Full text of Business Review (Federal Reserve Bank of Philadelphia) : January 1970

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OF P H IL A D E L P H IA

annual report

introduction To The Federal
Reserve System
The Human Lag
Regional Economy Loses
Some Zip In ’69

JANUARY 1970



The beginning of a new year has had special significance for members of the Board
of Directors of the Philadelphia Reserve Bank. For several years, Karl R. Bopp,
President of the Bank, has taken the occasion to discuss with them his views of the
purposes and functions of the Federal Reserve System.
Not only have men who have newly joined the Board found these talks a stimu­
lating introduction to their terms of service, but other directors and staff have
looked forward to them as an opportunity to gain new insights into Karl Bopp's
thinking. For these presentations have been the result of an evolutionary process.
They are built on a firm foundation of study and teaching of central banking, but
they have changed over time as a result of Mr. Bopp's experiences in nearly three
decades as a practicing central banker.
On the following pages, therefore, you see a still shot of what is essentially a
moving picture. That is why there is little here on the question of the proper place
of the Federal Reserve System in Government. Although he has devoted more time
and effort to the question than probably any other student or practitioner of central
banking, Mr. Bopp is not satisfied with what he said a year ago on this issue.
Hopefully, he will find time to develop a position in retirement, beginning in
March. Undoubtedly, he will see other questions in a somewhat different light. In
the meantime, the officers and directors of the Bank are happy to share these
thoughts, recorded essentially as they were presented orally.

BUSINESS REVIEW is produced in the Department of Research. Ronald B. Williams is Art Director. The authors will
be glad to receive comments on their articles.
Requests for additional copies should be addressed to Public In fo rm a tio n , Federal R eserve Bank of Philadelphia, Philadelphia,
Pennsylvania 19101.



BUSINESS REVIEW

Introduction To The
Federal Reserve System
A Message to New Directors of the Federal Reserve Bank of Philadelphia

by Karl R. Bopp, President
IMAGES OF THE BANK

The Federal Reserve Bank of Philadelphia has
many images. The casual pedestrian on Chestnut
Street may imagine that we are a cold and for­
bidding institution because the building is made
of marble and bronze. The building is a widely
recognized architectural masterpiece of Paul
Cret—who also, incidentally, was the architect
of the Federal Reserve Board building in Wash­
ington, D.C. The external coldness is muted by
the pleasant and attractive garden. The garden
is enclosed in order to assure that it will remain
pleasant and attractive.
Those who pass by do not see a second image
because it is inside. Inside are 966 employes and
36 officials, each with achievements, hopes, am­
bitions—and frustrations. Each is an important
person in his own right. I hope you come to
know us as individuals in due course. No orga­
nization chart can reveal the spirit that moti­
vates us. If I were asked to squeeze that spirit
into a sentence, I would say we try always to
take our jobs seriously but never, hopefully,
ourselves.
It is a continuing challenge to help each
member of our staff derive satisfaction from
doing his job well. The overwhelming majority
of us are engaged in operations that are scarcely
more than mentioned as service chores in the
standard college textbooks on money and bank­
ing. We operate around the clock with three




shifts in the collections, the guards, and the
building departments.
We have 247 people who receive, sort, list,
and send checks; 111 who receive, count, and
ship cash; 89 who are directly concerned with
our responsibilities as fiscal agent for the United
States; 48 in accounting; 43 in machine tabulat­
ing—or electronic data processing, as the profes­
sionals now call it. We have only 6 in the credit
department. That fact alone demonstrates that
though the word bank is in our title, we are
not an ordinary bank. So does the fact that we
have 40 engaged in the examination of our state
member banks.
Roughly a fifth of the staff are engaged in
what might be called internal services, including
19 in personnel—we have a deep sense of obli­
gation to those who devote their working lives
with enthusiasm to the public purposes for
which we exist; some 74 in the building depart­
ment—incidentally, we receive many com­
pliments on our “housekeeping” ; about 22 in
the cafeteria—we also have a reputation for
good food and absorb about one-half the cost
as an important investment in employe morale
and well-being; some 59 guards—frequent
winners of trophies for marksmanship. The re­
mainder are in public information, printing,
purchasing, research, telephone, and vault. We
officers have our silent partners, our secretaries,
who prevent us from making many “bloopers.”

3

JANUARY 1970

We have 21 who audit this Bank continuously.
The audit department is responsible directly to
the board of directors and not to the operating
management. This is as it should be. I, for one,
feel much more secure under this organization
than I would if the auditor were responsible to
me. After all, we do run a big operation. For
example, our vault contains $1.3 billion of
valuables held in custody for member banks,
$.6 billion of unissued Federal Reserve notes,
and $13.5 billion of unissued Government secu­
rities. I am as anxious as you are to be sure all
these valuables are indeed where they should
be! I also want to be sure that we spend only
such moneys as you, after careful study, have
authorized in the budget.
In addition, the Board of Governors examines
the Bank once each calendar year. The Board’s
examiners spend about three weeks going over
the Bank from top to bottom. The chief exam­
iner reports to the chairman of the board at the
conclusion of his examination and separately to
the first vice president and me. Incidentally, he
reads the minutes of the board meetings to
assure that the operating management acts
under proper authorization.
I mention these matters at the outset because
I have a greater appreciation of their importance
than I had when I taught central banking with­
out having had any practical experience.
A third image of the Bank is financial in
character. We have assets of about $4.4 billion.
A little more than 66 per cent is in U.S. Gov­
ernment securities. About 15 per cent is in gold
certificates. Discounts and advances on the other
hand represent only a very small fraction of our
assets—illustrating, once more, that we are an
unusual bank.
About 63 per cent of our liabilities are in the
form of Federal Reserve notes or paper money;
one-fourth in deposits, mostly the reserve ac­

Digitized 4 FRASER
for


counts of member banks. Our paid-in capital is
less than 1 per cent of our liabilities. Surplus is
maintained at the level of paid-in capital. Total
capital funds amount to approximately 2 per
cent of total liabilities.
Although we are not operated for profit, we
are a profitable institution. Current earnings last
year were approximately $172 million. Expenses
absorbed 7.3 per cent of earnings. Dividends,
which are limited to 6 per cent of paid-in capi­
tal, absorbed only 1.2 per cent of current earn­
ings. Excess earnings of about $157 million
were paid to the U.S. Treasury.
These three images of the Bank are impor­
tant. Bob Hilkert, other members of senior
management, and I spend a great deal of our
time and effort to assure that we have adequate
and suitable physical facilities, an enthusiastic
staff whose members derive satisfaction from
discharging their responsibilities efficiently, and
a solvent financial institution.
It is not primarily because of these charac­
teristics, however, that you were willing to join
our board of directors. The image to which you
can contribute most is the one that will deter­
mine our destiny. It is the contribution that
the Bank can make to national monetary policy.
OUR ECONOMIC SYSTEM

I should like to sketch for you what I conceive
to be the primary function of the Federal Re­
serve System in our society. I shall be very
general at the outset, but I shall highlight some
more specific elements before I conclude.
The basic economic goal of every society is
the maximum utilization of its human and other
resources. Societies differ, however, with re­
spect to the relationships that they feel should
exist between the Government and the indivi­
dual and, consequently, on how specific goals
are to be determined and achieved.

BUSINESS REVIEW

In dictatorships, the State is supreme, and
the individual is subservient to it. Essentially,
the leaders decide who is to produce how much
of what goods and services and for whom. They
determine the division of time into work and
leisure, the allocation of resources between in­
vestment and consumption.
In democracies, the State is the servant of the
people. Through secret ballots, the electorate
determine generally what role they want their
Governments to play. Within the limits thus
established, each individual decides his own
priorities as to specific goals.
The difference in basic philosophies is re­
flected in the differing role that money plays in
the two systems. In choosing among alternative
goals and alternative ways of achieving them,
even a dictatorship is concerned with costs.
Since the factors of production—land, labor,
capital—are not directly commensurate, some
unit of account is needed. Money serves this
purpose, even in a dictatorship. It also performs
some auxiliary function of allocations within the
limits determined by the general economic plan.
In democracies, on the other hand, money is
the basic instrument of economic freedom
through which individuals make their prefer­
ences known. Within very wide limits, each
individual has freedom to choose how he will
earn his money income. Through the democratic
process of the secret ballot, citizens elect repre­
sentatives to determine how and how much—
and it may be considerable—shall be allocated
to common purposes through the Government.
Again, within wide limits, the individual is free
to spend the remainder of his money income as
he sees fit. He may also borrow to supplement
his income, may save for the future, and may
sell some assets and buy others as he sees fit to
secure a maximum of welfare. This is a con­
tinuous process. Decisions of today are influ­




enced by the past and by expectations of the
future. Today’s decisions also condition the
choices of the future. In the process, individuals
direct the use of resources to those purposes
for which they spend money and away from
those for which they do not.
Democratic societies want their economic sys­
tem to achieve maximum utilization of resources
while maintaining a maximum of individual
economic freedom. Unfortunately, there is no
inherent reason why the total of all the indivi­
dual decisions to buy or sell, to borrow or lend,
to consume or invest, to hoard or spend will
add up to the exact amounts that are needed to
utilize available resources.
What is desired is some mechanism that will
induce individuals of their own volition to ad­
just their behavior so as to produce the desired
total result.
In the United States, the Federal Reserve
System is a vital part of this mechanism. It is,
however, by no means the only part. Before I
discuss monetary policy, therefore, I should like
to mention briefly the other major parts. First,
we need competitive and functioning markets.
Second, we need appropriate fiscal policies. Last
year governments at all levels purchased about
23 per cent of our entire output. How much
and what government buys, as well as where it
secures the funds it spends, obviously have farreaching effects on the level and composition of
total output. Third, we need appropriate man­
agement of the debt. We shall be discussing
these problems frequently in board meetings.
Appropriate wage-price actions and fiscal and
debt management policies contribute to stable
economic growth. Inappropriate policies in
these areas aggravate inflation or deflation and
impede stable growth. The monetary authori­
ties, unfortunately, cannot operate on the
assumption that appropriate policies in all these

5

JANUARY 1970

areas will be followed at all times. We must
deal with developments as we find them and
not as they might be.
THE ROLE OF MONETARY POLICY

I discuss monetary policy in greater detail be­
cause it is the area of our primary responsibility.
It is easy enough to describe in very general
terms the basic purposes of a flexible monetary
policy. If governments, corporations, and indi­
viduals try to purchase more goods and services
than can be produced at existing prices, their
efforts will tend to increase not production but
prices. It would be appropriate, therefore, to
make credit more expensive and more difficult
to secure. If, on the other hand, the public is
not buying as much as can be produced at exist­
ing prices, easier and cheaper credit would tend
to induce the public to step up its purchases
and thus restore production and employment
to capacity.
Even this highly simplified model indicates
that monetary policy, which is designed to serve
the long-run interest of the public, must move
against short-run swings of sentiment, restrain­
ing when sentiment is too exuberant and en­
couraging when it is too pessimistic; hence, the
money managers cannot expect to be popular.
We devote considerable effort to being under­
stood and, hopefully, respected.
Objectives of Policy

The real world, of course, is not so simple as
the sketch I have given. Those who have been
concerned with monetary policy have been in­
terested in having it achieve a number of spe­
cific goals. It is helpful to tabulate a number
of these goals and the direction in which mone­
tary policy should move to achieve each under
specified conditions.
Inspection will reveal the general relation­

Digitized 6 FRASER
for


ships between the objectives listed in column 1
and the conditions itemized in columns 2 and 3.
I have included No. 5— a fixed rate of inter­
est—and No. 6— productive credit—because
they have actually been pursued by central
banks and because even now they are advocated
from time to time in influential quarters. My
own view is that as early as 1898 the Swedish
economist, Knut Wicksell demonstrated con­
clusively that maintenance of a rate of interest
below the equilibrium rate would, in free money
markets, lead to cumulative inflation. Con­
versely, a rate pegged at too high a level would
lead to cumulative deflation. When I discuss
credit operations of central banks I shall try to
demonstrate that “productive credit” is a tan­
talizing notion that is quite irrational in real
economic terms.
There would be widespread agreement that
we would like to have our economic system
achieve the first four objectives on the list. And,
indeed, it is not unreasonable to suppose that
frequently—perhaps even generally—the con­
ditions listed in column 2 will occur at the same
time, as will those in column 3. For understand­
able reasons a rising price level is often asso­
ciated with rising employment and output and
decreases in a nation’s international monetary
reserves.
When I first studied money and banking in
the 1920’s, we demonstrated with careful
economic analysis that those objectives were in­
ternally consistent and achievable.
Stripped of qualifications, the essence of our
analysis ran something like this. Suppose you
start with an economy in recession. The reces­
sion would be characterized by less than full
employment and falling prices (in those days
the general level of prices, not merely individual
prices, fell as well as rose). The lower prices
would tend to increase exports and to reduce

BUSINESS REVIEW

OBJECTIVES A N D RELATED PRO GRAM S

C o n d itio n s
C o n d itio n s
C a llin g fo r o r p e r m it tin g a
C a llin g f o r o r p e r m it tin g a n
e a s in g o f c r e d it c o n d itio n s o r
t ig h te n in g o f c r e d it c o n d itio n s o r a
a n e x p a n s io n in m o n e ta r y a g g re g a te s c o n tr a c tio n in m o n e ta r y a g g re g a te s
L ess th a n fu ll e m p lo y m e n t.

J o b s in e x c e s s o f w o r k e rs .

D e c lin in g p ric e s .

R is in g p ric e s .

C O N V E R T IB IL IT Y O F
THE CURRENCY

H ig h a n d / o r ris in g p r im a r y
in te r n a to n a l re s e rv e s .

L o w a n d / o r d e c lin in g p r im a r y
in te r n a tio n a l re s e rv e s .

4.

ADEQUATE

W h e n g ro w th is in a d e q u a te .

W h e n g ro w th is to o ra p id to
b e s u s ta in e d .

5.

A

W h e n s a v in g s a r e in a d e q u a te .

W h e n s a v in g s a r e e x c e s s iv e .

6.

P R O D U C T IV E

In c r e a s e in m o n e ta r y v o lu m e
o f o u tp u t.

D e c re a s e in m o n e ta r y v o lu m e
o f o u tp u t.

1.

FULL

2.

STABLE

EM PLOYM ENT

3.

