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National Monetary Policy in An International Setting

Remarks of George W. Mitchell
Member, Board of Governors of the Federal Reserve System
at the
CENTO Symposium on Central Banking,
Monetary Policy and Economic Development

Izmir, Turkey

April 5-12, 1971

Nat:iona 1 Monetary Policy in An International Setting

Our concern at this Symposium is to consider the particular
contributions the central bank can make to national economic objectives.
At the outset, we must recognize the differences in monetary management between the United States, the other industrial countries and
the less developed countries.

These differences necessarily limit

the extent to which our experiences can be regarded as interchangeable.

Yet they should not obscure the similarities which

central bankers find when they talk shop among themselves.
Central bankers in all countries find that the role and
tools of monetary policy are always changing as national priorities
and the financial and economic environments are altered and as their
understanding of monetary linkages evolves.

Furthermore, they share

with each other the recognition that all central bankers must
operate at home within their particular authority and capabilities.
For they have to recognize the limits of their effectiveness, both
in terms of the technical effectiveness of the instruments of
credit control and in terms of the distribution of political power
and responsibility within the nation.
Our topic is particularly timely in that our Turkish
hosts have recently expanded the responsibilities and powers of
their central bank in the field of money and credit policy.
new powers include:

The

the setting of cash reserve requirements;

-2-

rediscount of medium-term paper; extension of medium-term
advances; and authority to conduct open-market operations.
They have also introduced a governorship type of organization
to replace the "general directorate" formerly in effect.

I

gather that the monetary authorities are hoping to make use of
open-market operations when a capital-market bill, now under
consideration at the Ministry of Finance, is approved.

I am

certain that all of us will be interested in discussing these
changes in Turkish banking at this conference and that all of
you join me in applauding this important decision and in wishing
officials of the central bank well as they face their new
responsibilities.

Evolving Central Bank Techniques
The kinds of problems our Turkish friends will be facing
are the central issues before our Symposium.

The effectiveness of

central banking operations can always be improved.

In the United

States, for example, we have a central bank established nearly
60 years ago; but we are in a constant state of flux so far as
operating techniques are concerned.

We have just completed a

broad-based study of our discount mechanism and the end-product
of our three years of study is likely to be the most sweeping
changes in the structure and administration of our discount window
in the history of the Federal Reserve System.

Let me mention three other technical innovations
already well-developed, or evolving, which have or probably
will materially alter the way the central banking system functions
in the United States.

We are attempting to construct econometric

models of how the U.S. economy functions with a sufficiently
developed financial sector to enable us to observe the linkages
from Federal Reserve actions to their effects on final spending.
In addition, we have now developed a flow-of-fund analysis which
enables us to observe the sources of financial flows and their
ultimate uses within the context of a matrix which imposes the
constraint that sources and uses must balance.

As a final

example, we have begun to make use of projections of a complex
of monetary variables in trying to choose between alternative
courses of monetary action.

None of these techniques were available

to us 10 years ago.
Central banks are also concerned about the establishment
of financial institutions and the formulation within each country
of policies and programs to accelerate economic growth within the
constraints of a reasonable degree of price stability and external
balance.

These are broad and difficult goals to attain and we

always have to ask ourselves as we look back over the recent past:
what lessons can we learn from our experience and from the experiences
of other countries about the effectiveness of monetary policy in
controlling aggregate demand?

-4-

As I thought about recent monetary developments in the
United States, it became more and more evident that our experience
might be relevant to the less-developed, as they are to the
developed, countries.

Let me discuss with you recent developments

in the United States which seem to be appropriate to the major
themes of this conference.

Monetary Policy and Aggregate Demand
Our big challenge in the United States, like the one
each of you faces in your country, has centered on the role of
monetary policy in controlling aggregate demand and economic
growth.

The way inflation has become so wide-spread and persistent

in recent years demonstrates that all of us, developed and developing
countries alike, have much to learn.

