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DEVELOPMENT OF AMERICAN MONETARY POLICY KARL R. BOPP Vice President, Federal Reserve Bank of Philadelphia Princeton Economic Seminar Princeton University, Princeton, N. J. November 20, 1947 INTRODUCTION A. Feeling 1« 2. 3* 4« I* Honored Enjoy Embarrassed Inadequacy B. Shall not discuss responsibility C. Analytical description - personal D. Sasy to be critical - post hoc, of course only where now agreed it was wrong VAR FINANCE A* Prom July 1940 to June 194-6 Government spent....... . . • • $400 billion T a x e s ........$175 billion Borrowed • • • 225 'n II. III. OPTIONS ON BORROWING FROM THE PUBLIC A. To determine the amount - then public determines the rate B. To determine the rate - then public determines the amount THE BASIC DECISION A. In verbal terms - on amount B. In operational tents - on the rate - 2 - IV. SEASONS FOR THE DECISION A. Distinction between money and Governments considered unimportant 1. B. Expenses — taxes = liquid asset increase Economics 1. Demand for funds unaffected by rate (a) (b) Government Private demands limited by direct controls 2 • Supply of funds &lso unaffected (a) Individuals: (b) Institutions direct controls forced saving Maturities, new funds C • Experience 1. V. VI. J II. Probable results of financing war with rising rates as in First World War WHAT RATE? A. Higher B. Existing THE RATE STRUCTURE THAT WAS TO BE MAINTAINED A. Based on institutional habits Banks and short funds B. Uncertainty - expectation of a rise RESULTS OF MAINTAINING RATES A. Injecting certainty into a market whose rates are based on uncertainty. B. Overcoming institutional prejudices - Oct. 1942 issues Banks from excess reserves to shorts and from shorts to intermediate eligibles. C.* IapOfiftftee Qf volume of short Issues - 3 - VIII. SOME TECHNICAL FACTORS A. Non-eligible securities B. Limiting direct bank subscriptions >^C. D. IX. (effects on bank holdings) War Loan Account and reserve requirements Quantitative measure of success of War Loan Drives PREPARATION FOR RECONVERSION A. The last drive B. The notion of economic maturity 1. C. Model builders versus monetary theorists Inadequacy of compensatory fiscal theory Possibility of private sector of the econony operating at a fiscal deficit when profit prospects are high enough and conditions of creating money are easy enough. X. XI. OUR CURRENT PROBLEM A. Excessive money supply B. Upward pressure on prices C. Profitability of creating more money ALTERNATIVE SOLUTIONS A. Collective self-restraint 1. 2. 3* B. Increasing the price of reserves 1* 2« C. Our regional meetings Productive versus non-productive credit Inadequacy of this approach Federal Reserve policy since July Limitations - Government bond prices Hardening other terms of creating money and reserves 1. The Board's proposals of 1945 2* The 1946 report -k - XII. QUERIES A. "There ain't no free lunch" B. Relative economic costs of XL B and C 1. Tradition: National Bank Notes 2. Pure economics