Full text of Statements and Speeches of Delos C. Johns : Federal Reserve Policy : Address before the Luncheon Meeting of the Annual Conference of Bank Correspondents of the First National Bank in St. Louis

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FEDERAL RESERVE POLICY

Address
by
Delos C. Johns
President, Federal Reserve Bank of St. Louis

Before the
Luncheon Meeting of the
Annual Conference of Bank Correspondents
of the First National Bank in St. Louis
Hotel Sheraton - Jefferson
Thursday, November 8, 1956.

FEDERAL RESERVE POLICY

When your genial and a r t i c u l a t e presiding officer, P r e s i d e n t McDonnell
of The F i r s t National Bank in St. Louis, invited me some weeks ago to a d d r e s s
this luncheon meeting, I accepted with p e r h a p s indecorous p r o m p t n e s s .

Let me

a s s u r e you now that I was not motivated by an overwhelming d e s i r e to occupy
the podium and to p a r a d e my views.

As a m a t t e r of fact, the passing y e a r s

suggest to me m o r e and m o r e that I am well advised to r e s t r i c t my public
u t t e r a n c e s r a t h e r s e v e r e l y a s to both frequency and content.

However, in this

c a s e t h e r e w e r e r e a s o n s - two of them - why the sober counsel of the passing
y e a r s could not or at l e a s t did not p r e v a i l .
In the first p l a c e , I found it, as always, e x t r e m e l y difficult to r e s i s t
Mr. M c D o n n e l l s artful and p e r s u a s i v e approach.

This r e a s o n leaves out of

account the further fact that M r . McDonnell is one of my b o s s e s , being a
d i r e c t o r of the F e d e r a l R e s e r v e Bank of St. Louis and having been one when and
since I was employed by that bank.

In the second p l a c e , the invitation to speak

h e r e today affords me the opportunity to make good on a p r o m i s e I gave five y e a r s
ago and was prevented from p e r f o r m i n g .

The r e c o r d d i s c l o s e s that five y e a r s

and two days ago t h e r e was a conference of bank c o r r e s p o n d e n t s of The F i r s t
National Bank in St. L o u i s .

Then, a s now, I was invited to speak, and I had

some r e m a r k s p r e p a r e d , but the fates d e c r e e d that I should spend that day and
a good many m o r e in a hospital.

Those of you who w e r e h e r e five y e a r s ago,

and I suspect you a r e many, will doubtless r e c a l l that this place on the p r o g r a m
was m o r e capably filled than I would have done by Mr. F r e d e r i c k L. Deming,
then Vice P r e s i d e n t and now F i r s t Vice P r e s i d e n t of the F e d e r a l R e s e r v e Bank
of St. Louis.



- 2 It has seemed to m e a p p r o p r i a t e to r e f e r back to the m a n u s c r i p t which
I planned to u s e five y e a r s ago.

It is entitled " B a n k e r s and Money Questions 1 1 .

It evokes m e m o r i e s not much dimmed by the p a s s a g e of five y e a r s .

It contains

a g e n e r a l description of the state of the economy of this country as it was then,
and which without substantial modification could be used to p o r t r a y the state
of our economy today.

Then I said, or was p r e p a r e d to say:

"The A m e r i c a n economy is operating at p r a c t i c a l capacity.
We have a l m o s t full employment of both the labor force and
of our productive plant. M
My five-year old m a n u s c r i p t also attempted to state what I chose to call "the
c u r r e n t money question of major i m p o r t a n c e " in t h e s e w o r d s :
"How can we hold the value of our money fairly stable over
a period of t i m e ? "
And to that question I appended the comment that "the basic money question h a s
to do with the integrity of the dollar. "

T h e r e a r e , of c o u r s e , significant differences between the situation of
five y e a r s ago and the situation today.

Then we had but r e c e n t l y e m e r g e d from

a long period of F e d e r a l R e s e r v e support of the m a r k e t for United States
Government s e c u r i t i e s .

Then t h e r e was war in K o r e a .

Inflationary p r e s s u r e s

g e n e r a t e d l a r g e l y by t h e s e two c i r c u m s t a n c e s had c r e a t e d s e r i o u s p r o b l e m s by
e a r l y 1951. In efforts to c u r b the p r e s s u r e s , r e s e r v e r e q u i r e m e n t s against
demand deposits had a l r e a d y been i n c r e a s e d by two p e r c e n t a g e points and
r e s e r v e s against time deposits by one p e r c e n t a g e point, an i n c r e a s e o v e r a l l
of m o r e than 10 per cent.

