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Member, Board of Governors
of the
Federal Reserve System,
Washington, D« C.

l,Before the
of the


Conrad-Hilton nu ^ Hotel.
Chicago, Illinois

11:00 A.M. CST
September 27, 19$k.

For Release at time of Delivery


I saw many of you at the Texas Mortgage Bankers convention in

Uas on May 7, 1953.

Let me, please, take advantage of this opportunity

talk about developments since that time.
At that time it appeared and I said that, on the basis of first
Quarter results, "the total number of new houses built in 1953 may not be
far different from either 1951 or 1952, which despite many restrictions
V ere


both excellent construction years."
As it turned out, the number was 1,101;,000, or 13,000 more houses

than in 1951


23,000 less than in 1952.

It now appears that the number

new houses built in 195U will surpass the 1952 mark, if the pace of the
eight months is maintained.
The record-making performance of the economic area in which you

^ ave a particular interest, real estate and building, has done much to

^ange the course of the economy from decline to over-all stability in the

•Ust Sj_x month3



Without in any way minimizing the earlier decline,


ggesting that stability at the present level is good enough, it is

^°ssible to say that the ability which our economy has shown in recent
"kftths to adjust to and moderate forces of change should give us great hope

the economic future of our nation.
In a cyclical economy like ours, however, the need to adjust to


§ing situations is a continuing one, and our ability to make the necesadjustments is always being tested.

One of the important instruments

f 0 Y>
Achieving sustainable economic growth over the years with a minimum of

tuation, and one which has been significant in the recent short-term re-

Juatment, is monetary and credit policy.

I am sure you are all aware of

-2the influence such policy has had and will probably continue to have on
Mortgage markets.

you don't mind, recent Federal Reserve policy in the monetary and credit



In my remarks today I should like to review with you,

and attempt a tentative evaluation of its influence and effectiveness,

dispassionately and as objectively as I know how.
you too j . c . Please try to stay with me.


it agairst you.

I hope my effort won't

If you can't, I'll not

Ix, has none of the warm oratorical appeal, to say the


Part of the effectiveness of Federal Reserve policy is the facility


-th which it can be adapted to changing circumstances, as is evidenced by



events of the past couple of years.

During late 1952 and early 1953,


entories were rising, capital outlays were being made on a large scale,


rising speculative interest was being manifested in many markets.


f o m e n t s constituted a threat to our objectives of long-term stability


Accordingly, Federal Reserve policy was directed toward exer-

t i n g restraint upon inflationary developments as well as keeping the

ttply of credit and money adjusted to the needs of a growing economy.


Notice, this meant permitting some expansion in bank credit and the money

Pply, but limiting the degree of expansion in view of the large excess of

^ a n d for credit over the available supply of savings.
neither stopped nor thrown into reverse.

The credit machine

It was simply held within a


Peed limit determined by considerations of safety, including the crowded
of the highway at the time.
In so far as savings provided banks with the necessary reserves,
could expand loans freely.

In so far as the banks had to sell securities

" h Federal Reserve or borrow from it to obtain the necessary additional

-3feserves, the story was different.

To prevent unlimited expansion of bank

credit, the Federal Reserve refrained from open market purchases that would
have supplied the necessary reserves.

Member banks still had the privilege

°f borrowing from their Reserve Banks, of course.

But as the monthly average

their borrowing mounted in late 19^2 and early 1953 to a range of one to
°ne-and-a-half billion dollars, the discount rate was increased from 1- 3/U
to 2 per cent.

The traditional reluctance of banks to borrow was fortified

y the higher rate.

Their resort to this method of temporary acquisition of

additional reserves consequently was lessened.

So was their extension of


These developments on the side of credit supply seemed to do no
^cre to diminish credit demand than storm warnings did to diminish the force
the hurricane that recently struck New England.

The rise of interest rates

Under this pressure seemed in itself to impel borrox-jers to rush into the
Market seeking to cover future financing requirements before the cost rose
You will recall, I am sure, some of the incidents of that period:

e breaking under par by the new 3-l/U per cent long-term Treasury bond,
the sharp reaction that followed in the price of seasoned issues of

corporate and municipal securities; the increasing difficulty of getting new
^rtgage commitments, the increasing availability of outstanding mortgages

rather large discounts, and the issuance of regulations raising the rates

° n FHA and VA mortgages.
It was at about this time that it became apparent that the Federal
cash deficit would be larger than had earlier been expected and that the
Treasury would be a heavy borrower during the remainder of the year. An


surance that this additional Treasury borrowing would not be allowed to


educe the supply of credit available for other borrowers was quickly pro-

v e d by the Federal Reserve's embarking upon substantial open market purchases
of U. S. Government securities*

From Me.y 7—the Dallas convention

e I mentioned earlier—through July 8 the Federal Reserve supplied about


billion dollars of reserves to banks by these operations.