In 1970, for example, the GNP

price deflator advanced at a rate of about 5 per cent on the average
for the 17 OECD countries covered in the recent OECD report on
Inflation.

We have been experiencing anew in the United States

the stubbornness of the price-wage spiral as we come out of a period
of pervasive excess demand and are confronted with the social costs
of the differential wage and income shifts which developed in a
strong inflationary surge.
Because we have been having more inflation than the U.S.
public is willing to accept, there has developed a determination
that U.S. demand-management policies be more effective during the
1970's than they were during the past five years.

This determination

-5-

to improve future performance has led to significant changes
in three areas of central banking in our country:
a.

Greater use of monetary and credit aggregates
as a monetary guide or indicator;

b.

The introduction of techniques to regulate
credit flows to specific areas instead of
continuing to depend wholly on allocation
through market processes; and

c.

The search for monetary techniques to make
monetary policy effective in an increasingly
interdependent world where the balance of
payments and international movements of
capital and goods threaten national
monetary management.

Let me discuss each of these points.

Monetary Aggregates and Monetary Policy
During 1970, there was somewhat more emphasis on the
behavior of monetary aggregates, especially money supply and
bank credit, as a key variable in the fashioning of day-to-day
monetary policy in the United States.

This greater emphasis has

been the subject of widespread discussion and it may be helpful
if I try to interpret the changes which have taken place in
terms of the techniques of central banking familiar to all of you.
From an historical point of view, beginning with the
Treasury-Federal Reserve Accord in 1951, there has been in the
United States an emphasis on money-market conditions--at one
time called "tone and feel of the market"--as a key guide to
Federal Reserve open-market operations.

Even though the various

money market indicators have shifted in significance, the

-6-

objectives of central-bank operations have been concerned with
such elements of the money market as (a) member bank excess
reserves and their borrowings at the central bank, and
(b) the interest rate on Federal funds, and short-dated certificates
of deposit, Treasury securities and other money market instruments.
In 1966, the Federal Open Market Committee introduced, as a
supplementary indicator, certain monetary aggregates--first,
bank credit and, later, the money supply.
The important change during 1970 was to give a more
prominent role than heretofore to financial aggregates — that is,
M _ and M 2 and total bank credit — along with interest rates and
j
money-market conditions in defining the immediate targets of
monetary policy.

Monetary conditions, so viewed, are a complex

of money and credit flows, a broad spectrum of long and short-term
interest rates and the environment of money market conditions,
both subjective as well as measurable.
This greater emphasis upon measures of monetary growth
does not represent a commitment to a monetarist theory of central
banking nor a radical change in the theories underlying central
banking in the United States.

I, for one, would seek the effects

of monetary actions through changes in liquidity and in wealth
and would regard the narrowly-defined money supply not as a
causal force in itself nor even a monetary North Star, but as a
generally useful proxy.

Since my fellow members of the Federal

-7-

Reserve Board would have their own concept of linkage, this
change in emphasis is consistent with several distinct economic
theories as well as a certain amount of agnosticism.
Moreover, the greater emphasis on measures of monetary
growth has not diminished the need to protect U.S. financial
markets from unexpected disturbances.

Last spring, for example,

the Federal Reserve found it necessary to protect U.S. financial
markets when they became unsettled as a result of the bankruptcy
of a major railroad.

In this situation the central bank shifted

attention, for a time, from monetary aggregates.

It reminded member

banks that the System's discount facilities were available to restore
liquidity on a scale and for a period appropriate to the prevailing
environment and it gave first priority to evidence that unexpected
shifts in the public's demand for cash and liquidity were being
adequately met regardless of the immediate impact on rates of
growth in the aggregates.
The lesson we have been learning from recent experience,
as I see it, is that no single monetary guide can serve the needs
of policy day in and day out.

Unfamiliar environmental conditions

have unique and unpredictable effects on the timing of changes in
expectations for liquidity and credit markets.