Selective c o n t r o l s of c o n s u m e r c r e d i t and r e a l e s t a t e

c r e d i t w e r e then in effect under Regulations W and X of the Board of G o v e r n o r s




- 3 of the Federal Reserve System and related regulations of the Federal Housing
Administration and the Veterans Administration affecting real estate credit.
Regulations T and U of the Board of Governors had been amended a few months
before by increasing margin requirements on so-called stock market credit
from 50 to 75 per cent.

And in addition to all this, a voluntary credit restraint

program had been inaugurated in an effort to direct the flow of credit away from
nonessential and into essential u s e s .
Changes in Federal Reserve policy and policy action which attended and
followed the Treasury-Federal Reserve accord of March 4, 1951 are well known
to all of you.

Suffice it for my purpose now to say that Federal Reserve support

of the Government securities market was gradually withdrawn and Federal
Reserve intervention in the money market was gradually reduced.

Over time

the inflationary psychology began to change and upward pressure on prices began
to abate.

Though shortly after midyear of 1951 the highly restrictive provisions

of Regulation W had been somewhat eased, this did not signal the end of need
for monetary and credit restraint.

Inflation was still a threat.

This in sketchiest outline i s where we were five years ago when a
conference similar to this one was held in this very room.

The objective of

Federal Reserve policy was then to restrain the rate of credit expansion without
handicapping the defense program and sustainable economic growth.

Policy was

aimed at the maintenance of a high level of economic activity without inflation
but with enough new bank credit to accommodate the requirements of growth.




- 4 The objective of c r e d i t r e s t r a i n t continued throughout 1952 and through
the f i r s t q u a r t e r of 1953.

The discount r a t e of 1 3/4 per cent established in

August, 1950 was continued in effect until J a n u a r y , 1953 when it was advanced
to 2 per cent.

In late 1952 mounting p r e s s u r e s of new F e d e r a l financing and

c r e d i t demands by b u s i n e s s e s and c o n s u m e r s , in the p r e s e n c e of r e s t r i c t e d
availability of r e s e r v e s , led to borrowing by m e m b e r banks from the F e d e r a l
R e s e r v e banks which in D e c e m b e r averaged $1. 6 billion, the l a r g e s t since 1921
N e v e r t h e l e s s during 1952 c e r t a i n selective and voluntary c r e d i t controls w e r e
discontinued.

Regulations W and X w e r e t e r m i n a t e d and the voluntary c r e d i t

r e s t r a i n t p r o g r a m was discontinued.
In late spring of 1953 a shift of policy o c c u r r e d following development
of s e v e r e l y tightened c r e d i t conditions and a l m o s t c o n c u r r e n t observation of
indicated abatement of inflationary p r e s s u r e s .

Injections of r e s e r v e s through

expansion of F e d e r a l R e s e r v e holdings of T r e a s u r y bills o c c u r r e d in May and
June, again in August and September, and again in November and D e c e m b e r .
Moreover reductions in r e s e r v e r e q u i r e m e n t s against demand deposits w e r e
made effective in July, amounting in all to two p e r c e n t a g e points for m e m b e r
banks in the c e n t r a l r e s e r v e c i t i e s and one point for all o t h e r s .

Throughout

the balance of 1953 and all or m o s t of 1954 the policy of the F e d e r a l R e s e r v e
System, reflecting slackening or slackened economic activity, w a s , in the
w o r d s of the Board of G o v e r n o r s Annual Report,

M

. . # to cushion defense and

inventory r e a d j u s t m e n t s and to foster business r e c o v e r y and sustain economic
growth.

,f

This c a m e to be known a s the policy of

f,

active e a s e " , in the

a c c o m p l i s h m e n t of which all t h r e e of the i m p l e m e n t s of general c r e d i t control



- 5 -

with which the System is endowed were used.

Reserves were made available

through System open market operations and reduction of r e s e r v e requirements.
Reduction in the cost of r e s e r v e s was aided and abetted by successively lowering
the discount rate from 2 to 1 3 / 4 per cent and from 1 3/4 to 1 1/2.
Came the end of 1954 and with it or shortly after it the end of the
"active ease" phase of Federal Reserve policy.

Responding to indications that

the forces of inflation were again coming into the ascendancy, policy was altered
to moderate the pace of credit expansion.

In broad t e r m s , this return to a

restrictive phase of policy is still in effect.

How it has been implemented

i s such recent history that there should be no need to recount it here.

Many

participants in this Conference, however, perhaps find some solace in the fact
that whereas in the previous policy of active ease all three of the System's
general tools were used in measures of relaxation, during the current policy
of restraint one of these tools has not been used as an active instrument of
restriction.

