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Printed for the use of the Joint Economic Committee
95-443 O


(Created pursuant to sec. 5(a) of Public Law 304,79th Cong.)
WILLiAM P R O X M I R E , Wisconsin, Chairman
W R I G H T PATMAN, Texas, Vice Chairman
J. W. F U L B R I G H T , Arkansas
H E R M A N E. TALMADGE, Georgia
JACK M I L L E R , Iowa
L E N B. JORDAN, Idaho

HALE BOGGS, Louisiana
H E N R Y S. REUSS, Wisconsin
MARTHA W. G R I F F I T H S , Michigan
WILLIAM S. M O O R H E A D , Pennsylvania
DONALD R U M S F E L D , Illinois
W. E . BROCK 3D, Tennessee

JOHN R. STARK, Executive Director
JAMES W. KNOWLES, Director of Research









I. Monetary and fiscal policies are not alternatives but must be coordinated
II. The "Fed" can effectively control the size of the money stock
III. The effects of Federal Reserve action are felt over a long time intervalIV. Even a discretionary monetary policy needs direction and evaluation.
V. A set of projections and rules for monetary action, with opportunity
to explain deviations, would be better than no guidelines at all
Findings and recommendations
Supplementary views of Representative Patman




2d Session







JUNE —, 1968.—Ordered to be printed


from the Joint Economic Committee,
submitted the following


together with


[Pursuant to sec. 5(a) of Public Law 304, 79th Cong.]

Under the Constitution, the Congress has been given the responsibility for determining matters involving coinage and the stock of
money. The Congress has chosen to delegate the exercise of this authority to the Federal Reserve authorities, giving them a considerable
degree of independence both from the Congress and from the Chief
Executive. F o r their part, representatives of the Federal Reserve
System have repeatedly acknowledged before the Joint Economic
Committee and elsewhere that the Declaration of Policy contained in
the Employment Act of 1946, along with the Federal Reserve Act
itself, provides in broad and general terms directives for their guidance. Discussion persists, however, as to whether such broad language
of the Employment Act is adequate or sufficiently specific to serve as
guidance for the Federal Reserve authorities, acting as the monetary
agent for Congress.

[Due to pressure of other responsibilities, Senator Fulbright was unable to
participate in the hearings and other committee deliberations pertaining to this
report and reserves judgment on the specific recommendations made therein.]
[Senator Symington states: "Because of unusually heavy commitments in
connection with other committee responsibilities, I was unable to participate in
all the hearings on which this report is based; therefore I do not wish to endorse

F o r its part, the Joint Economic Committee has heard much evidence over the years on the role of monetary policy and, in its recent
annual report, has made some specific policy recommendations. Nevertheless, there remain some very difficult unsettled questions about
monetary management. Some of these arise from our experience of
credit scarcity in the "credit crunch" of late 1966. Most of them have
to do with actual operations and market responses, rather than with
This report, relying heavily upon the testimony at our hearings on
May 8, 9, 15, and 16, 1968, and in many cases making use of the language of the expert witnesses, is directed especially at the following
(1) What are the interrelations between monetary policy and
fiscal policy and to what extent can they be regarded as alteratives?
(2) Is the monetary authority able accurately to manage the
stock of money, howTever money may be defined ?
(3) How do actions taken by the monetary authorities work
their way through the financial markets to affect interest rates
and the stock of money ?
(4) Has the Congress been sufficiently explicit in providing
guidance to the Federal Reserve authorities—its agent in monetary
management ?
(5) W h a t considerations would be most appropriate and most
helpful as guidelines for monetary action ?

Monetary and fiscal policies are not alternatives but must be
An overall objective of both fiscal and monetary policy is to keep
total spending, public and private, in such balance with the output
of goods and services as to maintain a high level of economic activity
at stable prices. Monetary policy can limit total private spending by
having private credit demand accommodate to Government credit demand. However, it cannot limit Government spending, which comprises a sizable part of the total. Fiscal policy can limit Government
spending, but its effects on private spending may be either supported
or largely frustrated, depending upon debt management and the choice
of a concomitant monetary policy. Under most economic conditions,
fiscal and monetary actions are thus complementary, not alternative,
instruments and should be used together as parts of a coordinated
economic policy.
For example, if the executive branch, acting under authorizations
from the Congress, were to undertake a large increase in spending, and
if at the same time the Congress did not assure adequate tax revenues,
there would be a large increase in the budget deficit, which the Treasury would have to finance by offering new U.S. Government securities
for sale. Fiscal policy, in this case, would require monetary action to
accommodate management of the Federal debt.
Conceivably, the nonbank public would be willing to acquire all of
the new debt offered without change in the Treasury's terms of offer, in
which case the monetary authorities would have to cope with the consequences of a lower supply of funds loanable to the private sector.
More probably, the Federal Reserve System would be required to act
through open-market operations in Federal Government securities.
Thus the Federal Reserve has a choice when faced with a Treasury
deficit: the Federal Reserve can increase the money stock as a side
effect of open-market purchases while maintaining interest rates about
the same, or hold the money stock fixed wThile permitting interest rates
to go up. Of course, one could choose a policy somewhere between these
two; that is, permit some increases in both the money stock and interest
rates. But the Federal Reserve cannot stabilize both the money stock
and interest rates in this situation.
Similarly, when faced with a Treasury surplus, the Federal Reserve
has a choice between stabilizing the money stock while interest rates
fall, or stabilizing interest rates while the money stock falls, but cannot stabilize both.
Although the Fed, as we shall see, can control the stock of money
within limits, as a practical matter its choice in doing so must inevitably give great weight to the reality that the Federal Government's
needs for credit cannot and will not be denied. The money needs of the
sovereign will be served even though this may mean higher interest


