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/ s 9 F E D E R A L R E S E R V E BANK O F P H I L A D E L P H IA (Zone 0 jf-fice or t h e March 31, 1958 P r e s i d e n t The Honorable Harry F. Byrd Chairman, Committee on Finance The United States Senate Washington 25, D. C. Dear Senator Byrd: Since Mr. Alfred H. Williams retired from the presidency of the Federal Reserve Bank of Philadelphia on February 28, 1958, I am responding as his successor to the questions you addressed to him in his official capacity. I share the view of the Presidents of the other Reserve Banks that we will make our maximum contribution to your extremely important inquiry if we follow generally the procedure established in responding to the inquiries re ceived from Senator Douglas in 19-49 and from Representative Patman in 1951« This procedure has the great advantage of assuring that the whole area of your interest will be covered while enabling each President to concentrate on those aspects that concern him or that have occupied his particular attention over the years and on which his judgment may be of some value. My complete response, there fore, consists of the enclosed document "Comments in Response to Questionnaire of the Senate Finance Committee," which was prepared by our staff committee, and this covering letter. I am sure you appreciate that discharge of imperative but unique timeconsuming duties during my first month in office has made it impossible to devote as much time to the inquiry as its importance requires or as much time as I desired to give. ideas. My available time, therefore, was spent on a discussion of a few basic It has not been possible to develop necessary qualifications or to polish E R A L R e s e r v e e No. 2 To B a n k o f P h i l a d e l p h i a The Honorable Harry F . Byrd 3/31/58 the ph rase o lo gy . The d is c u s s io n i s d ir e c t e d to three q u e s t io n s , as f o l l o w s : 1. 1. Has the r a p id developm ent o f f i n a n c i a l in t e r m e d ia r ie s changed the e s s e n t i a l r o le o f g e n e ral m onetary p o lic y ? 2. Has m arket s t ru c t u re been the source o f uneven impact o f c r e d it r e s t r a in t ? 3. Sh o uld the m onetary a u t h o r it ie s d i r e c t t h e i r p o l i c i e s toward a c h ie v in g a predeterm ined ra te o f growth o f the economy? Has the r a p id developm ent o f f i n a n c i a l in t e r m e d ia r ie s changed the e s s e n t i a l r o l e o f g e n e ra l m onetary p o lic y ? A v ie w th a t has g a in e d c o n s id e r a b le support i n recen t y e a r s i s th at the r a p id development o f f i n a n c i a l i n s t i t u t i o n s o th er th an commercial banks has weakened s e r io u s ly the in f l u e n c e o f c e n t r a l banks and the r o l e o f gen e ral monetary p o l i c y . S t r ip p e d o f q u a l i f i c a t i o n s , the re a so n in g th a t l e a d s to t h is c o n c lu s io n runs about as f o l l o w s ; The m onetary a u t h o r it ie s r e g u la t e the amount o f re se rv es a v a i l a b l e to the commercial b a n k s. Commercial banks a d ju s t t h e i r le n d in g and i n v e s t in g a c t i v i t i e s to t h e i r re se rv e p o s i t i o n s and thus i n f l u e n c e the amount o f d e p o s it money. When re se rv es are t ig h t i n a p e r io d o f r e s t r a i n t , banks w i l l l i m i t t h e i r l e n d in g by char gin g more and by sc r e e n in g a p p lic a t io n s more r ig o r o u s l y . I f banks are the o nly source o f c r e d i t open to bo rro w ers, t h e r e s t r a i n i n g monetary p o l ic y can be e ffe ctiv e . If, on the o th e r h a n d , borrow ers can turn to o th e r so u rc e s, the i n flu e n c e o f the m onetary a u t h o r it ie s i s d i s s i p a t e d . My own v ie w i s t h a t the e s s e n t i a l i n g r e d i e n t o f g e n e ral m onetary p o lic y i s the power o f the m onetary a u t h o r i t ie s to in f l u e n c e s i g n i f i c a n t l y the terms and □ R e r a l 5e No. e s e r v e 3 To B a n k o f P h i l a d e l p h i a The Honorable Harry F . Byrd 3/31/53 c o n d it io n s u n der which- the p u b l ic can secure the amount o f cash b a lan ce s th a t i t n e ed s. T h is judgment i n turn i s ba se d on the b e l i e f th at the a t t r a c t iv e n e s s o f cash r e l a t i v e to d e b t a sse t s on the one hand and r e a l a s s e t s on the o th er i n f l u ence the flo w o f exp e n d itu re s and thus the g e n e r a l l e v e l o f economic a c t i v i t y . The power o f the F e d e r a l Reserve System to t ig h t e n c r