These funds

tabled member banks to pay off a substantial portion of their borrowing at
ftfcserve Banks, and for the month of June excess reserves of member banks
their borrowing at the Reserve Banks by nearly hOO million dollars.
'^Us credit conditions began to be eased at a time that was later to be

'°VGd strategic from an economic standpoint, though those who chose to


Ucize the Federal Reserve's action as being inflationary could, and did,


ck up their arguments with data showing production, employment, and incomes
still at or close to record levels.
Those data did not control Federal Reserve actions, but I must


it, in justice to our critics at that time, that the data carried enough


ight with us to induce more caution than we would show now if we were


through the period again but aided this time by hindsight.
For instance, the data obviously had an effect upon the decision


the Federal Open Market Committee at its meeting on June 11, 1953. Despite

( ^eloping doubts in the Committee about the strength of underlying business
Editions, the directions it gave its Executive Committee for operations

d at "avoiding deflationary tendencies" were tempered by a caution against


Hcouraging a renewal of inflationary tendencies."
That action, with the various other steps in the transition to a
of active credit ease, is set out frankly in the official policy record



the Open Market Conimittee as published in the Federal Reserve Board's

Annual Report for 1953.
As the record further shows, on the following September 2k, the
Open Market Committee, influenced by softening tendencies in various sectors

the economy, revised its instructions to the Executive Committee.



ference to avoiding a renewal of inflationary developments was deleted,

having an unqualified instruction to operate with a view "to avoiding
^flationary tendencies."

This implied that a more active policy of supply-

S reserves was to be followed.
During the last quarter of 1953, the decline in economic conditions


°Ugh moderate, became unmistakable.

The December 15 directive of the Open

^rket Committee to the Executive Committee, therefore, was to operate with

Hew "to promoting growth and stability in the economy by actively maintain


g a condition of ease in the money market."
In accordance with those general policy objectives, the Board of


°vernors of the Federal Reserve System and the Open Market Committee took

several specific actions to contribute to active ease in financial markets.
1 f

eel compelled to recite them even at the risk of boring you.
(1) A reduction in reserve requirements, effective in July 1953,
Prevent an undue tightening of credit from developing out of a convergence


seasonally expanding private demands for credit, and substantial financing
^ the Treasury to meet immediate needs.


freed an estimated 1.2

"^lion dollars of reserve funds.
(2) Open market operations.

This sphere provided a graphic demon-


*ation of flexible operations in execution of a policy of keeping reserves

high but stable level under varying conditions. Open market purchases

-6s^pplied, between mid-August 1953 and the end of the year, 1.5 billion of

However, part of these purchases were temporary, to meet the usual

year-end tightness in the money market.

For instance, 600 million dollars of


curities were acquired near the close of the year from dealers, with agree-

ments by the dealers to repurchase the securities after the turn of the year.

contrast, during the early months of 19$k the System sold another 700
on dollars of Government securities in the market in order to absorb

Reserves which usually accumulate during that season of the year.

Back on

^e other side, open market purchases were resumed in May and June this year
in order to maintain a condition of ease in credit and capital markets.

^ill later, sales were again made following a further reduction in reserve


luirements this past summer, providing an example of close coordination
the federal Reserve's reserve requirement and open market powers, first,
release a large amount of reserves and assure availability of ample credit,


*> second, to insure against "sloppiness" in


°urse of the release of these funds.

financial markets during the

More recently yet, purchases were

undertaken in early September, as we approached the beginning of the
demands for credit, to keep the volume of excess reserves stable at a
^Sh level.

To be very frank with you, I expressed apprehension within the

and the Open Market Committee about releasing reserves by a reduction
reserve requirements and later absorbing some of these excess reserves
V sales of Government securities in the open market, but this flexible
^°licy i n the use of our monetary and credit instruments has, up to novr at

t, on the whole, it seems to me, worked well —

in the interest of a

level stable economy.
(3) Reduction in discount rates.

Discount rates remained at 2 per

°ent throughout the last half of 1953, but were reduced to 1 - 3 A P e r


January and again to 1-1/2 per cent in April and May of this year.


these changes followed a general lowering of interest rates in the money
Markets and had the effect of restoring the discount rate to a more customary
relationship to market interest rates.

After these reductions, discount

rates were at the level prevailing prior to the Korean outbreak.

Reduction in reserve requirements, July-August 195h»


further reduction in reserve requirements, to which I referred earlier in

°nnection with open market operations, was carefully timed to take effect

° Ve r a period of several weeks.
hilars in reserves.