rates to other would-be borrowers competing for restricted funds, or
by an expansionary policy resulting in an inflationary levy upon investors and consumers.
The policies that regulate money and credit availability and use, as
well as the policies controlling debt management operations and the
expenditures and receipts of the Treasury, are all integral parts of an
overall combination of policies. When the President, the Congress, and
the Treasury have decided on a particular combination of expenditure
and tax policies, they have already determined the magnitude of the
Treasury's debt management operations, and by this channel have decided in large part the limits within which monetary policy will operate. If, as in fiscal year 1968, a deficit of over $20 billion has to be
financed, and this makes up a high proportion of the total of new credit
sources, then clearly the Federal Reserve System and its managers are
limited either to buying enough Treasury securities in the open market
to facilitate absorption of the residue of this huge addition or, alternatively, to inducing a very sharp reduction in funding of private

The Fed can effectively control the size of the money stock
It was evident that if the committee were to outline a number of
guidelines for monetary actions of the Federal Eeserve System, they
should be within the effective control of the monetary authority.
Targets have no meaning if the range of inaccuracy is too wide or if
the constraints that have to be reckoned with are too numerous or too
The testimony of witnesses in the recent hearings showed & large
degree of agreement in speaking to these issues. The obligation of the
monetary authority to keep financial markets functioning and to maintain the quality of the Federal Government's debt were recognized as
constraints that, on occasion, acquired the status of priorities. In particular, as noted above, the severe burden imposed on the monetary
authority by the growth of the Federal budget deficit in 1967 reduced
the options of the monetary policymakers.
It was noted, moreover, that private-sector demand—and in particular corporate demand—for liquid assets to hold as protection
against foreseen and unforeseen needs was not under the direct control
of the monetary authority. Eather, it was indirectly influenced by the
results of monetary actions and, in particular, by the interest foregone
in the choice to hold demand deposits. Thus the so-called credit crunch
of 1966, when the availability of credit, at any cost, was for a time
sharply and embarrassingly reduced, was widely viewed as an important cause of the broad corporate policy of building up liquidity in
1967. While the acceleration of corporate tax payments was a contingency that the Federal Eeserve System could provide for, on a reasonably accurate quantitative estimate, the identification of the temporary
surge in demand for money—money that was intended to be kept,
rather than to be spent, and thus to generate an increase in the credit
flow—was not easy. Moreover, there was no assurance that this abnormal increase in the money supply would not, at some future date,
be used to fuel an inflationary increase in credit.
This particular example was held up as typical of the dilemma that
regularly faced the Federal Eeserve System. On balance, a majority of
the witnesses felt that in 1967 monetary policy had been circumspect
and, in view of the fiscal limitations, as moderate as could have been
devised. That feeling, however, was not shared by those who emphasized the importance and the future potential of a very large increase
in the money supply.
The sole conclusion was that the choice of tempering the surge of
interest rates was explainable, whether or not with approval, as an
exception to a rule of stable growth of money supply and as a concession to an increase in the demand for money, despite the inflationary
95-443 0—68


As a less important factor in the calculation of the Federal Reserve
System, member banks' initiative in changing the level of their borrowings from the System could in the short run change the money
supply from the intended level. Yet the control of the discount window
was recognized as an effective means of limiting any longer-run deviation from the monetary authority's intent.
The consensus of the witnesses, with which the committee agrees,
was that in normal times and with few exceptions, the Federal Reserve
System could, if it chose, reach with reasonable accuracy any given
preferred level of money supply, within a range of sensible and responsible action. The money supply might be defined narrowly as
currency in circulation plus demand deposits adjusted to exclude interbank and governmental accounts; it could be defined broadly to include also time deposits; or it could be replaced by the Federal Reserve
System's credit proxy—a limited measure of demand deposits including, however, governmental accounts. I n each case, the targets could
be reached in normal times and within a narrow range.
Given that the Federal Reserve System can usually control the
quantity of money, the question arises how the public On
this, the quantity theorists base their prescriptions on the view that
moneyholding is a relatively constant aspect of economic performance ; the velocity of circulation of a jgiven money s u p p l y or its rate
of turnover in meeting monetary nhligfltirm^ fhey argue^ wouloT not
vary significantly if there were no disturbances induced by changing
monetary policies.
Other witnesses were less prepared to accept the downgrading of
velocity as a financial reality. I n the short run, for example, the wish
of the public to hold money balances is clearly affected by the alternatives available. I n particular, the cost of holding demand fTpposits is
the interest that might be earned onTioTctmg olher assets. A high interest rate would, therefore, lead £o efforts to reduce Che level o i a e m a n d
deposits, making a given amount of money circulate Faster. "The behavior of moneyholders might depend, moreover, on expectations, degree of uncertainty, and liquidity targets.
Two observations are in order. The Federal Reserve System bases a
large part of its case for discretionary leeway on the grounds that
short-run changes in market behavior are not predictable. Secondly,
the greatly increased variety and quantity of interest-yielding and
relatively liquid assets that can serve as alternatives to noninterestyielding demand deposits has in the past three decades introduced a
new complexity into the analysis of money-holding and moneyvelocity. Hopefully, research in progress and improved analysis will
help us understand people's choices and hence the role of velocity.
The functional exceptions to the Federal Reserve System's control
of the money supply were associated with severe pressure from Federal
Government demand for credit to accommodate public needs—a demand which, unlike private demand, could not ordinarily be suppressed. Secondly, there was the swift, often unexpected variation in
private liquidity needs.
The historical exceptions to the Federal Reserve System's ability
to control the money supply were mostly presented by other witnesses
as examples of the perversity of Federal Reserve policy in circumstances over which it had perfectly adequate control. In either evalua-

