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Lecture I
MOHETAKT AMD FISCAL POLICY
Outline of Lecture by
KARL R. BOPP
Vice Présidait, Federal Reserve Bank of Philadelphia
before the

y

1956 Executive Program in Business idainistration
Graduate School of Business, Columbia University
Arden House, Harrioan, Mew York
July 26-27 and September 20->21, 1956

I* Our conaaon objective:

stable economic growth

Am The method of authority versus the method of cholee
B. Ve hove a money economy
1. Spending money is like casting rotes for
use of our resources
2m Freedom to choose
3. let want enough rotes east to utilise
available resources
C. Relation of fiscal, debt management, and monetary
policies ftt flow of expenditures
D. Obligations under Bqp^iyment Act of 1946
II*

Fiscal policy




A. Older idea
1. Government concerned only with its own fiscal problems
2. Decided vhat it wasted to do and how much it would cost
3m Passed taxes to pay
4. Annual balance, except for
a* Extraordinary items
(1) Vars
(2) European capital budgets
bm Tariffs for protection

if

- 2 B.

Newer idea
1* Government has a general economic responsibility
2. Fiscal policy has important repercussions on the economy

X
(Hew Seal
Recovery
^ and Reform)

a« Sheer magnitude
Fed. expend, fiscal 195© - 1^6 billion
State and local
=
billion
b. Tax a t r u c t j j r e ^ ^ ^ ^.

¿>£3 { /0 r
3^1 >

^

c. Expenditure structore

/
C.

Compensatory fiscal policy
1.

—

2.

The idea
(effects on business confidence)
€L
Automatic - or "built-in1 - stabilisers
1
a. Nature of Federal tax system - revenues heavily
dependent on individual & corp. incomes
e.g. Fiscal 1 9 5 ^
Direct 019 indiv.
Soc. Sec.
Corp.
b.

Expenditures
Social Security
Support progra
ms

3 * Discretionary:
a. Political aspects
4. Limits
a. The budget process
(1) Agencies now vorking on budget for
Fiscal 1 9 # f
7
(2)

By September 195^ departmental esti­
mates doe for 195 t9
f

(3)

Budget Bureau review

( - President subnits in Jan. 1957
4)
(5)

Budget year begins July 1, 195$

b. Projections -

18-24 months in advance

Fiscal Projections and Realizations
M w l Taar July 1. 1955 - Jtete 30. 1956
Original 1st*
Jan. 1955

60.0
<
a..u

BMaipta



Final as
Revised
Revised
Revised Reported
A*g. 1955 Jan. 1956 May 1956
July 19

nr gvnlgtf

62.1
63.8

64.5

67.7

68.1

<*.3

65.9

66*4

- 2*4

- 1.7

.2

+ 1.8

+ 1.75

-3o* Secure flexibility thru administratire control?
Dangers
d.

Tax rates apply to calendar year
The more flexible you make it, the harder
for business to plant

5. Conclusion:
a. Powerful, but not very flexible
b. But should not have big deliberate
unstabilising effect
III.

Debt Management policy
A.

Size of debt and changes in it a result of past fiscal policy
1, Responsibility of Congress
2. Debt ceilings
3«

Debt primarily a result of wars and depressions
U.S. Public Debt Outstanding

($ billions)

June 30, 1916 . . . . . .
$ 1.2
1919......... 24.5 ) 11 successive annual
16.2 )
reductions
1930 .........
1939
40*4 + 5.5 guarant.
Feb. 28, 1946 .........
279.2
April
19 4 9.........
251.5
l o w ..................
275.0
approx.
4. Present status
Total debt about . . .
Non-market.........

$275 billion
127 i f f "
(Incl. 11 b. conv.)

TOUR INTEREST IS IN
Mazketables
B.

Alternative principles

(no rabbits in the hatl)

1* Lowest interest cost
a. Obviously don't make any issue "too sweet"
b. But if this is BASIC objective
,
(Costs of Gov*t
goods and serr.Tj




(1)

Pressure on monetaxy authority - pre-Accord
nake all credit cheap and plentiful
(2) Also tends to rising interest structure
so issue shorts - end with basket of quicksilver
c. Of course, it makes for ease of flotation




2. Tailor issues to investor demand

^

. .

a. Hice sounding title
«
* ♦<**'
Of course, need judgment as to available
funds and investor groups
b.

"Investor demand” not absolute (Ownership Chart p* 32-3)

c. What it eomes down to is

Cl
)

On demand for funds: other borrowers would
get what they want and Treasury would get what is 3*ft
i.e. short-teims in boom and long-tems
in depression

d. Aggravate the business cycle
3.

Counter - cyclical

(compensatory)

a. Intellectual appeal
Vary liquidity to suit requirements of the economy
b. Some problems - need to predict economic future
(1) When do you issue long terms?
(a)

In prosperltyl - But
(i) Risk of failure - other demands
are then strong
(ii)

Means when rates are high:
successive issues at higher rates.
Also late prosperity issues will
go to premium
(iii) Hard to explain to unsophisticated
audience
(b)

In depression? No
(i) For fear of aggravating depression
but funds are plentiful then

(2) What about economic conditions when bonds mature?
(a) Make callable - but not for nothing
(3)

c.
4*

Illustrate with problem of savings bonds economy would best be served if people
bought during inflation - but is individual?
Some hope if cycles remain moderate in amplitude

Debt management can make a modest contribution

5. Has to manage in market as fixed by central bank

- 5 IV.

Monetary policy




A.

Basic principle: to influence the flow of expenditure
by changing the supply, availability, and cost of
money and credit.
1.

Central bank given authority to issue money and to
determine the conditions under which it will do so

2.

Demand deposits, the commercial banking system, and
the key role of reserves

B. Objective is not to achieve any given quantity of money
or any given rate of interest but, as Chairman Martin
phrased it, to influence the supply, availability, and
cost so that "the supply and flow of credit is neither
so large as to induce destructive inflationary forces
nor so email as to stifle our great and growing economy."
C.

The instruments of policy
1. Open-market operations - put money into the market
or take it out directly.
2.

Discounting
Market takes initiative
effect on availability

3.

Reserve requirements

4 . Selective credit controls
.
D.

How the System operates
Federal Open Market Committee meets every three weeks
*.
>

Continue as is
Tighten - and how much
(3) Ease - and how much
c. Changes ure usually moderate
(1) A little more, a little less
(2) # Resolve doubtq on one side or the other
( T U . dL*AJ¿CAMri
L
t x.
Manager of the account and daily telephone calls
and wire reports
^
^
a. Projections of non-controllable factors H*#**
b. Inevitable errors in projections

s

c. How correct for errors
(1) Bring average in line?
(2) Vhat happens on subsequent days?
d. Regular way transactions
•. Cash transactions
f.

♦L

' "
*

- 6 -

£$.

What to watch for
a. The critical importance of reserves and interest rates
b. Total - a growing economy needs more unless requirements are reduced
c.
d.
e.
f.

i w i




- . -

Excess reserves
Borrowings
Net excess (free) or net borrowing
Question of distribution
money rates
• • » k

:..

» *

w

A.

Stable economic growth means flexible fiscal,
debt management, and monetary policies

B.

Restraint is never popular

C.

Reason to hope we may achieve but
1, People were sure of this in the new era of
the 1920's. Are we, too, deluding ourselves?
2. Is "full-eraployment" consistent with stable
prices - or economic stability?

■

*4