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19^1 Advanced Management Conference of
the Metropolitan Life Insurance Company,
1:30 p.m., Monday, July 2^, 1961, Nassau
Inn, Princeton, New Jersey.
MONEY, BANKING AND MONETARY POLICY
AS THEY AFFECT THE ECONOMY
NATIONAL GOALS OF OUR ECONOMIC SYSTEM.
A.
Section 2 of Employment Act of 19*^6:
" . . . Federal Government shall use all practicable
means . . . in a manner calculated to foster and
promote free competitive enterprise and the general
welfare . . . to promote maximum employment, produc
tion, and purchasing power."
B.
Money as the instrument of economic freedom.
1.
Freedom to earn, spend, save, invest.
2.
Spending decisions guide production.
Edsel—^ Rambler.
(a) Profit and loss economy.
3. Earning and spending decisions.
(a) As individual consumers, household, businesses
(proprietorships).
(b) In voluntary collectives —
corporations.
(c) In public capacity — Government.
C.
Full use of resources.
1.
Private and public demand.
Output at maximum employment and stable price level.
2.
No automatic.
Fiscal policy.
Automatic effects.
Policy.
Debt Management.
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II.
THE ROLE OF MONETARY POLICY.
A.
Adjust flexibly to economic developments.
1.
"When demand is excessive, make money harder to get
and more expensive.
2.
Vice versa.
B.
Efficiency in use of money mitigates effects.
C.
Experience shows it works.
Affects capital values and whole economy.
Wide variety of borrowers/lenders free to choose.
THE ROLE OF FINANCIAL INTERMEDIARIES
1.
They cannot create money.
2.
If they acquire long debt for short debt, the
remainder of the economy is more liquid but
they are less liquid!
3-
Flow of expenditures may be influenced.
Velocity may rise; but can't excape monetary
authorities.
4.
The economy requires less money than otherwise;
but quantity can be regulated.
5.
True also if, e.g., corporations invest demand
deposits in Treasury Bills.
6.
Also their actions are affected by conditions in
money and capital markets.
e.g. — Finance companies.
Pressure by banks to repay in tight
money periods forces into capital
markets at higher rates. Reinforces
higher rates.
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III.
TOOLS OF MONETARY POLICY.
A.
Deposits as money*
1.
work through the banking system.
Commercial banks _
Seek loans and investments when they have
more to lend,
2.
Vice versa.
3*
Reserve position as measure of banks' position.
Supply, availability + cost.
B.
Reserve requirements.
C.
Open Market Operations.
D.
Discounting.
1.
2.
IV.
Rate.
Administration.
GUIDES TO CURRENT OPERATIONS.
A.
Lags.
1.
2.
Between knowledge and decision.
3.
B.
Between an event and knowledge
Between decision and effects.
Methods of determining current policy.
1.
Past relationships.
(a) Population forecasts.
(b) Harvard A.B.C. curves%
Speculation,
(c) Leading indicators.
2.
Current behavior.
Inertia — weather forecast.
Miss every change!
business, banking.
3«
Expressions of current opinion.
Expressions of current intentions,
5.
No rabbits in the hat.
6.
Judgment,
OPERATIONAL PROCEDURES.
A.
Organization for policy-making.
1.
Relations to the Government.
2.
Central vs. decentralized.
(a) A Federal System.
(b) A National Policy.
B.
Reaching a decision,
1.
Federal Reserve Banks.
(a) Boards of Directors.
2.
Board of Governors.
3.
Federal Open Market Committee meets every three weeks.
(a) N.Y. Memo on operations.
Economic memorandum:
Staff review of economic developmemts —
Credit developments.
12 Presidents and 7 Governors report.
Discussion of past three weeks.
(b) Decision as to whether to —
(1) Continue as is.
(2) Tighten — and how much.
(3) Ease — and how much.
(c) Changes are usually moderate.
(1) A little more — a little less.
(2) Resolve doubts on one side or the other.
(d) The directive.
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c.
Execution of policy.
1.
Manager of the account and daily telephone calls and
wire reports.
(a) Projections of non-controllable factors.
Float — uncollected cash items.
Deferred availability cash items.
(b) Inevitable errors in projections.
(c) How correct for errors —
Conduct of an
operation.
(1) Bring average in line?
(2) "What happens on subsequent days?
(d) Regular way transactions.
(e) Cash transactions.
(f) Repurchase agreements.
D . Ultimate authority in a united Board of Governors.