tion, these examples appeared to have only limited contemporary relevance. Thus there was a contraction of money supply by one-quarter
between mid-1929 and mid-1933; while banks with loanable funds chose
to restrict their business because they saw no chance of coping with
lending risks, this was a result of persistently erroneous Federal Reserve policies. Again, the fantastic doubling of banks' required reserve
ratios in 1936-37, accompanying a check to the growth of money supply, precipitated trouble in money markets and in the economy. So,
it could be said, it was the loss of confidence, the malfunction of the
credit markets and the relative cheapness of money holding, especially
when prices were falling, a situation compounded by the incapacity
or harmf ulness of Federal Reserve policy, that should be held responsible. More recent experience too, for example, the vagaries of Federal
Reserve policies in the late 1950's, shows how wrong it is to ascribe
limitless perspicacity to any human institution. Nonetheless, the committee is of the view that the management of the entire economy, still
beset by imperfections and uncertainties, has at least developed to the
level of never again having to undergo or tolerate such a vast monetary
and economic disorder as the depression of the 1930's.

The effects of Federal Reserve action are felt over a long time
The processes by which Federal Reserve policy affects the economy
are complex and indirect. Nevertheless, there was virtual unanimity
in the recent hearings that a steadily growing economy with stable
prices was likely to be best assisted by a comparable steady growth of
money supply. I t would also be natural to expect that the monetary
authority would wish to adhere to such policy in the absence of disturbance,
To say that steady growth in the money supply is a necessary condition for the maintenance of general economic stability and growth
is, however, not to say that a policy of creating steady growth in the
money supply will be sufficient to induce steady growth in the economy.
This critical issue was examined by the Joint Economic Committee
in terms not only of rules of conduct for monetary policy, but also in
terms of the pattern of changes that could be expected to follow actions
by the Federal Reserve System.
Subject to the demands of the Federal Government for support and
to the short-term variations in discounting for member banks, the
Federal Reserve can make a firm decision on the creation of its own
credit. I t has therefore good control over the maximum availability of
credit for the private sector. The willingness of the commercial banks
to lend or of businesses and persons to borrow merely sets the terms ori
which financial deals are transacted.
The pattern of interest rates, then, is to be regarded as an outcome
of a large number of forces of supply and demand to which the open
market operations of the Federal Reserve System contribute a very
powerful influence.
The strength of these forces and the market responses they set in
motion can be estimated in a general and not very accurate way, but
cannot be surely forecast. The capacity of the monetary authority to
achieve a chosen pattern of interest rates is therefore substantially less
than its control over the supply of money or of bank credit. For^this
reason the committee endorses the recommendation of one witness wh~o~
regarded mtefestrates as generally an unsuitaBjgmaior ob]ective~of
monetary policy action!
^ ^ g g p ^ ^ t , ' h p , T ^ , ATft differential impacts on different sectors of
the economy resulting from changes in interest rates. I t is clear therefore that the monetary authority, in adhering to some policy rule—
for example, oF stead y g r o w t h of money supply—cannoTwholly ignore_the_side effects of such a policy on the pattern of interest rates!
^ h e monetary authority cannot be indifferent if its policyjthreajfins
to create_such stringency that the mortgage and^nLU^cipainbond mar" kets verge on_ collapse. Nor can it ignore the del^ioTFa^
contracts m any important market.


The committee recognizes that in tempering the pressures of rising
interest rates, the Federal Reserve System is unable to avoid alternative risks associated with the higher growth rate of money supply, although it must take aocount of other forces in the economy so as to
minimize these risks as much as possible. F o r this reason, the committee is prepared to regard some short-term increases in the growth rate
of the money stock as reasonable, so long as they do not stimulate an
immediate inflationary rise in bank credit.
The least satisfactory aspect of the problem was that neither the
monetary authority itself nor the private witnesses were able to outline in any but the most general terms the manner in which the credit
flow generated a flow of real output over time. Apparently the guidance offered by econometric models has not yet reached the stage of
refinement that would yield a sufficiently accurate estimate. This is
also the conclusion of the staff study of the Federal Reserve-MIT
model, reported in the January 1968 Federal Reserve Bulletin.
Imperfections of knowledge not withstanding, the monetary policymakers have not given the committee or the public an -adequate assurance that their time horizon is distant enough when they evaluate their
alternatives. There was no hint that decisions were evaluated in the
light of any agreed or stable priorities of aims. There was no description of the resolution of conflicts between competing aims, which must
assuredly generate a high proportion of internal debate within the
Open Market Committee. Above all, there was no allaying of the widespread doubt that the deliberations of the Open Market Committee
were overly influenced by the most recent developments and the atmosphere generated by them, a process which, if it occurs frequently,
could cause damaging variability of intentions and actions by the Federal Reserve Board. The suspicions have been increased rather than
allayed by the ambiguous, nonquantitative, imprecise language of the
directives to the Manager of the Open Market Committee which are
now published with a 3-month delay in the Federal Reserve Bulletin.
The committee is aware of the high quality of the analysis performed within the offices of the Board of Governors, and of the advances in monetary analysis to which the Board has made a notable
contribution. I t would be gratifying to have some assurance that
these new methods are being subjected to operational testing. I n this
way, the Federal Reserve System might best answer their critics whose
testimony the Joint Economic Committee has heard with some sympathy, for it is certain that the current debate is not, to any extent, on
the nature of the ends to be pursued, but almost entirely, on the methods and decisionmaking in their pursuit.
I t behooves the Federal Reserve System, in brief, to show that it is
taking adequate account of the income-generating potential over a
long period that results from its making credit available, and is recognizing that an overf ast increase has an inflationary potential.

