
e ffe c tiv e

N a t io n a l B a n k , G r e e n v ille , S o u t h

C a r o lin a , w a s a p p o in t e d a C h a r lo t t e B r a n c h d ire c to r b y th e R ic h m o n d B o a r d f o r a t h r e e - y e a r term , re ­
p la c in g E rn e st P atto n , c h a ir m a n o f th e b o a r d , T h e P e o p le s N a t io n a l B a n k o f G r e e n v ille , G r e e n v ille , S o u t h
C a r o lin a , w h o s e te rm e x p ir e d D e c e m b e r 3 1 , 1 9 6 0 .

FEDERAL ADVISORY COUNCIL MEMBER

R o b e rt

B. H o b b s, c h a ir m a n o f th e b o a r d , F irst N a t i o n a l B a n k o f

B a ltim o re , B a ltim o re , M a r y l a n d , w a s a p p o in t e d b y th e B o a r d o f D ire c to rs to a

o n e - y e a r te rm a s Fifth

F e d e ra l R e s e rv e D istrict re p r e s e n t a t iv e to th e F e d e ra l A d v i s o r y C o u n c il, s u c c e e d in g J o h n

S. A lf r ie n d ,

c h a ir m a n o f th e b o a r d , N a t i o n a l B a n k o f C o m m e r c e o f N o r fo lk , N o r fo lk , V i r g i n i a .




27

C O M P A R A T IV E S T A T E M E N T OF C O N D IT IO N
ASSETS:

Decem ber 31, 1960 D ecem ber 31,1959

Gold certificate account-------------------------------Redemption fund for Federal Reserve notes

$1,035,163,268.08
81,220,045.00

$1,067,069,499.70
79,239,995.00

TOTAL GOLD CERTIFICATE RESERVES —

1,116,383,313.08

1,146,309,494.70

Federal Reserve notes of other banks---------Other c a s h ----------------------------------------------------Discounts and advances--------

42,922,520.00
21,478,712.60
510,000.00

69,408,050.00
25,493,580.05
5,300,000.00

183,566,000.00
573,437,000.00
790,004,000.00
160,963,000.00

166,997,000.00
673,373,000.00
705,628,000.00
159,180,000.00

TOTAL U. S. GOVERNMENT SECURITIES

1,707,970,000.00

1,705,178,000.00

TOTAL LOANS AND SECURITIES--------------

1,708,480,000.00

1,710,478,000.00

640.11
482,195,599.14
6,113,204.43
13,171,171.10

719.69
502,789,096.60
6,650,914.13
16,638,938.98

$3,390,745,160.46

$3,477,768,794.15

$2,185,035,255.00

$2,131,599,915.00

726,682,213.22
24,626,957.46
9,630,000.00
6,137,511.26

789,451,309.56
56,936,761.42
17,400,000.00
28,317,225.98

TOTAL DEPOSITS----------------

767,076,681.94

892,105,296.96

Deferred availability cash items
Other liabilities---------------------------

380,482,167.80
1,813,305.72

399,443,648.83
1,592,432.04

3,334,407,410.46

3,424,741,292.83

18,779,250.00
37,558,500.00

17,283,050.00
34,566,100.00
1,178,351.32

$3,390,745,160.46

$3,477,768,794.15

$

$

U. S. Government securities:
B i l l s -----------------------------------Certificates

N o te s -------B onds--------

Due from foreign ban ks----------------Cash items in process of collection
Bank prem ises-------------------------------Other a sse ts-----------------------------------T O T A L A SSE T S

LIAB ILITIES:
Federal Reserve n o te s--------------------Deposits:
Member bank— reserve accounts _
U . S. Treasurer— general account
F o r e ig n -----------------------------------------Other ----------------------------------------------

T O T A L LIA BILITIES

CA P IT A L A C C O U N T S :
Capital paid in
Surplus -----------------------Other capital accounts
TO T A L L IA B ILITIE S A N D C APITAL ACCOUNTS

Contingent liability on acceptances purchased for foreign correspondents .

28



10,449,000.00

4,115,000.00

C O M P A R A T IV E S T A T E M E N T OF
E A R N IN G S A N D E X P E N S E S
E A R N IN G S :

1960

. __
Discounts and advances.................. ........................................
Interest on U. S. Government securities_______________ _______________________
Other earnings
............................. ..... ...........
TOTAL CURRENT EA R N IN G S...... ...... .....................— .... ....................................... .

$
819,821.16
68,654,176.43
31,695.62
.

1959
$

1,559,501.81
54,981,403.12
18,329.15

69,505,693.21

56,559,234.08

Operating expenses (including depreciation on bank premises) after deduct­
ing reimbursements received for certain Fiscal Agency and other expenses
10,175,679.84
Assessments for expenses of Board of Governors______ _______________
292,800.00
Cost of Federal Reserve currency .........................................................................................
570,909.90

9,821,945.58
321,400.00
500,821.04

11,039,389.74

10,644,166.62

................................................ ...

