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OBJECTIVES OF FEDERAL RESERVE POLICY

Lecture given at our Research Seminar, Board Room*
May 11, 1967.
Presented to our Directors on June 1, 1967.

Material presented by President Bopp
Research Seminar
Federal Reserve Bank of Philadelphia
Thursday, May 11, 1967

OBJECTIVES AND RELATED PROGRAMS

Objective

Conditions
Calling for or permitting
an easing of credit

Conditions
Calling for or permitting
a tightening of credit

1. Full employment.......

Less than full employment.

Jobs in excess of workers.

2. Stable price level....

Declining prices.

Rising prices.

3. Convertibility of the
currency............

High and/or rising primary
international reserves.

Low and/or declining primary
international reserves.

4. Adequate growth.......

When growth is inadequate.

When growth is too rapid to
be sustained.

5. A fixed rate of interest

When savings are inadequate.

When savings are excessive.

6. Productive credit.....

Increase in monetary volume
of output.

Decrease in monetary volume
of output.




Material presented by President Bopp
at the Stated Meeting of the Board of
Directors of the Federal Reserve Bank of
Philadelphia on Thursday, June 1, 1967»

OBJECTIVES AND RELATED PROGRAMS

Objective

Conditions
Calling for or permitting
an easing of credit

Conditions
Calling for or permitting
a tightening of credit

1. Full employment.......

Less than full employment.

Jobs in excess of workers.

2. Stable price level.....

Declining prices.

Rising prices.

3. Convertibility of the
currency............

High and/or rising primary
international reserves.

Low and/or declining primary
international reserves.

4. Adequate growth.......

When growth is inadequate.

When growth is too rapid to
be sustained.

5. A fixed rate of interest

When savings are inadequate.

When savings are excessive.

6. Productive credit.....

Increase in monetary volume
of output.

Decrease in monetary volume
of output.




CIVILIAN LABOR FORCE AND EMPLOYMENT
Millions
Seasonally Adjusted

78

76

Employment

62

0
1957
Per cent




1959

1961

1963

UNEMPLOYMENT RATE

1965

1967

Index




WHOLESALE PRICE INDEX

Index

(1957-59=100)

1957

Index

(1957-59=100)




1959

1961

1963

CONSUMER PRICE INDEX

1965

1967

BALANCE OF PAYMENTS - LIQUIDITY BASIS
Billions $

-2

-

4

-

-6

-

1959

1957

1963

1961

1965

SHORT-TERM LIABILITIES TO FOREIGNERS REPORTED B Y BANKS
Billions $

1957

1959

1961

1963
GOLD STOCK

Billions $




1965

1967

MANUFACTURING CAPACITY AND PRODUCTION
Index

<1957-59-100)

1957

1959

1961

1963

MANUFACTURING CAPACITY UTILIZATION
Per cent




1965

(Excerpts from remarks made by President Bopp
at the meeting of the Board of Directors of
the Federal Reserve Bank of Philadelphia on
Thursday, June 1, 1967.
)

CONVERTIBILITY'
For the United States convertibility still means redemption of cur­
rency in gold at a fixed price.

Since this objective, more than any other

perhaps, arouses great emotions, it might be worth-while to see how England
came to adopt the gold standard in the first place.
Macaulay wrote:

,In the autumn of 1695» it could hardly be said
:

that the country possessed, for practical purposes, any measure of value of
commodities.

It was a mere chance whether what was called a shilling, was

really tenpence, sixpence, or a groat."

For example, the exchequer found that

coins which should have weighed 220,000 ounces actually weighed only 11^,000
ounces.
William and Mary appointed a committee to make recommendations for
solving the problems.

The membership was quite extraordinary:

Sir Isaac Newton,

Master of the Mint, John Locke, the great philosopher, and Lord Somers.
Sir Isaac recommended that the government call in the old coin at
face value and issue new full weight coins.

The ratio of silver to gold was

established at 16 silver to 1 gold (shades of Bryan!).
the Continent the ratio was 15 2 to 1.
the results a century before!
Continent overvalued silver.

In major countries on

Sir Thomas Gresham could have predicted

Relatively, England overvalued gold and the
Gold was taken to England for exchange into

silver, which was taken to the Continent for exchange into gold, which . . . .
Newton later recognized his error and recommended that it be corrected, but
this latter advice was not followed!/.

1/

This is the story as told by George F. Warren and Frank A. Pearson in their
PRICES, New York, 1933» P* 159.




-

2

-

A century passes and England is once again involved in war with her
old enemy, France; this time under Napoleon.

She abandons redemption of the

currency but decides to resume convertibility after the war.

The mint, of

course, had very little silver to coin and Lord Liverpool decided to close it
to the free coinage of silver because England was "naturally a gold country"
and that "gold was the natural currency of England."

And, indeed, it was if

one admits, as he should, that it is only "natural" for even a Sir Isaac to
make a mistake and for this mistake to have "natural" consequences.
It is irrelevant but tempting to speculate what might have happened
if Sir Isaac had made a mistake in the other direction, say by adopting a ratio
of 15 to 1.

England might well have become "naturally a silver country."

With

the role that sterling acquired on the basis of English leadership in industry
and commerce throughout the world, who knows, the world might naturally have
been on the silver standard.
These are irreverent conjectures.
some fictional natural history.

Still, the faithful have propagated

One gains an impression that the gold standard

existed for centuries without interruption.

Yet it has not existed in modern

times for as long as a century, though England almost made it from 1822 to 191^*
My own view is that England arrived on the gold standard because of a
mistake by Sir Isaac Newton in 1696. The gold

standard survived the nineteenth

century only because of the miracles of new gold discoveries in the 18^0* s and
1890's.

Finally, when one sees the incredibly small amount of gold frequently

held by the Bank of England, he is forced to conclude it was not a selfregulating system but was in fact maintained through management by the Bank
of England.

Thus, a mistake, miracles, and management describe the System more

accurately than does a mystical natural providence.
Do not misunderstand me.




I think that on balance an international

-

monetary system —
of exchange —

3

-

essentially this means a system of relatively fixed rates

is preferable to a system of national currencies with freely

fluctuating rates, despite its presumed intellectual attractions.
An international system, however, requires genuine international
cooperation on the part of the members based on rational economic principles.
Such a system should indeed put pressure on a member which has an unfavorable
balance of payments because it has pursued policies of over-full employment
and inflation.

It should not, however, put pressure on a member that has an

unfavorable balance of payments despite significant unemployment and stable
or even falling prices.
As you know, negotiations are now in process to reform and supple­
ment the international monetary system.
operating in a crisis atmosphere.




Fortunately, we are not at the moment