Even a discretionary monetary policy needs direction and
Since actions taken to affect the volume of bank reserves are necessarily and inherently quantitative in nature, it comes rather as a shock
to note how imprecise the standards guiding monetary management
are at all levels. The lack of guidelines is even more disconcerting
since the built-in uncertainty precedent to action makes it impossible
to assess or test after the event whether an action taken was of the
character, scale, or timing that was intended or should have been expected in the public interest. Little wonder that without standards of
direction or evaluation there is a generally uneasy feeling about, or a
dissatisfaction with, the performance of monetary management.
I t will be useful to divide the possible guidelines for monetary policy
into three levels in what might be regarded as a descending order from
objectives to policy to execution. First, there are guidelines relating to
the ends or objectives to be promoted by the monetary authorities.
Next are those relating to the specific monetary actions to be taken to
promote these selected ends. And finally there are guidelines for carrying out the actions, that is, open-market purchases or sales, once policy
has been determined. The central issue growing out of the present lack
of guidelines is not the choice between a broadly discretionary system
and a mechanistic system governing policy. I t involves rather the
level at which discretion is to be exercised—the Congress or its legally
constituted agents, the Board of Governors and the Federal Open Market Committee, or an employee of the system commonly known as the
manager of "the desk."
(1) Let us deal first with guidelines relating to the objectives of
monetary policy. The Employment Act is quite specific in setting forth
major objectives of economic policy: maximum employment, production, and purchasing powder. As interpreted by numerous executive department statements and actions, in which the Congress has concurred,
these are generally understood to involve maintenance of low rates of
unemployment; reasonable stability in the purchasing power of the
dollar; a high and stable rate of economic growth; and a stable exchange rate for the dollar. Likewise, the administration and the Congress have interpreted the Employment Act mandate as contemplating
a harmonious integration of fiscal and monetary policies. Yet, neither
the Federal Reserve System nor monetary policy are mentioned in the
Employment Act.
These omissions are difficult to comprehend today, but more understandable when considered in the light of conditions that prevailed at
the time of the Employment Act's passage. The country then was fearful that reconversion to a peacetime economy would be accompanied by
mass unemployment. Preoccupied with the prospect of a recurrence
of unemployment that characterized the thirties, when interest rates


were low, the Congress did not give much weight to monetary policies.
Nevertheless, there is now general agreement that monetary policy is a
basic instrument of public economic policy.
The Federal Eeserve continually and explicitly recognizes the Employment Act objectives in its announced policies and, indeed, it has
been zealous in exercising its own judgment in respect to the policy mix
shown to achieve these objectives. I t should be noted, too, that in addition to the aforementioned objectives of the Employment Act, there is
often official pressure on the Federal Eeserve to adapt its policy to
other objectives or considerations—to avoid significant changes in
money market conditions at times of new Treasury issues, to avoid "excessively high interest rates," to protect the flow of funds to nonbank
financial intermediaries, and to ameliorate adverse effects on the residential construction industry.
Thus, the Federal Reserve suffers from no lack in the number of
guidelines relating to its goals or objectives. However, it has been
given virtually no official help as to how it should weigh the various
objectives, assign priorities, or select among them when they come
into conflict. Some of these objectives are likely to be at least partially
incompatible, even under the most favorable circumstances. They will
almost certainly be incompatible if monetary policy is not assisted by
timely and appropriate flexible fiscal policies, or when overall fiscal
policies throw an undue burden on monetary policy.
The Congress should give serious consideration to providing more
specific guidelines relating to the objectives of monetary policy—
guides relating to the weights and priorities to be attached to the various objectives. Such an attempt by Congress might yield two beneficial,
results. First, it might provide more specific guidance to the Federal
Eeserve in terms of goals or objectives. Second, the very process, including periodic reports by the Federal Reserve on its achievement of
objectives, would afford Congress an opportunity to evaluate better
the relative roles of monetary policies and of other policies, including
various types of fiscal policies, in promoting and reconciling our economic objectives.
(2) We then come to the second level of shadowy standards upon
which monetary action hinges—the intermediate targets of policy.
These have been debated extensively in the professional journals, although without sufficient agreement having been reached to provide
any automatic guide for monetary policy decisions.
Some economists tend to focus attention exclusively, or primarily,
on changes in the rate of credit expansion, either in terms of total
credit expansion or some critical segment thereof, such as bank credit.
Others look principally to changes in the economy's liquid assets, either
in the aggregate or in some segment of the total, such as the money
stock. Others look principally to the terms and conditions on which
funds can be borrowed, regarding changes in the level and structure
of interest rates as the basis for establishing the course of monetary
Stating the problem another way, what financial variable or variables should be used as intermediate targets of monetary policy ? More
specifically, in assessing whether monetary policy has been tight or
easy, what interpretation should be assigned to the movements in the