P R IC E

LEVEL

GROW TH

F IX E D R A T E
IN T E R E S T

OF

C R E D IT

imports. The resulting favorable balance of trade
would be paid for with gold. Thus, in recession
all objectives would call for an easier monetary
policy.
The purpose of the easier policy would be to
stimulate demand. The initial impact of enlarged
demand would be on volume, more employment
and greater utilization of plant and equipment.
Profits would rise because fixed costs would be
spread over the larger volume.
As revival continued, operations would ap­
proach efficient capacity levels and unemploy­
ment would decline. As unused margins shrank,
prices and wages would rise. The favorable bal­
ance of trade would be reduced and ultimately
be succeeded by an excess of imports over ex­
ports. At this point all objectives would call for
monetary restraint.
I must confess that the logic of this analysis
was compelling to us in the 1920’s. It still
sounds convincing, granted the inarticulate
premises.
Doubts concerning these premises arose in
the early 1930’s, when, despite what was
thought to be relatively easy money for a con­




siderable period of time, revival failed to appear
around the corner.
Many individuals concluded that monetary
policy is a completely impotent tool of economic
policy. Fiscal policy, which was brought into
the discussions as a supplement to monetary
policy, emerged by supplanting monetary policy
entirely.
This shift in emphasis was reflected in gradu­
ate enrollments. Money and banking was a
popular graduate major in the 1920’s. It all but
disappeared for a couple of decades from the
mid-1930’s. In recent years many students have
again become excited about monetary theory
and policy.
These developments have influenced my own
thought. I have acquired some convictions, but
I am less certain than I was forty years ago.
Before I report on the degree to which we have
achieved our four objectives during the past
decade or so, I would like to recall an episode
that compelled me to reconsider the linkages
between monetary policy and our ultimate ob­
jectives. The episode was what happened in the
United States from roughly the middle of 1953

7

JANUARY 1970

to the middle of 1954. During that period, em­
ployment declined by 1 million ( and unemploy­
ment rose by nearly 2 million), our monetary
gold stock declined by $600 million, and both
the consumer and wholesale price levels varied
by only 1 per cent. Thus an employment objec­
tive would have called for greater ease, a con­
vertibility objective would have called for
greater tightness, and a stable price level objec­
tive would have called for no change. Now,
obviously, general monetary policy cannot move
in three directions at once. An unavoidable
problem of monetary policy is to arrive at a
judgment as to the appropriate balance over
time among the several objectives, each of which
is desirable in its own right.
I move next to some reflections on our basic
objectives and the extent to which we have
achieved them since 1957.

Full Employment. The first pair of charts re­
lates to the full employment objective. This
objective is of great importance in its own right.
It is a serious tragedy when a qualified person
wants a job and cannot find one. I feel very
deeply about this. I recall a period after the
First World War when my father, an excellent
union carpenter, sought a job diligently—but in
vain—day after day for months. I recall my early
days on the faculty at the University of Missouri
when graduates in all fields with long and suc­
cessful experience came back desperately look­
ing for jobs—any kind of job.
Unemployment, particularly widespread un­
employment, affects not only the individual who
is unemployed but also his immediate family. It
has widespread social consequences. When
many people are idle they have ample time to
get into or create trouble. This is true particu­
larly if the idle are disadvantaged in some way.


8


A significant part of our social unrest has arisen
from unemployment.

CHART 1
C IV IL IA N L A B O R F O R C E
AND EM PLOYM ENT
Millions

If, now, you look at Chart 1 on employment,
you will note the significant growth that we
have experienced, with only small interruptions
in 1958 and 1966. The chart also reveals, of
course, that employment is related to the size
of the civilian labor force. If you look at recent
years a bit more closely, however, you will note
that the size of the labor force itself seems to
be influenced by the level of employment. What
seems to happen is that when jobs are easy to get
and employment rises rapidly, many individuals,
particularly women and teenagers, decide to
seek jobs and thus enter the labor force. On the
other hand, when jobs are hard to get and em­
ployment is rising slowly, they simply cease
looking and, by definition, leave the labor force.
The stubbornness that has developed in the
rate of unemployment (Chart 2 ), despite rapid
increases in employment, has policy implica-

BUSINESS REVIEW

tions. In earlier times revival quickly brought
down the rate of unemployment. In 1958-1959,
for example, unemployment was reduced by a
third in less than a year, from 7.5 to 5 per cent.
It was during the early years of this period,
when unemployment was consistently running
above 5 per cent, that I argued against increas­
ing monetary restraint. I was placed with some
strange bedfellows for taking this position, but
a central banker should not change his view
because he may be falsely accused. This Bank, in
turn was a little slower than some in favoring
increased restraint and a little more prompt in
favoring ease.
If employment were our only objective, we
would, as the table shows, pursue an easy money
policy until we had no unemployment or only
seasonal and transitional unemployment. But
we have other commendable objectives. The
critically important question for policymakers is
what level of unemployment is implied to
achieve the appropriate mix of our over-all ob­
jectives. The answer one gives to this question
involves value judgments as well as economic
analysis.
Many competent individuals have expressed
their views on this matter, and views of many
have changed over time as we gain more expe­

CHART 2
U N E M P L O Y M E N T R ATE
PerCent

Seasonally Adjusted




rience. The primary reason for being tempted to
insist on a very low figure is genuine concern
for the plight of the individual without a job.
Pointing to a low rate also are the achievements
of such rates by ourselves during wars and by a
number of our highly industrialized competitors
in recent years. Pointing to caution in striving
for too low a rate are the undesirable conse­
quences that flow from inflationary pressures
when aggregate demand is excessive.
Unfortunately, the problem is not static but
dynamic. A policymaker can tolerate a bit more
unemployment if the economy is moving ahead
than if it is falling farther behind.
Selection of a specific rate is influenced also
by judgments as to the accuracy of the relevant
measurements, as to the minimum level of tran­
sitional unemployment, as to the extent of struc­
tural unemployment, as to the residence, skills,
and qualifications of the unemployed, and similar
factors. My own view is that for the present we
should pay increasing attention to other objec­
tives when the unemployment rate falls below
the 4 per cent level.
I envision higher standards for the future. As
an employer, we have engaged with enthusiasm
and success in several programs to train disad­
vantaged individuals. The results of our socalled BEEP (Business Experience, Education
Program) program to encourage high school
students to stay in school and still work have
been especially gratifying. I attach top priority
to public policies that will make possible ever
higher levels of employment. What is required is
a successful attack on ignorance, inadequate
training, and discrimination. Success also will
require more rigorous economic analysis, more
information ( e . g on job vacancies by type and
location) and better information (more accu­
rate and more complete on labor force, employ­
ment, and unemployment).

9

JANUARY 1970

I move now to the
objective of price stability. Our interest in the
price level is not quite as direct as our interest
in employment. We have no particular interest
in the absolute level of prices as such. If,
throughout our history, the price of every good
and every service had been exactly twice what
it has been in fact, we would be today precisely
where we are in real terms, even though all
dollar prices, of course, would be double what
they are.
Our interest in the price level derives from the
evil consequences of changes in it. Changes in the
price level redistribute wealth and income in­
equitably. A period of rising prices robs the
creditor for the benefit of the debtor because it
enables the debtor to repay with cheaper dollars
than he borrowed. A period of falling prices
robs debtors for the benefit of creditors.
Changes in the price level also produce un­
wise business decisions. Business decisions are
based on dollar magnitudes on the assumption
that the unit of measure, the dollar itself, re­
mains constant. Since the businessman is con­
cerned with maximizing profits in the long run,
he is necessarily vitally interested in an accurate
measure of what his profits actually are. A
changing price level, however, produces a dis­
torted view of profits.
Inventories and depreciation afford excellent
illustrations of the distortions. The process of
production is a lengthy one in which the busi­
nessman buys before he sells. He buys countless
raw goods to be funneled into his factories and
machines, and he usually keeps some inventory
of his finished products. If, month after month,
prices are rising, then this stock appreciates on
his hands. He is continually selling at a price
better than he expected and hence securing a
windfall “profit.”
These profits are inflated for another reason.
Stability of the Price Level.

10




It is clear that a manufacturer wears out his
plant and equipment as he produces his output.
Such wear and tear, or depreciation, is a cost
of production. By the time the asset is com­
pletely worn out, enough depreciation should
have been charged to replace it. If, however,
depreciation is computed on the basis of origi­
nal cost and prices have risen during the life of
the asset, the depreciation allowance will be
inadequate to replace it. The cost of deprecia­
tion will have been understated and profits
correspondingly overstated. George Terborgh
has estimated that the inflation in the decade
1947-1956 resulted in overstating corporate
profits by $43 billion. Reported profits were
$187 billion, whereas true profits were $144
billion. It does not take much imagination to
appreciate that business decisions may be irra­
tional if they are based on the assumption that
profits are 30 per cent higher than they really
are.
Here, then, sits the businessman, his profits
inflated by windfall inventory gains and by
understated costs. The future looks rosy indeed.
Expectations of future sales and profits lead
him to expand his plant and equipment. Rosy
expectations also lead him to accumulate greater
inventories, both because his sales are rising
and because he desires to lay in more stock
before the prices of that stock rise. In short,
we have a typical inventory and capital spend­
ing boom.
Things go on rising for a while but then the
bubble bursts. The businessman realizes that
additions to productive capacity have outrun
consumer demand. He realizes that his inven­
tories are high relative to any reasonable fore­
cast of sales. He cuts back on inventory pur­
chasing and capital spending. The firms which
supply him with inventory and which build his
plant and equipment are forced to cut back their

BUSINESS REVIEW

production and lay off workers. Then, like a
pebble dropped into a pond, the effects spread.
Other firms selling to the second group of sup­
pliers and builders find sales declining. More
workers are laid off and hence consumer income
falls. With income declining, business sales fall
even further. In short, we have the familiar
downward spiral of business into the depths of
recession, a recession which will continue until
top-heavy inventories and excess plant capacity
are corrected. Once more inflation has helped
breed the excesses which result in recession.
I move next to the history of prices. You
have before you a chart of wholesale prices
since 1800 (Chart 3 ). Now, there are very great
hazards in interpreting a chart of prices over
the very long term. The reason is the obvious
one that the things our forefathers actually
bought and sold are, with some rare exceptions,
not the same things we buy and sell. There are
hazards in long-term price comparison. None­
theless, I think we can draw some general
conclusions of contemporary relevance from an
index of prices over the long run.
It is perfectly clear that we have had four
major inflations in our history. These have all
been associated with war: first, the War of
1812; second, the Civil War; third, the First
World War; and, finally, the Second World
War. The great inflations have been warinduced inflations—that’s point one.
If you look a little more carefully, you see a
significant and rapid increase in prices in the
1830’s—actually 1832 to 1837. This one, it
seems to me, was essentially a product of
President Jackson’s successful war against the
Second Bank of the United States. As you
know, he destroyed the Second Bank of the
United States and ushered in an orgy of new
banks with state charters. This was a period of
wildcat banking in the United States which




resulted in a great expansion in our money
supply via a very inferior kind of banking sys­
tem. And the net of all this increase in the
money supply was a significant increase in
prices.

CHART 3
W H O L E S A L E P R IC E
1 8 0 0 -1 9 6 9

IN D E X ,

Index (1 9 5 7 -5 9 = 1 0 0 )

The second significant rise—though nothing
like the very tall ones—you will notice came in
the decade of the 1850’s. All you have to do
is recall 1849 to reach the correct conclusion
that this was clearly a consequence of the gold
discoveries in California and in Australia. The
third of these secondary increases in prices
came.from the late 1890’s up until the First
World War, roughly. This again was a result of
gold discoveries—this time in the Klondike and
Cripple Creek—which led to very rapid expan­
sions in our total money supply. Finally, we
have the rise from the late thirties up to the
Second World War. This followed the revalua­
tion of gold. So that these have all been asso-

11

JANUARY 1970

dated with monetary phenomena, either changes
in the base or discoveries of new primary money
in the form of gold.
I move next to the great declines. They have
followed wars. You see the significant decline
after the War of 1812 to roughly 1820. After
the Civil War, we have another long continued
price decline. Again a decline after the First
World War.
Interestingly enough, we did not have a de­
cline after the Second World War. Many peo­
ple predicted that we would. Sewell Avery, for
example, was determined that this was going to
happen. The lack of progress of MontgomeryWard in the post-Second World War period is
a reflection of his error of judgment. In my
view, this new post-war experience was not an
accident. It seems to me to illustrate that hu­
man intelligence applied to problems can, if
everything works out well, produce desirable
results. We did not have the anticipated great
price decline because of public and private
actions to prevent it. Organizations like the
Committee for Economic Development were
founded to develop and promote a smooth
transition to peace. It was felt deeply that if
we had another terrific recession the whole
fabric of society might not hold together. So
there was determination to do something about
it. We did not talk about a return to pre-war
normalcy or anything like that. We did do
something about the real economic problems
that were involved. The Employment Act was
passed in 1946.
You will notice that the very rapid declines
following wars were in turn followed by longcontinued but slower price declines. The de­
velopment after the War of 1812 was inter­
rupted by the Jackson episode that I have
mentioned. These were periods of great social
suffering, difficulties, and unrest. One need only

12




recall 1848—one of the watershed years in
modern Western history. In my view, these
were primarily the result of an inadequate
supply of the means of payment for the entire
Western world, resulting from an inadequate
supply of gold. The inadequacy was aggravated
by the decision of important industrial countries
to adopt the gold standard (e.g., Germany after
the Franco-Prussian W ar).
As I mentioned earlier, declining prices put
pressure on debtors and may even force them
into bankruptcy. The persistent price decline
after the Civil War had much to do with the
development of greenbackism; the free silver
movement; and similar so-called radical move­
ments. I think the debtor class simply would
not tolerate what was happening to it. In my
view the gold standard would have ceased to
exist as an international standard had it not
been for the wholly fortuitous discovery of gold
in California in 1849 and the wholly fortuitous
discovery of gold in the Klondike and Cripple
Creek in the 1890’s. Had these discoveries not
occurred I think the gold standard would have
collapsed.
One conclusion I draw from this long ex­
perience is that our economic system has no
inherent tendency toward either inflation or
deflation and that we should be aware of the
dangers and guard against both.
There always have been some who have felt
there is an inherent tendency toward deflation.
Usually they have been engineers or production
men who emphasize that increasing efficiency
reduces real costs. Of course it does, but one
must not confuse real costs with money costs.
Wage rates obviously can go up faster than
output per unit of time.
Others, who usually emphasize this latter
possibility, insist that our economy has an in­
herent tendency toward inflation. In recent

BUSINESS REVIEW

years they have based their argument largely
on the increased power of labor unions. To me,
this is a new version of an old argument. The
same complaint, in different terms, can be heard
throughout our history. “Men don’t work the
way their fathers used to work.” “They loaf
on the job.” “Quality isn’t what it used to be.”
This is nostalgia for a society that never existed
in fact.
My own view is that there is no inherent
price tendency in our economy. Prices are a
result of the monetary institutions that we
create and the skill with which we manage
them.
I move now to the story of prices since 1957,
and begin with wholesale prices (Chart 4).

country has ever experienced such an interval
of stability.
In reviewing what I said to our directors in
earlier years, I find that in January 1966 I said:
“This view is reinforced by our experience after
the Second World War and in the past eight or
nine years. I do have some reservations on how
well we will in fact manage in the period
ahead.”
You may recall that it was at this time that
the Federal Reserve System was taken to task
for being “excessively” concerned about infla­
tionary prospects. In retrospect, the rapid acce­
leration of the military effort in South Vietnam
and the excessive reliance on borrowing to pay
Governmental costs clearly warranted such
concern.

