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INVESTMENTS III Graduate School of Banking Rutgers University, New Brunswick, N.J. June 9 -10, 1953 K. R. BOPP Vice President Federal Reserve Bank of Philadelphia Lecture notes Introduction A. Pleasure to be back again. B. Prayer of negro preacher: "I pray you, ©hi Lordl to use me. Use me in Thy way, Oh! Lordl - preferably in an advisory capacity." C. Purpose of discussion is only incidentally to give information; primarily to help you train your selves to analyze developments. D. Prejudiced - though not always defend. No mental gyroscope No communion with burning bush I. Investment Management A. Objectives 1. 2. 3. B. Full investment 1. 2. 3. C. Safety Income Increase in capital value Minimum of cash - exceptions 1932-1933 and some smaller banks Equities Debts a. Mortgages b. Long-term bonds c. Short-term You appropriately follow what other investment managers are doing II. Why investment managers should understand the F.R.S. A. Its power Gold Certificates = At 25%, it can hold = Now holds Unused power = $21 63 25 38 billion billion E.A. billion billion B. C. Whether you agree with what it does or not, you cannot afford not to follow and understand. D. III. It does not follow a full investment policy Information made available promptly and in detail. How to interpret what the System is doing A. It uses its power to influence the 1. 2. 3. B. Supply Availability, and Cost of money and credit Therefore, the important itens to follow 1 . The volume of reserves 2. The source of reserves: 3. The cost of reserves: Discounts / Excess Governments/ Reserves Interest rates Balance Sheet - F. R. Banks, March 25* 1953 _________________(billions)_________ _ Gold Certificates ■Discounts and Advances Governments Other assets* 22 1 24 U Notes 25 Reserve Deposits 20 Treas. .007 Other Cr. & Cap.** 6 51 * Mostly uncollected items Deferred availability) other deposits and capital accounts III. C. The necessities of Federal Reserve Bank accounting 1. 2. 3. The accounts must balance Member bank reserves are a liability ' Therefore every change in reserves must be accompanied by changes in other account (Apologize for those who know, but many forget) D. Major accounts affecting reserves 1. Assets: a. b. c. d. 2. Gold certificates Loans, discounts, and advances U. S. Government securities Other assets Liabilities and capital accounts a. b. c. Federal Reserve notes Government deposits Other liability and capital accounts 3 * Exercises and how to use IV. Interpreting System operations Can control supply or cost but not both A. In the days of pegging - implications of pegging chain reaction B. during the conflict (Read F.O.M.C. release) The refunding of August 1950 At meetings of the Board of Governors and the Federal Open Market Committee on August 18, 1950, the following statement was approved: nThe Board of Governors of the Federal Reserve System today approved an increase in the discount rate of the Federal Reserve Bank of New York from 1-1/2 per cent to 1-3/4- per cent effective at the opening of business Monday, August 21. "Within the past six weeks loans and holdings of corporate and municipal securities have expanded by 1.5 billion dollars at banks in leading cities alone. Such an expansion under present conditions is clearly excessive. In view of this development and to support the Government’s decision to rely in major degree for the immediate future upon fiscal and credit measures to curb inflation, the Board of Governors of the Federal Reserve Systam and the Federal Open Market Committee are prepared to use all the means at their command to restrain further expansion of bank credit consistent with the policy of maintaining orderly conditions in the Government securities market. "The Board is also prepared to request the Congress for addi tional authority should that prove necessary. "Effective restraint of inflation must depend ultimately on the ■willingness of the American people to tax themselves adequately to meet the Government’s needs on a pay-as-you-go basis. Taxation alone, however, will not do the job. Parallel and prompt restraint in the area of monetary and credit policy is essential." (Federal Reserve Bulletin - Sept. 1950, p. 1110) C. ^ince the accord of March 1951 1. The Accord Joint announcement of full accord - 3/3/51 "The Treasury and the Federal Reserve System have reached full accord with respect to debt-management and monetary policies to be pursued in furthering their common purpose to assure the successful financing of the Government’s requirements and, at the same time, to minimize the monetization of the public debt." (New York Times, 3/4/51) a. Exchange