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Discussion on OBJECTIVES OF MONETARY POLICY by KARL R. BOPP before the FOURTH MEETING OF TECHNICIANS OF CENTRAL BANKS OF THE AMERICAN CONTINENT ^ew York City, May 11, 1954 -a- * * * * * Appreciate opportunity to discuss objectives of policy. All papers and discussants agree it should be to promote stable economic progress. But this tern is too vague to be a useful guide to operations. I find four meanings attached to it in the papers. It seems to me we are a bit too sanguine and optimistic in our belief that there is no conflict between them. Expand Contract Gold standard (stable exchange rate) Reserves large, rising Reserves declining Deflationary Productive credit (real bills doctrine) $ volume of business up Monetary volume of business down S elf-inflammatory Stable prices When prices down Prices up Full employment When unemployment Over full employment Inflationary Fixed rate of interest |low, stable) When savings are inadequate When savings are excessive — S elf-inflammatory I C o nflict in la s t fifte e n months. Lost$Lj b illio n of gold - Contract? Prices stable at wholesale and retail - No change. Unemployment up 1.8 to 3.7 million - Expand? Role of major countries, especially United States of America. - 2 I study history to gain perspective. We are tempted to believe our problems are entirely new problems - they aren't. We are apt to forget that the pressing problem of today is (a) the opposite of the pressing problem of yesterday BUT that it is essentially (b) the same problem as that of day before yesterday. Alternatives of prosperity and depression! Surely we can gain something - a little bit at least - by taking a longer view. I am one of that rate breed of college graduates who never took a single formal course in the History Department! Why not? But I have a great respect for experience - more than many professional students of history. So I am an amateur - in history - and for that matter - in central banking too. Responsible vs. observer - technician! I am much more conscious of my ignorance than of my knowledge yet I have convictions. Before I am finished you may say I am a reactionary. Well, maybe I am - at present. But 20 years ago I was considered a revolutionary true of many. But 20 - 10 - 30 years from now I will again be considered a revolutionary. A Bit of History Before the First World War the great fear was of inflation A. Fear based on experience Bank rate up 1 per cent; down § per cent (periodic debasements of the currency) 1. John Law early in 18th Century 2. Assignats late in 18th Century 3. The "Continentals" of American colonies Napoleonic inflation in England and France B. A belief based on "natural law" Depressions are God’s way of punishing men for failure to observe natural law - which meant convertibility C. Economic progress came as a surprise - continuing fear that it wasn’t real - and could not be maintained Pride in actual progress - not dissatisfaction that it was not more rapid - A PATIENCE THAT WE HAVE LOST* D. Diverse developments (later forgotten) after the Franco-Prussian War in 1. France and in Germany (or the U.S.A.) Low - stable rates and stagnation 2. High - variable rates and exhuberant prosperity Why? a. In part, natural resources b. More important, character (1) France admitted defeat - fear even victory in First World War led to Maginot Line (2) Germany even defeat in First World War did not destroy FAITH THE JOB COULD BE DONE AND IT INVOLVED SACRIFICE 3. Suggested limits to monetary policy Not merely that infant grows faster at faster rate*. He outstrips his father and continues to grow. - II. u - The 1920's in the U.S.A. We forgot these limits We talked of a new era - monetait, policy the panacea III. The Great Depression Vast, unused human and material resources Fiscal policy, starting as a supplement, eventually supplants monetary policy altogether Instead of natural law Man is the master of his fate - money is merely a servant true - but you remember Paul Dukas the Sorcerer1s Apprentice? IV. The Second World War and its aftermath A. Inflation - in varying degrees - but with a vengeance I Direct controls and their distortions which submerged the appearance You can't make money your servant by decree but only by treating it as a servant'. If you do not behave as a master, your servant may blackmail - or prosecute you! The curious recurrence of the contrast between France and Western Germany! V. Beneath the monetary facade there is a real economic problem How to use LIMITED resources to satisfy UNLIMITED wants and desires In the main, central banks will contribute most if they concentrate on MAXIMIZING OUTPUT OF REAL RESOURCES- including voluntary leisure! and leave to others the problem of distribution As one takes this view, Maximizing current standards of living and Maximizing the rate of economic development are brought in their true focus as 0OMPETITIVE or ALTERNATIVE ^ of resources 55555 - 5 - If we insist on trying to accomplish both via monetary policy, we shall end up with inflation - which falls far short of achieving the "best" combination - however defined. Fallacy of productive credit idea - motors VI. for refrigerators Stable prices have been at wholesale cost Full employment increased from 1.8 to 3.7 million Gold standard we lost $lj billion in last 16 months A final reason for studying our forefathers A. Without such study, we tend to react against everything we did before because we now consider the over-all effect bad B. A study of history reveals that our forebears were not all bad or all of ill will - IF IT DID, - are we prepared to face our historians? - or do we believe we exclusively commune with the BURNING BUSH? BUT don't take my word - take your own! There is high authority which says I am stupidl We cannot in any event DELIVER the millenium overnight. Let us not promise itI We may lose our bodies - TEMPORARILY but we shall retain our SOULS and regain our bodies - in DUE COURSE But how much is too much? Remember FRANCE and GERMANY But be RIGHT!
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