CHART 4
W H O L E S A L E P R IC E IN D E X
Index (1 9 5 7 -5 9 = 100)

From the middle of 1957 until the beginning of
1965, the index varied between 99 and 101 per
cent of the 1957-1959 average. If you recall
the long-run chart, it is clear that there had not
been such a long interval of stability in more
than 150 years. No other modern industrial




I move next to the consumer price index.
The record has been one of virtually uninter­
rupted rise ( Chart 5). The primary reason has
been the persistent increase in the cost of ser­
vices. There is a widespread judgment of quali­
fied individuals that this index probably has an

13

JANUARY 1970

upward bias because of improvements in qual­
ity. You might be inclined initially to dispute
this judgment. You might have in mind, for
example, the cost of medical services, including
drugs. Doctors now rarely make home visits;
office calls are brief; drugs are expensive. If,
however, one keeps in mind the service per­
formed—curing the patient—the story is differ­
ent. Time was when pneumonia was frequently
fatal and even recovery was long drawn-out. It
was a costly disease, directly and in terms of
time lost from work. I have a hunch our fore­
bears would have considered a modern cure
cheap even for their time, but it was not
available.
Improvement in quality has come also in
goods as well as services. Take the automobile
tire. I can remember when Sears Roebuck
guaranteed tires for 3,000 miles and how boldly
they advertised when this was increased to
5,000 miles. Imagine anyone even trying to sell
such a tire today. Unfortunately, we have not
devised a statistical technique to measure
changes in quality accurately.
If quality changes could be measured, it is
quite possible that an accurate consumer price
index would reveal no upward drift from, say,
1957 to the end of 1964. Since that time the
record has been similar to that of prices at
wholesale.
I move next to convertibility
as an objective of policy. For the United States
this still means redemption of currency in gold
at a fixed price. Since this objective, more than
any other perhaps, arouses great emotions, it
might be worthwhile to see how England came
to adopt the gold standard in the first place.
Macaulay wrote: “In the autumn of 1695, it
could hardly be said that the country possessed,
for practical purposes, any measure of value of
Convertibility.

Digitized14 FRASER
for


commodities. It was a mere chance whether
what was called a shilling, was really tenpence,
sixpence, or a groat.” For example, the ex­
chequer found that coins which should have
weighed 220,000 ounces actually weighed only
114,000 ounces.
William and Mary appointed a committee to
make recommendations for solving the prob­
lems. The membership was quite extraordinary:
Sir Isaac Newton, Master of the Mint, John
Locke, the great philosopher, and Lord Somers.
Sir Isaac recommended that the Government
call in the old coin at face value and issue new
full weight coins and that the ratio of silver
to gold be established at 16 silver to 1 gold
(shades of Bryan!). In major countries on the
Continent the ratio was 151/2 to 1. Sir Thomas
Gresham could have predicted the results a
century before! Relatively, England overvalued
gold and the Continent overvalued silver. Gold
was taken to England for exchange into silver,
which was taken to the Continent for exchange
into gold, which . . . . Newton later recognized
his error and recommended that it be corrected,
but this latter advice was not followed.1
A century passes and England is once again
involved in war with her old enemy, France;
this time under Napoleon. She abandons re­
demption of the currency but decides to resume
convertibility after the war. The mint, of
course, had very little silver to coin and Lord
Liverpool decided to close it to the free coinage
of silver because England was “naturally a gold
country” and that “gold was the natural cur­
rency of England.” And, indeed, it was if one
admits, as he should, that it is only “natural”
for even a Sir Isaac to make a mistake and for

1 This is the story as told by George F. W arren and
Frank A. Pearson in their Prices, New York, 1933,
p. 159.

BUSINESS REVIEW

this mistake to have “natural” consequences.
It is irrelevant but tempting to speculate
what might have happened if Sir Isaac had
made a mistake in the other direction, say by
adopting a ratio of 15 to 1. England might well
have become “naturally a silver country.” With
the role that sterling acquired on the basis of
English leadership in industry and commerce
throughout the world, who knows, the world
might naturally have been on the silver
standard.
These are irreverent conjectures. Still, the
faithful have propagated some fictional natural
history. One gains an impression that the gold
standard existed for centuries without interrup­
tion. Yet it has not existed in modern times for
as long as a century, though England almost
made it from 1822 to 1914.
My own view is that England arrived on the
gold standard because of a mistake by Sir Isaac
Newton in 1696. The gold standard survived
the nineteenth century only because of the
miracles of new gold discoveries in the 1840’s
and 1890’s. Finally, when one sees the incredi­
bly small amount of gold frequently held by
the Bank of England, he is forced to conclude
it was not a self-regulating system but was in
fact maintained through management by the
Bank of England. Thus, a mistake, miracles, and
management describe the system more accu­
rately than does a mystical natural providence.
Do not misunderstand me. I think that on
balance an international monetary system—
essentially this means a system of relatively
fixed rates of exchange—is preferable to a sys­
tem of national currencies with freely fluctuat­
ing rates, despite its presumed intellectual
attractions.
An international system, however, requires
genuine international cooperation on the part of
the members based on rational economic prin­




ciples. Such a system should indeed put pressure
on a member which has an unfavorable balance
of payments because it has pursued policies of
over-full employment and inflation. It should
not, however, put pressure on a member that
has an unfavorable balance of payments despite
significant unemployment and stable or even
falling prices.
I move now to recent developments in our
balance of payments. As you can see from Chart
6, we have been running at a persistent deficit

ever since the Suez crisis in 1957. Throughout
this period (except for a brief interruption in
1959) we have had an excess of exports over
imports of both goods and services. This excess,
however, has not been large enough to finance
our foreign defense, Government aid, and pri­
vate investment abroad. As a result our short­
term liabilities to foreigners have doubled from
about $15 billion to over $40 billion (Chart 7)
and our gold stock has declined from over $22
billion to about $11 billion (Chart 8).

15

JANUARY 1970

CHART 7
S H O R T -T E R M L IA B IL IT IE S
F O R E IG N E R S R E P O R T E D

TO
BY

*Series since 1960 is revised and excludes holdings o f dollars
of IMF.

Growth. This brings us to the last objective I
shall discuss: adequate growth and a rising
standard of living. Barring a nuclear war, our
children and grandchildren are almost certain
to have a higher standard of living than we
enjoy. For them, the hard core of our basic
economic problems may be solved. This may

16



not be an unmixed blessing. There is joy and
importance in work. The thrill of the craftsman
at whatever task is one of life’s real satisfac­
tions. Long hours of leisure are not necessarily
satisfying, even when they are voluntary.
Monetary policy has relatively little to do
with the germinal elements of growth. One of
these ingredients is the sporadic appearance of
genius, frequently motivated by what most
people consider a naive desire to comprehend:
Newton, Descartes, Harvey, Gibbs, Einstein,
Fermi. Another ingredient is the application of
knowledge to invention: Burbank, Edison, Fire­
stone, Ford; and to human organization: Tay­
lor, Mary Follett. Other ingredients are the
character of a people and availability of natural
resources.
My own view is that, although a central
banker should be interested in growth as is any
responsible citizen, he should not establish any
specified rate of growth as a specific objective
of monetary policy. He should, instead, con­
centrate on achieving the best balance among
the three objectives that I have already dis­
cussed.
Hopefully, this will produce a maximum sus­
tainable use of available resources. This, in
itself, is a large contribution to growth. Beyond
this, however, the actual rate of growth depends
on matters that are not reached directly by
monetary policy. One of these factors is how
hard and long we wish to work. It has been
estimated that in the past fifty years we have
taken about half of our productivity gains in
the form of increased leisure and about half in
the form of more output. We could grow much
faster if we worked longer and harder.
Another factor is how we divide our actual
output between consumption and investment.
The more we consume the less remains avail­
able for investment to increase our growth. It

BUSINESS REVIEW

is an appropriate role of Government to influ­
ence consumption, saving, and investment
through fiscal policies, but it is not a primary
responsibility of the monetary authorities.
The important concern of the central bank
should be to contribute all that monetary policy
can contribute to full utilization of resources.
It is the responsibility of the individual citizen
and the Government to determine the distribu­
tion of our total resources between work and
leisure, between consumption and investment.
This brief statement on objectives gives you
a general idea of my basic philosophy and
prejudices. My recommendations on monetary
policy arise from the application of these prin­
ciples to developments in the economy. Until
late in 1965, I had been slow to recommend
increasing firmness in credit conditions. The
primary reason was the persistence of excessive
unemployment, the stability in our price level
while those of our international competitors
were rising. In my view these factors out­
weighed our adverse balance of payments and
gave hope, indeed, that it too could be rectified.
Since the end of 1965, however, we have
come far closer to full utilization of our man­
power and prices have risen. These develop­
ments, in my view, fully justify the tighter con­
ditions in money and capital markets that have
been promoted by the System.
One conclusion from this analysis is that, de­
spite what some of us had come to believe, it is
not always possible to achieve all of these ob­
jectives completely and simultaneously. It be­
comes necessary from time to time to choose
among various objectives. The choice that an
individual makes reflects not only his economic
analysis and its application to contemporary
developments, but also his scale of values. The
choice need not be, and indeed seldom is, of the



either/or, all-or-nothing variety. It is more apt
to be a relative matter: a little more of this
objective for a little less of that one.
Instruments of Policy

Our value judgments extend beyond the choice
of an appropriate “mix” of objectives. They
extend to the means of achieving our goals.
There is widespread agreement that we should
do so “in a manner calculated to foster and
promote free competitive enterprise,” to use
the language of the Employment Act of 1946.
The general instruments of monetary policy
offer a possibility of promoting our basic objec­
tives in precisely this way. They are means of
inducing institutions and individuals of their
own volition to adjust their behavior so as to
produce the desired social result.
Lending Operations.

1. Eligibility and Acceptability. The first
instrument relates to lending operations of a cen­
tral bank. Although there is a conception that
central banks should be very meticulous in their
lending activities, even the most venerable cen­
tral banks have made some—well, unusual,
loans. For example, the London Gazette of
May 6, 1695 contained an advertisement an­
nouncing that the “court of directors of the Bank
of England give notice they will lend money on
plate, lead, tin, copper, steel, and iron, at four
per cent per annum.”
I mention this pawnbroking operation only
to indicate that we need not abandon considera­
tion of novel ideas merely out of fear of violat­
ing established traditions. Given enough time,
an historian probably could cite a precedent, or
reasonably accurate facsimile, of any action.
Even if he could not, mere tradition is not an
adequate basis for abandoning a decision that is
otherwise appropriate.

17

JANUARY 1970

This is worth mentioning in connection with
lending activities of central banks because there
was a time when influential scholars concluded
that central banks would achieve their desired
purpose provided only they limited their lend­
ing (discounting) to appropriate documents.
The idea is known as the real bills doctrine
or the commercial loan theory of banking. It is a
tantalizing conception that has survived refuta­
tion by outstanding individuals at least as far
back as Henry Thornton in 1802. In fact the
lending provisions of the original Federal Re­
serve Act, many of which still survive, were
based on this disproved theory. Current efforts
of the System to eliminate these provisions are
stalled in the Congress.
What then is the real bills doctrine? It is
based on the plausible notion that the volume
of money should be related directly to the vol­
ume of goods flowing through the productive
process.
An ideal banking system, therefore, would
create new money whenever a trader bought
goods and would extinguish it whenever he
sold. Merely to illustrate the principle, suppose
that each step of the production and distribu­
tion process takes 90 days to complete. The
supplier now sells raw materials to the manu­
facturer and draws a 90-day draft on him. After
acceptance he discounts the draft at his bank.
New money is created for 90 days. At the end
of that period the manufacturer sells to the
wholesaler and draws a 90-day draft, which he
discounts. He is now in position to repay the
draft drawn on him by the supplier which has
come due. Ninety days later the wholesaler sells
to the retailer, draws and discounts the draft
to repay his own debt to the bank. And so on.
The drafts are all real bills drawn against real
commodities flowing through trade channels and
since the sale of the commodities in the regular

18


course of business provides the funds to repay
the drafts, they are “self-liquidating.”
The general idea is so tantalizing it is tragic
that it contains flaws both in principle and in
application. A basic weakness is that the money
to which the batch of goods gives rise does not
remain attached to the goods but goes on a
series of visits of its own. The theory ignores
the velocity of circulation of money. Let us
suppose that the velocity of circulation increases
by say 10 per cent and that this results in a rise
of prices by 10 per cent. The batch of goods
that formerly gave rise to a real bill of $100
will now give rise to one of $110. The additional
money, with no further change in velocity, will
lead to a further rise in prices, which will re­
sult in a still larger volume of real bills and
money and so on ad infinitum. The real bills
doctrine is not, even in principle, a self-limiting
system; it is a self-inflammatory, chain-reaction
system.
There are other weaknesses in the theory. It
makes no provision for money needed to pur­
chase services or fixed assets. Furthermore, in
practice there is not such an identity between
the echeance or maturity of the bill and the time
it actually takes to move through the several
stages of the distributive process. Furthermore,
with development of the so-called clean bill
with documents surrendered against acceptance
instead of payment, it became possible to have
more than one bill outstanding against the same
batch of goods. Development of clean bills as
money market instruments made it possible to
issue so-called finance or accommodation bills,
with no underlying goods at all. Despite their
interest in doing so, even sophisticated dealers
confessed they could not distinguish a “real”
bill from any other.
The lending and discounting operations of the
Federal Reserve Banks are conducted in accord­