offer 2-3/4 - 29 yr. convertible into 5 year 1 -1/2 per cent note b. Purchases on scale-down of market offerings of 2-1/2’s review daily c. Federal reduce or stop purchases of shorts get banks to rely on discounting for funds. Unless unforeseen compelling circumstances arise, discount rate would be kept at 1-3/4 for remainder of year Federal and Treasury at staff and official levels would confer frequently. d. Treasury’s announcement of new issue - 3/3/51 "The Secretary of the Treasury announced today that there will be offered for a limited period a new investment series of long-term nonmarketable Treasury bonds in exchange for outstanding 2-1/2 per cent Treasury bonds of June 15 and December 15, 1967-72, the details of which will be announced on March 19. "The new bonds will be issued in registered form only, with appropriate maturity, and will bear interest at the rate of 2-3/4 per cent per annum payable semi-annually. They will not be transferrable or redeemable prior to maturity; however, ovners of such nonmarketable bonds will be given an option of exchanging them prior to maturity for marketable Treasury notes bearing terms to be announced in the official offering." (^ ew York Time§ 3/3/51) IV. C. 2. Orderly markets and supporting refunding operations to reduce attrition a. The 2-3/8*s of June 1952 Policy under the accord "In periods of Treasury refinancing, the Federal Reserve acted to steady the market for short-term Government securities, during such a refunding period a substantial volume of securities is shifted in the market. Some holders ■want to redeem the maturing securities for cash, while some nonholders want to buy maturing issues at current prices in order to obtain the new issue on exchange. In several of the refunding operations in 1951 , demand for the maturing securities for exchange purposes was not equal to the volume of the maturing issue for which holders wanted cash. Under these circumstances, Federal Reserve open market operations, by absorbing securities temporarily in excess of current demand, helped to assure larger exchanges and smaller cash redemptions. More than a billion dollars of securities were purchased by the Federal Reserve in June in this type of operation, and more than half a billion in September end October combined. There was only slight support of refund ing operations in December but the Federal Reserve made large purchases late in the month to meet seasonal needs in the money market. In all of these cases, the purchases were either concurrently or subsequently offset by sales of short-term securities from the open market account." (Annual Report, Board of Governors F.R.S., 1951, pp.6-8) 3. Preventing disorderly markets Martin*s address of Dec. 2, 1952 at Hollywood, Florida 4. . Correcting disorderly markets Martin's Detroit and Boston speeches D. Suggestions: 1. 2. E. Follow speeches, especially of Martin and Sproul Follow regular statistical releases Return to Open Market operations and Discounting Repurchase agreement Keep inter-relation in mind - especially on reserves e.g., open market purchases to ease Xmas cash V . The question of objectives A. Obligations of a professional man to his profession and to society B. Objectives and their implications VI. Organization of the System VII. Guides to policy What magnitudes to follow Prospects versus experience VIII. Instruments General Selective IX. A day with Reserve Officials What I have tried to say is two-fold: 1 ) Part is technical - on which there is a matter of right or wrong Analytical e.g. No outstanding issue below par Each new issue with a higher coupon at par 2) Part is a matter of judgment - on which reasonable men reasonably may differ Special interests vs. general interest orrr vr r v r ™ Z t e J M s B U L H s b o s l M J & l I s& u A A. H. t e & s a tH H a Hature of the pover B. OUTLINE AND EXTENSION PROBLEMS GRADUATE JiC.IOOL OF BANKING RUTGERS UNIVERSITY INVESTMENTS ttt june"9-iQ« 1953 Extant of the power laterpretlog Hpv ttw flyetga I» Palna It« Pavw A* Sources of information 1. Hegular end prompt release of statistical Information 2* Regular publication of charts 3* Occasional policy statments B, Ho* to Interpret the information 1. Accounting necessities (a) (b) 2. Implications of double-ontiy bookkeeping Osing the booklet ’ 'Exercises in the Debits end Credits of Bsnk Reserves* Some illustrations1 (a) The refunding of August 1950 (b) (c) (d) The aooord of March 1951 The 2-3/8fs of June 1952 Chsixmsn Martin's address of December 2, 1952 3* Keeping currently inforaed in. Mhy Have j j a ^ n U g a e a A* The role of cioney and reserves 1* The demand for aon«Qr (a) For use as a siedius of exchange (b) For use as a store of value 2. The supply end availability of money (a) Without a Federal Ret?erre System (b) With a Federal Reserve System 3. The cost of raoney B. C« K»!U£*?P 3/6/53 Choosing objectives Hev decisions are aada aaaaaa m Extension Probisa The Treasury-Federal Baserre Acoord The fallowing joint announcsaent vas issued for release on March 4, 1951* "The Treasury end the Federal Reserve Sy:>t« hare reached full accord \dth respect to debt man agement and monetary policies to be pursued in farthering their oossson purpose to assure the suc cessful financing of the Gcreraeot's requirements and, at t o sa&e time, to minimise the rr<onetisation te of the public debt.