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Selected Papers
ofAllan Sproul
Edited by Lawrence S. Ritter


Selected Papers
ofAllan Sproul
Edited by Lawrence S. Ritter

Federal Reserve Bank of New York

D ecem ber 1980

Library of Congress Catalog Card N um ber 80-67915
Book Design: Joseph Penczak Design, Inc.
P rinted in U nited States of A m erica



Table of Contents
Preface by Anthony M. Solom on..................... ix
Foreword by Paul A. Volcker............................. xi
Chapter 1
Allan Sproul, 1896-1978
A Tower of Strength”


Chapter 2
M onetary Policy and Inflation
In tro d u c tio n ............................................................................................... 23
1. L etter to W inthrop W . A ldrich (1 9 5 1 ).......................................... 25
2. L etter to Alfred Hayes ( 1 9 6 4 ) ......................................................... 27
3. L etter to Henry H. Fowler ( 1 9 6 5 )...................................................29
4. L etter to Alfred Hayes ( 1 9 7 0 ) ......................................................... 31
5. T alk to W ells Fargo B oard of D irectors (1 9 7 4 )...........................33
6. “ M onetary Policy and G overnm ent Intervention” (1968)......... 37

Chapter 3
Postwar Treasury-Federal Reserve Conflict
and the Accord
In tro d u c tio n ............................................................................................... 49
1. The “ A ccord” —A L an d m ark of the Federal
Reserve System (1964).................................................................. 51
2. L etter to R obert T. Stevens ( 1 9 5 0 ) .................................................74
3. L etter to C .F. Cobbold (1 9 5 0 )......................................................... 78
4. L etter to Thom as B. M cCabe (1951)...............................................81
5. L etter to Jam es E. Shelton (1 9 5 1 )................................................... 83
6. L etter to M urray J. R ossant (1 9 6 3 ).................................................86
7. L etter to M urray J. R ossant (19 6 6 ).................................................88


Chapter 4
Human Judgment and Central Banking
In tro d u c tio n ............................................................................................... 89
1. “ Policy Norm s and C entral B anking” (1 9 7 0 ).............................91
2. Congressional Testim ony on “ Bills Only” ( 1 9 5 4 ).................... 105
3. L etter to M urray J. Rossant (1 9 6 1 ).............................................. 112
4. Letter to Alfred Hayes ( 1 9 6 1 ) ....................................................... 114
5. L etter to H enry A lexander (1 9 6 1 ).................................................116
6. “ Money W ill Not M anage I ts e lf ’ ( 1 9 6 3 )................................... 120

Chapter 5
Deposit Interest Rate Ceilings
In tro d u c tio n .............................................................................................129
1. L etter to Alfred Hayes ( 1 9 6 0 ) ....................................................... 131
2. L etter to Alfred Hayes ( 1 9 6 0 ) ....................................................... 133
3. L etter to Alfred Hayes ( 1 9 6 6 ) ....................................................... 135
4. E xcerpt from “ C oordination of Economic Policy” (1966) . . . 139

Chapter 6
Federal Reserve Structure and M onetary Policy
In tro d u c tio n .............................................................................................141
1. S tatem ent on Federal Reserve “ Independence” ( 1 9 5 2 ) .........143
2. “ Reflections of a C entral B anker” (1 9 5 5 ) ................................. 149
3. L etter to Alfred Hayes ( 1 9 5 8 ) ....................................................... 165
4. L etter to Alfred Hayes ( 1 9 5 8 ) ....................................................... 168
5. L etter to Alfred Hayes ( 1 9 5 8 ) ....................................................... 170
6. Statem ent on the R eport of the Commission on
Money and Credit (1961)............................................................171


Chapter 7
Foreign Aid
In tro d u c tio n .............................................................................................185
1. L etter to Alfred Hayes ( 1 9 6 0 ) ....................................................... 187
2. “ India and Pakistan: Critical Testing G round
of Foreign A id” ( 1 9 6 0 ) ..............................................................188
3. Statem ent on Foreign Aid (1 9 6 3 ) ................................................. 198

Chapter 8
International Financial Problems
In tro d u c tio n .............................................................................................205
1. “ G old, M onetary M anagem ent, and
the B anking System” (1949)..................................................... 207
2. T alk to Wells Fargo B oard of D irectors (1 9 7 5 )........................ 221
3. T alk to Wells Fargo Board of D irectors (1 9 7 7 )........................ 227
4. T alk to W ells Fargo B oard of D irectors (1 9 7 7 )........................ 230

Portfolio of Photographs of Allan Sproul
and his handw ritten notes about an offer
of the presidency of the W orld B a n k ..........................................148-149



J L h e im petus for this volume to honor the memory of Allan Sproul
cam e from Paul A. Volcker. As a young econom ist in the early fifties,
M r. Volcker worked at this B ank und er M r. Sproul. He rem ained in
touch with him after he, in tu rn , becam e the B an k ’s President in 1975.
Preparation of the volume, und er M r. V olcker’s direction, was initiated
several m onths before he was appointed C hairm an of the B oard of
G overnors of the Federal Reserve System.
M any people contributed to the p reparation of this book. The Bank
is particularly indebted to Lawrence S. R itter, Professor of Finance at
New York University, who m ade the final selection of the m aterial to be
included, edited where necessary, and arranged the papers. He wrote
the introductory biographical sketch of M r. Sproul and the chapter in ­
In the process of gathering inform ation for the introductory
biography, Professor R itter was generously assisted by several people
whose help was invaluable. They include Charles A. Coombs, R obert
V. Roosa, R obert G. Rouse, W illiam F. T reiber, and Thom as O.
W aage, all of whom had been colleagues of M r. Sproul at this B ank;
R ichard P. Cooley, C hairm an of the B oard, W ells Fargo Bank; M urray
J. R ossant, D irector, The Tw entieth Century Fund; and last, b u t by no
m eans least, M ary C. Regan, M r. Sproul’s secretary at the Federal
Reserve Bank of New York for twenty-five years.
Carl W . Backlund, Chief, Central Records and Archives Division of
this B ank, undertook the initial sifting and winnowing of the large
volume of M r. S proul’s p ap ers—including his speeches, articles, C on­
gressional testim ony, internal m em oranda, and letters. Stephen V.O .
Clarke, Research Officer and Senior Econom ist, then reduced this
m aterial to m anageable proportions, organized it in term s of subject
m atter, and m ade a prelim inary selection of papers for inclusion in the
To all of them , we owe a deep debt of gratitude.
A nthony M. Solomon
Decem ber 1980




■Lllan Sproul was the th ird chief executive officer of the Federal
Reserve B ank of New York, having been its President from January
1941 until he retired in June 1956. He cam e to this Bank as Secretary in
1930, after serving during the twenties at the Federal Reserve Bank of
San Francisco.
His interest in public policy and central banking was lifelong. Those
who knew him were invariably im pressed with the b readth of his vision
com bined with technical com petence, the strength of his convictions
com bined with a grace and tem perance in intellectual com bat, the
sense of dignity and position com bined with a w arm th of personal
friendship. D uring his presidency of the “ New York F ed” , he
stim ulated a whole generation of Federal Reserve officials to find their
careers in central banking and related professions, fostering m onetary
stability in this country and international economic cooperation.
T hroughout his “ retirem ent” , he continued to support those causes, con­
sulting with those from Presidents on down who sought his judgm ent.
The volume of his w ritings—published and unpublished—bears
testim ony to the scope of his interests and the quality of his thought. A
representative selection from these w ritings is of more th a n historical
interest, and a fitting m em orial for a great central banker.
Paul A. Volcker
Decem ber 1980



Chapter 1
Allan Sproul
“A Tower of Strength”

m l l a n Sproul, president of the Federal Reserve B ank of New
York from 1941 to 1956 an d one of history’s m ost talented central
bankers, died in California on April 9, 1978, at the age of eighty-two. His
passing was widely m ourned, even though he had been in sem iretire­
m ent for over two decades, for few who h ad come in contact with him
ever forgot him .
He m ade an im posing first im pression: in his prim e a ruggedly built
200-pound bear of a m an, somewhat under six feet tall, with a disarming
smile and a vigorous tone of voice. “ He looked as solid” , someone once
said, “ as the Federal Reserve Bank itself.”
However, it was his intellectual vitality th a t m ade a m ore lasting im ­
pression on those who got to know him for any length of tim e. He had a
finely honed sense of hum or and an almost instinctive feel for the English
language—an uncanny ability to turn a phrase with style and grace. These
qualities, combined with a deep devotion to what might be called oldfashioned ideals and principles, including the work ethic, made him a for­
midable adversary. A voracious reader, especially of classical literature,
history, and biography, he was constantly bringing his learning to bear on
current policymaking problems, constantly searching for general prin­
ciples th at might help explain current developments by putting them in
perspective against the broad sweep of history.
Nor did this change in the twenty-two years following his prem ature
retirem ent from the Federal Reserve Bank of New York in 1956, at the age
of sixty. For central banking was more than a vocation to him —it was a
passion, and it rem ained so until the very day of his death.


The pride he took in his profession, which he was usually too reserved to
show, was inadvertently revealed during Hearings of the Senate Committee
on Banking and Currency in 1945. Senator Tobey, intending to be
complimentary, said at one point: “You are approaching this thing as a
ban k er, as you should, backed by all the conservatism and good ju d g ­
m ent th a t you have acquired by years of experience.”
But Sproul was m ore irritated th a n flattered. “ I appear here not as a
b a n k e r,” he responded, “ b u t as a central banker. There is quite a dis­
tinction. I have no years of conservatism behind me. I have years of try­
ing to improve and develop and liberalize the functioning of the
dom estic and international banking m achinery.” 1
Allan Sproul was born in San Francisco on M arch 9, 1896, the sec­
ond son of R obert and Sarah E lizabeth Sproul. His father had been
born in Scotland and em igrated in the 1880s to California, where he
found em ploym ent as a freight auditor for the Southern Pacific
R ailroad. His older brother, R obert G ordon, born in 1891, rose to the
presidency of the University of C alifornia, a position he held from 1930
until his retirem ent in 1958. Like his b rother, Allan always considered
him self a C alifornian, despite the q u arter century he spent in the New
York financial com m unity. New Y ork was challenging and exciting,
b u t it was never hom e.
A llan’s youth and early adulthood were spent alm ost entirely in the
San Francisco Bay A rea. He went to elem entary school first in San
Francisco and later in Berkeley, after the family moved across the Bay,
and in due course attended high school there and then the University of
C alifornia at Berkeley. His college career was interrupted by A m erica’s
entrance into W orld W ar I. He prom ptly enlisted in the Army Air
Force and excitedly learned to fly rickety fighter planes at M ather Field
near Sacram ento— a b are fourteen years after the W right B rothers’
first flight at K itty Hawk in 1903.
“ Aviation used to have a chivalrous asp ect,” he recalled years later.
“ W e flew by feel and touch, enjoying the rush of wind in our faces. Now
I look at the instrum ent panels in airplanes and w onder how we ever
did it.” 2
1 United States Senate Committee on Banking and Currency,
Hearings on Bretton Woods Agreements Act (June 21, 1945), p. 310.
2 The Fed, Federal Reserve Bank of New York (September 28,
1955), pp. 7-8.


He arrived in E ngland with his squadron late in 1918, b u t hostilities
ended before he flew any com bat missions. The war over, he returned
to th e University of C alifornia and g rad u ated in 1919 with a degree in
agriculture. He went to work briefly with the C alifornia Packing Com ­
pany, which dealt in farm produce, and then as an agricultural adviser
for two sm all b an k s in S outhern California. In 1920, however, he ac­
cepted a position as head o f the research departm ent at the Federal
Reserve B ank o f San Francisco, thereby beginning a career in the
Federal Reserve System th a t would last for thirty-six years.
Given his background, how did he get such a job in the first place?
Fortunately, Sproul’s own recollections o f his start in the Federal
Reserve System have been preserved in the form of a tran scrip t of an
after-dinner talk he gave in San Francisco in 1976, shortly after his
eightieth b irth d ay :3
This will not be one o f my offbeat reports on the elusive
aspects o f dom estic m onetary and fiscal policies, nor on the
m ore intricate aspects of th e in ternational m onetary system.
I th o u g h t a personal m em oir on th e triu m p h of serendipity
(discovering by chance things one has not sought) over ra ­
tional determ ination in finding and following a career
w ould be m ore in keeping with th e occasion.
About fifty-six years ago, I entered the fringe of banking. I
h ad recently been graduated from the College of Agriculture at
the University of California at Berkeley, clutching a B.S.
degree in pomology, which is fruit growing for those of you
whose Latin is a little rusty. I had learned one thing, at least,
in earning my degree. I was not cut out to be a farmer.
Fortunately, as things tu rn ed out, a friend of m ine had
recently becom e assistant to the chairm an of the fledgling
F ederal Reserve B ank of San Francisco. He allowed him self
to be deceived into thin k in g I m ight know som ething about
ban k in g because I was tem porarily m asquerading as a bank
agriculturalist at two small b anks in Southern California,
am ong th e orange an d lem on groves and w alnut orchards.
He lured me away from th a t rural scene with the offer of a
3 Talk at Wells Fargo Bank Directors Dinner, April 19, 1976.


job as head o f th e Division of Analysis and Research at the
Reserve B ank. It really d id n ’t m atter to him , nor to me,
th at I knew little about b anking and nothing about central
b anking.
In fact, I did not know w hat a central b an k was, which is
not so strange as it m ight now seem. No one else hereabouts
knew m uch about central ban k in g then, and even now not
m any people know w hat it is all about. All th a t I really had
to do, to get started, was to develop a nascent facility for
assem bling facts an d figures, and for presenting them to my
superiors in readable fashion and, through them , to the
F ederal Reserve B oard a t W ashington, concerning
agricultural, business, and credit conditions in the seven
W estern states which then com prised the Twelfth Federal
Reserve D istrict. Now, with greater sophistication and with
the w orkings of P ark in so n ’s Law, squadrons of people and
phalanxes o f com puters do the sam e thing.
Later, I becam e the assistant to the chairm an and
Secretary o f the B ank, which enabled me to hire the
equivalent of a couple of present-day M .B .A .s to do the
analysis and research, while I devoted myself to learning
how policy is m ade, an d other loftier pursuits. This includ­
ed m aking the acquaintance o f some notable San F ra n ­
ciscans who were directors of the B ank.
My most rewarding contact, however, was with my im­
mediate boss, John Perrin, the chairm an of the board, which
was then a full-time job. He was a testy old gentleman about
ten years younger than I am now, who had come out of retire­
m ent to help get the Reserve System started. He had a real in­
terest in developing the art of central banking, and he
dem anded th at I become a serious student of the occult call­
ing. He also dem anded th at I pay scrupulous attention to the
niceties of the English language. It was not always an easy
relationship, but it was a rewarding one.


S proul’s position as Secretary of the San Francisco B ank, which he
assum ed in 1924, entailed occasional cross-country trips to W ashington
for m onetary policy conferences. At those m eetings his abilities a t­
tracted th e attention of B enjam in Strong, head of the Federal Reserve
B ank o f New Y ork, and George L. H arrison, Strong’s deputy. Early in
1928, H arrison, on S trong’s behalf, discreetly sounded out the young
Californian: would he be interested in transferring to the Federal
Reserve B ank of New Y ork?
A lthough Sproul was intrigued by th e possibility of w orking in the
natio n ’s financial center, he was reluctant to leave the W est Coast. In
1921 he h ad m arried M arion Bogle. They h ad m et as classm ates at the
U niversity of C alifornia, and by 1929 they had three sons— A llan, Jr.,
G ordon, and D avid— and were happy in th eir Bay A rea hom e. Late in
1928 B enjam in Strong died b u t H arrison, his successor as head of the
New Y ork B ank, continued to renew the invitation.
W ith Sproul hesitant an d H arrison persistent, negotiations dragged
on for over a year. Finally, in 1930, with the stock m arket in disarray
and the economy sliding downhill, th e opportunity to get into the thick
of things becam e too tem pting to tu rn down any longer: the 33-year-old
Sproul accepted H arriso n ’s offer and b rought his family east.
T he thirties were years of desperation and frustration for most
A m ericans, b u t for A llan Sproul they were years of developm ent and
grow th. He joined the New Y ork B ank on M arch 1, 1930, spent his first
few years as Secretary, the sam e position he had held at the San F ra n ­
cisco B ank, and was assigned to the foreign departm ent. In the latter
role he began to get deeply involved for the first tim e in international
m onetary affairs, an area th a t soon fascinated him and was to rem ain a
m ajor interest th ro u g h o u t his life. The old international financial order
was collapsing, an d repeated efforts to prop it up were proving
fruitless. Along with H arrison, Sproul p articipated in international
m onetary conferences and cam e to know m any of his counterparts
abroad, including the fabled M ontagu N orm an, long-tim e head of the
B ank of E ngland.
He also cam e to know Professor John H. W illiam s of H arvard
University, a m an whose advice and counsel he grew to value im m ense­
ly. W illiam s becam e an officer of the Federal Reserve B ank of New
Y ork in the early thirties, and continued as such for over three decades,
all the while retaining his professorship a t H arvard. Nine years Sproul’s
senior, W illiam s was a world-renow ned authority on international


finance, com bining theoretical expertise with a bent for the p ra cti­
calities of the everyday world. There developed between them a m utual
respect and fondness th a t ripened with the years. At first with W illiam s
as teacher and Sproul as pupil, and later as equals, the two conducted a
continual dialogue on international finance—in corridors, over lunch,
after business h o u rs—th a t lasted for m ore th a n twenty years.
In 1934 Sproul becam e H arriso n ’s assistant, a newly created posi­
tion; w hat H arrison had been to Strong, Sproul now becam e to H a r­
rison. In 1936 he was prom oted again, this tim e to first vice president.
In Septem ber 1938, however, W . R andolph Burgess accepted an offer
to becom e vice chairm an of the N ational City B ank of New Y ork and
resigned as m anager of the System O pen M arket A ccount, a position in
which he h ad been responsible for conducting open m arket operations
on b eh alf of the entire Federal Reserve System under the direction of
the Federal O pen M arket Com m ittee. Sproul was rushed into the gap
and, while rem aining first vice president, spent the next fifteen m onths
conducting the F ederal Reserve’s open m arket operations— an ex­
perience th a t, although he could hardly know it at the tim e, would
stand him in good stead not too m any years later.
Shortly thereafter, in 1940, George H arrison decided to call it a day.
W ith the enactm ent of the B anking Act of 1935, which H arrison had
not favored, the balance of power in the Federal Reserve began shifting
from the n atio n ’s financial capital to its political capital. The New York
B ank no longer dom inated the System, as it had in the heyday of B en­
jam in Strong, and H arrison chafed u n d er w hat he considered undue in­
terference from W ashington. In addition, he had never gotten along
with the peppery M arrin er Eccles, since 1934 chairm an of the Board of
G overnors in W ashington and principal architect of the B anking Act of
1935. Friction between them h ad only increased with the passage of
tim e. T hus after twelve years at the helm George H arrison resigned in
1940, at the age of fifty-three, to becom e president of the New York
Life Insurance Com pany. The m an chosen to replace him was the m an
he him self had persuaded to leave C alifornia a decade earlier.
O n January 1, 1941, A llan Sproul becam e the th ird president of the
F ederal Reserve B ank o f New York and shortly th ereafter vice ch air­
m an of the Federal O pen M arket Com m ittee, the System’s m ain
policym aking body.
Sproul h ad hardly assum ed his new positions before he becam e im ­
m ersed in the com plexities of war finance. Early in 1942 the Federal
Reserve, after consultation with the T reasury, announced th a t it would
assure am ple funds for the w ar effort by m aintaining a fixed p attern of


interest rates on G overnm ent securities for the d u ra tio n —ranging from
3 /8 percent on three-m onth T reasury bills to 7 /8 percent on one-year
certificates, through abo u t 2 percent on ten-year bonds, and on out to
2Vi percent on the longest m arketable issues. The purpose of m ain tain ­
ing a fixed p attern of rates was to m ake clear to potential buyers th a t
they h ad nothing to gain by postponing purchases of G overnm ent
securities, since none would be issued later at higher yields. The yield
p attern would be m aintained, of course, by the Federal Reserve itself
acting as a residual buyer, thereby keeping securities prices from fall­
ing and interest rates from rising.
Both Eccles and Sproul preferred higher rates at the short end th a n
3 /8 percent an d 7 /8 percent, feeling th a t the spread between short and
long rates was too great. Nevertheless, with the country at war, the
System, u nder pressure from Secretary o f the T reasury Henry M orgenth a u , Jr., h ad no choice b u t to agree to th e details o f the program . As
Eccles and Sproul h ad w arned, however, the excessive spread resulted
in m ost of the short-term securities eventually being dum ped on the
Federal Reserve, while ban k s and others held the higher yielding long­
term issues instead. Looking back, several years later, Sproul w rote:4
If m istakes were m ade in this period, as they were, the
principal one was the too rigid m aintenance of the pattern
of rates and unwillingness to let the short rate fluctuate
(rise) som ewhat. A m odest rise in short-term rates could
have fu rth er m obilized unused reserves in banks outside the
money centers and in the h ands of nonbank investors;
would have tak en account of th e fact th a t as the w ar pro ­
gressed the am ount of idle funds declined, dem ands grew,
and stability of long-term rates becam e accepted; would
have narrow ed the spread between short and long rates and
the consequent riding of the p attern ; and m ight have
preserved a slight b u t healthy degree of unpredictability in
the short and interm ediate rate area. Since some movem ent
of short rates could probably have taken place w ithout
m uch, if any, overall increase in cost to the T reasury and
w ithout disturbing the m aintenance of long rates, it was
and is difficult to justify dogged adherence to a “ fixed” rate
p attern , b u t th a t was th e final decision of the war period.
4 Allan Sproul, “Changing Concepts of Central Banking”, in
Money, Trade, and Economic Growth„ Essays in Honor of John
Henry Williams (New York: Macmillan, 1951), pp. 304-5.


In general, the w ar was financed m ore by the creation of new money
th a n Eccles or Sproul th o u g h t advisable or necessary, resulting in the
build u p of an inflationary potential th a t was to cause grave problem s
after th e cessation of hostilities. In his 1951 autobiography, Eccles
recalled th a t Sproul was “ particularly helpful and constructive” in
devising less inflationary m ethods of w ar finance— m ost of which, u n ­
fortunately, were not adopted by the Treasury.
“ W e som etim es disagreed over policy m a tte rs,” Eccles said of
Sproul, “ b u t our differences were never m arked by personal acrim ony.
Sproul was an d is first and forem ost a representative of the public in­
terest. He has been and is a tower of strength in the Reserve System .” 5
As the w ar gradually tilted in the Allies’ favor, Sproul began to
devote m ore of his attention to the num erous plans th a t were in the air
for postw ar dom estic and international economic reform . For the most
p art, he was against them . In 1945 he wrote to the Senate B anking and
Currency C om m ittee opposing the Full Em ploym ent Act, expressing
concern with respect to excessive G overnm ent interference in the
economy: “ Just as there seems to be a lim it of tolerance of the woes and
evils of altern ate boom and depression, there is probably also a lim it of
tolerance of G overnm ent intervention in w hat we call private en ter­
prise, if it is to rem ain private en terp rise.” 6
He was also skeptical about the proposed In ternational M onetary
Fund (IM F), believing it to be prem ature and self-defeating, and caused
som ewhat of a stir when alone am ong Federal Reserve officials he
testified in th a t vein before the Congress in 1945. But he endorsed its
com panion In tern atio n al B ank for R econstruction and D evelopm ent
(the W orld B ank), viewing it as a m ore ap p ropriate vehicle for easing
the severe dislocations in the im m ediate postw ar period.
Som ething like the IM F, he suggested, would be b etter left until a
postw ar transition period h ad enabled the world economy to get on its
feet again, at which tim e exchange rates could be established on a m ore
realistic basis. Even th en , he felt, the in ternational financial system
would be b etter served by agreem ents am ong the principal trad in g and
financial nations, with the sm aller countries adapting to those
agreem ents, ra th e r th an in a forum th a t p erpetuated the illusion th a t
all nations are equal insofar as in ternational com m erce is concerned.
To him , the “ dem ocratic” organizational structure of the IM F all b u t
5 Marriner Eccles, Beckoning Frontiers (New York: Knopf,
1951), pp. 363-64.
6 United States Senate Committee on Banking and Currency,
Hearings on Full Employment Act o f 1945, p. 1219.


g u aran teed “ a diffusion of authority and responsibility which is alm ost
fa ta l” .7
In fact, the IM F tu rn ed out to be far more successful th an Sproul
h ad expected, as he later adm itted, and he eventually becam e an
advocate of m any of its ten ets—although never of its organizational
structure. O ne of the features of the IM F th a t particularly appealed to
him was the relative stability of exchange rates th a t it fostered. (His
earlier opposition was partly because he th o ught its ch arter encouraged
excessive rate flexibility.) Floating exchange rates, cham pioned by
m ost academ ic econom ists, left him unim pressed. He viewed floating
rates as an im pedim ent to the free flow of international com m erce and
a spurious solution to the underlying dom estic problem s they were sup­
posed to resolve; by helping nations postpone the h ard decisions they
often h ad to m ake to live within their m eans, floating rates frequently
m ade m atters all the worse.
Indeed, he was frequently at odds with the conventional wisdom of
econom ists, and over the years found him self in w hat can only be
described as a love-hate relationship with economic theory. He adm ired
and respected econom ic analysis th a t was firmly grounded in reality,
and for th a t reason built up the research d ep artm en t of the Federal
Reserve B ank of New Y ork to the point where its prestige rivaled th a t of
the economics d epartm ents of the top universities. It was by far his
favorite d ep artm en t in the B ank, the one where he felt m ost at hom e. It
was not unusual for him , after reading a m em orandum prepared by an
econom ist in the research departm en t, to am ble down to the surprised
m em o-w riter’s office for a chat about the issues involved.
Y ears later, speaking before the A m erican Econom ic A ssociation
and the A m erican Finance A ssociation in 1966, he recalled those days:8
Paul Sam uelson once said th a t the econom ists of the
Federal Reserve System h ad only one idea, which he d id n ’t
th in k was enough, although he said they were b etter th an
the econom ists of the B ank of E ngland who had only h a lf an
idea. T h at is funny b u t not factual. At the Federal Reserve
B ank o f New Y ork we were draw ing on some of the best
econom ic brain s com ing out of H arv ard — and other in stitu ­
tions of higher learning—before the governm ent at
7 Talk at Board of Directors meeting, Wells Fargo Bank, August
16, 1977.
8 Allan Sproul, “Coordination of Economic Policy” , Journal of
Finance (May 1967), pp. 137-38.


W ashington fully w aked up to the possibilities of such
recruitm ent. The “ Age of th e E conom ist” , which W alter
H eller hailed in his G odkin lectures at H arvard this spring,
cam e early to the New Y ork Reserve B ank. Ideas flowed
freely, balances governing problem s of choice were struck
by econom ists “ in term s a decision m aker could sink his
teeth in to ” , and I was a beneficiary of this sort of fruitful
collaboration for m any years. I miss it.
At the sam e tim e, he was im patient, even disdainful, of idealized
abstractions, no m atter how finely spun, th a t he felt neglected the
nuances an d com plexities of the real world. T he intim ate fam iliarity he
had developed with the foreign exchange m arkets when he was in the
foreign d ep artm en t in the early thirties, and with the dom estic money
an d capital m arkets when he m anaged the Federal Reserve’s open
m arket operations, left their m ark in the form of a lasting u n d e rsta n d ­
ing of and respect for the m any ways financial m arkets function and
evolve. As a result of these experiences, he grew increasingly restive
with m uch of form al econom ics, feeling th a t it ignored or m isconstrued
m ark et realities and was therefore a naive (and often m isleading) guide
to public policy.
O nce, w riting from retirem ent in C alifornia to a young form er col­
league still at the New Y ork Federal Reserve B ank, he expressed th a t
skepticism in his typical pungent fashion. R eferring to a m utual ac­
quain tan ce who h ad p u t forth certain proposals with respect to
m onetary policy, he w rote:9
. . .he has a strong tendency tow ard cosmic thinking
and m etaphysical round ab o u ts. B eneath all of the wordy
em broidery he is really distrustful of the money m arket and
the people who operate it. . . .This is a legacy, perhaps, of
a fund am en talist religious slant as b ent and twisted by the
University of Chicago, b u t it is also a consequence of his
having h ad no experience in a money m arket. W hatever
your own fu tu re may be, I th in k you can be th ankful th a t,
at one stage, you had to rub your nose in the m arket.
9 Letter from Sproul to Robert V. Roosa, April 27, 1959.


W orld W ar II h ad hardly ended before Allan Sproul faced a difficult
decision. In 1946 he was offered the presidency of the W orld B ank, and
he and M arion spent weeks agonizing over w hether or not he should ac­
cept it. As usual, he wrote down all the argum ents, pro and con, on a
legal-sized yellow p ad before com ing to a final decision. Long ago, he
had found th a t the best way to crystallize his thoughts was on paper, so
th a t whenever he faced a com plex or difficult problem , professional or
personal, he would sit at his desk and m ethodically write down the
issues, point by point, before m aking up his m ind.
Finally, he decided to rem ain at the Federal Reserve B ank. His notes
m ention, am ong other things: “ A pproaching critical opportunity in
life of FR System and would like to play out th a t strin g .” Also: “ The
W orld B an k ’s operations may well be m ore political (in broad sense)
th an economic. I do not like and am not too good at the sort of politicoeconomics and politico-adm inistration which seems inevitable.” 1
He could not have been m ore correct in his assessm ent th a t the
Federal Reserve indeed faced a critical ju n ctu re in its history, a
crossroads th a t was to have m ajor im plications for its fu ture role in the
economy. B ut little did he realize how “ political” the entire m atter
would becom e—h ad he known, he m ight well have chosen the W orld
W ith the w ar over, m any in the Federal Reserve felt the tim e had
come to begin term in atin g the interest rate pegs th a t had been m ain­
tained since 1942. By standing ready to buy securities at any and all
tim es solely to keep th eir prices from falling and yields from ris­
ing—buying at the m ark et’s initiative ra th e r th an its own—the central
b an k h ad lost control over b an k reserves and the money supply. It had
becom e, in M arrin er Eccles’ fam ous words, “ an engine of inflation” .
T he Treasury, however, saw things in a different light: tighter money
and higher interest rates would raise the cost of servicing a swollen
F ederal debt an d m ight possibly precipitate another depression. W hy
not, therefore, continue to keep money am ple and interest rates low?
It was not until m id-1947 th a t the F ederal Reserve was able to secure
T reasury perm ission to remove the 3 /8 percent peg on T reasury bills,
and then the 7 /8 percent peg on certificates. The 2 Vi percent long rate
rem ained sacrosanct, even though a Congressional subcom m ittee
chaired by Senator D ouglas, after exploring the controversy, recom ­
m ended in January 1950 th a t th e Federal Reserve, not the Treasury,
should be responsible for and determ ine m onetary policy.
1 Sproul handwritten notes, “Considerations Involved in Offer of
Presidency of World Bank” , dated December 22, 1946, Federal
Reserve Bank of New York.


B ut the D ouglas C om m ittee’s recom m endations only heated up the
dispute. U nconvinced, Secretary of the T reasury John W . Snyder con­
tinued to insist on having the final say in m onetary m atters, a final say
th a t effectively aborted anti-inflationary actions by the central b ank.
The controversy cam e to a head on W ednesday, January 31, 1951,
when P resident T ru m an asked the m em bers of the Federal O pen
M arket C om m ittee (of which Sproul was vice chairm an) to m eet with
him at the W hite House. O n T hursday and Friday the press was in­
form ed through W hite House and T reasury sources th a t at
W ednesday’s W hite House m eeting the Federal Reserve had agreed to
the P resid en t’s request to support G overnm ent securities prices and to
m aintain stable interest rates. This was at variance with the O pen
M arket C om m ittee’s im pression of w hat h ad occurred, and to set the
record straig h t M arriner Eccles, over the weekend and on his own in­
itiative, hastily released to the press the Federal Reserve’s m em oran­
dum of w hat h ad tran sp ired .
Eccles clearly exceeded his authority in taking it upon him self to
release the Federal Reserve’s version of the W hite House m eeting. He
was still a m em ber of the Board of G overnors and of the O pen M arket
Com m ittee, b u t no longer chairm an (having been relieved of th a t posi­
tion in 1948 by President T ru m an and replaced by T hom as B.
M cCabe). N orm al procedure would have been to wait until the
w eekend h ad passed and leave the decision to C hairm an M cCabe and
the full Board. W h at followed im m ediately thereafter was related by
Eccles in his au tobiography:1
By M onday m orning the fat was in the fire. R ather th an
w ait for the scheduled m eeting on February 13, M cCabe
called the O pen M arket Com m ittee to meet on the next day,
Tuesday, F ebruary 6. The purpose was to consider w hat
should be done in view of the weekend developm ent. W ith
the exception of A llan Sproul, no one at the m eeting either
approved or criticized my action in releasing the m em oran­
dum . Sproul expressed the view th a t w hat goes on at a
P residential conference should not be disclosed until the
President gives it out, b u t when the P resident does th a t he
should give an accurate report of w hat has happened. It was
1 Eccles, op. cit., p. 497.


the B oard’s m em orandum th a t accurately represented what
was actually said and the spirit in which it was said. For this
reason, Sproul continued, he was glad I had taken in­
dividual action in releasing the m em orandum ; it tem p o rari­
ly retrieved our place in the financial com m unity and with
the public.
In my reply I expressed regret th a t the situation had
developed to the point where releasing a confidential docu­
m ent seemed absolutely essential. I purposely avoided tell­
ing anybody w hat I was going to do because I did not want
to involve anyone else in any way.
At Sproul’s suggestion, the O pen M arket C om m ittee thereupon
agreed th a t letters would be drafted to President T rum an and Secretary
of the T reasury Snyder to get the issue back on an official basis. L ater
in the week M cCabe and Sproul, as chairm an and vice chairm an of the
O pen M arket Com m ittee, m et with leaders of the Senate B anking and
Currency C om m ittee and of the Joint Econom ic Com m ittee, all of
whom advised, in Sproul’s words, “ th a t it was no tim e for feuding and
no tim e for a Congressional hearing, b u t a tim e for the T reasury and
the Federal Reserve to try again to com pose their differences” . 1
Several weeks of difficult negotiations followed, including another
m eeting of M cCabe and Sproul with the President on February 26.
However, on M arch 4, 1951, the T reasury-Federal Reserve “ A ccord”
was finally announced. T he effect of the agreem ent was to restore the
independence of the Federal Reserve to pursue flexible m onetary
policies for the first tim e since 1942. Purchases of short-term securities
were prom ptly discontinued and, although the Federal Reserve con­
tin u ed to buy longer issues for a b rie f period, they were bought at
gradually declining prices (gradually rising yields) and in a few m onths
ceased altogether. The pegged 2 V2 percent long rate had finally passed
into history.
But, if Allan Sproul th o u g h t th a t the A ccord m eant th a t his unwill­
ing involvement in “ politico-adm inistration” was over, and th a t the
painful stom ach ulcers he h ad acquired would now subside in a period
of goodwill and tranquillity, he was sadly m istaken.
1 Allan Sproul, “The ‘Accord’—A Landmark in the First Fifty
Years of the Federal Reserve System” , Monthly Review of the
Federal Reserve Bank of New York (November 1964), p. 231.


Shortly after the Accord, T hom as M cCabe resigned as chairm an of
the B oard o f G overnors an d was replaced by W illiam M cChesney M ar­
tin, who until then h ad been assistant secretary of the T reasury. In July
1951 M arrin er Eccles also resigned, after m ore th a n sixteen years on
the B oard, to retu rn hom e to U tah . As the O pen M arket C om m ittee
began to grow fam iliar with conducting open m arket operations freely
once again, it appointed an Ad Hoc Subcom m ittee to explore the func­
tioning of the G overnm ent securities m ark et and to exam ine its effec­
tiveness as a conduit for central b an k policies.
T he Ad Hoc Subcom m ittee subm itted its report late in 1952. Its
principal findings were th a t the G overnm ent securities m arket lacked
sufficient “ depth, b read th , and resiliency” to be an effective tra n s­
m ission m echanism for the im plem entation of m onetary policy and th a t
these characteristics should be im proved and strengthened. To ac­
com plish those ends, it recom m ended th a t henceforth the Federal
Reserve confine its open m ark et operations strictly to Treasury bills,
except to correct disorderly m ark et conditions.
In Septem ber 1953, after a b itte r nine-m onth b attle w ithin the O pen
M ark et Com m ittee, the “ bills only” policy was duly adopted as
operating procedure for the conduct of open m arket operations. The
vote was nine to two, with A llan Sproul leading the opposition.
The m ajority position was th a t the constant th re a t of Federal Reserve
open m ark et intervention th ro u g h o u t the m aturity structure introduced
a capricious elem ent th a t prevented the G overnm ent securities m arket
from functioning as well as it m ight. A policy of m inim um in ter­
vention— confining open m ark et operations to Treasury bills—would
perm it the m ark et to grow and develop and thereby enable it to reflect
m ore accurately underlying supply an d dem and forces. “ Bills only”
would not h am p er th e effectiveness of m onetary policy, because an in­
itial change in short-term yields would soon spread over the entire
m aturity range thro u g h the m a rk e t’s own arbitrage. In fact, it would
enhance the effectiveness of m onetary policy, because the greater the
“ depth, b re a d th , and resiliency” of the m ark et the m ore prom ptly
changes in yields at the short end would spread throughout the m a tu ri­
ty structure.
Sproul argued vehem ently against this position on the grounds th a t
with experience the m ark et would grow and develop on its own, learn ­
ing by itself how best to ad ap t to open m arket operations in all areas.
Confining operations to T reasury bills could on occasion reduce the
effectiveness o f m onetary policy because changes in short-term yields


do not always spread to other sectors speedily enough. W hen in­
term ediate and longer yields respond sluggishly, some direct operations
in longer issues may be necessary to sta rt them moving or to keep them
moving once they have started.
O ther issues com plicated the debate an d gave it an em otional u n d er­
tow th a t perhaps dragged the leading p articipants fu rth er th an they
h ad originally intended. O ne was the trad itional suspicion between
W ashington and New Y ork, a tug-of-w ar th a t had considerable prec­
edent in Federal Reserve history. The very appointm ent of the Ad Hoc
Subcom m ittee, in S proul’s words, “ h ad been conceived by m em bers of
the staff of the B oard of G overnors (and of the O pen M arket C om m it­
tee) who not only were interested in the operation of the G overnm ent
securities m arket as a channel through which to reach and regulate the
reserve position of the m em ber banks, b u t who also were dissatisfied
with the perform ance of the m anagem ent of the System O pen M arket
A ccount at the Federal Reserve B ank of New Y ork and with the power
d istribution involved in the linkage between policym aking by the
F ederal O pen M arket C om m ittee at W ashington and the execution of
policy by the New Y ork B ank” . 1
As if th a t were not enough, a disagreem ent th a t began over practice
soon took on the m antle of principle for both sides. T he m ajority
spokesm an, W illiam M cChesney M artin, viewed m inim um interven­
tion (“ bills only” ) as the philosophical opposite of m axim um in ter­
vention (outright pegging of G overnm ent securities prices and interest
rates, as h ad been the practice prior to the Accord). If m axim um in ter­
vention was b ad central banking, then m inim um intervention m ust be
good central banking. W h at b etter way to prove th a t the Federal
Reserve was no longer in the business of determ ining, fixing, or sup­
porting interm ediate and long rates th a n total abstention from those
The im plication, which Sproul resented, was th a t anyone who op­
posed “ bills only” was somehow philosophically in league with the pro­
ponents of pegging and support operations. It was an im plication he
found particularly odious, since he h ad been in the forefront of the
Federal Reserve’s fight with the Treasury over th a t very m atter. Indeed,
he found it ironic th a t he h ad to defend him self on this issue against
M artin, who as assistant secretary o f the T reasury at the tim e had been
1 Allan Sproul, “Policy Norms and Central Banking” , Men,
Money, and Policy, Essays in Honor of Karl R. Bopp (Federal
Reserve Bank of Philadelphia, 1970), pp. 72-73.


one of the T reasury’s chief representatives in the negotiations leading
up to the Accord.
F or Sproul also, the controversy took on broader significance. He felt
th a t to replace the rigidity of m aintaining a p attern of rates with the
rigidity of “ bills only” was only to move from one straitjacket to
another. C entral bank in g cannot be reduced, he said, “ to an unchang­
ing form ula with ‘rules of the gam e’ which can be published, say, like
the rules of b a se b a ll” .1
T here are no wholly “ free” money and capital m arkets so
long as a central b an k exists and does its job under m odern
conditions. T here m ust be private m arkets— unpegged
m ark ets—the pulses of which can be taken in determ ining
central b an k policy, b u t the actions of the central b an k , no
m atter how or in w hat section of the m ark et they take place,
will always be a m ajor influence on the private m arket and a
m ajor factor in its expectations. T he search by a central
b a n k for some m echanical guide to autom atic action, for
some norm of behavior, in order to avoid the risks of fallible
h u m an judgm ents, ends up as a form of self-deception.
T he central b a n k should exert its influence on the cost
and availability of capital an d credit openly and directly, as
circum stances may require, in w hatever areas of the m arket
it can reach. To do less is to abdicate a responsibility and to
forfeit a power which has been g ran ted for public u se .1
The continual struggle was getting to him . His ulcers had becom e so
b ad th a t it would tak e a week of m ilk and blan d foods following the
tension of every O pen M arket Com m ittee m eeting before he began to
feel well again. In D ecem ber 1954 he testified head-on against C hair­
m an M artin on the subject o f “ bills only” , before a subcom m ittee of
the Joint Econom ic C om m ittee— a painful experience for a long-tim e
organization m an who respected an d believed in the hierarchical stru c­
tu re of the Federal Reserve System. He was getting m ore public a tte n ­
tion then he sought or felt com fortable with.
1 Allan Sproul, “The Federal Reserve System—Working Partner
of the National Banking System for Half a Century” , Banking and
Monetary Studies (Irwin, 1963), p. 66.
1 Allan Sproul, Statement Submitted to the Royal Commission on
Banking and Finance, Ottowa, Canada, September 27, 1962,
pp. 22-23.


Som etim e in 1955 he began for the first tim e to th ink seriously about
possibly leaving the Federal Reserve System. It h ad been his hom e for
thirty-five years, b u t things were no longer the sam e. W as the role he
found him self playing helpful or h arm ful to the System’s objectives?
P erhaps both he and the System would be b etter off if they parted? It
took him a year to m ake up his m ind. W hen he finally did, in late April
1956, he called his senior colleagues into his office, one by one, and told
them of his decision. None h ad h ad any p rior inkling of w hat had been
going through his m ind. He then issued the following statem en t:1
It is with real regret th a t I have resigned my post as presi­
dent of the F ederal Reserve B ank o f New York. I have done
so only because M rs. Sproul and I feel th a t personal needs
and wishes can now tak e precedence over public duties.
I have spent thirty-six years in the Federal Reserve
System, all b u t ten of th em in New Y ork. For the last fifteen
years an d a few m onths I have served as head of the New
York Federal Reserve B ank and as vice chairm an of the
Federal O pen M arket C om m ittee. I am grateful to the
directors of the B ank and to my associates on the C om m it­
tee for having given me the opportunity to serve in these im ­
p o rtan t posts.
The p roper functioning of the Federal Reserve System is
o f enorm ous im portance, not only to our economy b u t to the
whole fabric of our com m unity life; the broadly based struc­
tu re of the System is an outstan d in g accom plishm ent of our
dem ocratic an d federal governm ent. I have always been
proud th a t I have been able to play a p a rt in the form ulation
and execution of the System ’s policies during critical years
of war and peace. I expect to continue to be one of the
System’s firm est friends after I sever my form al connection
with it.
I have no im m ediate plans for the future beyond re tu rn ­
ing to C alifornia an d reestablishing my hom e there, with
th e hope th a t the opportunities for enjoying the pleasures of
fam ily life will be g reater th a n they have been in recent
1 Press Statement, Federal Reserve Bank of New York, April 30,


His resignation was effective June 30, 1956, and shortly thereafter he
and M arion drove cross-country to the W est Coast. A fterw ard, he
wrote back to a friend describing the exultation they both felt when
they reached th eir hom e state. They m ade sure to note the exact tim e
when they crossed the b order from N evada into California!
The Sprouls settled in K entfield, a small com m unity in M arin Coun­
ty, some twenty miles northw est of San Francisco. Now he had tim e to
rest, to unw ind, to reflect, and both of them had a chance to enjoy each
o th er’s com pany once again.
B ut retirem ent from the B ank, at the age of sixty, did not m ean in­
activity. A fter a while he becam e associated with the A m erican T rust
C om pany— and later with the W ells Fargo B ank, after the two institu­
tions m erged in 1960—first as a director and then as a consultant. As
p a rt of th a t association, he began m aking regular m onthly talks at
directors’ m eetings on current m onetary and fiscal policies, in ter­
national financial affairs, and related subjects. He prepared for these
as painstakingly as he h ad form erly prep ared for O pen M arket Com ­
m ittee m eetings, researching m eticulously and w riting out everything
beforehand. (He never spoke to any group extem poraneously, if he
could avoid it.) These talks were so enthusiastically received th a t he
continued to deliver them regularly until a couple of m onths before he
W ith some leisure tim e at his disposal for a change, he also perm it­
ted him self the luxury of fully gratifying his desire to write. Always a
prolific letter w riter, he now indulged him self, and regularly at length
com m unicated his views on cu rren t econom ic developm ents to the host
of friends and form er colleagues he h a d left behind on the E ast Coast.
Typically, his letters were carefully tho u g ht through and com posed
with a flair for expression th a t flowed w ithout seeming effort. In ad d i­
tion, he wrote a num b er o f articles on various aspects of central b a n k ­
ing. However, to the very end he steadfastly refused all efforts to get
him to w rite his m em oirs.
N or did his career in public service come to an end. T hroughout the
1960s he served, from tim e to tim e, in an advisory capacity to various
governm ental bodies and private public-interest organizations, such as
the Com m ittee for Econom ic D evelopm ent and the Tw entieth Century
F und. In early 1960 he traveled to In d ia and P akistan, as a m em ber of
a three-m an com m ission appointed by the W orld B ank, to exam ine the
role of foreign aid in the econom ic developm ent of those countries.


A nd in early 1961 he chaired a three-m an com m ittee, nam ed by then
President-elect K ennedy, charged with advising the new adm inistration
on m easures to strengthen both th e dom estic economy and this
country’s balance-of-paym ents position. T he Com m ittee’s report,
tran sm itted to President-elect K ennedy on January 18, 1961, was w rit­
ten jointly by all three m em bers (Roy Blough, Paul M cCracken, and
Sproul), b u t it was not difficult to identify the one responsible for a
prom inent section th a t recom m ended m ore flexible m onetary policies
in term s of the range of open m ark et operations.
T he following m onth, on F ebruary 20, 1961, the O pen M arket Com ­
m ittee suddenly announced th a t it was discarding “ bills only” because
of a conflict between dom estic objectives and balance-of-paym ents
goals. C onfronted by a recession and a paym ents deficit, the Federal
Reserve began to conduct open m ark et operations throughout the
m atu rity structure, in an attem p t to lower long-term rates (to stim ulate
dom estic business expansion) while sim ultaneously raising short-term
yields (to prevent an outflow o f money m arket funds abroad).
The ab andonm ent of “ bills only” in February 1961 tu rn ed out to be a
p erm anent change in the conduct o f m onetary policy. At the tim e,
however, it was not clear w hether th e change was perm anent or tem ­
porary. In response to one of m any congratulatory messages, Sproul
replied with a b rief note: “ As you surm ised, I am delighted th a t tim e
an d circum stance have com bined to dem onstrate th a t it is folly to tie
your hands with an inflexible rule. A lthough the boys are still talking
about a retu rn to chastity when th e present com bination of dom estic
recession and a balance-of-paym ents deficit is no longer with us, it will
be h a rd to regain a state of virginity. I hope the idea will be allowed a
quiet b u ria l.” 1
As the 1960s unfolded, he becam e increasingly concerned about
A m erica’s involvement in V ietnam . In 1966 he wrote to a friend: “ I am
glad th a t you have attain ed a certain status am ong the A dm inistra­
tio n ’s policym akers as an ‘objectionable ch aracter’—i.e. , one who does
not accept the party line w ithout question. W ith respect to the dom estic
econom ic situation— and the V ietnam w ar— I th ink they have backed
into policies which they now do not know how to change, and have
descended to calling those who disagree uncom plim entary n am es.” 1
1 Letter from Sproul to James Coggeshall, Jr., March 5, 1961.
1 Letter from Sproul to Murray J. Rossant, February 11, 1966.