Reserve requirements remain at the point to which they were

lowered in mid-1954.

Reliance in this restrictive phase up to now has been on

open market operations and repeated elevations of the discount rate.

Thus the wheel has come full turn in the five years since Mr. McDonnell
first invited me to one of these conferences.

Five years ago Federal Reserve

policy was designed to r e s i s t inflation as a means of protecting the stability
of our money and its integrity.
same purpose.

Today we are again resisting inflation and for the

In the meantime we have passed through a period when for precis

the same purpose, stability of the value of our money, we have seen Federal




- 6 Reserve policy the very opposite of restraint and restriction.

This comes as

no news to you, I feel sure, but the point I emphasize i s that Federal Reserve policy
i s flexible.

It i s not static.

It changes direction and it varies emphasis as

conditions change and situations develop.

It i s not rigid, though I dare to believe

that once a course believed to be right i s charted, it is unyielding to forces which
would veer it this way or that for purposes not consistent with the objectives to
which the System i s dedicated.

There may be, indeed there are, differences of

opinion as to timing, as to matters of degree, and occasionally perhaps as to
direction of policy.

So long as judgments of men are involved in policy formation,

which may well be forever, these differences of opinion, if informed and honest,
are not to be decried.
against rigidity.

They tend to enhance the flexibility of policy and to guard

They help to keep Federal Reserve people reminded of the fact

that there i s much wisdom and experience outside the System of which we should
and must make continuous and unselfish use.
At this point it should be made abundantly clear that in thus describing
and characterizing Federal Reserve policy I do not mean to say nor remotely
imply that only the Federal Reserve is concerned with the integrity of our money
or that only the Federal Reserve can do something about it.

Though the major

reason for the Federal Reserve System's existence is to be found in its responsibility
for contributing what it can to this objective, using the powers delegated to it for
that purpose, it does not follow by any means that the System has exclusive
responsibility in the field or that it alone can do the job.

In saying this I do not

derogate from the importance of the System's role and responsibility.
derogation to say that one can do only what one can do.



It is no

- 7 -

One who contemplates the role of F e d e r a l R e s e r v e policy in today's
scheme of things in this country finds a good deal to chalk up by way of
accomplishment and a v e r y g r e a t deal that is still to be l e a r n e d .

In the past

t h e r e have been changing fashions in beliefs concerning the effectiveness of
g e n e r a l monetary c o n t r o l s .

Although there is still lack of unanimity on that

point it i s not my intent to debate it today.

Upon the twin propositions that

money will not manage itself and that m o n e t a r y management is a vital function
of government, however, t h e r e is substantial a g r e e m e n t .

The unresolved

questions, t h e r e f o r e , and the a r e a s of c o n t r o v e r s y have to do m o s t l y with the
"hows" of monetary management and m o n e t a r y policy making.

Recognition of

m o n e t a r y management as a function of government unavoidably complicates the
subject by raising questions whether and to what extent the a i m s of m o n e t a r y
policy e m b r a c e the social objectives of government, as they a r e from time to
t i m e , a s well as economic objectives.
a r e mutually exclusive.

I do not suggest that the two c a t e g o r i e s

My only point is that without a reasonably c l e a r

understanding of the a i m s of m o n e t a r y policy and a g r e e m e n t with r e s p e c t t h e r e t o ,
lack of a g r e e m e n t with r e s p e c t to m e a n s , methods, and techniques is to be expected.
This may be tantamount to saying that until the social and economic objectives
of government a r e settled and decided for all t i m e , the techniques of m o n e t a r y
m a n a g e m e n t a r e doomed to r e m a i n subjects of dispute and debate.
i s not a forecast of despondent p e s s i m i s m .

If so, this

It is no m o r e than acceptance of the

facts that men have h e r e t o f o r e striven, and p r e s u m a b l y will continue to s t r i v e ,
for i m p r o v e m e n t of their lot on e a r t h , and that i m p r o v e m e n t n e c e s s a r i l y i m p l i e s
a dynamic r a t h e r than a static society.



- 8 -

Basic to the continued and continuing search for improvement in the
methods of monetary policy making is a substantial measure of agreement on
the role of decision making by the monetary authorities.

The idea of an easy

automaticity in monetary management has been generally abandoned although,
as some have pointed out, even under a so-called automatic monetary system
decisions had to be made.

In the present state of the art, however, the

requirement for conscious decision making is more and more recognized.
Decision making involves human judgment, and the application of human judgment
r a i s e s questions of criteria and guide-posts.