BUSINESS REVIEW

ance with the Federal Reserve Act and Regula­
tion A of the Board of Governors.
In our banking system it is important that
there be an “escape valve” to prevent pressure
from concentrating at times with undue severity
at particular points—either for reasons inde­
pendent of monetary policy (e.g., a local catas­
trophe) or as a result of what is intended as
general pressure.
It is for this reason that member banks have
the privilege, under appropriate circumstances,
of borrowing from their Federal Reserve Banks.
The borrowing privilege, it should be noted, is
not to be used to scalp a profit should the yield
on Treasury bills, for example, be above the
discount rate. The Federal Reserve Banks super­
vise their loans to member banks to see that
they are for proper purposes. We go to great
lengths to assure impartial administration of our
discount window. Consideration of the report
on borrowing is a standard item on the agenda
of your biweekly meetings.
Incidentally, if you ever hear rumors of dis­
criminatory treatment, I am sure that the man­
agement of the Bank would like to hear about
them. For understandable reasons, such rumors
arise occasionally—not in periods of easy money
but in periods of restraint. Occasionally, country
member banks allege that Philadelphia banks
receive preferred treatment. We have had
enough conversations with Philadelphia mem­
bers to appreciate that they at times feel we are
too gentle with the country members. We do
not, incidentally, adjust our administration to
changing conditions in the credit market. I de­
scribed the principles under which we operate
before the Pennsylvania Bankers Association in
May 1958 and the talk was published in our
Business Review (June 1958). I am asking you
to report any allegations of favoritism that come
to your attention because it is critically impor­




tant not only that we remain impartial but that
we maintain a reputation for objectivity.
2. Bank Rate. Price, or the rate that is
charged, is the most important condition that a
central bank imposes in extending credit. It has,
understandably, received most attention. It is
not, however, as we have seen, the only condi­
tion. It is not even the oldest means of con­
trolling the amount of credit extended.
The Bank of England, for example, main­
tained its rate at 5 per cent on inland bills from
1719 and on foreign bills from 1773 to 1822.
Henry Thornton, an outstanding financial
leader, recommended in 1802 that the Bank
vary its rate as a means of regulating the vol­
ume of circulating medium, but his advice was
not followed. He was virtually alone in his view.
Ricardo, the great classical economist, under­
stood that the volume of lending would be
influenced by the relationship between bank
rate and the rate of profit but he did not dis­
cuss changes in the rate as an instrument of
policy. The governor and deputy governor of
the Bank actually denied to the Bullion Commit­
tee in 1810 that the rate had any influence on
the volume of good bills offered for discount.
Instead of increasing the rate, the directors
rationed their credit and “set limits to their
advances according to circumstances, and as
their discretion may direct them.” They “con­
tracted their issues of paper . . . [when] their
apprehensions [w ere] excited by the reduction
of their stock of gold.” Instead of decreasing
the rate, they extended the list of collateral on
which they would extend credit.
The Bank of France maintained a uniform
rate from 1820 to 1847. The Bank of England
was subject to the 5 per cent usury law until
1837. It was not until the 1840’s that the rate
became the premier instrument of policy. Even­
tually the rate was changed to meet every gust

19

JANUARY 1970

of wind that blew. It was changed 202 times
from 1855 to 1874, including 24 changes in the
single year 1873.
Various theories were gradually developed as
to the nature of an “effective rate.” Most widely
taught at one time was the theory that to be
effective, the bank rate must be above the
market rate. Of course, there are many market
rates, and part of the analysis involved defini­
tion of the appropriate market rate. Underlying
the basic idea, it seems to me, is a judgment that
the only danger from monetary policy is infla­
tion. So long as the only basic goal of policy
was convertibility and so long as depression was
viewed either as an inevitable aftermath of in­
flation or as an act of God, the argument con­
vinced many.
The bias of the theory is reflected in its ap­
plication. As market rates rise, the bank is
compelled to increase its rate to remain above.
As market rates decline, it must defer action,
so that its own rate remains above, even after
the change. There may be times, of course,
when it is appropriate for the bank rate to fol­
low market rates—particularly when market
rates are subject to influence by other instru­
ments—but there are other times when it is
not appropriate. The theory is not of universal
applicability.
Another theory related effectiveness to the
volume of discounts actually held by the cen­
tral bank. One naive variant of the idea simply
held that bank rate is effective if it holds down
the volume of borrowing to low levels. This
version is similar to the idea that bank rate
should be above market rate. If bank rate is
above actual market rate on identical paper, one
would not expect much—if indeed any!—paper
to reach the bank. Another naive variant lies
at the opposite extreme and holds that bank
rate can be effective only if a considerable vol­

20


ume of paper is held by the bank. It is felt that
only under such circumstances can bank rate be
meaningful in affecting market conditions.
A somewhat more sophisticated version of
the theory is concerned not with the absolute
level of borrowing but with the relationship
between changes in the rate and changes in the
central bank’s portfolio. In this version the
purpose of an increase in the rate is to discour­
age borrowing from the central bank. If, there­
fore, an increase in the rate is followed by a
reduction in the portfolio, the increase may be
said to have been effective. Similarly, a reduc­
tion in the rate would be judged effective if it
led to an increase in the portfolio.
For purposes of economic policy, however,
this is a rather narrow conception. Our major
interest is not what happens to the central bank
portfolio but what effect the actions of the
central bank have on the economy. The first
theory that takes this aspect into account meas­
ures effectiveness by reference to market rates.
An increase is viewed as effective if it is followed
by increases in market rates; and a decrease in
bank rate is effective if it is followed by de­
creases in market rates.
The next theory goes one step further.
Votaries of this theory argue that the central
bank should not be interested in market rates
as such but should be concerned with the vol­
ume of money. They, therefore, measure the
effectiveness of a change in the rate by the
subsequent behavior of either the supply of
money or a proxy, such as the volume of re­
serves of the commercial banking system.
Each of these theories focuses on a particular
aspect of discounting. Each contributes some­
thing, though occasionally in a negative way, to
our understanding of the role of the discount
rate in the economy.
The implication of this conclusion is that it

BUSINESS REVIEW

is desirable to approach the problem from a
much broader point of view. Our ultimate in­
terest is to achieve as nearly as may be possible
the objectives that I discussed earlier. It is
appropriate, therefore, to measure the effective­
ness of any instrument of policy in terms of its
contribution—in conjunction with other instru­
ments—to those objectives. This is a more com­
plex undertaking and we shall have numerous
occasions to discuss it during the course of the
year.
In the Federal Reserve System, discount rates
are established by the directors of the Reserve
Banks “subject to review and determination” by
the Board of Governors. The vast expansion in
Government debt and the widespread owner­
ship of that debt have affected the degree to
which different discount rates can be maintained
at the several Reserve Banks.
I do not suggest for a moment that member
banks in a district where the rate is lower would
borrow in order to lend the reserves in districts
where the rate is higher. Nevertheless, the net
effect of a differential in rates will tend to pro­
duce the same result. This is true because sxlch
banks would tend to lend excess reserves in the
federal funds market and to borrow from their
Reserve Bank rather than from the funds mar­
ket, especially if the funds rate exceeded the
discount rate. This, in turn, would mean that
the administration of the discount window at
the lower rate Reserve Bank would become in­
creasingly difficult. It would also tend to mean
that the Reserve Bank or Banks with the lower
rate would in fact determine conditions for the
whole country. This implication reminds me of
a remark by one of your predecessors. After a
vigorous discussion in a meeting of the board,
Archie Swift said: “ I am reminded of my men­
tor who told me when I was young: ‘Always
remember that when a dozen people are on one




side of an issue and you are on the other, it is
possible—not likely, mind you, but possible—
that they could be right, and you wrong.’ ”
Nevertheless, different rates perform a useful
function at times.
3 . T h e Tradition against Borrowing. In
days when bank failures were common, an early
sign of weakness in a bank was that it borrowed
money—other than by deposit. Banks disliked
showing borowing on their published statements.
Although some banks have recently abandoned
the tradition against borrowing, many still hold
to it. Banks that anticipate a shortage of re­
serves on the semiannual call dates usually bor­
row in larger amounts for a day or two before
the end of June and December so that they can
meet their requirements, repay their borrowing,
and still show no borrowing on their call report
or published statement.
The Federal Reserve System has encouraged
member banks not to borrow from the Reserve
Banks except for appropriate purposes. Many
members in this District and elsewhere take
pride in never having borrowed from their Re­
serve Bank. This tradition affects the amount of
borrowing from the Reserve Banks.
Open Market Operations. The relationship be­
tween central banks and government finance is
intimate and reaches back to the origin of such
banks. The Bank of England was founded in
1694 because the standing of government credit,
after the so-called “stop of the Exchequer” by2
2Act 5 & 6 W m . & Mary, cap. 20. The full title of
the Act, though long enough, does not even mention
the Bank of England. It reads: “An Act for Granting to
Their Majesties several Rates and Duties upon Tunnage
of Ships and Vessels, and upon Beer, Ale, and other
Liquors, for Securing certain Recompences and Advan­
tages in the said Act mentioned, to such Persons as shall
Voluntarily Advance the sum of Fifteen hundred thous­
and Pounds towards carrying on the W ar against
France.” (Acres, W . Marston, The Bank of England
From W ithin, 16 9 4 -19 0 0 , vol. 1, p. 9, Oxford Univer­
sity Press, London, 19 3 1 .)

21

JANUARY 1970

Charles II, was so low that William and Mary
had great difficulty financing the war with
France. Creation of the Bank of England was
authorized in the Ways and Means Act of
16942, not in a separate bank act. Similarly,
Napoleon created the Bank of France in 1800
to help finance his military ventures. Most coun­
tries with considerable experience in central
banking have witnessed episodes in which the
view of the Government has differed from that
of the central bank concerning the methods of
extending central bank credit to the Govern­
ment, its amount and the terms and conditions.
Central banks experimented from time to
time with purchases and sales of Government
securities in the market to achieve a variety of
purposes. Early in the nineteenth century the
Bank of England bought Exchequer Bills on the
market when it wanted to expand its circula­
tion and sold them when it wished to contract.
In periods of strain it occasionally sold securi­
ties, presumably to afford greater accommoda­
tion to commerce. Such operations are com­
prehensible only on the assumption that funds
did not flow freely among segments of the mar­
ket and that the help of the Bank was needed
to redistribute credit. It is perhaps worth men­
tioning that such an action in the crisis of 1847
resulted in recorded criticism of the governor
and deputy governor—a rare experience. Cen­
tral banks also bought securities either in an
attempt to increase earnings or to invest what
they considered excess funds.
An early theory of open market operations as
an instrument of monetary policy is that sales of
securities can be used to make the discount rate
“effective.” It grew out of a somewhat incon­
gruous set of assumptions. Suppose a central
bank wishes to tighten credit when bank rate
already is considerably above market rate. An
increase in bank rate may simply widen the mar­

22



gin between bank rate and market rate. What
is desired, however, is an increase in market
rate. If, now, the central bank could sell securi­
ties, it could force market rate to rise and thus
force the market to borrow from the bank. The
amount of such borrowing, in turn, could then
be controlled or influenced by the higher bank
rate.
In the light of what has been said about the
development of bank rate theory, it is under­
standable that early theory of open market op­
erations would have been one-sided and dealt
only with sales. It did, however, contain some
important ideas which, unfortunately, were not
adequately developed or comprehended.
One of these ideas is that open market oper­
ations, the discount rate, and the volume of
discounts are interrelated. The Federal Reserve
System rediscovered this idea as it analyzed its
early frustrations with open market operations
after the First World War.
You will remember from your own experi­
ence and our discussion of objectives that the
First World War was followed shortly by a
severe depression. The depression was accom­
panied by sharp liquidation at commercial banks
and by repayments of borrowings at the Federal
Reserve Banks. A number of Reserve Banks
became concerned about how they might earn
enough to pay their expenses. Some concluded
that the appropriate way would be to buy Gov­
ernment securities. There is an interesting foot­
note to Federal Reserve history that concerns the
effects of these decisions on the Government
securities market, the Treasury, and the relation­
ship between the Federal Reserve Bank of New
York and the other Reserve Banks. Our pri­
mary interest, however, is in the intimate re­
lationship between open market operations and
borrowing at the Reserve Banks as a whole. The
relationship is not as precise as a mathematical

BUSINESS REVIEW

function because it is influenced by other fac­
tors, such as the intensity of demand for credit.
A close relationship, however, arises from the
reaction of member banks to open market oper­
ations. If member banks are in debt to the Fed­
eral Reserve when the System buys securities to
put funds into the market, the member banks
will use some of these funds to repay borrow­
ings rather than to expand credit. Contrariwise,
when the System sells securities, member banks
may replace some of the funds by borrowing
from the Reserve Banks. There is an inverse re­
lationship between reserves provided by the Sys­
tem through open market operations at its own
initiative and reserves provided by the System
through lending at the initiative of the member
banks.
It does not follow, however, that nothing im­
portant has happened or that open market oper­
ations are ineffective. Usually borrowed reserves
are more expensive than reserves provided via
purchases of securities and there are both the
tradition against borrowing from the System
and the administration of the discount window
at the Reserve Banks.
The intimate relationships between the two
instruments explains why a practitioner usually
prefers not to become involved in the semantic
morass of isolating the degree to which each is
effective in some meaningful sense. These two
instruments are complementary, as indeed are
all the general instruments of monetary policy.
Suppose that the Open Market Committee in­
structs the Manager of the Open Market Ac­
count to maintain firmer conditions in the
money market. He will sell Government securi­
ties. The sales will depress the prices (increase
the yields) of the securities sold. Dealers will
have larger portfolios and will reduce their
prices. Payment for the securities will absorb
reserves from the banking system and hence put




pressure on the banks to reduce their loans and
investments, thus reinforcing the rise in rates
and spreading it out to other markets and other
securities. The purpose, of course, is to make
borrowing more difficult and more expensive so
as to achieve the ultimate purpose of preventing
expenditures throughout the economy from
reaching inflationary levels.
Reserve Requirements. The third general in­
strument is the power lodged in the Board of
Governors to require member banks to hold
specified amounts of reserve against their de­
posits.
I must confess that I long shared the view
of those monetary theorists who hold that main­
tenance of a specified relationship between
reserves and deposits is an indispensable in­
gredient of an effective monetary policy. The
logic of the case is straightforward. If commer­
cial banks keep a fixed relationship between
their reserves and their deposits (which are the
largest part of the supply of money), then the
central bank which can determine the quantity
of reserves for the System can control the vol­
ume of money. If, however, the commercial
banks can change their reserve ratio at will they
can nullify the efforts of the central bank: (1)
by increasing the ratio rather than expanding
credit when the central bank wishes to expand
and (2 ) by decreasing the ratio rather than con­
tracting credit when the central bank reduces
the volume of reserves.
There is nothing wrong with this logic but
the assumptions are too rigid and are based on
the partial experience of a few countries. It is,
of course, part of modern American banking
tradition that commercial banks be required by
law to maintain minimum reserves against their
deposits. In England there was a long-standing
tradition as to the appropriate relationship be­