e d it may be m easured i n d o l l a r terms by i t s p o r t f o l io o f earn in g a s s e t s p lu s the amount by w hich e x i s t in g member bank re se rv e requirem ents f a l l sh ort o f the l e g a l maximum. The o rder o f m agnitude a t p r e se n t i s i n excess o f $ 2 5 b i l l i o n . The power o f the System to ease c r e d i t i s l i m it e d by the requirem ent th a t the Reserve Banks m ain ta in a g o ld c e r t i f i c a t e re se rv e e qu al to at l e a s t lia b ilitie s 25 per cent o f t h e i r note and d e p o s it and by the e xten t to which e x i s t i n g member bank re se rv e requirem ents exceed the l e g a l minimum. The d o l l a r amount a t prese n t exceeds $4-0 b i l l i o n . The m agnitudes are o b v io u sly adequate i n bo th d i r e c t i o n s . I do not w ish to c r e a te the im pressio n th a t i t i s easy to d e c id e the terms and c o n d it io n s th a t are ap p ro p ria te a t any g iv e n time to produce the d e s ir e d resu lts. On the c o n tra ry , I have found t h is an extrem ely d i f f i c u l t and n o t always su c c e s s fu l u n d e r t a k in g . But t h a t i s the b a s ic d e c i s i o n on which a t t e n t io n should be fo c u s e d . As f a r as f i n a n c i a l in t e r m e d ia r ie s are con cern ed, i t sh ou ld be remembered th at they do n o t o pe rate i n a vacuum. They operate i n o r g a n ize d and i n custom ers 1 money and c a p i t a l m arkets w hich are in f l u e n c e d by m onetary p o l i c y . In fact, one consequence o f the i n s t i t u t i o n a l developm ents o f re ce n t decades i s t h a t both bor rowers and le n d e r s have more o p t io n s . A man who w ish e s to f in a n c e the purchase o f a house o r o f an autom obile can ap ply a t s e v e ra l d i f f e r e n t types o f i n s t i t u t i o n s . A l t e r n a t i v e l y , one who w is h e s to save i n l i q u i d forms has numerous o p t io n s . Banks •£DERAL R ,age no. 4. e s e r v e B a n k o f P h i l a d e l p h i a 3 / 31/53 to The Honorable Harry F . Byrd and o th er i n s t i t u t i o n a l le n d e r s i n tu rn may l e n d to consum ers, b u s in e s s fir m s , and o t h e r s . to home owners, to I s i t not reaso n ab le to suppose t h a t as the number o f o p tio n s in c r e a s e s - as the network o f c r e d it c o n tacts becomes more e lab o ra te - the i n f l u e n c e o f the m onetary a u t h o r it ie s perm eates the economy more thoroughly and more q u ickly? In ciden tally , do e sn f t the w id e sp re ad ownership o f the F e d e r a l debt operate i n the same d ir e c t io n ? D o e sn ’ t the c r e d it m arket become more f l u i d and d o e s n ft the burden o f d i s t r i b u t i n g c r e d i t f a l l more on p r ic e and l e s s on adm inis t r a t io n or ra t io n in g ? N e v e r t h e le s s , the a l l o c a t io n o f c r e d i t among competing u s e r s i s an a r e a , o f r e ce n t f i n a n c i a l developm ents th at m e r it s much more s tud y . So, also , does the q u e s tio n o f com petitiv e r e l a t i o n s h ip s among v a r io u s f i n a n c i a l i n s t i t u t i o n s . My judgment as to the n a t u re o f the problem that c on fro n ts us i s re i n f o r c e d by an a n a l y s is o f two e a r l i e r in s t a n c e s i n w hich some o bservers a lso concluded t h a t c e n t r a l banks were l o s i n g t h e i r e f f e c t i v e n e s s . Altho u gh the two episo de s d i f f e r i n d e t a i l from curren t developm ents in the U n it e d S t a t e s , the b a s i c is s u e i s the same. I t i s th a t growing com petitio n o f o th e r l e n d e r s who presum ably escape c on tro l can n u l l i i ÿ the e f f e c t s o f a c tio n s by the c e n t r a l bank. A t tim es the com plaint was d ir e c t e d a g a in s t com petitio n from o th e r banks w it h l i m i t e d powers o f i s s u e and a t tim es a g a in s t com petiton o f com m e r c ia l banks w it h the c e n t r a l bank ra th e r than between nonbank and bank l e n d e r s , bu t the e s s e n t i a l core o f the problem has been the same. The f i r s t e p iso d e concerns the o p e ratio n s o f the Reichsbank from 1 8 7 6 to I 9I 4- D u r in g the f i r s t h a l f o f the p e r io d the com plaint was that the banks w it h l im it e d powers to i s s u e n o te s w ere n u l l i f y i n g the powers of the R eichsb an k and d u rin g the second h a l f i t was th a t the commercial banks were do in g so . R d e r a l se; No. e s e r v e 5 B a n k o f P h i l a d e l p h i a 3/ 31/53 To The Honorable