The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
(Last of a series of four meetings. E. Sheman Adams, L. V. Chandler and Wesley Lindov on 2/2, 2/16 & 3/2/54) THE EFFECTS OF FEDERAL RESERVE POLICIES BASIC ISSUES OF MONETÄRE POLICY BY KARL R. BOPP yice President, Federal Reserve Bank of Philadelphia before the Seminar on THE ECONOMICS OF BANKING AND MONETARY POLICY Presented by Philadelphia Chapter, American Institute of Banking and Economic Policy Commission of the American Bankers Association Midday Club, Philadelphia Tuesday, March 16, 1954 Introduction: A. Previous speakers emphasized two related aspects of all analysis 1. The "Inevitabilities1 1 a. - necessities IF you do thus and so then SOMETHING ELSE MUST happen e.g. If F.R.S. buys Governments^ then other Reserve Bank accounts must change so that books remain in balance. If Treasury sells long bonds, somebody must buy them - and he cannot use that money to buy something else. Changes in taxes have economic effects b. 2. This is so ’ simple we take it for granted - but we also forget and act as though it were not true. The elements of judgment - as related to the Federal Reserve System a. As to what the something else will be in fact e.g. which other F.R.B. accounts will change b. As to what the Federal Reserve System should try to accomplish - objectives of policy c. As to how the System should tiy to accomplish its goals - instruments of policy d. As to the organisation of the System (Once you make the choice you mist pay the cost. To will the end is to will the means.) - 2 B. Why have a Federal Reserve System? 1. Glib talk about letting money manage Itself 2. Kemmerer* s s u t - for the N.M.C. tcy a. Average call money rates 1890-1908 1st week in June 2»28% Last week in Dec. 7.38% b. 1907 Average call rate for June On Thursday, Oct. 2U (19 years) 1-3/l& 125% 3. 4* C. One reason for creating System was to provide an elastic currency But that is monetary management The Power of the System 1. To withdraw money $25 billion of earning assets 2. ( M=feJ0 ( Member bank reserves ( <$20 bill. To add money a. $38 billion b. 3. Free gold to buy Reserve requirements of members dbove legal minimum $ 8 billion To what purpose should these powers be used, since the System doesn't operate for profit? To promote stable economic progress - tut that is pretty vague I. Objectives of Federal Reserve Policy A, number of attractive objectives A. Specific objectives and related programs of action B. The possibility of conflict and the inevitability of choice - conscious or otherwise Combination Changing emphasis over time - 2-a - Distributed at Executive Forum - f£* 1 3fib /5 k Objectives and Related Programs Conditions calling for or permitting an easing of credit Conditions calling for or permitting a tightening of credit 1. Convertibility High and/or rising primary reserves Low and/or declining primary reserves 2. Productive credit Increase in monetary volume of output Decrease in monetary volume of output 3. Stable price level Declining prices Rising prices i . Full employment t Less than full employment Jobs in excess of workers 5. A fixed rate of interest When saving* «ore inadéquat« When savings are excessive Objective - 3 - Ve have an excellent current illustration of problem of choice among objectives JW6, ^ /«*** i£> , March 10> March 1Î, Dec.31, 1954 1953 Differ. 1952 1) Monetary gold stock 21,9&3 -bl3~ - 64B 22,611 Differ. -h ttS 23,187'-1,224 TIGHTEN CREDIT? In last year Latest______ Max. Min. 2) Prices a) Consumer b) Wholesale ^ ntè' , Jew. 115-A^ ¿ H * I Uô,t~ . Harrg H&ré- 111.0 * 1947-1949 = 100 i>3.1 ' H3v6 IMS* -i&frQ a**. -Janl 1953 /13.7' '*9.7 * Marr3-,1953 4 9 « - LEAVE ALONE - over whole year? /* 1953" : -Ste* ~3rigi SS 3) Unemployment; Total labor force 667400 ¿7,7 w / 67,139 17,0#' 66y905- > Civilian labor force 62,856 i t ~ 63?7£5 Wfibd' i ------------------n — ;— ------------------------* — Employed - total Non-agricultural Agricultural 6I735 O U J W ' 4djQA6 557400 ¿T $oc* 54>349 /, 5>650 L,t60^ -5x697 — . ■ -.......■ ■ - — ---- ------- ------------ . . . . . ■ , . ------------------------- Unemployed - total — ■■■■ ■■ ■ ■ / ^ n . 6O7IO6 11,4ft'" 54t4#0 ff.Mt ' 5» 626_ -3*671 3 946* , ■ mm* ?/, 3ob / % of civilian ^ labor force -2v9 ^^ ------------------------------------- — - -— — — ■ — — - • — — EASE? (Unemployment down from 1.9 in January to 1.3 in May) ; ,. ^ - II. u - The Means of Accomplishing Objectives A. You want to keep our markets for consumption and investment in balance vith production at high levels. B. By influencing credit conditions or the TONE of the money and capital markets 1. 