At times policy

should take account of such uncertainties by changing focus from
one aggregate to another or from some aggregate to money market
conditions, or to some segment of the interest rate structure.
Our knowledge, at present, is insufficient to orchestrate monetary
policy with but a single guide or a single tool.

-8-

Greater Flexibility in Interest Rates
As you know, interest rates in U.S. financial markets
in the late Sixties responded to unprecedented demand for capital
and to inflationary expectations by reaching very high levels-among the highest in our history.

This experience reminds us that

a realistic interest-rate policy is an integral part of sound
monetary management in any country.

Only by permitting such rates

to respond to underlying economic realities can we expect interest
rates to contribute to economic growth by providing (a) a real
incentive to attract private savings; and (b) a rational guide
for computing costs in the allocation of national resources.
The recent fluctuations in interest rates among the
industrial countries have tended to encourage international capital
flows in response to temporary differentials in yields.

These

capital movements appear to have had important, even if they were
only temporary, effects on the international reserves of the
leading trading countries and to have limited even further the
capability of their central banks to manage their monetary policy
primarily on the basis of domestic economic considerations.

This

situation is likely to persist and seems certain also to affect
the central banks of the less-developed countries.

It is also

likely that residents in the less-developed countries will find
themselves affected by the interest-rate variations in the
Euro-dollar and in other principal financial markets, both as
lenders and borrowers.

-9-

In the years ahead, therefore, countries which do not
wish to see domestic savings flowing abroad in response to higher
interest rates may have to restrain such flows directly or
tolerate higher interest rates at home than they otherwise might
like to see.
Outflows can, if necessary, be restrained by specific
taxation on foreign investment — such as our interest equalization
tax--or by agreements such as are incorporated into our foreign
investment restraint program.

While in the long run the world

economy and international borrowers and lenders have much to gain
from the free flow of funds we do not yet live in one financial
world where unlimited flows of this type can be accommodated.

The

strategy that works for the capital-short countries is to time their
borrowing when both interest rates and sensitivity to outflows of
funds are relatively low in the lending countries.
Non-Market Devices to Encourage Credit Flows into Priority Uses
The second point I want to stress is our experience with
attempts to divert or focus the onus of monetary restraint on
certain sectors of the economy.
The dilution of restraint was chiefly undertaken for the
benefit of the housing sector of the economy.

Because the home

construction industry experienced a disproportionate impact of
credit restraint in 1966, the U.S. Congress enacted various
measures to cushion such adverse effects during the credit
stringencies of 1968-69.

-10-

We were able to improve credit flows into housing in
several ways.

Mainly, Government housing agencies used the public

credit to borrow funds in financial markets and make them available
to the mortgage-lending industry, at times at below market (that
is, subsidized) costs.

In addition, the financial intermediaries

which provide the largest share of housing credit were protected
against the greater adaptability of the commercial banks' portfolios to rising interest rates by Government regulations which
set maximum rates each type of institution could pay.
These and other regulatory policies were also aimed at
placing more of the burden of restraint on the banking system and
its customers.

This was done with rate ceilings, regulations

curbing banks' ability to substitute other liabilities for deposits,
and restrictions on contingent sales of assets.

In total, these

measures limited the banking system's ability to lend to its
customers, a fact that is abundantly clear from the magnitude
of the decline in market shares of funds going to banks in 1966
and 1969.

The same rate ceilings also hampered the savings and

loan associations and the mutual savings banks in serving their
customers, although their plight in 1969 was ameliorated by
the operations of FNMA and the lending policies of the FHLB Board.
As seen by their proponents, regulatory constraints,
limiting bank access to funds, led to greater restraint on

business loans than would otherwise have occurred — a desirable
distributional effect on credit availability in view of the role
of business investment at that time in generating excess demand
and inflation.