Harry F. Byrd The case of the Reichsbank is particularly relevant because the mechanism of control, when viewed from today, was so loose-jointed. are that: The facts (1) before the First World War the Reichsbank paid virtually no at tention to reserve balances and ordinarily did not even know what their magnitude was; (2) it did not try to establish their amount at predetermined levels; (3) it was not in a position to do so quite apart from the question of controlling its own assets because of the magnitude of the variations in its other accounts; and (4.) German commercial banks did not maintain either their reserve deposits at the Reichsbank or their total primary reserves at any customaiy relationship to de posits. The argument was that any pressure the Reichsbank tried to exert could be absorbed by the other banks through the simple expedient of allowing their own reserve ratios to decline. In fact, by allowing their ratios to decline sufficient ly, they could move in the opposite direction from that desired by the Reichsbank. Similarly, they could absorb any ease'the Reichsbank was trying to create by allow ing their reserve ratios to rise. There is, of course, something to this argument. By allowing their reserve ratios to vary, the other banks could absorb or release some of the reserves the Reichsbank was creating or destroying. defeat the Reichsbank's intentions. It does not follow, however, that they could What the variable reserve ratios meant was that the Reichsbank had to conduct operations on a larger scale in order to achieve a given result because it had to offset the effects of the actions of the other banks. The fact is that the Reichsbank had sufficient power at all times to do this. Whatever reserves the commercial banks wished to keep had to be secured from the Reichsbank whose earning assets were always much larger than the total cash d e r a l ge No. R e s e r v e B a n k o f P h i l a d e l p h i a 3/31/53 To The Honorable Harry F. Byrd assets of the commercial banks. The Reichsbank was also able to influence direct ly the terms and conditions under ■which certain other borrowers acquired cash be cause it was a large commercial bank as well as the central bank. A conclusive demonstration of the Reichsbank*s power is that it was able, despite all these impediments, to achieve throughout this period its over-riding objective, which wa3 to maintain convertibility of the mark. The second episode concerns the Bank of England in the 19th Century. Professor Elmer Wood of the University of Missouri has made an exhaustive study of the experience. The question at that time was whether the so-called country banks which had authority to issue redeemable notes could escape the control of the Bank of England by reducing their reserve proportions. Professor Wood concludes that they could not do so because, as he puts it, "at no time down to 1913 were the total private securities of the Bank unmanageably small in relation to total bankers cash. Whether the banks, therefore, chose to adjust their reserve pro portion at 8 per cent or 15 per cent, the terms of the Bank had to be met." I have cited these two experiences because they contain elements that are relevant to our own problem. Indeed, the conditions that presumably impeded the Reichsbank and the Bank of England were stronger than the conditions now con fronting the Federal Reserve System. They were dealing with money-creating in stitutions whereas we are concerned with financial intermediaries. These latter can influence the flow of purchases - which is what really concerns us - only by affecting the efficiency in the use of money - or velocity of circulation as it is called technically - whereas the former could influence not only velocity but the actual quantity as well. d e r a l ge No. 2. R e s e r v e 7 B a n k o f P h i l a d e l p h i a 3/ 31/53 To The Honorable Harxy F. Byrd Ha3 market structure been the source of uneven Impact of credit restraint? An area of general monetary policy that needs much more study than it has yet received is the precise impact of that policy on various sectors of the economy. My immediate concern about this problem is that some observers are tempted to reach firm conclusions on -what seems to me to be limited analysis and evidence. We must begin by recognizing that if credit restraint is to be effective it must result in postponing some spending that would otherwise have taken place. It is obvious that these postponements will not be proportional to the actual ex penditures of all spending units. The impact will not be