23

JANUARY 1970

tween reserves and deposits. It is, of course,
reasonable to suppose that commercial banks in
these countries will usually keep their actual
reserves at approximately the legal or custom­
ary minimum. The reasons are obvious. A bank
will not ordinarily keep less than its required
reserve because of legal penalties or loss of
prestige and customers. It will not ordinarily
keep more reserves than required because this
will result in loss of income, since reserves are
nonearning assets. So long as the minimum re­
quirement is set higher than the bank would
adopt of its own volition, it will not hold excess
reserves.
Even in England and the United States, how­
ever, there have been times when banks desired
greater liquidity or reserves than they were re­
quired to maintain. During the great depression
banks increased their reserve ratio rather than
expand their loans and investments. Does this
mean that the central bank is helpless? Not nec­
essarily. It does mean that the central bank
must be able to supply more reserves or liquid­
ity than the banks of their own volition wish to
hold. This is the real heart of the matter. Can
the central bank create more reserves or limit
their creation to less than the banks desire to
hold for whatever reason (law, custom, preju­
dice, inertia)?
This conclusion is based on both logic and
experience. From its foundation in 1875 until
the First World War the German Reichsbank
achieved its objective of maintaining converti­
bility of the mark even though it operated in a
very loose-jointed banking and financial system.
Among the impediments were: (1 ) the Reichs­
bank had no continuing knowledge of the
amount of reserves actually held by the com­
mercial banks; (2 ) the operations of the
Reichsbank were such that it could not have
achieved a specified level of reserves even had

24



it wished to do so; (3 ) the commercial banks
were not governed either by law or custom as
to their reserve ratio which in fact declined
very substantially over the period as a whole
and varied significantly in the short run. In
short, the Reichsbank operated without any of
the conditions that some analysts consider in­
dispensable to effective monetary policy. What
it did accomplish was its basic objective! It did
so, in my view, by making its credit (it con­
ducted a large commercial banking business as
well as operated as a central bank) cheaper or
more expensive than the commercial banks de­
sired. Their reaction to the conditions enforced
by the Reichsbank achieved its purposes.
The ultimate power of a central bank to en­
force its will lies in its ability to create new
money or reserves—by acquiring earning assets
—and to destroy existing money or reserves by
disposing of earning assets.
It does not follow that I would advocate
elimination of reserve requirements and the
power to change them from the kit of tools
possessed by the Federal Reserve System. The
reasons for citing the German experience are
to indicate the basic nature of our problem and
to illustrate that even a primitive system can be
made to work. It does not follow that it would
be the best system for the United States in the
1970’s.
I move next to the general level of reserve
requirements not as a tool of monetary policy
but as a matter of equity. I confess that obser­
vation of the operations of many kinds of finan­
cial institutions has induced me to change my
approach to this problem. The change in ap­
proach, in turn, has changed my conclusions.
My initial approach to the problem began
with the fact that the issuance of money is a
sovereign function. It is, therefore, appropriate
for the Government to impose conditions which

BUSINESS REVIEW

in effect exact a payment from institutions
which are authorized to exercise this function.
This approach continued with the fact that de­
mand deposits are money. It is, therefore, ap­
propriate to require commercial banks as moneycreating institutions to keep part of their assets
in nonearning reserves. These reserves, in turn,
are created by the central bank when it acquires
earning assets. Excess earnings of the central
bank can then be returned to the Government
as payment for its delegation of the money­
issuing privilege.
I took it for granted that the authority (and
it still seems obvious until one analyzes the
process) to issue money is inherently a valuable
privilege and that, therefore, “fairly high” (a
weasely vague phrase!) reserve requirements
would be “equitable.” The logic of this ap­
proach implies that reserve requirements be uni­
form against all demand deposits subject to
check, with a possible qualification for inter­
bank deposits. Under such a system each bank
would contribute (by way of nonearning re­
serves ) to the Government in proportion to the
amount of money it had created. Yet, nonmem­
ber banks may be, and in Pennsylvania are sub­
ject to lower requirements than members of the
Federal Reserve System.
There are several other factors that must be
evaluated in determining the value to an in­
dividual bank of the privilege of issuing money.
First of all, such money is not issued without
cost. The bank must perform financial services
for its customers. It may, of course, charge for
these services. Any individual bank, however,
is limited in the amount of money it may issue
by its competitive position in the economy. As
banks compete with each other for the deposits
of customers, they reduce the profitability of
the money-issuing privilege. Much of the value
of the privilege remains not with the banks but




is transferred competitively to the public. Mean­
while commercial banks compete not only with
each other but with other financial intermediar­
ies. The value of the money-issuing privilege
might be measured by difference in profitability
between commercial banks and other financial
intermediaries. Such scattered information as I
have seen does not suggest that the privilege is
worth very much.
I have, therefore, come to the tentative con­
clusion that equity between member and non­
member banks and between commercial banks
and other financial intermediaries does not call
for very high reserve requirements. It is worth
recalling in this connection that the Federal
Government secures roughly half of net income
via corporate income taxes.
The general level of reserve requirements has
derivative but important effects on open market
operations. The higher the level of require­
ments, the larger the purchase of securities that
would be needed to support a given increase in
the volume of member bank deposits. Stated
another way, this means that the effect of a
given open market operation varies inversely
with the level of reserve requirements. If re­
quirements are low, a given operation will have
a large effect. This effect is taken into account,
of course, in planning such operations. The
logical implication of the relationship is that
errors of projection in the level of reserves have
greater impact when the level of requirements is
lower. The impact, however, will be felt in the
money market and actual operations can be ad­
justed appropriately if the directive to the man­
ager is written in terms of conditions in the
money market.
The Board of Governors has authority to es­
tablish minimum reserve requirements for mem­
ber banks. The limits of this authority are 10
per cent to 22 per cent for demand deposits of

25

JANUARY 1970

Reserve City banks, 7 per cent to 14 per cent
for demand deposits of other member banks,
and 3 per cent to 10 per cent for time deposits
at all member banks. A reduction in require­
ments makes additional funds available for lend­
ing and investing; an increase in requirements
reduces the funds available and would force
contraction. In important ways a reduction in
requirements is similar to a purchase of securi­
ties in the open market and an increase is
similar to sales.
There are some important differences be­
tween the two instruments. A change in require­
ments affects immediately and directly every
member to which it is applicable. The effects of
an open market operation affect most banks only
indirectly. The minimum quantitative effect on
“free” reserves of a change in requirements is
large. In principle, of course, changes could be
made in very small fractions of one per cent, but
the operating and other practical problems that
would be created by very small and frequent
changes in requirements make such use inap­
propriate. Open market operations, on the other
hand, can be conducted in any needed volume,
large or small, and their direction can be
changed at any time without ill effects.
ORGANIZATION OF THE SYSTEM

I move next to the organization of the Federal
Reserve System that has been created to admin­
ister monetary policy in the United States. The
organization can be understood best in terms of
our basic heritage. We as a people have an ab­
horrence for concentration of power. We prefer
a separation of governmental powers and a sys­
tem of checks and balances with full apprecia­
tion that it may be, or appear to be, less efficient
in the short run.
What was desired was an organization that
would not be controlled for partisan political

26



purposes by the administration in power or by
private interests, especially the so-called finan­
cial interests. Congress solved this problem by
making the System responsible to the Congress
rather than to the President and by creating a
rather complex organization in which Govern­
ment representatives would have final authority
but private individuals would have an influence.
At the apex is the Board of Governors of the
Federal Reserve System. It consists of seven
members appointed by the President by and
with the advice and consent of the Senate for
fourteen-year terms. The long terms are de­
signed to insulate the Board from the day-to-day
pressures of partisan politics. In the unlikely
event that private interests would attempt to
seize control of the System, it is perfectly clear
that the Board, selected by the Government, has
the power to enforce its will. A united Board
has authority over all the policy instruments;
has power not only to exercise general super­
vision over the Reserve Banks, but also to re­
move any officer or director of any Federal
Reserve Bank; and may ignore the advice of
the Federal Advisory Council. Within these
limits, Congress felt that private interests could
make a valuable contribution to monetary
policy.
The Federal Reserve Banks are organized to
blend public and private influences. Each of the
twelve Federal Reserve Banks is supervised and
controlled by a board of nine directors with
three-year terms. There are three classes, each
consisting of three directors. Class A are chosen
by and are representative of the member banks.
Class B are chosen by the member banks and
are engaged in commerce, agriculture, or some
other industrial pursuit and may not be bankers.
To diffuse power, it is also provided that mem­
ber banks be grouped for purposes of electing
directors into three groups: large, medium, and

BUSINESS REVIEW

small. Each group of member banks elects one
Class A and one Class B director. Finally, the
Class C directors are appointed by the Board
of Governors. The Board of Governors desig­
nates one Class C member as chairman and
another as deputy chairman of the board of
directors.
The general idea was that in establishing dis­
count rates or the cost of credit, the board of
directors should have the views of lenders
(Class A) and of borrowers (Class B) with a
public group (Class C) to resolve any differ­
ences that might develop.
I might say that my experience is that direc­
tors do not consider themselves as representa­
tive of any particular interest. I have known
Class B directors to move an increase in the
rate, even on occasion when the mover’s firm
had a security flotation in the offing. Similarly,
Class A directors have made a motion to reduce
the rate. Action on the rate is preceded by a
review of economic developments presented by
our senior vice president in charge of research.
He, in turn, has consulted with his staff, which
includes professionally trained economists and
statisticians. We are the original source of sig­
nificant economic data. You directors express
your judgments on developments. A motion on
the rate is made with reference to the total situ­
ation, not as a reflection of a narrow point of
view. Ordinarily, though not invariably, of
course, votes on the rate have been unanimous.
I mention this so that our new directors may
have some feel of the spirit that has motivated
their colleagues and their predecessors.
The board of directors supervises the Federal
Reserve Bank subject to the provisions of
the Federal Reserve Act, including the power
of the Board of Governors. They select the
officers. Their selection of a president and a
first vice president for five-year terms is subject




to the approval of the Board of Governors.
The president is the chief executive officer of
the Bank.
The third agency in the structure of the Sys­
tem is the Federal Open Market Committee. It
consists of the seven members of the Board of
Governors and the presidents of five Federal
Reserve Banks. The president of the Federal
Reserve Bank of New York is a permanent
member. The other four presidents are selected
in rotation by the directors of the other eleven
Banks which are divided for this purpose into
four groups. We are grouped with Boston and
Richmond. Currently, I am a member and will
serve until March 7, 1970. All presidents attend
and participate in the meetings, but only the
members vote.
The Federal Open Market Committee usually
meets every three or four weeks in Washington.
Regional and national judgments are brought
to bear on national monetary policy. Extensive
and intensive preparation goes into these meet­
ings. Principles of monetary policy as well as
their application to current developments are
analyzed. Professional economists at both the
Board of Governors and the twelve Reserve
Banks prepare analyses. In addition, each presi­
dent has the views of his own directors. He does
not go as an instructed delegate, however, but
votes as his judgment dictates.
The whole gamut of monetary policy is dis­
cussed. The immediate result is a directive to
the Manager of the Open Market Account as to
his operations until the next meeting.
The complexity of the System is illustrated
when we relate the several instruments of policy
to the agencies that have been described. The
Board of Governors has exclusive control over
the reserve requirements of member banks, over
margin requirements for purchasing or carrying
listed securities ( the sole selective credit control

27

JANUARY 1970

instrument), and over Regulation Q ( the maxi­
mum rates of interest banks may pay on time
and savings accounts). Discount rates are estab­
lished by the directors of the Reserve Banks
subject to review and determination by the
Board of Governors. Open market operations
are determined by the Federal Open Market
Committee.
The fourth agency is the Federal Advisory
Council. It was designed to give the commercial
banking community an opportunity to express
its views directly to the Board of Governors. It
consists of one banker from each Federal Re­
serve District elected annually by the board of
directors. The established custom in this Dis­
trict is for an individual to serve three terms.
The Council meets quarterly with the Board of
Governors. Our member reports to this board
after these meetings.
The fifth part of the System is the member
banks. National banks are required to be mem­
bers and qualified state chartered banks may
become members. Member banks are required
to subscribe 6 per cent of their capital and sur­
plus to the stock of the Reserve Bank in their
District. Half of this has been paid in and the
other half is subject to call. The stock is unique
in character. It does not convey residual owner­
ship of assets, which revert to the United States
in the event of liquidation. A cumulative 6 per
cent dividend is paid. Each member may nomi­
nate and has one vote in the selection of the
Class A and Class B director for its group.
There you have in capsule form the unique
blend of public and private interests that com­
prise the Federal Reserve System.
In conclusion, I should like to emphasize two
features on which continuation of the present
structure of the System depends.
The first feature is the dual role of my posi­
tion as president of a Federal Reserve Bank. On

28



the one hand, I am the chief executive officer of
this Bank and as such am responsible to you,
the board of directors. On the other hand, I am
a regular attendant and, in rotation, a statutory
member of the Federal Open Market Commit­
tee. As such I am responsible to my conscience
and cannot go as an instructed delegate.
As president, I have a responsibility to keep
you informed so that you may reach the best
decisions on monetary policy, especially the dis­
count rate of this Bank. As a Committee mem­
ber, I acquire certain sensitive information that
I am not at liberty to disclose. For my own part,
I have never found that this dual role creates
any difficulty or irritation. I am sure it never
will so long as the nature of our relationships is
understood. It is to develop understanding that
I mention it specifically today at the first meet­
ing with new directors.
The second feature relates to you as directors.
In our meetings, we deal with many matters
that must remain confidential. I cite action on
the discount rate as the most important single
example of many. You establish the rate on
Thursday morning subject to review and deter­
mination by the Board of Governors. The Board
typically announces its action at 4:00 p.m., after
the close of the financial markets in New York.
There is thus an interval in which such highly
important knowledge must be held in confi­
dence. This is true especially when we happen
to be among the first Reserve Banks to make a
change in the rate. Furthermore, there is always
the possibility that the Board will not approve
the rate you have established. A “leak” on the
rate could result in a complete reorganization
of the Federal Reserve System with elimination
of all private elements. When I consider how
much the directors of this Bank have contri­
buted to monetary policy and its application to
current developments, I am firmly convinced

BUSINESS REVIEW

that this would be a tragedy.
In the long run, of course, the future of the
System depends on the quality of our monetary
policy. A central bank can remain independent
within Government not as a matter of right or




of law but only as it maintains the confidence
of the public. In a very real sense, the future of
the System as we know it is in the hands of each
—and of all—of us.