Furthermore, since intermediaries are more efficient

in their credit allocative function than direct lenders and markets,
the reduction of intermediation is seen as the quickest and surest
way to slow and restrict the availability of credit and thus to
bring about the modification of spending and investment decisions.
All of those borrowers who are exclusively dependent on intermediaries encounter credit restraint even though they may be
preferred customers.
The main argument against sealing off the banks and other
intermediaries from markets is that the effectiveness of over-all
restraint is not significantly diluted as a result of its being
shifted by a bank intermediary to the market or another intermediary,
however different the incidence.

As banks disperse monetary

restraint, and they cannot disperse all of it, they force borrowers
other than their customers to pay higher prices for credit and to
face uncertain availability.

Their action in selling assets,

raising interest rates paid for funds, entering into repurchase
agreements of assets and the like, does not result in much diminution
of over-all restraint.

Even if intermediaries were given unlimited

access to money and credit markets they would themselves be in-

-Increasingly restrained by the market environment they would be
creating.

The argument continues that the channeling and confine-

ment of restraint to intermediaries and their customers results in
the unnecessary dislocation of credit patterns, in inequities in the
distribution of credit and inefficiencies in the operation of the
financial system.
The differential effect of forcing intermediaries to contract their lending operations has the most certain and serious
effect on smaller customers who do not have significant access to
capital and credit markets.

Shutting off or restricting the flow

of bank credit to large corporate borrowers only means they become
more dependent on markets.

And since such borrowers are better

able than most others to obtain funds in the market using such
non-depository credit instruments as commercial paper, some have
argued that corporate borrowers were more favorably situated with
respect to credit availability as a result of bank disintermediation.

While I am persuaded that intermediaries should have had
more ready access to markets, the contrary position is not without
merit from a pragmatic short-run standpoint.

However, I believe

the real problem is not one of making monetary and credit restraint
effective in some given interval but the longer run effect of such
tactics on the process of intermediation and the institutions
providing this service.

-13-

In recent years our Congress has considered, without
taking action, several proposals that the Federal Reserve actively
deal in and support the market for securities related to such
high priority social investment as housing.

At present, and

historically, the Federal Reserve's portfolio has almost
exclusively been invested in Treasury issues.

At the end of

February this year, for example, Treasury issues totaled $62.5
billion out of some $64.0 billion of earning assets held by the
System.

The weight of precedent, a continuing concern for a

strong Government security market, and uncertainty as to the
manageability of a portfolio oriented toward goals in potential
conflict with monetary objectives has deterred policy makers In
the U.S. from seeking or endorsing such diversification.

So far

as I can see the issue is not of principle or theory but a
pragmatic judgment as to how surely social investment objectives
can be realistically confined.

Experience in the IDG's
Perhaps you will agree that the central banks have gone
further in the developing countries to accommodate special credit
needs than have those in the developed countries.

In the LDC's,

the central bank often gives rediscounts and advances to favored
sectors or priority activities in preference to other credit
claimants.

This need to channel credit flows into priority areas

which will spur economic development and away from less socially
preferred channels — an excessive building of luxury housing, for
example—may pose difficult choices for the central banker; for
he should, to meet stability objectives, be able to limit flows
of funds to favored sectors to amounts within a monetary constraint.
Many central banks also use a variety of policy measures
with a selective impact in order to encourage the commercial banks
to allocate credit along certain lines.

Just last week, Chairman

Burns testified before a Senate subcommittee on a proposal to
establish differential reserve requirements on assets of commercial
banks with a view to effecting the allocation of credit. —^Such
guidelines to commercial banks are known to have practical shortcomings but there are a number of countries in which this approach
to credit-channeling appears to have altered the pattern of domestic
credit flows.

In fact, I think all of us should acknowledge that

many central bankers in the developing countries have been able to
achieve results in this area—both in devising ways to provide
additional flows of local capital for economic growth and in
orienting them toward high social priority uses.

On the other hand,

central banks in Europe have been moving away from the use of such
selective devices.