RECENT POLICY
Last overt move to greater restraint —
September 11, 1959 —
Ratei
3t to 4$.
Despite steel strike.
Inflationary psychology.
I960 Boom assured because of strike.
However, no additional restraint on availability.
Net borrowed reserves in 400-500
will range until end of year.
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(1960 ANNUAL REPORT OF BOARD OF GOVERNORS)
D i g e s t o f P r i n c i p a l F e d e r a l R e s e r v e P o l i c y A c t io n s , 1960
• Period
Action
Purpose o f action
JanuaryMarch
Rcduccd System holdings of
U.S. Government securities
by about $1.6 billion. Mem
ber bank borrowings at the
Federal Reserve Ranks
dropped from an average of
$900 million in December to
$635 million in March.
To offset the seasonal inflow
of reserve funds, mainly from
the post-holiday return of
currency from circulation,
while permitting some reduc
tion in borrowed reserves.
Late MarchJuly
Increased System holdings of
Government securities by
nearly SI.4 billion. Member
bank borrowings at Reserve
Banks declined to an average
of less than $400 million in
July.
June
Reduced discount rates from
4 to 3Vi per cent at all
Reserve Banks.
To promote further reduc
tion in the net borrowed ré
serve positions of mOnber
banks and, beginning in May,
to provide reserves needed
for moderate bank Credit and
monetary expansion.
To reduce the cost of bor
rowed reserves for member
banks and to bring the dis
count rate closer to market
interest rates.
July
Reduced margin ,require
ments on loans fof purchas
ing or carrying listed securi
ties from 90 to 70 per cent of
market value of securities.
August
Authorized member banks to'
count about $500 million of
their vault cash as required
reserves, effective for country
banks August 25 and for
central reserve and reserve
city banks September 1<
Reduccd reserve require
ments against net demand
deposits at central reserve
city banks from 18 to 17Vi
per cent, effective September
1, thereby releasing about
$125 million of reserves.
AugustSeptember
Rcduccd discount rates from
3 Vi to 3 per cent at all
Reserve Banks.
To lower margin require
ments from the high level in
effect since October 1958 in
recognition of decline in vol
ume of stock market credit,
outstanding and lessened
danger of excessive specula
tive activity in the market
To provide mainly for sea
sonal needs for reserve funds,
and to implement 1959 legis
lation directed in part toward
equalization of reserve re
quirements of central reserve
and reserve city banks.
To reduce further the cost of
borrowing from the Reserve
Banks and reduce the differ
ential between the discount
rate and market rates • of
interest.
‘Bdqght or sold at different To encourage bank credit
AugustNovember times' .varying amounts of and monetary expansion by
Government securities with a meeting changing reserve
net increase in System hold . needs and offsetting the im
ings of about $lv* billion, pact of a large gold outflow
including securities held un without exerting undue
der repurchase agreement downward pressure on short
and issues with short ma term Treasury bill rates that
turities other than Treasury might stimulate further out
bills. Member bank borrow flow of funds.
ing declined further to aver
age below $150 million in
Ortober and November.
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{Digest of Principal Federal Reserve- Policy Actions-, I960)
Period
Action
Late
Authorized member banks
November- to count all their vault cash
December in meeting their reserve re
quirements and increased *
reserve requirements against
net demand deposits for
country banks from 11 to 12
per cent. The net effect o f
these two actions, effective
November 24, was to make
available about $1,050
million of reserves.
Reduced reserve require
ments against net demand
deposits at central resery$
city banks from 17Vi to 16%
per cent, effective December
1, thereby releasing about
$250 million of reserves.
Sold U.S. Government se
curities except for seasonal
purchases in last week of
December. Member bank
borrowings at the Reserve
Banks averaged less than $90
million in December.
Purpose of Action
To provide, on a liberal basis,
for seasonal reserve needs, to
complete implementation of
legislation directed in part
toward equalization of re
serve requirements of central
reserve and reserve city
banks, and to offset the
effect of continued gold out
flow, while avoiding direct
impact on short-term rates
that might stimulate further
outflow of funds.
RESERVE SYSTEM BOND PURCHASES
(WIRE SERVICE
- 2:50 p.m.)
"N Y
At the direction of the Chairman of the Open Market Committee
of the Federal Reserve System the Manager of the System Open Market
Account announced:
"The System Open Market Account is purchasing in the Open
Market U. S. Government notes and bonds of varying maturities,
some of •which will exceed five years.