As the w ar heated up, so did his feelings. “ I am so m uch against our
involvement on the Asian m ain lan d ” , he wrote to a friend in 1968,
“th at I place it at the core of much of our domestic and international
political, social, and economic difficulties.” 1
His opposition to V ietnam was intim ately related to his long­
standing apprehension over the acceleration of inflation. A fter the war
ended, his concern deepened over the ap p aren t incom patibility of high
em ploym ent with price stability. He expressed his anxieties in letters in
1974 and 1975.
I am not. . .sanguine about the present world m alaise,
the principal outw ard m anifestation of which is worldwide
inflation. In my m ore depressed m om ents I see the basic
cause of persisting long-run inflation as being the infinite
desires of hum an beings o u trunning their finite willingness
to defer present consum ption for the sake of future
As a person who was influenced by O rtega y G asset’s
R evolt o f the M asses in his youth, I am beginning to have
global forebodings. The essential principles of capitalism
and of dem ocracy are on a collision course, although the
tim e of final im pact approaches slowly.
O r have I grown old and is my vision obscured? There
h a sn ’t been a president of the U nited States I could be en­
thusiastic about since I p u t on long pants, although I did
like K ennedy as a person!2
A nd, of course, he was indeed growing old, M arion as well. In the
1970s th eir health, which h ad not been robust, began to deteriorate
fu rth er. Late in 1973 M arion entered the hospital for surgery; it was not
successful, and she died on the operating table. They had been m arried
alm ost fifty-three years.
Afterward, he continued to work, but without the same enthusiasm. He
lunched often with M arriner Eccles, who by then made his home primarily
in San Francisco. They had always gotten along well personally, despite
frequent doctrinal disputes, and their m utual friendship became even
1 Letter from Sproul to Robert V. Roosa, February 13, 1968.
2 Letter from Sproul to Robert V. Roosa, June 25, 1974.
2 Letter from Sproul to Robert V. Roosa, September 19, 1975.


warm er as they grew older. And he thought frequently of his years at the
Federal Reserve Bank. “ One of the things in my life which I cherish
m ost” , he wrote in a 1977 letter, “ is th at when I was at the Federal Reserve
Bank of New York I earned the respect and became a friend of some
younger men of superior ability who went on to great accomplishment.” 2
He gave his last scheduled talk to the W ells Fargo directors on
F ebruary 21, 1978. Less th a n seven weeks later, on April 9, at the age
of eighty-two years and one m onth, he died.
Following M arion’s death, he h ad tho u g h t about ending his associa­
tion with W ells Fargo because it was too dem anding. However, he
finally decided to continue because, as he wrote to a friend, “ keeping in
touch with current economic developm ents will help me in m aking the
adjustm ents to life w ithout M arion which I face. ‘W e have to struggle
on, even if the idea of the ultim ate pointlessness of everything hovers on
the edge of our thoughts, even if we know th a t there will never be a final
answer to m an ’s questionings.’” 23
2 Letter from Sproul to Robert V. Roosa, March 16, 1977.
2 Letter from Sproul to Robert V. Roosa, January 26, 1974.



Chapter 2
Monetary Policy
and Inflation


MLwo principal them es were never far from the surface of Allan
S proul’s thinking from early in his career until the very end. O ne was
the need to exercise hu m an judgm ent, with all its adm itted im perfec­
tions, in the conduct of m onetary policy. The other was the need to take
m eaningful action, m onetary and otherwise, to prevent inflation.
T his chapter contains six “ p ap ers” bearing on the subject of infla­
tion, spanning alm ost a q u arter century of his thinking (from 1951 to
1974). He was never insensitive to the attainm ent of other national
economic objectives— such as high em ploym ent and balance-ofpaym ents equilibrium —b u t in his view the goal of reasonable price
stability was generally at least as im p o rtan t as any other objective and
frequently m ore so. Indeed, he felt th a t, w ithout price stability, the a t­
tain m en t of any other goals would be short-lived at best.
To th a t end, he on occasion advocated selective controls over con­
sum er and m ortgage credit (as during the K orean war) and flirted from
tim e to tim e with various form s of G overnm ent intervention in the
w age-bargaining and price-setting process. M onetary and fiscal policy,
he felt, had to be aided an d abetted by some form of “ incomes
policy” — not as a substitute for m onetary and fiscal policy, b u t as a
supplem ent—if there was to be any realistic hope of stopping the wageprice spiral. “ So far as G overnm ent is concerned,” he wrote to
Secretary of the Treasury H enry Fowler in 1965 (in a letter reprinted
below), “ I have always argued th a t the stool we use to get the most m ilk
from the economic cow should have three legs—fiscal policy, m onetary
policy, and wage-price policy.”


W hen he cam e right down to the point, however, he could never real­
ly settle on a satisfactory form th a t such w age-price intervention should
take. A lthough he advocated an incomes policy in principle, he could
never find a version in practice th a t would be effective and at the same
tim e be consistent with the preservation of the economic and political
freedom s he so greatly cherished. Because of this conflict, he was
forever on the horns o f a dilem m a with respect to approval or disap­
proval of G overnm ent involvement in private wage-price bargaining
and decision m aking.
O f one thing, though, he was always certain: regardless of the stance
of fiscal policy, or the presence or absence of an incomes policy,
w ithout courageous m onetary policies there was no hope of stopping
the m om entum of inflation. M onetary policy, by itself, m ight not be
sufficient to do the job, b u t it was definitely a necessary com ponent of
any genuine anti-inflationary policy. He could never take seriously
anyone who urged an incomes policy as a su b stitute for a firm and
vigorous m onetary and fiscal policy.
As a general rule, the papers reprinted in each section of this book
are presented in historical order. In this chapter, however, Sproul’s
1968 talk on “ M onetary Policy and G overnm ent Intervention” has
been placed at the end o f the chapter, since it gives his views in depth
and serves as a capstone to the four relatively short letters and one brief
talk which precede it. M ore effective anti-inflationary m onetary and
fiscal policies, he concluded, are not “ the narrow concern of m en who
are m ore interested in financial sobriety th a n in social progress, m ore
interested in the growth of our m aterial resources th a n in the im prove­
m ent o f our environm ent, m ore interested in money th an in people.
These concerns are inextricably in tertw in ed.”


Letter to Winthrop W. Aldrich
November 7, 1951
M r. W inthrop W . A ldrich, C hairm an
The Chase M a n h attan B ank
18 Pine Street
New Y ork 15, N.Y.
D ear W inthrop:
I have been thinking about your talk on inflation at
A ustin, Texas, next week, and particularly about your
statem ent th a t all th a t is needed is the courage to do the
job. Perhaps I am a little sensitive on this point, having had
some responsibility for m onetary and credit policy in the
anti-inflationary struggle. At any rate I thought I would jot
down some notes for your consideration.
1. Inflation can arise from a variety of causes even
though the end result is too m uch money chasing too
few goods.
2. Inflation can arise from the push of increased
costs as well as from the pull of increased dem and.
(a) It can hardly be avoided if wages often go up
b u t never come down, an d if all the fruits of increased
productivity go to favorably situated workers and
stockholders, none to consum ers. A lthough our goal
is a high level of em ploym ent, there m ust be the
possibility of dism issal for the inefficient worker. Even
full em ploym ent c an ’t and shouldn’t m ean security for
everyone in his present job, or preferred work in the
place where th e w orkers prefer to live.
(b) Inflation will gain strength if we try to keep in­
efficient m anagem ent afloat, and in destructive com ­
petition with efficient m anagem ent, by the use of
G overnm ent or G overnm ent-guaranteed credit. T here
m ust be th e possibility of b an k ru p tcy for the ineffi­
cient firm , large or sm all.
3. Inflation can arise from a farm price policy
which m atches every rise in industrial wages and
prices with increased support for farm prices. T h at is
alm ost built-in inflation.


4. The principal elem ents of an anti-inflation pro­
gram in a country such as the U nited States are not
unknow n. They em brace fiscal policy, debt m anage­
m ent, credit policy and, in tim e of w ar or great
defense program s, such direct controls as will channel
essential and scarce m aterials into defense produc­
tion, and prevent the developm ent or continuance of a
wage-price spiral.
All of these things m ust be w orking in the same di­
rection and tow ard the sam e end if there is to be any
chance of success in an economy in which the m ainte­
nance of a high level of production and em ploym ent is
necessary to meet our dom estic needs and our in te rn a ­
tional responsibilities.
5. I am not trying to m inim ize the im portance of
credit policy nor the responsibilities of the m onetary
authorities. I believe th a t credit policy has a big role to
play in com bating inflation even though the doses of
credit restrain t m ust be hom eopathic. A nd I believe
th a t a central bank in g system, independent alike from
narrow political control (or T reasury dom ination) and
from private pressures, is essential. But if you are go­
ing to call for courage you m ust call on a lot of
people—the executive bran ch of the G overnm ent
from which leadership should come, the Congress
which preaches economy and appropriates lavishly,
the m onetary authorities, the bankers and in stitu­
tional investors, the labor unions, the businessm en
who, for exam ple, sponsor escalator clauses in labor
contracts, the farm ers who dem and “ parity” prices,
and a lot of other people.
The problem is not merely a lack of courage on the p art
of D em ocrats, or of m onetary authorities working alongside
a D em ocratic ad m inistration, and I hope and expect th at
you won’t present it as such. You probably had all this in
m ind b u t I thou g h t it would do no harm to send you these


Allan Sproul

Letter to Alfred Hayes*
M arch 1, 1964
D ear Al:
T hank you for sending me so prom ptly the annual report
of the Bank for 1963. It is a fine job; I thought the opening
section “ 1963: Achievements and Unfinished Tasks” was
particularly effective in its presentation of the economic posi­
tion of the U nited States, nationally and internationally.
I have been glad to see, too, th a t it has not gone unnoticed,
publicly, th a t the tenor of the report indicates th at you are
not a m em ber of the chorus which has been singing “ don’t
offset the tax cut by being stingy with credit” . The underlying
them e of the “ sing along with M itch” group seems to be th at
there is still slack in the economy and th at, until the economy
is operating at full capacity and some predeterm ined
m inim um rate of unem ploym ent has been achieved, we must
rely on “ statesm anship on the p art of business and labor” to
protect us from inflationary pressures; th at we have suffered
enough from w hat is now becoming internationally labeled a
“ stop and go” m onetary policy. This is a variation of the
them e th a t we should not let our domestic economic aims be
thw arted by unnecessary concern about the international
balance of paym ents and the position of the dollar. It really
suggests a flexible m onetary policy which doesn’t flex until
the economy is about to burst or the dollar is about to bust,
or both.
It was kind of dram atic and instructive that, on the day the
annual report of the Bank was released , the Bank of England
raised its discount rate. It would be stupid, of course, to
restrict credit merely because there has been a relaxation of
fiscal restraint on the economy, b u t surely the rationale of the
use of fiscal policy as an economic stim ulant m ust, in our
present state, include perm itting monetary policy greater
leeway for dealing effectively with developments in our
domestic affairs or our international position which threaten
sustainable growth or currency collapse.

* President, Federal Reserve Bank of New York, 1956-75.


I think President Kennedy understood this. I am not at all
sure th a t President Johnson understands it or th a t he is even
really m uch interested in the rationale of fiscal and monetary
policy. This may m ean a troubled tim e for the System if infla­
tionary pressures at home or another worsening of the
balance of paym ents should call for m onetary action.
President Kennedy, partly because of the belief or suspicion
am ong m any businessm en th a t he was loose on Governm ent
spending and credit policy, was concerned to show th a t he
was not an easy money crank, and his attitude tow ard the
System reflected this concern. President Johnson, on the
other hand, because he talks somewhat like a businessm an
and because of his recent budget perform ance (which con­
tained at least the usual am ount of budget legerdemain) has
gained a lot of kudos in the banking and business com m uni­
ty. It may be, therefore, th at his political view of the role of
m onetary policy may be overlooked, in the m onths ahead,
and a possible shield of the System may be lacking.
If the difficulty of such an attitude in high places is com­
pounded by a m ixed-up situation in the Board of Governors
and in the Federal O pen M arket Committee (as Bill M artin
has seemed to imply in recent conversations of which I have
heard reports), there may be stirring times ahead. It is also
true, I think, th a t the opinion th at the System will not be will­
ing or able to act, if and when action may be desirable,
because of political pressures or internal differences, is
already beginning to contribute to the view th at an infla­
tionary period lies ahead. If this view feeds on itself, it will
help to bring about w hat it purports to fear. Y our rem inder
th a t the System m ust be allowed to play its proper role in the
changing mix of fiscal and m onetary policy, therefore, is
m ost constructive.



Letter to Henry H. Fowler
D ecem ber 1, 1965
The H onorable H enry H. Fowler
Secretary of the T reasury
T reasury D epartm en t
W ashington, D .C.
D ear M r. Secretary:
Please excuse the formality, but this is serious. W hen you
kindly let me come in to see you two weeks ago, you gave me
a copy of a talk you were going to m ake in Chicago and asked
me to tell you what there was in it with which I m ight not
I have read the talk and thought about it, and I have read
the reports of talks which you have subsequently m ade, and
it seems to me th a t we agree pretty completely on objectives
b u t disagree on how best to attain these objectives under
present circum stances. W e both w ant a continuance of
steady vigorous growth of the economy and a m inim um of
unem ploym ent with generally stable prices. W e both believe
in a Governm ent-business partnership working tow ard these
objectives at all tim es and, especially, when our country is
engaged in a war. I think we both agree th at we can accom­
m odate the dem ands of the war in Vietnam and th at we have
the capacity to m eet its economic burdens without resort to
m easures which a global war m ight entail.
W e disagree, in the circum stances of today, as to the
m eans of assuring an effective partnership of Government,
business, and labor in m eeting our responsibilities. So far as
Governm ent is concerned, I have always argued th a t the stool
we use to get the most milk from the economic cow should
have three legs— fiscal policy, m onetary policy, and wageprice policy. O ur present position is one in which, as you say,
most of the previous slack in the economy has been taken up
and there are now upw ard pressures on wages and prices
which should be restrained if we are to continue the healthy
economic growth of the past five years. Recent budget
estim ates show th a t we are faced with increasing budget
deficits, so th a t fiscal policy will be providing a stim ulant


rather th an the restraint which is needed. O ur wage-price
policy is a jerry-built affair which will have increasing dif­
ficulty in meeting the requirem ents of such a policy in a situa­
tion of high employment and optim um use of productive
capacity in many lines of business. But there is one power of
G overnm ent, long established by the Congress with an effec­
tive Governm ent agency charged with its execution, which I
think is m ade to order for use in the present situation. T hat is
general m onetary policy.
Here a m easure of restraint can be applied which will help
to sift out m arginal and speculative dem ands for credit, to
relieve some of the upward pressures on wages and prices, and
to offset some of the stim ulant from the fiscal side which is
not now appropriate. Yet, use of this power by the Federal
Reserve System has been put under wraps by repeated public
statem ents which are interpreted as a freeze on action with
respect to the availability and cost of credit. Nor should the
bearing of such action on our balance of paym ents be
overlooked. It is neither necessary nor possible to try to bring
into equilibrium interest rates in this country and in other
money centers, in order to assert a favorable influence on—
although certainly not to cure—the deficit in our balance of
paym ents. The likelihood of a ratcheting upw ard of rates
abroad has now decreased, some additional funds would stay
home with higher rates here, and confidence here and abroad
in our will to restrain inflationary pressures and to rem ain
competitive in our own and foreign m arkets would be in­
W hat all this adds up to is th at I think the discount rate
should be raised, the existing ceiling under Regulation Q
should be raised, the availability of reserves should be re ­
duced somewhat, and the prime rate of the commercial
banks should be increased. You hold an opposite view. I
think th at, if there is ever going to be a tim e to use general
m onetary policy to restrain excesses in the economy and to
contribute to sustained economic growth, this is it.
I am sorry th a t you have not been able to see it this way.
But I am sure th at you will not charge me with putting profits
above patriotism in advocating it.


Yours sincerely,
Allan Sproul

Letter to Alfred Hayes
D ecem ber 13, 1970
D ear Al:
Y our statesm anlike talk to the Savings Bankers struck the
right notes. I hope th a t your views will be influential in the
form ulation of the fiscal and m onetary policies which will
become clearer when the budget estim ates and the economic
reports to the Congress come along next m onth.
The President bothers me on a lot of counts. One count is
his glibness on fiscal and m onetary m atters. His change from
an initial position of balancing the unified federal budget to a
position of balancing a full em ploym ent budget is too facile.
The theoretical full em ploym ent budget has its place and a t­
traction in the present state of the economy, but unless we
have an expenditure ceiling which the Congress will accept
and observe it also has its dangers. I am for it in theory, b u t I
worry about it in practice.
The statem ent he m ade in New York recently about a com­
m itm ent from A rthur Burns on m onetary policy seemed to
me to be disingenuous at best. I suspect th at Burns may have
said som ething to the effect th a t the Federal Reserve will con­
tinue to do its job, which is to meet the productive m onetary
needs of the economy at all tim es while trying to avoid adding
to inflationary pressures. The President’s statem ent,
however, implied: (1) th a t monetary policy would become
m ore aggressively easy, working along with a stimulative full
em ploym ent budget policy to hasten economic recovery and a
decline in unem ploym ent without too many qualm s about in­
flation, and (2) th at Burns, personally, could deliver a bind­
ing com m itm ent on future Federal Reserve action.


This sort of m isunderstanding is one of the dangers of talk ­
ing with presidents on such m atters (shades of T rum an).
They tend to hear w hat they want to hear, and they may
claim to have com m itm ents from the Federal Reserve System
which have not been given, b u t which it is hard to deny
publicly without seeming to imply th at the president is a liar
or an economic ignoram us. It is significant th at Burns avoid­
ed this issue in his Los Angeles appearance, and concen­
trated on anti-inflation measures which m ight be taken, now
or soon, in support of fiscal and m onetary policies.
A central b an k er’s lot is not an easy one!



Excerpts from the remarks of Allan Sproul at the
Board of Directors Meeting, Wells Fargo Bank,
San Francisco, California, April 16, 1974
In these rem arks I do not want to quarrel with the overall
forecast for economic activity during the rest of this year nor
to enter into the debate on the particular means and methods
of trying to m ake the forecast come true. The forecast is still
the best we have at the m om ent, and it has achieved some
m om entum of its own through widespread acceptance. Dif­
ferences in the prescriptions for helping to keep the economy
on course are im portant b u t will not determ ine the outcome.
No one of them is likely to be fully accepted and given
political life, and they are all subject to modification in the
light of future developments. Interest rates already have in­
dulged in a tem porary zig when they were supposed to be in a
continuous zag.
The question which disturbs me is more fundam ental. It is
whether we are not being forced to grapple with a problem
which is not only intractable b u t may be insoluble; whether
within the limits of our political institutions and economic
knowledge we can com m and a m ixture of government in­
tervention and m arket freedom which will provide an accept­
able degree both of price stability and so-called full employ­
m ent, especially if full employment always is the top priority.
W e have been trying to combine these two objectives, under
the m andate of the Em ploym ent Act of 1946, for over a
q uarter of a century. A nd we have only come close when, in
February 1966, our indexes showed a satisfactory rate of
economic growth, with a 4 percent rate of unem ploym ent and
an inflation rate of 2 percent on an annual basis.
Ever since then we have been fighting a losing battle, with
small victories on one front or the other but with m ajor
defeats overall. Prices and wages have risen in times of
slackened dem and as well as in times of active dem and; in
tim es of underutilization of our productive capacity as well as
in times of overutilization. Unemploym ent has been above
the level which had been given political blessing (commonly


4 percent of the civilian labor force) most of the time. And
m onetary and fiscal policies have been dragged in or moved
in to validate the rising level of prices (and wages). An in­
creasing public belief th a t our attem pts to achieve an ar­
bitrary unem ploym ent goal (the m eaning of our employment
and unem ploym ent statistics is still suspect in term s of the
em ploym ent quality and availability of a substantial p art of
our population) has too often erred on the side of stim ulating
dem and pressures, has widened public expectation of con­
tinuing inflation, and accentuated the bias tow ard inflation
which already existed in our economy. It is easier to raise
prices th an to lower them ; the average level of all prices
seldom declines, and wage rates alm ost never go down.
M ore than anything else, it was this increasing expectation
of continuing inflation, and the acceleration of inflation
which such expectations fostered, which forced an adm in­
istration which professed an abhorrence of wage-price con­
trols, to resort to a wage-price freeze in A ugust 1971. This ac­
tion had a brief success as an emergency m easure widely ac­
cepted on a tem porary basis. Subsequent attem pts to ease off
into an institutionalized incomes policy failed, however, and
are now headed tow ard em asculation if not abandonm ent.
If we have found out anything from this experience, it is
th at our economy under a system of government wage-price
controls does not m ake the necessary adjustm ents in supplydem and relationships required by changing domestic and in­
ternational conditions—changes in relative prices and
relative wages, changes in technical progress, changes in the
availability and use of natural resources, changes in public
dem ands, and on and on.
W hatever acceptance the program had by business, which
initially was surprisingly w idespread, has evaporated. A nd it
never had m uch acceptance by organized labor which is wed­
ded to free collective bargaining, and the leverage which it
provides to push up wages and benefits so long as govern­
m ent, in effect, is trying to guarantee “ full employm ent” ,
and m anagem ent can expect to recoup increased costs by in­
creasing prices.


And so we are pretty m uch back where we started, faced
with an inflationary situation which we don’t know how to
check unless we are willing to run the risk of a further slowing
down of economic growth and increased unemployment,
which is a risk no one intrinsically desires and which the ad­
m inistration says it won’t take.
My own view is th at in a situation in which all choices are
risky, priorities m ust be established to deal with the greater
risk more firmly than with the lesser risk. And I believe th at
in our present situation curbing inflation should be our top
priority. W e have been in an upw ard surge of inflation
w ithout recent precedent except in time of war. O ur fiscal
and m onetary policies should be directed tow ard checking
th a t surge, not to provoke a recession b u t to prevent a con­
tinuing and possibly accelerating inflation which would lead
to greater problems of reduced economic growth and in­
creased unem ploym ent than we now face. As C hairm an
Burns of the Board of Governors of the Federal Reserve
System said recently, if rapid inflation continues this year, it
could underm ine confidence in the capacity of government to
deal with the problem and seriously dim inish our chances of
regaining stable and broadly based prosperity.
There are those, however, who have become discouraged
by recent failures in dealing with inflation and who have
begun to seek radical solutions (on the Brazilian model). If
you can’t lick it, join it, they say. And then to protect as many
as possible of those who may be h u rt in the process, they sug­
gest th at escalator clauses be affixed to wages, pensions,
long-term interest rates and contracts or wherever, which
would com pensate for increases in prices. This is another
m anifestation of the recurring search for some m echanical
cure-all, or “ cure-m ost” , which would avoid the hazards of
hum an fallibility in struggling to m aintain the dynamic
equilibrium of a complex society subject to the rational and
irrational actions of millions of hum an beings. W hat price in­
dexes might be chosen for the suggested compensatory ad ­
justm ents to inflation in a dem ocratic and complex economy


such as the
parts of the
w hat would
the answers

U nited States, what would be the fate of those
economy which would not fit into the program ,
be the effect on our international relationships—
to these and other questions are not divulged.

W e can leave such proposals to be threshed out in the
academ ic groves. In the present state of our economic knowl­
edge, and in our present circum stance, we m ust grapple
with inflation with our existing monetary and fiscal powers. If
this m eans tem porary acceptance of a slower rate of eco­
nom ic grow th th a n we desire, th a t is the price of previous
excesses. We have enough built-in stabilizers in our econ­
omy to prevent a severe and prolonged recession—a
depression. We have no built-in stabilizers to prevent inflation.


Talk before Business Economists Conference
Graduate School of Business Administration
University of Chicago, May 9, 1968
Monetary Policy and Government Intervention
The last tim e I addressed myself publicly and specifically
to the subject of “ Inflation: How G reat An Issue?” was in an
article which appeared in Fortune m agazine in July 1959,
when I still retained fresh memories of my experience as an
official of the Federal Reserve System during the inflationary
period following W orld W ar II. At th at time I took a rather
dim view of our ability to m aintain the purchasing power of
the dollar while hitching national politico-economic policy,
by law, to the m aintenance of m axim um production, employ­
m ent, and income, if we were not ready, willing, and able to
curb the possible misuses and abuses of such a policy by
government and by business, labor, agriculture, and a host of
m inor pressure groups. I ended my lam ent for the dollar by
saying th at, unless we com m itted ourselves to the hard things
which would help elim inate upside rigidities and restore
downside flexibility in costs and prices, the expectation and
the actuality of rising costs and prices would persist, the one
reinforcing the other. The only hedge I perm itted myself was
th at deterioration of our international financial position
m ight force or shock us into taking the necessary measures.
My gloomy assessm ent of the inflationary outlook was
followed by a rem arkable period of relative stability of
prices accom panied by generally vigorous economic growth
during the early sixties, precious little of which could be a t­
trib u ted to an adequate response to a deteriorating in tern a ­
tional position. In fact, we tended to com fort ourselves, as
the deficit in the balance of paym ents persisted, with the
tho u g h t th a t our international accounts eventually would be
self-correcting if we continued to m aintain a competitive in­
ternational trad in g position in the private sector, n o t­
w ithstanding the effects of heavy governm ent spending
abroad and the uncertainties of the ebb and flow of capital
and credit. My confidence in my ability to discern the shape
of things to come reached a new low.


If one lives long enough, however, and rides with a forecast
which contem plates th at hum an myopia, government short­
comings, and unforeseen events such as the Vietnam war are
likely to thw art or deflect rational hopes and aspirations, you
quite often turn out to be right eventually. Governm ent in­
tervention in economic affairs is accident prone—it seems to
have an affinity to “ M urphy’s law—if it can fail, it will fail,
and if it does fail, it will fail at the worst possible tim e and
p lace” .
Right now, at a tim e of national peril at home and abroad,
our goal of m axim um production and high employment,
w ithout inflation, has been placed beyond present reach. In ­
flationary pressures are in the ascendant. O ur bright hopes of
development of flexible fiscal policies to help counter
economic fluctuations, which m asqueraded for a tim e under
the nam e of the “ new economics” , have been destroyed at
least tem porarily, and it has become questionable whether a
governm ent of divided powers such as ours can achieve this
kind of fiscal flexibility. M onetary policy, deprived of the
assistance of fiscal policy, perhaps assailed by inner doubts,
and in the face of the frequent and large dem ands of deficit
financing by the Federal Government, has lost much of its
flexibility and has tem porized with inflationary pressures
while it has flirted with selective controls of credit and the in­
ternational movement of funds. A ttem pts to devise and apply
an incomes or wage-price policy through governm ent guide­
lines have becom e a series of retreats, covered by ineffective
governm ent pleas for economic statesm anship on the p a rt
of organized labor and big business. Nor would a com ­
pulsory program prom ise b etter results, even if it were
politically possible and privately tolerable. The problem of
productivity which is the h eart of the m atter cannot be
solved by wage-price controls; you cannot legislate laborm anagem ent cooperation for increased efficiency.
W hether we look at our domestic economy or our interna­
tional financial relationships, then, there are ominous signs
th at the apparatus of government intervention in economic
affairs is in disarray. We are being forced tow ard and into
the use of selective and direct controls because we have
allowed ourselves to be overtaken by events for which we
have not p repared or have p repared inadequately.


Recent experience, if one deplores a proliferation of selec­
tive direct controls, is almost enough to throw one into the
arm s of Milton Friedm an; to m ake one look for m echanical
guides or free floating m echanism s to replace fallible hum an
discretion in the guidance of economic intervention by
Let me give one or two examples which may serve to il­
lustrate my thought. On the domestic side, we have seen how
the adm inistration of general m onetary policy has been p a r­
tially diverted from broad pervasive measures, which in­
terfere as little as possible with the decisions of reasonably
competitive m arkets, tow ard attem pts to channel credit into
the housing industry. By using the power to fix ceiling rates
on the interest which banks can pay on savings and tim e
deposits, and especially on large-denom ination certificates of
deposit, the authorities have sought to prom ote the com­
petitive position of those nonbanking institutions which have
been large investors in hom e mortgages. The government has
a legitimate concern for the quality and cost of housing in the
U nited States, b u t the source, availability, and cost of m ort­
gage credit is only one aspect of the problem. U ndue em ­
phasis on this one aspect, particularly as it relates to general
credit adm inistration, serves to distract attention from a
more deep-seated and persistent industrial sickness. Here is
an industry of the greatest social and economic im portance
which suffers from fragm ented operating units addicted to
mediocrity or worse in subdivision development, guild-like
practices of the building trades unions relating to the use of
equipm ent and m aterials and the training of apprentices,
m unicipal building codes which are often obsolete in term s of
today’s technology and which vary widely from place to place,
and m ortgage instrum ents which seem to be less than perfect
for purposes of long-term lending of potentially short-term
money. As a social priority, governm ent intervention in and
subvention of the housing industry should be more direct,
and should take account of the whole state of the industry. It
should not rely so heavily on the evasive m ethod of selective
credit control which may pervert general monetary policy,
while it largely ignores basic defects in the industry itself.


On the international side, we have had the actions which
government has taken to control the outflow of private
capital and credit from the U nited States, in its attem pts to
right the international balance of payments without paying
adequate attention to government outflows and to the use of
general fiscal and m onetary policies to help achieve the objec­
tive. The interest equalization tax on purchases of certain
foreign securities was proposed as a tem porary m easure in
1963, enacted in 1964, and is still with us five years later in
expanded form . We are now in the fourth year of voluntary
and mandatory regulation of bank lending and direct invest­
ment abroad, there has been a suggestion that such controls be
made perm anent and more detailed, and the executive branch
of the government recently burned its fingers trying to get the
Congress to clamp down on tourist travel to certain foreign
countries. Each one of these selective direct controls has been
precipitated by a crisis situation, and has served as cover for the
fact that, at the core of the problem of the balance of payments,
have been our increasing military expenditures abroad and our
lax fiscal-monetary policies at home, which have finally eroded
our competitive trading position and which have progressively
weakened confidence in the dollar and in the whole interna­
tional system of fixed parity convertible currencies.
I deplore most selective, direct controls of the economy by
government because they smack of totalitarian methods, and
because I do not think they ever have or possibly can equal the
performance of private m arkets, imperfect though such m ar­
kets may be, in organizing and operating an advanced, com­
plex economy. I deplore them because of their tendency to pro­
liferate and to live beyond the crisis which brings them into be­
ing, until they have invaded and destroyed healthy organisms
in the private m arket. I deplore them because of their insidious
effect on those who try to operate the levers of control and are
seduced into seeking greater and greater power because of the
imperfect performance of the powers they already have. Final­
ly, I deplore them because so often they represent an attem pt
to paper over cracks in the economic structure and defects in
general economic policies, which we haven’t had the wit or the
will to attack directly. I am rem inded of a W orld W ar II
regulation which said that “the D epartm ent of Agriculture
and the W ar Production Board have issued an order cutting 75


percent of the jelly bean production to preserve sugar. The
W ar Production Board previously stopped the m anufacture of
chocolate Easter eggs and chocolate rabbits.” This resounding
order caused M argaret Fishback, a mistress of light verse, to
Farewell to chocolate Easter rabbits
A n d other pleasant peacetime habits.
Egg rolling on the W hite House lawn
That springtime revel too is gone.
A n d although jelly beans remain
They 're definitely on the wane.
While those who color eggs fo r baby
Will eat them, and I don't mean maybe.
At the other end of the spectrum of opinions on govern­
m ent intervention in economic affairs, and more specifically
such intervention by way of fiscal-monetary policy, I cannot
accept the view of those who want to eliminate or drastically
reduce the element of flexibility and discretion in these m at­
ters by prescribing some norm for intervention, to be fol­
lowed without deviation through tim e and circumstance.
G etting a little closer to my assigned subject, “ M onetary
Policy and Governm ent Intervention”, I dislike this prescrip­
tion, particularly, because it tends to deny the direct im por­
tance of fiscal policy and to exalt the im portance of monetary
policy in sm oothing cyclical fluctuations of the economy.
Massive statistical com pilations have been assem bled—
Friedm an and Schwartz, M onetary History o f the United
States, 1867-1960, has 700 pages plus appendixes—in an a t­
tem pt to show th a t the rate of change of the money supply is
the overriding determ inant of fluctuations in business and in
national income and prices; th at to the extent th at the central
bank can control the money supply it can control the
business cycle with m inim al deviations in the tim e lag be­
tween cause and effect; and th at the best policy for the central
bank is to m aintain a steady rate of growth of the money sup­
ply at a rate which corresponds roughly to the growth of the
economy’s productive capacity. In their use of discretion,
proponents of this view suggest, the m onetary authorities of
the U nited States have most often been wrong in the direc­
tion or tim ing of their actions, and when they seemed to be
right it was usually by m istake.


I used to rely on a quotation from Paul Samuelson to ex­
press my view of this position. He once wrote concerning it
th a t “ a definitive m echanism which is to run forever after, by
itself, involves a single act of discretion which transcends, in
both its arrogance and its capacity for potential harm , any
repeated acts of foolish discretion th at can be im agined”.
M ore specific refutation of the money supply thesis, insofar
as the asserted prevailing relationships between monetary
cycles and cycles of general business are concerned, is not
lacking, however. Just recently an article appeared in the
M onthly Review of the Federal Reserve Bank of New York,
w ritten by R ichard Davis of the B ank’s economic research
departm ent, which exam ined the relevant statistics and con­
cluded th a t the relationship between the two kinds of cycles
has certain attributes of a chicken and egg relationship, but
does not provide real support for the view th at the behavior of
money is the predom inant determ inant of fluctuations in
business activity. At the same time, the study finds th at the
historical relationships between cycles in money and in
business cannot be used, accurately, to dem onstrate th at
discretionary m onetary policy is, in its effects, so long
delayed and so uncertain in its tim ing as to be an unsatisfac­
tory countercyclical weapon. The coincidence of the results of
this careful piece of research with my own pragm atic views
m akes it easy for me to accept M r. Davis’s findings.
I do not want to seem cavalier in dismissing the idea of
autom atic guides or form ulae for government intervention in
econom ic affairs. I believe, however, th a t, except for the in­
tellectual enjoyment of debating the issue, the idea is sterile
in the present state of our economic knowledge of where we
are, how we got here, and where we are going. The live issue
today is whether we are going to continue to strive for better
perform ance in the use of general and pervasive discretionary
powers of government intervention to deal with a variety of
complex economic situations, or whether we are going to
become enm eshed in a thicket of selective controls. I suggest
th a t we can preserve more of the advantages of decision by
the private m arket if we follow the form er course.


W here does all this leave me? I have said th at discretionary
governm ent intervention in our economic affairs by generally
pervasive fiscal-monetary action has failed us rather badly
during the past three years, the period of our increasing
military involvement in Southeast Asia. At the same time, I
have rejected the idea of more specific and selective govern­
m ent intervention in our economic system, and I have re­
jected the idea of autom atic guides or controls of such
government action. Well, it leaves me where anyone is likely
to be left in dealing with hum an affairs through government
agencies— considerably short of perfection but not without
hope for a better future. I still think th at the governm ent’s
role as intervenor in our economic life should be by way of
flexible, discretionary, contracyclical fiscal and monetary
policies with, perhaps, an assist from a continuing educa­
tional program with respect to the relationship between n a­
tional and individual productivity and real income, hoping
th at at some future tim e we might be able to establish condi­
tions which will be favorable to a general and viable incomes
or wage-price policy which will work in periods of high
employment and strong consum er dem and. I do not think
th a t we can do better th an this, at least until economists
know more th an they now know about future economic
developments, and until governm ent and community accep­
tance of w hat they know is greater th an it now is.
To fortify our hopes for a better future, however, we m ust
be critical of our past failures. We m ust refute the dictum of
an old colleague of mine th a t what separates m an from the
anim als is th a t the anim als learn by experience. W e have to
adm it th a t our perform ance since mid-1965, when we began
the tragic escalation of our m ilitary involvement in V ietnam,
has not been good at hom e and th a t internationally it has
brought us close to disaster. At the core of our failure has
been our approach to the economic dem ands of the war. We
bem used ourselves with aggregates, th at the war and its
related costs would only dem and a small percentage of the
gross national product, and th at we could massively enlarge
our o utput of goods and services w ithout strain, even though
the new dem ands were being injected into an economy
already operating in the upper range of its rated capacity. We
slipped and slithered into a larger and more costly war than


we h ad anticipated, while we refused to adm it th a t because of
the war we m ight have to slight serious domestic needs and
problem s, th at we m ight have to dem and sacrifices of more
th an chewing gum by the civilian population, and th a t we
m ight have to cut back some of our other government com ­
m itm ents abroad to avoid continued w eakening of our inter­
national financial position.
It was a tim e of testing of the so-called “ new economics”. It
was a tim e of testing w hether we could not only speed up the
economy with tax cuts, increased government spending, and
easy money, b u t also w hether we could slow it down with tax
increases, reduced governm ent spending, and credit
restraint. A coordinated, two-way fiscal-monetary policy was
needed, and it failed to come through the barbed wire en­
tanglem ents of our governmental procedures. The executive
branch of the governm ent m ade some of the right motions
with respect to fiscal policy in fiscal 1965-66, b u t never with
enough vigor and follow-through to impress the Congress or
the public. At the same time the executives used influence
and the pressures of high office to deter the monetary
authorities from reducing the availability and increasing the
cost of credit, so as to keep dem and from pressing too heavily
against the upper limits of supply. W hen the monetary
authorities finally applied the brakes without the assistance
of adequate fiscal action, a banking crisis threatened— the
“ crunch” of the fall of 1966—and signs of a possible business
decline appeared. This provided a more congenial occasion
for governm ent intervention and a coordinated fiscalm onetary policy. Tax incentives for investment, which had
been removed, were quickly restored, government spending
was speeded up, and easy money again became the order of
the day. On the whole, the response of the economy was
enlivening, and it resum ed its upw ard course but, unfor­
tunately, unit costs were now beginning to rise more widely,
prices were rising more rapidly, the deficit in the federal
budget was seen to be getting badly out of control, and the
international m onetary system which leans so heavily on the
dollar was being seriously frayed by the continued substantial
deficit in our balance of payments and the methods we were
using to try to correct it.


Again the need was for a coordinated policy of fiscal and
m onetary restraint which, while it could not erase the infla­
tionary pressures already in being, and in prospect as
dem ands for large wage increases multiplied, could help
restrain the further excesses which m ight otherwise develop.
Again the executive was moving tow ard fiscal action in the
tax side, having proposed a surtax increase of 6 percent and
then having raised the ante to 10 percent, a display of fiscal
resolve which was weakened by accompanying increases in
proposed federal expenditures. Again the m onetary
authorities watched and waited to see how the fiscal cat
would jum p while the cat drowsed on the Congressional
hearth. There was the distressing debate over whether the Ex­
ecutive or the Congress should appear to be responsible for
an increase in taxes and a reduction of expenditures in an
election year. There was the resort to statistical aggregates to
support the view th at the nation’s productive plant and labor
resources were not overextended, even though increased
prices were adulterating the apparent rate of economic
growth. There was the specious claim th at these increases in
prices were of the cost-push variety and therefore not
am enable to fiscal-monetary action, although cost-push soon
depends on dem and-pull for continued life.
The result was no significant fiscal action, a worsening
budgetary situation, and a m onetary policy which rem ained
unduly expansive, even though interest rates rose to
historically high levels, until a near breakdown of confidence
in the dollar and in the international m onetary system
precipitated the beginnings of a less extravagant program . In
brief, fiscal-monetary policy was found lacking, and again we
approached the boundaries of unsustainable, unbalanced
economic growth, accom panied by increased unit costs and
increased prices, again we dissipated opportunities to im­
prove our balance-of-paym ents position and to protect the in­
ternational value of the dollar by preserving our competitive
stance, and again we teetered in the direction of a widening
circle of direct, selective controls.


If one cause of this current failure, in the im portant m atter
of government intervention in economic affairs, is to be
elevated above all others, I would say th at, aside from a
general failure in determ ining national priorities, it has been
the failure of coordination between the executive and the
legislative branches of government in m atters of fiscalm onetary policy. W alter Heller has said th at what is new in
the “ new econom ics” is th a t for the first tim e two presi­
den ts—President K ennedy achieving the breakthrough and
President Johnson consolidating our position—have pressed
the lessons and tools of m odern economics into full-tim e use
in national policy. U nfortunately, the executive pressure
faltered when restraint was desirable, and the Congress
h a d n ’t m astered the lesson or h a d n ’t been given the tools,
and W ilbur Mills w asn’t consulted or convinced.
I have no starry-eyed plans for reforming the organization
of the Congress, nor for changing the committee and sub­
com m ittee arrangem ents and the ordinary procedures of the
A ppropriations Com m ittee and the Ways and M eans Com­
m ittee of the House of Representatives, and I recognize th a t
the role of the Executive in the area of fiscal policy involves
Constitutional questions of political power. If, however, we
are eventually to achieve success in using a small part of the
governm ent’s spending and taxing powers alongside mone­
tary policy, as a constructive and m oderating influence on the
short-run fluctuations of business, the Congress and the Ex­
ecutive will have to devise a better m ethod than now exists for
m utual appraisal of the strategy and tactics of flexible contracyclical fiscal action, and a better means than now exists
of reaching timely decisions in accord with national and in­
ternational economic needs. If we really want to use a mix­
ture of flexible fiscal and m onetary policies in prom oting sus­
tainable economic growth, m axim um employment, price
stability, and international balance, it should not take years
from the tim e the executive proposes a tem porary increase (or
a decrease) in taxes to reach a legislative decision on the pro­
posal. T h at is a contribution to confusion and disorder in our
economic affairs which we cannot afford at this critical stage
of our national life.


Let there be no m istake. Em phasis on improved fiscalmonetary perform ance by government is not the narrow con­
cern of men who are more interested in financial sobriety
th an in social progress, more interested in the growth of our
m aterial resources than in the im provement of our environ­
m ent, more interested in money than in people. These con­
cerns are inextricably intertwined. Right now, in a significant
sense, achievement of our social and environm ental goals, as
well as our national and international economic well-being,
have become fiscal and financial hostages of the race between
de-escalation of the war in Vietnam and escalation of the
domestic war against urban blight, poverty, and racial
discrim ination. If we do not regain control of the federal
budget, and if we are not able to devise some means of coor­
dinating flexible fiscal-monetary policies, we shall be risking
all our long-term economic and social objectives, and
w eakening the defenses of our national security.



Chapter 3
Reserve Conflict
and the Accord


A h e postw ar dispute betw een th e T reasury and the Federal
Reserve, culm inating in th eir fam ous 1951 “ A ccord” , was discussed at
some length in the introductory chap ter of this book. The first of Allan
S proul’s papers reproduced in the present ch apter is the only full-length
treatm en t of th a t episode he ever com m itted to p rint. He wrote it in
1964, and even then he probably would not have done so except for the
urging of Alfred Hayes, his successor as president of the New York
Reserve B ank, who asked th a t he write it for a special issue of the B ank’s
M o n th ly R eview com m em orating th e fiftieth anniversary of the Federal
Reserve System.
T h a t article is followed by six letters, four w ritten in the m onths or
days p rior to th e A ccord and two w ritten m ore th an ten years later. The
four letters w ritten shortly before the A ccord recapture the sense of im ­
m ediacy and urgency th a t was in the air at the tim e. They are to R obert
T. Stevens, C hairm an of the B oard of D irectors of the Federal Reserve
B ank o f New Y ork; C .F. C obbold, G overnor of the B ank of England;
T hom as B. M cCabe, C hairm an o f the B oard of Governors of the
Federal Reserve System; an d Jam es E. Shelton, President of the
A m erican B ankers A ssociation. However, there is some question
w hether the letter to Shelton was ever m ailed; there is a notation “ Not
Sent” on the carbon copy in the B an k ’s files. In any case, it is a mystery
how he ever found tim e to write such lengthy letters in late February
1951, when negotiations with the T reasury were at their peak.
T he two letters w ritten m any years later, to M urray J. Rossant, then
of th e N ew Y ork Tim es, are typical A llan Sproul post-1956 letters: live­
ly, inform ative, an d com posed with a flair few could equal.


The ch ap ter’s introductory article on the Accord, w ritten for the
B an k ’s M o n th ly R eview , illustrates Sproul’s typical thoroughness. He
begins the story th a t ends with the 1951 Accord not in 1941 or 1942, as
m ost would, b u t ra th e r in 1917 an d 1918. A nd, ju st as typically, he
does not stop with the Accord itself b u t goes on to draw from the ex­
perience the m any lessons he sees it as providing for the future.
O ne of these lessons is th a t the Congress should “ include a reference
to price stability am ong the general guides to economic well-being in
the pream ble of the Em ploym ent Act, and to add a general directive with
respect to price stability and the in ternational position of the dollar to
the Federal Reserve A ct”. Tim e has validated the wisdom of these
recom m endations.
B ut in no sense did he view the Accord as a “ victory” for the Federal
Reserve over the U nited States G overnm ent. “ The Federal Reserve
challenge to the T reasury’s assertion of dom inance in the area of their
overlapping responsibilities” , he concluded, “ had its ultim ate justifica­
tion in the achievem ent of coequal status in these m atters, and not as
an assertion of a false independence. The Federal Reserve does not
have, never has had, and never has claim ed to have an independence in
m onetary affairs which divorces it from the general economic policies of
the G overnm ent.”


From Monthly Review of the Federal Reserve
Bank of New York, November 1964
The “Accord"—A Landmark in the First
Fifty Years o f the Federal Reserve System
Personal recollections of the history of institutions may
range widely, following the broad avenue of the development
of the institution itself, or the high road of the careers of in­
dividuals who served it, or they may focus on episodes which
stand out in historical perspective as having a special
significance. Such an episode in the history of the first fifty
years of the Federal Reserve System is the web of events
which found its denouem ent in the “ Accord” of the Treasury
and the Federal Reserve System in M arch 1951.
Having chosen to write about this controversial episode,
because of special fam iliarity with it, I faced certain hazards
which I have tried to avoid. One such hazard is th at episodes
of historical significance do not spring into being without a
past and, inevitably, they have a future. So it is with the “ Ac­
cord” ; its roots go deep into the past of the Federal Reserve
System and its influence is still being felt and its results are
still being challenged. Yet, in an article such as this, if one is
to avoid the trap of trying to write a history of the Federal
Reserve System in a few thousand words, it is possible only to
brush over the past of the “ Accord” and touch only lightly on
its future. A second hazard is that, in treating an episode in
which one has participated, there is a tendency to em brace
the benefits of hindsight. Recourse to records written at the
time, and not since “ im proved” , has helped me to avoid this
hazard, I hope. But even if the advantages of hindsight are
elim inated in this way, there rem ains the fact th at most of the
contem porary records I have consulted are the records of in­
dividuals or groups who were in the contending forces and
only on one side— my side. I have had to try to avoid the
hazard th at my recollections, refreshed by a reading of writ­
ten records, are subject to institutional and personal bias.


A fundam ental cause of the controversy which led to the
“ Accord” was the growth in the im portance of the overlap­
ping responsibilities of the Treasury and the Federal Reserve
during the years 1914-51. On the one side, the deficit financ­
ing of two world wars had m ade the m anagem ent and cost of
the Federal debt a m atter of m ajor economic and adm inistra­
tive concern, and the proliferation of Governm ent securities
of various m aturities brought the Treasury to the m arket, for
financing and refinancing, with increasing frequency. On the
other side, the development of credit policy as one of the
prim ary m eans of Governm ent influence on the total
economy, and the open m arket techniques which the
m onetary authorities evolved to discharge their respon­
sibilities under law, m eant th at an overlapping area was
created in which understanding and accom m odation took
the place of rigid legislative directives.
The first sprouting of the conflict inherent in such a situa­
tion appeared when the young Federal Reserve System was
plunged into the problem of financing the participation of
the U nited States in W orld W ar I. The then Secretary of the
Treasury notified the Federal Reserve, early in 1917, of his
desire to float an issue of certificates of indebtedness at a rate
well below the m arket, which m eant th at the issue would
have to be bought by the Federal Reserve Banks. Subse­
quently, the Secretary “ undertook not to unload anything
further on the Federal Reserve Banks, certainly not without
notice, and in consideration of his attitude in the m atter it
was agreed th at every effort should be m ade to bring about a
satisfactory organization for shifting Treasury requirem ents
to m em ber banks and, through them , to the public” .1 A
working entente was arranged by the System and the
Treasury and, eventually, preferential discounting ar­
rangem ents and preferential discount rates were established
to facilitate Treasury financing through the banks of the
country. These arrangem ents—the “ bank-borrow -and-buy
policy” —persisted for a year after the armistice in November
1918, at the insistence of the Treasury, and were an increas­
ing source of friction between the Treasury and the System as
inflationary pressures built up in the postwar economy. The
The Federal Reserve System by H. Parker Willis (New York,
1923), pp. 1117-18.


