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The methodology employed in this study Is of a different kind, if

not a different order of importance from that used in most economic analysis

and therefore merits more than the attention of technicians.

began conventionally enough.

The inquiry

Since the objective was to describe, explain

and evaluate monetary and credit policy in the years following the Treasury -

Federal Reserve Accord it was natural to use as a major source the Annual

Reports of the Board of Governors of the Federal Reserve System covering the

years, 1951-1962, inclusive.

These Annual Reports contain the official records

of policy actions of the Federal Open Market Committee and the Board of Governors.

During the course of the study, however, three collateral questions

came up.

First, and most important, was the question of analytical and descrip­

tive framework.

How did one describe, explain and evaluate money and credit

policy in meaningful form?

What were the objectives of policy and how could

central banking performance be measured?

These questions led to a classification

of objectives of (and guides to) policy into three groups:

mediate and ultimate.

Proximate, inter­

Various system publications have stated that the functions

of the system are to influence the supply, cost and availability of bank reserves

so as to facilitate a flow of money and credit with a view to contributing to

economic.growth, high employment and stable values.

The paper dealing with the






aims and objectives of monetary policy contains the general theoretical framework

and full explanation of the classification of objectives.

All that is necessary

to note here is that the actuals or the proxies used for the three classes of
objectives are:


total, nonborrowed and free reserves; three month
Treasury bill rate.



liquid assets, money supply (both broad and
narrow) bank credit, gold stock.

personal income, plant and equipment expenditures,
industrial production, unemployment rate and
wholesale prices.

Precise descriptions of the series used are given in an appendix to
this paper.

The second question came from the frequent criticism, both inside and

outside the System, of the language of official policy explanation.

There have

been many assertions that the language of Federal Open Market Committee directives
to the Open Market Account management were meaningless, or, even if meaningful
to the management, were virtually meaningless to the Congress and to students
of monetary affairs and completely so to the layman.

Furthermore, it has been

asserted that the whole official policy record was written in a form so as to be
almost as meaningless as the directives.

The third question sprang naturally

from the second, and is of interest mainly to professional central bankers.




If the above charges were valid, was the Federal Open Market Committee giving
adequate instruction to the Account management; if not, how could the form of

the instruction be improved?
It is against the background of these latter two questions that the

comment is made about the methodology employed in this study being of a different
kind of importance from that used inmost economic analysis.

The methodology

leads to the clear conclusion that the directives have meaning and can be

understood clearly not only by the Account management but by students and
probably by reasonably well-informed laymen; that the policy record is a
meaningful record and contains sufficient information to judge the objectives

of policy.

That statement stands whether one looks at an individual entry of

policy action or at the record as a whole but obviously study of the record

as a whole is more meaningful.

Monetary policy is a continuous process and

therefore the record should be read as a continuum.
The methodological points leading to the above conclusions are as
The approach to determining what monetary policy was being followed

involved the following steps.





Each directive given by the Federal Open Market Committee to

the Account management was listed in chronological order.

Each time the

directive changed a judgment was made as to whether policy was designed to

be tighter or easier.

No attempt was made to determine the degree of increase

in tightness or ease.

There was no difficulty encountered in determining the

direction of change and the writer doubts that anyone, studemt or layman,
would encounter any difficulty in making a judgment as to whether policy was

to be relatively easier or relatively tighter solely on the basis of comparing

the current directive with the preceeding one.


A moderately careful reading of the policy record indicates

that the Account management was frequently given a subsidiary instruction at

meetings when the directive itself was left unchanged.

struction is called a "shade1 in this paper.

Such subsidiary in­

The most typical "shades" are

expressed by such phrases as "resolve doubts on the side of ease", "resolve
doubts on the side of restraint", "Maintain an even keel during the Treasury
financing", "meet seasonal needs" or "hold steady".

These "shades" were listed

in chronological order, interspersed with the chronological order of the


Again no difficulty was encountered in determining the direction

of policy change - to greater ease or to greater restraint.

Again the writer




doubts that anyone would have difficulty in making this determination.
It is worthy to note here that the "shades" constitute actual in­

structions to the Account management and the record clearly indicates this

No attempt was made to indicate a "shade" merely from the explanation

given in the policy record of what the Open Market Committee had in mind.


the fact that the Committee was concerned (say) about the balance of payments,

as noted in the policy record, is not classed as a shade.