58,466,303.47

45,915,067.46

Profit on sales of U. S. Government securities (net) .................. ..........................
Transferred from Reserves for contingencies (net) ............................... ...............
All other ................... ....... — - .........
— -------------------------------- -

153,386.87
1,178,351.32
277.66

11,746.06
6,500,111.52
265.56

________ _____ _________ -

1,332,015.85

6,512,123.14

DED U CTIO N S FROM C U RREN T N E T E A R N IN G S ________ ____ ____________

3,501.91

1,385.24

1,328,513.94

6,510,737.90

EXPENSES:

NET EXPENSES

............................ ... ................

CURRENT NET EARNINGS ...................... .

.

................................ -

......... ............................ ,..

A D D IT IO N S TO CU R R E N T N E T E A R N IN G S :

t o t a l a d d i t i o n s ______ _______________ _______

Net Additions

- _____ _..............- __ __ __ - - _____

________-

N E T E A R N IN G S BEFORE P A Y M E N T S TO U. S. T R E A SU R Y

$59,794,817.41

T O T AT.

__

52,425,805.36

$ 1,083,429.25
55,718,988.16
2,992,400.00

$

1,016,949 98
61,688,734.93
-10,279,879.55

$59,794,817.41

Dividends paid . __. . . ___
.. __ _________ . . ____ __________
__ _ .
Paid U. S. Treasury (interest on Federal Reserve n o te s )_____________________
Transferred to su rp lu s------. . . . . . .
.
. .
..............
.. .

$

$

52,425,805.36

$34,566,100.00

$

44,845,979.55
-10,279,879.55

SURPLUS A C C O U N T
Balance at close of previous y e a r ------------------------------------------- -------------------------Paid U. S. Treasury (interest on Federal Reserve notes) _____________ _______
Addition account of profits for y e a r ----------------------------------------------------------------------B A L A N C E A T CLOSE OF CU RREN T Y E A R ....

................

.

.

34,566,100.00
2,992,400.00

34,566,100.00

$37,558,500.00

$

34,566,100.00

$17,283,050.00
1,654,750.00

$

16,438,600.00
979,450.00

C A P IT A L ST O C K A C C O U N T
(Representing amount paid in, which is 50% of amount subscribed)
Balance at close of previous y e a r -------------------------------------------------------------- ----Issued during the year — ------------------------.
.
.
_ ~ --------Cancelled during the y e a r -------------------------------------------

.

.

.. ------

_

------ _

B A L A N C E A T CLOSE OF CURRENT Y E A R ____________________




18,937,800.00
158,550.00
$18,779,250.00

17,418,050.00
135,000.00
$

17,283,050.00

29

FEDERAL RESERVE B A N K OF RICH M ON D
DIR ECTO R S
A l o n z o G . D e c k e r, Jr.

Chairman of the Board and Federal Reserve Agent

E d w in H y d e

Deputy Chairman of the Board

CLASS A
H. H. C o o le y

President, The Round Hill National Bank
Round Hill, Virginia (Term expires December 31, 1962)

D e n v e r L. M o r g a n

Executive Vice President, The Charleston National Bank
Charleston, West Virginia (Term expires December 31, 1960)

Su ccee d e d by:

A d d is o n H. R e e se
President, North Carolina National Bank
Charlotte, North Carolina (Term expires December 31, 1963)

A . S c o tt O f f u t t

Chairman of the Board and President, The First National Bank of Washington
Washington, D. C. (Term expires December 31, 1961)

CLASS B
L. V in t o n H e r s h e y

President, Hagerstown Shoe Company
Hagerstown, Maryland (Term expires December 31, 1961)

R o b e rt O . H u f f m a n

President, Drexel Furniture Company
Drexel, North Carolina (Term expires December 31, 1960)

Su ccee d e d by:

R o b e rt E. L. J o h n s o n
Chairman of the Board, W oodward & Lothrop, Inc.
Washington, D. C. (Term expires December 31, 1963)

R a y m o n d E. S a lv a t i

President, Island Creek Coal Company
Huntington, West Virginia (Term expires December 31, 1962)

CLASS C
A l o n z o G . D e c k e r, Jr.