System, in the euphem istic words of the A n n u a l R eport o f
the Federal Reserve Board fo r 1920, was prepared during
1919 to “ resort to the well-known m ethod of advancing the
rate of discount, as soon as Treasury exigencies perm itted”.
Perhaps the Federal Reserve System further m ingled the
areas of responsibility in 1937-38, when the fledgling Federal
O pen M arket Committee, created by the Banking Act of
1935, announced in April 1937 th at “ with a view to exerting
its influence toward orderly conditions in the money
m arket. . . it was prepared to make open m arket purchases of
U nited States G overnm ent securities, for the account of the
Federal Reserve Banks, in such am ounts and at such times as
may be desirable”. Since Treasury bills and other short-term
T reasury paper had already become bellwethers of the money
m arket, this was an acceptance of responsibility for orderly
conditions in the G overnm ent securities m arket. In fact, the
A n n u a l R eport o f the Federal Reserve B a n k o f New York fo r
the Year 1938 stated th a t “ the open m arket operations in
which this bank participated during the past year were not
undertaken prim arily with a view to affecting the reserve
position of m em ber banks, b u t rath er with a view of exercis­
ing an influence tow ard the m aintenance of orderly condi­
tions in the m arket for Governm ent securities”.
This assum ption by the credit authorities of a m easure of
responsibility for m aintaining orderly conditions in the
G overnm ent securities m arket hardened into a com pact with
the Treasury for the m aintenance of a “ pattern of rates” in
th a t m arket to facilitate the financing of the U nited States
participation in W orld W ar II. It was recognized by the p a r­
ties to the com pact th at, insofar as it was politically and
economically possible, the war should be financed out of
taxes and th at, for the rest, borrowing from nonbank in­
vestors (borrowing of savings) would be preferable to borrow­
ing from the commercial banks. It was also recognized,
however, th a t a substantial residue of borrowing would have
to be done through the banks, and th a t this would involve an
increase in the money supply (and in the liquidity of the
economy) which would not be m atched by an increase in
goods and services available for civilian use. There was an in­


evitable inflationary factor in war financing, which was held
in check but not removed by direct controls, such as
m aterials priorities and price ceilings. At the time th at this
general approach to the problem s of financing the war was
adopted, it was also agreed th at, to the extent the Treasury
had to borrow from the banks, it should borrow at stable, not
rising, rates of interest such as the financing m ethods of
W orld W ar I had produced. This led to the establishm ent of
a fixed “ pattern of rates” which ranged from 3 percent on
ninety-day Treasury bills to 2Vi percent for 20- to 25-year
G overnm ent bonds (excluding Savings Bonds). As a by­
product of this pegging of prices of Governm ent securities,
the initiative with respect to the creation of reserve credit was
shifted from the Federal Reserve to the m em ber banks.
In the reconversion period, at the end of the war in 1945,
the problem facing the Federal Reserve System was how to
proceed, and at what speed, to recapture from the banks of
the country this initiative, and to restore the ability of the
Federal Reserve Banks to place a price upon reserve credit
and a check on its availability which could be varied to meet
changes in economic circum stances. The Treasury, which
h ad a proper concern for the functioning of the Government
securities m arket, which had become habituated to the con­
venience of the m ethod used to finance the war, which still
h ad the problem s of rolling over the war-swollen debt, and
which was dubious of the scope left for a flexible monetary
policy in the existing circum stances, was reluctant to ab an ­
don support prices and a “ pattern of rates” for Government
securities. In a situation of overlapping responsibilities and
on the basis of seniority in the W ashington hierarchy, the
Treasury assum ed the role of final decision. The System
wished to discontinue before the end of 1945 its preferential
discount rate on G overnm ent securities m aturing within one
year. Treasury acquiescence was not forthcom ing until April
1946. From the closing m onths of 1945, all through 1946, the
System was pressing for an end of its artificially low buying
rate— % percent— on ninety-day Treasury bills, but the
Treasury would not agree until July 1947.


These small changes, im portant in themselves in term s of
improving the structure of interest rates, were even more im­
portant as an indication of the intention of the Federal
Reserve System gradually to restore its control over bank
reserves and their availability. It was deemed to be an in­
evitable consequence of the great wartime increase in the
money supply and in the total liquidity of the economy (of
business, of consumers, and of the banking system) th at in­
flationary pressures would assert themselves in time, and
from tim e to time, as direct economic controls were removed.
An appropriate credit policy would require restraint in the
creation of additional bank reserves and would result in in­
creases in short-term interest rates, including rates on shortand interm ediate-term G overnm ent securities.
The hesitations and refusals of the Treasury m eant th at
the defrosting of the wartim e “ pattern of rates” took place
distressingly slowly, and then only in steps to a higher fixed
rate curve ending with the 2Vi percent long-term Govern­
m ent bonds. The supported rate of 7 percent on one-year
Treasury obligations was not raised to 1 percent until August
1947, to iy8 percent in November 1947, and to IV* percent in
O ctober 1948. The discount rates of the Federal Reserve
Banks had to be kept in line with these rates, and were raised
equally slowly from 1 percent to 1V* percent in January 1948
and to W i percent in August 1948.
A slight business recession beginning in the fall-winter of
1948-49 provided an opportunity to em phasize the change
which was gradually taking place in credit policy and, it was
thought, in debt m anagem ent. An official statem ent was
published, couched in term s of the credit relaxation ap­
propriate to a business dow nturn, th at the “ pattern of rates”
had finally been abandoned. This was the statem ent issued
on June 28, 1949:
The Federal Open M arket Com m ittee, after con­
sultation with the Treasury, announced today that,
with a view to increasing the supply o f fu n d s available
in the m arket to m eet the needs o f com m erce, business


and agriculture, it will be the policy o f the Com m ittee
to direct purchases, sales and exchanges o f Govern­
m ent securities by the Federal Reserve B anks with
prim ary regard to the general business and credit situa­
tion. The policy o f maintaining orderly conditions in
the G overnm ent security market, and the confidence o f
investors in G overnm ent bonds will be continued.
Under present conditions the m aintenance o f a
relatively fix e d pattern o f rates has the undesirable ef­
fe c t o f absorbing reserves fro m the m arket at a tim e
when the availability o f credit should be increased.
U nfortunately, the acquiescence of the Treasury in the
m aking of this statem ent by the Federal O pen M arket Com­
m ittee was not m eant to em brace a policy of flexibility in
credit availability and interest rates, except when the flexibili­
ty was on the downside. As the economic clim ate changed
and business moved up from the trough of recession, the
System -Treasury debate over the coordination of debt
m anagem ent and credit policy resum ed.
The persisting differences between the two agencies, of
course, h ad not gone unnoticed in the Congress and in the
public press. A subcom m ittee on M onetary C redit and
Fiscal Policies (C hairm an, Senator D ouglas of Illinois), of
the Joint C om m ittee on the Econom ic R eport, held hearings
during the latter p art of 1949 and, subsequently, m ade a
report to its p aren t com m ittee which discussed m onetary
and debt m anagem ent policies and took special cognizance
of the dispute between the Treasury and the Federal Reserve
System. Among other things, it recom m ended ‘ th a t an
ap p ro p riate, flexible and vigorous m onetary policy,
employed in coordination with fiscal and other policies,
should be one of the principal m ethods used to achieve the
purposes of the Em ploym ent Act [of 1946]”. And it went on
to recom m end, as a m eans of prom oting monetary and debt
m anagem ent policies th a t would contribute most to the p u r­
poses of the Em ployment Act “ . . .that Congress by joint


resolution issue general instructions to the Federal Reserve
and Treasury regarding the objectives of monetary and debt
m anagem ent policies and the division of authority over those
policies. These instructions need not, and in our opinion
should not, be detailed: they should accomplish their p u r­
pose if they provide, in effect that, (1) in determ ining and ad ­
m inistering policies relative to money, credit and m anage­
m ent of the Federal debt, the Treasury and the Federal
Reserve shall be guided prim arily by considerations relating
to the effects on employment, production, purchasing power
and price levels, and such policies shall be consistent with
and shall prom ote the purpose of the Employment Act of
1946; and (2) it is the will of Congress th at the prim ary power
and responsibility for regulating the supply, availability and
cost of credit in general shall be vested in the duly constituted
authorities of the Federal Reserve System, and th at Treasury
actions relative to money, credit and transactions in the
Federal debt shall be m ade consistent with the policies of the
Federal Reserve.” 2 The press, on the whole, also was
favorable to the position of the Federal Reserve. Bankers, in­
sofar as they expressed themselves, were reluctant to take
The unfortunate failure of the Treasury and the Federal
Reserve to find common ground for meeting the respon­
sibilities delegated to them by the Congress, where their
fields of responsibility overlapped, was now approaching a
climax. The economy was rapidly recovering from the slight
dow nturn of 1949, when the outbreak of hostilities in Korea,
in June 1950, “ transform ed the tone and the tem po of
American economic life” .3 An already buoyant economy
becam e surcharged with inflationary pressures; anticipatory
spending by consumers and business reflected expectations
of increased Government spending and Government dem and
2 It should be noted that one member of the subcommittee, Con­
gressman Patman, stated that these proposals did not make the
Federal Reserve sufficiently responsible to the Executive Depart­
ment of the Federal Government and that the Joint Committee in its
reference to these recommendations of the subcommittee recom­
mended “further careful study” .
3 Federal Reserve Bank of New York, Thirty-sixth Annual Report
fo r the Year Ended December 31, 1950, p. 5


for m aterials for m ilitary purposes; commodity prices were
advancing rapidly; b ank loans were rising, including
business loans, as well as consum er loans and mortgage
loans. Confronting this situation, President T rum an, in a
message to the Congress on July 19, 1950 concerning the
K orean crisis and the defense program , called for prim ary
reliance upon strong fiscal and credit measures to reduce the
volume of private purchasing power competing with the
G overnm ent for available goods and services. And, in his
m idyear Economic Report (July 26, 1950) there was this
statem ent: “ First of all for the im m ediate situation, we
should rely in m ajor degree upon fiscal and credit
measures. . .the m ore prom pt we are with these general
measures the less need there will be for direct controls. . . . ”
So far as the Federal Reserve was concerned, these
statem ents of overall national policy confirmed its view of
what it should be doing to help counteract the forces of infla­
tion, not only by way of selective controls of consumers and
m ortgage credit but, more im portant, by general credit
measures without which selective controls would not be effec­
tive. The Federal Reserve view, reaffirm ed and reinforced in
the light of the K orean crisis, h ad been given to the Secretary
of the Treasury earlier in July, when it was stated th a t the
System could not m aintain the existing rate structure in the
Governm ent securities m arket while going forward with the
general policy of regaining control of the initiative with
respect to b an k reserves which it deem ed essential; either
short-term rates would have to rise or the long-term rate
would have to come down, and both from the standpoint of
countering inflationary pressures and correcting an artificial
interest rate structure, it preferred the first alternative. The
Treasury reply counseled delay until the situation became
clearer, and em phasized th at the nation was waiting to learn
what domestic program s might be needed in order to utilize
the full strength of the country in national defense. The
Federal Reserve System believed th at the messages of the
President h ad now answered the question.
The action question, which rem ained on the agenda of the
Federal O pen M arket Committee, was what contribution it


would m ake to the general program in its sphere of prim ary
responsibility; w hat it would do about m aking further reserve
funds available to the banking system in an inflationary
situation which could quickly become critical and in which
the effectiveness of m oderate general credit measures of re­
straint would depend upon the prom ptness of their use. The
Federal Reserve felt th a t it was under the compulsions of
statutory responsibility to meet a present danger, and th at it
h ad exhausted the possibilities of devising a mutually
agreeable program with the Treasury which would have per­
m itted credit policy and debt m anagem ent to go forward in
tandem .
So it was, on A ugust 18, 1950, the Board of Governors of
the Federal Reserve System approved an increase in the dis­
count rate of the Federal Reserve Bank of New York from
IV 2 percent to 13 percent (effective August 21), which had
been held in abeyance for about a m onth, and the Federal
O pen M arket Com mittee adopted a general policy of m aking
reserves less readily available to the banks of the country, and
then informed the Treasury of what it was doing. U p to this
point, the Federal Reserve h ad presented its views con­
cerning an appropriate combination of credit policy and debt
m anagem ent to the Treasury; the Treasury had decided what
it was going to do and h ad then informed the Federal
Reserve; and the Federal Reserve had followed along, a t­
tem pting to adjust its open m arket operations, as best it
could, to the debt m anagem ent decisions of the Treasury.
The August 1950 decision reflected the Federal Reserve’s
belief th at the facts of the economic situation and the general
economic program of the G overnm ent dem anded th a t it
break out of th a t pattern.
Advice of the actions taken was immediately given, orally,
to the Secretary of the Treasury by the C hairm an and Vice
Chairm an of the Federal O pen M arket Committee (after­
noon of A ugust 18, 1950). A delayed response without fur­
ther conference came within the hour. The Treasury had
decided to announce its Septem ber-O ctober refunding— a
$13.5 billion operation— at once, m aintaining the existing
rate of IV* percent for one-year obligations. (The actual of­
fering was a thirteen-m onth note.) The result was an issue


which was a m arket failure—the Federal Reserve had to p u r­
chase the larger part, upw ard of 80 percent—of the m aturing
securities in order to m ake sure th a t the Treasury would not
have an em barrassing cash redem ption. At the same tim e, as
an offset to the effect of these purchases on bank reserves, the
Federal Reserve sold other securities from its portfolio at
prices and yields in line with its actions on discount rates and
open m arket policy.
There followed a period of confused and confusing
attem pts to reestablish a working form ula for coordinating
debt m anagem ent and credit policy. The President of the
U nited States was early brought into the em barrassing
dispute by the Treasury. A tem porary truce was evolved
which perm itted tim e to observe the results of the actions
taken by the Federal Reserve and, in November 1950, there
was a fairly am icable agreem ent em bracing credit policy and
the Treasury refunding of its Decem ber and January
m aturities with a 1V* percent five-year note. As it turned out,
the new note did not fare well and, in term s of the am ount of
the m aturing issues which the Federal Reserve had to buy
and the am ount which the m arket redeemed for cash, the
financing was not a success.
The Treasury evidently felt th at it had been let down, and
th a t some public statem ent had to be m ade to restore con­
fidence in the G overnm ent securities m arket. In a speech at
New York, on January 18, 1951, the Secretary of the
Treasury declared th a t “ the delusion th a t fractional changes
in interest rates can be effective in fighting inflation m ust be
dispelled from our m inds” ; th at “ any increase in the 2 Vi
percent rate for long-term G overnm ent securities would
seriously upset existing securities m arkets” ; and th a t “ the
Treasury D epartm ent had concluded, after a joint conference
with President T rum an and C hairm an McCabe of the
Federal Reserve Board, th a t refunding and new money issues
of the Treasury will be financed within the pattern of th at
rate”. This attem pted reestablishm ent of a “ pattern of rates”
in G overnm ent financing, and the implication of a com m it­
m ent by the Federal Reserve to support the 2 Vi percent long­
term rate on new as well as outstanding issues of Treasury
securities, was immediately challenged, most notably by Marriner Eccles, a m em ber and form er C hairm an of the Board of


Governors, in testim ony at a hearing of the Joint Committee
on the Economic Report which was then in session.
Amid a rising volume of public com m ent on, and Govern­
m ent concern over, the differences between the Treasury and
the Federal Reserve System, it was announced on January 31,
1951, th a t President T rum an had asked m em bers of
the Federal O pen M arket Com mittee to come to the W hite
House th a t afternoon. There followed a bizarre exchange
of contradictory reports on w hat had taken place at
the meeting. A W hite House press secretary said th a t the
Federal Reserve had pledged its support to President
T rum an in m aintaining the stability of Governm ent securi­
ties as long as the emergency lasted. A T reasury spokesm an
said th at the W hite House statem ent m eant that the m arket
for Government securities would be stabilized at their present
levels and th at these levels would be m aintained during the
emergency. These press reports, which left a cloud of doubt as
to what had happened at the W hite House meeting, were given
official sanction in a letter from the President to Chairm an
McCabe which was released to the press on February 1, 1951.
In it the President wrote, “your assurance th at you would fully
support the Treasury defense financing program, both as to its
refunding and new issues, is of vital im portance to me. As I
understand it, I have your assurance th at the m arket on
Government securities will be stabilized and m aintained at
present levels in order to assure the successful financing re­
quirements and to establish in the minds of the people con­
fidence concerning Government credit.”
This was at variance with what the Federal Open M arket
Committee believed had been said and done at the W hite
House meeting. In a m em orandum prepared immediately
after the meeting, the Federal Reserve recorded that there had
been no references to recent disputes with the Treasury; and
th at at no time had the President indicated that he had in
m ind support, or a pledge of support, of the financing pro­
gram recently outlined by the Secretary of the Treasury
(January 18, 1951 at New York). Shocked by the public letter
of the President to Chairm an McCabe, Governor Eccles
released the Federal Reserve record to the press on his per­
sonal responsibility, on February 3, 1951.


An intolerable situation had been created in which, as the
Federal Open M arket Committee said in a letter to the Presi­
dent on February 7, 1951, “You as President of the United
States and we as members of the Federal Open M arket Com­
mittee have unintentionally been drawn into a false position
before the American public—you as if you were committing us
to a policy which we believe to be contrary to what we all truly
desire, and we as if we were questioning you and defying your
wishes as the chief executive of the country in this critical
period”. The letter went on to say th at “ in accordance with our
assurance to you, we shall seek to work out with the Secretary
of the Treasury as promptly as possible a program which is
practical, feasible and adequate in the light of the defense
emergency, which will safeguard and m aintain public con­
fidence in the values of outstanding Government bonds and
which, at the same time, will protect the purchasing power
of the dollar” .
Concurrently with the sending of this letter to the Presi­
dent, a m eeting of the C hairm an and Vice C hairm an of the
Federal O pen M arket Comm ittee was held with Senate
leaders of the Banking and Currency Committee, a subcom ­
m ittee of which had been nam ed to inquire into the TreasuryFederal Reserve controversy. The general tenor of the
senatorial advice was th a t it was no tim e for feuding and no
tim e for a Congressional hearing, b u t a tim e for the Treasury
and the Federal Reserve to try again to compose their dif­
ferences. The same advice was given by the Senator Chair­
m an of the Comm ittee on the Joint Economic Report, the
following day.
This counsel from m embers of the Congress, from which
the Federal Reserve System derives its authority and powers,
coincided with the wishes of the Federal O pen M arket Com­
mittee, which on the same day (February 7, 1951) th a t it had
written to the President drafted a letter to the Secretary of
the Treasury expressing a desire “ to discuss credit policy and
debt m anagem ent program s which would assist in the highly
im portant fight against inflation and improve public con­
fidence in the m arket for Governm ent securities” , and sug­
gesting a program as the basis for such a discussion. This let­
ter was handed to and discussed with the Secretary of the


Treasury by the C hairm an and Vice C hairm an of the Federal
O pen M arket Committee. (At this meeting, for the first time,
M r. W illiam McC. M artin, A ssistant Secretary of the T rea­
sury, took p a rt in the discussion.)
The m atters at issue were now back on the track of respon­
sible discussion by the two agencies of G overnm ent whose
overlapping responsibilities had erupted into controversy,
although there were still a few detours to be traversed. Before
the proposed discussions could begin, the Secretary of the
Treasury had to enter a hospital to recuperate from an opera­
tion and the Treasury sought a com m itm ent from the Open
M arket Com m ittee th a t there would be no change in the ex­
isting situation in the Governm ent securities m arket during
the period of his hospitalization. This was a com m itm ent
which the Committee felt unable to give in the face of mount­
ing inflationary pressures, and a Government securities
m arket which was dem anding heavy purchases by the
Federal Reserve, contrary to the policy and program which it
thought the economic situation required. The Committee
asked the Secretary to nam e someone at the Treasury with
whom it could talk, in the interim , and the Secretary nam ed
M r. M artin.
Negotiations now took a tu rn for the better. M r. M artin
suggested th at m em bers of the staff of the Treasury D epart­
m ent and of the Federal Reserve meet as soon as possible to
go over the proposals contained in the February 7 letter of the
Federal Open M arket Com m ittee to the Secretary of the
Treasury, and such other ideas as m ight be brought forward.
(C hairm an M cCabe had previously suggested such staff con­
ferences, b u t the Secretary of the Treasury had said he
preferred to settle m atters at the policy level and then have
the details worked out at staff levels.) A working party was
created4 and progress began to be m ade toward understand­
ing at the “ technical level” for referral to the “ policy level” ,
as the Treasury phrased it, although the negotiation faltered
at times.
4 Mr. Martin, Mr. George Haas, Director of Technical Research,
and Mr. Edward Bartelt, Fiscal Assistant Secretary, from the
Treasury, and Mr. Winfield Riefler, Assistant to the Chairman of
the Board of Governors and Secretary of the Federal Open Market
Committee, Mr. Woodlief Thomas, economist of the Committee,
and Mr. Robert Rouse, Manager of the System Open Market Ac­
count and Vice President of the Federal Reserve Bank of New York.


W hile these discussions were going on, the W hite House
again intervened. A meeting was called by the President on
February 26, 1951, including the D irector of Defense
M obilization, the U nder Secretary of the Treasury (in the
absence of the Secretary), the Assistant Secretary of the
Treasury (M r. M artin), the C hairm an of the Securities and
Exchange Commission, the C hairm an and Vice C hairm an of
the Federal Open M arket Committee, the m em bers of the
Council of Economic Advisers and the special counsel of the
President. At this meeting the President began by reading a
m em orandum (which was also released to the press), in
which he expressed his concern with the problem of reconcil­
ing the need to m aintain stability in the Governm ent
securities m arket and the need to restrain credit expansion;
outlined the general economic program of the A dm inistra­
tion; and requested the Secretary of the Treasury, the C hair­
man of the Federal Reserve Board, the D irector of Defense
M obilization, and the C hairm an of the Council of Economic
Advisers to study the problem of the overlapping respon­
sibilities of the Treasury and the Federal Reserve System. He
also expressed the hope th at “ while this study is under way,
no attem pt will be m ade to change the interest rate pattern,
so th at stability in the Governm ent securities m arket will be
m aintained”. This intervention was different in form from
previous interventions and came more nearly to grips with the
problem , but it also failed to recognize th at the Federal
Reserve has duties laid upon it by the Congress which cannot
be abandoned to the arbitration of ad hoc committees. For­
tunately, the Treasury-Federal Reserve “Accord” was reached
while the Presidential com m ittee was still pondering the
problem , and when its report was later com pleted it ap ­
parently was “ filed” .
The tenor of inform ed thinking in the Congress, which was
the only place the dispute could be decided, in default of
agreem ent by the two agencies directly involved, was in­
dicated in a powerful speech by Senator Douglas in the
Senate cham ber on February 22, 1951, which he concluded
with a plea “ th a t the Treasury abate its policies and yield on
this issue” and th at “ the Federal Reserve gird its legal loins
and fulfill the responsibilities which I believe the Congress in­
tended it to have”.


Meanwhile, the negotiations of the principals in the
dispute regained their m om entum . On February 28, the staff
negotiators felt th at m atters were sufficiently well in hand to
w arrant presentation to their principals and, th at evening,
the Secretary of the Treasury was consulted by M r. M artin
and the request was m ade by the Secretary th at Mr. M artin
and M r. B artelt be perm itted, orally, to present to the
Federal Open M arket Committee the response of the
Treasury to the Committee letter of February 7, 1951. Con­
sideration of this report by the Committee evoked a generally
favorable response, and the staff group of the Committee was
requested to resume its discussion with the Treasury group,
in the light of the views expressed by the m embers of the
The Federal O pen M arket C om m ittee m et again on
M arch 2, and Mr. Riefler reported the results of the final staff
conference with the Treasury representatives. There ensued a
fu rther discussion of all the points on which agreem ent was
being sought, and a concise statem ent of a program accept­
able to the O pen M arket Com m ittee was w ritten and given
to Messrs. M artin and Bartelt for their consideration, and
later discussed with them at length by Messrs. M cCabe,
Sproul, Riefler, and Thom as. A meeting of m inds was
achieved along the following lines:
1. P urpose—to reduce to a m inim um the creation
of b an k reserves through m onetization of the public
debt, while assuring the financing of the G overn­
m e n t’s needs.
2. A conversion offering by the T reasury which
would be designed to remove a substantial am ount of
the long-term restricted5 2 Vi percent bonds from the
m arket.
3. S upport of the m arket for the outstanding
restricted 2 Vi percent bonds by the Federal Open
M arket C om m ittee at p ar or slightly above for a
lim ited am ount and only during the b rief period of the
conversion offering.
4. W ith the exception of this support, the
m aintenance of orderly m arket conditions, hereafter,
5 I.e., purchase restricted to noncommercial bank investors.


to be w ithout reference to the m aintenance of the par
value of any Treasury issues.
5. Reduction or discontinuance of purchases of
short-term Governm ent securities by the System Open
M arket Account, so as to perm it yields on such
securities to fluctuate around the discount rate {VA
percent) and thus to m ake th a t rate effective, with the
understanding th at it would not be changed during the
rem ainder of the year, except in compelling cir­
cum stances.
6. Prior consultation between the Treasury and
Federal Reserve on changes in debt m anagem ent or
credit policy, unless extraordinary circum stances made
such prior consultation impossible.
7. The public statem ent of agreem ent to be brief,
financial, and nonpolitical.
The term s of agreem ent were taken by M r. M artin to the
Secretary of the Treasury, at the hospital, and the program
was cleared with him and then with the m em bers of the
Federal Open M arket Committee on M arch 3, 1951. The
following statem ent and announcem ent appeared in the
press on Sunday, M arch 4, 1951:
Joint announcem ent by the Secretary o f the Treasury
and the Chairman o f the Board o f Governors and o f the
Federal Open M arket C om m ittee o f the Federal
Reserve System.
The Treasury and the Federal Reserve System have
reached fu ll accord with respect to debt m anagem ent
and monetary policies to be pursued in furthering their
com m on purpose to assure the successful financing o f
the G overnm ent 's requirem ents and, at the same tim e,
to m inim ize m onetization o f the public debt.
Simultaneously, the Secretary of the Treasury announced
th at there would be an offering for a limited period of a new
investm ent series of long-term nonm arketable Treasury
bonds in exchange for the two longest outstanding restricted
Treasury bonds (the 2 Vi percent bonds of June and
Decem ber 1967-72). The details of this offering were an­
nounced M arch 19. The offering was a 2 3 percent bond of
1975-80 which, while nonm arketable, could be converted


at the holder’s option into five-year m arketable notes carry­
ing a coupon of IV 2 percent. More th an two thirds ($13.6
billion) of the outstanding 2Vi percent bonds of 1967-72 were
turned in for the new 2 V a percent bonds in this first offering.
(A year later another $1.8 billion of the new bonds was issued
in exchange for the four longest issues of outstanding
restricted bonds.)
D uring the transition period, over the next six weeks, the
System O pen M arket Account and some of the Treasury in­
vestment accounts purchased substantial am ounts of long­
term Treasury bonds at declining prices, in order to ease the
adjustm ent in the m arket to the final abandonm ent of the
“ pattern of rates” and its long-term anchor of 2Vi percent.
By April 12, 1951 the initial price adjustm ents were com­
pleted and the m arket “ bottom ed out” . Happily, the infla­
tionary pressures which h ad brought m atters to a head be­
tween the T reasury and the Federal Reserve subsided after
the first q u a rte r of 1951, and for this the release of
m onetary policy from the shackles of a “ p attern of rates”
received a m odicum of credit.
If it is too m uch to say th a t the Treasury and the Federal
Reserve have lived happily ever after the “ Accord” , they at
least have learned to get along together with a m inim um of
m arital friction.
There could be discord again, of course, but it is less likely
if the experience and lessons of the “ Accord” period are
rem em bered. As a contribution to this rem em brance, here
are some gleanings.
1. In situations and areas where debt m anagem ent
and credit policy overlap, neither the Treasury nor the
Federal Reserve System should m ake final decisions
without responsive consultation and w ithout due regard
for the responsibilities and views of its partner.
2. Continuous com m unication provides the basis for
such sharing of responsibility. In the pre-“ Accord” pe­
riod there was a failure of com m unication which helped
to lead to the breaking of this rule. The Federal Re­
serve thought it understood the position of the
Treasury, b u t it may not have. There is good reason to
believe th at the Treasury did not understand the posi-


tion of the Federal Reserve. For the latter lack of u n ­
derstanding, the Federal Reserve bore some blame. Al­
though its basic objective was to regain the initiative
with respect to the creation of bank reserves, m uch of
its argum ent with the Treasury was couched in term s of
interest rates. The interest rate structure, of course, was
the place where Federal Reserve policy would directly
and obviously impinge on debt m anagem ent, but con­
centration on small changes in interest rates tended to
reduce discussion to a question of “ hat sizes” in the
m inds of the Treasury and, to some extent, of the Con­
gress and the public. The Federal Reserve had come to
believe, however, th a t with a greatly enlarged Federal
debt and a nearly homogeneous national money m ar­
ket, an opportunity had been created for effective ac­
tion with lim ited variation in interest rates and th at, for
the tim e being, its objectives could be achieved by
restoring m odest rate flexibility at the short end of the
rate structure.
In the absence of understanding and acceptance
of this belief, the Treasury viewed with some doubt the
strength of purpose of the Federal Reserve to m aintain
the 2 V2 percent rate on outstanding long-term Treasury
bonds, since the m aintenance of this ceiling on the rate
structure limited the permissible variation of rates
lower down the m aturity schedule. The Federal Reserve
was aware of this restriction, b u t was willing to accept it
for a tim e because of its belief th a t there would need to
be an extensive shifting in the portfolios of investing in­
stitutions out of long-term Governm ent securities and
into corporate bonds, m ortgages, and other debt in­
strum ents of the private sector of the economy in the re­
conversion period, and th at this shift would have to be
eased along if serious m arket unsettlem ent was to be
avoided. In perform ing this orderly m arket service, the
Federal Reserve tried to offset the effect of its bond
purchases on bank reserves by selling equivalent
am ounts of short-term Governm ent securities, and had
considerable success. Continued success in this
m aneuver, however, needed the assistance of higher in­
terest rates on the short-term securities being sold.


4. Finally, in the catalogue of m isunderstanding,
there was the general Treasury opinion th at the credit
program which the Federal Reserve wished to follow
would be of little use in com bating inflationary pres­
sures, particularly in the K orean period, and th at “ ex­
perim enting” with the interest rate structure could
weaken faith in the Governm ent securities m arket and
in the credit of the Governm ent at a time when m ajor
war financing might be necessary. The Federal Re­
serve, on the contrary, believed th a t faith in Govern­
ment credit and confidence in Governm ent securities
would be destroyed if it became apparent that monetary
policy was to be prevented from fighting inflationary
pressures and th a t a dollar invested in Government
securities would be a shrunken dollar when the
securities m atured.
U p to the tim e of the Korean crisis, the Federal
Reserve was content to carry on a holding operation. It
joined with the Treasury in opposing those who, in the
im m ediate postwar years, counseled ab rupt and
vigorous use of credit policy to reduce the swollen
money supply, inherited from the war, and to wring ex­
cess liquidity out of the economy. R ather, it took the
position th at the economy would have to grow up to the
money supply (which it rapidly did) and that, m ean­
while, release of inflationary pressures suppressed by
direct control during the war period would be partially
offset by increases in the national product (as they
were). In the face of the economic repercussions of the
Korean crisis, however, such an approach was no
longer practical.
5. The K orean confrontation focused attention on
the core of the problem . Coequal Governm ent agen­
cies, with certain overlapping responsibilities, had been
unable to arrive at a common policy other than by the
subordination of one agency to the other. Various
answers to this problem were suggested.
A clearer Congressional m andate. There is no
clear m andate to the Treasury with respect to the
broader economic im plications of debt m anagem ent


and no clear m andate to the Federal Reserve System
with respect to the m aintenance of price stability and
the international position of the dollar. As m entioned
earlier, a subcom m ittee of the Joint Economic Com m it­
tee—in 1950—recom m ended th at it be expressed as the
will of the Congress th at transactions with respect to
money and credit and transactions in the Federal debt
be m ade consistent with the policies of the Federal
Reserve. This recom m endation followed the dictum of
Senator Douglas th at “ good fences m ake good
neighbors” , but when the location of the property line
is uncertain and the line may change at times, “ good
fences” are not an adequate answer.
Both the Treasury and the Federal Reserve have af­
firm ed th at, in addition to Congressional directives ap­
plying to them specifically, they consider themselves
bound by the declaration of policy set forth in the
Em ployment Act of 1946. W hat rem ains to be done, in
term s of a Congressional m andate to the Federal
Reserve System, it seems to me, is to include a
reference to price stability am ong the general guides to
economic well-being in the pream ble of the Employ­
ment Act, and to add a general directive with respect to
price stability and the international position of the
dollar to the Federal Reserve Act.
This will not satisfy those who believe th at a central
bank should pursue a prim ary objective—stable p u r­
chasing power of the m onetary u n it—without being
diverted by a wider range of economic objectives such
as are set forth in the Employm ent Act of 1946. Cer­
tainly the Federal Reserve System m ust have its own
objectives in the field of m onetary policy and realize its
capacities and lim itations, but I do not believe th at it is
possible in the light of the Em ploym ent Act, and what
it reflects of national purpose, for the central bank to
be completely free.
Another suggestion for resolving conflicts of the
Treasury and Federal Reserve, where their interest and
duties overlap, and which usually draws considerable
support, is the establishm ent of an interagency con­


sultative com mittee or a national m onetary and credit
council, which would bring together the heads of a
num ber of Governm ent agencies having responsibilities
related to credit policy and debt m anagem ent. This
would be expected to provide for informal collabora­
tion, although the body would be without directive
powers, which most agree would be an usurpation of
Congressional authority. This sort of thing sounds good
in conversation and looks good on paper, but the only
people who can resolve differences arising out of
overlapping statutory responsibilities are people who
bear the responsibility and know what it is all
abo u t—th at is, the people at the Treasury and in the
Federal Reserve System in this case. A committee or
council of the sort proposed either languishes on the
vine because of a lack of authority, or becomes a means
of exerting executive pressure on a body (the Federal
Reserve) which draws its powers from the Congress.
There are some who think, of course, th at the
Federal Reserve System should be made more respon­
sive to the Executive Branch of the Government and,
presum ably, th at the President by virtue of his office or
the power of his presence should be able to order a
composition of contrary views held by Treasury and
Federal Reserve officials. W hether as a three-m an
body, with the President holding the balance between
Treasury and Federal Reserve, or as a council m ade
up, on one side, of a num ber of individuals holding
Presidential appointm ents and owing Presidential
loyalty as a part of a political adm inistration and, on
the other side, by a representative of the Federal
Reserve System, this kind of proposal has little to
recom m end it. In the words of a witness (Beardsley
Ruml, formerly Chairm an of the Board of the Federal
Reserve Bank of New York) at the hearing of the Patman subcom m ittee of the Joint Committee on the
Economic Report in 1952, bringing the President in to
settle differences between the Federal Reserve and the
Treasury would m ean th at one or both parties to the
disagreem ent would devote their efforts to procuring a


favorable opinion from the President, and would lead
to the use of force rather than reason in dealing with an
agency of the Congress which has statutory duties.
“ Nothing b u t harm to public confidence in both money
and Governm ent would result.”
This is not to say th at the C hairm an of the Board of
Governors should not discuss the problems of the
Federal Reserve System with the President, alone or
with the Secretary of the Treasury. T hat is natural and,
at times, desirable. But to m ake this a regular means of
coordination of policies can lead to dictation instead of
persuasion, as the experience of the pre-“ Accord”
period attests.
Then there are those who would substitute an
invariable form ula for fallible hum an judgm ent or
weak hum an resolve in directing m onetary affairs and,
so long as the Federal Reserve followed the form ula (if
it retained its job at all), the Treasury (and everyone
else) would have to accom m odate its objectives to the
working of the form ula. Ideally, one exponent of this
theory says6 “ the surest way to achieve the aim of a
stable m onetary structure is. . .to legislate a rule spec­
ifying the behavior of the quantity of money. The
rule I favor is one which specifies th a t the quantity of
money shall grow at a steady rate from week to week,
m onth to m onth, and year to year” . But when this in ­
variable form ula is related to an existing and future
state of affairs, and when account is taken of the lag
between m onetary action and its economic effects, he
says that “the problem of lag in reaction and the fact that
the effects are spread over a period is not a problem that can
be solved by ju st looking at the quantity of money. In
order to solve th a t problem or in order to elim inate
th a t difficulty it would be necessary to forecast w hat is
going to hap p en m uch b etter th a n we now c a n .” So,
in point of fact, except as an assertion th a t an invari­
able form ula would have m ade fewer m istakes th an
have been m ade w ithout such a form ula, he says we do
6 Professor Milton Friedman at the hearings on “The Federal
Reserve System after Fifty Years” , held by the Subcommittee on
Domestic Finance of the Committee on Banking and Currency,
House of Representatives, March 3, 1964.


not “ know enough now to set up a form ula . . .which
would do m ore good th a n h a rm ” . I am willing to wait,
at least until we have m ore persuasive argum ents
th a t a rigid invariable form ula can ride through the
continuing changes in the economic environm ent,
w ithout the benefit of hu m an jud g m ent and w ithout
causing m ajor errors instead of m inor ones.
My own conclusion is th at the experience of the “ Accord”
leads to a more hum an and natural solution of the problem
of the overlapping responsibilities of the Treasury and the
Federal Reserve th an any of the corrective devices which have
been suggested. It is the solution which has been working
since the “ Accord” . It involves the recognition th at Treasury
and the Federal Reserve are coequals in the area of their
overlapping responsibilities. It is based on the assum ption
th a t inform ed and responsible men recognize that, in our
form of Governm ent, such sharing of responsibility requires
thorough discussion of divergent views and every effort to
merge them into a common purpose. It dem ands th at there
be open and frequent com m unication between those who
determ ine policy, th a t the m akers of policy have staffs of the
highest competence which also are in open and frequent
com m unication, and th a t the policymakers have a sufficient
understanding of the theory and practice of their art to be
able to add wisdom to knowledge when positions show signs
of becoming unyielding. Finally, it assumes th a t the Con­
gress, presum ably through the Joint Economic Committee on
the Economic Report, will continue to m onitor perform ance
and to provide evidence of the attitude of the Congress
tow ard perform ance because, if irreconcilable differences do
arise, the Congress m ust be the final arbiter in m atters con­
cerning the power to regulate the “ people’s money” .
The Federal Reserve challenge to the Treasury’s assertion
of dom inance in the area of their overlapping responsibilities
prior to the “ Accord” had its ultim ate justification in the
achievement of coequal status in these m atters, and not as an
assertion of a false independence. The Federal Reserve does
not have, never has had, and never has claimed to have an in­
dependence in m onetary affairs which divorces it from the
general economic policies of the Government.


Letter to Robert T. Stevens
A ugust 28, 1950
M r. R obert T. Stevens
C hairm an, B oard of D irectors
Federal Reserve B ank of New York
D ear Bob:
Your letter of August 24 rem inds me th at I had a vacation.
I had alm ost forgotten it.
I returned to New York in tim e to attend the directors’
meeting on August 17, and then went to W ashington for a
meeting of the Federal Open M arket Committee on Friday,
the 18th. At th a t meeting I was in the chair most of the day as
Tom was fogbound between N ortheast H arbor, M aine, and
W ashington. It was the view of the Committee, which I m ust
adm it I steered in th a t direction, th at inflationary pressures
were strong and increasing, th at announced Government
policy is to restrain these pressures by fiscal and credit
measures rather th an by all-out direct controls, and th at it
was high time we did som ething to restrain the rapid expan­
sion of bank credit. We knew, of course, th at legislation was
in the works to fix controls over m ortgage credit and con­
sum er credit—two sore spots—but we also knew th at it
would take tim e to pass this legislation and time to set up its
adm inistration. In addition, we felt th at selective controls
would not be enough in any case, th at bank credit of all sorts
was expanding, and that general credit controls should be used.
W e decided, therefore, to act in our sphere of prim ary
responsibility, the control of credit, by refusing to provide
further reserves to the banking system at existing rates. We
also decided to tell the Treasury what we had done, rather
than to formulate our action in terms of a recommendation to
the Treasury as to the rates it should place on its SeptemberO ctober refundings, its action in its prim ary sphere of
responsibility. The fact th at these two spheres of responsibili­
ty are the opposite sides of the same coin is what causes the


Tom was in agreem ent with all this when he joined the
meeting, and he and I saw the Secretary th at afternoon and
told him what we had decided to do and why, both with
respect to the New York Bank discount rate and open m arket
operations. The Secretary was brief and abrupt, indicating
th at since we had told him what we had decided to do there
was nothing for him to say. Tom asked him if he agreed with
us, and he again said there was nothing for him to say. I said
I did not think we should ask his blessing—th at we should
take sole responsibility for our action—b ut we could hope for
his acquiescence and, perhaps, his later approval if our ac­
tion worked out well. We then told him we had a statem ent
for the press in preparation which we had hoped would reach
him before we left his office, and th at we would telephone it
to him as soon as it was ready.
Tom and I returned to the Board building and in a few
m inutes a call came through from the Secretary. He told
Tom th a t he was announcing his Septem ber-O ctober financ­
ing immediately and th at it was 13-month lV is for all
m aturities, totaling $13 billion plus. This was contrary to all
the advice he had received from any source I know of; and, of
course, ran directly counter to our program . Tom read him
our statem ent and pointed out the conflict, but the Secretary
had m ade up his m ind. This is the way, on two recent occa­
sions (last winter and late this spring), he had throttled us by
early announcem ents of forthcom ing refundings. This time
we had decided we m ust stick to our course, even though he
again tried this maneuver.
The result is a messy situation both in term s of our rela­
tions with the Treasury and with the m arket, and in term s of
our broad objective. We are trying to im plem ent what we
understand to be Governm ent policy by trying to restrain ex­
cessive expansion of bank credit, as a holding action, until
the stronger weapon of higher taxes can be brought into play
in the battle to control inflation. At the same time, we cannot
perm it a large Treasury refunding to fail completely, par­
ticularly in tim e of war. As a consequence, we are buying very
large am ounts of the Septem ber-O ctober m aturities at par to
protect the Treasury’s refunding, while letting the yields in
the rest of the m arket rise above a rate of 1 V a percent for one


year. Obviously, few will w ant to exchange their m aturing
holdings for 13-month 1V4S when they can buy shorter
m aturities at higher yields or improve their earnings position
by buying longer m aturities. To offset our purchases of the
m aturing issues, we are allowing some of our bill m aturities
to m ature without replacem ent and selling other securities as
and when we can at the higher yields which have developed.
A large p art of the public reaction to all this has been, of
course, th a t it is a flare-up of an old fight between the
Treasury and the Federal Reserve. T hat makes the most
striking news story. The public attitude on th at may well be
th a t “ W e don’t know who is right, b u t this is no tim e to be
fighting am ong ourselves” . It is im portant, therefore, th a t we
m ake it clear as and when we can (without engaging in a b a t­
tle of statem ents with the Secretary) th at there is more to this
th an a clash of personalities or agencies on the question of
whether short-term rates should be an eighth or a quarter
higher or lower. The fundam entals are two:
(1) Is inflation in the present circum stances going
to be controlled by adequate credit and fiscal measures
or are we going to let it go, perhaps later moving into
direct controls?
(2) Are we going to have a central banking system
which has some power and authority with respect to
interest rates, within the term s of general G overnm ent
policy, or is this no longer possible in view of the
T reasury’s debt m anagem ent problem s and the
G overnm ent’s debt position?
The Congress may have to render the decision on these
points, and an inform ed public opinion will be most im por­
tan t. I think th at, if we can m ake it clear th at confidence in
the credit of the Governm ent and in the dollar can be
preserved, not by freezing interest rates and prices, but by
giving evidence of a will to restrain inflation, we can win.
There is a growing feeling th at Government securities are a
poor investment because the dollar you get back isn’t the
same dollar you put in, and there is a dangerous chance th at
people m ight begin to change dollars for “ things” if they
become convinced th a t another substantial rise in prices of
“ things” is inevitable.


So far as the New York B ank’s discount rate is concerned,
I was not distressed by it as I recognized th a t the tide was
running strongly for action when I left on vacation. As it
turned out, it was fortunate th a t we were ready with a higher
discount rate at the tim e of the O pen M arket Committee
meeting, a week ago Friday. This gave the Board of Gover­
nors something specific on which to act immediately, and
gave us a peg on which to hang our public statem ent. There
are difficulties about m aking a public statem ent with respect
to specific open m arket operations, because you may tip your
hand before you are ready. O ur directors were a little im pa­
tient, I think, but in the end their action fitted in very nicely.
I hope you are having a fine vacation and will be ready for
anything when you return on Septem ber 7. It will be good to
have you back.
W ith best regards,

Yours sincerely,


Letter to C.F. Cobbold
Septem ber 18, 1950
M r. C.F. Cobbold
Governor, Bank of England
My dear Cobbold:
I find I am a little behind in my correspondence as a result
of a holiday in California (which I enjoyed thoroughly), and
the events which began to take shape as soon as I returned to
the Bank at m id-August.
First, with regard to our studies of the general balance-ofpaym ents position and particularly with reference to your let­
ter of July 20, the K orean situation and the rearm am ent pro­
gram of the W estern world have obviously m ade all previous
estim ates and hopes out of date. Presently I don’t think we
can foresee what deterioration in previous trade expectations
may develop, over time. Nor can we see what the balance-ofpaym ents effects of the rearm am ent program may be. The
only thing th at emerges clearly, so far as I am concerned, is
th at some form of m utual aid will be necessary after 1952 and
that, while hope is deferred, we can nevertheless keep our
ultim ate objectives in mind.
I am not surprised th at you are bewildered by the position
in this m arket. It really is an old story, however, and one with
which you are fam iliar. It seemed to us in the Federal Re­
serve System, and to most others in Governm ent and out,
th at inflationary pressures were building up and th at w hat­
ever steps could be taken to dam p them down should be ta k ­
en. The Governm ent, both in its executive and legislative
branches, decided that reliance in this effort would be placed,
at least for the present, on fiscal and credit measures. Direct
controls were not to be used, at least for the present, except
in special circum stances. T here was, therefore, no attem pt
at central b an k defiance of G overnm ent policy, as we
understood it, in what we have done. W e felt, rather, th at


our continuing responsibility to prom ote stable progress in
the economy had been given an added weight. W e knew, of
course, th a t increased taxes were in process of enactm ent and
we believe this to be the country’s m ain reliance. We also
knew th at powers of selective control of credit—instalm ent
credit and mortgage credit—were in the works and th at these
would be helpful, since m uch loose lending was going on in
these areas. W e could not, however, ignore the excessive ex­
pansion of bank credit in other fields and this called for
general credit controls, however modest.
In the circum stances, instead of trying to recom m end to
the Treasury what term and rate it should put on its
Septem ber and O ctober refundings, which obviously is
prim arily its responsibility, we advised the Treasury of what
we were going to do to m ake it a little more difficult and a lit­
tle m ore costly for the banks to get additional reserve funds,
which is prim arily our responsibility. Since these powers and
responsibilities overlap, or are the reverse sides of the same
coin, one would hope for agreed and coordinated action.
This we had sought, in one circum stance or another, over
many m onths, with meager results. This time we went our
separate way and the Treasury went its way.
The result was a rise in short-term rates which m ade the
T reasury’s offering of §\2>Vi billion of 13-month lVi percent
notes (in exchange for m aturities of 2Vi percent bonds, 2 per­
cent bonds, and 1 % percent notes called or due Septem ber
15 and O ctober 1) largely unacceptable to the m arket. We
then set ourselves to buy as m uch of the m aturing issues as
we could so th at the Treasury m ight not have a complete
failure in these difficult times, and to sell as m uch of our ex­
isting holdings as we could, so th at we would not be forced to
put funds into the m arket, contrary to our avowed objective.
The result was Alice in W onderland in some ways, but we
have been able to come out fairly well so far. The Treasury
got its money, or most of it, at VA percent, short-term
rates have gone up to about 1% percent for one year, and
the money m arket has been on the “ tight” side m uch of the
This sort of thing can’t go on. M aybe minds will be clearer
and agreem ent more likely as a result of what has happened,


or maybe anger or resentm ent will prevent calm consider­
ation. I don’t know. The Treasury doesn’t believe th at small
changes in interest rates can have any effect on strong infla­
tionary pressures, such as we are now exposed to, and no one
thinks of drastic action such as m ight have been taken in
“ olden days” . O n the other hand, it is quite sensitive about
increases in the cost of servicing the debt. W e shall have to
try again to work out a coordinated program . Failing that,
the Congress m ight have to take a hand in deciding how our
overlapping authorities and responsibilities are to be exer­
cised. This m atter was discussed last D ecem ber and com­
m ented upon in the report of hearings of the Douglas Sub­
com m ittee of the Congressional Joint Committee on the
Economic Report. Despite the encouragem ent of this report,
experience would suggest th at the odds are against us, but
tim e and circum stance could be in our favor. In any case, we
h ad a present responsibility we felt we m ust meet.
W ith best regards,
Yours sincerely,
Allan Sproul


Letter to Thomas B. McCabe
February 20, 1951
M r. Thom as B. M cCabe
C hairm an, B oard of Governors
Federal Reserve System
D ear Tom:
At the meeting of the Executive Committee of the Board of
Directors of this bank on February 8 (at which I was not pres­
ent because I was attending a m eeting of the Federal O pen
M arket Committee at W ashington), and again at a meeting
of the Com mittee on February 15, there was extended discus­
sion of credit policy and debt m anagem ent, of the differences
which have developed and persisted between the Treasury
and the Federal Reserve System, and of the responsibilities of
the directors in the circum stances. It was the consensus of the
directors present th at positive action should now be taken by
the System to restrain the further expansion of bank credit,
and th a t they, as directors, h ad perhaps been remiss in not
urging more vigorous action, during the past several m onths,
while inflationary pressures have been m ounting.
At the same time, the directors find themselves somewhat
at a loss in defending the Federal Reserve System and in pro­
moting its policies, in the absence of definitive word from the
Board of Governors and the Federal O pen M arket Com m it­
tee as to what their policy is, whether support of policy within
the System is unanim ous or divided, and whether the policy
will be pursued over Treasury opposition or not.
I have told the directors, in the past, of my own personal
views and I have now told them what I could of our present
situation and about the efforts we are again m aking to reach
an accom m odation with the Treasury, short of abandoning
those policies which we think are essential to help prevent
further inflation and consequent loss of confidence in the
credit of the Governm ent and in the dollar. The difficulties of
m aking a clarifying public statem ent in these circum stances
were recognized, b u t the idea th a t such a statem ent is not
desirable was reluctantly accepted, if at all.