"Price quotations and offerings are being requested of
all primary dealers in U. S. Government securities. Determina
tion as to which offerings to purchase is being governed by the
prices that appear most advantageous; i.e., the lowest prices,
net amounts of all transactions for system account will be shown
as usual in the condition statements issued every Thursday.
"During recent years transactions for the system account,
except in correction of disorderly market^ have been made in
short-term U. S. Government securities. Authority for transactions
in securities of larger maturity has been granted by the Open Mar
ket Committee of the Federal Reserve System in the light of con
ditions that have developed in the domestic economy and in the
U. S. Balance of payments with other countries."
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System moved toward ease or less restraint_
Before the economy over-all turned down
because —
1.
Inflationary psychosis subsided - dormant at least.
2.
Competitive buyers markets - unused manpower
unused plant and equipment.
Could have credit for real growth without inflation.
VI.
PROPORTION AND PERSPECTIVE ON OUR INTERNATIONAL POSITION.
A.
Improve our competitive position at home and abroad.
1.
Regain our leadership in innovations — new products.
Home market — compact car.
Foreign market — what they want.
2.
Quality of product.
3-
Competitive prices.
Control of costs.
B.
Avoid inflation at home.
C.
Maintain confidence in the dollar.
D.
Influence foreign behavior.
1.
We generously and successfully helped the west
to reconstruct.
2.
Rising international liquidity.
(a) Reduce barriers against U. S. imports.
(b) Aid in development — especially Germany.
3.
E*
Review our government expenditures abroad.
The business cycle and the balance of payments.
Convertible currencies.
Interest rates.
Gold movements*
-9CRITICISM
FOR NOT MOVING FAST OR FAR ENOUGH?
Letter dated July 24, i960 from C. Lowell Harriss, Professor of
Economics of Columbia University:
Dear Friend:
In glancing through the FEDERAL RESERVE BULLETIN last night,
I noted that you are on the FOMC. This note may be a presumption,
but I send it with the best of intentions.
With many people, I suppose, I have been sharing disquiet
about the business picture. The immediate outlook may be tinged
by gloom from the stock market. Yet business ought to be expand
ing more, I feel. And last night when I looked at the figures
of the money stock over recent months and years — I do not
ordinarily keep up with matters of this nature — the very slow
rate of growth seemed to be not consistent with what I should
consider best for the economy. Perhaps if the "Fed" gave a bit
more encouragement to money growth, the economy would be better.
And I say this recognizing my long record as one who thinks we
should pay quite a price to prevent inflation.
Please be assured of my very best personal wishes.
FOR MOVING TOO FAST:
BARRONS1s, August 22, I960:
Against this sober setting the recent moves by the Federal
Reserve begin to look less like a calculated risk, as they com
placently have been described, than a wild gamble with the
nation’s solvency. For whatever else it may achieve, easy credit
invariably works to postpone or prevent the adjustments in prices
and costs without which no country for long can remain competitive.
Thus it tends to perpetuate the very conditions which inexorably
lead to debasement of the currency. By easing credit the Fed has
appeased its critics and, perhaps, helped stave off an impending
recession. However, it has done so only at mounting peril to the
dollar and the long-range national interest.
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THE SHORT-RUN1
Hiatus from difference in cycles.
Convertible currencies —
gold movements.
interest rates _ and
IF WE HAD:
Inflationary psychology —
Rising prices.
Deteriorating trade position.
Full use of resources.
Large fiscal deficit.
Low gold reserves.
Then, to compound with easy money would, indeed, be hazardous.
But surely with the reverse, the dangers from easier credit
are less than those from tight credit.
Cycle in Europe and United States.
Proportion and perspective on our International position.
Flight from the dollar to gold simply have not had.
Balance of payments position.
Our trade position —
Great improvement since second quarter of 1959.
Auto imports —
except V.W. & Renault
exports
At $4 billion annual
rate, mostly exports!
Our businessmen have been adjusting —
Still a problem.
WHAT CAN BE DONE ABOUT OUR UNFAVORABLE BALANCE OF PAYMENTS?
1.
Influence behavior of foreigners.
We helped them - generously - reconstruct —
and successfully!
(a) Rising international liquidity.
Reduce barriers vs. U. S. Imports.
Aid in development — especially Germany!
The lesson of Germany.
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(b) Review our expenditures abroad.
Families of servicemen.
(c) Avoid inflation at home.
(d) Improve competitive position at home/abroad.
QUALIFICATIONS OF CENTRAL BANKER.
Open mind — but not draughty!
Tough skin.
Know when to stop!