R E P R IN T S A V A IL A B L E

You may secure additional copies of the pre­
ceding article, “Introduction to the Federal Re­
serve System” by Karl R. Bopp. Please send
your request to Public Information, Federal
Reserve Bank of Philadelphia, Philadelphia,
Pennsylvania 19101.

29

JANUARY 1970

The Human Lag
by Edward G. Boehne

30



Much has been said about the lags of monetary
and fiscal policy. But there are also lags asso­
ciated with changes in human attitudes. These
lags have been heavy contributors to the eco­
nomic problems we face as we break into a new
decade. Public attitudes as well as the attitudes
of policymakers failed to shift quickly enough
in the past decade as the entire complexion of
our economy changed.
Human attitudes remain remarkably stable as
long as they provide guidelines for successful
behavior and policy. So, as long as what we do
pays off, there is little incentive to review our
attitudes even though the environment in which
we function is changing. Success at worst makes
us oblivious to changes and at best causes us to
perceive changes selectively so that they fit pre­
vailing attitudes. Stability of attitudes is not
just so much psychological jargon; it is a real
cause of our economic difficulties.
EXPANSIONIST PSYCHOLOGY

Coming into the 1960’s, the Kennedy Admini­
stration inculcated the “expansionist (get the
country moving again) psychology” in the
American people. This expansionist psychology
grew out of the recession-riddled 1950’s. The
1950’s began with war and escalating inflation
and ended with recession and price stability.
Throughout the decade, the policy focus gen­
erally was on fighting actual inflation or combat­
ing the threat of rising prices. For example, in
the 1952-59 period, discussions of the Federal
Open Market Committee, with only a few inter­
ludes, concerned inflation, and much less at­
tention was paid to the goal of economic
growth.1
1 Mark H. Willes, “Changing Goals of Monetary
Policy: 1952-1966,” The National Banking Review,
vol. 4, no. 4 (June, 1967) pp. 503-507.

BUSINESS REVIEW

The anti-inflationist policies of the 1950’s, in­
deed, were effective. As the decade of the
1960’s began, the roots of inflation had been
choked off. But, in the process, economic
growth had been stunted. There was a growing
concern that too many people were out of work,
too many machines were idle, and too much
economic waste was occurring.

Changing of the Guard. The year 1960 brought
with it not only a new decade, but also the
election of a new national administration. And
the Kennedy team developed a persuasive case
for getting the economy moving again. How
absurd, they argued, to have idle men and idle
machines coexisting with want when prices are
stable. Aside from relieving human distress
caused by involuntary unemployment, they
wanted to meet social needs—schools, roads,
health, and cities. And their clinching logic was
that we could have more of everything without
taking less of anything else. This concept be­
came the attitudinal hook upon which the hats
of fiscal and monetary policy were hung.
How was it possible that we could get more
without giving up anything? The chart provides
a graphic answer. The straight, broken line
shows the economy’s potential GNP. This line
moves up because the economy’s capacity to
produce expands each year. Additional workers
and more capital (plant and equipment) mean
greater potential output. The solid, sometimes
jagged line represents the amount of actual
GNP. This is the amount of output we really
produced.
For ten years prior to 1966, there was a gap
between potential GNP and actual GNP. The
economy was producing below its capabilities.
In early 1961, during the trough of the 1960-61




recession, this gap reached $50 billion. In other
words, the economy had unutilized resources—
labor and capital—capable of producing $50
billion of additional goods and services. All that
was needed to accelerate economic growth and
close the gap was more demand.
And so the Kennedy Administration set out
to upend the anti-inflationist attitudes of the
’50’s and replace them with expansionist eco­
nomic policies of the ’60’s. Government spend­
ing accelerated, taxes were lowered, and busi­
ness investment was stimulated. The Federal
Reserve cooperated by making plenty of bank
reserves available so that the faster pace of
economic activity could be financed easily and
fairly cheaply. Certainly, the comfortable mone­
tary policy which prevailed was a powerful
stimulant consistent with the expansionary psy­
chology. The economy zoomed, and because of
slack capacity, prices remained stable. Whoever
said economics is a dismal science?

EXPANSIONISM: LEGACY AND
CONSEQUENCES

Expansionist policies of the early ’60’s were,
indeed, successful. Unemployment was greatly
reduced, economic growth accelerated, and all
the major sectors of the economy gained in this
windfall affluence. By 1965, the gap disappeared,
as shown in the chart, but the expansionist
attitudes still prevailed.
With the gap gone and with Vietnam War
expenditures mushrooming, something had to
give. No longer could slack capacity be counted
on to yield the extra output. Either Govern­
ment outlays unrelated to the war had to be
trimmed, or consumers and businessmen would
have to tighten their belts and pay more taxes.
But the expansionist illusion was too good to

31

JANUARY 1970

let go. Officials said we could have both more
guns and more butter. We could fight the war
and have more of everything else, too.
As the economy bumped along its ceiling
and output exceeded normal capacity, prices
escalated. Not only did they rise, but they
climbed at an accelerating rate. Inflation had
clearly replaced unemployment as the chief
economic problem. But policy itself, torn be­
tween the reality of inflation and the leftover
spirit of expansionism, became a destabilizing
element. Recognizing the perverse effects of
fiscal policy on inflation, the Federal Reserve in
1966 slammed on the monetary brakes in an
effort to cool the economy and relieve infla­
tionary pressures. As can be seen in the chart,
the medicine worked well, and the pace of
economic activity began to slow in late 1966.
As soon as the economy began to lose steam,
however, the short-lived anti-inflationary poli­
cies of the Fed were reversed. The threat of a
slowdown was more persuasive than the fact
of escalating inflation.
Again, in 1968, after three years of rapidly
rising prices, the expansionist psychology domi­
nated the policy scene. Recovering from its
paralysis, fiscal policy finally took on an antiinflationary posture in mid-1968. Taxes were
increased; the rein on expenditures was
tightened; and the huge Federal deficit turned
into a small surplus. But the Fed became fearful
of “overkill”—fearful that a restrictive mone­
tary policy on top of a tax increase might cause
too much slowing in the economy. So, the Fed
eased up on the monetary brakes. This policy
tended to offset the effects of fiscal restraint,
and the inflationary spiral intensified. After
three years of inflationary boom, the ghost of
expansionism still whistled its familiar tune.
A NEW ELEMENT

It became increasingly clear that the old atti­


32


Recessions and slow growth during the
’50’s caused a large gap to develop between
potential and actual GNP. Expansionist
policies during the first half of the ’60’s
eliminated this gap. And excess demand
since 1965 has pushed output beyond the
normal limits of economic potential. The
result has been escalating inflation.
740
700
660
620
580
540
500
460
420

31

53

55

57

59

61

63

65

67

69

Logarithmic scale with 1/3 cycle in a given distance
*Trend line of 3 y2 percent per year through middle of 1955
from 1st Quarter 1952 to 4th Quarter 1962, 3% percent from
4th Quarter 1962 to 4th Quarter 1965, and 4 percent thereafter.

tudes were serving as inappropriate guides to
policy. The public became concerned as a grow­
ing chunk of each paycheck was being wiped
out by rising prices. After a considerable lag,
attitudes were beginning to be reexamined.
But even in the face of massive evidence that
the expansionist philosophy had run its course,
we were not ready yet to toss aside completely
the old attitudes. The human lag was at work.
But it was also being reinforced by a new ele­
ment—a shift in emphasis from how many
people are unemployed to who are unemployed.
The trade-off between unemployment and in-

BUSINESS REVIEW

flation is an old dilemma which policymakers
have faced on numerous occasions. But in the
1960’s, a new dimension was added to this
trade-off.2 An aroused nation had become sensi­
tive to the social and economic inequities borne
by some groups in society—notably non-whites.
Even with record prosperity, the non-white un­
employment rate had remained roughly twice
that of all workers. Surely, it was reasoned, the
burden of any rise in unemployment would fall
most heavily on these same disadvantaged
groups. Since disadvantaged persons typically
are the least skilled and least educated, they are
the last to be hired in an expansion and the first
to be laid off during periods of slack demand.
The upshot of this new element was that it
raised the cost of unemployment as a remedy
against inflation and lengthened the life of ex­
pansionism. But as prices continued to soar, it
was apparent, even with this new element, that
some form of restraint had to be placed on the
economy.
THE COMPROMISE OF GRADUALISM

So, late in 1968 monetary policy again was
reversed and made restrictive. In early 1969,
the Nixon Administration took office and
promptly unleashed a barrage of anti-inflation­
ary pronouncements. But even then, with mone­
tary and fiscal policies coordinated for the first
time in the struggle against inflation, officials
still apologized for curtailing demand. Antiinflationary policies were described as designed
to slow-#p rather than slow-down the economy.
By gradually reducing excess demand, the argu­
ment went, inflationary pressures would sub­
2For a closer look at the trade-off, see Sheldon W .
Stahl, “The Phillips Curve: A Dilemma For Public
Policy, Inflation versus Unemployment,” Business Re­
view, Federal Reserve Bank of Philadelphia, January,

1969.




side without the pain usually associated with
an economic transition of this kind. Gradualism
was a kind of compromise. It continued to pay
homage to the expansionist heritage while still
espousing restraint, yet it clearly avoided ad­
vocating recession as a cure for inflation.
The logic of gradualism is impressive in the
abstract world of theory. But in the context of
a four-year inflationary boom, supported not
only by demand excesses, but also by expecta­
tions of more boom and more inflation, gradu­
alism has serious flaws. It provides for little
uncertainty; it advertises a painless transition;
it makes caution a seemingly costly pursuit. The
result: businessmen and labor continued to bet
on inflation, and expectations became more and
more unrealistic in the face of an unwinding
economy.
Businessmen and union leaders are well
aware of the expansionist attitude which has
prevailed. They continue to act as if that atti­
tude will never change. They forget that al­
though attitudes are quite stable, they can
change. For most of 1969 people were skeptical
of the authorities’ intent to fight inflation. It
was believed that expansionist attitudes would
prevail ultimately, and that inflation would con­
tinue. This skepticism existed despite evertighter monetary policy.
Policymakers now are confronted with an
uncomfortable dilemma. They are faced either
with confirming these expectations by easing
policy and making winners out of those who
bet on inflation, or they can keep on the brakes,
puncture inflationary expectations, and probably
bring on a recession. The slow-ttp alternative of
gradualism no longer exists.
To confirm inflationary expectations now
would just about end all hope of bringing infla­
tion under control in the foreseeable future. It
would widen the credibility gap and make it

33

JANUARY 1970

extremely difficult for Government to convince
the public of its resolve to dampen inflation.
Further, future assaults on inflation would
probably be more costly. The deeper and more
numerous the roots of inflation become, the
more difficult they are to choke off.
But to puncture inflationary expectations by
keeping policy taut probably would cause a
sharper and more painful adjustment than
would have been supposed some months back.
Consumer enthusiasm for spending already is
low. If the bullish expectations of business­
men should break, sharp adjustments in in­
ventory investment and capital spending easily
could occur. With all of this, a recession would
be just short of inevitable.
So, policymakers find themselves once more
at the crossroads. Do they again pay homage
to the expansionist view and follow the road of
ease? Or do they travel the path of continued
restraint and forsake the expansionist legacy?
SOME LONGER-RUN ISSUES

The expansionist panacea was born in the de­
pression of the 1930’s, rekindled in the reces­
sions of the 1950’s, and brought to full bloom
in the boom of the 1960’s. The magnificent suc­
cess of expansionism was both numbing and
hypnotic. Its great appeal is that in a sense it
revokes the basic law of economics—scarcity.
More Government spending or business invest­
ment did not mean less private consumption.
But the expansionist spell lingered on past its
appropriate time, and inevitably produced an
overheated, inflationary economy. Expansionism
turned out not to be a panacea after all; it
proved to be a cure for only one kind of illness
—an underemployed economy. But now as we
look beyond the current problem of inflation
and take a longer view, the chief concern is

34




how we manage an economy as it bumps
along its ceiling. How do we walk the tight­
rope between unemployment and inflation?
First, we need to shake off the expansionist
legacy. The human lag has lagged long enough.
We need to recognize the reality of the new
ball game and stop pretending that we are play­
ing in an old one. Demands need to be tailored
to supply in the ’70’s—not the reverse as we
have been accustomed to in the ’60’s. We
need to realize that in a full employment
economy more for one thing means less for
something else. We cannot do all things for all
people at the same time. We need to order our
priorities, difficult as this may be in a pluralistic
society.
Second, we need to take a closer look at the
nature of unemployment. If 10 million people
are out of jobs and there are no jobs available,
that’s one kind of unemployment problem. But
if three million people are unemployed and
three million jobs exist, this is quite another
problem. In the first case, pumping more de­
mand into the economy would be appropriate.
But in the second case, the problem is not one
of deficient demand; rather, it is the difficulty of
fitting square pegs into round holes. Although
massive, club-like tools of expansionism may
force some of the square pegs through some of
the round holes, the inflationary costs appear to
be prohibitive. Rather, chisel-like tools, such as
job training to fit available workers to available
jobs, seem better suited for mopping up struc­
tural unemployment along the normal limits of
economic capacity.
Finally, the yo-yo approach to policymaking
must be avoided. Stop-and-go policy measures
over the last four years have themselves been
destabilizing. Policymakers, in short, need to
gear their policies more toward compensating
for longer-run and more basic changes in the

BUSINESS REVIEW

economic climate and less toward attempting
to iron out short-run wrinkles. Less concern
with “fine tuning” and more sensitivity to
fundamental changes in the economy would re­
duce the human lag, and hopefully guard against
repeating the over-reactions of recent years.
No one, of course, can guarantee what this

N O W A V A IL A B L E :
F IL M S T R IP O N
T R U T H IN L E N D IN G
FO R C O N S U M E R S




decade will bring. Over the last decade, we
came a long way in learning how to stabilize a
modern economy, and we have also learned how
not to stabilize one. Hopefully, we are not be­
ing overly optimistic in assuming that the
future will reflect lessons learned from both
past successes as well as past shortcomings.

A film strip on Regulation Z, Truth in Lending,
for showing to groups of consumers has been
developed by the Board of Governors of the
Federal Reserve System.
The 20-minute presentation is designed for a
Dukane projector which uses 35mm film and
plays a 33 RPM record synchronized to the
film. Copies of the film strip can be purchased
from the Board of Governors of the Federal
Reserve System, Washington, D.C. 20551, for
$10.00. It is also available to groups in the
Third Federal Reserve District without cost
except for return postage.
Groups in the Third District may direct re­
quests for loan of the film to Truth in Lending,
Federal Reserve Bank of Philadelphia, Phila­
delphia, Pennsylvania 19101. These requests
should provide for several alternate presenta­
tion dates. Others not in the Pennsylvania, New
Jersey, or Delaware area should direct requests
to their nearest Federal Reserve Bank or branch.