Though these questions have not been

finally answered by any means, nevertheless here i s where a good deal of the
accomplishment of which I spoke a moment ago has occurred.
For one thing our techniques for the accumulation and presentation of
the economic intelligence indispensable to monetary policy making have been
vastly improved and are continuing to improve.

There are t i m e s , I suspect,

when bankers and other business men feel that the collection of statistics by the
Federal Reserve System and other agencies imposes unprofitable burdens upon
them.

With that view it would be easy for me to sympathize if I were not in

good conscience convinced of the pertinence and essentiality of the requested
information to important aspects of policy making.

It i s such a self-evident

principle that I assume none would controvert it that one has to know the
pertinent facts before he can reach sound conclusions.

I therefore suggest

that when bankers and others are asked to furnish data with respect to which they
are the only sources, or in any event the best sources, it may ease the burden



- 9 of compliance somewhat to reflect upon the r e q u e s t as an opportunity to
p a r t i c i p a t e in an i m p o r t a n t way in the formulation of national m o n e t a r y and
c r e d i t policy.

In r e t u r n for your valued cooperation and a s s i s t a n c e you a r e

entitled to the a s s u r a n c e that you will not be called upon u n l e s s the need i s
r e a l and the r e l e v a n c e of the r e q u e s t e d data r e a s o n a b l y c l e a r .

In another r e s p e c t t h e r e has been significant a c c o m p l i s h m e n t in the
evolution of the a r t of m o n e t a r y management.

Through a combination of

e x p e r i e n c e by p r a c t i t i o n e r s and t h e o r e t i c a l a p p r a i s a l and formulation by
s c h o l a r s in the field, a substantial body of knowledge h a s a l r e a d y been accumulated.
It will be expanded and enlarged a s t i m e goes on.
s o m e of the things we have l e a r n e d a r e wrong.

We m a y even discover that

The economic c l i m a t e is right,

however, for the exploration of m o n e t a r y policy a s an e s s e n t i a l r e s p o n s i b i l i t y
of government to proceed at a c c e l e r a t e d p a c e .

If the world can but r e m a i n at

peace so that the incontestable n e c e s s i t i e s of war do not displace the peaceful
objectives of government, we shall a l m o s t s u r e l y witness in the coming y e a r s
a l a r g e d e g r e e of preoccupation with m o n e t a r y affairs.
commenced.

Indeed it h a s a l r e a d y

R e a d e r s of c u r r e n t n e w s p a p e r s , p e r i o d i c a l s , and journals m u s t

be a w a r e of the fact that the space devoted to m a t t e r s of finance and m o n e t a r y
and c r e d i t policy has grown by leaps and bounds in r e c e n t y e a r s .
t h i s i s good.

Up to a point

Since I believe that m o n e t a r y policy vitally affects the lives of

our people, I also believe that it should be as well understood a s is r e a s o n a b l e
to expect so that the people m a y intelligently a p p r a i s e it and e x p r e s s their
w i s h e s with r e s p e c t to its g e n e r a l place in the framework of government.

But

t h e r e i s a point beyond which I do not believe that preoccupation with money and



- 10 the monetary management is productive of good.
but it is not all powerful.

The power of money is great,

No matter how skillful the regulation of the money

supply may be, that fact alone and by itself cannot guarantee the economic and
social health of the nation.

There are decisions to be made by others which are

quite as important as the decisions of the monetary authorities.

Under the system of monetary policy making which has been provided
by law in this country, the monetary authorities are, with a relatively minor
exception, limited to the use of general, quantitative controls.

With these

instruments they may influence the quantity of money in existence and its rate
of change.

They may also influence the cost of money both indirectly by affecting

the balance of supply and demand and somewhat more directly by fixing the rate
at which r e s e r v e s may be borrowed from the Reserve banks.

With but one

exception at the present time the monetary authorities are not authorized by law
to undertake direct, qualitative regulation of the u s e s to which the existing money
supply and additions thereto may be put.

The exception, as you know, is to be

found in Regulations T and U of the Board of Governors with respect to so-called
stock market credit.

I do not forget, of course, that there have been, at prior

t i m e s , interludes of qualitative regulation of consumer credit and real estate
credit.

Who, then, makes the decisions concerning the u s e s to which the money
supply of this country shall be put? In answering the question, one must take




-11 into account the flow of spending that r e s u l t s from the production, distribution,
and consumption of goods and s e r v i c e s .

One must take into account the savings

of those who elect to save r a t h e r than spend.