uniform. I shall analyze briefly one theory that has been advanced to describe the differential impacts. analysis is tentative. This is not a field in which I have specialized and the My sole purpose is to indicate that we should not rush to adopt solutions before we understand the problems that confront us. The particular theory is that general credit restraint sorely handicaps "competitive-price industries'1 and leaves virtually untouched the ”administeredprice industries.” In some versions, the conclusion seems to result from a rather unusual classification of industries between the two categories, with housing and "other industries where firms are small and numerous" classified as competitiveprice industries. The inclusion of housing is particularly interesting. starts fell from about 1.3 million in lion in 1957 , 1955 Since housing to 1.1 million in 1956 and to 1.0 mil it is tempting to some to include home building among competitive industries. It seems to me that prices of new houses are administered pricesj just seral Re s e r v e Ba nk o r Ph i l a d e l p h i a ;e No. 8 To The Honorable Harry F. Byrd 3/31/58 as administered as, say, the price of an automobile at the dealer's showroom. There are many thousands of homebuilders in this nation. local market. But housing sells in a Housing starts in Los Angeles have little or no effect on house prices in Philadelphia. Each homebuilder erects individualized houses. His price is determined by his costs, the home's location, and what he thinks the market will pay. But he sets the price. than most other administered prices. It is no more subject to fluctuation (In this connection it is interesting to note that housing prices were 7 or 8 per cent higher in 1957 than in 1955, despite a decline of one-fifth in starts.) Perhaps it would be profitable to debate whether homebuilding is a competitive-price industry. Certainly, there is room for some argument. But there is widespread agreement as to why credit restraint had an unusually severe impact on housing in 1956 and 1957. And the answer has nothing to do with market structure. The figures below pretty much tell the story. Private Starts (000 omitted) 195 5 195 6 195 7 ______FHA______ _____ VA______ 276.7 189.3 168.4 392-9 270*7 128.3 Conventional 639-9 633-9 694*4 Housing starts slumped off in the Government-guaranteed and insured sector. There was an actual increase in houses started under conventional financing. (No one would want to argue that homebuilding of conventionally financed housing is characterized by administered prices and that government-insured starts are com petitively priced.) The "sticky" interest rates on FHA and VA mortgages unquestion ably had a great deal to do with this disparity. Interest yields for lenders on d e r a l 3E No. R 9 e s e r v e To B a n k o f P h i l a d e l p h i a The Honorable Harry F. Byrd government-insured mortgages were not attractive. 3/31/58 Funds went elsewhere. Housing starts were dramatically affected by tight money, not because homebuilding is a competitive-price industry but mainly because FHA and VA in terest rates did not slide freely with general interest rates. Some of those who emphasize market structure classify "other industries where firms are small and numerous" as competitive-price industries. businesses, however, fall neatly into this category. Not all small For example, there are smaller manufacturers of appliances, of steel, of automobiles. The question of whether credit restraint handicaps small business unduly is now being studied extensively by the Federal Reserve System. will be deferred until that study is completed. My own judgment At this point I certainly am not convinced that small businesses in administered-price industries escape the effects of credit restraint while those in competitive-price industries feel the effects unduly. Agriculture is another industry on which credit restraint is alleged to have had undue impact because it is a competitive industry. at the outset that not all of agriculture is competitive. We should recognize We may admit that we do not know the answer. We do know, however, that we had a farm problem before we had tight money. We also know that even with tight money our farmers were able to grow more farm products than the market would take. It seems likely that difficulties in the farm sector arose not primarily because it was a competitive price industry; but rather because the industry has been undergoing a basic readjustment. It was a weak industry before, during, and after tight money. The general idea that monetary policy might have an uneven impact is not e r a l e no R . 