stock of money, as against movements in other financial variables such
as broader measures of liquid assets, credit flows and terms, money
market conditions, or the level and structure of interest rates ?
Section 12A of the Federal Eeserve Act, as amended in 1933, reads
The time, character, and volume of all purchases and sales
of paper described in Section 14 of the Act as eligible for
open-market operations shall be governed with a view to
accommodating commerce and business and with regard to
their bearing upon the general credit situation of the country.
Clearly, the Congress, apart from specifying eligible paper, has not
been explicit in providing guidance or setting standards for Federal
Reserve authorities in the choice of instruments to be used in performance of the duties which have been delegated to them. Even when supplemented by the Declaration of Policy contained in the Employment
Act of 1946, the statutory directives are broad and most general. This
does not mean, however, that the agency charged by those statutes with
day-to-day responsibility can do without some quantitative formulation of its objectives.
Unfortunately, the Federal Reserve itself does not appear to have
developed a set of priorities for its own guidance. This lack of firm
working criteria has troubled monetary students and members of
this committee ever since the Board exposed its methods by making
generally available the Record of Policy Actions of the Board of Governors and the Federal Open Market Committee. The minutes made
available are couched in the most general, nonquantitative monetary
and stabilization terms. They have tended to indicate a considerable
reliance on intuition and mystique in shaping actions rather than giving Congress, or observers of monetary affairs, a full opportunity to
follow the developing and sometimes conflicting concepts or reasons
which have influenced decisions.
A single example will illustrate the lack of rules. One will suffice,
although similar statements reporting procedures are made available
with a 3-month lag in the monthly Federal Reserve Bulletin and may
be read by all. The minutes of the July 18, 1967, Open Market Committee meeting report t h a t :
I n the course of the Committee's discussion considerable
concern was expressed about the recent high rates of growth
of bank credit and the money supply, particularly in view of
the prospects for more rapid economic expansion later in the
year. I t was generally agreed, however, that the Treasury's
forthcoming financing militated against seeking a change in
money market conditions at present. Moreover, even apart
from the Treasury financing, most members felt that it would
be premature to seek firmer money market conditions at a time
when resumption of expansion in overall economic activity
was in a fairly early stage; and some also referred in this
connection to the growing expectations that the administration would press for measures of fiscal restraint. I n addition,
some members expressed concern about the possibility that
any significant further increases in market interest rates
might reduce the flows of funds into mortgages and slow
the recovery under way in residential construction activity.

A member of the J o i n t Economic Committee is certainly not alone
in asking, "Was the Fed continuing to create money at the rate of 9
percent [as it had been] because of Treasury borrowing, the level of
production, expectations about future tax increases, worries about residential construction, or what? W h a t weight was assigned to these
factors ? We are not told."
(3) Open Market Committee policy, thus arrived at without any
apparent overriding rules or criteria, is summed u p at each meeting in
a broadly worded "policy directive," which, taken by itself, is admittedly not an adequate guide for day-to-day action. The full text of
the several directives in effect during parts of the past year appear, as
is usual, in the Board's annual report. Stripped of essentially repetitive
and formal language, changes in the critical "policy" words during the
year called upon the Account Manager to conduct operations with a
view t o :

Dec. 13,1966
Jan. 10, 1967
Feb. 7,1967

Mar. 7, 1967

Apr. 4,1967
May 2,1967
May 23,1967
June 20, 1967

July 18, 1967

Aug. 15, 1967

Sept. 12, 1967

Oct. 3, 1967


Attaining somewhat easier conditions in the money
market, unless bank credit appears to be resuming
a rapid rate of expansion.
Attaining somewhat easier conditions in the money
market, unless bank credit appears to be expanding significantly faster than currently anticipated.
Maintaining the prevailing conditions of ease in the
money market, but operations shall be modified
as necessary to moderate any apparently significant deviations of bank credit from current expectations.
Attaining somewhat easier conditions in the money
market, and to attaining still easier conditions if
bank credit appears to be expanding significantly
less than currently anticipated.
[No change.]
Maintaining the prevailing conditions in the money
Maintaining the prevailing conditions in the money
market, while utilizing operations in coupon issues
in supplying part of the reserve needs.
Maintaining about the same conditions in the money
market as have prevailed since the preceding
meeting of the Committee, while continuing to
utilize operations in coupon issues in supplying
part of reserve needs.
Maintaining about the prevailing conditions in the
money market; but operations shall be modified
insofar as the Treasury financing permits to
moderate any apparent tendency for bank credit
and money to expand more than currently
_ Maintaining about the prevailing conditions in the
money market; but operations shall be modified,
insofar as Treasury financing permits, to moderate any apparent tendency for bank credit to
expand more than currently expected.
Maintaining about the prevailing conditions in the
money market; but operations shall be modified
as necessary to moderate any apparent tendency
for bank credit to expand significantly more than
currently expected.
Maintaining about the prevailing conditions in the
money market; but operations shall be modified,
to the extent permitted by Treasury financing,
to moderate any apparent tendency for bank
credit to expand significantly more than currently expected.