President, The Black & Decker Manufacturing Company
Towson, Maryland (Term expires December 31, 1962)

W illia m H. G r ie r

President, Rock Hill Printing & Finishing Co.
Rock Hill, South Carolina (Term expires December 31, 1963)

E d w in H y d e

President, Miller & Rhoads, Inc.
Richmond, Virginia (Term expires December 31, 1961)

M EM B ER FEDERAL A D V IS O R Y CO U N CIL
J o h n S. A l f r i e n d

Chairman of the Board, National Bank of Commerce of Norfolk
Norfolk, Virginia (Term expires December 31, 1960)

Su ccee d e d by:

R o b e rt B. H o b b s
Chairman of the Board, First National Bank of Baltimore
Baltimore, Maryland (Term expires December 31, 1961)

30



FEDERAL RESERVE B A N K OF RICH M OND
OFFICERS
Hugh Leach

President

N . L. A r m is t e a d

Vice President

S t u a r t P. F is h b u r n e

Assistant Vice President

J. G o r d o n D ic k e rs o n , Jr.

Vice President

H. E rn e st F o rd

Assistant Vice President

D o n a ld F. H a g n e r

Vice President

W illia m B. H a r r is o n , Hi

Assistant Vice President

A u b r e y N . H e flin

Vice President and
General Counsel

V ic to r E. P re g e a n t, III

Assistant General Counsel

E d m u n d F. M a c D o n a ld

Vice President

R a y m o n d E. S a n d e r s , Jr.

Assistant Vice President

J o s e p h F. V iv e re t te

Assistant Vice President

C liff o r d B. B e a v e r s

Assistant Cashier

J o h n E. F rie n d

Assistant Cashier

W illia m H. G e n t ry , Jr.

Assistant Cashier

J o h n C. H o r i g a n

Chief Examiner

R o b e rt L. M ill e r

Assistant Cashier

W y t h e B. W a k e h a m

Assistant Cashier

U p to n S. M a r t i n

J o h n L. N o s k e r

Jo se p h M . N o w la n

Edward A. Wayne

First Vice President

Vice President

Vice President

Vice President and Cashier

B. U. R a t c h fo rd

Vice President

Ja m e s M . S la y

Vice President

R o b e rt P. B la c k

Assistant Vice President

J o h n G . D e itric k

Assistant Vice President

W e lf o r d S. F a r m e r

Secretary, and
Assistant Counsel




G . H a r o ld S n e a d

General Auditor

G . N . C a m p b e ll

Assistant General Auditor

BALTIM ORE B R A N C H
DIR ECTO R S

OFFICERS

G o r d o n M . C a ir n s

Dean of Agriculture, University of Maryland
College Park, Maryland (Term expires December 31, 1962)

D o n a ld F. H a g n e r

Vice President

H a r v e y E. E m m a r t

Senior Vice President and Cashier, Baltimore National Bank
Baltimore, Maryland (Term expires December 31, 1961)

A . A . S t e w a rt , Jr.

Cashier

J a m e s W . M c E lr o y

President, First National Bank of Baltimore
Baltimore, Maryland (Term expires December 31, 1962)

B. F. A r m s t r o n g

Assistant Cashier

E. R i g g s J o n e s, Jr.

Assistant Cashier

A . C . W ie n e r t

Assistant Cashier

J o h n T. M e n z ie s , Jr. President, The Crosse & Blackwell Company
Baltimore, Maryland (Term expires December 31, 1961)

J. N . S h u m a t e

President, The Farmers National Bank of Annapolis
Annapolis, Maryland (Term expires December 31, 1963)

J o h n W . Stou t

President, The Parkersburg National Bank
Parkersburg, West Virginia (Term expires December 31, 1961)

C la r e n c e R. Z a r f o s s Vice President, Western Maryland Railway Company
Baltimore, Maryland (Term expires December 31, 1960)

S u c c e e d e d b y:

H a r r y B. C u m m in g s

Vice President and General Manager, Metal Products Division
Koppers Company, Inc.
Baltimore, Maryland (Term expires December 31, 1963)

CHARLOTTE B R A N C H
OFFICERS

D IRECTORS
G e o r g e H. A u l l

Agricultural Economist, Clemson College
Clemson, South Carolina (Term expires December 31, 1963)

E d m u n d F. M a c D o n a ld

Vice President

J. C . C o w a n , Jr.

Vice Chairman of the Board, Burlington Industries, Inc.
Greensboro, North Carolina (Term expires December 31, 1962)

S t a n h o p e A . L ig o n

Cashier

C h a r le s D. P a r k e r

Asheville, North Carolina (Term expires December 31, 1962)

R o b e rt R. F e n tre ss

Assistant Cashier

E rn e st P a tto n

Chairman of the Board, The Peoples National Bank of Greenville F re d C . K r u e g e r , Jr.
Greenville, South Carolina (Term expires December 31, 1960)

Su ccee d e d by:

W . W . M c E a c h e rn

President, The South Carolina National Bank
Greenville, South Carolina (Term expires December 31, 1963)

I. W . S t e w a r t

Honorary Chairman of the Board, North Carolina National Bank
Charlotte, North Carolina (Term expires December 31, 1961)

C la r e n c e P. S tre e t

Secretary and General Manager, McDevitt & Street Co.
Charlotte, North Carolina (Term expires December 31, 1961)

G . G . W a ttS

President, The Merchants and Planters National Bank of Gaffney
Gaffney, South Carolina (Term expires December 31, 1961)

32



E. C lin t o n M o n d y

Assistant Cashier

Assistant Cashier







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