But when the Com­

mittee states that it wishes present ease continued but without putting further

downward pressure on short-term rates a "shade" is indicated; that "shade"
incidentally indicating slightly less ease.


The next step involved classifying policy in terms of three

degrees of ease and three degrees of tightness, high, moderate or low.


this classification is over-simplified; the range is more a spectrum than a
series of discreet shades.
surprisingly well.

Nevertheless the attempt was made and worked

In a broad sense a change in directive was weighted 1 and

a "shade" was weighted 1/2.

A color code was employed with red indicating

restraint and green indicating ease.

Red 3 indicated greatest restraint, Red 2

moderate restraint, Red 1 least restraint, Green 1 least ease, Green 2 moderate

ease and Green 3 greatest ease.

Plus and minus signs were used for fine




adjustments, particularly with "shades1 . Then, beginning with March 1, 1952,
which was classed as Red 1 the directives and shades were merely run through in
chronological order to determine the color pattern with each change reflecting

comparison of the current directive or shade with the preceeding one.


reason for beginning with March 1, 1952 is that the date marks the first meeting

of the Federal Open Market Committee in 1952 and 1951 was classed as a year of
neutrality in view of the Accord.

Step (d) was a checking device.

Each directive from January 31,

1951 up to December 19, 1961 was written on a card.

The cards then were arranged

in order from greatest ease to greatest restraint solely on the basis of the

language of the directive.

After arrangement the directives were given color

codes, just as described in step (c). Obviously, more subjective judgment was
involved in this ranking than in the former since it depended solely upon the
phrasing of the directive and not on any chronological order.

Upon comparing

this color coding with that derived under step (c) a high degree of uniformity
was found.

Of the 26 directives involved, 17 corresponded almost exactly

(differing only by a plus or a minus sign) from the color coding given under

step (c) and it must be remembered that the step (c) coding was influenced by

the 1 shades1 as well as the directives.

Of the nine other deviations the differ­

ences were only one degree of color (e.g. Green 1 under step (c) and Green 2




under step (d))and of these, all but one showed an easier policy rating under
step (d) from that under step (c).
The reason for not including the directives from December 19, 1961

on was that the form of the directive was changed from the relatively simple

(b) clause to a much more elaborate phrasing beginning with December 19, 1961.

In effect the old (b) clause form of directive and the nshade" were combined
in the new form of directive and the instruction to the Account management

was given in greater detail together with some rationale of policy.


ically, this greater elaboration makes the directives harder to classify and makes the

course of policy less clear than did the (b) clause form, although it is still
relatively easy to determine whether policy is moving toward more or leas

restraint or more or less ease.


Undar this step the other policy moves were introduced with the

chronological order and allowed to date changes in policy and intensify the
color intensities.

The major effect, however, was upon the dating of policy

For example, policy is dated as shifting from the least degree of ease

to the least degree of restraint, Green 1 to Red 1 on April 14, 1955 when the
discount rate was advanced instead of on May 10, 1955 (the Open Market Committee

meeting date) when the directive was changed.




In an appendix to this paper, all of the directives, the "shades1 and

the other policy moves (discount rate, reserve requirements, margin require­
ments and other moves such as those in connection with Regulations W, X and Q)
are listed in chronological order with the color codes shown.

It will be

observed that on many occasions the color code does not change even when a

"shade" or another policy move is involved, and in a few cases when the direc­
tive itself changes.

In most of these cases the color code does not shift

because only a plus or minus sign is involved and by definition the color code
contains only three reds and three greens.

This underlines the point made

earlier that the range of policy, when viewed in color intensity is more of a

spectrum than a series of discreet color intensities.

In a few cases, there

is no color shift because the explanation in the policy record makes clear

that the change was technical in nature and involved no change in policy.
This applies mainly to the year 1962.
The following table shows by years the number of Committee meetings,
the number of directive changes, the number of times "shades" were used to

amplify instructions and the number of other policy moves.

It might be observed

that "flexible monetary policy" has meant just that in the sense that policy

has changed frequently.



No. of

No. of direc­ No. of
tive changes




No. of
rate changes





No. of
No. of
requirement requirement






























* Not including telephone meetings.
** Includes two special directives and one "shade1 relative to market
support operation of July, 1958.
# Thirteen increases and eight decreases.
## One increase and seven decreases, including counting of vault cash
as reserves.
### Five increases and four decreases.