Oct. 24, 1967
Nov. 14, 1967

Nov. 27, 1967_

Dec. 12, 1967_

Jan. 9, 1968_


[No change.]
Maintaining about the prevailing conditions in the
money market, but operations shall be modified
as necessary to moderate any apparent tendency
for bank credit to expand significantly more than
currently expected.
Facilitating orderly market adjustments to the increase in Federal Reserve discount rates; but
operations may be modified as needed to moderate any unusual pressures stemming from international financial uncertainties.
Moving slightly beyond the firmer conditions that
have developed in money markets partly as a
result of the increase in Federal Reserve discount rates; provided, however, that operations
shall be modified as needed to moderate any apparently significant deviations of bank credit
from current expectations or any unusual
liquidity pressures.
Maintaining the somewhat firmer conditions that
have developed in the money market in recent
weeks, partly as a result of the increase in reserve requirements announced to become effective in mid-January; provided, however, that
operations shall be modified as needed to moderate any apparently significant deviations in
bank credit from current expectations.

All that one can safely infer from such language changes in directives is that the Open Market Committee sought to have open market
operations move in the direction of relative ease until the December
meeting. Except for that shift in policy, the semantic changes in the
various versions of the directive, standing by themselves, appear to
have little operational meaning. Presumably they mean something, but
the operational or quantitative significance is not clear. Outsiders, including the Congress, can judge neither the degree of change intended
by revisions of the directives nor the extent to which the manager
implemented the intended change in policy.
I t may well be that members of the Open Market Committee talk
in rather more quantitative terms and arrive at a consensus in more
concrete terms, providing a more substantial guideline for operations
in the interim between meetings. If there are indeed any quantitative
guides or standards for action at this level—the operational level—it is
not clear why the outside reader, seeking to understand the niceties of
policy, must always be sent back to reread and compare the old and
new fine print in order to understand what has been going on in monetary administration.
The vagueness and obscurity of the reports on policy actions (and,
at the succeeding level, the resultant directives to the "desk") arise, one
may be sure, not so much from willful veiling in reporting marching
orders as from an inherent imprecision in the objectives, policy standards, and operations themselves.
One might have hoped, of course, that, under the admittedly broad
delegation from the Congress, the monetary authorities themselves
would have tested and developed working criteria or quantitative rules
of thumb by which to guide and later test policy decisions and results.

While some recent progress has apparently been made in developing
economic and computer models, the uneasiness and dissatisfaction with
the results of past policy actions have prompted many people to wonder
whether monetary management must forever remain an "art" dependent upon the "color, tone, and feel" of the money and credit situation.
Is it necessary, as was suggested at the hearings, that the monetary
authorities must forever "fly by the seat of the pants"? The Joint
Economic Committee has consistently thought not. To this end, it has
sought ways of improving the situation. The evolution of its search
for some rules or standards is discussed in the following section.

A set of projections and rules for monetary action, with opportunity to explain deviations, would be better than no guidelines
at all
The Joint Economic Committee has on occasion made some rather
specific recommendations for the conduct of monetary policy. These
have been put forward with the intention of pointing directions in
which Congress and the monetary authorities hopefully can improve
the actions and policy of monetary management, through more explicitly stated objectives and guidelines. An awareness t h a t almost any
rule of guidance will have some drawbacks as well as advantages has
been an important consideration in prompting this particular set of
The testimony and advice of the experts, together with the resultant
exchange of ideas, lead us to what we believe is an improved restatement or refinement of our earlier proposals. These modifications are
set forth more fully later in this report; but since the earlier statements have been so largely the focus of this study, it seems appropriate
to repeat them here in this report as the best way of bringing out the
types of problems involved and the kinds of revised rules which we
hope will advance the discussion and sharpen the use of the monetary
I n our report of March 1967, we said:
The committee urges that the monetary authorities adopt
the. policy of moderate and relatively steady increases in the
money-supply, avoiding thp, disruptive effects of wide swings
in the rate of increase or decrease.
' T h e committee is impressed with the increasing weight
that many economists give to the importance^T a steady rise
in the money supply. Such rate of Increase should be more
orless consistent with the projected rate of growth—generally
within a range ot 3 to 5 percent per year. Sudden changelTln
the" money supply give rise to instabilities in the economy.
We" are convinced that restoration of pf>rmnrmV grnw^h and
avoidance of a recession demand such increases in the money
supply as recommended ajhove. [p. 14~]
The Joint Economic Committee, in its recent annual Economic Keport of March 1968? again reiterated this recommendation of earlier
jrears. The words in the current report are these!
jVe are thus convinced that a steady rise in the money supply more or less consistent with the projected rate of economic
growth-—generally within a range of 3 to 5 percent per year—
would be a healthy, long-run ideal. But the very essence of
^uch a policy is to avoid large and sudden changes or reversals.


The paragraph just preceding reads:
* * * the Joint Economic Committee has consistently * * *
[urged] that the preferred course would be to follow a pattern
of steadily t r e a t i n g money in keeping with the growth in the
economy, aiming perhaps at the higher side of some range at
times of alow ecollohiic growth, and in years of inflationary
pressures leaning toward the lower end of the register * * *
The guidelines that can be devised for monetary action ought not to
be interpreted as rigid directives. The evidence presented before the
committee, by witnesses of different viewpoints, gave examples of exceptions to strict rules that were by no means rare contingencies. There
has to be room for deviation from rules, and for the exercise of discretion in response to need.
On the other hand, a prolonged departure from what could be called
a reasonable long-term range of variation of such an indicator as
seasonally adjusted money stock, or credit proxy for money stock,
does not appear to be justified. E&anJf neither the Fed, proclaiming
its entitlement to be unrestricted by rules, nor its critics, asserting* the
heed tor such rules, has precisely traced the effect of, say, a zero or
negative growth rate of money or a prolonged prowth rate in excess
01 an annual rate of 6 percent, it is still reasonable to believe that such
fllYnornrml pohmps would gp.nprate i n s t a b i l i t y .




