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release to afternoon newspapers
Friday, jferch 16, 1959

Cardinal O'Hara Lecture Remarks

by

M. S. Szymczak

Member, Board of Governors of the Federal Reserve System

C ^ i t y of Notre Dame
6
°ame, Indiana

Monday, 2:30 p.m.
March 16, 1959.

C.S.T,

instruments of monetary policy in the United States
The basic function of the Federal Reserve System is to make possible a flow of credit and money that will foster orderly economic growth
aj

id a stable dollar.

In performing this function the Federal Reserve de-

pends chiefly on its ability to increase or decrease the availability, cost,
an

d volume of bank reserves, which constitute the legally required basis of

bank deposits.

Changes in the reserve position of the commercial banks af-

fect directly the flow of bank credit and money, which in turn are reflected
In

changes in the availability of credit and in interest rates throughout the

entire financial system.
The three principal methods of regulating bank reserves are disccunts for member banks, purchases and sales of government securities in the
°Pen market, and changes in reserve requirements.

Discount policy and open

^rket operations are more flexible and, hence, more adaptable to day-to-day
°hanges in credit and monetary conditions than changes in reserve requirements.
The principal method by x^hich the Federal Reserve System takes the initiative
ln

influencing the flow of credit and money is through open market operations,

" * Periods when restraint is desirable and reserve availability is restricted,
k
k^nks may feel obliged to borrow from the Federal Reserve Banks at the prefixing discount rate in order to meet part of their reserve needs.

In periods

credit ease, purchases by the Federal Reserve of securities have the effect
adding to bank reserves, and thereby enabling banks to reduce their indebtedne

ss with the Federal Reserve Banks.

- 2 -

Sgderal Reserve policy during the recession
In response to the course of economic recession and revival in
^58, the Federal Reserve System employed all the principal instruments
of monetary policy—open market operations, discount rate adjustments, and
changes in member bank reserve requirements0

The policy of credit ease

adopted in the fall of 1957 was continued and extended by a number of actons in the first half of
Open market operations early in the year absorbed a smaller portion than usual of the reserves released by the seasonal return flow of cura c y and decline in demand depositsc

Further easing of member bank reserve

Positions in the spring and early summer was brought about by Federal Reserve
0

Pen market purchases beginning in March and accelerating in May and June,
Complementary action to ease member bank reserve positions was taken

^ late February, when the Federal Reserve reduced reserve requirements•

This

re

duction freed about $500 million in reserves^ and was followed by further

Eductions of similar magnitude in March and April*

Meanwhile the Federal

He
serve lowered the cost of member bank borrowing by a three-step reduction
discount rates in January, March, and April, bringing the rate at all Re~
8ei

*ve Banks to 1-3A per cent*
The effect of these Federal Reserve actions was that, in spite of
^arge increase in bank deposits and considerable loss of reserves through

S°ld outflow, member bank excess reserves grew steadily while member banks
re

duced their borrowings at the Reserve Banks„

From March through July the

^^gin of excess reserves over borrowings averaged about $500 million.

- 3 -

When it became apparent shortly after midyear that the recession's
lo

w point had been passed and that a vigorous recovery was under way,, the

Federal Reserve began to temper the availability of reserve funds.

Seasonal

demands for credit were allowed to tighten member bank reserve positions beginning in August.
In these circumstances, discount rates were increased in AugustSeptember from 1-3A to 2 per cent. A further increase to 2-1/2 per cent
f

°llowed in late October and early November.

Member bank reserve positions

c

°ntinued to tighten moderately.
In the final three months of the year, Federal Reserve open market

pur

chases aided banks in accommodating seasonal demand for credit and cur-

acy.
SUCh

In addition, member banks increased their borrowings at Reserve Banks.

borrowings averaged about #500 million in December, or $50 million higher

than excess reserves,, The reserve status of member banks changed little in
Januar

y 1959, as Federal Reserve open market sales about offset the usual

seasonal influences that tend to increase the availability of reserve funds„
In early March 1959 disccunt rates were raised in a number of Federa

l Reserve Banks from 2-1/2 to 3 per cent to bring discount rates into

c

loser alignment with market rates«
The Federal Reserve made three changes during 1958 in the margin
Quired for the purchase of stock market securities.

In January, in re-

°Ponse to reduced use of stock market credit following the decline in stock
Prices in the early fall of 1957* the required margin was reduced from 70 to
Per cent. Following a rapid rise in the amount of stock market credit in

-

k

-

spring and early summer, which was accompanied by substantial increases
in stock prices and the volume of trading, margin requirements were
restored to 70 per cent in early August,

The volume of credit contin-

ued to rise, however, and in mid-October the margin requirement was
further increased to 90 per cent*
The Board is considering possible amendments to its margin
regulations—Regulation T that applies to brokers and dealers and Regulation U that applies to banks.

