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TIGHT MONEY M D IT3 COMMERCIAL BANKING IMPLICATIONS Panel Discussion before the Philadelphia Chapter, Robert Morris Associates KARL R. BOPP - Vice President, Federal Reserve Bank of Philadelphia WM. R. K. MITCHELL - Chairman of Board, Provident Trust Co. of Philadelphia Member Federal Advisory Council (rep. 3rd F.R. District) WILLIAM F. KELLY - President, First Pennsylvania Banking & Trust Company The Barclay Hotel, Philadelphia, Pa. October 4-, 1956 - 6:15 p. m. Karl R. Bopp Introduction N.S.F. - Not you - us! What I have been asked to do: I. (1) Give a background on development of tight money (2) Since Bill Mitchell and Bill Kelly preferred answering questions to giving talks, to ask appropriate questions of them - handed in (3) Clay Anderson before A.I.B. will give statistical presentation. I shall use precious few figures. If in banking 20 years, have heard of tight money only in the past 4 years on 2 occasions: 1952 - 1953 1955 - date A. Why not in preceding 15-16 years? 1. 2. B. From revaluation to World War II Inflow of gold f supply Government, business & individual little demand World War II - March J+, 1951 Era of the pegs DidnH hear of tight money - but of inflation! The Accord and its meaning No longer tolerate inflation Direct monetary policy toward ftill employment of resources at stable prices, i.e. lean against the wind - 2 - C. An over-all program Effective demand = flow of goods and services at current average price level In a flexible economy with great freedom by consumer to spend for one thing or another, a profit - and loss ~ economy cannot thru monetary policy build a floor under demand for every product e.g. automobiles without inflation elsewhere Monetary policy can*t do the whole job • D. The real test of whether credit is too tight is are we using our resources fully at stable prices? Employment release for September Price Indexes E. II. The future: What will be true next May-June? Should fear of that close our eyes to what is going on now? Bi-weekly meetings of F.O.M.C. Money supply for economic growth A . Perspective 60 million In 184-3 Aggregate deposits in U.S. 60 billion 194-3 Demand deposits adj. End of July 1956 107 billion By 19[66 substantially higher still but how we get there in detail from day-to-day is another question; also from area to area! B . Recent developments About 3% a year BUT not every year Greater in 1954Less in 1955 Still less in 1956 Why? Briefly, more efficient use of money-velocity Corporate investment policy Implications for future cycles and money supply III. Philadelphia has hiiit mi id* rerss balance Regional changes - Why is Philadelphia hit especially hard? A. Expectation of normal national growth in deposits B. Expectation of sharing normally in that growth C. Expectation of normal growth in credit demands D. In 1954 actively seeking new accounts Opportunity to acquire national customers E. Where funds have come from Larger liquidation of investments Larger borrowings QUESTIONS SENT IN IN ADVANCE For M r . Bopp: What factors are responsible for the present tightness of money? To what extent and in what ways has the Federal Reserve System influenced the situation? What are the objectives of Federal Reserve monetary and credit policies? What has been the relative impact of tight money on commercial banks in the Philadelphia Federal Reserve District compared with banks in the other Districts, and what factors have been respon sible for the difference? Has the relative position of the banks in the Third District been changing recently for better or worse? Wage rates have been rising more or less steadily since World War II, without an accompanying equivalent rise, in the aggregate, in the productivity of labor. This certainly appears to be an inflationary trend and one, which if continued over a period of years would seem to present a real dilemma to the Federal Reserve System authorities in their efforts to combat inflation through control of the money supply. Mounting wage costs have served to stimulate the demand for more labor-saving machinery and for funds with which to finance same. Are higher interest rates going to effectively deter business men from borrowing for such purposes? There is a vast segment of the money supply in this country which the Federal Reserve System has very little control of, namely, the savings and loan business, the savings banks, the insurance com panies, pension funds and labor union funds. Both of these sources might be said to supply long-term capital needs rather than short term. If these two premises are correct, generally speaking, then how can the system effectively control inflationary trends, long range, in our economy? For Mr. Mitchell: What factors should influence a bank's decision regarding tax switches in its bond portfolio? Will you comment on the basic principles which should motivate bank portfolio management during the present tight money period? Is this a good time to extend bond maturities in view of the present levels of bond prices? Should a commercial bank liquidate short, intermediate or long-term securities linder present circumstances to provide funds to lend to its customers? As a commercial banker, what is your view of Federal Reserve monetary and credit policies and their implementation during the recent past with respect to their effectiveness in achieving their objectives? F o r Mr . Kelly: More attention has been focussed recently upon the subject of compensating deposit balances. What constitutes a proper rela tionship between credit lines and deposit balances in the case of different types of borrowers, and how can the bank's require ments best be sold to customers? To what extent should the continuing rise in the operating costs influence interest rates? In the matter of loan interest rates, is it proper to charge all that the traffic will bear, recognizing that borrowers will give expression to their bargaining power when credit and money rates ease? Will you comment on some of the customer and public relations aspects of credit rationing? What general principles should be observed in the rationing of credit during a period of tight money?
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