On the basis of these discussions, I am sure th at the direc­
tors strongly support the kind of program we have in m ind,
which is to deprive the banks of further ready access to
reserve funds, assum ing the possible risks of the rise in short­
term rates and the decline in prices of long-term bonds which
would follow. They would urge us only to put the program in­
to effect as prom ptly as possible, doing what we think is right
in term s of our statutory responsibilities and the present
economic situation. I think they would want us to do this
regardless of Treasury opposition, if th at continues, leaving
to the Congress the final determ ination as to whether or not
we have perform ed our duties faithfully and well.
Because they feel this strongly, and because they believe
th at you and your fellow m em bers of the Board of Governors
have a right to know their views, they have asked me to write
you in this vein.


Yours faithfully,
Allan Sproul

Letter to James E. Shelton
February 28, 1951

M r. Jam es E. Shelton
President, A m erican B ankers A ssociation
c /o Security - First N ational Bank
Los Angeles, C alifornia
D ear Jim:
I see th a t you are going to speak at the A nnual Savings and
M ortgage Conference of the A .B.A ., here in New York on
M arch 5. Your subject is listed in the program as “ 1951 — A
Critical Y ear” .
It is alm ost certainly going to be a critical year for the
Federal Reserve System and for the whole banking system. It
looks as if there is going to have to be a determ ination, prob­
ably by the Congress, as to whether we are to have a central
banking system, such as we thought we had, or w hether it is
to become, in essence, a bureau of the Treasury; whether we
are going to be able to have a credit policy somewhat di­
vorced from the stark needs of Treasury borrowing and
unilateral decisions as to debt m anagem ent, which directly
and indirectly involve credit policy. This is a great banking
issue, and I would be sorry to see you ignore it during your
term of office as President of the Am erican Bankers Associa­
Please do not let anyone tell you th at all this commotion is
just so m uch buildup by the Board of Governors preparatory
to another “ grab for power” over reserves of the m em ber
banks. I do not know whether or not the Board of Governors
will ask the Congress for additional powers over m em ber
bank reserves, nor whether the Treasury will support such a
request, but th at isn’t the m ain issue. The m ain issue is
whether credit policy is to m ake its contribution—now—to
restraint of the trem endous inflationary pressures in the


economy. We are completely serious about the need to curb
any further expansion of bank reserves, through open m arket
operations and the discount rate, and I should think you
would be equally serious about curbing any further aggregate
expansion of bank credit. We can’t do our job if we have to
support Governm ent securities at their present levels or at
any fixed level, and 14,000 individual banks, even with a
voluntary agreem ent, can’t do their job if we don’t do ours
given the competitive situation which exists. The Treasury
has dem anded, in effect, th a t we give fixed support to the
Governm ent securities m arket at present levels as part of
what it calls financial m obilization for defense. T hat means
the abandonm ent of all control over bank reserves, as was the
case during the war, and it helps to expose the country to
another round of dollar debasem ent such as we inherited
from our war finance. I should think the banks of the country
would w ant us to use all our powers to help prevent such a
tragic encore, since under present circum stances it can be
done without risk to the defense program , full production,
and employment, and since it should contribute to greater
confidence in the credit of the Governm ent, which m eans the
dollar, rath er th an the reverse.
T hat is why I was sorry to see you spend so much tim e in a
recent talk berating the idea of increased Board powers over
reserve requirem ents, and raising the cry of socialism, while
consigning to the fine print your rem arks on what I consider
to be the real issue. I don’t care m uch w hether you, or the
A .B .A ., are for or against increased powers over reserve re­
quirem ents, so long as you take a stand in favor of effective
action to com bat inflation, including action to curb further
expansion of bank credit and the money supply which feed
the inflationary fires. I care mightily whether you, the
A .B .A ., and the many fine bankers of the country really
discuss the issues involved in the controversy between the
Federal Reserve System and the Treasury and reach objective
conclusions. I continue to hope th a t you will prom ote such
discussion, so th a t if and when the issue comes before the
Congress the b ankers of the country will not be unprepared
to take a stand on principle, rath er than on expediency and


tem porary political advantage. This is not an argum ent
about eighths or thirty-seconds. It is an argum ent about a
fundam ental question of economic and financial policy.
If you have any tim e when you are in New York, I should
be glad to talk with you about all this.
Y ours faithfully,
A llan Sproul
P.S. I haven’t m entioned the m ore arbitrary controls over
bank lending, which some are suggesting, as a way to restrict
credit and peg interest rates at the same time. I assume we
would all abhor this kind of Governm ent control. If you are
afraid of state socialism, this would be it.


Letter to Murray J. Rossant
New York Times
February 10, 1963
D ear M urray:
The trial balloons having been launched and having
floated quite well, the reappointm ent of Bill M artin has now
been m ade official. He can leave whenever he wants, with
colors flying, which is as it should be. Meanwhile, as a sym­
bol of the m onetary conscience of the adm inistration, he is
useful at home and abroad and, to paraphrase his favorite
phrase, he can lean with as well as against the wind.
In the prelim inary stories concerning the president’s inten­
tions, however, there was one historical note to which, as a
m em ber of the society against creating history by constant
repetition, I take exception. The W estern edition of the
Times for February 6, in a brief sketch of Bill M artin’s
career, said th at “ In the ‘Accord’ drafted primarily by Mr.
M artin and W infield Riefler of the Board’s staff, the pegging
was discontinued.” The “ Accord” was not drafted primarily
by M artin and Riefler. The general basis for the “ Accord”
was laid down by the Federal Open M arket Committee,
itself, in a letter from the then chairm an of the Committee to
the then Secretary of the Treasury early in February 1951.
The term s of the specific program , which becam e the “ Ac­
cord” , were set forth in a statem ent prepared by the Federal
O pen M arket C om m ittee, in m eeting assem bled, and sub­
sequently han d ed to the w aiting representatives of the
Secretary of the Treasury. In between these events, the
Secretary had gone to the hospital, and had appointed Mr.
M artin and two associates at the Treasury to carry on ex­
ploratory conversations “ at the technical level” with
representatives of the FOM C.
The “ Accord” was only an accord by courtesy. Actually, it
was alm ost entirely a statem ent by the Federal Open M arket
Comm ittee of what it was prepared to do and not to do in the
related fields of m onetary policy and debt m anagem ent, so as


to free itself of any obligation to support fixed prices of
Governm ent securities. The unique feature of the program
was the offering of a long-term nonm arketable 2 3 percent
bond in exchange for outstanding 2Vi percent bonds of
1967-72, with a provision for conversion of the non­
m arketable bonds into m arketable five-year IV 2 percent
notes. This was a proposal advanced by M r. Riefler. It pro­
vided a bridge over which the Treasury could retreat from its
insistence on the m aintenance of a ceiling rate 0 H V 2 percent
for Treasury bonds. At the same time, it offered a means of
removing from the m arket a large am ount of 2Vi percent
bonds which the holders were pressing for sale so th a t they
m ight invest their funds in higher yielding obligations.
M r. M artin’s contribution to the “ Accord” , I think, was to
get the Secretary of the Treasury to accede to the term s laid
down by the Federal O pen M arket Committee, as the best
way out of a bad situation.
As they say, I wanted you to have this bit of lore, in case
anything happens to me.

Allan Sproul


Letter to Murray J. Rossant
New York Times
Septem ber 3, 1966
D ear M urray:
I see th at form er President T rum an has gotten into the act.
His concern is proper, although his reasoning leaves
something to be desired and his recollections are faulty. As
one who has entered the age of reminiscence, my attention
was drawn to the latter aspect of what he said.
The “ th reats” from the Federal Reserve during the latter
p art of his adm inistration, to which he refers, were really
threats against the Federal Reserve coming from his office,
his advisers, and the Treasury. The “ G overnm ent
prevailed” , as he claims, in the sense th at the Federal
Reserve had the backing of strong Congressional opinion and
refused dictation from the President. The System even had to
give out a statem ent (by M arriner Eccles) saying th at a report
of our meeting with the President, given out by his office and
the Treasury, was incorrect. Or, as he would say, false. Your
editorial on his statem ent was easy on him , as it should have
been. After all, he was President of the U nited States, he is in
his eighties, and he never did know anything about
I am going to attend the Bank and Fund meetings at
W ashington at the end of the m onth, an invitation from
George W oods having overcome my resolution of about fif­
teen years’ standing to forego these mass celebrations. After
the meetings I shall be in New York for a couple of weeks and
I shall hope to see you.



Chapter 4
Human Judgment
and Central Banking

m s id e from the need to do som ething about inflation, no sub­
ject was dearer to Sproul’s h eart th an w hat he viewed as the closely
related need to exercise hum an judgm ent, however fallible, in the con­
duct of m onetary policy. He rarely let an opportunity go by w ithout
calling attention to one or the other, m ore likely both.
The first of his papers reprinted in the present chapter, “ Policy
Norm s and C entral B anking” , is the m ost com plete treatm en t of the
“ bills only” or “ bills preferably” controversy he ever published. It was
this conflict, of course, th a t eventually led to his d ep arture from the
F ederal Reserve System. He went about writing the paper with his
usual historical thoroughness: starting with 1880 and putting “ bills on­
ly” in the context in which he h ad always visualized it— as a p articular
instance of the eternal search for a m echanical rule to replace hum an
ju d g m en t and discretion in economic policym aking.
“ P racticing central bankers (and the governm ents to which they are
responsible)” , he concluded, “ cannot afford to be confined by for­
m ulae which attem p t to cope, in precise m easure, with the actions and
anticipations of millions of h um an beings exercising a high degree of
econom ic freedom of choice. M onetary policy can continue to m ake its
contribution to the goals of vigorous sustainable economic growth,
m axim um attain ab le production and em ploym ent, and reasonable
stability of prices, if its practitioners continue to sharpen their analyses
of com plex econom ic developm ents and continue to base their actions
upon a balanced view of total situations. They cannot be relieved of this
difficult task by doctrinaire policy n o rm s.”
T his article is followed, in the present chapter, by his historic 1954
Congressional testim ony on “ bills only” , when he opposed C hairm an
M artin head-on before the Subcom m ittee on Econom ic Stabilization of
the Joint Econom ic Com m ittee (then known as the Joint Com m ittee on
the Econom ic R eport). It was not an easy task for a long-tim e organiza­
tion m an, and he could hardly avoid frequent misgivings.


Three 1961 letters and a 1963 address at New York University con­
clude the chapter. T he first two of the letters (to M urray Rossant and
Alfred Hayes) are replies to com m unications received shortly after the
Federal O pen M arket C om m ittee abandoned “ bills only” in February
The th ird letter, to H enry A lexander, C hairm an of the B oard of
M organ G uaran ty T ru st Com pany, was w ritten and m ailed from
Zurich, Sw itzerland. A day before the Sprouls were to leave on a threem onth trip to Europe, M r. A lexander h ad handed him a copy of the
A pril 1961 issue of the M organ G uaranty Survey, containing an article
entitled “ A Closer Look at Interest R ate R elationships” . The article a t­
tem p ted to show by various statistical techniques th a t there is a
high degree of covariation between short-term and long-term interest
rates, with m inim al tim e lags, leaving the im pression th a t the ab an d o n ­
m ent of “ bills only” a few weeks earlier by the O pen M arket Com m ittee
h ad been a m istake.
A lthough Sproul was on vacation, he found it im possible to postpone
a response until his retu rn hom e. He wrote the letter by hand in Zurich
and m ailed it to A lexander in th a t form , although he knew th a t his
handw riting was alm ost illegible. “ I hope you can and will read th is” ,
he wrote; “ Miss Regan at the Reserve Bank will decipher and type it for
you if necessary, I am su re.”


From Men, Money, and Policy,
Essays in Honor of Karl R. Bopp
Federal Reserve Bank of Philadelphia, 1970
Policy Norms and Central Banking
From the earliest days of central banking in its primitive
forms to the present era in which central banks, as the na­
tional m onetary authorities, are charged with prom oting the
general economic interests of the nations they serve,
domestically and internationally, there has been a continuous
pursuit of a will-o’-the-wisp— a policy norm which would
guide the operations of such banks with a m inim um intru­
sion of fallible hum an judgm ent. The theory has been th at a
central bank, or any m onetary control, m ust have a supreme
norm of reference; th at it cannot use more than one norm of
The m odern beginnings of this passionate pursuit of an
elusive object may be traced to misconceptions which have
grown up concerning the operation of the international gold
standard during the period 1880 to 1914. Prior to th at
period, the forerunners of present-day central banks were
designed prim arily to finance governments or acquired a
tinge of public responsibility because of the m agnitude of
their private banking operations. In the years following 1880,
however, most of the principal trading nations of the world
h ad linked th eir currencies to gold—either they were on a
“ full” gold standard or a “ lim ping” gold standard or a “ gold
exchange” standard or some com bination of these stan­
d ards—and the central banks of the financially developed
countries h ad taken prim ary responsibility for m aintaining
the international convertibility of their national currencies,
directly or indirectly, into gold at a legal parity.
Responsibility for a system of fixed exchange rates
necessarily focused attention on international movements of
goods and services, capital and credit, and on the rise and
fall of the country’s international reserves (gold or other legal
reserves) which could be used as a buffer to confine fluctua­
1 Unpublished paper of Robert B. Warren, Institute of Advanced
Study (Princeton, New Jersey).


tions in the exchange rate within a narrow band around pari­
ty. The central b a n k ’s response to a fall in the exchange rate
and a loss of reserves was usually an increase in its discount
rate designed to reverse the movement and, with less unifor­
mity, the response to a rise in the exchange rate and a gain of
reserves was a reduction of the discount rate. But the tim ing
and extent of such changes were m atters of judgm ent and
their effect on the domestic economy, while secondary to the
prim ary objective, did not always go unattended, particularly
in tim es of loss of public confidence and financial crisis. The
whole working of the system depended upon a complex of in­
stitutions and techniques and economic conditions, domestic
and international, favored by a period of relatively m oderate
shifts of trade and capital movements around m ultilateral
balance, and fostered by the absence of great wars. To
describe the system as an autom atic gold standard, hardly
touched by hum an hands, is to m isrepresent it.
As the studies of A rthur I. Bloomfield have indicated,
“ Not only did central banking authorities, so far as can be in­
ferred from their actions, not consistently follow any simple
or single rule or criterion of policy, or focus exclusively on
considerations of convertibility, but they were constantly called
upon to exercise, and did exercise, their judgm ent in such
m atters as w hether or not to act, the kind and extent of ac­
tion to take, an d the instrum ent or instrum ents of policy to
use. . . .Discretionary judgm ent and action were an integral
p a rt of central b anking before 1914, even if m onetary
m anagem ent was not oriented tow ard m aintenance of
dom estic econom ic growth and em ploym ent and stabiliza­
tion of prices in the broad er m odern sense.” 2
The discussion in the U nited States concerning the crea­
tion of a central b an k , or a central banking system, during
the years before the passage of the Federal Reserve Act in
1913 took place in a period when belief in the autom atic
ch aracter of the international gold stan d ard was little ta r­
nished by later heresies; and gold redeem ability at hom e
an d internationally was a widely accepted article of faith in
this country. A ttention was centered on changes in the n a­
tional m onetary system which would correct weaknesses in
2 Monetary Policy Under the International Gold Standard,
1880-1914, published by the Federal Reserve Bank of New York.


the dom estic b anking structure, b u t which would not in­
terfere with dom estic adjustm ent to “ autom atic” in tern a ­
tional m onetary arrangem ents under the gold standard.
The principal purposes of the Federal Reserve Act in a
m onetary sense and, aside from m atters of bank supervision
and the pyram iding of bank reserve funds in New York, were
as stated in the pream ble to the Act: “ . . .to furnish an
elastic currency and to afford a means of rediscounting com­
mercial p a p e r.” The panic of 1907 had focused attention on
these problem s. S ubsequent studies h ad pinpointed the dif­
ficulty as being inherent in a currency largely in the form of
gold certificates and national b an k notes and in bank
reserve requirem ents which placed a limit on bank loans and
investments more or less regardless of the appropriate and
changing needs of the economy.
Although there was little specific reference in the final
Federal Reserve Act to the prom otion of general economic
stability and stability of prices, there was a thread of theory
running through the consideration of various drafts of the bill
which saw in the legislation a m eans of autom atically con­
trolling the volume of currency and bank loans and in­
vestments in a way which it was thought would go far to ac­
complish these purposes. This theory found expression in the
so-called “ eligibility” provisions of the Act. The paper which
the Federal Reserve Banks could discount or purchase or­
dinarily had to be, in the terminology of the time, “ selfliquidating commercial p aper” —th at is, it had to be based
on short-term agricultural, industrial, or commercial tran s­
actions which gave assurance of paym ent at m aturity. This
was the kind of paper which the Federal Reserve Banks could
pledge as collateral (in addition to gold) for Federal Reserve
notes, which were to become the elastic p art of the currency,
and this was the kind of paper which m em ber banks could
present to the Federal Reserve Banks for rediscount in order
to acquire additional reserve funds with which to support ad­
ditions to their existing loans and investments. Since the
volume of such paper would rise and fall with the transaction
needs of the economy, w hether in the form of currency or


bank deposits subject to check, excessive increases or
decreases of currency circulation and excessive expansion or
contraction of bank loans and investment would not occur.
O r so it was believed.
This experim ent in a species of autom atic control of cen­
tral banking operations did not long survive its inclusion in
the Federal Reserve Act. It was first eroded because it proved
to be im practical in the day-to-day operations of the Reserve
Banks, and then was voided by am endm ent to the Act (in
1916) which perm itted Reserve Banks to m ake advances to
m em ber banks on their promissory notes secured by deposit
or pledge of U nited States Governm ent securities.
This was done partly in preparation for financial needs
which m ight arise if the U nited States entered the war then
raging in Europe, b u t the perm anence of the change was the
result of an acquired awareness th at the concept of eligibility
was unrealistic. As stated by Goldenweiser: “ M em ber banks
borrow from the Federal Reserve Banks almost exclusively
for the purpose of building up their reserve deposits (with the
Reserve Banks) to the necessary (required) level. The banks
lend money to such customers (and make such investments)
as they choose and meet the currency requirem ents of their
depositors. If, as a net result arising out of all their opera­
tions, they find themselves short of reserves, they borrow
from the Reserve B anks. . . .T here is thus no relationship
between the character of the discounted paper and the use to
which the funds are p u t.” Furtherm ore, “ . . .the theory
disregards the fact th at banks can expand at a multiple rate
on the basis of Federal Reserve credit; consequently, paper
representing the movement of goods to m arket, when dis­
counted with the Federal Reserve Banks, can become the
basis of several times its value in loans of an entirely different
character.” 3 Self-liquidating commercial paper as an
autom atic means of controlling the expansion and contrac­
tion of bank credit or adjusting the money supply to the pro­
ductive requirem ents of the economy was a theoretical and
m echanical failure. It provided neither a quantitative nor a
qualitative norm of central bank policy.
3 American Monetary Policy (1951), p. 126.


Along this chronological road, the idea th at central bank
policy should find its norm al guide in stability of prices was
never far from the surface of discussion. It had been around
for a long time, b u t it received increased attention in the
U nited States following W orld W ar I, when there was a
sharp increase and then a sharp fall in prices, and when Pro­
fessor Irving Fisher of Yale became a cham pion and ar­
ticulate advocate of a dollar of “ invariable purchasing
power” .
He held th at the only unstable unit of m easurem ent in
civilized countries was the unit of money, th at this was a sur­
vival of barbarism , and th at it was manifest th at an economic
system which is largely based on agreements m ade at one
date to pay money at another date would have to find a way
to adjust its contracts to changes in the purchasing power of
money. (The problem is still with us.) This, he argued, had
become possible because a m eans had been devised for
m easuring the aberrations of an unstable monetary unit, to
wit, a representative index num ber of prices. And his specific
proposal was th at the m onetary authorities should use such
an index num ber of prices as a guide for adjustm ents
(perhaps every two months) in the weight of the gold content
of the dollar so as to keep its purchasing power invariable. If
prices tended to rise or fall, the movement would be corrected
by “ loading” or “ unloading” the gold in the dollar.
This idea of a “ goods dollar” or a “ m arket basket dollar”
or a “ com pensated dollar” , in the form suggested, sounded
academic and impractical in a country (or a world) which had
become accustomed to the idea (if not the practice) that, if ex­
ternal price levels were unstable, it could not keep both its
domestic price level and the exchange rate of its currency
stable and th a t (under whatever form of the gold standard it
adhered to) it m ust put stability of the external exchange
ahead of stability of the internal price level.
The idea was opposed on other grounds th an those grow­
ing out of habit and custom, however. It was argued th at (a)
no price index, no m atter how comprehensive, could include
all of the things for which money is spent; (b) th at the rela­


tion between the volume of credit and the level of prices is not
precise and determ inable but is indirect and inconstant; (c)
th at things which do not enter into the price-money relation­
ship, such as an increase or decrease in the efficiency of pro­
duction and distribution, and changes in quality of product
would affect an index of prices; and (d) th a t the movements
of a price index which might be used to trigger monetary
counteraction would usually be late, since they would refer to
past rises or falls in prices, whereas it would be future price
moves which should be counteracted.
D espite its break with gold-standard thinking and the
defects of the proposal itself, it h ad a simple and direct ap­
peal which led to its consideration by the Congress at hear­
ings of the Committee on Banking and Currency at the
House of Representatives. The proposal was put forward and
was the subject of hearings of the Committee in 1926, th a t all
the powers of the Federal Reserve System should be used to
prom ote stability of the price level.
A principal witness opposing such a statutory instruction
to the Federal Reserve System was Governor Benjamin
Strong of the Federal Reserve Bank of New York. Governor
Strong was aware of and used the various agreements
which had been advanced in opposition to legislation th at
would order the Federal Reserve to use all its powers to
stabilize price levels, b u t the m ain thrust of his testimony was
th a t there could be no m athem atical form ula for the ad­
m inistration of Federal Reserve policy or for the regulation of
prices. He accepted the view th at credit is a m ajor influence
on prices and th a t the prom otion of price stability should be a
m ajor policy objective of the Federal Reserve, but his views
h ad a broader scope, comprising ideas later finding expres­
sion in the Em ploym ent Act of 1946. They were th at the
Governm ent, through its various agencies, has a responsibili­
ty for m aintaining m axim um employment and production
and prom oting economic growth, and th at the objective of
credit policy should be to insure th a t there is sufficient money
and credit available to conduct the business of the nation and
to finance not only seasonal increases in dem and but also the
annual norm al growth of the economy. He was willing to
have the powers of the Federal Reserve System used to pro­


mote stability of the price level, but he also recognized th at
choices and compromises h ad to be m ade between various
objectives at various times and th at, in the end, hum an
judgm ent has to govern the decisions which are made.
Stability of prices as a norm of central bank policy as a
suprem e norm of reference did not survive (although the
Em ploym ent Act of 1946 does include prom otion of m ax­
im um purchasing power in its policy declaration). O ther can­
didates for th a t honor have arisen or persisted, however. The
doctrine of “ bills only” (common name) or “ bills preferably”
(botanical name) may be placed in this category, not because
when viewed as a technique of Federal Reserve open m arket
operations it deserves this prominence, b u t because its pro­
ponents came to place so m uch stress on the avoidance of
price and yield effects of open m arket operations th a t they
finally asserted (and m ade it a p art of the operating directives
of the System Open M arket Account) th at the sole purpose of
open m arket operations is the provision and absorption of
reserves (excepting the correction of disorderly m arkets in
G overnm ent securities). This was an attem pt to elevate what
first h ad been advanced as a m atter of technique to the
eminence of a m echanical rule of Federal Reserve policy— a
“ suprem e norm of reference” for the principal element of
flexible and effective central bank policy in the U nited
The controversy which this doctrine aroused for several
years until it was ab andoned in 1961 resulted in a consider­
able literature and involved emotions which seemed to widen
and distort the differences of those who favored and those
who opposed the policy. In a broad survey such as this, no
extended discussion of all the argum ents which were brought
forw ard on both sides can be attem pted. Only a sum m ary
presentation of its life history from birth to death is possible.
The formal birth certificate was recorded in May 1951 when
the Federal O pen M arket Committee voted to authorize its
C hairm an (W illiam McC. M artin) to appoint a committee to
m ake a study of the Governm ent securities m arket. But the
idea had been conceived earlier by m em bers of the staff of
the Board of Governors (and of the O pen M arket Com m it­


tee) who not only were interested in the operation of the
Governm ent securities m arket as a channel through which to
reach and regulate the reserve position of the m em ber banks,
b u t who also were dissatisfied with the perform ance of the
m anagem ent of the System O pen M arket Account at the
Federal Reserve Bank of New York and with the power
distribution involved in the linkage between policymaking by
the Federal O pen M arket Committee at W ashington and the
execution of policy by the New York Bank. The study com­
mittee, which becam e known as the Ad Hoc Subcommittee,
was set up and began its work in May 1952, and its findings
and recom m endations becam e a subject of discussion at a
meeting of the Federal Open M arket Committee in M arch
1953, after a delay which was reported to have stem m ed from
the fact th a t it h ad become apparent th at “ the issues involved
in the Com m ittee’s term s of reference are of a most fun­
dam ental and far-reaching character. They involve not only
the most com plicated problems of technique and organiza­
tion, b u t profound problems of a more theoretical or
philosophical n a tu re .”
A nd yet, at the M arch 1953 m eeting of the Federal O pen
M arket Com m ittee there was unanim ous approval of the two
most im portant statem ents of policy with respect to the
operations of the System Open M arket Account which had
been suggested by the Ad Hoc Subcom m ittee. (U nderlining
(1) U nder present conditions, operations fo r the
System account should be confined to the short end o f
the m a rket (not including correction o f disorderly
(2) I t is not now the policy o f the Com m ittee to support
any pattern o f prices and yields in the G overnment
securities m arket, and intervention in the G overnment
securities m arket is solely to effectuate the objectives o f
monetary and credit policy (including correction o f
disorderly markets).


The second of these ordinances, which really should have
been first, put a seal of disapproval on any future pegging of
prices of Governm ent securities such as had been practiced
during W orld W ar II, and in the postwar period of readjust­
m ent in the Governm ent securities m arket while the conse­
quences of financing the war were being unwound. The first
ordinance represented a consensus th at, in m ost cir­
cum stances, the O pen M arket Committee would be able to
attain its policy objectives by operating in the m arket for
Treasury bills and other short-term Government securities.
The apple of discord became apparent later when there
was a creeping movement to give constitutional perm anence
to the doctrine which had become known as “ bills only” , and
to engrave it perm anently in the public m ind, and particular­
ly in the m inds of Governm ent securities dealers, by a dribble
of statem ents of individuals concerning the “ ground rules”
for all future open m arket operations, even though the ques­
tion of publicizing ground rules h ad been deferred by the
Open M arket Committee for fu rther study.
At the Septem ber 1953 meeting of the Open M arket Com­
m ittee4 the phrase “ under present conditions” was dropped
from the directive th a t operations for System Account be
confined to the short end of the m arket, and replaced by the
clause “ until such tim e as (it) may be superseded or modified
by further action of the Federal Open M arket Com m ittee” .
And, at the Decem ber meeting of the Committee in 1953, the
There was a June meeting of the Open Market Committee at
which there were five presidents of Federal Reserve Banks and four
members of the Board of Governors, and at which the March direc­
tive relating to confining operations for System Account to the short­
term sector of the market was rescinded, with the understanding
that the Executive Committee of the Federal Open Market Commit­
tee (which was later abolished) would be free to determine how
operations should be carried on in the light of the current general
credit policy of the full Open Market Committee. The five presidents
voted for the motion to rescind and the four Board members voted
against it (following the meeting, the Executive Committee, con­
sisting of three Board members and two presidents, decided to con­
fine current operations to Treasury bills). By the time of the
September meeting of the Open Market Committee, three of the
presidents had changed their minds concerning preserving such
limited freedom of action and the March pronouncement, as
amended, was restored by a vote of nine to two.


general statem ent with respect to System intervention in the
Governm ent securities m arket was changed to read “ transac­
tions for System account in the open m arket shall be entered
into solely fo r the purpose o f providing or absorbing reserves,
except in the correction of disorderly m arkets” . 5
The m ajor differences of opinion, at least within the
Federal O pen M arket Committee, had now become (1)
w hether it was misleading and undesirable to prom ulgate a
capsule version of the whole theory of central banking, and
the whole purpose of open m arket operations, which m en­
tioned only the providing and absorbing of reserves and om it­
ted the essential linkage between such actions and the cost
and availability of credit; (2) whether it was unnecessary and
undesirable to endow the doctrine of “ bills only” with an air
of perm anence as a norm of System open m arket operations,
no m atter what changes in economic conditions and in the
m arket structure of interest rates m ight occur; (3) whether it
was desirable to attem pt to provide the Government
securities dealers with a continuing set of “ ground rules” for
System open m arket operations, which would seek to protect
the m arket from the hazards of there being a central banking
system whose policy decisions, and whose every action to
m ake its policy decisions effective, m ust influence the cost
and availability of credit throughout the economy and,
therefore, the movements of interest rates and prices through
the whole range of m aturities in the Government securities
m arket.
In the running debate which followed, a great deal of
discussion was devoted to elucidating the obvious necessity of
having a properly functioning Government securities m arket
in which to conduct System open m arket operations; to try­
ing to prove th at confining such operations to the short end of
the m aturity scale would improve, or had improved, the
“ breadth, depth, and resiliency” of the m arket; and to assert­
ing th at substitutability was more im portant than arbitrage
in carrying impulses throughout the whole range of
m aturities. But the m ajor questions involving the prom ulga­
This change had a special application to so-called “swap” trans­
actions in connection with Treasury financing, but it also was an at­
tempt to nail down permanently a general philosophy of open
market operations.


tion of a norm of central banking and the publication of per­
m anent “ ground rules” for the conduct of open m arket
operations tended to be neglected, while the Federal Open
M arket Committee annually voted to perpetuate the views of
its satisfied majority. It is ironical, perhaps, th a t the so-called
“ bills only” policy, which was hailed by one of its chief ar­
chitects in O ctober 1960 as “ the greatest advance in central
banking technique in the last decade” , was overtaken by
events and abandoned in February 1961. The Federal Open
M arket Committee then announced th at the System Open
M arket Account was purchasing Governm ent notes and
bonds of varying m aturities “ in the light of conditions th at
have developed in the domestic economy and in the U.S.
balance of paym ents” . The question of “ bills only” may arise
again, of course; its abandonm ent can be endowed with no
more real perm anence th an its adoption, b u t it is unlikely
th a t it will ever be revived as the basis for the sweeping asser­
tion th at transactions for System Account in the open m arket
shall be entered into solely for the purpose of providing or ab­
sorbing reserves.
It is reassuring on this score th a t the latest Joint TreasuryFederal Reserve Study of the U .S. Governm ent Securities
M arket (April 1969) recom mends th at “ System purchases of
interm ediate- and long-term U .S. Governm ent coupon issues
should be continued—even ap art from use in correction or
forestalling disorderly m arket conditions— as a useful sup­
plem ent to bill purchases in providing reserves to the banking
system and, when compelling reasons exist, for affecting to
the extent consistent with reserve objectives interest rate
pressures in specific short- or long-term m aturity sectors of
the debt m arket” .
The m echanical purpose form ula for Federal Reserve open
m arket operations which grew out of the doctrine of “ bills
only” is a not too distant relative of what is, at the m oment,
the most virulent form of norm addiction, the “ money sup­
ply” addiction. Both would rely wholly on m arket forces to
produce desired effects flowing from Federal Reserve action
affecting a single m onetary aggregate. The present virulence
of the money supply proposal for getting rid of the fallible
judgm ent of central bankers, and substituting a mechanical


form ula for their gropings, may be ascribed to the existence
of a “ school” for the propagation of the faith and to a com­
bination of circum stances relating to the respective merits of
fiscal and m onetary policy in helping order our economic
affairs which has stirred up academic dispute and endowed
the views of the “ school” with a m odicum of public attention
and political acceptance.
Once an energetic and forensically form idable economist
assembles a massive collection of empirical historical
evidence to provide apparent support for his opinions, and
indoctrinates enough disciples who then go forth and preach
the gospel, a “ school” becomes established. If there happens
to be another “ school” of followers of another leader whose
views have found wide professional and political acceptance
in the past, and which now may be attacked with some hope
of success, the stage is set for a rash of academ ic and jo u r­
nalistic coverage of the battle. The whole subject then comes
to the attention of a growing group of men of affairs in
politics and in business, and the risk arises th at a shaky
hypothesis may become something more th an a source of
academ ic argum ent and journalistic enterprise.
We are not concerned here, however, as to whether Keynes
or Friedm an is the economic messiah of our time, but with
the claim of the m onetarists th a t the money supply should be
the sole or, at least, the suprem e norm of reference of
m onetary policy. We are concerned with the proposal th at
the Federal Reserve should content itself with attem pting to
increase the money supply at a fixed annual rate (4 or 5 per­
cent a year is suggested) calculated on the average to be con­
sistent with stable prices, thus providing a stable monetary
framework in which other economic goals may be realized
and avoiding the hazards of trying to use monetary policy as
a flexible and sensitive instrum ent for influencing our
economic affairs.
In the more restrained versions of this theory, it is adm it­
ted th at m onetary growth is not a precise and infallible
source of future economic stability b u t that, on the average
(which conceals much variability in both the time delay and
the m agnitude of the response), there is a close relationship


between the rate of change in the quantity of money and the
rate of change in national income (at current prices) some six
m onths or more later.
This is an appealing doctrine which “ rolls up into one
simple explanatory variable all of the many complex forces
which determ ine aggregate dem and” . No wonder political in­
terest has been aroused and a public following has emerged.
But the economic peers of the m onetarists are skeptical. They
have raised many questions concerning the money supply
theory which the m onetarists have yet to answer convincingly.
Drawing on the work of those who have addressed themselves
to the problem and are com petent to discuss it as professional
economists, I shall list some of these questions.
First and foremost is the question of whether the asserted
causal connection between cycles of growth of the money
stock and cyclical movements of the economy runs from
money to business activity or from business activity to money.
It is akin to the question phrased by a British writer: “ Did
m an begin to lose his general covering of hair when he began
wearing clothes, or did he begin wearing clothes when he
noticed he was going into a perm anent m oult?”
Second, w hat m onetary aggregate is to be used as the
guide of m onetary policy; is it the money stock narrowly
defined as currency in circulation and dem and deposits at
banks, or is it currency and dem and deposits plus time
deposits at banks, or is it the “ m onetary base” , or is it the
money supply which is “ currently most meaningful in in­
dicating m onetary influence in economic activity” ? Recent
revisions of the most commonly used money supply series,
and the patent sketchiness of such series stretching back into
the historical and statistical past (“ over a century” ) add point
to this basic question.
Third, are the econometric models which the m onetarists
use to dem onstrate how the transm ission process proceeds
from money to business activity adequate for the purpose?
Fourth, are not both price and quantity of money im por­
tant; do you not have to take into account shifts in dem and
and in interest rates?


Fifth, do the observed variations in m onetary tim e lags and
m onetary velocity cast doubts on the suggested simple causal
relationship between the money supply and general economic
activity; do they not suggest th at there are unpredictable
variables other th an the money supply which influence the
level of economic activity and which m ust be taken into ac­
count in devising m onetary policy?
Sixth, the suggested m onetary framework for the economy
is put forw ard most precisely in term s of a closed economy,
although it is adm itted th a t it should involve a free foreign
exchange m arket (floating exchange rates) in the open
economy of which this country actually is a part. Is this a
practical directive for monetary policy?
Even if some of these m urky areas are cleared and the
m onetarists become less rigid in their form ulations, ex­
perience suggests th a t the money supply norm of central
b ank policy eventually will take its place on the library
shelves along with the policy norms of the past. W ith im ­
provem ent of our knowledge and understanding of the pres­
ent state of the economy and its likely future course, the
money supply norm may leave a trace; the use of annual rates
of change in the money supply as a navigational aid for cen­
tral bank action (channel m arkers indicating m axim um and
m inim um rates of growth to be sought) cannot be ruled out,
b u t the discretionary b and would have to be wide enough to
accommodate the flexible requirements dictated by experience.
Practicing central bankers (and the governments to which
they are responsible) cannot afford to be confined by for­
mulae which attem pt to cope, in precise m easure, with the
actions and anticipations of millions of hum an beings exer­
cising a high degree of economic freedom of choice.
M onetary policy can continue to m ake its contribution to the
goals of vigorous sustainable economic growth, m axim um a t­
tainable production and employment, and reasonable stabili­
ty of prices, if its practitioners continue to sharpen their
analyses of complex economic developments and continue to
base their actions upon a balanced view of total situations.
They cannot be relieved of this difficult task by doctrinaire
policy norm s.


Testimony on “Bills Only” before the
Subcommittee on Economic Stabilization of the
Joint Committee on the Economic Report,
December 7, 1954

I am going to speak of som ething which I am sure is not
the m ajor concern of your hearing, just as it is not the m ajor
concern of the Federal O pen M arket Committee, b u t never­
theless it is som ething which I do not think was covered, from
my point of view, in the answers subm itted to you by the
C hairm an of the Board of Governors and, therefore, if I may
take your tim e, I would like to refer to it. It is, perhaps, what
m ight be called th e negative, in answer to your question
n um ber th ree.*
Y our subcom m ittee addressed five questions to the C hair­
m an of the Board of Governors, and his answers have been
m ade available to other participants in these hearings, as well
as to the public.
W ith respect to the answers to questions 1, 2, 4, and 5 , 1 am
in general and substantial agreem ent, even though there
m ight be some shades of difference of opinion or degrees of
em phasis in answers to the same questions which I might
This suggests the first point I would like to make: So far as
general credit policy is concerned, there has been a high
degree of unanim ity within the Federal Reserve System
throughout the period covered by your inquiry, th at is, since
M arch 1951.
O ur differences, or my differences with other m em bers of
the Federal O pen M arket Committee, have related to the
techniques of open m arket operations, not to general credit
* Editor's note: Question 3 was: “What is the practical
significance of shifting policy emphasis from the view of ‘maintain­
ing orderly conditions’ to the view of ‘correcting disorderly situa­
tions’ in the securities market? What were the considerations
leading the Open Market Committee to confine its operations to
the short end of the market (not including correction of disorderly
markets)? What has been the experience with operations under
this decision?”


It is to these questions of techniques th a t your question
No. 3 is directed. Here again I can express a good deal of
agreem ent with m uch th a t is included in the answer of the
chairm an. It is a persuasive and stim ulating discussion of the
issues involved. Yet there is also a good deal with which I
disagree, and my conclusions as to the most effective use of
open m arket operations, to im plem ent credit policy and to
prom ote economic growth and stability, diverge quite sharply
from those set forth in the answer of the Chairm an.
His answer is, of course, responsive to the question of the
subcom m ittee, which asked for affirmative support of the ac­
tions of the Federal O pen M arket Committee to which it
refers, not for the argum ents for and against such actions.
Obviously, there is not tim e here for a full-dress presenta­
tion of the negative side of the question. I should like to m ake
certain points which, I th in k , are significant to an u n d er­
standing of the problem , however, and I should be glad to
subm it to the com m ittee later, if it so desires, a written
statem ent of views which might m atch the answer of the
chairm an in completeness and, I would hope, in per­
First, as a m atter of background, I think I should say th at
I am not for pegging Governm ent securities prices nor for
trying continuously to determ ine the structure of interest
rates by m eans of open m arket operations. As one of the
principals in the fight to free the Federal Reserve System
from the pegging of prices of Governm ent securities,
throughout a difficult period of controversy on this point,
beginning in 1 9 4 6 ,1 think I have the right to m ake this clear.
And, as one who has a great deal of respect for the operations
of the m arketplace, I would not want to be classed with those
who believe th at a continuously better result can be obtained,
so far as the structure of interest rates is concerned, by com­
pletely substituting the judgm ent of the Federal Open
M arket Committee for the m arketplace. If we want to find
out how the patient is doing, there m ust be some place where
we can take the p atient’s pulse.
Now, taking up the real issues in this m inor problem. The
least controversial issue was dropping from the directive of
the Federal Open M arket Committee the clause authorizing


open m arket operations to m aintain orderly conditions in the
m arket for Governm ent securities, and substituting for it a
clause authorizing operations to correct disorderly situations
in the m ark et. I voted in favor of this change, and thought
it desirable, not just as a question of semantics. But I would
stress the avoidance of disorderly situations rather than their
correction after they have happened.
One of the virtues of credit control is supposed to be its
ability to take prom pt action to head off financial distur­
bances which might otherwise have harm ful repercussions
throughout the economy. If open m arket operations in longer
term Governm ent securities can be used to this end, I would
use them rather th an wait until a disorderly situation or a
crisis has developed, and only then depart from operations
solely in Treasury bills.
The most controversial issue was the instruction by the
Federal O pen M arket Com m ittee th at open m arket opera­
tions m ust be confined to the short end of the Government
securities m arket, except in correcting disorderly situa­
tions which, in practice, has come to mean confining opera­
tions to Treasury bills. I did not get the impression th at the
action was merely an assertion of the power of the Federal
Open M arket Com m ittee to determ ine whether and when the
System Open M arket Account should engage in transactions
outside the short end of the m arket. There need not be any
question of the power of the full com m ittee to determ ine the
conditions and the general tim ing of operations in the longer
term areas of the m arket.
I was concerned with the strong em phasis which I thought
was given to perm anence of the “ bills only” doctrine. Sugges­
tions for publishing a set of rules of the game, references to a
constitution for open m arket operations, and the repeated
argum ent th at G overnm ent securities dealers could not
create a broad, continuous m arket if we did not forego opera­
tions in long-term securities—except to correct disorderly
conditions—gave me the disturbing impression th a t we were
in danger of placing ourselves in a straitjacket which would
not perm it us to accomplish w hat the Congress and the
public m ight expect us to accomplish in term s of monetary
m anagem ent.


I, therefore, welcomed the statem ent in the answer of the
chairm an to your question No. 3 th at the door is being kept
open to a change in the present basic technique of open
m arket operations, and the recognition in his answer th at the
present approach to open m arket operations is still ex­
perim ental and th at insufficient tim e has elapsed to draw
firm conclusions as to its perform ance. The publication of
these views should help dispel the idea th at present tech­
niques have been adopted for all tim e, and should help to
avoid further hardening of the dangerous opinion th at any
future operations by the System in the long-term m arket will
be the signal of a critical situation.
I also welcome the repeated references, in the answer of
the chairm an, to the concern of credit policy with
developments in the long-term sector of the m arket and the
assertion of the particular concern of the Federal Open
M arket Com m ittee th at its policies be reflected in the cost
and availability of credit in the long-term m arkets. It has
been, and still is, my contention th at this concern can find its
best expression, at times, in open m arket operations
specifically directed at these longer term m arkets.
This is, perhaps, the variant approach to open m arket
operations briefly com m ented upon, and summarily dis­
missed, beginning on page 20 of the answers of the chairm an
to your question No. 3. As set forth there, it is described as a
m ethod of operation in which—
the Federal Open M arket Com m ittee would normally
p erm it the interplay o f m arket forces to register on
prices and rates in all o f the various securities sectors o f
the m arket, but would stand ready to intervene with
direct purchases, sales, or swaps in any sector where
m arket developm ents took a trend that the com m ittee
considered was adverse to high-level economic stability.
T hat seems to me to be an eminently reasonable approach
to our problem , but it has never really been tried—not even
in the period 1951-53 to which the chairm an refers. A nd now
it has been dismissed on what I believe is the shaky assum p­
tion th at it “ did not appear to offer real promise of removing
obstacles to im provem ent in the technical behavior of the
m arket” .


This probably brings us down to the nub of the differences.
The C hairm an’s answer to your question No. 3 em braces the
view, with which I agree, th at the “ depth, breadth, and
resiliency” of the Governm ent securities m arket, or its “ con­
tinuity and responsiveness” , should be furthered by all
m eans th a t are consistent with a credit policy of m axim um
effectiveness, and that, in general, the greater the “ depth,
breadth, and resiliency” of the m arket, the greater will be the
scope and opportunity for effective credit control through
open m arket operations. But the proof of th at pudding m ust
be found in the actual m arket, not in a theoretical discussion
of a supposedly ideal m arket.
The answer of the C hairm an asserts th at the m arket has
become increasingly stronger, broader, and more resilient
since the Committee adopted the “ bills only” technique. It
suggests most persuasively why, theoretically, this should be
so. But it does not prove th at it has actually happened. In
fact, I wonder w hether we are talking about the same
m arket, and what are the definitions of “ strength” and
“ b read th ” th at are being used. It is my inform ation and
observation th at the m arket for longer term securities has re­
m ained at least as “ th in ” , under existing open m arket pro­
cedures, as it was before these procedures were adopted.
I think it has lost depth, breadth, and resiliency, whether
you view it in term s of dealer willingness to take position
risks, volume of trading, or erratic price movements. We
m ust not be misled by the claims of one or two dealers who
urge the present techniques and now proclaim th at they are
helping to create a b ro ad er m arket for G overnm ent securi­
I do not think we have helped to create such a m arket.
And, therefore, I do not see how the responsiveness of cost
and availability of credit in all sectors of the m arket since
June 1953 can have been the result of a progressive
strengthening of the Governm ent securities m arket growing
out of the actions of the Open M arket Committee with
respect to the open m arket techniques. M uch of the success
of the System’s actions during this period has derived from
the prom ptness of adaptation of overall credit policy to


changes in the economic situation, and to a high degree of
coordination of Federal fiscal policy and debt m anagem ent
with credit policy. For the rest, it has sometimes taken
massive releases of reserves, under the techniques adopted or
in support of those techniques, to accomplish what might
have been accomplished more economically with the help of
lim ited direct entry into the long-term m arket.
I am hopeful, therefore, th at the present period of ex­
perim entation will not be too long extended, and th at we
shall soon have an opportunity to experim ent with the middle
way—the variant approach—which I m entioned earlier.
One final com m ent should be m ade, perhaps, in connec­
tion with your question 3 on the discontinuance by the
Federal O pen M arket Committee of direct supporting opera­
tions in the G overnm ent’s securities m arket during periods of
Treasury financing.
I would agree th a t the System Open M arket Account
should not, as a m atter of routine, provide such direct sup­
port, bu t I would also say th at we cannot, as a m atter of
routine, tu rn our back on such support.
The em phasis in the present approach to Treasury financ­
ing is good. The Treasury should meet the test of the m arket,
in relation to other credit needs of the economy, to the fullest
possible extent. But too rigid application of this doctrine is
questionable as a m atter of m arket procedure and TreasuryFederal Reserve relationships. In periods of credit ease, when
policy considerations point to the need of keeping Treasury
dem ands from draining credit away from desirable private
use, reliance on bill purchases alone may lead to unwanted
consequences. The flooding of funds into the bill m arket, in
order to assure adequate credit in the areas tapped by the
Treasury, may produce an undue enlargem ent of bank
reserves, or an extreme distortion in Treasury bill prices and
yields, or both.
There will also be times, particularly in periods of credit
restraint, as distinguished from the recent period of overall
credit ease, when rigid application of the present rule may
result in serious collisions of debt m anagem ent and credit
policy, which m ight have been avoided without jeopardizing
the overall public interest.