As a final checking step the proximate objectives of policy

were coded red or green in the following manner.

Since the series are

monthly averages each month'was given a red or green check for each of eight
factors; change in level of total reserves, nonborrowed reserves, free reserves,
borrings and three month Treasury bill rate; absolute level of free reserves,
borrowings or Treasury bill rate.

Thus if total reserves, nonborrowed

reserves or free reserves declined (on average) in the month from the preceed-

ing month it got a red check; if it increased it got a green check.


tolume of borrowings or the three month bill rate rose (on average) it got a




red check; if it fell it got a green check.

If free reserves were positive

(on average) it got a green check, if negative a red check.

When the bill

rate averaged under 2 per cent it got a green check, above 2 per cent it

got a red check.

When borrowings exceeded $300 million (on average) it got

a red check; below $300 million it got a green check.

If there were no

changes a blue check was used but there were only nine such instances.

Then a simple scanning of the check marks in color indicated a red or green

pattern for the month or for longer periods.

By and large the number of red

or green checks varied with the color intensity as derived by the preceeding

The final step was to color the background of three charts

in line with the color codings derived from the above procedure.

Then against

these backgrounds were plotted the series noted earlier which served as
actuals or proxies for proximate, intermediate and ultimate objectives.


charts then served as an analytical device to describe,explain and evaluate
monetary policy.

Two concluding observations should be made.

The whole methodology

tends toward showing policy as more restrictive than it really was.


virgually no time was policy designed to reduce the level of reserves or the




volume of bank credit or the money supply.
rate of gain rather than absolute reduction.

Restriction meant reduction in
That does not mean that policy

was ineffective but merely that the thrust of a restrictive policy is toward
deceleration rather than reversal.

Furthermore, the whole color scheme in a

sense depends upon the color with which the coding begins, Used here is Red 1

for the beginning color in March, 1952, because the directive itself sounds

as though restraint was intended.

(The period January, 1951 through February,

1952 is shown as white since operations were neutral under the Accord.)
Actually the first half of 1951 shows 38 green checks and only 10 red checks;
the second half shows 25 green and 23 red.

The first quarter of 1952 shows

17 green checks and 7 red checks, the next two quarters 23 green and 25 red,
the last quarter 6 green and 18 red.

When one considers that there is some

overlapping among the eight factors (e.g. a rise in borrowing is quite likely
to be associated with a drop in nonborrowed reserves and free reserves), that
classing a bill rate of 2 per cent as being the line between ease and restraint
and borrowings of $300 million as being a mark of restriction it is evident

that the coding tends toward producing red marks even under conditions of

relative ease.

Thus it is agreeable that 1952 really should be classed as a

period of relative ease rather than one of relative restraint which would




affect the relative voting of subsequent periods.

Actually, this bias toward

classifying policy as more restrictive than it really was was deliberate.
Rather than incur criticism that central bankers tend to be restrictive and

thus claim credit is easier than it is, the author deliberately strove in his
classifications to lean over backward by employing very rigorous standards

for determining a policy as being easy.

Finally, to repeat a point made earlier, the whole analysis and

the whole methodology could be employed by anyonebecause nothing is used that

is not in the public record.

While the author has participated in credit

policy formulation for half the period as a Reserve bank president, and for

the balance as a relatively high ranking Reserve bank official with access to
all information available to an Open Market Committee member, the methodology
and analysis did not employ any of this confidential information.


the author could not deliberately close his mind to such knowledge and ex­
perience that he had but he did not call upon it for the classification of
credit policy as easy or restrictive.

And it is instructive to note that

an almost independent check of the author’s work (using the methodology outlined)

by two relatively new staff members of his bankfs research department, neither




of whom had any access to the confidential material, yielded results virtually
indistinguishable from those obtained by the author.
Therefore, this one methodological note closes with the assertion

made earlier.

The policy record is written in meaningful language, the direc­

tives are phrased in meaningful language and the course of policy can be

determined quite clearly by anyone who wishes to read the record with a modicum
of care as a continuum.

Obviously, the analytical process and the conclusions

as to the "goodness1 of policy reflect the author’s judgments, but the facts

of policy are there for anyone to read.