* Vrite a concise aesoranchre of the eoonosic develo pments si the tiae this acoord was reached. You usy use as your prisary source the "Federal Reserve Ch&rts on Bank Credit, Honey Hates, and Business, j m s x m L m , Xtension Problem F*>w*l Raa«rr« Dlsogunt Foliar Assurae that the president of your bank is a amber of the Board of Directors of the district Federal Reserve Bank. On October 1# 1953 ha asks you to prepare a memorandum to aaalat his in discussing vhat action the board should take vith respect to the Federal Reserve discount rate during the next Month, Vrite a concise aMaorandum s t lainlng vhat action you op believe should be adopted, and the arguneots for and against your decision* Include in your discussion such factors ss an appraisal of the general credit situstion, the trend and frequency of aenber bank borrowing, the Treasury financing problem, and the probable effects of a change or failure to change the rate* (This problem should be answered in about six pages and Must be sub&itted t r October 15, 1953.) $ aggagaat m Sxtension ?xoblaa For the 3-eonth period September 30, 1953 to December 30, 1953, end far each of the three sionths thereof (September 30 — October 28, October 28 - Hoveaber 25, end Novenber 25 - December 30), calculate the chaoses sbovo In the "Factors Steteeaent* of the Federal Reserve Banks vhlch were responsible for the change in the maaber bank reserve accounts end excess reserves. Reconcile the chaoses in all factors increasing end decreasing raserrea vith the net change in re>erre accounts. (This >art of the -oroblea should be » A^tlqUaea. tftM-eJ Helfcte th?se changes to donestlc and international eoonontic derelopwwats, including Federal P.e«?erre credit policy and Treasury financing operation*. (Thl» part of Vi« jrobjan M B b» M C M B t j la JWSih) This material used by K. R. Bopp at Graduate School of Banking, Rutgers University, on June 9 and 10, 1953. Also the following: 1952 Annual Report, Fed. Res. Bank of Phila. "Exercises in the Debits & Credits of Bank Reserves" May 1953 Business Review article "Free Markets and the Federal Reserve System" Objective Conditions calling for or permitting expansion Conditions calling for or permitting contraction Inherent Bias 1. Convertibility High and/or rising gold holdings Low and/or declining gold holdings Contractive 2. Productive credit Increase in monetary volume of production Decrease in monetary volume of production Chain reaction 3. Stable prices Declining prices Rising prices None 4. Full employment Less than full employment Jobs in excess of workers Expansive 5* Maintaining a fixed rate of interest When savings axe inadequate When savings are excessive Selfinflammator KRB - Investments III REDEMPTION EXPERIENCE IN REFUNDING, SELECTED DATES, 1950 (Amounts in millions of dollars) Refunding Issues being retired Total outstanding ............. Federal Reserve holdings: At time of announcement. . . . Purchased after announcement . Exchanged: By Federal Reserve ......... By others................... Redeemed for cash ............. March & Apr. 1950 June & July 1950 Sept. & Oct. 1950 9 ,444 10,620 13,570 i,o4o 2,812 2,370 0 1,384 8,030 i,oko 4,196 5,973 451 10,400 794 2,376 39-5 76.7 17.5 59-2 5.8 17-5 7,954 450 Percentage of total Exchanged by Federal Re serve-total. Original holdings ......... Purchased................... Exchanged by others ........... Redeemed for cash ............. 11.0 11.0 0 26.5 13.0 56.2 84.2 4.8 FEDERAL RESERVE BANK STATEMENTS - 1950 Wednesdays Aug. l6 45.2 Liabilities Fed. Res. Notes. . 22.8 Reserve Balances . 16.3 Other Deposits . . 2 .1 Other Liabilities & Capital . . 4.0 - .4 + 1.1 22.3 19.4 19.4 1.4 5-0 9.2 3-8 Aug-. 16 -Oct.4 1.4 - 2.9 - 2.9 + 7-8 ^ - .9 .1 l4.l 3.8 .0 3.9 3.6 45.5 ^5-3 r H Total 22.2 Oct. 4 + Assets G o l d ........... 22.7 U.S. Gov't Secur. . 18.3 Bills ........ Certificates. . 3.0 Notes ........ 6-3 Bonds ........ 4.7 Other ............ 4.2 Sept.27 Change 23.0 16.7 2-3 23.0 16.6 2.2 + + -3 3-5 3*5 - .5 -2 + -1