10 new. e s e r v To e B a n k o f P h i l a d e l p h i a The Honorable Harry F. Byrd 3/31/58 Few individuals would assume that a veiy broad-based, general control of credit must have an exactly proportionate impact on the various firms and indus tries within our economy. Obviously, there are times when certain sectors will be more responsive to monetary actions. not difficult to understand. The reasons for this uneven impact are A restrictive monetary policy, stripped to its bare essentials, is supposed to bring current investment spending into line with the current volume of savings. Investment spending pretty much depends on current sales and profit margins and on an evaluation of future sales and profit potentialities. If firms are enjoying high levels of demand pressing on current capacities; and if it ap pears demand will grow as the economy expands; these firms probably will be in clined to increase spending for inventory and to enlarge productive capacity. This is especially the case if current price levels are enabling good profit margins. Firms with less buoyant demand, somewhat dimmer prospects, and poorer profit posi tions are not so strongly inclined toward freewheeling spending on inventory and new plant capacity. A policy of credit restraint probably will seem to have a much more im mediate and drastic impact on the latter firms. The firms themselves will be more readily discouraged by the increased cost of borrowing. In addition, lenders will tend to "screen out" these firms as less credit worthy than some others. These seemingly obvious points must be pressed to show that these differing demand and profit positions, which explain the uneven impact of monetary policy among firms, can also explain its uneven impact among industries. Surely, during any boom period the demand for the products of some in dustries is stronger than that for others. Investment spending of these industries F e d e r a l Pa g e N o . R e s e r v 11 T o e B a n k o f P h i l a d e l p h i a The Honorable Harry F. Byrd 3/31/58 will seem less affected by credit restraint than others where demand pressures and profit positions are not so strong. I have presented this analysis to indicate why I am not convinced that market structure was responsible for such uneven impact as the credit restraint in 1956 and 1957 may have had. This, of course, is not the same thing as saying that administered-price industries respond to credit restraint in the same way as competitive-price industries. They probably do not. Prices in administered-price industries very possibly respond somewhat slowly to changes in demand. In these industries the initial responses to a de cline in demand are likely to occur in cutbacks in production and employment. petitive-price industries probably respond in a different manner. Com Prices in these industries are more likely to be immediately sensitive to changes in demand. Changes in production and employment would come about somewhat more slowly. If this likely sequence of responses is accurate, it has implications for monetaiy policy. Since a large fraction of our measured prices are set by adminis trative action, it may mean for example that the consumer price index is a tardy indicator of the impact of monetary policy. :d e r a l .g e 3. R No. 12 B e s e r v e To a n k o f P h i l a d e l p h i a The Honorable Harry F. Byrd 3/31/58 Should the monetary authorities direct their policies toward achieving a predetermined rate of growth of the economy? A rising standard of living in the sense of more goods and services to consume is made possible only by an increase in real output per capita. Let us admit that growth is desirable; it does not follow that monetary policy should be directed toward achieving a predetermined rate of growth each year. It is pos sible that policies directed toward that goal could actually inhibit long-term growth. Economic growth is compounded from many ingredients. One of the most important is that some individuals are motivated by an insatiable desire to com prehend the universe of which we are a part and devote their lives to what has been called basic research. most to our progress. freedom. It is the men of genius in basic research who have contributed I believe such individuals flourish most in an environment of In the interest of growth, I would promote such an environment rather than place on it the limits that might be necessary to achieve a specified rate of growth in the short run. Related to basic research in achieving growth is