1/ See Appendix for a portion of Chairman Burns' statement.

-15-

Monetary Management In an Integrated World Economy

Finally, we have also learned in the United States how
substantially national monetary management is linked to developments in the international economy.

Any of us may have to be

reminded that balance-of-payments considerations may set limits
to the use of credit policies for the domestic goals of economic
stabilization; but we all recognize how important sound international economic relations are to domestic stabilization and growth.
In the United States, the expansion of multi-national
corporations and of financial institutions has raised new problems
affecting the U.S. banking structure and monetary management.
These corporations and international financial institutions have
embarked on overseas expansion on a scale which has taxed the
capacity of the U.S. payments position.

As a result, the U.S.

authorities have taken steps to ensure that a greater proportion
of these investments be financed from savings outside the United
States.

As you know, the U.S. programs on capital flows and on

bank lending abroad have been designed not to limit U.S. direct
investment abroad but to ensure that the projects be financed
abroad.

Under them, however, provisions have been made to accord

the LDC's a special access to U.S. financial markets.

-16-

Both the U.S. and the host country have an interest in
the financial decisions of the multi-national corporation and the
international financial institution.

In general, we can agree,

these activities are least likely to disturb domestic policies
if the transactions are done in the country or currency in which
the expenditure is to be made.

Similarly, there are times of

relative credit ease when it is a matter of indifference how such
transactions are carried out,

There are also times of strain in

the domestic economy or in the balance of payments when capital and
credit shifts impose an important challenge to the capabilities of
the authorities to achieve national economic objectives.
There are also situations where U.S. corporations have
been thought to borrow excessive amounts from local banks.

In some

countries, these credit demands have been thought (rightly or
wrongly) by local businessmen to have impaired their own access
to local bank credit.

On these grounds, some developing countries

have adopted measures to limit the credit which local banks may
extend to branches and subsidiaries of foreign business firms.

U.S. Banks Follow Customers Abroad
It was a natural result, I think, that U.S. banks have
followed their business customers abroad.

As a result, we have

witnessed over the past decade a large expansion in U.S. banking
overseas.

-17-

In general, the Federal Reserve has expected that U.S.
banks would function overseas in accordance with local standards
and regulations and that they would serve to mobilize local
resources for their business financing.

A few developing countries

have restricted the activities of foreign banks and/or have required them to bring in substantial amounts of equity capital.
When foreign banks penetrated a developing country by buying an
interest in an existing bank, this has at times produced a reaction
from local business firms whose access to credit might, or would
possibly, have been impaired.

A few countries have prohibited

the sale of stock in existing banks to foreign interests.
On the other hand, I am not sure that the contribution
of U.S. banks to the economies of LDC's is fully appreciated.
They not only have helped their American customers to meet their
financing needs in the particular country but have extended their
services as financial intermediaries to non-U.S. residents.

In this

capacity, they have offered them attractive yields in localcurrency and even in dollar-denominated assets, greater liquidity
and perhaps greater security for their savings as well.

U.S. banks

have also often introduced an element of competition which has
benefited both local borrowers and local lenders.

They have

also made available U.S. financial expertise and technology in
business and consumer financing.

Local businessmen have been

-18-

introduced to new ways of obtaining working capital which were
often more flexible or more readily adaptable to their business
requirements than were the traditional forms of bank finance
available to them.
The U.S. and other foreign banks in the LDC 1 s have also
been a link between local financial markets and the broadly-based
international markets which have developed outside the United
States for dollar-denominated deposits and long-term placements.
The flow of private and official savings from this Near East area
and from other developing areas into Euro-dollar markets for
deposits and long-term securities demonstrates that non-U.S.
residents have found these facilities attractive.
Such a flow, of course, represents the reverse of what
most of us would prefer because it represents loans by the lessdeveloped countries to the industrial countries.