Since savings a r e generally spent,

too, by b o r r o w e r s who employ the savings of o t h e r s , one m u s t take into account
the institution of c r e d i t in answering the question, "Who decides how the money
supply shall be used? 1 1 And in considering the economic i n s t r u m e n t called

,f

credit f f

one m u s t also be a w a r e of the fact that in addition to the c r e d i t r e s o u r c e s derived
from savings another s o u r c e of c r e d i t is to be found in the ability of the c o m m e r c i a l
banking s y s t e m , if supplied with r e s e r v e s , to c r e a t e additions to the nnoney supply
by making loans.

All t h e s e things c o n s i d e r e d , the a n s w e r m a y be truly made

that the people of the country, operating in and through their political institutions,
their p r i v a t e financial institutions, and their m a r k e t p l a c e s , decide how the money
supply shall be used and how fast it shall be turned over in the s t r e a m of spending
for consumption and investment.

The people make the d e c i s i o n s , not the

monetary authorities.

At this juncture in such a d i s c u s s i o n one i s face to face with a number of
tangents.

The temptation m a y be i r r e s i s t i b l e to s o m e , for example, to follow

a tangent which takes them into the social a s p e c t s of free m a r k e t s , the much
d i s c u s s e d free e n t e r p r i s e s y s t e m , or one of a v a r i e t y of profound questions of
wide ramifications.

F o r t u n a t e l y for you, and for m e too, the hour is so late and

m y allotted time so n e a r l y spent that we a r e at l e a s t m o m e n t a r i l y spared an
e x c u r s i o n along such a philosophical tangent.

Before closing, however, I should

like to expose briefly two thoughts which p e r h a p s you may take home with you and
ponder during the coming long winter evenings.



- 12 T h e r e a r e some people in the world, not to say in this country, who
have no confidence in the ability of the people to make sound decisions with
r e s p e c t to the uses to which the money supply shall be put, even in t i m e s of
p e a c e and n o r m a l c y , whatever that m e a n s .

T h e r e a r e o t h e r s who profess

confidence in the people and in their institutions for deriving d e m o c r a t i c
j u d g m e n t s , such as free m a r k e t s , but who a r e inclined to become so unhappy
when they find t h e m s e l v e s in the m i n o r i t y with r e s p e c t to specific i s s u e s that
they begin to c l a m o r for the inauguration of governmental controls to p r e v e n t
s i m i l a r m i s c a r r i a g e s in the future.

Whatever the c a u s e or the motivation, a

question which, in my judgment, will have to be faced and decided in the future
i s whether the people shall continue to p o s s e s s the p r e r o g a t i v e of deciding in the
main how their money supply shall be used or whether qualitative c o n t r o l s of
money and credit shall be extensively added to existing g e n e r a l , quantitative
controls.

I do not argue the question one way or the other.

I m e r e l y state it.

The second thought I wish to leave with you i s actually a subdivision
of the first but i s , I think, of special significance to b a n k e r s .

In the composite

decisions of the people concerning the use of our money supply, a most i m p o r t a n t
sector of decisions i s in the hands of c o m m e r c i a l b a n k e r s .

Bank c r e d i t , as I

have a l r e a d y indicated, constitutes the p r i n c i p a l source of additions to the money
supply.

It therefore follows that in a time of m o n e t a r y r e s t r a i n t bank c r e d i t i s

a s c a r c e r e s o u r c e and the task of allocating it falls upon bankers and especially
bank lending officers.

This m e a n s that one of the econonnic functions of c o m m e r c i a l

b a n k e r s is to effectuate m o n e t a r y policy.

Their multitudes of individual d e c i s i o n s ,

the e s s e n c e of a free m a r k e t , bring about better allocations of funds than any



- 13 other s y s t e m yet devised.

But with the o v e r a l l r e s u l t s of their allocations it

can not be denied that t h e r e a r e , in some q u a r t e r s at some t i m e s , d i s s a t i s f a c t i o n s .
T h e r e a r e complaints that too much i s allocated for this or that p u r p o s e and too
little for another.

T h e r e a r e complaints that bank c r e d i t i s available to this or

that size of b o r r o w e r but not to another.

In substance t h e r e is complaint that

the s a m e economic motivations which produce good r e s u l t s in the economy
g e n e r a l l y work evil in the c o m m e r c i a l banking s y s t e m .
a w a r e of t h e s e things.

B a n k e r s should be

They should give constant attention to the i m p r o v e m e n t

of their allocative d e c i s i o n s .

As l e a d e r s in the financial community they can

and of right ought to accept a major s h a r e of r e s p o n s i b i l i t y for the decisions of
the people concerning the u s e of their money supply.




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