35

JANUARY 1970

Regional Economy
Loses Some Zip in '69
by Edward G. Boehne

Economic activity in the Third Federal Reserve
District during 1969 set new records, but
showed signs of losing momentum at year’s
end. Sales reflected rising consumer anxiety,
and gains in production for the year lagged be­
hind the hectic pace of 1968. Labor markets
remained tight, but rising prices chipped away
at climbing wages, and real purchasing power
rose only slightly. Banking conditions reflected
both strong loan demand and a restrictive mone­
tary policy.
PRODUCTION AND SALES

Output in the Third Federal Reserve District
climbed to another record high in 1969, but the
rate of increase was under the torrid pace of a
year earlier. Manufacturing activity in the Dis­
trict, measured by electric power consumed by
industrial firms, rose 6.8 per cent in 1969, com­
pared to a jump of nearly 10 per cent in 1968,
as shown in Chart 1. The less hectic tempo of
last year largely reflected a general slowing up
of the economy during the second half of the
year in response to restrictive monetary and
fiscal policies.
CHART 1
E L E C T R IC P O W E R C O N S U M P ­
T IO N O F M A N U F A C T U R E R S IN
T H E T H IR D D IS T R IC T
Percentage Change

*Based on First 10 Months

36




BUSINESS REVIEW

Construction activity, including residential,
nonresidential, and public works, in particular
felt the bite of monetary tautness. After a
whopping gain of just over 40 per cent in 1968,
the value of construction plummeted to a 10 per
cent decline in the District during 1969 (Chart
2 ). At the national level, the growth rate of con­
struction activity dipped from 17 per cent in
1968 to 11 per cent in 1969. The sharper slump
in the region was caused largely by the abnor­
mally high volatility of public works in the Third
District during the past two years. In 1968,
public works jumped 124 per cent, or nearly
five times the gain posted a year earlier. In con­
trast, public works construction in the District
for 1969 skidded 45 per cent.




CHART 3
N E W P A S S E N G E R CAR
R E G IS T R A T IO N S
: .........................

i

C

1966

1 U N IT E D
STATES

1

1
1

T H IR D
D IS T R IC T

1967

1

1968

1969 s

____ L
-1 0

_______1
_______ 1
_______ 1
_______
0

10

20

30

P e rc e n ta g e C ha n g e
*Based on First 10 Months
Source: U.S. Data, Automotive News

While business firms in the Third Federal
Reserve District were producing more in 1969,
consumer zest for spending began to wane, espe­
cially for durable goods. For example, following
a big leap in 1968, registration of new passenger
cars (a rough proxy for new car sales) in the
District slipped over 3.5 per cent in 1969.
Nationally, the number of registrations rose
slightly, as indicated in Chart 3.
Department store sales also lacked the zip
evident a year earlier, although sales perform­
ance was mixed throughout the District, as in­
dicated in Chart 4. Lancaster, Philadelphia, and
Trenton trailed the nation; whereas, Reading,
Scranton, and Wilkes-Barre kept ahead of the
national pace.

37

JANUARY 1970

CHART 4
CHANGE
IN
DEPARTM ENT
STO RE SALES*

*Based on First 10 Months of 1969
Source: Department of Commerce, Data SMSA Basis

LABOR MARKETS

Even though the economy of both the nation
and the region was losing some momentum
CHART 5
U N E M P L O Y M E N T RATE
Per Cent

"Based on First 11 Months
Source: U.S. Data, Department of Labor

Digitized38 FRASER
for


during the latter part of 1969, labor markets re­
mained tight. As seen in Chart 5, the unemploy­
ment rate in the District dropped slightly from
3.1 per cent in 1968 to 2.9 per cent in 1969,
and still remained below the national figure of
3.5 per cent. In part, this low unemployment
figure may reflect the fact that recruiting and
training of skilled labor is expensive. Especially
if the dip in business activity is short-lived, as
most businessmen apparently believe it will be,
hoarding of labor may be a cheaper alternative
than first laying off and later rehiring workers
with scarce skills.
Employees in the region also continued to
put in a standard workweek in 1969. The
average weekly hours worked in manufacturing
last year in the District remained essentially
unchanged from 1968 at 39.9 hours (Chart 6).
Nationally, the number of hours worked per
week was slightly higher, as it has been for
several years.
On the wage side, another record was set in
terms of the number of dollars earned. In the

BUSINESS REVIEW

CHART 6
AVERAGE W EEKLY
H O U R S W O RKFn
Ho^ ! _______________________________

CHART 7
A V E R A G E W E E K L Y E A R N IN G S

UNITED STATES

THIRD DISTRICT

38

n I—
1965

1966

1967

1968

1969*

'Based on First 11 Months
Source: U.S. Data, Department of Labor

'

'

J

District, weekly earnings in manufacturing
climbed $7.70, or 6.5 per cent, in 1969 (Chart
7). In the nation, by comparison, the step-up
in weekly earnings last year amounted to $6.61,
or about 5.5 per cent.

CHART 8
C O N S U M E R P R IC E IN D E X
Percentage Increase

_________________

PRICES

Along with record wages came a record cost of
living. Consumer prices in the Philadelphia
metropolitan area rose 5.3 per cent, or about
the same as for the nation as a whole (Chart 8).
Despite record dollar earnings, workers in the
region barely were able to outrun inflation.
With prices rising 5.3 per cent and wages climb­
ing 6.5 per cent, the real purchasing power of
workers rose only slightly.
1967

BANKING

Banking trends in 1969 reflected record eco-




* Based on First 11 Months
Source: U.S. Bureau of Labor Statistics

39

JANUARY 1970

nomic activity and the resulting loan demand,
particularly from the business sector, as well as
a restrictive monetary policy. Accordingly, bank
loans continued to rise sharply, but investments
and time deposits changed little during 1969.1
W ii
CHA RT 9
LO ANS*
P ercentage C hange
□

15

10

U N ITED STATES

vm

TH IR D D ISTRICT

-

5 -

1966

1967

1968

at member banks grew by more than 10 per
cent in the Third District, barely under the
national gain of 12 per cent (Chart 9).
In order to meet this strong loan demand in
the face of a restrictive monetary policy, banks
in both the District and the nation not only had
to cut back on their acquisition of securities, but
they also had to acquire nondeposit funds
through such techniques as Eurodollar borrow­
ings and the sale of commercial paper. On the
investment side, banks in the Third District
during 1969 barely added to their holdings of
U.S. Governments, municipal securities, and
other investments. This performance is in sharp
contrast to 1967 and 1968 when the volume of
investments shot up 10 per cent or more (Chart
10). Nationally, investments of member banks
declined slightly for the first time since 1966.

1969”

*Member Banks Only-—Data for Last Wednesday of Each Month
” Based on First 11 Months
Source: U.S. Data, Board of Governors of the Federal Reserve System

CHART 10
IN V ES TM EN TS

Corporations were pressed for funds during
much of 1969, and many of them turned to
commercial banks. And, because of previous
credit commitments, banks had to scramble to
be responsive to the loan demands of businesses.
Consumer needs for housing and installment
credit, although not as robust as the demands
of businesses for credit, offered little room for
banks to reallocate loans. Consequently, loans

P ercentage C hange
]
15

U N ITED STATES

H TH IR D DISTRICT

10

5

__ r n
TLX

|0 s
'— 1
5

'Banking data are for member banks only. Percentage
changes are based on data collected for the last Wednes­
day of each month. Percentage changes for 1969 in­
clude data through November. U.S. data are from the
Board of Governors of the Federal Reserve System;
Third District data are from the Federal Reserve Bank
of Philadelphia. Demand deposits include interbank
deposits, U.S. Government deposits, and other deposits.
Time deposits include interbank and other time de­
posits. Loans include both loans and discounts. Invest­
ments include U.S. Treasury securities and other
securities.

40



1966

1967

1968

1969**

"Member Banks Only— Data for Last Wednesday of Each Month
* "Based on First 11 Months
Source: U.S. Data, Board of Governors of the Federal Reserve System

; ;

■

111

Record high interest rates in the financial
markets made time deposits less attractive to

BUSINESS REVIEW

savers than other investments such as Treasury
Bills. Commercial banks are prohibited from
paying more than 4 per cent on savings de­
posits and a maximum of 6.25 per cent on
single maturity (180 days or more) time de­
posits of $100,000 or more. With the 91-day
Treasury Bill rate, to mention only one example,
averaging nearly 7 per cent in 1969, a large
share of the savings flow bypassed banks and
headed directly for the open market. And, as

shown in Chart 11, time deposits at member
banks suffered. After posting a 13 per cent
boost in 1968, time deposits inched up only
3 per cent for member banks in the Third
District during 1969. Nationally, the gain in
time deposits last year was under 1 per cent,
compared to a 10 per cent jump in 1968.
Finally, gross demand deposits at member
banks in the Third District rose just over 5
per cent in 1969, compared to a 6 per cent gain
in 1968—a shade under the national rate in
both years (Chart 12).

CHART t l
T IM E D EPO SITS*
Percentage Change

CHA RT 12
DEM AND D EPO SITS*
Percentage Change

‘ Member Banks Only— Data for Last Wednesday of Each Month
“ Based on First 11 Months
Source: U.S. Data, Board of Governors of the Federal Reserve System

‘ Member Banks Only— Data for Last Wednesday of Each Month
“ Based on First 11 Months
Source: U.S. Data, Board of Governors of the Federal Reserve System

In short, for the Third District as well as for the nation, 1969 was a year of troubled prosperity.
Output rose, wages climbed, and sales advanced, but rising prices and the threat of still higher prices
made much of the gain illusory. The primary problem facing the nation and the District in 1970,
therefore, is how to get the economy back on a sustainable growth path with minimum transitional
cost.




41

JANUARY 1970

W H A T T H IR D D IS T R IC T B U S IN E S S M E N S E E
FO R 1 9 7 0
The staff of the Federal Reserve Bank of
Philadelphia conducts a monthly Business Out­
look Survey. The purpose of the survey is to
obtain a reading of business conditions within
the Third Federal Reserve District—an area
comprising the eastern two-thirds of Pennsyl­
vania, the southern half of New Jersey, and
Delaware. The survey sample polls manufac­
turing firms with 500 or more employees.
Since its inception at the request of the
regional business community nearly two years
ago, the Business Outlook Survey has become
a useful source of economic intelligence both
for business and public policymakers. You may
request that names be placed on the mailing
list for the Business Outlook Survey by writing
to Public Information, Federal Reserve Bank
of Philadelphia, Philadelphia, Pennsylvania
19101.
OUTLOOK FOR 1970

Area businessmen foresee a slowdown in the
economy lasting at least through the first half
of 1970. Underlying this bearish outlook is a
projected softness in new orders, shipments,
and order backlogs. With product demand

Digitized42 FRASER
for


weakening, most manufacturers in the Third
District plan either to halt inventory accumula­
tion or actually to liquidate some of their exist­
ing stocks during the opening six months of
1970.
Despite sluggish demand, most firms plan to
maintain the present size of their labor force.
On the price front, area businessmen see little
encouragement for a quick end to inflation. The
majority of respondents to the Business Out­
look Survey expect both to be paying as well as
receiving higher prices during 1970.
As businessmen peer into the second half of
1970, however, a growing minority of them are
beginning to look across the valley of business
contraction to the upward slope of recovery
beyond. This suggests that with the slowdown
in the economy just now becoming clearly vis­
ible and with some bullish expectations already
on the second-half horizon, regional business­
men anticipate only a short-lived decline in eco­
nomic activity. So, as area executives gaze
into the latter part of 1970, they are begin­
ning to see a lot of what they have been seeing
for the past four years—an expanding, inflation­
ary economy.

BUSINESS REVIEW

DIRECTORS AND OFFICERS

A t th e e le c tio n h e ld in th e fa ll o f 1 9 6 9 , M r . W illia m
to n

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by m e m b e r

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R a lp h

M r . W illia m

E. H a a s , f o r m e r ly A s s is ta n t V ic e

P r e s id e n t,

b e c a m e V ic e

P re s id e n t;

F. S ta a ts , f o r m e r ly S e n io r E c o n o m is t, b e c a m e S e c r e ta r y a n d S e n io r

E c o n o m is t; a n d M r . J a m e s A. A g n e w , fo r m e r ly C o lle c tio n s O ffic e r , b e c a m e A s s is t­
a n t V ic e P r e s id e n t. E ffe c tiv e t h e s a m e d a te , M r . A le x a n d e r A . K u d e lic h , f o r m e r ly
H e a d , D e p a r tm e n t o f C o lle c tio n s , w a s p ro m o te d to o ff ic e r s ta tu s w ith t it le o f
A s s is ta n t V ic e P r e s id e n t. As o f J a n u a r y 3 1 , 1 9 6 9 , M r . L a w re n c e C . M u r d o c h , J r .,
V ic e P r e s id e n t a n d S e c r e ta ry , re s ig n e d to a c c e p t a p o s itio n w ith a P h ila d e lp h ia
c o m m e r c ia l
June 2,

bank.

M r.

S h e ld o n

W.

S ta h l,

S e n io r

1 9 6 9 , to a c c e p t a p o s itio n w ith th e

E c o n o m is t,

F e d e ra l

R e s e rv e

re s ig n e d
Bank

e ffe c tiv e

of Kansas

C ity .

FO R EC A STS FOR 1970
N O W A V A IL A B L E




The Department of Research has compiled and analyzed
a number of predictions made by businessmen, econo­
mists, and Government officials. This compilation in­
cludes a summary of forecasts for the economy as a
whole as well as for particular sectors of the economy.
The more important indicators are presented in chart
form.
Copies of this release are available on request from
Public Information, Federal Reserve Bank of Philadel­
phia, Philadelphia, Pennsylvania 19101.

43

JANUARY 1970

DIRECTORS AS OF JANUARY 1, 1970

G ro u p

T e r m e x p ir e s
D ecem ber 31

CLASS A
1

H A R O L D F. S T IL L , J R .