As such, this

flow of capital will aggravate the already serious shortages of
capital in the developing countries and place added burdens upon
the monetary authorities there.

It challenges them to create

financial institutions, a type of intermediation, and a pattern
of incentives attractive enough to encourage the local placement
of these savings.
More broadly, the answer to this problem may lie in
developing new opportunities for employment of domestic savings

-19-

within the developing countries and in providing an environment
in which the risks of capital loss from inflation and devaluation,
or from expropriation, are at a minimum.

Keynote
National financial problems often appear on the surface
to differ greatly as between less-developed and developed countries,
or even from country to country within each group.

But the need to

pursue domestic stabilization programs to promote sustained national
economic growth is a challenge common to the monetary officials of
both developed and less-developed countries.
In both, the central bank can make its contribution
effective only if its potential and limitations are understood
and only as it brings its techniques and its monetary actions into
line with changing conditions in the national economy.

The central

bank to be successful needs financial markets, banks, and other
local financial intermediaries through which it can make its policies
operational.
Each of us has had a varied and specialized experience in
matters of monetary management.

This Conference will fulfill its

purpose when our discussions over the next five days remind us how
much we can profit from each other's experience and lead us to
recognize how unique are the contributions of skill and continuity
which the central bank can make to the national economic effort in
each of our countries, developed and less-developed alike.

APPENDIX--2

Excerpts from the testimony of Chairman Burns on March 31, 1971,
before the Subcommittee on Financial Institutions of the Committee on Banking, Housing and Urban Affairs of the U.S. Senate

Finally, Section 4 of S. 1201 would authorize the B o a r d to
require banks that are m e m b e r s of the Federal R e s e r v e S y s t e m to
maintain supplemental reserves against assets, in addition to the
reserves they m u s t n o w maintain against depositary liabilities.

T h e purpose of the supplemental reserve requirements would be
to facilitate flows of credit into specified channels and restrain
flows into sectors w h e r e , in the Board's judgment, such restraint
would "help stabilize the national e c o n o m y . "

T h e Board unanimously

r e c o m m e n d s against enactment of this section of the bill at the
present time.
All of us agree, I a m sure, on the need to explore w a y s to
avoid unwanted selective effects of general m o n e t a r y restraint.

But

use of reserve requirements for this purpose poses p r o b l e m s for
which w e do not yet have a n s w e r s .

M u c h further study is needed.

APPENDIX--2

Another shortcoming of supplementary reserve requirements
is that they would complicate the already intricate task of the Federal
R e s e r v e S y s t e m in discharginp the m a i n responsibility assigned to
it by the C o n p r e s s - - n a m e l y , to conduct m o n e t a r y policy so as to
p r o m o t e prosperity while protecting the integrity of the nation's
money.

C n c e supplementary reserve requirements c a m e into use,

shifts in the level of required reserves would result f r o m every
shift in the lending policies of c o m m e r c i a l banks.

A s required

reserves rose or fell, funds for expansion of bank credit would
be absorbed or released.

T h e s e m o v e m e n t s would introduce an

additional element of uncertainty into the task of achieving, through
o p e n - m a r k e t operations, a desired rate of prowth in the m o n e y
supply or in bank credit.
E v e n if these operational difficulties could be o v e r c o m e ,
there would still be fundamental objections to this section of the
bill.

I trust you will consider m o s t carefully the implications of

granting the central bank the vast discretionary authority contained
in this bill to determine social priorities in the use of credit.

The

Federal R e s e r v e S y s t e m has the critically important assignment
of providing for aggregate supplies of m o n e y and credit needed to

APPENDIX--2

p r o m o t e healthy e c o n o m i c growth with reasonable price stability.
C o n g r e s s has granted the S y s t e m a considerable m e a s u r e of
independence, to ensure that it will be insulated f r o m short-run
political pressures in performing this function.