One question faced by the committee was to designate an approximate time span for the measurement of changes in the money stock.
The time basis used by Governor Mitchell in his testimony appears
to be entirely adequate—the comparison of change from one quarter
to another. A 3-month period is sufficiently long to allow abnormal
and extreme temporary movements to be absorbed in an average, and
it is short enough to provide a reasonably frequent measure of the
course of events. Of course, seasonal adjustment will eliminate regularly recurrent variations in the course of any year.
The,committee estimate^ thflt, on n qnnrtor by quarter mmpnriiion,
an appropriate normal range of increase in the money stock seasonally
adjusted would be 2 to 6 percent per annum and that, on occasions
when the rate of increase was outside this ran pp.. it would be wise
l o r the Congress to take a prompt look at the Federal 'Reserve"System^ actions. Moreover, the Congress should have the benefit of
periodic reports to reviewT actions taken within the above range!
' 1 here is no intention to make the 2 to 6 percent range a permanent
aiflhunchanging One. Advances m banking techniques, economization
in the use7
ose forms of credit within the definition of money,
changes in business practices, in the rates of growth of population or
productivity, or even in personal preferences—all can modify the
desirable range of money growth rates. In the meantime, however, the
pragmatic choice of 2 to 6 percent requires the Federal Reserve
System to explain only significant abnormalities in monetary
Furthermore, the Federal Reserve should give valuable guidance
to the Congress in a reciprocal fashion, by making known its own
estimates of quantitative developments in the national accounts, estimates that are prepared early in each calendar year and on which the

broad lines of monetary policy would be based. Unlike the periodic
directive to the Manager of the Open Market Account, these projections are not required to be secret at all. While it is likely that the
projections are similar to those used by the Council of Economic Advisers for the President's Annual Economic Report, there is some need
for greater detail in the Federal Reserve System's expectations on
monetary developments. These figures would, moreover, be useful in
assisting Congress to pursue fiscal policies that would be compatible
with the Federal Reserve's monetary policy.
Until about ten years ago, U.S. economic policies, and monetary
policy in particular, enjoyed an unprecedented exemption from the
need to take account of external reactions. Now, the U.S. balance of
payments exerts a strategically important, if quantitatively small, influence on our fiscal and monetary posture. Relatively free movements
of short-term funds between the United States and the increasingly
developed Eurodollar market have the incidental effect of lessening
the precision of Federal Reserve policy, in regard to money supply
and in other ways. I t is not the purpose of this report to go into detail
on these problems, still less to advocate deflationary action in order
to moderate the U.S. overall international deficit. But it is appropriate
that the report recognize that at this time there is no conflict of prescriptions for attaining domestic and international objectives. At some
other time, however, there may be conflict between domestic and international monetary prescriptions, in which case it will be necessary to
decide on priorities, as well as to enlist the aid of fiscal policies.

The Congress should give serious consideration to providing more
specific guidelines relating to the objectives of monetary policy—guidelines relating to the weights to be attached to the various objectives,
among which are maintenance of continuously low rates of unemployment, reasonable stability in the purchasing power of the dollar, a high
and stable rate of economic growth, and a stable exchange rate for the
dollar. Such an attempt by Congress might yield two beneficial results:
First, it might provide more specific guidance to the Federal Reserve
in terms of goals or objectives. Second, the very process would afford
Congress an opportunity to evaluate better the relative roles of monetary policies and of other policies, including various types of fiscal
policies, in promoting and reconciling our economic objectives. However, as noted earlier in the report, these guidelines ought not to be
interpreted as rigid directives.
Just as the Congress has the authority to fix Government expenditures and taxes, and thus largely to determine the budget surplus or
deficit, the Congress has the responsibility of reckoning with the monetary consequences of its action. While the monetary authority granted
to the Congress by the Constitution has been delegated to the Federal
Reserve System, it behooves the Congress to provide some guidance to
the Federal Reserve on how the System should see to the support of
the Government's credit and, in particular, to what extent Congress
regards the expansion of Federal Reserve credit as an appropriate way
to finance any part of the deficit.
To provide a first approximation to an economic posture that would
manage to maintain price stability while encouraging maximum employment and rapid economic growth, the Congress should advise the
Federal Reserve System that variations in the rate of increase of the
money stock (currency plus demand deposits adjusted) ought not to be
too great or too sharp. I n normal times, for the present, the desirable
range of variation appears to be within the limits of 2 to 6 percent
per annum, measured on a quarter-by-quarter basis—a range that centers on the rate of long-run increase in the potential gross national
product in constant dollars, which is our sustainable real growth rate.
On any occasion on which the Federal Reserve System, deliberately
or as a result of external monetary developments, has not maintained
a money-stock growth rate within the desired range, the committee
requests that the monetary authority report promptly to it, or to another appropriate body of the Congress, on the reasons that the Fed-