On March 13 the Board filed those pro-

Posed amendments with the Federal Register for publication and comments,,
The proposed amendments would further restrict withdrawals and substitutions of cash and collateral under both regulations in so-called
"restricted" accounts, that is, accounts in which more credit is outlanding on securities than would be permitted in a new purchase of
"those securities under current margin requirements»

The proposed amend-

ments would also make a number of other changes in Regulation U, the
re

gulation applicable to banks, in order to increase the effectiveness
that regulation.

Any comments on the proposed amendments are to be

submitted by April 6, 1959.

- 5 -

The outflow of gold and the drop in U, S 0 exports
In recent months there has been a good deal of comment in the
domestic and in the international press about the significance of the large
outflow of gold and the sharp fall in U. S„ exports in 1958„

The more sen-

sational commentators have purported to see in the first of these developments a flight from the dollar and in the second proof of the loss of competitiveness of U0 So products on world markets®

In fact, neither of

these allegations can be seriously maintained in the light of the evidence.
During 1958, when there was an outflow of $2<>3 billion in gold,
foreigners had sufficient confidence in the dollar to increase their liquid
dollar holdings in this country by $1 billion net.

Instead of running away

from the dollar by converting their existing balances into gold, foreign
countries simply took a good part of the increases in their official foreign
exchange reserves in the form of gold—a customary practice for many European countries who like to keep most of their reserves in gold,, The real
reasons for the outflow of gold must then be sought in the changes in our
international payments positions which led us to pay out substantially
m

°re dollars than we took ine
First, during the 1957-58 recession U 0 o 0 exports fell by almost
per cent while imports were sustained, in part, by high levels of con-

- 6 -

sumer expenditures in the U„ S„

The reasons for the fall in exports will

discussed shortly < but the result of this development was to keep for,
ei

gn earnings of dollars at high levels while reducing our earnings from

ab

*'oad„
Second,, U 0 S„ capital exports in the form of U 0 S e purchases o f
.

foreign securities^ U Q S„ private loans abroad and direct investment by
African firms in foreign countries remained at high levels during the reCe

ssion„

To a great extent growing U„ SQ foreign investment abroad reflects

^ e success of our postwar policy of rebuilding confidence in the free world
trade and payments mechanism,, U0 S„ capital is attracted by high rates of
r

eturn abroad,, including interest rates generally higher than at home0

The

° utf low of Uo So private capital in 1958 was actually higher than our loss
gold so that in one sense it might be said that as a nation we exchanged
£°ld for ownership of profitable investments abroad„
Third-, U„ S 0 Government loans and grants to foreign countries refined at high levels during 1958<> thus contributing to our net payments
sb.roado

This foreign aid is5 of course., an important aspect of our policy

building a free international economy which is strong both economically
militarily„

In addition., a large part of our aid program is directly

c

°hnected with the export of Uo S„ products abroad; indeed., in the case of
surplus agricultural products sold for foreign currencies the aid is in

^ e form of the exports of such products,.
What of the contention that UQ S 0 exports are no longer competitive? An examination of the facts indicates that the decline in demand was

- 7 ^ large part related to the falling off of investment activity especially
a

decline in the rate of inventory accumulation in Europe even before our

0Wn

recession and to declining incomes of raw material producing countries.

Some two-thirds of the decline in our exports was in the field of raw materials and semimanufactures, which are highly sensitive to cyclical forces®
During the boom period from 1955 to 1957 foreign countries had built up
•Wge inventories of raw cotton, coal, and metals.

Furthermore, our ex-

Ports, particularly of oil, had expanded abnormally as a result of the
Suez

Ja

crisis, and of over importing by countries such as France, India, and

Pan#

Was

While our exports of manufactured products fell during 1958 this too
Part related to reduced purchasing power in some of our markets. The

growth of u. S. exports of manufactured products since 1955 has not been out
line with that of other countries except perhaps Germany, Italjj and Japan,
w

hich started from very low levels and are only now regaining their prewar

P°sitions.

In the past several years industrial prices have not risen sig-

ni

ficantly more here than in other major countries.
It is nevertheless essential to recognize that changing competi-

tiy
e

relationships over time for individual products are bound to make us

Relatively more efficient in some kinds of production and less so in others0
While it can be said with some assurance that there is little eviC en e

* ° "that we are at present pricing ourselves out of world markets in any

general sense it is necessary to recognize that the physical and financial
ec
overy
countries and Japan has made them more competitivg •r\f of Western European inflation at home would have serious consequences
ut course, excessive

both for our external as well as our internal stability.

In a world of con-

vertible currencies we can no longer count on other countries inflating more
than we do and thus shielding cur balance of payments from the consequences
of our failure to adopt responsible monetary and fiscal policies.
Finally, it should be noted that our competitive position can
only be fully tested where restrictions do not prohibit competition.

There

is little excuse any longer for the maintenance in any country of discrimination against dollar goods.

By the same token a freer system of world trade

and payments can only be achieved if the U. S., the largest supplier of
international means of payments in the world, resists protectionist pressures
and continues to demonstrate its adherence to liberal trade policies•