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(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