2. Availability 3. Demand for credit 4. III. Supply of money and credit Price of credit or interest rates - mortgage money last May and June! Instruments of Policy A. Types 1. General - or "quantitative" affect supply, availability and cost - and demand 2. Selective - or "qualitative" relate to particular types Limit demand by requiring prospective borrower to meet specified conditions B. Analysis of General Controls 1. Discount rate and administration à. Appropriate and inappropriate uses. Difference of opinion on relative weight to cost and rules Martin's Boston speech b. Limits to effectiveness of rate (1) To control expansion: when no one is borrowing high rate can't reduce (2) To induce expansion when no attractive loan and investment opportunities are available - 5 - 2. Open market operations a. Developed to overcome defects of the rate (1) (2) b. To control expansion -•tasking rate effective" by forcing maiket into central bank To induce eaqpansion - make funds freely available , supply more liquidity than the market wants Limits to effectiveness of open market operations (1) To control expansion Portfolio of Government securities e.g. Dec. 1935 Nov. 1940 (2) Excess reserves $3.3 bil. 6.9 " Portfolio $2.4 bil. 2.2 " To induce expansion eligible assets in maiket authority to buy - now $38 billion Can't push on a string - severe depression (This le d to idea o f compensatory f i s c a l p o licy but that i s another to p ic that I sh a ll not d iscu ss.) 3. Changes in Reserve Requirements - first suggested in 1917 &. Affects all members directly rather than through money market b. Limits on authority to change on effectiveness - contingent on willingness to see "tone" of maiket change - poshing on string - U* 6 - Interrelations of instruments Sale of securities may force banks to borrow Their attempts to repay will be reflected in reduced availability of credit and higher rates. Change in reserve requirements not very effective unless allowed to affect tone and terns in credit market. (We still have much to learn about this.) But 1% = $1 billion - may offset part to prevent sudden spasm of tightness or sloppiness ? C. Analysis of selective controls 1. Margin requirements 2. Consumer credit regulation 3. Heal estate credit regulation 4. Other? . A basic issue of monetary policy - relative importance of general and selective 1. Extreme for general. 2. Extreme 3. In between - 7 - IV. Other Basic Issues of Monetary Policy A. The role of interest rates 1. 2. Should be kept low - Keyserling, Clark 3. B. Level should be of no concern - Chicago Variable but controlled to suit economic development How useful can monetary policy be? 1. Can do everything 2. Chicago Clark Varburton Edison Cramer Can do nothing - too great a risk 3. Necessary but not sufficient ) ) f .D.I.C. Council of Economic Advisers* view on cheap credit (Hearings - January 1950 Economic Report - 1/17-20/50, p. 68) The value of cheap credit. - The difference in our position from that of the subcommittee arises in part from a somewhat different view of the desirability of low interest rates. In the report of the subcommittee it is said, and repeated, that low interest rates are generally beneficial, but it is proposed to yield that principle in periods of inflation and to use central bank operations to induce an Increase in the cost of money. Our view is that low interest rates are alweys desirable. In periods of inflation they have the undesirable collateral conse quence of contributing to inflationary forces, but even then they have the economic advantage of facilitating the expansion of pro ductive capacity which is the best road to stability. Where we differ with the subcommittee is that we would not abandon the ad vantages of cheap money and use central bank operations to cause an anti-inflationary Increase in interest rates. We would retain the advantages of cheap money and adopt other measures to curb the in flationary forces. In extreme cases, as in 1947-48, we would tighten the availability of credit by pressure upon bank reserves under the plan proposed by the Federal Reserve Board at that time, but would hold the resulting trend to higher interest rates within narrow limits. - 8 - C. Organization of System 1. Relation to Government: 2. Centralization vs. decentralization 3. On differences of opinion within the System A. On errors in judgment a. Looking back b. Treasury Looking forward (Do not expect perfection in a human institution.) D. Suggestions 1. Follow the statistics 2. Follow official statements 3. Follow reports Principles of Var. General von Clausewitz "The conduct of war resembles the workings of an intricate machine with tremendous friction, so that combinations which are easily planned on paper can be executed only with great effort." "The results on which we count are never as precise as is imagined by someone who has not carefully observed a money market and become used to it." Qualities every student tries to achieve Technical competence - to recognize and always take into account - become part of our thinking: THE NECESSITIES Improved judgment with experience Courage and enthusiasm Humility