It released a total of about 1.5 billion

The reduction involved 2 percentage points on demand

^Posits at central reserve city banks; one percentage point on such deposits

reserve city and country banks; and one percentage point on time deposits


all member banks.


These reductions brought requirements to levels at or

ow those prevailing in late 19h9 and 1950.
The reduction in reserve requirements at this time was made in


ticipation of demands on bank reserves during the summer and fall, taking
account Treasury financing needs as well as probable private financing


luirements, including the marketing of crops and the replenishment of

^tail stocks in advance of the fall and Christmas sale seasons.


N a t i o n s in the open market followed, as I sketched them for you above.
Reflecting the foregoing credit actions, bank reserve positions
changed markedly since the spring of 1953.

In April of last year,

^mber bank borrowing from the Reserve Banks averaged about 1 - l A billion
^ l a r s or about 3/li billion more than excess reserves.

In July of this

however, member bank borrowing averaged less than 100 million dollars


2 excess reserves more than 800 million. Free reserves—excess reserves

•^ss borrowing at Reserve Banks—expanded progressively during this period
°m a negative 3/h billion dollars to more than a positive 3 A billion


Having reviewed with you what has been done by the Federal Reserve

the field of credit and monetary policy in the recent past in order to


°Pe with conditions of sharp economic change, I should like to turn now to


ttoredifficult task; namely, that of attempting to appraise the results


uch policies.

Bankers, businessmen, and economists are generally

^ainiliar with the way credit and monetary policies contribute to dampening
and inflationary developments, but they are much less familiar with
they contribute to stability when depression and deflation threatens.
The matter can be clarified, I think, if it is kept in mind that
the^it and monetary policy exerts an influence on economic conditions on both
P and down sides, mainly through its effect on five factors: the volume
of m ne
° y, the cost of borrowing, the availability of credit, capital values,

and + k
i n general liquidity of the economy.

These factors are closely inter-


-^ted but may be discussed separately for purposes of convenience and



following examination of financial developments over the past

to th it-h respect to each of these factors will help clarify judgments as

contribution of recent Federal Reserve policy to economic stability.
The money supply.

Instead of contracting, the volume of money

y the public has expanded over the past eighteen months, though the


•W 4, since the second quarter of last year has been a modest one. Consider.
extent of the decline in over-all business activity since mid-1953,

s in the money supply has been a positive stabilizing force in the



This contrasts with the early stages of a number of previous

business declines, when the money supply contracted, reflecting significant
credit liquidation as a factor of economic recession. At those times, consumers and businesses wanting to maintain their liquidity had to reduce
their expenditures from time to time, cumulatively inducing additional
Eductions in employment and incomes.
Cost of borrowing.

The cost of borrowing has declined sharoly

°Ver the past year and a half, reflecting, besides the actions we have been
discussing, a reduction in demands for funds and a continuing high rate
money saving.

The decline in rates has pervaded the entire credit market,

Meeting all types of paper and securities, although, of course, in varyXn

g degress•

You have all been aware of the changes in nominal rates, in

discounts, and in other terms of mortgage loans.

These declines in interest

*^tes have given a strong incentive for marginal borrowers in all credit

as to raise funds through financial markets.
The declines in interest rates have been as sharp and as wide-

spread as in the comparable phase of any recession since World War I. As

Usual during a period of rapid movement in interest rates, yields on


hort-term securities have experienced the sharpest relative changes.



ag e yield on Treasury bills, for example, dropped almost 70 per cent
mid-1953 through July of this year, and the rates on commercial paper

Alined nearly 50 per cent.

These drops in yields on short-term paper

close to the average for the corresponding phases of other recessions


ce the First World War. Rates charged by banks on short-term business

^°ans reacted more slowly than other short-term rates, but they also declined
^ i n g the first half of 195U.

-10Yields on long-term securities, those used for financing capital
^vestments. have declined somewhat more over the past year than in corres

P° phases of past recessions.

For example, at the end of July yields

long-term U. S. Government securities were down 20 per cent from mid-1953,
^ose on high-grade corporate bonds 15 per cent, and those on high-grade
^icipal securities 23 per cent.
In the mortgage field, where your principal interest lies, the
discounts that prevailed a year ago on U-l/2 per cent Federally insured

guaranteed home mortgages also have largely disappeared.

In addition,


tes on conventional home mortgages seem to be down approximately 1/2 per
from levels prevailing a year ago.
Availability of credit.


Changes in the availability of credit

capital funds, as you can well imagine, are exceedingly difficult, if not

^Possible, to measure objectively.