W e believe there

is great value to our society in this a r r a n g e m e n t , and that its
continuance depends on confining the discretion of the central
bank, in the m a i n , to matters of general m o n e t a r y policy.
S. 1201 authorizes the Board to establish supplementary
reserve requirements to facilitate flows of credit into housing,
small businesses, exports, municipal finance, f a r m s with sales
of less than $100, 000 a year, and development of areas of low i n c o m e
or high u n e m p l o y m e n t .

Increasing credit flows for these purposes

implies reducing t h e m for others --relatively, if not absolutely.

The

implications of such a wide-ranging substitution of public for private
decisions need to be considered with utmost care.
O u r free credit m a r k e t s have served our nation well over
the years by channeling financial resources to productive and socially
beneficial UGCS.

T h e B o a r d recognizes, nevertheless, that m a r k e t

m e c h a n i s m s are imperfect and that the effects of m o n e t a r y ease or
restraint do not affect all sectors of the e c o n o m y uniformly.

There

is a m p l e justification, therefore, for serious efforts to i m p r o v e the
functioning of our financial markets--particularly, to cushion the
effects of m o n e t a r y restraint on sectors such as housing.

APPENDIX--2

Such efforts have been m a d e on an extensive scale in our
country, and they have typically taken the f o r m of supplementing
the m a r k e t m e c h a n i s m rather than subjecting the decision-making
process of private financial institutions to detailed and shifting
governmental rules.

Federally sponsored credit agencies that

b o r r o w funds in the m o n e y and capital m a r k e t s and channel t h e m
to sectors of high social priority have played a particularly
constructive role in this regard,

So also have g o v e r n m e n t loan

guarantees to encourage private investment in risk enterprises
or in low- and m i d d l e - i n c o m e housing.
F o r m o s t of the specific sectors singled out for special
attention in S. 1201, special credit facilities already exist.

The

nation's h o m e building industry, for example, is provided special
assistance, particularly in periods of m o n e t a r y restraint, by the
Federal H o m e L o a n Eanks, F N M A , C N M A ,

and through a variety

of p r o g r a m s operated by the D e p a r t m e n t of Housing and U r b a n
Development; small firms are aided in securing credit by the
Small Business Administration: the nation's f a r m e r s are assisted
by the F a r m e r s H o m e Administration and the several lending

APPENDIX--2

agencies of the cooperative F a r m Credit S y s t e m .

T h e s e agencies

have p e r f o r m e d a vital service in improving the functioning of
financial m a r k e t s .

If the C o n g r e s s should conclude that the sectors

singled out for special attention in S. 1201 deserve m o r e ready access
to sources of credit, certainly the m o s t direct and probably also
the best m e a n s of accomplishing this objective would be to expand
the scope of operations of existing Federal credit agencies in these
fields, and to create n e w entities w h e r e they s e e m needed.

However,

if a f t e r d u e d e l i b e r a t i o n t h e C o n g r e s s w e r e

to

d e c i d e t h a t s u p p l e m e n t a r y r e s e r v e r e q u i r e m e n t s o n a s s e t s of b a n k s
a r e to p l a y s o m e r o l e in r e d i s t r i b u t i n g fund f l o w s in f i n a n c i a l
markets,

w e w o u l d s t r o n g l y u r g e t h a t t h e o r d e r a n d d e g r e e of

p r i o r i t i e s s h o u l d b e d e t e r m i n e d by t h e C o n g r e s s and e m b o d i e d in
legislation.

B r o a d d i s c r e t i o n a r y a u t h o r i t y of t h i s k i n d s h o u l d not

be lodged in the F e d e r a l R e s e r v e ,

w h i c h is not the

appropriate

body to m a k e fundamental d e c i s i o n s r e g a r d i n g s o c i a l

priorities.

It m a y be useful to note that the trend over the past 10 years
or m o r e in central banks of other industrial countries has been
a w a y f r o m practices that discriminate in favor of particular sectors
and toward policy instruments that have broad application and
generalized effects.