technological progress. Technology embraces the application of a wide range of human knowledge to the productive process. It includes scientific discoveries as well as the invention of new machines and new processes of production. The development of new seeds and improved breeds of livestock have contributed significantly to the increase in agricultural output. It was the work of scientists which led to such significant discoveries as synthetic fibers, plastics, electronic products and processes, and atomic energy. Restless minds and scientific research are the sources of innovation - in materials, in productive processes, in machines, and in managerial skills. d e r a l g e n o . R e s e r v e 13 T o B a n k o f P h i l a d e l p h i a The Honorable Harry F. Byrd 3/31/53 New discoveries and new inventions in themselves, however, add little to our total output of goods and services. There remains the problem of fashion ing an efficient process for producing the product, building a plant and equipping it with the necessary machinery, and developing a market in order that the product may be produced in volume. This is the work of the entrepreneur. For scientific discoveries and innovations to be fruitful, substantial sums are usually required for investment in plant, new machinery and equipment. Another ingredient of economic growth, therefore, is saving and invest ment. If we are to have the investment that technological progress requires, we cannot consume all of our current output. There must be saving - abstaining from current consumption - to release resources for the capital goods needed in expand ing our productive capacity. The more we consume, the higher our current standard of living but the slower our rate of economic growth. The more we save and invest the lower our current standard of living, but the more rapid our rate of growth. Productive capacity is determined by the character as well as the total volume of investment. more than others. Some types of investment contribute to productive capacity Investment in houses and durable consumers goods, for example, usually adds less to productive capacity than investment in manufacturing plant and equipment and in mining. Mobility of resources is another ingredient of economic growth. nological progress means change. economy. Tech Change is the essence of a dynamic growing As industries producing new products expand, those producing products rendered obsolete decline. Growth will tend to be more rapid, the more promptly labor and capital shift to meet changing demands. Attempts to support or "prop up" declining industries, by postponing the shifting of resources, retard the rate of R e d e r a l age: n o . e s e r 14 v e To B a n k o f P h i l a d e l p h i a 3/ 31/58 The Honorable Harry F. Byrd economic growth. Another ingredient of growth is the intensity and nature of the desires of the public. People work because they want something - more food, better clothing, an automobile, a home, better education for their children, more se curity. In this country a strong desire for such things has been a powerful force in stimulating demand for goods and services, and in providing the human and ma terial recources necessary to produce them. With a lesser desire for material things our rate of economic growth would undoubtedly have been slower. The rate of growth thus depends largely on choosing among alternatives choices that involve basic social, as well as economic values. In the present state of international tension, adequate defense is essential for our security, and to pro tect our freedom. If we are to preserve our way of life, defense needs must have priority in the allocation of our resources. The large volume of expenditures re quired for adequate defense, provides strong support for a high level of total output It also provides a strong tendency toward instability. old ones are rendered obsolete. As new weapons are discovered Labor, plant and equipment must be shifted from the old to production of the newer type weapons. craft to missiles is a case in point. The recent shift in emphasis from air Even though total defense expenditures re main the same, a shift in the pattern of expenditures may result in declining pro duction and employment in some industries and an increase in others. Another choice that has a significant influence on our rate of economic growth is the division of current output between consumption and saving and invest ment. This raises a baffling question, particularly with a standard of living as high as that which now prevails in the United