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By Karl R. Bopp Pittsburgh A.I.E. Forum Roosevelt Hotel, Pbg. April 21, 1954 Summery Fiscal "fjbUBftÆÜeâfc Policies and Their Effects on the Local Bank" was the topic discussed by Karl R. Bopp, Vice President, Federal Reserve Bank of Philadelphia, at the concluding session of the Forum series. Hr. Bopp analyzed the effects of alternative fiscal, debt management, and monetary policies. He pointed out that the major agencies in these fields are the Congress, the Treasury, and the Federal Reserve System. The Congress is responsible for expenditures and receipts and therefore for the cash surplus or deficit of the Federal government. Treasury takes up where the Congress leaves off. The Decisions of earlier Congresses largely determine the management of the debt and decisions of the current Congress largely determine the rate of increase or decrease in the debt. A basic responsibility of the Treasury is the management of the public debt and the cash balance. The Federal Reserve System has primary responsibility for monetary policy. The policy of each of these major fiscal, debt management, and monetary agencies influences and^ls Influenced (In tfsas» of the #th«rs. Mr* Bopp then reviewed policies in each of these fields during the past eighteen months. FISCAL POLICIES AND THEIR EFFECT ON THE LOCAL BANK by Karl R. Bopp Vice President, Federal Reserve Bank of Philadelphia before the 1953-1954 FORUM, Pittsburgh Chapter, Inc. American Institute of Banking Roosevelt Hotel, Pittsburgh, Pa. April 21, 1954 INTRODUCTION; Economic Policy Commission of American Bankers Association has issued six monetary studies devoted to the topic for this evening. New York A.I.B. held 6 meetings Philadelphia A.I.B. held 4 meetings You have asked me to cover in one. I. Financial policies directed toward economic stability A. Fiscal policy - Government receipts and expenditures 1. Level of Government expenditures even with balanced budget 2. Alternative fiscal policies a. Annually balanced budget - impossibility in war b. Amortize outstanding debt c. Stagnation thesis and increasing debt d. Compensatory (1) General theory (a) Cash surplus/deficit (b) Tax structure (2) Admini stration (a) Predictability ? (b) Legislative process (c) Technical - the calendar year Built-in flexibility - automatic discretionary (3) 3. Best that can be hoped for - that it will not seriously aggravate B. Debt management policies 1. Amount of debt, maturities, and changes are given data for the Treasury 2. Alternative principles a. b. Lowest interest cost (1) Pressure on monetary authority (2) Temptation to shorts Tailor to investor demand would aggravate the cycle c. Compens atory d. C. Balanced debt structure 3. Timing the issuance of long-term bonds U. Possible stabilizing effects through debt management exaggerated Monetary policy 1. Principles 2. Instruments 3. a. Discount rate and discount mechanism b. Open-market operations c. Changes in reserve requirements Flexibility - but not all-powerful A review of the past A. 18 months The story in general 1. 2. The economic development a. G.N.P. rose to peak of $371 billion in 2nd quarter of 1953 b. Since then has slid off slowly, without acceleration, to $359 i» first quarter of 1954 Financial policies a. Fiscal policy (1) Initial desire to balance budget (a) (b) (2) Cut expenditures Maintain most taxes As weakness developed (a) More tax relief including excise cuts - 3 - b. Debt management (1) Lengthen the debt - April 8th announcement of the 3-1/4*s (2) Nov don't want to absorb long-term funds from local Governments or private borrowers c. Monetary policy (1) Requirement to report on actions taken (2) Successive directions of F.O.M.C. to Executive Committee: "Transactions for the System open market account should be with a view... (a) March 4-5 (b) "to exercising restraint upon inflationary developments." June 11 "to avoiding deflationary tendencies without encouraging a renewal of inflationary developments (which in the near future will require ag gressive supplying of reserves to the market)." (c) September 24"to avoiding deflationary tendencies." (d) December 15 "to promoting growth and stability in the economy fcy actively maintain ing a condition of ease in the money market." B. It doesn’t work out so smoothly in detail - the 3-1/4 story 1 . Background a. March 1953 - ascertaining the market - underwriting ? b. April 8 - preliminary announcement $1 billion + F + G c. April 9 _ Treasury announces it will need $2 billion through June 30 d. April 11 - reactions Porter Goldsmith e. April 13 - Circular of terms Martin Detroit speech Illustrative reactions to preliminary announcement: Goldsmith letter of April 11, 1953! Heading - "New 3-1/4’s expected to be heavily oversubscribed and to go to substantial premium." Porter letter of April 11, 1953s "We believe this first issue of 30-25 year 3-1/4$ bonds will move to a substantial premium in the open market*" - f. u - April 14- - issue closed - open one day "Announcement of allotments will probably be made Friday, April 17" (Private rate up) Subscriptions Padding $6 billion 3/4 " Accepted $5|- n Selective vs, across the board allotment g. April 15 - F.N.M.A. halts buying of VA and FHA mortgages presaging higher rates - national finance companies increase rates offered on their paper. h. April 22 - 20% allotment 2 . How fast can things change and why? a. b. April 23 Treasury said receipts had not held up. would need more than it had expected on April 9 - no estimate of amount. Possible supply: (1) (2 ) the allotments by classes Individuals, partnerships, and corporations Dealers, brokers, investment houses (3 ) F and G c. It 254.6 158.2 400 400 Possible demand for - or lack of it (1 ) Government investment account fully invested had bought 118 (2 ) Real investors annoyed with allocations (3) Fed ? No. Martin Detroit speech d. Prime rate raised from 3 to 3-1/4% e. May 6 - Martin Boston speech f. A. S. conversations (April) Anticipatory borrowing - fearing still higher rates and perhaps rationing g. Fed begins buying bills 2nd week in May h. Mey 25 - Treasury announces $800 million TAB'S a complete surprise i. j. You have seen the worst on June 1 Reduction in reserve requirement - July - 5 - 3. Clausewitz dictum: "The results on which we count are never as precise as is imagined by soneone who has not carefully observed a money market and become used to it." III. Effects on local baule Interest rates will be flexible
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