Now, let me repeat, what I have been discussing are
disagreem ents over techniques of open m arket operations,
not over general credit policy. It is good to have these dif­
ferences opened up, and I hope th at this hearing will result in
more discussions of the problem s involved by an informed
public. We in the Federal Reserve System cannot consider
ourselves to be the sole repositories of knowledge in these
m atters. W hat I have been most afraid of is th at we m ight
come to think th at we can indulge in the luxury of a fixed
idea. There is no such easy escape from specific and em ­
pirical decisions in central banking. W e cannot have a
general form ula, a kind of economic law, which will serve the
ends of credit policy under all sorts of economic conditions.

I ll

Letter to Murray J. Rossant
February 28, 1961
D ear M r. Rossant:
Y our letter of February 24 was a welcome rem inder th a t
there are some people who rem em ber the “ bills preferably”
controversy of a few years ago and my p art in it. I am
delighted th a t tim e and circum stance have now com bined to
persuade the Federal Open M arket Committee to do w hat I
failed to persuade it to do by repeated votes of eleven to one.
The chairm an has been fond of saying th a t the task of a cen­
tral b an k is to lean against the wind. The Federal Reserve
System is now leaning with the wind.
I think th a t the proponents of “ bills preferably” painted
themselves into a corner with the idea th a t there m ust be a
“ norm ” to guide a central bank in its decisions and th at
“ bills preferably” provided the key to such a norm . Having
adapted this b it of economic lore to their needs, they were
hell-bent to publish “ the rules of the gam e” so th a t change
would not be easy. This was vetoed by the Federal Open
M arket Com mittee, b u t it was soon leaked out th a t there
were “ rules of the gam e” which destroyed the residue of flex­
ibility which was piously proclaim ed. The argum ents th a t the
alternative to “ bills preferably” was pegging, and th a t to deal
in longer term securities m eant trying to establish the whole
structure of interest rates, were trotted out to silence the op­
position by trying to m ake its position one of subservience to
the needs of the Treasury or an absurdity. I think th a t the in­
dependence of the Federal Reserve System has been dam ­
aged, b u t not irreparably, by its intransigence in this whole
business. It is now believed to be following the election
returns as well as changing economic conditions.
The m oaning of the Governm ent securities dealers I would
attribute largely to the sounds em anating from Lanston and
Co., which h ad quite a bit to do with the adoption of “ bills
preferably” . The rest of them talked out of both sides of their
m ouths, and went ahead m aking money in the Governm ent
m arket, as is their business. The banks, of course, kept m um
for fear of offending somebody.


I shouldn’t think anyone would expect miracles of this
change in the operating techniques of the System, but I do
hope th at the revived freedom to operate in all sections of the
m arket will be used effectively in situations in which it can be
useful, such as the present. Com bined with appropriate debt
m anagem ent, quite a bit can be accomplished.
I am still working on the 1952, 1953, and 1955 wines, b u t I
have no doubt th at some of the 1959 whites are now ready for
drinking and good, and I shall be into them shortly.
W ith best regards.

Allan Sproul


Letter to Alfred Hayes
M arch 14, 1961
D ear Al:
T hank you for your letter of M arch 3, and now for your let­
ter of M arch 10. I am glad to know th at one of the brethren
supported you “ most of the way” in the Federal Open
M arket Committee, but the vote was always eleven to one, as
I recall.
The problem of imaginary history, one-sided explanations,
eith er/o r presentations, and dubious allies, in the battle of
“ bills only” has bothered me over the years, as it has you. I
still think th a t you were right, as an individual and in setting
policy for the Bank, not to engage in a public debate on the
m atter, after my abortive attem pt to stir up public interest in
what was being done. I think I was right not to take up the
argum ent, again, after leaving the System. I had two reasons.
One, I did not wish to be an em barrassm ent to the New York
Bank, which had to m ake up its m ind and then press its
views within the Committee, under your direction. Two, I
have observed th at, usually, he who continues the attack
after he has left the fighting forces is likely to lose his au ­
diences pretty quickly. T hat has not m eant th at I did not feel
free to m ake my views known, and thus to keep them alive,
whenever they were sought by individuals, publications, com­
m ittees, and commissions.
As one result of the partial blackout of conflicting views
during the past few years, the present reversal of policy, as
you point out, has been the subject of new distortions by the
uninform ed (e.g., A rthur Krock) and violent attacks by the
inform ed partisans of “ bills only” , and it has encouraged em ­
barrassing allies. There were some monetary analysts who
opposed “ bills only” in the past, however, and I would expect
them and others to be more vocal in opposing a return to th at
doctrine if it is attem pted. I would also expect th at you and
others would have a chance to oppose it within the System,


and before Congressional committees, with a m uch better
chance of success th an in the past. I shall certainly now feel
free to say and write what I think about the past and about
the future for whatever th at may be worth. I have a lot of
m aterial which I have been collecting during the period of
Q uite ap art from the technical m erits or demerits of “ bills
only” , I think it was a great m istake for the Federal Open
M arket Committee to let itself become enam oured of socalled “ rules of the gam e” , which were to be the ten com­
m andm ents of central banking—carved in stone. These rules
m ade a pious fraud of protestations of flexibility and con­
tributed to intellectual dishonesty in pretending to study and
discuss the question of “ bills only” . I am disturbed,
therefore, th at some defenders of the Federal Reserve are
saying th at the abandonm ent of “ bills only” is a tem porary
expedient and an experim ent, and th at the System will return
to “ bills only” as soon as we are rid of a domestic recession
and a balance-of-paym ents deficit. I would hate to see the
System get back into the straitjacket.
W ith best regards.



Letter to Henry Alexander
April 17, 1961
M r. Henry Alexander
C hairm an of the Board
M organ G uaranty T rust Company
D ear Henry:
It is a partial holiday in Zurich and so this letter. I have
read the exercise in statistical calisthenics which was includ­
ed in the April Survey of your bank, which you gave me when
I had the pleasure of dining with you last Thursday noon. It
seems to me th a t it shows considerable ingenuity in
dem onstrating th at if you resolve all, or nearly all, of the in­
fluences which affect interest rates at short and long term in
the actual money and capital m arkets, both as to tim ing and
am plitude of savings, there is convincing evidence of a high
degree of “ covariation” . Even then, there was a lack of
“ covariation” in 1955 and early 1956, which had to be ex­
plained— an exception to prove the rule, I suppose.
As an attack on the decision of the Federal Reserve System
to abandon the doctrine of “ bills preferably” , which this arti­
cle will be considered by many, it is less than convincing no
m atter what its excellence for other purposes may be. It sets
up a misleading basis of debate, namely the degree of linkage
between short and long term interest rates over the whole of
the business cycle, and then proceeds to show “ the realities of
the case” by its own variety of statistical analysis.
The first general rule of central banking is th at statistical
analysis can never carry you to the heart of an economic
problem requiring prom pt decisions before all the statistics
of the past have been gathered and analyzed over days,
weeks, and months. You need all the inform ation you can
get, analyzed as competently as possible, and then you need
to m ake some hum an judgm ents which are still beyond the
range of electric computers.


To be more specific, the discussion of m onetary policy, as
it relates to “ bills preferably” has not centered in the degree
of linkage between short and long rates over the whole of the
business cycle, and it has not been assum ed th at long-term
rates have been continuously sluggish in their response to
changes in the business cycle and to the force of monetary
policy. It has been claimed th at, at times, the linkage may
be less rapid th an would be desirable in term s of effective
m onetary policy, and th a t the Federal Reserve System should
be free, at such times, to intervene directly in the
intermediate- or long-term m arket for Government securities,
to try to ascertain if there is some tem porary friction or if it is
m isjudging the force of fundam ental factors—in which case
it can withdraw.
If the m onetary authorities are properly concerned with
the whole interest rate structure, as it may affect the flow of
credit and capital into productive use, as I think they m ust
be, it accomplishes little to prove a high degree of “ covaria­
tio n ” over periods as long as the ordinary business cycle, or
to extract “ obscuring influences” which are themselves
obscured by actions of the m onetary authorities. For exam ­
ple, on page 3, where the article says seasonal patterns of in­
terest rates have been gradually reemerging and “ reflect for
the most p art the extent to which the central banking system
does not elect to cancel out the rhythm ic changes within the
year in the credit dem ands of business and governm ent” .
The dog is chasing its tail!
As I see it, the m onetary authorities responded to a com ­
pelling set of circum stances in announcing on February 20
th a t they had abandoned the doctrine of “ bills preferably” .
A nd the circum stances were properly more compelling than
the “ volatility pattern characteristic of each (short and long
rates) over a prolonged period of observation” . Those who
have spoken for the System have m ade it clear th at they have
no preconceived or fixed rate relationships in m ind, and th at
they do not intend to try to force the m arket in a direction
counter to th a t determ ined by the underlying dem and and
supply conditions, and they have shown th a t they have a
problem of the rate structure growing partly out of the con­
centration of their open m arket operations in the bill m arket.


In the relatively new world of widespread currency convert­
ibility, which encourages the flow of short-term funds be­
tween international money m arkets in response to interest
rate differentials, and in the light of a balance-of-payments
position which showed substantial deficits and triggered a
flight from the dollar, and in the face of a domestic economic
situation which called for an easy money policy, the monetary
authorities needed to free themselves from their self-imposed
rule of dealing only, or largely, in Treasury bills. At the same
tim e, they were justified in seeking to find out if operations in
other sectors of the m arket m ight beneficially hasten
“ covariation” even though the frictions in the m arket “ are
m inim al under norm al circum stance” whenever th a t is.
It is significant th at, even with free reserves in the banking
system m aintained at a level of about $500 million, short­
term rates have rem ained at figures which, together with
some reduction of rates in foreign money centers, have
removed most or all of the incentives to send short-term
funds abroad for interest rate reasons. Equally significant,
perhaps, is the fact th at open m arket operations in the in­
term ediate area have facilitated some extension of the
Federal debt, which becomes shorter all the tim e if you don’t
do som ething about it. And, finally, despite a num ber of in­
fluences which m ight readily have pushed up long-term rates,
such rates have rem ained fairly steady during the past two
m onths, suggesting th at they have rem ained as low as was
consistent with underlying m arket factors, without inter­
fering with the flow of savings into productive use as
witnessed by the heavy calendar of securities flotations. This
is what the discussion of “ bills preferably” has been
about; not about buying “ to force the movements (of rates)
a p a rt for any prolonged p erio d ” .
Quite apart from the m erits or demerits of “ bills
preferably” under “ norm al” circumstances, I think the
Federal Reserve System should not again paint itself into a
corner so th at responses to “ abnorm al” circum stances re­
quire elaborate explanation and m ake changes in a tech­
nique of operation seem to be an im portant change of policy.


The elevation of “ bills preferably” to a great new principle of
central banking which m ust be engraved on tablets of stone,
for all time, was a presum ptuous thing. The undoing of this
presum ption is no m atter of experim ent or expedience, b u t a
return to the real world. The episode should be buried.
I hope you can and will read this (Miss Regan at the
Reserve Bank will decipher and type it for you if necessary, I
am sure).
W ith all the best,

P.S. How about getting the statisticians to study the
“ covariation” of the prim e rate and other short-term rates?
From the 1959-60 high to early April 1961, it had declined
from 5 to AVi percent while three-m onth Treasury bills were
going down from 4.67 to 2.47 and one-year issues from 5.15 to
2.97. Stickiness seems to be more th an m inim al here!


The Second Annual Arthur K. Salomon Lecture
delivered at the Graduate School of Business of
New York University on November 7, 1963
Money Will Not Manage Itself
It is a sobering circum stance for me to find myself speak­
ing from this platform from which my friend, the late Per
Jacobsson, delivered the first A rthur K. Salomon Lecture a
year ago. T hat vigorous and wide-ranging Swedish interna­
tionalist talked of m onetary m atters in term s of tim e and
place, of theory and practice, with a com m and which only he
could bring to the discussion of world m onetary problems. I
think it appropriate on this occasion to register my respect
for his accom plishm ents and my affection for the m an.
The thoughts on monetary m anagem ent which I shall
place before you will be narrower th an his in compass and
less extensive in time. They will relate prim arily to central
banking in the U nited States now and during the past fifty
years, although the title I have given my talk comes from a
“ foreign” book, the writing of which was begun nearly a h u n ­
dred years ago. You will have recognized it as the catchline
from the most fam ous book on central banking, W alter
Bagehot’s “ L om bard Street” . Just as any economist worth
his salt will m ention the nam e of Adam Smith sometime in
his discourse or in his writings, so a central banker gains
character by associating his views and reflections with those
of a m an who wrote about the London money m arket and the
Bank of E ngland in 1870-73, especially if he agrees with the
dictum th at “ money will not m anage itse lf’ as he almost
m ust by reason of his calling.
I have two other reasons for launching my rem arks with
Bagehot’s words. O n another occasion, when I delivered
myself of opinions which questioned the sanctity of the “ old”
Gold Standard, a disputatious m erchant of this city p u b ­
lished a pam phlet with the intriguing title “ Sproul Ignores
Common Honesty” . In it he included this priceless definition
of m onetary m anagem ent: “ A high-sounding euphemism; it
m eans constant lying to support constant sw indling.” I
rath er liked th at or I would not have rem em bered it.


And, finally, there is the fact th at it is just fifty years since
the Congress of the U nited States passed the Federal Reserve
Act, which created the Federal Reserve System. A
semicentennial bow to monetary m anagem ent in the U nited
States suggests itself as appropriate to this gathering.
Perhaps it will advance the clarity of my discussion if I
quickly sketch in a little banking history. And here I shall re­
ly largely on what others have written, because I am going
back one hundred years and my own association with these
m atters does not go back th at far. The National Currency
Act, signed by President Lincoln in 1863, which authorized
the incorporation of national banks; and the N ational Bank
Act of 1864, which am ended and improved the Currency Act;
and the Federal Reserve Act of 1913 are the high m arks of
progress in our banking legislation over the past century. The
national banking legislation of one hundred years ago knitted
together the badly raveled banking system of the country and
provided us with the beginnings of a controlled circulating
m edium which the U nited States h ad lacked since the
Jacksonians destroyed the Second Bank of the U nited States
in the 1830s. M en’s m inds in the 1860s were concentrated
on b ank notes, however, and the national banking legislation
did not take m uch account of the role of bank deposits, and
the b ank check, in the money supply of the nation. It left the
Federal Governm ent with powers less th an its responsibilities
and its needs. The Federal Reserve Act of 1913 moved to
complete what had been started fifty years before, namely the
provision of a uniform and generally acceptable currency and
national regulation of the money supply. The issuance of our
principal form of currency, the Federal Reserve note, and the
m eans of regulating the money supply, by way of the volume
of dem and (and time) deposits in the commercial banks of
the country, were placed in the hands of the Federal Reserve
T h at was a determ ination th a t there was to be a degree of
m onetary m anagem ent in the U nited States. But, because of
ancient prejudices and still lively suspicions, and because of
an awareness of the fallibility of hum an foresight and hum an
judgm ent, it was thought th a t this power could be substan­


tially divorced from acts of discretion. The reserve creating
and destroying powers of the Federal Reserve System, which
are the m eans by which it controls bank deposits, were to re­
spond to changes in the country’s gold supply and to the dis­
count by m em ber banks of self-liquidating paper. Changes in
the production of gold, the international balance of
paym ents, and the rise and fall of the self-generated credit
needs of agriculture, commerce, and industry were to deter­
mine, pretty largely, the am ounts of Reserve Bank credit
which would come into being or go out of existence.
This groping for an autom atic means of m onetary in­
fluence on economic affairs sometimes changes its form, but
never its substance. And so long as hum an beings disagree as
to what has been done, and what m ight have been done, and
what should have been done, in a variety of particular cir­
cum stances, it probably never will be abandoned. It is now
generally accepted, I believe, th at monetary policy has power
to stim ulate, stabilize, and restrain the economy and should
be used to these ends. But, since the reasons for action are
seldom clear and conclusive, and the conflicting currents in
the economy m ust be analyzed and interpreted by men who
lack perfect foresight, the quest for an autom atic guide to af­
firmative action goes on.
The simplest form of this yearning is the nostalgic belief of
many people th at a return to the Gold Standard, as they
believe it existed during the years 1880 to 1914, would be the
m eans of our salvation. They seem to think, and I have to
confess to having shared the opinion in my salad days, th at
m onetary policy as it existed in the brief thirty-four years of
the “ golden era” was essentially autom atic (except, perhaps,
to some extent in the case of the Bank of England), involving
mostly m echanical responses to in tern atio n al gold
movements and a m inim um of discretionary action directed
toward influencing such movements or toward influencing
domestic economic conditions. As Professor A rthur Bloom­
field, of the University of Pennsylvania, has developed in his
notable studies of this period, this is a misconception.
Although we know much less than we used to think we did


about the actual functioning of the pre-1914 Gold Standard,
Professor Bloomfield’s studies of central bank action in th at
period suggest strongly th at the m onetary authorities “ did
not consistently follow any simple or single rule or criterion of
policy, or focus exclusively on considerations of convertibili­
ty, b u t they were constantly called upon to exercise, and did
exercise, their judgm ent on such m atters as whether or not to
act in any given situation and, if so, at what point of tim e to
act, the kind and extent of action to take, and the instrum ent
or instrum ents of policy to use” . A nd they had to contend
with many of the problems with which central bankers have to
contend today including, in the international sphere, disrup­
tive movements of short-term funds from country to country,
destabilizing exchange speculation, capital flights threaten­
ing the m aintenance of convertibility, and concern as to the
adequacy of international reserves. All they lacked to be
m odern, it seems, were the directions which central banks
have now received from their governments, explicitly or im ­
plicitly, concerning national economic objectives (such as the
Em ploym ent Act of 1946 in our case), and some of the
statistical inform ation and analytical tools which central
bankers now have to help them discharge their respon­
sibilities, and some m eans of executing policy, domestic and
international, which central bankers have devised by way of
open m arket operations in Governm ent securities and
cooperative arrangem ents for stabilizing the foreign ex­
changes. A return to the m ixture of the variants of the Gold
Standard which existed in m uch of the W estern world from
1880 to 1914 could not free us from the m istakes of men. And
this would hold, whether we m aintained the present price of
gold, or doubled it, or tripled it in order to increase interna­
tional liquidity with one hand, while we destroyed it with the
other by destroying confidence in the dollar and sterling (or
any currency) as an international reserve currency.
The search for a more effective and practical guide than
the old Gold S tandard to m onetary autom ation under
present-day conditions is m ost ardently pursued, I suppose,
by Professor M ilton Friedm an of the University of Chicago
who has said th a t “ what we need is not a skilled driver of the


economic vehicle continuously turning the steering wheel to
adjust to unexpected irregularities of the route, b u t some
means of keeping the m onetary passenger, who is in the back
seat as ballast, from occasionally leaning over and giving the
steering wheel a jerk th a t threatens to send the car off the
road” . The steering device which he suggests, in lieu of this
back seat driver, is a steady 3 or 4 percent week-by-week and
m onth-by-m onth increase in the stock of money (not easily to
be defined accurately) to accom m odate an expanding need
which arises from a growing population, increases in per
capita o utput and income, and increases in the proportion of
income directed to liquidity, all of which call for an increase
in the money supply to prevent a continually falling price
Professor Friedm an has assem bled massive statistical sup­
port, chosen by him , to show th a t the m onetary authorities in
the U nited States have most often been wrong in their acts of
discretion, and th a t when they seemed to be right it was
usually by mistake. I find it impossible to swallow his
prescription which would reduce m onetary m anagem ent to
the definitive act of forcing a constant drip of money into the
economic blood stream . It seems to me to be patent th at the
uncertain h and of m an is needed in a world of uncertainties
and change and hum an beings, to try to accommodate the per­
form ance of the m onetary system to the needs of particular
tim es and circum stances and people. I here agree with Pro­
fessor Samuelson, of the M assachusetts Institute of
Technology, who has w ritten th at a “ definitive mechanism,
which is to run forever after, by itself, involves a single act of
discretion which transcends, in both its arrogance and its
capacity for potential harm , any repeated acts of foolish
discretion th a t can be im agined” .
It is not my purpose to argue th at the Federal Reserve
System has not m ade m istakes in the past fifty years, nor th at
it may not m ake m istakes in the future. The early attem pts of
the System to preserve a distinction between essential and
nonessential, or between speculative and constructive, uses of
Federal Reserve credit now appear naive. The attem pt to
preserve a distinction between the elasticity of the com­


ponents of the money supply, currency and dem and deposits,
was misguided. The exercises in m oral suasion and direct
pressure were largely futile. The resort to “ bills only” or
“ bills preferably” as a technique of open m arket operations,
thus trying to forswear action to influence directly any p art of
the interest rate structure except at the short end, was an
eight-year aberration. There has been tim idity approaching
irresolution with respect to selective credit controls, and many
recurring actions designed to stim ulate or restrain or stabilize
the economy can be and have been criticized. W hat I am say­
ing is th a t over the past fifty years there have been im ­
provements, and I am confident there will be more. Some
primitive beliefs concerning money have been discarded, the
collection and analysis of economic statistics have steadily
improved, the organizational arrangem ents and the decision­
m aking powers of our central banking system, despite some
b ad stretches, have evolved in the right direction.
I m ake the latter statem ent with full realization, I think, of
the hazards which beset such arrangem ents and processes,
especially when the political capital of the country and the
private financial capital of the country are 220 miles apart on
the m ap, and sometimes m uch further ap art in their thinking
about money m atters. Per Jacobsson used to tell some of his
central banking friends abroad th at we have a funny central
banking system in the U nited States; th a t most of the power
is lodged in W ashington and most of the knowledge in New
York. He was indulging his wit at the expense of tru th , of
course, b u t it is wise to rem em ber th a t the first and most
direct point of contact between the policies of the m onetary
authorities and national and international money and capital
m arkets is in New York.
As I have said before, this is no device of greedy men and
no mere accident of geography which can be changed by
legislative or adm inistrative fiat, even if the fiat be called
“ driving the money changers from the tem ple” . It reflects the
necessity in a money economy, such as ours, of having a
m arketplace where the final and balancing transactions of
our national and international financial accounts can be car­
ried out by a variety of financial institutions, with connec­
tions which span the country and the world. A nd the
operating arm of the Federal Reserve System in this money
and capital m arket is the Federal Reserve Bank of New York.


Fortunately, it seems to me, we have been largely suc­
cessful in overcoming this organizational hazard by one of
those strokes of evolutionary genius which, more often than
flashes of pure inspiration, bless our kind of society. O ut of
early attem pts to find a way to use and coordinate the open
m arket powers of the Federal Reserve Banks and to bring
these powers within the am bit of the Board of Governors at
W ashington, the Federal Open M arket Committee evolved.
It has become the heart of the Federal Reserve System,
although the shorthand of the press has created a public im ­
age of a Federal Reserve System wholly dom inated by its
W ashington center. On the contrary, the Federal Open
M arket Comm ittee recognizes a Federal association in a n a­
tional authority, without sacrificing the ability to form ulate
and to execute necessary national policies. It is the forum
where representatives of the constituent parts of the Federal
Reserve System meet as individuals and equals, having iden­
tical responsibilities under law, to decide questions of high
m onetary policy with respect to open m arket operations in
Governm ent securities and foreign currencies, and to con­
sider the coordination of these operations with discount rate
policy and other policy measures. And, finally, the present
constitution of the Federal O pen M arket Committee, with
the President of the Federal Reserve Bank of New York as a
statutory perm anent m em ber, observes a cardinal principle
of central banking th a t those who determ ine m onetary policy
should not only coordinate their actions with the general
economic policies of the government, but should also have
direct contact with the private money m arket— a contact
which comes from living in the m arket, and being able to feel
the pulse of the m arket by dealing in it, and by keeping in
personal touch with the individuals and institutions whose
composite actions help to determ ine how m onetary policy will
be transm itted to the whole economy through the
m arketplace.
I reaffirm , then, my belief in the art and practice of money
m anagem ent, and I place my hopes for the future in im ­
provem ent of the tools we have to use in practicing the art,
and in the experience we gain in using them .


And now, in conclusion, let me return to my general
them e: “ money will not m anage itself”. It needs m anagers
who are aware of the fact th at they are dealing prim arily with
problem s of hum an motivation and hum an reactions, and
th at some public understanding of what they are trying to do
is a necessary ingredient of success. It needs m anagers who
realize th at “ scientific analysis, unaided, can never carry the
inquirer to the heart of an economic situation” . It needs
m anagers who “ operate in the light of all the inform ation
they can get” and have it “ organized and analyzed in such a
way as to give the m axim um am ount of illum ination” , so th at
the available alternatives are clearly presented. And it needs
m anagers who then rem em ber th at their tasks require “ that
practical wisdom which comes only from experience” .
As I recall the past fifty years of development of the
Federal Reserve System, I am reasonably sanguine about the
future of money m anagem ent in the U nited States. The
system has proved to be a constructive public invention and
a useful public servant. It has had a variety of experience. It
should be ready for the work ahead.
An economist, who has achieved the rare distinction of
having one of his books become a “ best seller” , gave a
chapter in th at book to the “ m onetary illusion” , in which he
expounded “ the charm which this mysterious thing called
monetary policy has for those who are privy to its practices,
and whose affection for it is translated into claims for its ef­
fectiveness which invade the supernatural” . “ No other
economic policy” , he wrote, “ has ever shown such capacity to
survive failure, to be hailed as a success.” This may be witty,
but I reject the indictm ent. The practitioners of monetary
policy are not exorbitant in their claims of effectiveness and
usefulness. The prim ary function of m onetary policy, with
due allowance for the liquidity of the economy, is to regulate
the total supply of money and to influence its cost and
availability so as to help keep m arginal dem ands—govern­
m ent and private—from spending themselves in speculation
and increased prices in times of prosperity, and from being
stifled in times of recession. In this way, it contributes im por­
tantly to stability of the price level and stability of the ex­
change rate of the dollar, and to the attainm ent of m axim um


employm ent and sustainable growth. M onetary m anagem ent
cannot reach all the causes of economic instability, nor can it
insure sustained high levels of employment and high rates of
growth. But, com bined with fiscal policy and wage-price
policy, it is our best hope of preserving our freedom from the
straitjacket of more direct governmental control of economic
affairs. W e m ust not cross over into the barren lands of the


Chapter 5
Interest Rate


M h is chap ter contains three o f S proul’s letters and an excerpt from
one of his talks, all on the subject of deposit interest rate ceilings.
By way of b ackground, when the Federal Reserve Act was passed in
1913, it contained no provision of any sort fixing m axim um perm issible
interest rates th a t banks could pay on deposits. At th a t tim e, this was
not considered an ap p ro p riate area of regulation. Twenty years later,
however, in the B anking Act of 1933, the Congress instructed the
Federal Reserve to set rate ceilings on com m ercial ban k tim e and sav­
ings deposits (R egulation Q), an d prohibited entirely the paym ent of
interest on dem and deposits (a rate ceiling of zero).
The ceilings were im posed on the grounds th a t alleged excessive in­
terest rate com petition for deposits during the 1920s had underm ined
the soundness of the bank in g system. It was believed th a t com petition
to a ttra c t depositors h ad driven deposit interest rates up so high th a t
the ban k s, b u rd en ed by the higher costs, were led to acquire highyielding b u t excessively risky low -quality assets. It was held th a t this
contributed to the collapse of the banking system in the early 1930s.
Sim ilar argum ents were responsible for the im position of com parable
ceilings on m utual savings ban k s and savings and loan associations
starting in 1966.
U ntil the early 1960s, the ceilings on tim e and savings deposit in ­
terest rates were hardly noticed, since they were always raised by the
Federal Reserve whenever they becam e m eaningful—th a t is, when
short-term m arket interest rates th reaten ed to rise above the ceilings.
Above-ceiling short-term interest rates would tem pt depositors to shift
funds out o f savings deposits an d into money m arket instrum ents, such


as T reasury bills. In 1966, however, the ceilings were not raised: in ­
stead, sim ilar ceilings were im posed by the Congress on m utual savings
b anks and savings and loan associations and the ceilings were lowered
despite rising open m ark et rates. Since then, deposit interest rate ceil­
ings have been one of the m ore controversial elem ents on the A m erican
b anking scene.
Sproul began to question the wisdom of deposit rate ceilings rather
early. In May 1960, in a letter reprinted below, he wrote to Alfred Hayes,
his successor as president of the New York Bank: “ It seems to me th at it
is tim e to assume th at the banks are grown up and able to determ ine how
m uch they can safely pay on savings deposits without going wild in m ak­
ing loans and investments . . . .1 am thinking th at it is time the System
recom m ended to the Congress th at the power to fix this ceiling be
rescinded, leaving the banks free to m ake their individual decisions.
M any bankers may not like this, for one reason or another, but they
shouldn’t expect to snuggle under Governm ent coverlets when it pleases
them and to howl about Governm ent interference with business when it
doesn’t . ”
By 1966 his position had become even stronger. In a speech before a
joint session of the A merican Finance Association and the American
Economic Association, reprinted below, he concluded: “ These attem pts
to fix interest rates and to direct savings flows have helped cause some of
the most rapid and disruptive shifts in rates and in savings flows th a t we
have ever experienced. It is hard to see how m arket forces could have
done a worse job. Now we have our hand in a pocketful of fish hooks and
it is going to be impossible to get it out without pain and discom fort.”


Letter to Alfred Hayes
May 8, 1960
D ear Al:
I am assum ing th at you are back from your European trip,
full of vigor and new ideas.
I have some ideas about the statutory and regulatory con­
trol of interest rates paid by commercial banks th at I would
like to put up to you people before I stick out my own neck.
The rate ceiling on savings deposits. It seems to me th a t it
is tim e to assume th at the banks are grown up and able to
determ ine how m uch they can safely pay on savings deposits
without going wild in m aking loans and investments. Given
the changes in the condition of the banking system and in the
climate of banking, since this regulatory power was given to
the Board, the quality of bank supervision, and the favored
competition of other thrift institutions, the commercial
banks should not be forced to climb into the ring with one
hand in a sling. Continuance of the present sluggish
m anipulation of the regulated ceiling is not fair to them , and
a more flexible use of the ceiling would be tantam ount to
having the Board fix the rate. I am thinking th at it is time the
System recom m ended to the Congress th a t the power to fix
this ceiling be rescinded, leaving the banks free to m ake their
individual decisions.
M any bankers may not like this, for one reason or another,
b u t they shouldn’t expect to snuggle under Governm ent
coverlets when it pleases them and to howl about Govern­
m ent interference with business when it doesn’t.
Paym ent o f interest on dem and deposits. The passage of
time, with its changes in conditions and climate, affects this
statutory control also. O f particular significance are the rise
in the Treasury bill to the position of the chief liquidity in­
strum ent of the economy, the large volume of foreign short­
term funds in this m arket, and the awakening of the
treasurers of large corporations and of state and municipal
financial officers from their long slum ber. As you well know,


funds now flow in and out of deposits at banks and into and
out of Treasury bills with alm ost the predictability of the
The G overnm ent securities dealers, with their corporate
repurchase deals, have stepped into the picture. Why
shouldn’t banks m ake repurchase deals with their depositors
who are interested in Treasury bills, or why shouldn’t they
buy and sell Treasury bills for their customers for a small fee?
This sort of thing seems likely to get going and, since it has
some of the appearance of paying interest on dem and
deposits, it may raise a question for the supervisory
If you can give me any light and leading on these ques­
tions, I would appreciate it.
W ith best regards.



Letter to Alfred Hayes
June 26, 1960
D ear Al:
T hank you for letting me in on some of the thinking at the
Bank on the question of interest rate ceilings, a confidence
which I will respect, of course. I thought the m em orandum
read as if it were a joint product of Research and Bank
Supervision, and th a t it had some of the virtues and some of
the defects of such joint ventures.
Being footloose and fancy-free, I can wave my arm s and
raise my voice. I think the m em orandum too readily accepts
the role of operating within existing law and too easily kisses
off m arket freedom. My own ram pant view is th at there is no
longer necessity for having a government body at
W ashington fix ceilings on the rate of interest which can be
paid by banks on tim e and savings deposits. In term s of asset
quality, liquidity, and banks with less than adequate
m anagem ent, there is no com parison between 1930 and
1960. The problem of banks m aking speculative loans and il­
liquid investments, in order to be able to pay high rates of in­
terest, to the extent th at it persists, seems to be almost wholly
a problem of small banks with weak m anagem ent. Super­
visory authority should be exerted to eradicate such
weakness, or its results in bank assets, not to keep the whole
banking system under wraps in order to protect the weakness
of the few. The weak small banks are probably pockets of
monopoly, anyway, hiding behind the sanctity of the small,
independent bank. And they probably are carrying some of
the costs of their commercial business and their dem and
deposits, by shortchanging their savings depositors. Even­
tually they will be wiped out by m erger, branch banking, or
holding company banking, and inability to survive in com­
petition with other thrift institutions.
But the fact th at we are not writing on a blank sheet of
paper is not sufficient justification for the supervisory
authorities to cling to a power which has outworn its
usefulness, and which may have become positively dangerous
to the health of the whole commercial banking system.
If this all-out approach is wrong, or im practical, the ideas
about greater flexibility expressed in the m em orandum cer­


tainly point in the right direction. But do they go far enough?
Using the distinctions between fixed time and savings
deposits, and their use by banks, developed in the m em oran­
dum , how would it be to m atch the characteristics of the two
kinds of deposits and of bank portfolios with the perfor­
m ance of short- and long-term interest rates, to get the
following pattern?
(a) The ceiling rate on savings deposits should be
fixed largely on the basis of w hat b anks can earn on
long-term investm ents over tim e, rath er th an in rela­
tion to current rates of interest in the m arket, and
changes in the ceiling should be m ade infrequently.
(b) The ceiling on fixed tim e deposits should be
higher at tim es and at tim es lower than the ceiling on
savings deposits, and should be changed m ore fre­
quently. This could be more readily done th an in the
case of savings deposits, especially when rates are go­
ing down, because the rate on fixed tim e deposits is a
negotiated rate.
(c) Ceilings should not fix rates and, therefore,
should not try to follow m arket rates too closely.
M aybe this merely shows how com plicated a logical solu­
tion of the problem of fixing ceiling rates by adm inistrative
regulation can become, and how adm inistrative difficulties
can multiply. But a rule snch as we have, simple enough to be
applied to all banks in all circumstances, is procrustean.
I am piping down so far as the payment of interest on de­
m and deposits is concerned. I would still like to know,
however, whether bank buying and selling of Treasury bills
for customers, for a fee, as distinguished from repurchase ar­
rangem ents, would have any merit.
W ith best regards.
P.S. I liked your statem ent before Subcom m ittee N um ber 3
of the House Banking and Currency Committee for two
reasons. I agreed with what you said and the way you said it,
and I was warmed by the mention of my name.


Letter to Alfred Hayes
Bolinas sur M er
July 18, 1966
D ear Al:
I am typing this by the shore with inferior m aterials and
equipm ent, and it may not be my usual im m aculate job. I am
rushing into correspondence because I am wondering
whether you are as distressed as I am about recent
developments with respect to interest rates, and by the pro­
posals which are being put forward to deal with the situation.
It was distressing to me, first, when the A dm inistration
perpetuated its wrongheaded attitude toward Federal
Reserve policy by having Joe Fowler recommend to the Con­
gress the fixing of interest rate ceilings on certain classes of
tim e deposits at banks and savings and loan associations. It
is hard for me to see why he should have picked up the ball
th at P atm an ’s committee had to drop so recently unless, in
addition to concern about the position of the savings and loan
associations, there is a rankling resentm ent which harks back
to the action of the Federal Reserve in increasing the discount
rate and raising the ceilings on time deposit interest rates last
December. I noted that, in his letter to Representative
U llm an, the Secretary recalled “ th at the Adm inistration op­
posed the action of the Federal Reserve last D ecem ber” , and
th at he also presses a weak claim th at the A dm inistration has
not been remiss in striving for a “ healthy balance of
m onetary and fiscal policy” .
And now comes the action of the Board of Governors
reducing to 5 percent the ceiling rate which can be paid by
banks on so-called m ultiple m aturity CDs which m ature in
90 days or more, and 4 percent on such deposit instrum ents
which m ature in less than 90 days. This rapid response to
Adm inistration and Congressional pressure (as well as to the
difficulties of the existing situation) is a descent into the bog
of price fixing by ineffective inches. The descent is becoming
like the U nited States involvement in Vietnam; the more we
struggle to get out, the deeper we sink in.


The way we got into the present mess was by setting in­
terest rate ceilings, by legislation and regulation, which
banks can pay on tim e deposits, while an aggressive savings
and loan industry, without such restraints, was using every
available m eans to provoke a shift of bank deposits into the
shares of such associations. And then, when the banks were
unleashed, their retaliatory actions in trying to attract
deposits from their nonbank com petitors, and their rapacity
in trying to steal deposits from one another—as well as to ob­
tain a measure o f relief fro m the restraint being im posed
upon them by Federal Reserve policy— com pounded the dif­
ficulties in a difficult situation. W hatever slight amelioration
of the im m ediate political and economic pressures the latest
action of the Board of Governors may obtain, I suggest it
represents another step in the wrong direction.
I start with the proposition th at our present practice of
m onetary m anagem ent rests mainly on our ability to regulate
the availability of reserves in a banking system based on the
m aintenance of fractional reserves against deposits. T hat is
the fulcrum of our m ain lever. And I proceed with the belief
th at trying to fix (or peg) m arket rates of interest beyond use
of the discount rate, by statute or regulation, is tricky,
dangerous, and habit forming. Pegging m arket rates of in­
terest and pegging m arket prices of Governm ent securities
are two of a kind. They are both incom patible with a properly
functioning money and capital m arket and with the proper
functioning of the Federal Reserve System.
W ith these premises, and recognizing th at the present
situation is com plicated by short-term political and economic
pressures which seem to dem and some action, I think th at
the action should be geared to the control of reserves and not
to further control of interest rates. In this context, I thought
th at the earlier action of the Board of Governors in raising
reserve requirem ents on certain time deposits at certain
banks moved in the right direction (even though it appeared
to me to be based on some slippery legal logic and even
though it apparently did nothing to appease the critics of the


If a uniform reserve requirem ent on all deposits at all
banks could be legislated, so as to preserve the aggregate
total and without seriously disrupting the affairs of individual
banks, it would approach the ideal of a prim ary reserve re­
quirem ent geared to the needs of m onetary policy and
m anagem ent, instead of a requirem ent geared to the
historical accident of reserves related to the assum ed liquidity
needs of different kinds of deposits at banks in different
places. Such legislation isn’t in the realm of the possible at
present, of course. A lesser step in the appropriate long-term
direction, which would also take account of the short-term
problem , would be a gradual increase in the reserve required
against tim e CDs to the level of reserves required against
dem and deposits.
It seems to me th at the banks— and particularly the banks
in New York City and some other large centers—have played
a dangerous gam e since last D ecem ber with the difference
between reserve requirem ents for dem and and tim e deposits.
W hen I was at the Bank at th at time, some of your
economists told me th at there are a lot of leaks in the “ cir­
cular flow of money” . But I can’t get it out of my head th at
most of the large figure CD funds were in the banks as
somebody’s dem and deposits before the CD business took
hold. This would suggest th at the banks, in rapidly raising
the rates on their CDs since D ecem ber 1965, were seeking
not only to meet aggressive com petition from the savings in­
stitutions, b u t also were avoiding in some m easure the
restrictive policy of the System by prom oting a switch from
dem and to tim e deposits. R apid and massive shifts of this
sort can be disruptive of m onetary m anagem ent and unbri­
dled competition for deposits doesn’t necessarily mean th at
funds are flowing to the place where they can be used most
effectively. The response of interest rates to the course of the
economy and to Federal Reserve action in recent months
seems to me to have been excessive. Rates appear to have
been ratcheted upw ard by the action of the banks with
respect to CD funds, apart from the pressures of monetary
policy and m arket supply and dem and.


Action such as I am playing with, of course, would recreate
some questions of fair competition as between banks and the
savings institutions, but th at is a relatively m inor m atter so
far as overall m onetary policy is concerned. The answer to
th at problem should be sought in equity of treatm ent of the
banks and the savings institutions with respect to reserve re­
quirem ents, taxes, and other things by the governments
which charter them , and not in the fixing of interest rates
(ceilings) by the Federal Reserve, the Home Loan Bank
Board, or anyone else.
I realize th at there is a lot more th at could be said about all
of this, but I had become so interested th at I had to get
som ething on paper quickly in order to seek your calm view.
Am I lost in a thicket, or are the banks and the System?
W ith all the best.

P.S. This is a long letter, b u t I forbore m entioning sterling
which I am sure is on your m ind these days. Those who say
th at this is an interesting tim e to be alive usually have little
responsibility for anything big, or they would not be so chip­


Excerpt from Coordination o f Economic Policy,
a paper presented before a joint meeting of the
American Finance Association and the American
Economic Association on December 23, 1966.
(The entire paper appears in the Journal of
Finance, May 1967.)
O f special concern, also, in the m onetary sphere is the un­
fortunate situation into which we have drifted in the fixing of
ceiling rates which commercial banks, m utual savings banks,
and savings and loan associations may pay on savings and
time deposits or share holdings. Originally introduced to try
to protect commercial banks from their presum ed folly, the
authority to fix such ceilings has been stretched to serve as a
handm aiden to general monetary policy in bringing pressure
to bear on commercial banks to restrict their lending, and as
a yo-yo device to shift funds from one type of thrift institution
to another in accordance with the ideas of the authorities as
to who should get what. This is a heady but dangerous
The history of such regulation of m aximum rates of in­
terest to be paid on tim e and savings deposits of various kinds
and m aturities is a journey down a road paved with good in­
tentions and bad practices. They were first used by com m er­
cial banks as an excuse for not paying depositors as high a
rate of interest on such deposits as m arket conditions might
have w arranted. Later they became a halter on the com m er­
cial banks when the savings banks, and particularly the ag­
gressive savings and loan associations, began luring away
bank customers with offers of interest rates much higher than
the banks were allowed to pay. This hot money was invested
by the savings and loan associations largely in long-term
mortgages, a hazardous proceeding. Then the banks were
periodically let loose by a lifting of the ceiling on the rates
they could pay, and they immediately tried to reverse the flow
of funds by quickly moving their rates up to the new ceilings.
Finally this upward ratcheting of rates got out of hand and


the savings and loan associations were least able to compete
profitably for new funds at the new rates. Funds flowed out
of these associations, but not so much into the banks as into
securities, open m arket paper, and Government and Govern­
m ent agency obligations. At this stage, all financial in­
term ediaries were being ill served by the rate ceilings, but the
plight of the savings and loan associations was such that
special legislation was sought and obtained which authorized
the Federal regulatory authorities to get together and to give
a rate advantage, for the tim e being, to some of these institu­
tions. These attem pts to fix interest rates and to direct sav­
ings flows have helped cause some of the m ost rapid and
disruptive shifts in rates and in savings flows th at we have
ever experienced. It is hard to see how m arket forces could
have done a worse job. Now we have our hand in a pocketful
of fish hooks and it is going to be impossible to get it out
without pain and discomfort.


Chapter 6
Federal Reserve
Structure and
Monetary Policy

m l l a n S p ro u l, as m ig h t have been ex p e cte d from his
b ackground, for the m ost p art believed strongly in the existing struc­
tu ral organization of the Federal Reserve System—both internally (a
regional federation with central supervision) and externally (“ indepen­
d e n t w ith in th e g o v e rn m e n t b u t n o t in d e p e n d e n t fro m th e
governm ent” ).
The present chapter begins with his statem ent to a Congressional
subcom m ittee in 1952; it is the fullest and most com plete exposition he
ever m ade on the question of Federal Reserve “ independence” . Next is
a p ap er entitled “ Reflections of a C entral B anker” , presented in
D ecem ber 1955 before a joint m eeting of the A m erican Finance
Association and the A m erican Econom ic Association. Three 1958 let­
ters follow, all related to his m em bership (and then his nonm em ber­
ship) on the Commission on Money and C redit. The final paper is a
com m unication to the Congressional Joint Economic Com m ittee op­
posing m uch of the Com m ission on Money and C redit’s final report.
Ironically, it was Sproul him self who was largely responsible for the
creation of the Commission on Money and Credit in the first place. He
concluded “ Reflections of a C entral B anker” in 1955 by calling for “ a
fresh and thorough exam ination of our existing banking and credit
m achinery and our money and capital m ark ets” . At th a t tim e he was
still president of the Bank and the appeal struck a responsive chord in
influential circles.
Slightly over a year later, now no longer president, he enlarged on the
them e in a talk before the Econom ic Club of D etroit on February 18,
1957: “ We have had a succession of relatively narrow official inquiries
into this or th a t phase of our m onetary arrangem ents and our fiscal and


credit policies since the war, some of which were constructive and bore
good fruit and some of which assum ed the ritual character of the
m ating dance of the fiddler crab without apparent results. Now we need
a b road study, or an inquiry by an objective panel of citizens, divorced
from partisan public and special private interests, who will develop a
comprehensive picture of the structure of our financial system and the
ways in which it operates.”
The Commission on Money and Credit produced his “ broad study” —
b u t not one, in his view, sufficiently “ divorced from partisan public
and special private interests” . A lthough he had initially accepted an in­
vitation to become a m em ber of the Commission, he withdrew before it
began its deliberations on the ground th a t too m any of its m em bers had
been chosen because of their special interest point of view—thereby
foreclosing the opportunity to get an objective report devoted prim arily to
the public interest.
W hen the Com m ission’s report finally cam e out, in 1961, he opposed
m any of its recom m endations and strongly com m unicated those views to
the Congress (see below), despite the fact th a t his old friend M arriner
Eccles h ad been a leading m em ber of the Commission and one of its
foremost spokesmen. This caused a tem porary estrangem ent between the
two th a t was not fully healed until the late sixties, when they once again
found common cause in their shared opposition to Am erican military in­
volvement in Vietnam .


Statement from Monetary Policy and
Management o f the Public Debt, Hearings
before the Subcommittee on General
Credit Control and Debt Management
of the Joint Committee on the
Economic Report, 1952.
April 22, 1952
H onorable W right P atm an, C hairm an
Subcom m ittee on G eneral Credit Control and
D ebt M anagem ent of the Joint Com m ittee
on the Econom ic R eport
House of R epresentatives
W ashington 25, D .C .
D ear M r. P atm an:
In the course of the recent hearings of your committee
there were certain recurring questions which were never
definitely answered, so far as I know, and which perhaps
cannot be definitely answered. Nevertheless, the fact that
they were not answered or, perhaps, cannot be answered
definitively and categorically, should not be taken to mean
th at they contain proof of argum ent by default or opposition.
I have in m ind such questions as the following, which may
not have been asked in exactly this form but contained this
Is not the argum ent for an “ independent” Federal
Reserve System a denial of our dem ocratic ability to
function properly through the legislative and ex­
ecutive branches of the G overnm ent?
W hy should m onetary policy be treated differently
from , say, foreign policy or defense policy, in term s of
the adm inistrative arrangem ents and relations with
the Congress and the executive?