States. To what extent should we abstain from consumption and reduce our current material standard of living in d e r a l ge n o R e s e r v e .15 To B a n k o f P h i l a d e l p h i a 3/31/58 The Honorable Harry F. Byrd order that posterity, which, barring a nuclear war, will almost certainly have a higher standard in any event, may have an even higher standard of living? What is the optimum blend of consumption and saving, in terms of human welfare - social and spiritual as well as economic? Growth also depends in part on our relative preference for progress and security. Technological advances open up new opportunities but they also inflict losses and hardships. Some of our existing investments are rendered obsolete and workers trained and experienced in the older technology may find that their services are no longer in demand. Temporary unemployment and losses on existing investments are a part of the price we pay for changes which contribute to growth. The desire to protect existing investments and jobs frequently leads to attempts to delay the introduction of new and improved technology. The price of such temporary security, however, is a slower rate of economic growth. Another factor influencing the rate of growth is the proportion of our population employed and the number of hours worked per week. The larger the pro portion of the population employed and, within limits, the longer the hours worked / per week, the higher output per capita will be. Should the labor force be enlarged by encouraging youths, women, and older people to take jobs? Would the additional output thereby achieved be worth the sacrifices involved in terms of the education and training of youth and life in the home? Which would provide greater satis faction - more leisure or having the larger amount of goods which might be pro duced ty working longer hours? Directing monetary policy toward the attainment of a predetermined annual rate of growth involves some basic difficulties. One is that a decision as to specific rate of growth to be used as a target involves appraising a whole range of d e r a l R ge; no. 15 e s e r v e B a n k o f P h i l a d e l p h i a To The Honorable Harry F. Byrd intangible human values. 3/31/58 How does one determine whether it is economically and socially desirable to consume less now in order to have more in the future? undergo temporary hardships and insecurity to promote progress? To To have sub stantial inequality in income which would provide a stronger incentive for individual effort and initiative? for leisure? Or to use more of our time for work and less Choices such as these have a significant influence oh the welfare of the individual as well as that of society as a whole. A second difficulty is that monetary policy has little direct influence on the principal ingredients of economic growth. It is not an effective means for directly influencing research and the rate of technological progress; promot ing individual freedom and initiative; or encouraging people to work more rather than to enjoy more leisure. It is for this reason that undue emphasis on growth as such would tempt the authorities to search for more effective weapons. ing the flow of credit to "preferred" uses is an obvious possibility. Direct Should we elect to go down that road, I fear we would discover in due course that we had created more problems than we had solved and that our actual rate of growth or our current standard of living would be less. My conclusion is that monetary policy can make a significant contribu tion to growth. It can make its maximum contribution, however, by promoting an economic environment favorable to growth not by seeking to achieve a predetermined rate of growth. Monetary policy will make its maximum contribution by promoting a reason ably full use of resources at a reasonably stable level of prices. An appropriate supply of credit and money should be made available to foster rather than inhibit growth. Beyond that, however, the factors determining the precise rate of economic >e e r a l R n o . 17 e s e r v e T o B a n k o f P h i l a d e l p h i a The Honorable Harry F. Byrd 3/31/58 growth can best be left to the decisions of individuals rather than to the monetary authorities or any central agency. In conclusion, I appreciate your invitation to express my views on the vital matters before you. I have done my best within the time limit that you mentioned in your letter of February 17, 1953, to Mr. Williams. Sincerely, Karl R. Bopp Enc. Karl R. Bopp, President
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