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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.