H asn ’t the tren d in all other countries been to “ n a ­
tionalize” the central banks where they were not al­
ready “nationalized” and to make them directly respon­
sible to the “governm ent” through the “Treasury” ?
Does not the growing interest of governments in
economic affairs, and their growing participation in
such affairs, m ake this trend logical and necessary?
These are questions which compel thought and analysis,
even though one may feel, as I do, th a t the right answer does
not follow the lead of the questioning.
In the first place, I think it should be continuously borne
in m ind th a t whenever stress is placed upon the need for the
“ independence” of the Federal Reserve System it does not
m ean independence from the G overnm ent b u t independence
within the G overnm ent. In perform ing its m ajor task —the
adm inistration of m onetary policy—the Federal Reserve
System is an agency of the Congress set up in a special form
to bear the responsibility for th a t particular task which con­
stitutionally belongs to the legislative branch of the Govern­
m ent.
It is in no sense a denial of our dem ocratic form of Govern­
m ent to have the Reserve System set up the way it is. It is
rath er an expression of the ability of our dem ocratic powers
to meet new or changing conditions. The Congress, as the
sovereign power in this area, has developed a special means
of perform ing a function with respect to which it has final
authority, b u t which it cannot adm inister from day to day.
The Congress has, of necessity, had to delegate some
segments of its power to agencies of its own creation which, in
tu rn , are responsible to it. The Federal Reserve System as
one of these agencies attem pts, as does the Congress itself, to
m aintain close relations with the executive branch of the
Governm ent, for the purpose of achieving a coherent and
generally unified economic program . But th at does not m ean
th a t physical m erger of the Congress or its agencies with the
executive branch of the G overnm ent is necessary or
It really takes us little way along the road to understanding
to ask why m onetary policy should be treated differently from
foreign policy or defense policy in term s of adm inistrative ar­


rangem ents. The form of the question implies th a t here are
m atters (defense policy and foreign policy) of greater im por­
tance to the country th an m onetary policy which are ad­
m inistered by the executive branch of the Government,
through the State D epartm ent and the Defense D epartm ent,
and not by an independent agency. No one, of course, would
want to enter into a footless argum ent about the relative im­
portance of policy in these areas to the citizens of the coun­
try—they are all of vital im portance. It may suggest a dif­
ference between them , however, to rem em ber th a t the
Federal Reserve is trying to help guide, regulate, and to some
extent control the functioning of the private economy, and
prim arily the domestic economy, whereas foreign policy and
military policy, while they affect our private and domestic af­
fairs, deal largely with our relations with other countries and
governments. It is in the general area of regulation of
domestic economic affairs th a t the Congress has found
repeated use for “ independent” agencies.
The underlying question is w hether it is better to have the
legislative branch in full and final control of the purse and
the money of the country, directly and through an agency
responsible to it, or w hether these m atters should be turned
over to the executive branch for adm inistration along with
most other governm ental affairs. The Constitution, insofar as
its language may be applied to present-day conditions, leaves
this m atter with the Congress. W isdom and experience sup­
port this early separation of powers. Over the years and
within our C onstitutional fram ework, the people have pre­
ferred to keep all aspects of the money power as the
prerogative of their duly elected representatives in the Con­
gress. The tem ptation to tam per with money for tem porary
gain or narrow purpose is always present, and particularly in
tim es of economic stress. The power to do so should be kept
where it can be most readily observed and its abuse most
quickly punished. T h at place is not under the protective wing
of the chief executive or hidden in one of the big departm ents
of the executive branch of the Government.
It may be instructive in this regard to com pare the role of
the Congress with respect to debt m anagem ent with its role in
relation to m onetary policy during the past three or four
decades. It is significant, I think, th a t the Congress, at fre­


quent intervals, has conducted comprehensive and useful in­
quiries into the conduct of monetary policy by the Federal
Reserve System. It has not m ade sim ilar inquiries into debt
m anagem ent; even during the investigations of this com m it­
tee, which have been m ost far-reaching, debt m anagem ent
has been considered only in its broadest aspects and, essen­
tially, only when it has becom e intertw ined with credit
policy. Yet debt m anagem ent is a concern of the Congress,
particularly under present-day conditions. To be sure there
are specific acts of the Congress which authorize whatever is
done in the nam e of debt m anagem ent, but the economic
ram ifications of the decisions taken with such legal authority
are generally unobserved or unexam ined. There seems to
have been a gradual and more or less tacit acceptance of the
assum ption th at debt m anagem ent is a function of the ex­
ecutive branch of Governm ent with which the Congress need
not concern itself once it has passed the enabling legislation.
T hat is what m ight happen to m onetary policy if it became
im bedded in the executive branch of the Government. That
would, I think, be a disservice to the country. The inquiry of
this com m ittee, and other Congressional investigations which
have preceded it, would seem to provide a clear-cut
dem onstration of the contributions which can be made to the
nation’s economic welfare by arrangem ents which lead the
Congress to appraise performance of its own agent from time
to time.
The particular forms and adm inistrative arrangem ents
which have worked in foreign countries for the adm inistra­
tion of m onetary policy are not a usable guide for us. In
most such countries, of similar economic m aturity and with
similar economic systems, the “ governm ent” comprises both
the executive and legislative branches in one responsible body
or parliam ent. The executive must explain and justify policy
from day to day, and is exposed to legislative questioning and
the possibility of legislative repudiation without the protec­
tion of a fixed term of office. The trend of relationship in
such countries between governments and central banks has
been a process of evolution. No m atter what their beginnings
the central banks have evolved as “ public” institutions.
Changes from private ownership to public ownership, where


they have occurred, have quite often confirmed what had
already happened. They have been changes of form rather
th an of substance and have usually tended to perpetuate
some independence (as I would define independence) for the
central bank rath er than to snuff it out.
It is more useful, as a guide, for us to observe that in most
of these countries, and certainly in the economically more
m ature countries, central banking is regarded as a field re­
quiring special technical competence and continuity of
m anagem ent rather than complete subordination to the
government of the day. The head of the central bank in these
countries is not brought directly into the government and
does not necessarily change with changes in the government.
The central bank is still a place where views on economic
m atters and m onetary policy can be independently developed
and candidly put forward no m atter what the precise rela­
tions to the government may be. It is chiefly in the countries
which are less advanced economically, where monetary policy
is likely to be less developed, and where the central bank is
prim arily the fiscal agent of the government, th at central
bankers are political appointees responsible to and changing
with each new executive.
I come back to the conclusion th at neither our form of
government nor the experience of foreign countries requires
or recommends the placing of the Federal Reserve System in
the executive branch of the Governm ent. It is the pursuit of a
doubtful logic and of neatness in adm inistrative chart m ak­
ing which suggests this solution of our problem. The fact that
there have been unfortunate differences of opinion between
the Treasury and the Federal Reserve during recent years
does not require the Congress to abandon its agent to the ex­
ecutive branch in order to bring about a better coordination
of powers. It has already been pointed out that the Congress,
through its specialized committees, reviews from time to time
the m anner in which the powers it has delegated to the
Federal Reserve System are exercised. If, in the course of
such reviews, the Congress finds th at relationships between
its delegated agent and the executive branch of the Govern­
m ent are not what it wishes them to be, it has remedies at


hand. It can define more fully and more clearly what it ex­
pects these relationships to be, an approach which recom­
m ended itself to the Douglas Subcommittee of the Joint
Committee on the Economic Report when it reviewed the
problem .
On the basis of my experience which now comprises over
thirty years in the Federal Reserve System at two Federal
Reserve Banks, and attem pting to make allowance for the
bias which such long association can foster, I believe that the
Federal Reserve System is an expression of an adaptable
creative governm ent. The System is by no m eans perfect; it
needs im provem ent. But it can provide a competent
mechanism , and a continuity of able personnel, which will
enable us to cope with the day-to-day intricacies of m onetary
policy, while rem aining responsive to the general economic
purposes of the Governm ent. The inquiry of your committee,
and the Congressional investigations which have preceded it,
provide a dem onstration, I believe, of the advantages of con­
tinuing the existing direct relationship of the Federal Reserve
System to the Congress, which causes the Congress to under­
take periodic comprehensive appraisals of System perfor­
If there is still tim e and if you think it would serve a useful
purpose, I would like to have this statem ent added to my
testimony before the committee.


Yours faithfully,
Allan Sproul



A board the S. S. Europa, returning fr o m Europe, in 1934: left to right,
George L. H arrison, head o f th e F ederal R eserve B a n k o f N ew York;
M ontagu C. N orm an, governor o f the B a n k o f E ngland; A lla n Sproul;
ship's captain, Oscar S c h a r ff

In L o n d o n in 1949, with R t.
Hon. H ugh D alton (left),
Chancellor o f th e E xchequer,
a n d others.


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W illiam M cC hesney M artin, Jr. (left), Chairm an o f the B oard o f Governors
o f the F ederal R eserve System , a n d A lla n Sproul, shortly a fter their testim ony
on “bills o n ly " before a C ongressional su b c o m m itte e in 1954.


A lla n S p ro u l in the early 1950s.


A lla n S p ro u l in 1960.

Paper read at joint meeting of American Finance
Association and American Economic Association,
New York City, December 29, 1955. Published in
Journal o f Finance (March 1956).
Reflections of a Central Banker
W hen you invite someone who is not a professional
economist to speak on an occasion of this sort, there is always
the danger th at he will try to talk like a professional
economist, and thus m ake a fool of him self while failing to
fool his audience. I am not a professional economist. I hate to
m ake a fool of myself. And I know I could not fool you.
I may have to skate pretty close to what is, for me, the thin
ice of theoretical economics, however, because although I am
not a professional economist I am a practitioner of an art
which m ust draw inspiration from the work of professional
economists. Central banking is largely practical economics, a
sort of laggard son of theoretical economics, and I have been
practicing central banking for the past thirty-five years. My
long apprenticeship in the field is the excuse for the title
which has been given to my talk, “ Reflections of a Central
B anker” . Maybe th at sounds as if I were going to give you
some rocking-chair stories of my experience, but th at is not
my intention. I think it would be pretty dull. W hat I would
like to do is to discuss a few of the things I have observed and
thought about while I have been an officer of the Federal
Reserve System, and which I think m ight merit a larger
m easure of interest and attention from you.
M onetary policy was in the doldrum s for a num ber of years
prior to and during W orld W ar II. It had been running fast
before a brisk breeze for quite a while prior to th at time, and
then the wind died down and its sails went slack. Big claims
had been m ade for it as a solvent of our economic ills, and
when it couldn’t support these claims there was a tendency to
discard it in favor of more direct and what m ight seem to be
more powerful economic controls. I suspect th at somewhat
the same pattern could be traced in the interest of econ­
omists, and particularly the younger economists, in the prob­
lems of central banking. For a time, preceding and following


the passage of the Federal Reserve Act in 1913, such prob­
lems attracted a lot of men. Then it began to appear th at
more im portant work could be done, in other branches
of economics, while interest in central banking suffered a
relative decline. Now there has been something of a
renaissance in the use of m onetary policy as one of the means
of achieving greater economic stability, without sacrificing
too much economic freedom. If we are careful not to claim
too much for it, it may hold its place. And I am hoping that
central banking problem s will similarly recapture the interest
of a new generation of economists.
Let me speak first and most particularly about the Federal
Reserve System, its organization, its policies, and its tech­
niques. You all know the general organization of the System,
but you may not all be aware of the evolutionary changes
which have been taking place within the general organiza­
tion. The m ain outlines of the System are much as they were
when the System was established forty-one years ago: a
regional system, federal in character, with a national coor­
dinating and supervisory body at W ashington and twelve
regional Federal Reserve Banks which are the operating
arm s of the System in their respective districts.
W ithin this framework, however, there has been a definite
tendency for power and influence to gravitate toward the
center, a corollary of developments in other areas of social,
political, and economic organization, as well as a result of
growing fam iliarity at the center with the means of ac­
complishing things at the periphery. Fortunately, I think, for
the development of the System and the good of the country
this tendency has not gone so far as to destroy either the
federal character of the System in terms of policy formation
or its regional character in term s of policy execution.
T hat this is so is largely due to the development of the
Federal Open M arket Committee and its evolution as a body
in which the various parts of the System are represented not
by blocs, not by opposing groups of members of the Board of
Governors on one side and presidents of Federal Reserve
Banks on the other, but by individuals having equal authority
and equal statutory responsibilities with respect to one of the
most im portant functions of the System, namely, open
m arket operations.


It is true th at the m eans of credit control, other than open
m arket operations, are scattered about the System in what
seems to be an illogical m anner. Discount rates are fixed by
the board of directors of the individual Federal Reserve
Banks, but are reviewed and determ ined by the Board of
Governors, and the setting of reserve and margin re­
quirem ents is wholly a charge of the Board of Governors. But
all of these measures of credit control m ust be integrated and
used as a common kit of tools. The Federal Open M arket
Committee provides the forum where discussion of their
coordinated use can take place without unnecessarily infring­
ing upon the rights and duties of other parts of the System.
The illogical, in term s of organization charts and precisely
drawn lines of authority, becomes logical in term s of the
evolution of a body which appropriately and effectively
represents all parts of the System.
It may be useful to recall how this unique arm of the
System developed, not from some sudden inspirational a t­
tack on the problem of bringing national unity to a regional
central banking system, but by trial and error during a
shakedown cruise of about twenty years’ duration. In the
beginning, adjustm ents of the reserve positions of m em ber
banks were m ade entirely through the discount window. E ar­
ly open m arket operations emerged in the form of an attem pt
by individual Federal Reserve Banks to supplem ent their
earnings. It soon became apparent th at the effect of these
purchases and sales of Government securities (and bankers’
bills) was to put reserves into the banking system or to take
them out without regard for what might be credit policy at
the time. The first informal attem pt to correct the situation
was the adoption by the Conference of Governors (presidents
now) of Federal Reserve Banks, in 1922, of a policy of buying
and selling Governm ent obligations in an orderly and
systematic m anner, and the appointm ent of a committee of
five governors to see th at this was done. This loose arrange­
m ent was tightened up somewhat by the Federal Reserve
Board in 1923, and the rule was adopted, which has since
become a statutory principle of open m arket operations, th at
the time, character, and volume of such operations m ust be
governed with prim ary regard to the accom m odation of com­
merce and business and to their effect on the general credit


situation. In 1930 an open m arket policy conference was
created which included a representative of each of the twelve
Federal Reserve Banks. Statutory recognition of and
restraint upon this particular m ethod of conducting open
m arket operations was legislated in 1933, when the banking
act of th at year created a Federal Open M arket Committee
and prohibited open m arket operations of Federal Reserve
Banks except in accordance with the regulations of the
Federal Reserve Board. The Federal Open M arket Com m it­
tee in its present form came into being with the passage of the
Banking Act of 1935, which also m ade it m andatory for
Federal Reserve Banks to engage in open m arket operations
in accordance with the directions and regulations of the
So far so good. Evolution has proceeded by a process of
natural selection toward a higher form of organism, which
retains some of the desirable characteristics of regional
organization within a federal system, while acquiring the
powers necessary to a coordination of national policy under
present-day conditions. This organism has survived for twen­
ty years and given evidence of being able to adapt itself to en­
vironmental change.
There are those, however, who see in the persistence of
present regional representation on the Federal Open M arket
Committee a serious flaw in our credit control machinery.
They appear to believe that this has enabled the poachers to
rem ain on the Committee along with the game wardens, in
the person of the five presidents of Federal Reserve Banks
who are members of the Committee along with the seven
members of the Board of Governors. The presidents of the
Federal Reserve Banks, they say, are selected by the directors
of the banks—to be sure, with the approval of the Board of
Governors. The nine men who serve as directors of Federal
Reserve Banks include six men elected by the m em ber banks
of their D istrict, and three of these men are bankers. Ergo,
the presidents of Federal Reserve Banks are the represen­
tatives of the m em ber banks and, in political term s, m ust be
responsive to the wishes of their constituents or they won’t be
presidents very long. And so, it is claimed, the group which is
supposed to be regulated and controlled has at least five
fingers in the pie.


This line of chain reasoning has its appeal if you believe
th at the presidents of Federal Reserve Banks are so beholden
to commercial bankers for their jobs, and so lacking in
awareness of their statutory responsibilities th at they cannot
honestly serve the public interest as m em bers of the Federal
Open M arket Committee. The fact is, however, th at the rela­
tion between a president of a Federal Reserve Bank and the
bankers of his District is not th at of an elected representative
and his constituents or an employee and his employer. The
present somewhat complicated arrangem ents for the election
and appointm ent of directors of Federal Reserve Banks, and
for the appointm ent of presidents of Federal Reserve Banks
by these directors, have instead a double virtue. First, they
inject into the System’s conduct of its everyday affairs
the standards of efficiency and practical judgm ent th at wellchosen business executives can provide from their own ex­
perience— and th at includes everything from judging the
fitness of a man to adm inister the complex operations of a
Federal Reserve Bank to the m aintenance of its plant and
equipm ent. This has contributed to an operating perfor­
m ance which has protected Federal Reserve Banks from
m uch of the criticism which is leveled against other institu­
tions not prodded toward efficiency by the profit motive. Sec­
ond, these electoral arrangem ents keep the presidents of
Federal Reserve Banks directly in touch with men who are
aware of banking and credit conditions and economic
developments in their Districts, and who can help to interpret
credit policy to the banking, business, and agricultural com­
m unity, without m aking the presidents subservient to
whatever may be the selfish interests of any group in the com­
On the even more im portant level of policy form ation,
the problem is not com parable to th at faced by a government
regulatory body fixing rates and conditions of service under
monopoly or semimonopoly conditions, nor to the problem of
an adm inistrative tribunal watching over observance of the
law. The main problem of the central banking system is the
appraisal of m ajor developments affecting the whole
economy and the form ulation of a policy which will influence


the money and credit sector of th at economy so as to con­
tribute to the stability of the economy as a whole. This is a
public service which requires of its practitioners continuous
contact with economic processes, and with people in the
m arketplaces of the country as well as with the represen­
tatives of governm ent at its political center. It requires practi­
tioners with an awareness of the problems of an economy
which is neither wholly private nor wholly public in
character. It requires practitioners who are insulated against
narrow partisan political influence on the one hand, and
against narrow selfish private influence on the other, but who
are responsive both to broad government policies and to the
im portance of private initiative and private enterprise in giv­
ing support to those policies. In my view there has been
developed in the Federal Reserve System in general, and in
the Federal O pen M arket Committee in particular, a unique
contribution to the dem ocratic adm inistration of such a task.
There is no conflict of interest in this adm inistration.
I have spoken of this m atter of organization at some length
because I think it is vital to the preservation of a Federal
Reserve System which retains regional vigor in a national set­
ting, and because attem pts to destroy the Federal Open
M arket Committee, as presently constituted, have been
m ade from tim e to time. In fact, a bill has been resting in a
Congressional com m ittee for the past year, which would
abolish the Federal Open M arket Committee and transfer its
functions to an enlarged Board of Governors of the Federal
Reserve System. T hat way lies a revolution in the organiza­
tion of our credit control machinery. I believe th at this is a
question which goes well beyond the mere mechanics of
organization, and which needs and deserves your closest
scrutiny as citizens, as well as economists and men of
So m uch for organization. Now for reference to policies.
The pream ble to the Federal Reserve Act says th at the
Federal Reserve System is to be concerned with the provision
of an elastic currency, affording a means of rediscounting
commercial paper, and establishing a more effective supervi­
sion of banking in the U nited States, and for other purposes.
Well, the “ other purposes” have long since stolen the show,
as m ust be the case when the manifold objects of an


economic experim ent are compressed into a few words, no
m atter how well chosen. We are all now engaged in an at­
tem pt to prevent the occurrence of wide and deep economic
fluctuations and to m itigate the hardships of the smaller
cyclical functions and the necessary internal adjustm ents
of a dynamic, growing, relatively free-choice economy.
The role of the central banking system in this attem pt to
achieve better balance in our economy has never been spelled
out specifically, and probably cannot be. We were not
specifically mentioned in the Employment Act of 1946, which
gave expression to the present general concept of the
economic role of government, but our share of the general
responsibility derives largely from th at expression of national
policy. I have always felt, however, th at if we are to be true to
the explicit requirem ents of our own charter we m ust em ­
phasize the implicit requirem ents of this broader charter by
combining stability of the purchasing power of the dollar
with the promotion of the most effective possible utilization
of our resources. We m ust be alert to oppose both infla­
tionary and deflationary pressures, either one of which can
upset the precarious balance of a high-employment, highproduction, high-income economy.
We are pretty much all of one m ind, I take it, when it
comes to opposing deflationary forces which threaten a waste
of hum an and m aterial resources. But there is no such
unanim ity when inflation— usually trotted out as mild infla­
tion—is in prospect or in being. Here is a central banking
problem with respect to which we should, perhaps, have had
more help from you than you have so far given us. Are we
right in the belief th at stability of the dollar and a growing
high-level economy are com patible? Or, at least, are we right
in our belief that there are so many forces in the economy
which now exert inflationary pressures as to make it likely
th at our role will generally be to resist those pressures in the
interest of sustained economic growth? The siren song of
gradual modest inflation, if it be th at and not the music of
the spheres, appeals to many groups, political and economic.
There is a tendency to relax and enjoy the sound of more
money in the cash register and the appearance of more
dollars in the balance sheet and in the pay envelope. The


problem has become a fundam ental one in the adm inistra­
tion of m onetary policy, and your advice and counsel and, in­
deed, your leadership are needed.
There are those, of course, who think the answer has
already been given, and th at our powers have been reduced
to exerting a gentle tug on the reins from time to time, which
is really adm inistered by the horse. W ith th at I cannot agree;
I cannot bear witness to the impotence of our central banking
system. It still has considerable power, even though we
recognize, as I think we m ust, th at general monetary controls
can no longer be used so drastically as to bring about a severe
restriction of the money supply with restriction of income,
production, and employment in its wake. In this we would
only find support if we were faced with a runaway inflation
due solely or prim arily to m onetary causes. T hat is an
emergency we have not had to face, and certainly do not have
any desire to face, even though the actual experience of such
a catastrophe might subsequently m ake for broader public
understanding of the anti-inflationary steps we m ust take
from tim e to time. In developed countries which have ex­
perienced hyper-inflation the central bank has only to m en­
tion the word “ inflation” to bring a large m easure of public
support to a restrictive credit policy. W hen we m ention infla­
tion as a reason for trying to restrain a boom, which shows
signs of tem porarily exhausting physical capacity to increase
the supply of goods and services, and in circum stances when
further injections of bank credit are likely to show up largely
if not entirely in increased prices, we are apt to be charged
with crying wolf when there is no wolf, to be denounced as
apostles of deflation. And, if actual inflation does not
develop, perhaps because we have done our job of helping
curb its development, the accusation against us seems to gain
increased validity. You can see why I would like to have aid
and comfort in resolving doubts about our ability to combine
a stable dollar with a growing, expanding, high-level,
peacetim e economy.
A nother aspect of policy form ation which concerns me is
whether or not undue reliance is now being placed upon the
judgm ents of m en, and whether we should seek some


autom atic or m echanical guides to policy action. I do not
think th at we have been led too far astray by reading our
press clippings. W hen it is said of the Federal Open M arket
Comm ittee th at “ these twelve men have more financial power
than any other official body in U nited States history” , we
may think it will impress our children and grandchildren, but
we are also hum ble enough to recognize th at the power we
wield is a circum scribed one which cannot be wielded ar­
bitrarily or capriciously. In the first place, it is a power exer­
cised by a group of individuals of differing backgrounds and
talents, and with differing approaches to the policy actions
upon which they m ust finally agree. There are checks and
balances such as are characteristic of our whole concept of
government, which give assurance th at decisions will be
reached by a deliberate process, and th at power will not be
wielded by an individual who m ight acquire the habits of a
despot. In the second place, it is power exercised in the white
light of full disclosure: weekly, monthly, and annually our ac­
tions are publicly reported for all to examine and to judge.
Finally, it is power exercised within the limits of national ob­
jectives and public tolerance, which would not perm it the
Comm ittee to indulge a sense of power or to experim ent
rashly with it, even if it were so inclined.
But to recognize the lim itations of our powers is not to
deny their im portance. We m ust and do take them very
seriously. We realize th at we are trying to measure and adjust
the flow of credit in a money economy, and we are steeped in
the belief th at whether the economy works well or poorly
depends in p art on our success or failure in discharging our
responsibilities. A nd therein, I think, lies a danger. The op­
pressive character of such a heavy responsibility leads men to
seek some autom atic or mechanical device as a guide to
policy action, in order to remove the risk of exercising fallible
hum an judgm ent. The gold standard, as it existed during the
latter p art of the nineteenth century and the early years of the
present century, largely perform ed this role in those countries
which had central banks and which looked first and almost
entirely to the state of their balance of payments and the size
of their gold reserves in form ulating central bank policy.


Those “ good old days” began to pass into history, however,
when central bankers began consciously to interfere with the
effects of inflows and outflows of gold upon the domestic
credit situation and, through it, upon the domestic economy.
They receded further into limbo as national policy became
more and more oriented toward the m aintenance of high
levels of production and employment at home, and tried to fit
together the international and the domestic situation without
subordinating one to the other.
And yet there have been and no doubt are serious students
of central banking who believe th at it cannot function prop­
erly without a “ norm ” of behavior, or a m athem atical equa­
tion, which will tell its hum an guides what to do and when to
do it. In the present state of our knowledge of the functioning
of the economic world, and despite the flood of available
statistics which never seems to be out of spate, I do not
believe that we can now devise a “ norm ” or an equation
which will relieve us in any substantial and consistent way of
the necessity of exercising hum an judgm ent in discharging
our responsibilities. W hat we need is not just a catalogue and
synthesis of symptoms, but an appraisal of a whole situation,
in c lu d in g th e co m p lex re a c tio n s o f h u m a n b e ­
ings—businessmen, labor leaders, consumers, politicians.
Early in my career in the Federal Reserve System I read a
statem ent by Allyn Young which impressed me then and im ­
presses me now:
In fact, we can be certain that reliance upon any sim ­
ple rule or set o f rules would be dangerous. Econom ic
situations are never twice alike. They are com pounded
o f d iffe r e n t e le m e n ts —fo r e ig n a n d d o m e stic ,
agricultural and industrial, monetary and non­
m onetary, psychological and physical— and these
various elements are com bined in constantly shifting
“Scientific" analysis, unaided, can never carry the
inquirer to the heart o f an economic situation. Judg­
m ent and wisdom— the power to take a com plex set o f
considerations into account and come to a balanced
view o f them — are quite as much needed as fa cts and
theories. The Federal Reserve System needs to operate
in the light o f all the inform ation it can get, and it


needs to have this inform ation organized and analyzed
in such a way as to give the m axim um am ount o f il­
lumination. B u t it also needs the guidance o f that prac­
tical wisdom which is born only o f experience.
If in our time, however, with increasing knowledge of how
credit policy works, we can discover a “ norm ” of action, or a
m athem atical guide to policy, our task would be greatly
simplified. To do that, we shall have to know more than we
yet know about how m onetary and credit policy actually af­
fect the economy as a whole and in its various parts, and with
what leads and lags. This will m ean deep probing into the
operations of our money and bank in g system as it is now
constituted, and into the effects of changes of monetary and
credit policy upon the whole economy working through the
banking system. U ntil this job is fu rther along, a good motto
for central banks may continue to be the lines of the poet:
O ur stability is b u t balance
A n d wisdom lies in m asterful
A dm inistration o f the unforeseen.
I am now going to turn to one of the techniques of execu­
tion of central bank policy, partly because it has im portance
from a general economic standpoint which transcends its
purely technical trappings, and partly because it has been the
subject of some public com m ent and discussion during the
past year or two. I refer to the range of open m arket opera­
tions: whether such operations should be rigidly confined to
short-term G overnm ent securities except under the most
unusual circum stances or whether a willingness at times to
operate over the whole range of m aturities of Government
obligations would provide a better means of m aking credit
policy effective. I am not going to reiterate all of my own
views which are already in the record and which are distinctly
minority views within the Federal Open M arket Committee.
There are as yet no absolutes in this business, however. Those
who advocate, and I who oppose, the present techniques of
the Federal Open M arket Committee are merely climbing the
hill on opposite sides, trying to reach the same sum m it of
knowledge and effectiveness.
But I do think th at the question is one worthy of the atten­
tion of at least some of you who are here today, not merely as


a m atter of casual com m ent in panel discussions, or writings
on other subjects, b u t as som ething which has real economic
significance and deserves serious study. A nd I am encour­
aged in this opinion by the articles which have appeared in
the journals during the past year. If the present technique
derives from a too rigid application of supposed classical
economics to problem s of money and credit, we need
enlightenm ent from you.
I had supposed th at the classical economists, the men of
private property and free m arkets, did not think th at free
m arkets could provide everything necessary to the public
good, and th a t if they were our contem poraries they might
have th o u g h t of the m arket for money and credit as
som ething separate and apart from other m arkets, and as an
appropriate area of intervention by government or agencies
of governm ent—intervention at th at cross-section of the
economy where the public need for some overall economic
guidance toward stability could be provided with a m inim um
of direct intrusion into the details of production and distribu­
tion. And I had supposed th at this would mean central bank
action to help the m arket in determ ining the significant
characteristics of the m aturity structure of interest rates im ­
plied by the kind of credit policy being pursued— not to try to
set decimal points on daily quotations, nor to peg a curve, but
to nudge the m arket in the direction sought by credit policy.
And finally I had supposed th at the effects of increases or
decreases in capital values, arising from changes in long-term
rates of interest, were becoming more and more im portant in
an economy in which public as well as private debts have
become so large a part of our so-called assets, and th at some
direct intervention in this area m ight at times be appropriate.
W hether or not these or contrary suppositions are true, it
seems to me th at this m atter of open m arket techniques in­
volves problem s of economic significance beyond its im ­
m ediate technical application, and th at it deserves your study
and your published findings.
There is another area of credit adm inistration which can
be brought under the loose heading of techniques. T hat is the
problem of selective credit controls, and particularly the con­
trol of consum er instalm ent credit. I suppose th at all of us


who have a bias against detailed planning “ from above”
would prefer th at credit policy accomplish its m ajor aims by
general quantitative controls which work impersonally but
pervasively, and without interfering directly with individual
transactions. But if there has grown up a form of credit ex­
tension which, no m atter how prodigious its contribution to
mass production and mass consum ption, is also introducing
a dangerous elem ent of instability in our economy, and if it is
difficult to reach this credit area by general credit measures
without adversely affecting all of the less avid users of credit,
is there not a case for a selective credit control? Thackeray
says in Vanity Fair: “ Everybody m ust have observed how well
those live who are comfortably and thoroughly in debt; how
they deny themselves nothing; how jolly and easy they are in
their m inds.”
Well, I am not jolly and easy in my m ind. I am disturbed
by the present situation in consum er instalm ent credit, just
as I was concerned, under different conditions and for dif­
ferent reasons, about stock m arket credit until the Board of
Governors was given power to establish, and to vary, margin
requirem ents. I am disturbed not by the total am ount of con­
sum er credit, b u t by the fact or the indication th at successive
relaxation of term s has been largely responsible for keeping
the ball in the air. This is a process which cannot go on in­
definitely, and when it ceases there will come a time when
repaym ent of old debt will catch up with new extensions of
credit. The special stim ulus of a rapidly increasing net supply
of consum er credit, which has contributed so much to the
record production and distribution of consumer durable
goods during the past year, will then be gone, at least tem ­
porarily. Will it then become clear th at we drove our produc­
tive capacity to unsustainable limits—for the present—by
borrowing consum er dem and from the future?
This is a subject on which many voices have expressed
many views, but usually they have not been views which
seemed objective enough to help resolve the question in the
best interest of society as a whole. I know th at there are those
who believe th at selective credit controls are a dangerous step
on the road to general overall planning, and I have no desire
to become a fellow traveler on th at road. But I do believe th at
there is a tem ptation to abuse consum er credit in boom


times, th at it can thus become a serious source of instability
in our economy, and th at we would not jeopardize our
general freedom from direct controls by giving the Federal
Reserve System perm anent authority to regulate consumer
credit. I freely adm it, however, th at this view would be better
held if it were based more firmly on objective study and
research into the place of consum er credit in our economy
and less on observation and opinion. T hat is the sort of basis
for consideration and action which you could provide.
The same or something similar might be said of m ortgage
financing, but I shall not try to go into that. Economics and
social objectives become interm ingled so fiercely when hous­
ing is discussed as to m ake calmness and objectivity a h an d ­
icap, if not a badge of moral delinquency.
The basic question involved in both cases is whether an a t­
tem pt should be m ade through regulation of these specific
types of credit to exert a stabilizing influence on areas of the
economy which, in the past, appear to have been major
sources of instability of employment and production, or
whether we should be content with efforts to regulate the
overall availability and cost of credit, hoping that fluctua­
tions in the m ajor areas of the economy will balance out. O ur
experience thus far suggests to me th at general credit con­
trols can exert an effective influence on these particular types
of credit only with a considerable lag, and that we cannot rely
upon countervailing forces in the economy to m aintain
overall stability.
Perhaps you can see where I have been heading in these
somewhat random rem arks, which have touched on a few
aspects of central banking organization, policies, and tech­
niques, while not m entioning others of equal or, perhaps,
even greater im portance. In general my purpose has been to
fram e a plea for help— a plea that theoretical economics
come more steadily and effectively to the aid of practical
economics in such fields as central banking.
I recognize th at theoretical economics is the basis of prac­
tical economics. And I recognize that theoretical economists,
in our time, seem mostly to have preferred to work on general
principles, or on building models of economic perform ance,
rather than on economic policies and their effects. I have not
the competence to challenge the value of their work, but I


question whether it is enough. I question whether economists
individually and as a group can fulfill their obligations as
citizens, as well as students and scholars, if they do not try to
bring these interests together. I would say we need a revival of
political economy, and I would invite you to look on central
banking as a good place to start. The economists of an earlier
day did not hesitate to jum p into the thick of battle over cur­
rent issues, and it did not seem to lower their academic
standing then nor should it now. They were pam phleteers,
they organized and participated in public meetings and
discussion groups, they brought their influence to bear in any
way they could on public officials and private citizens. They
were pungent and provocative in debate. M acaulay said of
Jam es Mill and his followers on one occasion, “ These smatterers whose attainm ents just suffice to elevate them from the
insignificance of dunces to the dignity of bores.” Perhaps
th at sort of thing is a little too violent for our present mood
and condition. But it might be better than withdrawing com­
pletely into a realm of esoteric jargon, or indulging in an ex­
cess of politeness in dealing with your peers and your public,
so th at issues are seldom drawn clearly enough to attract
public attention and prom ote public understanding. By your
studies and your research and your application to the prob­
lems of economic theory, you have earned the right to be
heard, and to give some sense of continuing direction to of­
ficial action and to public opinion. I would like to see that
right more vigorously exercised.
I feel th at it could be exercised more vigorously and to ad­
vantage in the field of central banking. We have excellent
research staffs in the Federal Reserve System: able
economists and statisticians and devoted students of money
and banking problems. But their work needs more cross­
fertilization and critical analysis by thoughtful and disci­
plined minds outside the System who can apply their talents
to this special field without the bias of an organizational
viewpoint. Not enough work has been done, I would say, on
the m onetary problems of a mixed government-private
economy, on the functioning and form of a fractional reserve
banking system in such an economy, on the growing im por­
tance of other financial institutions, which crisscross both the
fields of commercial banking and investment banking, and


on the perform ance and characteristics of our money and
capital m arkets. These are subjects which are becoming
critical in the development of central banking.
You have tended, I venture to say, to occupy yourselves too
m uch with the refinem ent of old ideas which are no longer
wholly relevant, with the cataloguing of new economic pro­
cesses, with the application of m athem atical equations to
situations too dependent on hum an behavior to be am enable to
such treatm ent, or with building utopian models of the dream
world of the future, while neglecting the hard but rewarding
task of studying the present in a way which would contribute ef­
fectively to public policy and private well-being. If you will not
use it against me, I would say th at you have left the latter task to
the improvised judgm ents of practitioners who have lacked the
tim e or the equipm ent needed to work out a coherent and con­
sistent basis for the actions which they m ust take.
It is said th at there has been a renaissance of monetary and
credit policy in recent years. In fact, some extravagant claims
are again beginning to appear concerning the power and in­
fluence of m onetary measures in curing or am eliorating our
economic ills. Governments may be tem pted to commit or
condone economic errors, in the hope that m onetary policy
can redress the balance, and in the hope th at the central
banking system will stand as a buffer between the govern­
m ent and an electorate which chafes at restraint. We shall
have to guard against asking too much of monetary policy.
But it is a fact th at m onetary measures have reestablished
themselves, and rightly so, as one of the principal means used
by governments to try to keep national economies in order
without the stifling restrictions of more direct physical con­
W hat I would now like to see is a renaissance in the study
of money and banking in general and of central banking in
particular. I would like to see a fresh and thorough exam ina­
tion of our existing banking and credit machinery and our
money and capital m arkets. I would hope th at out of such
study and exam ination would come new ideas and new pro­
posals which would give shape and direction to future public
policies and private actions. It would be a task worthy of the
best talent you can bring to bear on it.


Letter to Alfred Hayes
February 21, 1958
D ear Al:
I want you to know th at I have been asked and have agreed
to serve as a m em ber of the Commission on Money and
Credit which is being set up by the Committee for Economic
Development, with the financial support of the Ford F ounda­
tion. Although I consider this commission distinctly second
best, as com pared with a commission which might have been
nam ed by the President, if the Congress had been so in­
clined, I practically chiseled out the niche in which I have
been placed. It would have been difficult for me to decline to
serve, even if I had wished to do so, and I had no such wish. I
think this way of attacking the problems involved is better
than not attacking them at all, or attacking them piecemeal.
The personnel of the Commission is not going to be what I
would have considered ideal, either; th at is, a group of men
with sufficient general knowledge of the field to enable them
to use “ experts” wisely, and sufficiently objective to be able
to hear and consider all points of view, and to determ ine
w hether and to what extent differing points of view should be
reflected in the findings of the Commission and its recom­
m endations for action. This was never a realistic hope, I sup­
pose, and it may not even have been a good idea. W hether it
was or not, the Commission is to be made up of people
rep resen tativ e of d ifferen t in terests an d d ifferen t
geographical areas—big business, small business, big banks,
small banks, other financial institutions, labor, agriculture,
etc., coming from the northeast, the southeast, the middle
west, the far west, etc. I shall now have to hope that the
m em bers of the Commission do not consider themselves as
having been selected to “ represent” these various interests
and places, in the sense of being bound to support the views
and interests of their “ constituents” , whether they serve the
broad national interest or not. W ho knows, maybe my col­
leagues on the Commission will prove to be as objective as I
think I am!


As you know, the studies of the Commission are to go for­
ward during the three years ending December 31, 1960, and
it is anticipated th at the Commission will meet, on the
average, about once a m onth and will have lots of homework,
too. No doubt the Federal Reserve System will be called upon
to help the Commission in many ways. As an individual
m em ber of the Commission, I shall also need help, and I
hope th at I can call upon the people at the New York Bank
from time to time, if I am not too greedy in my calls. This
would be a happy arrangem ent for me if it is agreeable to
I was interested, of course, in the announcem ent W ednes­
day afternoon th at the Board of Governors had reduced the
reserve requirem ents of mem ber banks. It had seemed to me,
with the sharp deepening of the recession, the System was be­
ing a little niggardly in increasing the reserves of the banks
through open m arket operations, even though the effect of
the actions it has taken has been dram atic in term s of the in­
terest rate structure. It now looks as if, following the pattern
of last November when open m arket action was preceded by
discount rate action, the System has taken action on reserve
requirem ents rather than through the more gradual pro­
cesses of the open m arket. This has the advantage of bring­
ing moves toward credit ease quickly to the attention of a
m uch wider public, I suppose, than would open m arket
operations. And this first hom eopathic dose probably com­
forts a Board which is still worrying about a revival of infla­
tionary pressures, and convinced it erred in 1953 when a
massive dose of new reserves was adm inistered.
On the well-established principle th at economic situations
are never twice alike, however, I am wondering whether the
lesson the Board sees in 1953 can be applied in 1958. There is
an equal danger, I think, th at this recession is not 1953-54
(or 1948-49) over again, but a downturn which contains a
m uch greater risk of going deeper and lasting longer than the
two preceding postwar recessions. If this be so, it will be
possible to wait too long to take more vigorous credit action,
and we may then find th at our medicine doesn’t work as well


as it m ight have earlier. It can be said th at a tax cut will do
the job if more vigorous action is needed, but I would like to
have credit policy play its proper role, too. Nor am I con­
vinced th at we can turn the economic spigot on and off by
fiscal means, as easily as now seems to be assumed; certainly
not without inflationary risks which equal, if they do not ex­
ceed, those which m ight attend a more vigorous relaxation of
The banks out here are disappointed, of course, in the
small size of the reduction in reserve requirem ents. The
am ount of the im m ediate reduction for individual banks
seems to them to be picayune, and bankers never have been
much impressed by the effect of such a reduction on the lend­
ing and investing power of the whole banking system, even
when they have understood it. They want something which
enables them directly and immediately to increase their earn­
ing assets substantially. This latest move, therefore, is getting
less credit than it deserves. (It leaves the Federal Reserve
Bank of San Francisco further out on the limb; a case of mis­
placed independence which I believe must have been forced
on H erm ann Mengels by his directors.)
I hope th at you don’t m ind my writing you in this way. I
stay away from the San Francisco Bank, but I don’t do so
well when it comes to the New York Bank.
W ith best regards.



Letter to Alfred Hayes
March 20, 1958
D ear Al:
T hank you for letting me know about the rum ors which
are going around about CED ’s Commission on Money and
Credit. They had not reached me (nor had any direct infor­
m ation from headquarters), but I am not surprised and I
suspect th at they are true. It is now over a m onth since Don
David telephoned me and then wrote me, asking me if I
would serve as a m em ber of the Commission. At th at time I
think he expected to be able to announce the m em bership of
the Commission on or about M arch 1, a hope later deferred
to m id-M arch. The delay in m aking the announcem ent had
led me to wonder whether some of those invited were not will­
ing to serve, and the labor people (two of them) would seem
to be the most likely candidates.
This rem inds me of our conversation, when I last saw you,
about trying to get representatives of labor interested in
Federal Reserve policies and operations. I told you, I think,
of my failure to get anywhere with them , and expressed the
hope th a t you would be more successful. Their suspicion of
bankers (W all Street?) is deep-seated and uninform ed, and
the more dangerous for th at reason. It is tim e they realized
that, if they are going to live and work in a money economy,
they should know more about how such an economy works
and should be eager to take p art in attem pts to improve its
workings. I can’t believe th at they really want to do away with
the private sector of our financial machinery.
I do come back, however, to the mistake which I think
CED m ade in trying to have the m em bership of the Commis­
sion representative of various economic and geographical
areas of the community. My idea was to have a commission
which would carry its own credentials of competence in the
field, and which would rely on its studies and hearings to
bring out all points of view. I can’t say that CED came close
to this ideal in its proposed Commission (so far as I have had


names), and some of those proposed really surprised me, and
caused me to have second thoughts about serving. I still cling
to the hope th at a good job will be done, but not with the en­
thusiasm I once had. I try to rem em ber, too, th at I am in­
clined to think th at my way of doing things is best!
W ith best wishes.



Letter to Alfred Hayes
June 13, 1958
D ear Al:
I think th a t you should know th at I have decided to
withdraw from the M onetary Commission, and have so ad­
vised Don David.
The original prospectus of the Commission said th at “ It is
of the utm ost im portance th at the m embers of the Commis­
sion be persons of unquestioned reputation for competence
and objectivity. The m em bers should be chosen for their in­
dividual qualities, not as representatives of organizations or
sectors of the community. A balanced representation of
philosophies and approaches should be sought.”
The Commission of fifteen members, on which I agreed to
serve last February, did not wholly realize these ideals but
came close enough, I thought, to make my m em bership
useful and rewarding. The enlarged Commission, the
m em bership of which was unknown to me until the CED
press release came out at the end of May, departs so far from
these ideals as to m ake my m em bership unpalatable. It
comes down to a personal judgm ent as to the conditions and
circum stances under which you can do your best work and
hope for the satisfactions which a workman requires. I decid­
ed th at I could not hope to find these conditions and cir­
cum stances as a m em ber of this mixed and unwieldy Com­
mission. It has been a tough decision for me to make. I have
tried to m ake it calmly and without rancor.
Now th at I am home again, there are many things I would
like to talk over with you, which we didn’t have time to get in­
to when I was at the Bank. I think th at my visits have been
too hurried, but th at I may write oftener to share ideas and
views with you.
W ith best regards.



From Review o f the Report of the Commission
on Money and Credit, Hearings before the Joint
Economic Committee, August 1961
A ugust 16, 1961
H onorable W right P atm an, C hairm an
Joint Com m ittee on the Economic Report
U nited States Congress
W ashington, D .C .
D ear M r. Patm an:
I regret th at I could not accept your invitation to appear at
the current hearings of the Joint Committee on the Economic
Report, to testify regarding the recom m endations of the
Commission on Money and Credit concerning the structure
of the Federal Reserve System. I realize th at a m em orandum
of views is not a wholly satisfactory substitute for an ap­
pearance before the Committee, with its opportunity for
questioning by interested Committee members. Nevertheless,
since the subject is one in which I have a keen interest, and a
degree of knowledge based on thirty-six years spent in the
Federal Reserve System, I have thought it worthwhile to use
this m eans of placing my views before the Joint Committee.
To identify myself in the m anner which has become
custom ary at hearings of the Committee, my nam e is Allan
Sproul, I am a director of the Wells Fargo Bank and
American T rust Company of San Francisco and of the Kaiser
Alum inum and Chemical Corporation of O akland, Cali­
fornia, and I was president of the Federal Reserve Bank of
New York and vice chairm an of the Federal Open M arket
Committee for fifteen years from 1941 to 1956. In presenting
my views, however, I represent no one b ut myself; neither the
private business community, the commercial banks, nor my
form er associates in the Federal Reserve System.


I should also m ention, I think, th at I was nam ed as a
m em ber of the Commission on Money and Credit when it
was first being organized in February 1958. In preceding
years I had been am ong those who had advocated a study of
our financial system by a national monetary commission
established by the government, and composed of a small
num ber of men com petent in the field, experienced in
economic m atters, and with a reputation for objectivity. This
official or governm ent commission did not come to pass. As a
second choice, the private commission sponsored by the
Com m ittee for Economic Development seemed to offer a p a r­
tially satisfactory means of bringing our financial machinery
under scrutiny and suggesting possible ways of improving it.
W hen I accepted appointm ent to the Commission in
February 1958 it was to be a Commission of fifteen members
“ chosen for their individual qualities, not as representatives
of organizations or sections of the com m unity” with a
“ balanced representation of philosophical approaches” . In
mid-April 1958 I was advised th at it had been decided th at
“ for more ideal balance the Commission should be expanded
to a m inim um of twenty-five, bringing about representation
of areas, points of view, and interests which were not ade­
quately provided for in the Commission of fifteen as originally
planned” . I learned of the m em bership of the enlarged Com­
mission by way of a press release on May 29, 1958. On June
12, 1958 I withdrew from the Commission. My resignation
was announced in a press release of the Commission on
January 22, 1959.
So m uch for identification. As you requested, I now ad­
dress myself to th at p art of the recently published report of
the Commission on Money and Credit (CMC), which has to
do directly with the structure of the Federal Reserve System.
In this area, at least, I suggest th at the CMC, in its efforts to
compromise the various points of view and interests of its
m em bers, produced a doubtful package of recom m enda­
tions. Some of them are good but, in the aggregate, they
represent an attem p t to pacify those who would
“ nationalize” 1 the Federal Reserve System by destroying its
Federal character, and they tend to water down the symbols
of support of the System by the private financial community
1 A vague general term used to frighten conservatives.


to the point of poisoning rath er than preserving a relation­
ship which has m ade successful evolutionary progress for half
a century. I directly challenge, therefore, so far as the struc­
ture of the Federal Reserve System is concerned, the state­
m ent of the CMC in the introduction of its report, th at it has
tried to “ confine its recom m endations and suggestions for
change only to situations where the present structure has not
worked well” .
W hat are the recom m endations and suggestions of the
CMC for changes in the structure of the Federal Reserve
1. The FRB (Board of Governors of the Federal
Reserve System) C hairm an and Vice C hairm an should
be designated by the President from among the B oard’s
m em bership, to serve for four-year term s coterminous
with the President’s.
2. The FRB should consist of five m em bers with
overlapping ten-year term s, one expiring each oddnum bered year; m em bers should be eligible for reap­
pointm ent.
3. The FRB C hairm an should be the chief executive
officer of the B oard, empowered to handle ad ­
ministrative m atters. The law should be clarified to
authorize the Board to delegate to Board committees or
to B oard m em bers individually, or to senior staff of­
ficers of the Board, any of its functions in the ad ­
m inistration of its powers in regard to the supervision
of the banking structure, etc. Any actions so delegated
should be subject to review in the B oard’s discretion.
4. O ccupational and geographical qualifications for
Board m em bers should be elim inated. Instead, the
statute should stipulate th a t m em bers should be
positively qualified by experience or education, com ­
petence, independence, and objectivity com m ensurate
with the increased responsibilities recom m ended for
them in the achievement of low levels of unemploy­
m ent, an adequate rate of economic growth, and
reasonable stability of price levels in the economy.
Salaries of top officials throughout the Governm ent


should be sharply increased and, in view of the gravity
of their responsibilities, FRB mem bers should be com­
pensated at the highest salary level available for ap ­
pointive offices in the Government.
5. The present statutory Federal Advisory Council
should be replaced by an advisory council of twelve
m em bers appointed by the Board from nominees
presented by the boards of directors of the Federal
Reserve Banks, etc.
6. The law should formally constitute the twelve
Federal Reserve Bank presidents as a conference of
Federal Reserve Bank presidents, to meet at least four
times a year with the Board, and oftener as the Board
finds necessary.
7. The determ ination of open m arket policies should
be vested in the Board. In establishing its open m arket
policy, the Board should be required to consult with the
twelve Federal Reserve Bank presidents. The deter­
m ination of the rediscount rate (the same for all
Reserve Banks) should be vested with the Board. In
establishing this rate, the Board should be required to
consult with the twelve Federal Reserve Bank
presidents. The determ ination of reserve requirem ents
should continue to be vested in the Board. In
establishing these requirem ents, the B oard should be
required to consult with the twelve Federal Reserve
Bank p resid en ts.2
The first five of these recom m endations, which I would
characterize as the trim m ings of this section of the report of
the CMC, might be accepted, I think, as moves in the right
The suggestion th at the term s of office of the C hairm an
and Vice C hairm an of the Board be m ade coterm inous with
the term of office of the President has been attacked by those
who see this as an attem pt to introduce partisan politics into
the functioning of the Board, which is a sin we all deplore.
In veering toward centralization of power within the Reserve
System, the CMC rightly avoided the recommendation sometimes
put forward that the Board as well as the Open Market Committee
should be abolished, and our monetary affairs placed in the hands of
a single executive. This country has shown a wise aversion to
“czars” , and still likes the idea of some checks and balances.