eral Reserve System would give for this divergence. Periodic reports
on the reasons for action taken within the desired range should also
be made.
If, after several years' experience with a rule, refinements in the
guidelines seem warranted, they could, and should, of course, be made.
Finally, as a regular procedure, the Federal Reserve authorities
should, at the beginning of each year, set forth publicly as specifically
as possible their notion of what kind of monetary policy the expected
state of the economy calls for. This would supplement in the monetary
field the review of the Federal Government's economic programs
which the President is now required to set forth in the Economic Report. Such a public projection (which we understand is already available internally) would present a picture of what the financial world—
money supply, flows through financial intermediaries, the appropriate
course of interest rates—would look like. This would also tie in with
the gross national product projection indicated in the report of the
Council of Economic Advisers. I t would certainly help Congress to
adopt the necessary fiscal policies and to foresee and forestall potential
problems such as those resulting from disintermediation, oppressive
interest rates in the housing field, international capital flows, and the

While I agree with many of the conclusions reached by my colleagues
concerning the policies that have been pursued by the Federal Reserve
System, I do not think that the remedies proposed go far enough.
I have long believed that a monetary policy directed toward the
goals of the Employment Act will not be achieved within the present
institutional structure. As long as we allow the Federal Reserve System to act independently, even in defiance, of the Government, and as
long as we allow control of our monetary powers to rest in the hands
of a self-appointed money trust, we cannot hope to reverse the direction of our current monetary policy.
My views on the so-called "independence" of the Federal Reserve
are set forth in detail in the Report of the Joint Economic Committee
on the January 1965 Economic Report of the President, and I will not
repeat them in detail here. Briefly, the main points raised in that statement were the following:
1. Despite the original intent of the Congress, the Federal Reserve
System over the years has become increasingly banker-oriented.
2. Polls and studies have shown heavy preponderance of banking
background among the directors of the 12 Federal Reserve banks who,
in turn, select the bank presidents.
3. These developments have led to a lessening of public control, as
represented by the Federal Reserve Board, and toward increased
domination by the banking interests.
4. This unfortunate situation is especially apparent in the representation on the Federal Open Market Committee, which, through the
purchase and sale of Government securities, exercises the fundamental
monetary powers of the Nation. Although the Committee is made up,
on the record, of five Reserve bank presidents and the seven members
of the Board, all 12 bank presidents participate in the secret deliberations of the Committee.
5. Public control of the Federal Reserve Board itself is diluted by
the length and distribution of members' terms. The members serve for
14-year terms, staggered at 2-year intervals. Consequently, a President
serving for two full terms could not appoint a majority of the Board
until the end of his second term. H e is also restricted in his choice of
Chairman to the present membership of the board.
The fact that the existing situation is intolerable and dangerous is
underscored by two issues raised in the Committee Report. The first
is the need for coordination of all of the Government's economic
instruments and policies. Coordination of our economic policies is the
first priority toward achievement of the goals set forth in the Employment Act. But the independent and sometimes actually defiant attitude
of the Federal Reserve makes coordination of the Government's eco-


nomic policies difficult, if not impossible. A dramatic example of this
predicament occurred in December 1965, when the Federal Reserve
ignored the pleas of the President and raised interest rates without
waiting just a few weeks until the Government's budget and fiscal
plans could be completed. In effect, the Federal Eeserve openly defied
the President, the Secretary of the Treasury, the Budget Director, and
the Council of Economic Advisers, and forced the President to adopt
budgetary and fiscal policies in light of the Federal Reserve's action.
I think it is intolerable to allow the Federal Reserve to dictate economic policy decisions to the President.
The other point I would like to emphasize is the Federal Reserve's
interest rate policies. As the Report states, our interest rates are now
at their highest level for a century. Rates have been rising consistently
since World W a r I I , and are now at a dangerous level.
I think there can be little doubt that we can thank the bankers who
control the Federal Reserve for this situation. Interest rates are the
bankers' income, and, of course, the higher the rates, the greater bank
I think it is clear that we have reached a point where banker
domination of our monetary system has imperiled the welfare of our
citizens. I n my view, the most important economic and governmental
problem facing the Nation today is the need for immediate rehabilitation of the Federal Reserve System, so that it is again subject to the
will of the people, acting through their elected representatives. The
Constitution clearly vests the monetary power in the Congress. I t is
high time that the Congress reassert its proper control.
Another aspect of the Federal Reserve that is absolutely wrong is
the $50 billion portfolio of bonds kept in the Federal Reserve bank
vaults. The Federal Reserve is collecting $2 billion of interest each
year as if it were a private citizen investing in U.S. bonds. Yet the
fact is that these bonds have already been paid for by the U.S. Government, an event that occurs when the Federal Reserve, acting as the
Government's agent, repurchases these bonds. I t is absolutely absurd
to permit the Fed, as the Government's agent, to collect this massive
amount of interest; moreover, it permits the Fed to operate completely
free of the whole appropriation process. They spend as much as they
want of this huge flow of interest without any outside controls whatsoever. As I have often observed, this situation can be compared to
that of a private individual who j)ays off his mortgage but then has
to continue to pay interest to the mortgage company that acts as his
agent. This would be absurd and illegal in the case of a private individual, but we permit the Federal Reserve to get away with it.
The Joint Economic Committee made an extensive study of this
situation, under my direction, 2 years ago. We solicited the views of a
large number of economists and monetary experts and a great many
of them suggested that this practice be stopped because there is no need
for it and no point to it. I urge Members of Congress to consider this
situation and correct it.