1971

P r e s id e n t, C e n tr a l P e n n N a tio n a l B a n k
B a la C y n w y d , P e n n s y lv a n ia
2

W IL L IA M R . C O S B Y

1972

P r e s id e n t, P r in c e to n B a n k a n d T r u s t C o m p a n y
P r in c e to n , N e w J e rs e y
3

H . LYLE D U F FE Y

1970

E x e c u tiv e V ic e P r e s id e n t
T h e F ir s t N a tio n a l B a n k o f M c C o n n e lls b u r g
M c C o n n e lls b u r g , P e n n s y lv a n ia
CLASS B
1

P H IL IP H . G L A T F E L T E R , III

1970

P r e s id e n t a n d C h a ir m a n , P. H . G la tf e lte r C o.
S p r in g G ro v e , P e n n s y lv a n ia
2

H E N R Y A. T H O U R O N

1971

P r e s id e n t, H e r c u le s In c o r p o r a te d
W ilm in g to n , D e la w a r e
3

ED W ARD J. DW YER

1972

P r e s id e n t, E S B In c o r p o r a te d
P h ila d e lp h ia , P e n n s y lv a n ia
CLASS C
W IL L IS J . W IN N , C h a ir m a n

1970

D e a n , W h a r to n S c h o o l o f F in a n c e a n d C o m m e r c e
U n iv e r s ity o f P e n n s y lv a n ia
P h ila d e lp h ia , P e n n s y lv a n ia
B A Y A R D L. E N G L A N D , D e p u ty C h a ir m a n

1972

C h a ir m a n o f t h e B o a rd
A tla n tic C ity E le c tric C o m p a n y
A tla n tic C ity , N e w J e rs e y
D. R O B E R T Y A R N A L L , J R .
P r e s id e n t, Y a r w a y C o rp o r a tio n
B lu e B e ll, P e n n s y lv a n ia

44




1971

BUSINESS REVIEW

OFFICERS AS OF JANUARY 1, 1970

KARL
ROBERT

N.

R.

BOPP,

H IL K E R T ,

P r e s id e n t

F irs t V ic e

P r e s id e n t

J O S E P H R . C A M P B E L L , S e n io r V ic e P r e s id e n t
D A V ID P. E A S T B U R N , S e n io r V ic e P r e s id e n t
D A V ID C . M E L N IC O F F , S e n io r V ic e P r e s id e n t
J A M E S V . V E R G A R I, S e n io r V ic e P r e s id e n t a n d G e n e ra l C o u n s e l
E D W A R D A . A F F , V ic e P r e s id e n t
H U G H B A R R IE , V ic e P r e s id e n t
N O R M A N G. D A S H , V ic e P r e s id e n t
R A L P H E. H A A S , V ic e P r e s id e n t
W IL L IA M A . J A M E S , V ic e P r e s id e n t
G . W IL L IA M M E T Z , V ic e P r e s id e n t a n d G e n e ra l A u d ito r
J A M E S A. A G N E W , A s s is ta n t V ic e P r e s id e n t
J A C K P. B E S S E , A s s is ta n t V ic e P r e s id e n t
J O S E P H M . C A S E , A s s is ta n t V ic e P r e s id e n t
D . R U S S E L L C O N N O R , A s s is ta n t V ic e P r e s id e n t
A L E X A N D E R A . K U D E L IC H , A s s is ta n t V ic e P re s id e n t
W A R R E N R. M O L L , A s s is ta n t V ic e P r e s id e n t
H E N R Y J. N E L S O N , A s s is ta n t V ic e P r e s id e n t
K E N N E T H M . S N A D E R , A s s is ta n t V ic e P r e s id e n t
A L B E R T S P E N C E R , J R ., A s s is ta n t V ic e P r e s id e n t
R U S S E L L P. S U D D E R S , A s s is ta n t V ic e P r e s id e n t
J A M E S P. G IA C O B E L L O , C h ie f E x a m in in g O ffic e r
T H O M A S K . D E S C H , E x a m in in g O ffic e r
W IL L IA M L. E N S O R , E x a m in in g O ffic e r
J A C K H . J A M E S , E x a m in in g O ffic e r
L E O N A R D E. M A R K F O R D , E x a m in in g O ffic e r
W A R R E N J . G U S T U S , E c o n o m ic A d v is e r
W IL L IA M F. S T A A T S , S e c r e ta r y a n d S e n io r E c o n o m is t
M A R K H . W IL L E S , S e n io r E c o n o m is t
S A M U E L J . C U L B E R T , J R ., B a n k S e rv ic e s O ffic e r
G E O R G E C . H A A G , P u b lic In fo r m a tio n O ffic e r
H IL IA R Y H . H O L L O W A Y , A s s is ta n t C o u n s e l
E U G E N E W . L O W E , S e c u r itie s O ffic e r
A. L A M O N T M A G E E , A s s is ta n t G e n e ra l A u d ito r
D A V ID P. N O O N A N , A s s is ta n t P e rs o n n e l O ffic e r




45

JANUARY 1970

STATEMENT OF CONDITION
Federal Reserve Bank of Philadelphia
E nd o f y e a r
( 0 0 0 ’ s o m itte d in d o lla r f ig u r e s )

1969

1968

$ 525,671

$ 494,258

$ 525,671
34,614
5,034

$ 494,258
35,064
4,901

650
3,071,751

100
2,810,204

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

$3,072,401
729,778
2,475
125,279
$4,495,252

$2,810,304
634,903
2,359
257,666
$4,239,455

F e d e ra l R e s e rv e n o t e s ................................................................

$2,756,766

$2,615,923

986,466
70,870
6,760
17,965
$1,082,061
557,760
30,631
$4,427,218

991,103
522
11,660
13,321
$1,016,606
520,863
20,499
$4,773,891

$

$

ASSETS
G old c e r t ific a t e re s e rv e s :
G o ld c e r t ific a t e a c c o u n t .......................................................
R e d e m p tio n f u n d — F e d e ra l R e s e rv e n o t e s ............
T o ta l g o ld c e r t ific a t e re s e rv e s

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

F e d e ra l R e s e rv e n o te s o f o th e r F e d e ra l R e s e rv e B a n k s
O th e r c a s h

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

L o a n s a n d s e c u r itie s :
D is c o u n ts a n d a d v a n c e s

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

U n ite d S ta te s G o v e r n m e n t s e c u r i t i e s ........................
T o ta l lo a n s a n d s e c u r itie s

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

U n c o lle c te d c a s h i t e m s .............................................................
B a n k p re m is e s

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

A ll o th e r a s s e t s ...............................................................................
T o ta l a s s e ts

L IA B IL IT IE S

D e p o s its :
M e m b e r b a n k re s e rv e a c c o u n t s ....................................
U n ite d S ta te s G o v e r n m e n t .................................................
F o re ig n

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

O th e r d e p o s its

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

T o ta l d e p o s i t s ......................................................................
D e fe r re d a v a ila b ility c a s h i t e m s ...........................................
A ll o th e r l i a b i l i t i e s .........................................................................
T o ta l lia b ilitie s

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

C A P T IT A L A C C O U N T S
C a p ita l p a id in

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

S u r p l u s ...........................................................................................
T o ta l lia b ilitie s a n d c a p ita l a c c o u n t s .....................

34,017
34,017
$4,495,252

32,782
32,782
$4,239,455

19.1%

18.9%

R a tio o f g o ld c e r t ific a t e re s e r v e to
F e d e ra l R e s e rv e n o te l i a b i l i t y ..........................................

Digitized 46 FRASER
for


BUSINESS REVIEW

EARNINGS AND EXPENSES
Federal Reserve Bank of Philadelphia
( 0 0 0 ’ s o m it te d )

1969

1968

E a r n in g s fro m :
U n ite d S ta te s G o v e r n m e n t s e c u r i t i e s .................................
O th e r

s o u rc e s

$ 1 6 4 ,7 1 1

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

T o ta l c u r r e n t e a r n i n g s ..............................................

$ 1 3 6 ,3 0 0

8 ,3 7 1

$ 1 7 3 ,0 8 2

4 ,6 0 4
$ 1 4 0 ,9 0 4

N e t expenses:
O p e r a tin g e x p e n s e s *

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

C o s t o f F e d e ra l R e s e rv e c u r r e n c y ...........................

1 0 ,7 0 1

9 ,5 8 4

1 ,2 6 2

A s s e s s m e n t fo r e x p e n s e s o f B o a rd o f G o v e rn o rs

.

..

T o ta l n e t e x p e n s e s ......................................................................
C u r r e n t n e t e a r n i n g s ............................................................

1 ,3 8 5
779
1 2 ,7 4 2

$

750
$ 1 1 ,7 1 9

1 6 0 ,3 4 0

1 2 9 ,1 8 5

A d d itio n s to c u r r e n t n e t e a rn in g s :
P r o fit on s a le s o f U .S . G o v e r n m e n t s e c u r itie s ( n e t )
A ll o th e r

..

—

41

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

319

427

T o ta l a d d i t i o n s ...............................................................................

$

319

$

468

D e d u c tio n s fr o m c u r r e n t n e t e a rn in g s :
Loss on s a le s o f U .S . G o v e r n m e n t s e c u r itie s ( n e t )

..

M is c e lla n e o u s n o n -o p e r a tin g e x p e n s e s ...............
T o ta l d e d u c tio n s

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

N e t a d d i t i o n s ..............................................................................
N e t e a r n in g s b e fo re p a y m e n ts to U .S . T r e a s u r y

317

—

25
$

9
342

$

(2 2 )
...............

D iv id e n d s p a i d ...........................................................................................

459

$ 1 6 0 ,3 1 7

$ 1 2 9 ,6 4 4

$

$

P a id to U .S . T r e a s u r y (in t e r e s t on F e d e ra l R e s e rv e n o te s )
T r a n s f e r r e d to o r d e d u c te d fr o m ( — ) S u r p l u s ..................

9

2 ,0 0 0
1 5 7 ,0 8 2

$

1 ,2 3 5

1 ,9 3 4
1 2 6 ,7 5 4

$

956

* A^ter deducting reimbursable or recoverable expenses.




47

VOLUME OF OPERATIONS
Federal Reserve Bank of Philadelphia
N u m b e r o f p ie c e s ( 0 0 0 ’ s o m it te d )

1969

1968

1967

C o lle c tio n s :
O r d in a r y c h e c k s *

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

3 6 3 ,7 0 0

3 2 4 ,5 0 0

2 8 3 ,4 0 0

G o v e r n m e n t c h e c k s ( p a p e r a n d c a r d ) ...............

3 3 ,9 0 0

3 2 ,8 0 0

3 2 ,7 0 0

P o s ta l m o n e y o r d e r s ( c a r d ) ....................................
N o n -c a s h ite m s ................................................................

1 3 ,7 0 0

1 4 ,6 0 0

1 7 ,3 0 0

899

832

846

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

2 9 ,5 8 1

2 2 ,6 3 3

1 7 ,3 9 1

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

607

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

308

655
271

706

T ra n s fe r o f fu n d s
C u rr e n c y c o u n te d

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

3 3 4 ,9 0 0

3 1 9 ,7 0 0

3 0 5 ,2 0 0

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

Food s ta m p s re d e e m e d
C le a r in g

o p e r a tio n s

in c o n n e c tio n

w ith

d ir e c t

in g s & w ire & g ro u p c le a r in g p l a n s * *

C o in s c o u n te d

se n d 248

8 0 3 ,8 6 8

4 9 2 ,3 7 7

5 6 0 ,7 0 0

. . . .

1

D e p o s ita r y re c e ip ts fo r w ith h e ld t a x e s ..................

1 ,2 9 3

(a )
1 ,0 5 6

(a )
799

P o s ta l re c e ip ts ( r e m i t t a n c e s ) .......................................

281

271

282

569

482

536

18

13

1 0 ,1 8 7

1 0 ,5 0 6

9 ,9 3 4

9 ,2 2 9

7 ,9 4 1

7 ,2 6 0

996

959

1 ,0 7 0

D is c o u n ts a n d a d v a n c e s to m e m b e r b a n k s

F is c a l a g e n c y a c tiv itie s :
M a r k e ta b le s e c u r itie s d e liv e re d o r re d e e m e d
C o m p u te r iz e d

m a r k e ta b le

t r a n s a c t io n s )

s e c u r itie s

(B o o k

e n try

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

—

S a v in g s b o n d s a n d n o te s ( F .R . B a n k a n d a g e n ts )
Is s u e s (in c lu d in g r e i s s u e s ) .................................
R e d e m p tio n s

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

C o u p o n s re d e e m e d (G o v e r n m e n t a n d a g e n c ie s )
D o lla r a m o u n ts ( 0 0 0 , 0 0 0 ’s o m it te d )
C o lle c tio n s :
O r d in a r y c h e c k s

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

$ 1 1 6 ,7 1 7 $ 1 0 0 ,7 7 4

$

9 4 ,4 2 2

G o v e r n m e n t c h e c k s (p a p e r a n d c a r d ) ...............

9 ,4 2 1

8 ,9 5 2

7 ,9 8 3

P o s ta l m o n e y o r d e r s ( c a r d ) ....................................

241

253

1 .4 6 4

1 ,2 5 8

248
1 ,1 0 4

42

31

23

N o n -c a s h

i t e m s ................................................................

Food s ta m p s re d e e m e d
C le a r in g o p e r a tio n s

in

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

c o n n e c tio n

w ith

d ir e c t

in g s & w ire & g ro u p c le a r in g p l a n s * *

se n d -

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

6 6 ,9 4 6

6 1 ,7 4 2

5 4 ,5 6 8

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

3 5 1 ,5 2 4

2 5 0 ,6 9 5

2 1 9 ,8 1 5

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

2 ,4 9 4

2 ,3 5 1

2 ,2 5 8

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

103

58

63

6 ,2 8 9

1 ,1 9 3

323

D e p o s ita r y re c e ip ts fo r w ith h e ld t a x e s ..................

7 ,0 1 2

5 ,6 9 5

P o s ta l r e c e ip ts ( r e m i t t a n c e s ) .......................................

1 ,0 3 1

1 ,0 0 8

3 ,9 3 5
929

1 1 ,6 0 3

1 4 ,0 9 1

1 3 ,5 7 1

5 ,9 6 6

7 ,8 7 7

T r a n s fe r s o f fu n d s
C u rr e n c y c o u n te d
C o in s c o u n te d

D is c o u n ts a n d a d v a n c e s to m e m b e r b a n k s

. . . .

F is c a l a g e n c y a c tiv itie s :
M a r k e ta b le s e c u r itie s d e liv e re d o r re d e e m e d
C o m p u te r iz e d
tr a n s a c t io n s )

m a r k e ta b le

s e c u r itie s

(B o o k

e n try

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

—

S a v in g s b o n d s a n d n o te s ( F .R . B a n k a n d a g e n ts )
459

428

468

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

530

403

385

C o u p o n s re d e e m e d (G o v e r n m e n t a n d a g e n c ie s )

380

394

435

Is s u e s

(in c lu d in g

R e d e m p tio n s

r e is s u e s )

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

4 Checks handled in sealed packages counted as units.
44 Debit and credit items.
(a) Less than 1,000 rounded.