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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