The facts of the m atter as I have observed them , however, are
th a t the C hairm an of the Board really serves largely at the
will or pleasure of the President now. The C hairm an of the
Board is the chief point of contact between the Board and the
President, the Secretary of the Treasury, the Council of
Economic Advisers, and all the most im portant officers of the
executive branch of the G overnm ent, and only to a slightly
lesser degree with the Congress. If he is persona non grata at
the W hite House, his ability to carry out the duties of his of­
fice is so gravely dam aged as to m ake it im practical and un­
wise for him to continue as Chairm an. The present wording
of the law concerning the term of office of the C hairm an
seems to me merely to mask this fact of life. I do not mean,
however, th at the C hairm an of the Board m ust become a
subservient political appointee; he retains the right and the
duty to represent the Board fairly and forcefully in expound­
ing its views and m ethods, and preserves the individual right
of resignation without disloyalty to the President, or party, if
he decides th at his service as C hairm an is no longer com pati­
ble with the economic policies being followed by the Govern­
A reduction in the num ber of m em bers of the Board from
seven to five, and in the term s of office from fourteen to ten
years, with eligibility for reappointm ent, should m ake a
modest contribution to improving the quality of the Board
m em bership. And, as the report of the CMC says, it is a sug­
gestion which retains stability of m em bership, protects in­
dependence in expressing views and advocating policies
which may not be popular, and provides some safeguard
against superannuation.
The recom m endation th at a m eans be sought to make
clear th at the Board, as a whole, is not to be enmeshed with
routine adm inistrative m atters, to conserve its m em bers’
tim e, and to arrange for the more expeditious disposition of
its caseload of business, has merit. The success of the sugges­
tion is bound up, however, with questions of the qualifica­
tions for Board m em bership, the size of the Board, and the
extent to which the individual m em bers participate with the
Chairm an in working out coordination of m onetary policy


with the general economic policies of the Governm ent. One
reason for the im plied “ congestion of detailed business at the
to p ” at the B oard is the druglike attraction of such business
when sitting in your office pondering the broad issues of
m onetary policy becomes tedious.
There is no question in my m ind th at the present occupa­
tional and geographical qualifications for Board m em bers
have outlived whatever sound purpose they ever had. They
represent an embryonic phase of thinking concerning the role
of a central banking system in this country. The general
statem ent of qualifications suggested by the CMC is m uch
m ore in tu n e with the responsibilities of the Federal Reserve
System, present or proposed, and with the need to abandon
ideas of finding effective national m onetary policies in an a t­
mosphere of representation of special interests. The com pan­
ion recom m endation of increased salaries for Board
m em bers has become a standard item in all considerations of
the m em bership of the Board. The consistency with which
this recom m endation has been ignored by the executive and
legislative branches of the Governm ent suggests th a t there is
a roadblock to its acceptance which does not have to do with
the specific merits of the recom m endation.
The suggestion of the CMC concerning the Federal A d­
visory Council appears to be an attem pt to rescue from possi­
ble eventual extinction a body which was established in the
early days of the Federal Reserve System as a sop to the
bankers who had been ruled off the B oard on the theory th at
you don’t m ake game wardens out of poachers. Although the
B oard can seek advice from whatever individuals or groups it
chooses under its general powers, there is some m erit in re­
taining a statutory body, outside the Governm ent and the
Federal Reserve System, with which the Board m ust consult
from tim e to time, and which has statutory authority to ask
questions, seek inform ation, and proffer advice. I do not
think, however, th at it is necessary or desirable to change the
m ethod of election of m em bers of the Federal Advisory
Council. W hat is necessary and desirable is to smash the
tradition, growing out of the early history of the System, that
the m em bers of the Council elected by the boards of directors


of the Federal Reserve Banks should be commercial bankers.
Relieved of this anachronism , the boards of directors of the
D istrict banks are m uch better able to select representatives
of their Districts th an is a board at W ashington, and the
privilege is a desirable one in the relations between the Board
and the Districts. T urning the present election process
around, so as to m ake the Board the final appointing
authority, seems to me to be a picayune obeisance to an
obsession with what the CMC calls the influence of the
“ private base” of the System.
Now we begin to get down to the m eat in the coconut. The
recom m endation th at the law should formally constitute the
twelve Federal Reserve Bank presidents as a conference, to
m eet at least four times a year with the Board, is an un­
necessary and spurious attem pt to seem to increase the
stature of the presidents of the Federal Reserve Banks, who
are to be deprived of their most im portant function by the
next recom m endation of the Commission. The conference of
presidents of Federal Reserve Banks has been in existence for
years; it meets regularly to discuss m atters of credit policy
and Federal Reserve adm inistration; it consults with the
Board as a necessary corollary of their joint responsibilities.
The sanctions of tradition and long practice have given it a
place and stature in the working of the Federal Reserve
System, to which statutory recognition can neither add nor
Having paid a left-hand com pliment to the presidents of
the Federal Reserve Banks in this recom m endation, the
CMC in its next recom m endation relegates them to the role
of branch m anagers by proposing th a t all the main powers of
the System in the field of m onetary policy should be lodged in
the Board, with only advisory participation by the presidents
of the Reserve Banks. It does this, first, on the ground that
these powers— determ ining rediscount rates, deciding open
m arket policy, and fixing reserve requirem ents— “ should be
com plem entary and governed by the same considerations,
th at is by the same people in the same forum ” . And, second,
the CMC says th at the exercise of these powers belongs ex­
clusively in the hands of public officials: th at is, the Board,
and th at there should be no ambiguity about where this
responsibility lies.


The Commission is right, of course, in saying th at these
powers should be and are com plem entary, and it is right in
saying th at they should be exercised by public officials, but
the fog of compromise evidently concealed from the Commis­
sion the logical suggestion, based on successful experience,
th at the place to lodge these complem entary powers is in the
Federal Open M arket Committee (as it would be constituted
on the present form ula, if the size of the Board were reduced
from seven to five members). The Federal Open M arket
Com m ittee has become the heart of the Federal Reserve
System; cut it out and you have a skeleton. It is a unique
development in central banking which has evolved out of the
experience of the System with the needs of a country of the
size and character of the U nited States.3 It is m ade up of men
having statutory responsibilities, who serve on the Committee
as individuals under law, and who are public officials and
public servants in every real sense. Finally, the present con­
stitution of the Federal Open M arket Committee observes the
cardinal principle of central banking that those who determine
m onetary policy should not only coordinate their actions with
the general economic policies of the Government, but should
also have a direct contact with the private money m arket— a
contact which comes from living in the m arket, operating in
the m arket, knowing the people in the m arket, and being
able to feel the pulse of the m arket by hand from day to day,
and not by random telephone calls or reviewing cold statistics.
Here, I think, is a tender point with some m embers of the
joint com m ittee and indeed of the whole Congress, and with
some people in the Federal Reserve, but it cannot be avoided.
The first and most direct point of contact between the
policies of the monetary authorities and our national and in­
ternational monetary systems is the New York money
m arket. This is no device of greedy men and no accident of
geography which can be changed by legislative fiat. It reflects
the necessity, in a money economy such as ours, of having a
m arketplace where the final and balancing transactions of
This argument should not be confused with the ideas prevalent
in the early days of the Reserve System concerning regional dif­
ferences in monetary policy. Monetary policy must be national, ex­
cept in minor degree, but the whole is still the sum of its parts, and
regional conditions are important in formulating national policy.


our national and international accounts can be carried out by
a variety of delicately constructed financial institutions. And
the operating arm of the Federal Reserve System in the
principal money m arket of the nation, and of the world, is
the Federal Reserve Bank of New York. The Banking Act of
1935 recognized th at inescapable fact, and the need for a liv­
ing link between m onetary policy and the money m arket, by
requiring th at the president of the Federal Reserve Bank of
New York m ust be a continuing m em ber of the Federal Open
M arket Committee. All Federal Reserve Banks are equal, but
the Federal Reserve Bank of New York is first among equals.
I can only surmise why the CMC decided th at the Federal
Open M arket Committee should be dism antled. The state­
m ent th at the “ distinction between the Board and the
Federal Open M arket Committee has outlived its usefulness”
raises questions, but answers none. From the language of
other sections of the report, I would guess th at those
m em bers of the CMC, who m ight have argued for the reten­
tion of the Federal Open M arket Committee if they had
known more about it, were lulled into acceptance of its aban­
donm ent as a “ package deal” by those who were united in
prom oting the idea th at private influence still perm eates the
Federal Reserve System, and m ust be elim inated if the
System is to discharge its public functions properly and merit
the complete confidence of the Government and the nation.
The report first constructs a neat word pattern to describe
the structure of the Federal Reserve System, and it then
states th at a basic issue concerning the System is the “ degree
of independence of the Federal Reserve . . .from the b an k ­
ing com munity which it both serves and regulates” .
It is my view th at the word p attern —a System with a
regulated private base, a mixed m iddle com ponent, and a
controlling public apex— is neat, but inaccurate. In all of its
operations in the area of m onetary policy I assert th at the
Federal Reserve System (Board and Reserve Banks) is a
public institution, as it m ust be to discharge the public func­
tions vested in it by the Congress. Clearly, the Board is a
public body. It is equally clear to me th at the Federal Open
M arket Committee, on which the presidents of the Federal
Reserve Banks serve, as individuals, by statutory appoint­


m ent, is a public body and not a “ mixed middle
com ponent” . The report of the CMC seems to rest its con­
trary view on the statem ent th at the presidents of the Federal
Reserve Banks are not Governm ent appointees, but are
elected by and have their com pensation fixed by the boards
of directors of their Banks, subject to the approval of the
Federal Reserve Board. If the Commission had pursued this
lead further, it would have known th at approval by the Board
of appointm ents and salaries of presidents of Reserve Banks
is not a perfunctory power. The Board has dem onstrated on
num erous occasions th at it is an active veto power, so th at
there is final public control. But this is more quibbling with
words than meeting the real issue. The real answer is th at you
do not achieve honesty and integrity and unswerving devotion
to the public interest by way of appointm ent procedures, but
by charging com petent men with an undivided responsibility
for public service. T hat is the case with respect to the
presidents of the Federal Reserve Banks as they serve by
statutory appointm ent on the Federal Open M arket Com m it­
tee. They have no allegiance to private business in these m at­
ters, except as they try to contribute to the attainm ent of high
level production and employment, sustainable economic
growth, and a stable price level by m onetary means.
The report of the CMC goes on to fill out its pattern of the
“ public-private category” within the Federal Reserve System
with a brief discussion of the Federal Reserve Banks, b u t it
quickly adm its th a t “ very tangibly as well as legally the
Reserve Banks are public service institutions, and th at their
private ‘ownership’ is a highly attenuated right” . In a rather
odd “ on the other h an d ” the report goes on to say, however,
th a t the salaries of Reserve Bank presidents and their staff
salary scales are set at going m arket rates rather than
Government levels; the Reserve Bank presidents are not
public servants in the usual sense. In my book this is no more
th an pandering to confused public ideas about conflict of in­
terest. The salaries of Federal Reserve Bank officials and
staffs are set at going m arket rates so th at the Banks can a t­
tract the quality of adm inistrators and personnel needed to
assure the qualities and services necessary for constructive


participation in determ ining monetary policy, and efficient
operation, in the com munities in which they live. I would say
th at it is fortunate and in the public interest th at they are
able to do this, so th a t num bers of capable, com petent men
can m ake a career of service in the Federal Reserve System,
away from the hazards of political appointm ent, without the
support of family or personal wealth, and without engaging
in outside activities of any kind to supplem ent their regular
compensation. There is no entering wedge for conflict of in­
terest here.
The only specific suggestion which the Commission makes
concerning the Federal Reserve Banks is th at the present
form of stock ownership of the banks should be retired, and
th at m em bership in the System be continued by a non­
earning certificate of, say, $500, the same for each m em ber
bank. This seems to me to be knocking down an already “ a t­
tenuated” straw m an, insofar as it represents a belief or a
suspicion th at somehow private interests have a nefarious in­
fluence in, or derive special benefits from, the Federal
Reserve System. As my previous rem arks have indicated,
however, I would be concerned if insistence upon the present
form of stock ownership were to be interpreted as supporting
such belief or suspicion. I would rath er have the stock
subscription changed to a certificate of m em bership than to
have any cloud over the character of the Reserve Banks as
public institutions.
There is one other point here th at is worth m entioning,
however. I have referred to the statem ent in the report of the
CMC th at a basic issue with respect to the Federal Reserve
System is its degree of independence from the banking com­
m unity which it both serves and regulates. This statem ent
tends to confuse the m onetary powers of the Federal Reserve
System and its bank supervisory powers. In discharging its
duties as a bank supervisor the Federal Reserve System may
be a Governm ent agency with an agency-clientele relation­
ship with the business concerns it both serves and regulates,
in the words of the Commission, b u t in the vastly more im ­
portant realm of m onetary policy the Federal Reserve has no
agency-clientele relationship with any one but the American
people as a whole. If the bank supervisory powers of the


Federal Reserve System are the reason for concern about the
“ ownership” of the stock of the Federal Reserve Banks by the
m em ber banks, consideration should be given to con­
solidating the regulatory functions of Federal banking
authorities outside the Federal Reserve System, as suggested
in a footnote by some m em bers of the CMC. The “ regulated
private base” of the System (the commercial banking
system), in the word pattern of the Commission, is not the
base of the System as a m onetary authority. It is the private
m onetary m echanism which serves as a channel through
which the m onetary actions of the System spread out through
the whole community, pervasively but without unnecessary
intrusion upon private transactions between citizen and
Now let me close by coming back to the question of the
Federal Open M arket Committee, which is by far the most
im portant question to which the CMC addressed itself in the
section of its report on the structure of the Federal Reserve
System. I do not believe th at many of the m em bers of the
Commission realized the full im port of what they were doing
when, actively or passively, they acquiesced in recom m ending
th at the Federal Open M arket Committee be abolished. I
have said it is the heart of the Federal Reserve System as it
has evolved over the years, and it is. It is the forum where
representatives of the constituent parts of the System—the
Reserve Board and the Reserve B anks— meet as individuals
and equals, bearing identical responsibilities under law to
decide questions of high m onetary policy. It is the group
within the System which brings to the consideration of policy
knowledge of what is going on in Government, in the money
m arket, and in commerce, industry, and agriculture
throughout the country.4 Its m em bers take back to the
Governm ent, to the money m arket, and to the country, an
understanding of what has been decided which is an essential
ingredient of effective monetary policy.
This form of words does not exclude labor or the consumer or
any other group within the body economic, although organized labor
has ordinarily been suspicious of the Reserve System, and has
generally refused to become better acquainted, even when invited to
do so.


I have said th a t if you remove the presidents of the Federal
Reserve Banks from continuous (in the case of New York) or
periodic (in the case of the others) participation in this high
function you will tear down the spirit and morale of the
twelve Banks, and I believe it. The men who are the most
capable and imaginative officers of Federal Reserve Banks,
and who staff their outstanding economic research depart­
ments, are not primarily interested in counting coin and cur­
rency, in sorting checks, and in exam ining m em ber banks.
They and their successors won’t be attracted to jobs in which
these operating chores are their only direct and prim ary
responsibility: jobs in which they are only called upon as con­
sultants and advisers in m atters of m onetary policy. P a r­
ticipation in the work of the Federal Open M arket Com m it­
tee, with authority and responsibility—the right to vote as
well as to talk —is what attracts the best men to the chief of­
fices of the Federal Reserve Banks, and it is this contact
which fills their official staffs with a sense of dedication and
high purpose.
I sincerely hope th at the Congress of the U nited States will
never reverse itself on this im portant m atter. I sincerely hope
th at it will go forward to complete the ingenious work of the
Banking Act of 1935, by combining in law in the Federal
Open M arket Committee the com plem entary powers of the
Federal Reserve System with respect to open m arket opera­
tions, rediscount rates, and reserve requirem ents.
T hank you for giving me this opportunity to present my
views to your committee.

Yours faithfully,
Allan Sproul



Chapter 7
Foreign Aid

m lla n Sproul was not by background an expert, at least no
more th an anyone else, in the field of foreign aid. Nevertheless, in early
1960 he visited Ind ia and P akistan as a m em ber of a three-m an team
appointed by the W orld B ank. W ith him were H erm an Abs, C hairm an
of the D eutsche B ank of F ran k fu rt, and Sir Oliver F ranks, C hairm an
of Lloyds B ank of London. T heir mission was to exam ine the role of
foreign aid in the economic developm ent of India and P akistan, and
they came to be known as “ The T hree W ise M en” .
This chap ter contains a letter he wrote to Alfred Hayes from New
D elhi in the m iddle of his trip, an address he delivered to the W orld Af­
fairs Council shortly after he retu rn ed , and his testim ony in the spring
of 1963 before a com m ittee appointed by P resident Kennedy to advise
the G overnm ent on foreign aid.
On his trip to India he m et with Prim e M inister Jaw aharlal N ehru,
and his reactions are of historical interest as well as providing insight
with respect to Sproul himself: “ Ind ia has had the good fortune—one
m ight say the providential good fo rtu n e—to have as its leader in all of
the years since partitio n , M r. N ehru. M any of us have blown hot and
cold on M r. N ehru as a result of w hat seemed to be his H am let-like in­
decision in m atters involved in a world collision of totalitarianism and
dem ocracy, and because of w hat we h ad read of his economic views,
which seemed to derive a great deal from M arxism . After m eeting with
him an d after seeing som ething of his people and country, however, I
am willing to accept the ju d g m en t th a t his intelligence and integrity
have usually overcome political and economic dogm a. His favorite label
for his economic program new seems to be ‘pragm atic’ and, unlike
some of his associates, I believe he has dem onstrated his ability to
change course when necessary in order to abandon untenable positions.
So far as I am concerned, he has perform ed a political m iracle in


holding his country together and bringing it along the path of
dem ocratic accom plishm ent as far as it has now progressed.” *
Sproul’s overall views on the subject of foreign aid were sum m ed up
in a letter he wrote on July 6, 1965 to M urray J. Rossant, then of the
N ew Y ork T im e s: “ P erhaps the two m yths which need m ost to be
dispelled, if we are to move tow ard a b etter public appreciation of the
program , are th a t foreign aid is prim arily a hu m an itarian exercise and
th a t dollars will do the job in the absence of an adequate organization
in this country to adm inister th eir allocation and in the absence of peo­
ple in the recipient countries who can effectively and usefully m anage
th eir expenditure. A .I.D . [Agency for International Developm ent] of­
ficials have long argued th a t they are spending about as m uch as can
properly be spent, while the mushy fringe of the liberal com m unity
talks about the niggardliness of spending anything less th an , say, 1 per­
cent of our GN P. A nd the take-off advocates have sidestepped the fact
th a t it is p rim a rily p eople th a t have to ta k e off in th e less
developed countries; th a t the shortages have been more hum an than
financial. There is significance in the fact th at the Peace Corps is the
most imaginative and relatively the most effective thing we have done in
this a rea.”
* Excerpt from a talk by Sproul before the World Affairs Council,
June 23,1960. This excerpt is contained in a part of the talk which is
not included as reprinted.


Letter to Alfred Hayes
A shoka Hotel
New Delhi
M arch 15, 1960
D ear Al:
T hank you for your birthday letter! We had been out of
touch on a ja u n t around India and East Pakistan for two
weeks, and mail from home was most welcome.
This has been an exciting, interesting, strenuous, tiring
trip. Fourteen-hour days were not unusual, with frequent
plane hops and overnight stops. I have stood up well,
however, except for a two-day layover and lie-down in
K arachi, where I contracted the “ disease of the east” .
Charlie Coombs has been a great help and a good traveling
com panion. He too had one brief bout with the abovem entioned ailment, b u t usually has m anaged to come
through with nothing more than a tired feeling. O ur col­
leagues have been pleasant and stim ulating and so have our
hosts. The countries we have visited are, as you know, coun­
tries of almost unbelievable contrasts.
We are spending this week in New Delhi, pulling ourselves
and our ideas together and we hope to finish up at the
weekend. After a stop in London, it looks as if I shall be get­
ting to New York about the tim e you leave. I am sorry th at
this is so, but maybe I shall get in a day or two early and
catch a few m inutes with you.
T hank you for the press copy of the A nnual Report. It is
surprising how quickly one can forget the affairs of a country
which have occupied most of his life, when he becomes im­
m ersed in the affairs of a country such as India. I had almost
forgotten net borrowed reserves.
W ith best regards,



Address delivered before the World Affairs
Council, San Francisco, California
June 23, 1960
India and Pakistan: Critical Testing Ground
o f Foreign A id
I am not an expert on India and Pakistan, as anyone with
any knowledge of these two countries, uneasy neighbors on
the Indian subcontinent, could quickly find out. In fact, after
visiting them , I have what I believe is a healthy skepticism of
any outsider who thinks he is an expert on countries with
such com plicated backgrounds and diverse problems. They
do not lend themselves to easy analysis and facile generaliza­
Nor am I an authority on foreign economic aid to so-called
underdeveloped countries. A considerable literature has
grown up around this subject, and there has been a lot of
sophisticated theorizing about it. But the factual inform ation
needed to support the theories is not available and won’t be
for a long time, if ever. The one clear fact is th at theory has
run quite a bit ahead of practice. Meanwhile, decisions with
respect to foreign aid and development are being made large­
ly on the basis of what appear to be the im m ediate political,
military, and economic factors directly involved.
Well, if I am not an expert on India and Pakistan, and if I
am not an authority on foreign economic aid, you might ask
w hat I was doing on the Indian subcontinent last February
and M arch, as a m em ber of a three m an bankers’ mission,
familiarly known as “ The Three Wise M en” , which attem pt­
ed to gain some useful impressions concerning the economic
progress of the two countries and the contributions of foreign
economic aid to th at progress. It is a somewhat involved
story, but I shall try to tell it briefly as an illustration of
policymaking in this field.
It all began in February 1959, when Senator John F. K en­
nedy, now aspiring to higher office, and Senator Cooper, a
form er U nited States A m bassador to India, introduced a
resolution in the Senate, recom m ending th at a mission com­
posed of representatives of the U nited States and other


friendly, dem ocratic countries consult with the governments
of South Asia on their economic problems. The Senate Com­
m ittee on Foreign Relations considered the resolution and, in
Septem ber 1959, it was passed by the Senate, as am ended.*
The resolution stated th at it is the sense of the Congress th at
the President of the U nited States should explore with other
friendly and dem ocratic countries, and appropriate interna­
tional organizations, the desirability and feasibility of
establishing an international mission to consult with the
governments of countries in the area of South Asia on their
needs in connection with the fulfillment of currently planned
and anticipated development program s, and to consider and
recom m end ways and m eans of jointly assisting in the im ­
plem entation of these plans in cooperation with the govern­
ments of South Asia.
This was a pretty tall order. The area of South Asia was
th o u g h t of as including In d ia, P ak istan , B urm a,
A fghanistan, Nepal, and Ceylon. The friendly democratic
nations, besides the U nited States, presum ably included n a ­
tions of the Common M arket in W estern Europe, nations of
the British Commonwealth, and donor members of the
Colombo Plan, including Japan. Meanwhile, India and
Pakistan, the key m embers of the South Asia group, had got­
ten well into the development of their respective third and
second Five Y ear Plans. The conception of a high-powered
mission from aid-granting countries, which would be able to
“ m ake a deal” with aid-receiving countries in South Asia
regarding the size and shape of their development program s
and regarding the volume and character of Western aid, ran
out of tim e and support.
A more m odest idea then began to take shape. It confined
the survey of economic problems and progress in South Asia
to India and Pakistan; it narrowed down the members of the
mission to nationals of three of the principal industrial and
aid-granting countries—the U nited Kingdom, W est G er­
many, and the U nited States—and the mission became a
private mission which would neither represent nor be
authorized to speak for governments.
* A similar resolution was introduced in the House of Represen­
tatives by Congressman Chester Bowles, another former United
States Ambassador to India, but failed to reach a vote because of
lack of time before adjournment of the session.


There was still some difficulty, however, as to who would
take the initiative in appointing the m embers of the mission
and arranging for their reception in India and Pakistan. The
governments of these countries, I believe, indicated their will­
ingness to receive such a mission and their unwillingness to
request th at it be sent. It was finally decided th at the Presi­
dent of the International Bank for Reconstruction and
Development, M r. Eugene Black, should invite three
bankers, one each from the U nited Kingdom, W est G er­
many, and the U nited States, to visit India and Pakistan in
February and M arch of this year. The three governments
welcomed M r. Black’s initiative, and the governments of
Pakistan and India indicated their willingness to receive the
mission as guests of government and to give it every oppor­
tunity to learn about their economic development program s
and their use of foreign aid. T hat is how Mr. H erm an Abs,
C hairm an of the Deutsche Bank of F rankfurt, Sir Oliver
F ranks, Chairm an of Lloyds Bank Limited of London, and I
happened to go to the Indian subcontinent. As missions go,
and they go often to such countries as India and Pakistan, we
were unique. Since officially we represented nobody, in a
sense we represented everybody.
In the letter which we wrote to Mr. Black at the conclusion
of our visit on M arch 19, 1960, we phrased our assignment in
this way:
The proposal that we should visit India and Pakistan
was sponsored by you, as President o f the International
B a n k fo r R econstruction and D evelopm ent, and was
w elcom ed by the G overnm ents o f India and Pakistan.
We accepted the invitation as independent and private
individuals. We received no terms o f reference or in ­
structions either fr o m the International B a n k or fro m
the G overnm ents o f our own countries. We have,
therefore, had to consider what an independent mission
o f this kind, with a lim ited am ount o f tim e at its
disposal, could m ost usefully attem pt. You told us that
we were not expected to su b m it a fo rm a l report: and,
indeed, it would have been im possible fo r us in the


course o f a m onth to undertake any detailed assessm ent
o f the econom ic situation and developm ent program s o f
India and Pakistan. We have concluded that the m ost
useful task which we can set ourselves is to try and fo rm
broad general im pressions about the problem s o f
developm ent in these two countries. In doing so, we
have approached the question o f the scale and balanceof-developm ent plans in qualitative rather than q u a n ­
titative term s, and we have tried to see how the k in d o f
proposals f o r developm ent which are at p resent under
consideration in these two countries f i t into the broad
pattern o f w hat has already been achieved. We hope
th a t the bundle o f im pressions which we have fo rm e d
will help toward the understanding o f som e o f the p ro b ­
lems o f policy which seem to us to confront both the
countries which we have visited and those countries and
international institutions which are, or m ay be, con­
cerned with providing fin a n c e fo r developm ent.
W hat I have to say, now, will be based on the impressions
of this mission, and its advisers, because we each had an ad­
viser known variously as “ the three wise guys” and the “wise
men, second class” and known by us as our good right arms.
I shall add to my report on these impressions one or two p er­
sonal opinions based on my trip but not included in the letter
which the mission wrote and signed without individual reser­
vation or dissent.
And let me inject one such opinion right here. The cynical
response to the observations of such a mission as ours is th at
the Indians and Pakistanis showed us only what they wanted
us to see. O f course they showed us what they wanted us to
see, and we w anted to see what they thought were favorable
examples of their development and their use of foreign aid.
You can’t see everything in six weeks, even though your days
are filled from early m orning to late at night, seven days a
week, as our days were. But you can’t travel about for hu n ­
dreds of miles in the cities and through the villages and farm ­
lands of India and Pakistan w ithout seeing the pitiful condi­
tion of m ultitudes of hum an beings, the poverty, dirt, and
disease, and the primitive methods still in use in agriculture


and some industries, which m ake hopes of progress seem
alm ost doomed. These things had to be seen—not to be
believed. We saw them .
Now, in order that you may have some basis for judging my
personal views, as well as my report on some of the views of
the mission, I should also tell you my general attitude with
respect to foreign economic aid. So far as the countries we aid
are concerned, I agree with those who say th at the purposes
of our aid, broadly, are to develop constructive forces th at
will fu rther political and social stability in these countries, to
support their military strength, and to enlarge the productive
and technical bases of their economies so as to improve the
standards of living of their people and thus to dem onstrate
th at expectations of a better life can be realized w ithout
resort to totalitarian methods.
So far as we are concerned, I think th at the prim ary
justification for foreign economic aid is our national security
which includes survival of our national values—th at we have
no moral obligation to raise the standard of living of other
nations up to our own. I think th at whatever economic ad­
vantages we derive from such aid, and I believe there will be
such advantages in the long run, are supplem entary. I think
th at, if foreign aid coincides with the hum anitarian instincts
of our people, th at is fine and contributes to our strength as a
nation, but it is not the purpose and province of government
continuously to distribute the resources of this country for
hum anitarian purposes. Nor do most foreign peoples believe
th at governments do things for hum anitarian purposes. As
has well been said, “ If we do not reveal a good, solid motive
of self-interest, they are apt to invent one for us and this can
be more sinister than anything we could even dream of
ourselves.” Finally, I do not belong to the school of roving
economists and international philanthropists which believes
that, if a billion dollars of foreign aid is good, two billion
would be twice as good or maybe four times as good. Men are
more im portant than money in a foreign-aid program and
able and available men are even more scarce than money in
both the aid-giving and the aid-receiving countries. You can
go badly wrong giving too m uch money to men of too little


W ith th a t testam ent in the record I can get on with my
task. Despite the many differences and contrasts between
India and Pakistan, there are also im portant economic
similarities and I am going to talk first of the two countries,
together, in order to keep my rem arks within the confines of
your tim e and patience and in order to try to keep the thread
of my exposition clear.
The basic economic problem of both countries is the short­
age of capital resources in relation to investment needs.
There is the fam iliar vicious circle of low income, low invest­
m ent, and continuing low income, which can only be broken
effectively and in tim e by an inflow of help, of capital, from
abroad. And right there you may well ask why this vicious
circle m ust be broken by foreigners, and relatively
quickly—why Indians and Pakistanis m ust try to ac­
complish, in say thirty or forty years, what it took us a hu n ­
dred or a hundred and fifty years to accomplish. To this I can
only say th at times and circumstances have changed. These
people, recently come to independence after a long period of
colonialism, with the strident claims of what can be ac­
com plished quickly by totalitarian m ethods flooding across
their borders from Russia and China, are putting democratic
or nontotalitarian processes to the test of relatively swift ac­
com plishm ent in term s of economic progress. They may be
trying to go too far too fast, but it would take a curious kind
of simplicity, in the face of a most complex political and
economic problem , to rely completely on this judgm ent, and
to condem n their efforts wholly because of it.
Perhaps equally as im portant as the shortage of capital in
their economic dilem m a is the sheer size of their economic
problem . Not only are the real incomes of the people low but,
with a population of 500 million in the two countries, the
capital resources required to generate even modest increases
in real income are very large. And the problem is made more
intractable by the rate of population growth. The govern­
m ents are confronted with the task of trying to provide the
additional food and services required by increases in popula­
tion in the order of 2 percent per annum , while at the same
tim e struggling to bring about an increase in per capita in­


It is the size of the task, as well as the need for swift ac­
com plishm ent, which has m ade it more of a government
undertaking, involving a larger degree of economic planning
than we m ight think desirable. But here it is fair to say, I
think, th at there is a definite purpose in Pakistan to have as
m uch business as possible take place in the private sector;
and in India there seems to be a growing realization th at both
the public and the private sectors of the economy have their
proper contribution to m ake to economic progress, and that
a doctrinaire socialist approach is not the way to the
economic heavens. . . .
Most of us know something of the handicaps of the Indian
nation in achieving economic progress. The religious
taboos— it is a commonplace th at at least one third and
perhaps one half of the cattle in India are surplus in relation
to the feed supply. The caste system which still survives. The
persistent elements of feudalism. The linguistic nationalism
or regionalism. The illiteracy. The disease. The pitiless
climate which saps energy. The cultural emphasis on im ­
m aterial things. The live-and-let-live philosophy which can
mean an unhealthy tolerance of inefficiency and corruption.
There are countervailing assets, however, if we are going to
do double-entry bookkeeping. India has probably m uch the
best adm inistrative organization for political, economic, and
social development of any nation in Asia outside the RussoChinese bloc, except Japan. It has geographic unity and
agricultural diversity. It has a relatively homogeneous
governing class, both in power and in opposition, giving it a
workable parliam entary system. Its people will work hard
and have a shrewd common sense in most m atters not af­
fected by religious scruples. It is technically the most ad­
vanced country in Asia next to Japan, and possibly China. In
the long run, it should be able to become a m ajor m anufac­
turing country, supplying industrial goods and equipm ent to
Asia and Africa, and even farther afield.
I cannot give you an unequivocal answer to this problem in
relativity, in justifiable self-interest, and in chances of suc­
cess, nor do I think, can anyone else. The m argins of error
are great. The likely existence of items of lesser urgency in


any such development program as th at of India suggests
strongly the possibility of trim m ing down the need for foreign
aid. The requirem ents of prudence, because of possible bad
harvests or faulty industrial planning and the thin layer of
m anagerial talent, suggests th at there may be smaller ag­
gregate development plans which would provide sustainable
progress. O r it may be th at, for bargaining purposes and en­
couraged by the advice of some of the more enthusiastic plan­
ners from this country, the Indians have projected a larger
figure of foreign aid than they expect to realize in their Third
Year Plan. W hen you have said and weighed all this however,
you will still be faced with a value judgm ent.
Given the key position of India in the whole Asian-African
complex, and recognizing the inevitable comparisons which
will be made between the economic progress of a democratic
India and a totalitarian China, my own judgm ent is th at the
course followed by the 400 million people of India will have
direct and indirect repercussions on the security of the
U nited States. T hat is why I have come to the opinion that
the risks and hazards of investing heavily in Indian develop­
m ent are justified, and for equivalent reasons in Pakistan
We have been doing just th at, and I do not know th at the
increased size of India’s T hird Five Y ear Plan and P akistan’s
Second Five Y ear Plan would require an increase in the
am ount of foreign economic aid extended by the U nited
States. The tim e has come when other industrial nations of
the Free W orld can and should participate more heavily in
this investment, and there are indications th at this is being
recognized and given effect. In this case I also welcome the
assistance which the Russians and some of their satellites are
giving to India. I do not think th at such assistance will
outweigh, in the aggregate, the aid given by the free nations,
and I do not think it will sway the political development of
India, one way or the other, but it will share the burden and
the risk of India’s need for foreign assistance. It is my guess,
and it can be nothing more, th at there will be no left turns in
India if dem ocratic processes and program s can, within some
reasonable period of time, bring about a modest increase in
the standard of living of the Indian people. Left turns have
always been unpopular in Pakistan, of course.


There should be no m istaking, however, th at our program
of aid to India, and Pakistan too, is a project of long term as
well as huge size. W e have all heard a great deal about socalled “ take-off points” in countries such as India and
Pakistan; the theoretical concept that, if enough investment
funds are poured into a country over a relatively short period
of time, self-sustaining growth will develop and eliminate the
need for further foreign aid. I have doubts about the prac­
tical application of this whole concept, and I am certain that
we would be fooling ourselves if we approached the develop­
m ent problem s of India—and of Pakistan— in term s of a
M arshall Plan designed to reach certain targets of viability
and self-sustaining growth within a fixed period of years. The
simple fact th at per capita income in both countries is so low
will almost inevitably m ean th at development will be a slow
laborious process probably extending many years into the
future. As in other facets of the contest between communism
and democracy, we should be girding ourselves for a pro­
tracted conflict, not expecting to win quickly like the “ good
guys” in a television western.
A necessary ingredient of a successful attack on these longrange problem s, I think, is th at as a nation and as individuals
we should understand th at it will require sacrifices to achieve
our objectives. This year, 1960, would be a good year to try to
achieve th at understanding. We shall be choosing our na­
tional leaders and our national legislators for another elec­
tion period. We should be dem anding leaders and legislators
who will dare to tell us th at great achievement may dem and
great sacrifices. So far I have not detected the clear sound of
this note in the cam paign oratory and literature.
Instead there is a good deal of juggling with figures of na­
tional production and income, apparently intended to con­
vince us th at our rate of economic growth can be readily in­
creased so th at there will be plenty of available resources with
which to do everything we might want to do at home and
abroad, without anybody having to give up anything. Mil­
itary needs and domestic civilian needs will be met handily
out of the same ever-normal treasury. Foreign economic aid
will be increased, while the current deficit in our balance of


payments will wither away without check to our habits of
conspicuous consum ption. Such a prospectus is a fraud in
the face of bitter and protracted conflict which lies ahead
with those who talk peaceful coexistence while they seek to
destroy us.
A provocative writer on these m atters, B arbara W ard, has
written that: “ W estern economies cannot make a fetish of a
3 percent rate of growth if real, demonstrable hum an needs
call for a higher rate; and there seems little doubt such needs
exist.” The implications of such statem ents as this, for most
of those seeking political office, seems to be th at an increase
in our rate of economic growth is what is needed and possi­
ble, in order th at we may be spared the necessity of m aking
hard choices in attacking our current economic problems.
This is not a m atter of fetishes, however, but of what the
National Bureau of Economic Research calls a respect for
facts. We know something about our past rate of economic
growth, and something about the present rate, and our
knowledge does not encourage too sanguine hopes of an early
and substantial increase. We do not know anything about
our future rate of economic growth, although there is no lack
of fancy as to what the potential rate could be. We may be
able to do better than we have done in the past, and we hope
we shall, but it won’t be easy and it won’t be quick.
M eanwhile, if we are going to continue to m aintain our
military security, increase the resources we devote to socially
desirable objectives at home, provide foreign aid in the
m agnitudes which can be effectively adm inistered, and
preserve our international solvency and our domestic stabili­
ty, we shall have to postpone some of our ideas of increased
leisure, and curb some of our desire for an ever-increasing
volume of consum er goods and services, in favor of our
longer term goals.
From what I know, and have seen and heard, I would
counsel m aking such sacrifices in order to do our share in
aiding the economic development of India and Pakistan.


Aide-memoire on foreign aid prepared as
background for testimony before the
Committee to Strengthen the Security of the
Free World, headed by General Lucius Clay,
and appointed by President Kennedy on
December 10, 1962. A note transmitting the
document to Alfred Hayes is dated April 19, 1963.
I realize th at foreign aid policy is a “ complex com bination
of military, political and economic measures which m ust be
com plem entary and reinforcing” , and th at it cannot be
treated fully in a brief m em orandum .
I realize th at the President recently appointed a new chief
of the A .I.D ., who seems to have excellent qualifications for
the job, and th at the A .I.D . has been working on a plan
which would concentrate our aid in fewer places, with greater
operating efficiency and more com petent personnel.
I realize th at your committee is composed of men with a
special range of experience in these m atters and special
means of determ ining “ whether the level and distribution of
the foreign aid program is contributing to the security of the
U nited States, and is directed to specific and attainable goals
of economic and political stability in the Free W orld” .
Nevertheless, it has seemed to me th at the views of an in­
dividual who has a general knowledge of what has been done
and what is now being done m ight be of help to you, p ar­
ticularly as you may be concerned with foreign economic aid
insofar as it can be separated from military aid. At least I suf­
fer from no restraints of appointm ent in expressing my opin­
My questions about our foreign aid policies go well beyond
the adm inistration of the foreign aid program , susceptible as
its adm inistration has been to a variety of organizational and
executive changes over the past fifteen years which might well
have disrupted a more substantially based operation. It has
seemed to me th at our present policies have suffered from
our first success, from a faulty em phasis on the virtues of
economic development of backw ard countries as a shield
against com m unism and a contribution to our military


defenses, from the mixing of vague moral and hum anitarian
motives with the vital interests of the U nited States, and from
our inability to explain clearly to the Congress and to the
public exactly what we are doing, what we have done, and
O ur first foreign aid success was the M arshall Plan, which
contributed so m uch to the rebuilding of the w ar-shattered
economies of W estern Europe. T hat success offered no guide
to subsequent program s, unless it was a misleading one. The
economies of the nations we were then helping were a p art of
the social fabric of countries with stable political institutions,
and their economic systems were m anned by people with
m anagerial talent and technical skills equivalent to our own.
And, most im portant, their values and their aspirations were
m uch the same as ours. But the public image of foreign aid
has continued to be distorted by the success of the M arshall
Plan; by the belief that, given certain efforts at social reform
and self-help by the recipient countries, injections of capital
(and technical assistance) from abroad will put backw ard
countries on the road in a relatively short time (say the ten
years of the Alliance for Progress) to a viable economic ex­
This false guide was supported by the political use of p a r­
tially hedged theories concerning so-called take-off points in
the economic development of nations. It is only recently th at
there has come to be some public criticism, by people who
have been exposed to the practical problems of foreign aid, of
those persuasively presented views. W hat was om itted in the
popular version of the theory was th at economic take-off
depends, fundam entally, on peoples’ values—what they
want, and the m eans of getting what they want in accordance
with their capacities, their traditions, their religious beliefs,
and their moral codes, if any. Capital and technology are
now being dem oted to the bottom of the list of basic needs for
economic development and growth, being preceded by
general literacy, a reliable ap paratus of government and
public adm inistration, a clear development of objectives
toward which the mass of the people is willing to work, and
pride in the attainm ents necessary to reach those objectives.
Admittedly, the values of whole peoples are not easy to deter­


mine and, over time, they may be modified, but to attem pt to
impose our values on a variety of foreign cultures smacks of
im pertinence and is doomed to failure. (It rivals and draws
sustenance from the missionary spirit which conceives of the
Jewish-Christian ethic as the only revealed religion.)
Even if preoccupation with the capital needs of people in
the underdeveloped countries is not an invitation to failure,
the philosophical idea th at foreign economic aid will yield
desirable results in term s of freedom, stability, democracy,
and peace has a shaky foundation. The dynamics of in­
dustrial development, and the movement of peoples from
villages to cities which it entails, create tensions and ferm ent
(somewhat as it did in W estern Europe and the U nited
K ingdom during the industrial revolution). The revolu­
tionary progeny of these tensions and ferm ents may take on
the wrong coloration. Leaders in new nations, or those who
overthrow governing groups in older but underdeveloped na­
tions, usually gain much of their popular support by oppos­
ing foreign influence and foreign dom ination, call it Yankee
im perialism , or neo-colonialism, or whatever. If they haven’t
the ability or the m eans to m ake good the im provement in the
lot of the people, which they have also prom ised in their
revolutionary phase, and if anti-foreign attacks begin to lose
their power, they usually try to hold on by force and by deny­
ing those freedoms and those forms of democracy which they
formerly espoused. This sort of thing is likely to lead to
endemic political and economic instability. O ur existing pro­
gram s have been exposed to and have not shown much ability
to deal with this sequence of events.
The vague moral and hum anitarian motives, which have
confused past aid policies, have ranged from the presidential
dictum in his inaugural address th at rich nations should help
poor nations “ because it is right” , to the advice of a host of
official and unofficial advisers th at one of the two most im ­
m ediate problem s of worldwide scope facing m odern m an is
the disparity between the “ have” and the “ have not” nations,
and th at we “ need the challenge of world development to im­
prove the quality of our national life” . (A m bassador Steven­
son m ight have said this although I don’t know th at he did.)
A bout these noble sentim ents there can certainly be two


points of view, depending somewhat on whether you believe
th at we m ust still rely on the nation state to bond masses of
people under civil discipline, or whether you think the nation
state is becoming obsolete, th at we should be leading the way
to the millenium of the world state, and th at we can move in
th at direction by shuffling off some of the problems of foreign
aid to world organizations. My own view is th at we m ust still
get along, largely, with the nation state.
The government of a nation state, in order to “ do good”
abroad, has to do most of it directly or in a consortium with
other nation states, and has to find th at what it proposes to
do serves the interests of the state itself in term s of security or
trade or something more specific than “ improving the quality
of the national life” .
Meanwhile the advice of, say, a B arbara W ard th at
devoting 1 percent of the national product to foreign aid is lit­
tle enough to do, or of, say, an Oliver Franks th at the north­
ern hemisphere should now do for the southern hemisphere
what the eastern hem isphere (northern branch) did for the
western hem isphere in the nineteenth century is of little use
or relevance. The first generalization is like saying th at if we
spent less on chewing gum we could spend more on education
and health—it dodges the question of how choice is to be ex­
ercised in a democracy. The second generalization avoids the
fact th at the success of the injection of European capital into
the northern p art of the western hem isphere was due to the
virtual exterm ination of the native population and its
replacem ent by Europeans. In the southern part of the
western hem isphere, where the native population was
assim ilated, or vice versa, the problem of underdevelopm ent
is still with us after four centuries and the outlook for
democracy and stability is still uncertain.
Nor can clothing this sort of vague aspiration in the cloak
of “ enlightened self-interest” get us out of our difficulties of
precision in defining objectives, devising means of attaining
them , and establishing criteria for cutting off aid when a t­
tainm ent becomes unlikely. Taking the simplest argum ent in
support of self-interest, it is said th at in building up the
economies of the underdeveloped countries we are creating
wider world m arkets and thus widening of the range of our


own economic development. This can only be true if in­
creases in population do not equal or outrun increases in pro­
duction in the backw ard areas. There is no present evidence
th at this will be the case in many of them . Birth control “ in­
volves the whole adult population of a country and dem ands
forethought and directed will power” . It is “ unlikely to be
carried out successfully in the countries th at need it most
urgently” .
I realize th at this catalogue of faults of our foreign aid pro­
gram is largely based on subjective reasoning, and I realize
th at we could not (and I would not) abandon our foreign aid
efforts. I do think, however, th at it is past time for us to sub­
ject the program to a more vigorous exam ination as to its
fundam ental premises than it has had thus far, so th at we
can begin modifying it in substance in the light of the find­
ings of such an exam ination. This is what I hope your com­
m ittee has in m ind.
My own suggestions are:
(1) T hat we recognize th at we are not going m ateri­
ally to better the lot of millions of people in the
underdeveloped countries over the next few decades—it
is a long-term process at best.
(2) T hat the im portant question for us is not
whether the Congress appropriates $4.9 billion or some
lesser figure for foreign aid in a given year, but whether
we can put together a program which has sufficiently
clear and definite objectives and sufficient chances of a
m oderate success, so th at it will com m and the vigorous
support of the public and the Congress. Here I realize
th a t the power of the central government has come to
depend, to a considerable extent, on appeals to the
people by the President couched in lofty term s and con­
sisting of unsupported generalizations, but it seems
clear th a t the effectiveness of this approach is wearing
out in the case of foreign aid appropriations (or your
com m ittee would probably not exist).
(3) T h at such a program , geared to a tim e factor of
the rest of the century, say, instead of a decade, and
taking more account of the values of the peoples of dif-


ferent countries and less of theories of economic tak e­
off based on our own values, will shift the emphasis
from aid dollars of which we have a lot, to com petent
people in this country and in the recipient countries, of
which there are not too many. An A .I.D . organization,
conceived in these term s, should be developed on a
career basis. W e would give up the idea of trying to do
it in a relatively few years with tem porary or borrowed
personnel. And, in my opinion, it should be an
organization with autonomy, directly under the Presi­
dent, and coordinating its affairs with the State
D epartm ent and Defense and Treasury as they now
coordinate with one another.
(4) T h at it is neither possible nor desirable to
develop an d service such a program effectively when
it covers upw ard of 100 countries. This is an invita­
tion to random decisions on a shotgun basis aim ing at
a vague general target. A nd it is likely to result in
a lot of foreign governm ents being encouraged to
u n d ertak e tasks beyond their capabilities, which leads
to w aste through incom petence and to an extension
and tightening of governm ent authority over the in­
dividual. W h at is needed, I would say, is a clearer
definition of objectives, a clearer understanding of
the m eans and the chances of attaining them , and a
culling out of the countries which are receiving aid.
T he priorities should be d eterm ined on the
basis of selecting countries where the stakes are high,
where the scale of our real interests is great, and where
the chances of aid being used effectively are moderately
good (India for example). In the case of these coun­
tries, we should aid them with whatever it takes, within
their capacity to absorb aid, and not niggle about the
degree of their alignm ent with us. (I find it hard to
justify the am ounts of economic aid we have been ex­
tending to Korea, Form osa, V ietnam, Laos, Turkey,
and Spain, quite apart from military aid, and I think in
some cases it may have been a disservice to them .)
(5) If anything could be done, at this late date, to
pull the President back from his hasty alliance with the


Alliance for Progress, it would be a blessing. It has
such a slim chance of success overall in the ten years
allotted th at it is becoming a weight in the whole
foreign aid program and a symbol of failure. Yet, we do
not seem to have any interm ediate objectives to insert in
place of those which have begun to dem onstrate a lack
of validity.
If it appears, on exam ination, th at our failures
have been failures of a concept of foreign aid based on
faulty generalizations and inapplicable expressions of
high moral purpose, th at we do not blam e such failures
on not having done enough, or not having done it effec­
tively, or not having been firm enough in dealing with
recipients, or not having the right sort of organization.
T hat is the way a program which contains some good
and had some hope has become a near casualty.
As it stands, our foreign aid program is reminiscent of
G reat B ritain’s first embassy to China by Lord M acartney in
1793-94. The British government w anted to remove the
restrictions to which trade with China was subject and to
establish a perm anent embassy in Peking. The mission ac­
complished neither of these ends. Lord M acartney was taken
to be an envoy bearing tribute and was sent home with a
message from Em peror Chiien Lung to George III:
“ We have never valued ingenious articles, nor do we have
the slightest need of your country’s m anufactures. . . .You, O
King, should simply act in conformity with our wishes by
strengthening your loyalty and swearing perpetual obedience
so as to ensure th at your country may share the blessings of


Chapter 8


M ro m his earliest days at the Federal Reserve Bank of New York,
where his first assignm ent was in the foreign departm ent, Allan Sproul
was intrigued by the intricacies of international finance. By all accounts
he was m ore interested in the international im plications and ram ifica­
tions of m onetary policy, especially the interrelations between dom estic
and international policies, th an in any other aspect of central banking.
In light of th a t interest, frequently expressed in private, it m ight be
considered surprising th a t he did not write m ore about international
m atters for public consum ption during his years as head of the New
York B ank. However, during th a t period—with the war, the peg, the
Accord, and then the “ bills only” controversy— serious thinking about
international financial problem s necessarily had to give way to more
im m ediate concerns. If he had rem ained at the B ank beyond 1956, it is
likely he would have had m ore to say publicly on the subject. As it was,
it becam e a m ajor topic in his personal correspondence and in his talks
to the W ells Fargo B oard of D irectors.
T he first of his papers reprinted in this chapter is an address he
delivered to the annual convention of the A m erican B ankers Associa­
tion in 1949, entitled “ G old, M onetary M anagem ent, and the B anking
System ” . It a ttracted wide attention at the tim e, mostly favorable, but
also provoked a p am phlet entitled “ Sproul Ignores Common H onesty”
th a t he enjoyed m aking reference to for years thereafter.
The 1949 address to the A m erican B ankers A ssociation is followed
by three talks delivered to the Board of D irectors of the W ells Fargo
B ank, one in 1975 and two in 1977. The last of these, in m id-N ovem ber
1977, was delivered only m onths before he died, on April 9, 1978, at the
age of eighty-two.


