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ROLE OF FEDERAL RESERVE SYSTEM IN CURRENT SITUATION

by
Karl R. Bopp, Vice President
Federal Reserve Bank of Philadelphia
before
ECONOMICS WORKSHOP
School District of Philadelphia
Federal Reserve Bank of Philadelphia
December 18, 1951

Introduction
A.

No gyroscope - no communion with burning bush
I have personal judgments; but I shall not try to create straw man.

B.

You will hear of Federal Reserve System via Patman Inquiry

C.

The Congressional inquiry as a by-product of our
governmental system

Middle

1907-10
1913
1921
1920's
1930's
1935
1938
1940's
I94 - 5
. O
9
1951-52

National Monetary Commission
Establishment of Federal Reserve System
Joint Commission of Agricultural Inquiry
Stabilization and brokers' loans
Operation of banking systems
Banking Act of 1935
Government ownership of F. R. Banks
Inflation control - economic stabilization credit policies
Douglas inquiry and report
Patman inquiry

Perhaps 15-20 lineal feet specifically on F.R. System
Schools study - influence the future
Through all these hearings ve have learned

I.

Nature of a purposeful monetary policy is well known and easily described
Alternate restraint, neutrality, ease




- 2 -

II. Why then have we had inflation?
A.

Financing the war - expand total output and
squeeze the private sector
1.

Total

|378 billion

a.

Taxes

40/6 -

why not all?

2^

b.

Nonbank

35% -

'why not entire remainder?

x as high

Commercial banks
$72 billion
Federal Reserve Banks 22
"
Loans in 1940
20
"
Other securities
8 n
■c.
2.

25%

Bank

Direct controls

Price/wage ceilings — > rationing/guesses

a.
b.
B.

Repress evidences of inflation

Removal of direct controls
1.

C.

Equitable distribution of available supplies

Open inflation

Conflicts over monetary policy
- arose over dealing with Government debt
of $250 billion - 6
o£ of all debt




1.

Principles
a.

Role and functioning of debt - analogy with iron
(1)

b.

Cast iron - hard but rigid, fragile

(2)

Wrought iron - tough and malleable

Role of monetary policy - analogy with brake on car
(1)
(2)

c.

Pressure would lock brake
Pressure would reduce speed

Cost
(1)

(2)

2.

Cost of debt
Cost of total Government operations,
including debt

Application of principles
a.

Differences in view as to economic prospects

3 . Chief principals in the conflict
a.

Treasury

b.

Federal Reserve
Not a new conflict (see attachment)

-

4.

3 -

Results of conflict
a.

Until Korean invasion
(1)

Compromise

(2)

Douglas Report &
Washington Birthday speech

(3)

Conflict breaks into open

After invasion of Korea
(i)
(2)

Government to rely on indirect controls

(3)

Prices no longer pegged along the whole range

Inflation clearly the danger

III. The basic issues that arise - The Patman Inquiry
Introduction:
1.

Not exclusively - not even primarily - economic,

but political, social, and cultural as well
2.

Perhaps that is the nature of all human problems
Each problem may be taken as a microscopic
CORE CURRICULDM or RESOURCE UNIT

A. The role of monetary policy; how implement
1. Indirect general instruments supplemented
by a few selective instruments
or
2. Basic reliance on selective instruments
including direct rationing
or
Direct controls
B. Relation of central bank to Government
- essentially a political problem
Would you permit
your opponent to have?

1. Issue is not independence vs. subservience
but responsibility to the legislature or to
the executive
Banking Act 1933
1935

C. Organization of Federal Reserve System
efficiently accomplishing the wrong
thing




Centralized, efficient - but dictatorial
2.

or
(Present) Decentralized, cumbersome - but democratic
Wave flag a bit
but you are warned

Footnote in K. R. Bopp's

"Central Banking at the Crossroads"

29)
Except possibly for quaintness of expression the following
quotations describe wartime conditions in other countries and
at other times as well as those in England during the Restriction
periods Parliamentary Papers. 1819. Vol. III. Vansittart
usually addressed the Governor and Deputy Governor somewhat as
follows: "I beg leave to acquaint you, that it will be an
Accommodation to the Public Service, if your Court will consent
to exchange the Exchequer Bills dated . . . for a like Amount to
be dated . . . I request therefore you will have the goodness to
move your Court to consent to such Exchange accordingly." In the
case of purchases (as contrasted with exchange) of bills, it was
a "great Accommodation to the Public Service" or even a "very
great Accommodation." Ordinarily the Court resolved to comply
with the Chancellor's letters. Not infrequently, however, they
imposed conditions, especially concerning repayment. For example,
the Bank became increasingly concerned in 1814* They had agreed
to purchase 8 million from May 5 to June 9. They agreed to a fur­
ther purchase of 2 million on June 16 "on account of the urgent
Necessity of Government, under the peculiar Circumstances of the
Moment, and also that so large a Portion of the said Advances is
settled to be paid off out of the Instalment of the present Loan."
Three weeks later they agreed to purchase another 2 million. "But
the chairs to acquaint the First Lord of the Treasury and the
Chancellor of the Exchequer, that the Court cannot grant any fur­
ther Advances; and expect such Arrangements may be made as shall
tend to a very considerable Reduction of the present enormous
Amount of these Advances." Nevertheless, the request of July 28
for yet another 2 million "was Reluctantly complied with, under
the Assurance that every Endeavour will be made to bring the
Advances of the Court within reasonable Bounds as soon as possible.