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Before the Member Bank Directors & Officers
Assembly - FEB Minneapolis
April 26-27. 1954
FORTY YEARS OF THE FEDERAL RESERVE SYSTEM
by Karl R. Bopp
INTRODUCTION
1.

Happy to be here

2.

Regret circumstances

3.

Pete (J.M.Peterson) a representative of finest in System
We could ill afford to lose

U»

Consideration of life and death leads one to take
a longer view

5.

Many times someone has thought he has had the
FINAL answer

6.

As Mr. Justice Holmes once said:
To rely (rest ?) on a formula is a slumber, that
prolonged means death.

Forty years in forty minutes!
I commend to you the 1953 Annual Report of the Federal Reserve
Bank of Minneapolis - feature article on 40 years of the System
Federal Reserve System arose out of the Panic of 1907
when you simply could not get money and the call money rate went to 125%
Reserve Banks established so they could create new money and
reserves in such cases
Also for seasonal currency needs
In general to adjust the quantity of money and credit to the
needs of the economy

Essential Nature of Central Banks




(a)

With unused authority to issue currency and reserves
for member banks to expand

(b)

With a portfolio of earning assets that it can
dispose of to contract

(c)

Institution operating in the Public Interest

In forty years we have gained increasing comprehension
of this basic nature
Persistent problems
Objectives
Instruments
Guides
Effectiveness
Organisation

I.

Objectives of Policy
A.

General:

promote stable economic progress

B.

Possible specific objectives and their implications
1.

2.

Productive credit:- seductively appealing
but how can you tell when productive?
e.g. 194-6 borrow to buy motors for refrigerators
(The monqy value not physical quantity of output)

3«

A fixed rate of interest: experience 194-6 to the accord

4.
-

Stable price level:

5«
C.

Convertibility:
expand with more gold - contract when less
On gold standard: did not prevent panic of 1907 - or
great depression of 1932

Full employment: inflationary bias if at any wage rate

can we be sure?

late 1920* s?

Possible conflicts and need for choice or combination
e.g. last fifteen months
1.
2.

Prices - wholesale and retail levels stable but agriculture down

3.

II.

Ve lost lj billion gold

Unemployment doubled to 3,745,000

Instruments
A.

B.

Open market
How contract when you have no portfolio
- or it is less than excess reserves?
1930's

C.

Changes in Reserve Requirements of member banks

D.

III.

Discounting and Discount Rate
eligibility theory - didn't work out
Limits? How expand when No one will borrow?
How contract when no one is borrowing?

Selective instruments

Guides to current actions
A.

Application of principles to current developments

B.

Time lags
1.

In collection, tabulation, and analysis of information

2.

Between an act of policy and its effects

C. Infora&tion of past or
Projections of the future




- 3 TV.

Effectiveness of operations
A.

B.

Sufficient condition to assure stable progress

C.

V.

Appropriate action a necessary but not a

Effectiveness

the business cycle

Organization
A.

Relation to Government
Not to executive but to legislature
Objection: can't move fast enough
Answer: can -when necessary

B.

Internal
1.
2.

C.

VI.

A Federal system
Group judgment

Outside criticism and support

Experience and the future
A.

A central banker must work against the current wave of
optimism and pessimism
Unpopular
But not dogmatic - must have an open - not drafty - mind

B.

In the 20's
In the 30* s
In the 4D's
Now, in the

C.

But most important, I believe, is a recognition of the complexity
of the problems that confront us, how difficult it is to have
sound judgment, the consequences of mistakes - hence humility
Yet must act on judgments courage




we thought monetary policy all powerful
we concluded it is impotent - fiscal policy everything
we found that to ignore money is dangerous
50's we remember the 30's and know it is not omnipotent
we remember the 20's and 40 's and know we
cannot even hope to achieve stable growth
without appropriate monetary policy