In th a t talk he sounded a note th a t he h ad expressed on a num ber of
occasions: “ Sum m it m eetings and m eetings of finance m inisters from
R angoon to R am bouillet, and pronouncem ents of the IM F, have ex­
horted the nations to coordinate their dom estic economic policies with
their in ternational econom ic responsibilities. The overall result has
been a surplus of com m uniques and not m uch concrete action. Now, in
its own defense, the U nited States should take the lead in seeking a con­
tribution to the solution of this general problem . It will have to bring
about a m ajor im provem ent in its own international position, and in the
strength of the dollar which is still the center of the w orld’s m onetary
m achinery. It will have to quit dragging its feet and get on with the
business of adopting an effective energy policy. . . .we shall have to
move quickly and decisively to adopt an energy policy which will begin
the process of curtailing the enorm ous volume and value of our oil and
gas im ports. There are grave dom estic questions involved in existing
energy proposals. B ut so far as the balance of paym ents is concerned the
evidence is unam biguous and clear. The bargains and com prom ises
m ust be struck. Tim e is running o u t.”


Address to the Seventy-fifth Annual
Convention of the American Bankers Association
San Francisco, California, November 2, 1949
Gold, Monetary Management, and
the Banking System
As a native Californian— and a native San Franciscan— I
have tried to think of som ething I might discuss which would
be of special interest to our generous hosts at this convention.
The fact th a t this is 1949, and th a t the whole State of Califor­
nia has been engaged in a two-year round of celebrations of
the 100th anniversary of the discovery of gold in California,
and of its im m ediate consequences, gave me an obvious lead.
Gold is something in which we are all interested. Nor is this
an untim ely topic on other grounds. The recent wave of cur­
rency devaluations which swept around the world, following
upon the devaluation of the British pound sterling six weeks
ago, has fanned into modest flame the always smouldering
fires of the gold controversy. In addition, I was eager to
review the gold question because it is a good starting point for
an understanding of the place of the Federal Reserve System
in the m onetary and economic life of the country.
As central bankers, of course, charged with responsibility
for our m onetary and credit policies, we have the question of
gold under more or less constant surveillance. Most of the
tim e, in recent years, we have been under attack from two
sides because of our attitude tow ard gold. Those interested
prim arily or initially in the price of gold, and in what they call
a free gold m arket, have fired from one side. Those interested
prim arily and eternally in gold coin convertibility—in a full
and autom atic gold standard domestically and interna­
tionally—have fired from the other. More recently, we have
h ad a brief respite from attack while these two groups fired at
each other, each group arrogating to itself responsibility for
the only true gospel according to St. M idas. W hat I have to
say will probably bring th at brief respite to an end. The fire
will again be concentrated on the m onetary authorities, for
whom I cannot presum e to speak except as one individual
engaged in the practice of central banking, but who will, no
doubt, be blam ed for my views.


Let me take account of each of these two groups separate­
ly; those who concentrate, at least initially, on a free gold
m arket, and those who will have none of this heresy, b u t who
w ant a fixed and im m utable gold price and convertibility of
currency—and therefore of bank deposits—into gold coin.
The first group, which includes the gold miners, makes its
argum ent on several grounds, trying to combine economics
and psychology with self-interest. Let me paraphrase their
principal argum ents as presented at hearings on bills to per­
mit free trading in gold in the U nited States and its ter­
ritories. In this way I may avoid the fact as well as the ap ­
pearance of building straw opponents. The argum ents most
frequently presented in favor of these bills were:


(1) In the face of rising production costs and fixed
selling prices, the gold mining industry has been forced
to curtail its operations, and to the extent th at it has
operated, its profits have been reduced. The higher
gold prices which would presum ably prevail in a free
m arket would correct this situation. This is the “ do
something for the gold m iners” argum ent at its baldest.
W hen this argum ent is em broidered a little, it is
claimed th at, since the prices of all goods and services
have increased so substantially during the past ten or
fifteen years, it is necessary to open the way for an in­
crease in the price of gold so as to be sure there will be
enough gold to carry on the country’s business; to bring
the price of gold into adjustm ent with the prices of
everything else.
(2) A second group of argum ents expresses concern
over the unsettling effects of the “ prem ium ” prices
which are paid for gold abroad, and claims th at a free
gold m arket in the U nited States, with no gold export
restrictions, would cause these prem ium m arkets
abroad to disappear, with beneficial effects upon world
trade and international relations.
(3) T hird, there is an argum ent in equity—th at gold
miners should be allowed to sell their product at the
best price they can obtain, as do producers of other
products; and th at American citizens, like the citizens
of most other countries, should be free to hold or to buy
and sell gold.

Finally, there were those who viewed and favored
a free gold m arket as a first step in the direction of a
full gold coin standard, and who held th at even a free
m arket would act as a “fever ch art” of the economy
and lead to reform of extravagant Government fiscal
policies, remove inflationary tendencies fostered by a
m anaged currency, and lead to sounder conditions,
To take these argum ents up in order, it should be pointed
out right away th at it is quite possible th at a free m arket for
gold in the U nited States would not result in a rise in the
price of gold, if for no other reason than th at the Secretary of
the Treasury is required, by law, to m aintain all forms of
U nited States money at parity with the gold dollar which con­
tains y3 of an ounce of fine gold. This means th at the
Treasury should m aintain the price of gold at $35 a fine
ounce in legal gold m arkets in the U nited States. To do this,
if there were a legal free m arket for fine gold, the Treasury
should sell gold to the extent necessary to maintain the m arket
price at $35 a fine ounce. We might, therefore, get what would
be in effect gold convertibility by way of a free m arket, but not
a rise in the price of gold. Aside from this possible outcome of
the establishm ent of a free m arket for gold, what is it we are
being asked to do? In effect we are being asked to do
something to benefit the gold mining industry, to encourage
a shift of productive resources, in this and other countries,
into gold production, in order to provide gold for hoarding.
This, I subm it, would be a witless proceeding, in term s of the
welfare of the whole economy, m atched only by our bonanza
provisions for the special benefit of the miners of silver.
As for the economic embroidery of this request for aid to
the gold m ining industry, there is no lack of monetary means
of carrying on the business of the country, nor is there likely
to be. It is the economics of perpetual inflation to argue th at
a rise in the commodity price level should be followed by an
arbitrary increase in the price of gold and hence in the reserve
base, thus perm itting and perhaps prom oting additional
deposit expansion and a further upw ard movement of prices.
Even on the basis of statistics, which are not always reliable
or com parable, it is interesting to note th at the increase in the


price of gold in the U nited States, in 1934, raised the price of
gold by 69 percent, whereas wholesale prices in the U nited
States are now only 60 percent above the 1927-29 level. We
have been plagued, if anything, with an oversupply of money
in recent years, and the U nited States gold stock, at the pres­
ent price, is large enough to support whatever further
growth of the money supply may be needed for years ahead.
The second group of argum ents has to do with the
desirability of knocking out of business the prem ium m arkets
in gold which have existed and still exist in various foreign
countries. I share the general dislike of these m arkets
because they are parasites on the world’s monetary system
and help to siphon into gold hoards the resources of people
who need food and clothing and equipm ent— and who
w ouldn’t need so m uch help from us if they didn’t use scarce
foreign exchange to buy gold for private hoards. But I don’t
think the soundness nor the stability of the U nited States
dollar is actually brought into question by these prem ium
m arkets. At our official purchase price for gold—$35 a fine
ounce—the U nited States has been offered and has acquired
more gold than the total world production (excepting the
U .S .S .R . for which reliable data on gold production, as on
everything else, are not available), since 1934, the year of our
devaluation. D uring those years— 1934 to 1948 in­
clusive—estim ated world gold production, valued at U nited
States prices, was about $13.5 billion and U nited States gold
stocks increased $16 billion. Most of the producers and
holders of gold have been quite willing to sell us gold for $35
a fine ounce despite the quotations of $45 and $55 and so on
up in the prem ium m arkets. The fact is th at these prem ium
m arkets represent insignificant speculative adventures
around the fringe of the world supply and dem and for gold.
They reflect mainly the urgent and often illegal dem ands of a
small group of hoarders, together with some private dem and
for gold to be used in relatively backw ard areas, or areas
where the forms of civilized government have broken down,
and where the m etal serves the needs of exchange—or hoard­
in g - b e tte r th an a paper note. I do not think there would be
any appreciable stim ulus to U nited States gold production, if
we opened the doors of this largely clandestine trade to our


domestic gold miners. But, by legalizing it, we m ight well
create what we are trying to destroy—uncertainty about the
stability of the dollar and our own intentions with respect to
its gold content.
The third argum ent—th at the m iners of gold should be
free to sell their product at the best price they can get— is
probably the giveaway. It is the argum ent th at gold should be
treated as a commodity when you think you can get a higher
price for it, and as a m onetary metal and an international
m edium of exchange when you want a floor placed under its
price. I would say th a t you can’t have it both ways. If you
want the protection of an assured m arket at a fixed price,
because gold is the m onetary m etal of the country, you
should not ask permission to endanger the stability of the
m onetary standard by selling gold at fluctuating prices (the
gold producers hope higher prices) in a fringe free m arket.
U nder present conditions, the only real price for gold is the
price the U nited States Treasury is prepared to pay for it. So
long as th a t is the case, there is no sense in a “ m ake believe”
free gold m arket, in which possible tem porary or short-run
deviations from the fixed price of the Treasury m ight have
disturbing consequences.
Nor is the argum ent th a t citizens of the U nited States
should have the same privileges as the citizens of other coun­
tries, when it comes to holding or trading in gold, at all con­
vincing to me. It is true th a t in a num ber of foreign countries
the holding of gold by private citizens is legal, and in some
foreign countries strictly internal free trading in gold is per­
m itted. In m any cases, however, this merely represents the
shifting around of a certain am ount of gold which is already
being hoarded in the country, since in practically all these
countries the export and im port of gold on private account is
either prohibited or subject to license. And, in m any coun­
tries where gold is produced, some percentage, if not all, of
the newly m ined gold m ust be sold to the m onetary
authorities, a requirem ent which fu rther limits the am ounts
available for trading and hoarding. These restricted and cir­
cum scribed privileges in other countries are no reflection of a
loss of inalienable rights by our people. They are attem pts by
these foreign countries to adjust their rules with respect to


gold to their own self-interest and, so far as possible, to the
habits of their people, all under the sheltering um brella of a
world gold m arket and a world gold price m aintained by the
Treasury of the U nited States. We have deemed it wise to
m aintain such a fixed point of reference in a disordered
world. W e have decided by dem ocratic processes and by Con­
gressional action th at this policy requires, among other
things, th at gold should not be available for private use in
this country, other than for legitimate industrial, professional,
or artistic purposes. We have decided th at the place for gold
is in the m onetary reserves of the country, as a backing for
our money supply (currency and dem and deposits of banks),
and as a m eans of adjusting international balances, not in the
pockets or the hoards of the people. If we want to reverse th at
decision, the means of reversal are at hand, but it should be a
clear-cut and clean-cut reversal, restoring convertibility. Pro­
viding a dependent free gold m arket, in which gold miners
and a little gold group of speculative traders or frightened
gold hoarders (such as those who now take advantage of a
provision in the regulations to buy and sell “ gold in the
natural state” ) could carry on their business is not the way to
m eet the problem .
I do not propose to get in the cross fire of those who claim
th at a free gold m arket would be a step toward convertibility
and those who claim th at a free gold m arket, without free
coinage at a fixed price, would cause us to lose whatever
m odicum of a gold standard we now have and lead to
m onetary chaos. T h at is one of those doctrinal argum ents in
which the subject abounds. I will merely say here th at I think
authorization of a free gold m arket in this country, with no
change in the present responsibility of the Secretary of the
Treasury to m aintain all forms of money coined or issued by
the U nited States at parity with the “ gold dollar” , would
probably lead indirectly to convertibility. The desirability of
doing this is another m atter, which I shall now try to discuss
briefly and dispassionately. This is a hazardous attem pt
because there is no subject in the field of money and banking
which so arouses the passions, and which so readily defies
b rief analysis.


Two groups of argum ents for the reestablishm ent of a gold
coin standard may, perhaps, be distinguished in the writings
and speeches of those who propose it, one group relating
prim arily to the domestic economy and one to the probable
effects on international trade and finance. In the first group
the argum ents run about as follows:
(1) Replacem ent of our “ dishonest” , inconvertible
currency with an “ honest” money having intrinsic value
would prom ote confidence in the currency and en­
courage savings, investment, long-time comm itm ents,
and production.
(2) Irredeem able paper money leads to inflation,
whereas the upper limits imposed upon currency and
credit expansion by a thoroughgoing gold standard
serve as a restraining influence on irresponsible politi­
cians and overoptimistic businessmen.
(3) Present Governmental taxing and spending
policies are wrong, and dangerous. The gold standard
would put a brake on public spending.
(4) As a corollary of the preceding argum ent, since
the gold standard would hinder further extension of
Governm ent control and planning, it is a necessary im ­
plem ent of hum an liberty.
The second group of argum ents, relating to the interna­
tional advantages of a gold coin standard, generally makes
no distinction between the effects of a unilateral adoption of
such a standard by the U nited States, and the m ultilateral
establishm ent of an unrestricted gold standard by many
countries, and of exchange rates fixed by such a standard.
The argum ents run somewhat as follows:
(1) The existence of prem ium m arkets in gold
abroad and the lack of gold convertibility at home
creates—and is representative of—lack of confidence in
the gold value of the dollar. In the absence of a
thoroughgoing gold coin standard, we cannot convince
anyone th at we may not devalue the dollar.
(2) Restoration of “ norm al” patterns of interna­
tional trade is being retarded by the inconvertibility of
currencies in term s of gold and, therefore, one with
another. This inconvertibility has led to tariffs, quotas,
exchange controls, and to general bilateralism .


U nder a m anaged paper currency system there is
always the tem ptation to solve national problem s by
devices which lead to international disequilibrium .
This, in tu rn , has led to domestic devices restrictive of
foreign trade. The international gold standard, by
elim inating the need for restrictive commercial policy,
would increase the physical volume of international
trade, resulting in an improved division of labor and
higher standards of living for everyone.
First, let me say th at I perceive no moral problem involved
in this question of gold convertibility. Money is a convenience
devised by m an to facilitate his economic life. It is a standard
of value and a m edium of exchange. Almost anything will
serve as money so long as it is generally acceptable. M any
things have served as money over the centuries, gold perhaps
longest of all because of its relative scarcity and its intrinsic
beauty. In this country we still retain some attachm ent to
gold domestically, and more internationally, but to carry on
our internal business we use a paper money (and bank
deposit accounts) which has the suprem e attribute of general
acceptability. There is no widespread fear of the soundness of
the dollar in this country, no widespread flight from money
into things. The constant cry of wolf by a few has aroused no
great public response. Savings, investment, long-term com ­
m itm ents, and the production and exchange of goods have
gone forward at record levels.
M uch of the nostalgia for gold convertibility is based, I
believe, on fragrant memories of a state of affairs which was a
special historical case, a state of affairs which no longer ex­
ists. The great period of gold convertibility in the world was
from 1819 to 1914. It drew its support from the position
which G reat Britain occupied, during most of the nineteenth
century and the early p art of the twentieth century, in the
field of international production, trade, and finance. The
gold coin standard flourished because the organization of
world trade under British leadership provided the conditions
in which it could, with a few notable aberrations, work
reasonably well.
The ability of the British to sustain, to provide a focal point
for, this system has been declining for m any years, however,
and the decline was hastened by two world wars which


sapped the resources of the British people. The heir apparent
of G reat Britain, of course, was the U nited States, but up to
now we have not been able to assume the throne and play the
role. A nd until some way has been found to eliminate the
lack of balance between our economy and th at of the rest of
the world, other th an by gifts and grants-in-aid, we won’t be
able to do so. This is a problem of unraveling and correcting
the influences in international trade and finance, which have
compelled worldwide suspension of gold convertibility, not
vice versa. The job before us now is to attack the problems of
trade and finance directly. W e should not deceive ourselves
by thinking th a t gold convertibility, in some indefinable but
inexorable way, could solve these underlying problems for us.
Nor is it true, of course, th at gold convertibility prevented
wide swings in the purchasing power of the dollar, even when
we had convertibility. W ithin my own experience and yours,
while we still had a gold coin standard, we had trem endous
movements in commodity prices, up and down, which were
the other side of changes in the purchasing power of the
dollar. W hat happened to us in 1920-21 and 1931-33 under a
gold coin standard should prevent a too easy acceptance of
th at standard as the answer to the problem of a money with
stable purchasing power.
W hen you boil it all down, however, and try to eliminate
mythology from the discussion, the principal argum ent for
restoring the circulation of gold coin in this country seems to
be distrust of the money m anagers and of the fiscal policies of
Governm ent. The impelling desire is for something auto­
m atic and impersonal which will curb Government spending
and throw the money m anagers out of the temple, as were the
money changers before them . To overcome the inherent
weakness of hum an beings confronted with the necessity of
m aking hard decisions, the gold coin standard is offered as an
im p erso n al an d a u to m a tic solution. T h ro u g h this
m echanism the public is to regain control over Govern­
m ent spending and bank credit expansion. It is claimed th at
whenever the public sensed dangerous developments, the
reaction of many individuals would be to dem and gold in ex­
change for their currency or their bank deposits. W ith the


monetary reserve being depleted in this way, the Government
would be restrained from deficit financing through drawing
upon new bank credit; banks would become reluctant to ex­
p and credit to their customers because of the drain on their
reserves; and the Federal Reserve System would be given a
signal to exert a restraining influence upon the money sup­
ply. In this way, the Congress, the Treasury, and the Federal
Reserve System would be forced by indirection to accept
policies which they would not otherwise adopt.
In effect, u nder a gold coin stan d ard , therefore, the in ­
itiative for overall monetary control would, through the
device of free public withdrawal of gold from the monetary
reserve, be lodged in the instinctive or speculative reactions
of the people. No doubt some people would take advantage of
their ability to get gold. There would be many reasons for
their doing so. Conscientious resistance to large Government
spending, or fear of inflation, might well be among these
reasons. But speculative motives, a desire for hoards
(however motivated), and such panic reactions as are
generated by unsettled international conditions or tem porary
fright concerning the business outlook or one’s individual
security—all of these, and m ore—would be among the
reasons for gold withdrawals. The gold coin m echanism does
not distinguish am ong motives. W henever, for any reason,
there was a dem and for gold, the reserve base of the
m onetary system would be reduced. Moreover, if only the
U nited States dollar were convertible into gold while prac­
tically all other currencies were not, hoarding dem ands from
all over the world would tend to converge upon this country’s
m onetary reserves. Circumvention of the exchange controls
of other countries would be stim ulated, and dollar supplies
which those countries badly need for essential supplies or for
development purposes would be diverted to the selfish in­
terests of hoarders.
Even if a particular reduction of the reserve base did occur
for useful “ disciplinary” reasons, the im pact of such gold
withdrawals upon the credit m echanism is likely to be crude
and harsh. Since the present ratio between gold reserves and
the money supply is about one to five, and since some such
ratio will be in effect so long as this country retains a frac­


tional reserve banking system, a withdrawal of gold coins
(once any free gold is exhausted) will tend to be multiplied
many times in its contractive effect on bank credit and the
money supply. In a business recession, the Reserve System
might undertake to offset this effect as it does now in the case
of gold exports but, if the gold withdrawals attained suffi­
cient volume, the shrinking reserve position of the Federal
Reserve Banks would eventually prevent them from coming
to the rescue.
It was, in part, to offset such arbitrary and extreme in­
fluences upon the volume of credit, and to m ake up for the
inflexibility of a money supply based on gold coins (in
responding to the fluctuating seasonal, regional, and growth
requirem ents of the economy), th at the Federal Reserve
System was initially established. D uring the first two decades
of its existence, the System devoted m uch of its attention to
offsetting the capricious or exaggerated effects of the gold
movements associated with continuance of a gold coin stan­
dard. We had an em barrassing practical experience with
gold coin convertibility as recently as 1933, when lines of peo­
ple finally storm ed the Federal Reserve Banks seeking gold,
and our whole banking m echanism came to a dead stop. The
gold coin standard was abandoned, an international gold
bullion standard adopted, because repeated experience has
shown th at internal convertibility of the currency, at best,
was no longer exerting a stabilizing influence on the economy
and, at worst, was perverse in its effects. Discipline is
necessary in these m atters b u t it should be the discipline of
com petent and responsible men; not the autom atic discipline
of a harsh and perverse m echanism . If you are not willing to
trust men with the m anagem ent of money, history has proved
th at you will not get protection from a m echanical control.
Ignorant, weak, or irresponsible men will pervert th at which
is already perverse.
Here, I would emphasize my view th at the integrity of our
money does not depend on domestic gold convertibility. It
depends upon the great productive power of the A merican
economy and the competence with which we m anage our
fiscal and monetary affairs. I suggest th at anyone who is wor­
ried about the dollar concentrate on the correction of those


tendencies in our economic and political life which have
brought us a deficit of several billion dollars in our Federal
budget, at a tim e when taxes are high and production,
employment, and income are near record levels. I suggest
that, going beyond the im m ediate situation, they address
themselves to the difficult problem of the size of the budget,
w hether in deficit or surplus or balance. At some point the
mere size of the budget, in relation to national product, can
destroy incentives throughout the whole community, a dilem­
ma which is even now forcing curtailm ent of Governm ent ex­
penditures by the Labor governm ent in G reat Britain. These
are problem s gold coin convertibility cannot solve under pres­
ent economic and social conditions. Gold has a useful p u r­
pose to serve, chiefly as a medium for balancing international
accounts am ong nations and as a guide to necessary
disciplines in international trade and finance. It has no
useful purpose to serve in the pockets or hoards of the people.
To expose our gold reserves to the drains of speculative and
hoarding dem ands at home and abroad strikes me as both
unwise and im provident.
Perhaps before I let go of this subject, which has held me
and you overlong, I should say a word about merely raising
the price of gold, without doing anything about a free gold
m arket or gold coin convertibility of the currency. This is
something which has intrigued Europeans and others who
are “ short of dollars’’, has interested some of our own people,
and has become a South African war cry. An increase in the
price the U nited States pays for gold would have two major
results. It would provide the gold producing countries (and
domestic producers), and the countries which have sizable
gold reserves or private hoards, with additional windfall
dollars with which to purchase American goods. And it
would provide the basis for a manifold expansion of credit in
this country which m ight be highly inflationary.
We have been engaged in an unprecedented program of
foreign aid for the past four years. The Congress has
authorized this aid at such times and in such am ounts as
were deemed to be in the interest of the U nited States. This is
m uch to be preferred, I suggest, to the haphazard aid which
would be granted by an increase in the price of Rold, which


m ust be on the basis of a more or less accidental distribution
of existing gold stocks and gold producing capacity. If we
raised the price of gold, every country which holds gold would
autom atically receive an increase in the num ber of dollars
available to it. The largest increases would go to the largest
holders which are the Soviet Union, Switzerland, and the
U nited Kingdom . Every country which produces gold would
autom atically receive an annual increase in its dollar supply,
and its gold m ining industry would be stim ulated to greater
productive effort. The largest increases would go to the
largest producers which are South Africa, Canada, and prob­
ably the Soviet Union. T hat would be an indiscrim inate way
to extend our aid to foreign countries, both as to direction
and as to timing.
The domestic results of an increase in the price of gold
would be no less haphazard. This country, as I have said, is
not now suffering from a shortage of money and it has large
gold reserves, which could form the basis of an additional
money supply if we needed it. An increase in the dollar price
of gold would increase the dollar value of our existing gold
reserves in direct proportion to the change in price. There
would be an im m ediate “ profit” to the Treasury. The
“ profit” could be spent by Congressional direction or
Treasury discretion. This would provide the basis for a m ulti­
ple expansion of bank credit which, unless offset by ap ­
propriate Federal Reserve action, would expose our economy
to the threat of an excessive expansion of the domestic money
supply. The arbitrary creation of more dollars in this way
would certainly be inappropriate under inflationary condi­
tions, and would be an ineffective method of com bating a
deflationary situation.
At the m om ent, also, we should have in m ind th at there
has just been an almost worldwide devaluation of currencies.
Using the fixed dollar as a fulcrum , individual foreign coun­
tries have taken action designed to improve their competitive
position vis-a-vis the U nited States, and to m aintain their
competitive position vis-a-vis one another. An increase in the
dollar price of gold, which is devaluation of the dollar by
another nam e, would undo the possible benefits of a venture
in improved currency relationships which already has its
doubtful aspects.


For all of these reasons it is encouraging to know th at the
Secretary of the Treasury has recently reiterated th at the gold
policy of the U nited States is directed prim arily toward m ain­
taining a stable relationship between gold and the dollar, and
th at for all practical purposes only the Congress can change
th at relationship. W e have m aintained an international gold
bullion standard by buying and selling gold freely at a fixed
price of $35 a fine ounce in transactions with foreign govern­
ments and central banks for all legitimate monetary p u r­
poses. This has been one fixed point in a world of shifting
gold and currency relationships. W e should keep it th at way
as another contribution to international recovery and
domestic stability.


Remarks of Allan Sproul at the Board of
Directors Meeting, Wells Fargo Bank,
San Francisco, California, August 19, 1975
Having exhausted, at least tem porarily and at least so far
as I am concerned, the possible variations in treatm ent of a
domestic economic situation which is struggling out of the
rough and on to the fairway, I have assumed the task of
bringing together some of the threads which m ake up the
present pattern of the international m onetary situation.
The international monetary system given form by the Bretton Woods Agreements of 1945, and based on convertible
currencies at fixed parities and on the pedim ent of a reserve
currency, the U nited States dollar, which was also the prin­
cipal transactions currency of the world, served rem arkably
well for about a quarter of a century in term s of meeting the
needs of expanding world trade and commerce.
But developments am ong the nations in a growing
m ultinational and interdependent world probed the weak
spots of the system, so th at instead of building up stability
over the years it moved toward instability and finally lost
credibility. The necessary appearance of simple, effective
perform ance, which causes people to think they know how
the system works and to have faith in its workings, was lost in
a series of financial crises which had to be patched up with ad
hoc measures.
The final breakdow n of the system was precipitated in
A ugust 1971, when the U nited States announced th at it was
no longer willing to buy and sell gold, freely, from and to
foreign m onetary authorities, the linchpin of the system.
Subsequent attem pts to prop up the Bretton W oods ar­
rangem ents failed and, by early 1973, most of the countries
of the world h ad abandoned fixed rates, the U nited States
dollar h ad been devalued for the second time in fourteen
months, and the world was awash on a sea of “ m anaged”
floating currencies.
Meanwhile, in view of the obvious deterioration of the
old arrangem ents, the International M onetary Fund, or
IM F, in Septem ber 1972 had set up a Committee on the


Reform of the International M onetary System, the so-called
Comm ittee of Twenty. It represented all of the 126 constit­
uent m em ber states of the IM F at the technical level. Its
assignm ent was to consolidate earlier work on the problems
which had developed and to design, as had been done at
Bretton W oods, a new structure of international monetary
cooperation, a task which was expected to take about two
years to complete.
But the situation had so changed since Bretton Woods,
and was continuing to change, and the war-engendered spirit
of international cooperation of 1945 was so diluted, th at the
Committee had to adm it in June 1974 th at events—including
a worldwide inflation, large and fitful international capital
flows, the lack of a dom inant currency such as the U nited
States dollar formerly had been, and the sudden increase in
oil prices with a consequent distortion of the whole interna­
tional balance-of-paym ents netw ork—had overtaken its
deliberations. It decided th at reform of the international
m onetary system in the existing situation would have to be a
m atter of evolution under political as well as technical
economic guidance.
Having m ade this decision the Committee of Twenty fold­
ed up its papers, presented its recom m endations for im ­
m ediate action on certain subsidiary m atters to the Executive
D irectors of the IM F, and adopted a final report containing
an outline of longer term principles of international monetary
behavior to be subm itted to the Board of Governors of the
IM F at its annual meeting in Septem ber 1974. The Com m it­
tee of Twenty then ceased to exist.
The various actions or recom m endations of the Committee
subsequently adopted, or approved for further consideration,
by the appropriate bodies of the IM F are too num erous and
detailed to recount here, nor is it necessary to recite them all
in order to appreciate the difficulties which a technical com­
mittee, such as the Committee of Twenty, found it impossible
to surm ount. They had to be passed on for ministerial con­
sideration by finance ministers and such, who could take ac­
count of the political as well as the economic aspects of this
whole exercise in political economy.


Two or three of the proposals for im m ediate action can be
m entioned, however, to carry the story forward. They are:
(1) T h at an Interim Com m ittee of the Board of
Governors of the IM F, m ade up of m inisterial
m em bers of the B oard, should be established to advise
the Board with regard to the m anagem ent and a d a p ­
tation of the international m onetary system through
the present troubled tim es, and until a perm anent and
representative Council of Governors with decision­
m aking powers can be brought into being by am end­
m ent of the Articles of A greem ent of the Fund. This
would be, in essence, an executive com m ittee of the
Board of Governors which would meet several tim es a
year between the annual m eetings of the full board. A
necessary adm inistrative im provem ent.
(2) T h at guidelines be set forth for the m anage­
m ent of floating exchange rates since the Fund, under
the present articles of agreem ent, cannot legally
prom ulgate and enforce rules for this purpose. The
guidelines, which were later approved by the IM F, are
based on the assum ption th a t in a situation of floating
exchange rates it may be desirable (a) to smooth out
very short fluctuations in m arket rates, (b) to offer a
m easure of resistance to m arket tendencies in the
slightly longer run when they are leading to unduly
rapid movem ents in the rate, and (c) to the extent
possible to form a reasonable estim ate of the m edium term norm for a country’s exchange rate, and to resist
m ovements in m arket rates th a t appear to be
deviating substantially from th a t norm . But the
guidelines also take into account th a t national
policies, including those relatin g to dom estic
stabilization, should not be subjected to greater con­
straints th an are clearly necessary in the international
interest. A nd if th a t sounds like a lawyer or an
econom ist or a spokesm an following a Sum m it Con­
ference kicking up a lot of dust to obscure a lack of
content, it is.


T h at the m ethod of establishing the value of
special draw ing rights which can be created by the
IM F (in order to increase international liquidity in
m uch the same way th at national governm ents or cen­
tral banks create dom estic reserves) be changed from
a direct link with the U nited States dollar and,
through it with gold, to a link with a basket of c u rren­
cies of sixteen countries th a t have a substantial share
in the w orld’s export of goods and services. This
change, which has been m ade, resulted in a partial
divorce of special draw ing rights, an international
reserve unit, from the U nited States dollar which had
become an unsteady reference point.
The Board of Governors of the IM F at its meeting in
Septem ber 1974, formally established the Interim Committee
of Governors, recom m ended by the Committee of Twenty, to
pick up where the Twenty left off. For the rest, the Board
took note of the finding of the Committee of Twenty th at it
will be some tim e before a reform ed international monetary
system can be agreed upon and established, and endorsed
the Com m ittee’s proposal that, in the interim , the F und and
its m em ber states should pursue the general objectives and
observe the general principles outlined by the Committee.
These objectives and principles envisage a reformed inter­
national m onetary system which will include:
(1) An effective and sym m etrical adjustm ent pro ­
cess, including a better functioning of the exchange
rate regime based on stable b u t adjustable par values,
b u t with floating rates recognized as providing a
useful technique in p articu lar situations. A neat
straddle of a sticky point;
(2) Cooperation in dealing with disequilibrating
capital flows. A pious hope;
(3) The introduction of an appropriate form of con­
vertibility for the settlem ent of im balances am ong the
countries of the world, which m eans allowing as m uch
freedom as possible for individual countries to choose
the composition of their reserves, whether gold, special
drawing rights, or reserve currencies such as the United
States dollar;


(4) An obligation laid upon all countries, both
those in surplus and those in deficit in their paym ents
balances, to assure effective and timely paym ents a d ­
justm ents. A nother pious hope;
(5) Better international m anagem ent of global li­
quidity, with special drawing rights becom ing the
principal reserve asset, the role of gold and reserve
currencies being reduced, and the official price of
gold being abolished. A tough nut still uncracked.
In term s of the bright hopes or, perhaps, the enforced
show of confidence in finding early solutions of difficult prob­
lems, when official reform of the international monetary
system was first undertaken in 1972, this catalogue of
frustration might be said to be where we came in. T hat, of
course, would not be wholly fair. The ground work for a sec­
ond phase of discussion and negotiation at the m inisterial or
politico-economic level has been put in place by the technical
committee, and some of the underbrush surrounding the
more im portant issues has been cleared out. Nevertheless,
the difficulties in the way of reaching acceptable solutions, or
compromises, of the hard-core m ajor problems which are at
the center of our international monetary difficulties cannot
be minimized. Too many vital concerns of individual nations
and groups of nations are involved, motives of self-interest
and self-protection are strong, and the leadership of the more
powerful nations in prom oting international cooperation is at
a low ebb.
To sum m arize: The most intractable issues which still will
face the annual meeting of the Board of Governors of the In­
ternational M onetary Fund in W ashington next m onth are:
Finding an international adjustm ent process
with respect to balances of paym ents of individual
countries, and gaining acceptance of the joint respon­
sibility of all countries for the correction of im ­
balances, both countries whose paym ents are in
surplus and countries whose paym ents are in deficit,
while preserving the independence of each nation to
conduct its dom estic economic affairs w ithout in ter­
national constraint.


(2) Deciding the question of whether stable b u t a d ­
justable p ar values or floating rates for national cu r­
rencies are to be the system norm . The hopes th at
floating rates would provide an autom atic or m arket
solution of the adjustm ent problem have not been
realized in practice. T heir ap p arent success in
avoiding periodic m onetary crises during the past two
years has derived more from an overlay of continuing
all-em bracing crisis rath er th an from their inherent
contribution to stability.
(3) M anaging the problem of international liquidi­
ty, including the volume of such liquidity and its com ­
position as between gold, special drawing rights, and
national currency reserves, which includes the im ­
m ediate problem of shrinking the trem endous in ­
crease in international reserves during the recent years
which contributed to a worldwide inflation.
Essentially these are the same problems which brought
down the Bretton Woods Agreements and which the Interna­
tional M onetary Fu n d set out to correct in 1972. A bicycle
theory of m onetary reform appears to have emerged from
these deliberations. We have avoided falling flat, but the em ­
phasis so far has been on staying erect; the bicycle h a sn ’t
really been going anywhere.
This may be the correct posture in the present disordered
state of world economic affairs, and it appears to be the
posture which has been publicly assum ed by our government.
Nevertheless I would like to see the bicycle discreetly devel­
oping some forw ard m otion, and I think the U nited States,
W est G erm any, and Japan (with possibly the U nited K ing­
dom and France) should now take the lead in bringing
this about. These three (or five) nations have the financial,
trading, and industrial muscle and the developed financial
m arkets necessary to form the core of any new or reformed
international m onetary system. Their approach at this stage
could be low-key, as was the case before Bretton W oods when
com petent senior officials of the U nited States and the
U nited Kingdom were quietly and more or less informally
assigned the task of developing plans which later were placed
before the wider world community for consideration. I do not
think it wise or prudent to rely wholly on evolution to do the
job for us.


Excerpts from the remarks of Allan Sproul at
the Board of Directors Meetings, Wells Fargo
Bank, San Francisco, California, August 16, 1977
Beneath the welter of economic statistics which are
published alm ost weekly, reflecting various developments in
the national and international business and credit situations
with varying degrees of accuracy, at least two m ajor problems
have thus far defied the solvents of m arket forces and the
m inistrations of governments.
O n the domestic front we are still groping to find a way
between the dangers of inflation and the dangers of
unem ploym ent. These two economic scourges, which in
earlier and simpler times were supposed to be antithetical,
have now been in cohabitation for several years, and we have
yet to find a remedy for their behavior, a remedy which is
socially, politically, and economically acceptable. Both the
rate of inflation and the rate of unem ployment in the U nited
States rem ain at historically high and disturbing levels.
Internationally, we do not have a m onetary system which
will respond quickly and adequately to the inevitable ups and
downs of international trade and capital movements, while
m aintaining a degree of exchange stability which is necessary
for the most effective accommodation of world trade, and the
m aking of sound com m itm ents in real term s to move finan­
cial capital or to m ake direct investments outside one’s own
country. Floating exchange rates have not proved to be a
panacea in a world of nation states in which wide disparities
of national econom ic perform ance exist and persist. . . .
The utopian international m onetary system would consist
of a single world money, and a world central bank which
would provide the necessary liquidity to accommodate the
growth of world trade, and would act as a lender of last resort
in the case of individual countries facing tem porarily severe
b u t not necessarily fatal economic strains. The infringem ents
of national sovereignty which such a system might involve,
and the interference with national economic and social pro­
gram s with which its requirem ents m ight conflict, provide
assurance th at the emergence of such a system is impossible
in the present world of nation states.


We have always had to get along with m uch less. In the
nineteenth century the British were the dom inant factor in
world trade and finance, and the Bank of E ngland more or
less m anaged the so-called gold and gold exchange standards
of international m onetary intercourse. This system disap­
peared between the two world wars, with the decline of
British influence and power in world trade and finance. In
the im m ediate post-W orld W ar II period, the U nited States
and the U nited States dollar partially assum ed the privileges
and burdens of this hegemony, but the U nited States tired of
the role when it was deemed to be working against our na­
tional interests in the early 1970s and shucked it.
The nearest thing we now have to an international a r­
biter— an institutional apparatus which can try to balance
the scales between national policies of price stability and
m axim um employment, and the international need for com­
petitive trade expansion, reasonably stable exchanges, and
interlocking credit and capital m arkets (including the
Eurocurrency and bond m arkets)— is the International
M onetary Fund. But th at organization, somewhat like the
U nited Nations, is beset by an organizational structure
which, in deference to the power of the great industrial coun­
tries and the “ dem ocratic” dem ands of the less powerful, less
developed countries, is enm eshed in a variety of veto provi­
sions which practically deprive it of the attributes needed for
its m ajor tasks. Veto power on im portant actions has been
given to the U nited States, to the E uropean Economic Com­
munity, to the O rganization of the Petroleum Exporting
Countries, and to the “ Committee of 77” which now
num bers about 140 lesser countries. This is a recipe for diffu­
sion of authority and responsibility which is almost fatal.
W hat we are left with, in term s of an international
m onetary system, are periodic meetings of the finance
ministers of the principal countries, and periodic statem ents
of intent to keep their countries in phase so far as economic
growth and price stability are concerned, and to keep the
values of their currencies in some sort of equilibrium .
Such international good intentions falter, however, in the
face of disparate economic perform ances of the various coun­
tries, widening foreign trade and current account deficits and


surpluses, and substantial fluctuations in currency values.
There follows debate as to who should take action to defend
the shaky structure, i.e., should it be West Germany and
Japan and other countries with large trade surpluses and
strong currencies or should it be the U nited States and other
countries with large trade deficits and relatively weaker cur­
rencies. M eanwhile nontariff im port and export restrictions
for protectionist purposes proliferate, leading to losses in in­
ternational efficiency and economic well-being. This is
economic retrogression on a world basis.
My own opinion is that, eventually, the international
m onetary system will have to move back toward a regime of
fixed rates, or strongly m anaged rates which approxim ate
fixed rates, in a world which apart from the com m unist states
is more and more becoming one large international economic
entity. In such a development the U nited States, as the
largest trading nation and the largest capital m arket, should
play a leading part, and the U nited States dollar which is still
the principal transactions currency of the world and the prin­
cipal reserve currency of much of the world should have a
leading role. “ Benign neglect” of the exchange value of the
dollar, which the U nited States Treasury still seems to
espouse from time to tim e, is not a tenable policy.


Remarks of Allan Sproul at the Board of Directors
Meeting, Wells Fargo Bank, San Francisco,
California, November 15, 1977
The domestic economy is in partial disarray, a situation
which is disturbing b u t not fatal. It is in disarray politically
and it is in disarray economically, rem inding us th at our field
of concern is political economy, not just economics in a text­
book sense.
Politically, too many difficult and contentious problems
have been heaped by the President on a Congress conditioned
by years of feuding with the executive branch of government.
This has m eant th a t the first nine m onths of our first ad­
m inistration in eight years, in which the two branches of
government have been controlled by the same political party,
have been spent more largely in Byzantine m aneuvering of
Congressional committees than in bringing to passage im por­
ta n t measures dealing with urgent economic problems. The
energy problem , and the tax changes needed to put new life
into the ongoing recovery from the 1974-75 recession, have
been left dangling.
H arried by a m ixture of contending political and economic
forces, and with the persistent problems of unem ploym ent
and inflation still inflicting social and economic costs on
business and consumers, the underlying strength of the
domestic economy is overlaid with a fog of uncertainty. And
th a t is where I am going to leave it, in the hope th a t during
the next few m onths the fog will lift and the future will
become less obscure.
Meanwhile our international economic position is plagued
with its own uncertainties. It is misleading, of course, to
separate sharply our foreign and our domestic affairs. They
intermingle with and react on one another in a m ultitude of
ways. But, for purposes of exam ination, it is possible to focus
on certain international aspects of our trading and financial
situation so th at we can look more closely at m atters which
recently have forced themselves on our attention. I am refer­
ring to the large deficit in our trading accounts with the rest
of the world and to the signs of incipient weakness of the
dollar in the foreign exchange m arkets.


Balance-of-payments statistics are tricky. The various
com ponents of the total balance react on one another in a
variety of ways at different times and in different cir­
cumstances, and detailed interpretation of the figures is an
arcane accom plishm ent of specialists, which I am not. Even
the conception itself--a double-entry system of international
bookkeeping, in which assets an d liabilities m ust
balance—has its weaknesses as a reflection of the real world.
Nevertheless the figures do offer guides to opinion and to
The m ain em phasis, recently, has been on the develop­
m ent of a massive deficit in our balance of trade during the
past nine m onths, which it is now estim ated will be $25
billion or more during the calendar year. A more significant
figure, perhaps, is our balance of paym ents on current ac­
count which, in addition to trade, includes net revenues on
services, m ilitary transactions, and investment income from
abroad. Together, a favorable balance on these latter items
may offset about h alf our deficit on trade, but the deficit thus
reduced will still be of record and disturbing proportions.
The figure needed to offset the rem aining half of the trade
deficit—th at is to balance the books—is an inflow of foreign
capital, including some long-term funds, but probably con­
sisting to a large extent of short-term funds seeking employ­
m ent in our broad financial m arkets, while serving as tran s­
action balances and reserves of the countries of origin and
their nationals. This is in part, of course, our contribution to
the process of recycling the petrodollars continuing to pile up
on the books of the OPEC countries. The OPEC surplus with
the rest of the world is estim ated at $37 billion this year, and
is expected to continue at about this annual rate for
sometime ahead. For our m arkets to help recycle some of
these funds is constructive, but to become too largely in­
volved in the process is dangerous.
This im balance is the m onetary face of the energy crisis
and is at the core of our balance-of-payments problem. It
bears seed which could sprout into serious international


m onetary instability. At worst, it could degenerate into per­
sistent weakness of the dollar, creating the kind of monetary
crisis which developed in the late 1960s when other nations
(and their nationals and some of our nationals) developed a
growing reluctance to add to or even m aintain their dollar
holdings. On th at occasion the movement finally led to the
complete breakdown of the existing international monetary
arrangem ents.
Floating or freely flexible exchange rates, according to
their more fervent advocates, were supposed to correct such
m aladjustm ents in the future by bringing about equilibrating
m ovem ents of trad e and capital between nations. They were
to be the lubricant of the international adjustm ent process.
But the exchange rate flexibility of the past four years does
not seem to have played much of a role in reducing external
im balances. These im balances have been dom inated by other
This is not surprising. The difficulties of the international
adjustm ent process have always been at the center of
weakness of international m onetary arrangem ents. Politically
and economically such adjustm ents collide with domestic
realities. They impinge upon national rates of economic
growth, of inflation, of employment and unemployment; they
impinge on the survival of critical national export and im port
interests; and they foster trade and speculative responses to
disparate national monetary and fiscal policies. National
governments have been unable or unwilling, or both, to sur­
render their prerogatives in these m atters wholly to the
foreign exchange m arkets.
Summit meetings and meetings of finance ministers
from Rangoon to R am bouillet, and pronouncem ents of the
IM F, have exhorted the nations to coordinate their domestic
economic policies with their international economic respon­
sibilities. The overall result has been a surplus of com m uni­
ques and not much concrete action.
Now, in its own defense, the United States should take the
lead in seeking a contribution to a solution of this general
problem . It will have to bring about a major improvement in
its own international position, and in the strength of the


dollar which is still the center of the world’s m onetary
m achinery. It will have to quit dragging its feet and get on
with the business of adopting an effective energy policy.
The need for such a policy has existed for four long years,
at least, since the A rab oil em bargo and the subsequent in­
crease in OPEC oil prices from $2.53 to $13.25 a barrel in
1973, and nothing equal to the task has been accomplished.
United States net imports of fuels during 1977 have been
running at an annual rate of about $40 billion, and this is by
far the biggest cause of our overall trade deficit. O ur record of
response to the problem has been the worst of the principal in­
dustrial countries. Since 1973, oil consumption in the United
States has increased substantially while consumption in other
principal industrial countries such as the United Kingdom,
Germany, France, Italy, and Japan has decreased by effective
amounts in term s of need.
To get some real mileage in reversing present trends in our
balance of paym ents, and in preventing further weakness of
the dollar, fu rther disturbances in the international monetary
system, and further slippage of the world into restrictive
trade practices, we shall have to move quickly and decisively
to adopt an energy policy which will begin the process of cur­
tailing the enorm ous volume and value of our oil and gas im ­
ports. There are grave domestic questions involved in existing
energy proposals. But so far as the balance of payments is con­
cerned the evidence is unam biguous and clear. The bargains
and compromises m ust be struck. Time is running out.