Suffice it to say that in the spring of

year there were wide-spread reports about the shortage

of many types

financing, with the stringency of funds in the mortgage market particularly

Object to complaint.

easy to arrange.

Few such reports are heard today.

Loan commitments

Mortgage lending on small non-farm properties totaled

° V e r 12 billion dollars in the first 7 months of this year as compared with

kittle over 11 billion in the first 7 months of last year; and new securi-

t:i e3


issued by State and local governments for new capital amounted to about

U b

iUion in the more recent period compared with a little over 3 billion



The volume of corporate security issues for new capital, however,

dropped from about 5 billion to U-l/2 billion over this period, due to
^ U c e d demand for outside funds by certain types of manufacturing corporal s .

-11Gapital values.

These values, in general, have risen since

June of last year. Falling interest rates, in addition to meaning lower
costs for borrowers, affect economic activity in the nation through raising the dollar value of existing assets, particularly long-lived assets.
This comes about because the expected future returns from such assets

re recapitalized at the lower rates of interest.
One example is in the stock market where, for instance, rising

Prices for outstanding investment-type securities have registered the

fluence of falling interest rates as well as other factors.

On the

°ther hand, capital values have apparently not risen recently in the

cal estate area.

Even here, however, the effect of lower interest rates

^ y have been to cushion a decline in values of existing property due to
^e sharply increased supply growing out of the recent high level of
construction activity.
General liquidity.

Higher values of existing assets, as well

the maintenance of the money supply and other highly liquid assets,

^ave tended to maintain the liquidity of business and individuals and
^ake them more willing to spend and invest,

They have also made financial

stitutions more liquid and willing to lend.

Commercial banks, for


Xample, have been able to increase greatly their holdings of short-term


ighly liquid securities as well as to repay a large part of their indebt-


Any attempt at over-all appraisal must take into consideration
following factors:

-12(1) The first, and foremost, difficulty in arriving at any
°ver-all appraisal of the stabilizing effect of recent Federal Reserve
action is that such action is only one of many factors, although an
important one, influencing the general level of economic activity.


success, moreover, is conditioned by various other policies, programs,

*d activities of Government.

To cite only a couple of illustrations,

such built-in stabilizers as unemployment compensation and farm price
supports, for example, have provided important cushions in the current

Tax reductions and public debt operations have also helped

stabilize the economy.
The success of Federal Reserve credit and monetary policy is
also affected by a wide range of private activities and by the changing
^cods and impulses of businesses and the public generally with respect
spending, borrowing, and saving.

The manifold elements affecting

Economic stability will each be influenced in some measure by credit and
^netary policy, but the degree of influence will vary considerably under
different circumstances and the effects from any one element can never
completely isolated and measured.
(2) A second difficulty in appraising recent credit and
^ e t a r y actions is that their full impact cannot be determined for a

siderable period of time. Accordingly, it is too early to appraise


lately the actions of the past year and a half.
(3) Finally, difficult questions of judgment are involved in

as any given current economic situation. At any given time, the

-13economy generally exhibits a mixture of tendencies toward expansion and

An over-all appraisal of the effectiveness of a specific

factor affecting general economic and business conditions, therefore, hinges

a large degree on one's judgment as to where we stand currently in so far


business conditions are concerned.
Basically, of course, the question that one would have to answer


order to appraise the effects of Federal Reserve action with full assur-


e is this:

What would have happened to the general business and economic

situation over the past eighteen months if such actions had been different?

that question, of course, is impossible to resolve.
All in all, however, I think it is fair to say that recent Federal

Reserve actions have been of significant benefit, first, in contributing

restraint of what threatened to be an unstable speculative boom, and,

subsequently, in contributing to the moderation of the business downturn.

the past few years, we have had almost a classical business cycle situation


deal with as we moved through a period of record high activity under a


>stant threat of inflation and went from that into a period of a business


In the earliest phase, credit restraints helped to discourage

speculative excesses, restrain inventory accumulation, damp down undue

*Pansion in capital goods expenditures, and encourage saving.


^ d e r a l Reserve credit actions have helped to encourage business capital
° u U a y s , home construction, and State and local expenditures for construction


other improvements, as is indicated by the sustained if not growing volume
activity in these areas. The pace of these activities is considerably

* f f ected by ready availability of low-cost long-term financing, a condition
recent System policy has had an important part in establishing.

-lliInventory liquidation, moreover, has thus far been orderly, with no material
Pressure arising from financing problems.
Emerging economic developments will need to be scrutinized carefu

U y and continuously in the period ahead,

and Federal Reserve policies

Promptly adjusted as required to contribute to the fullest to the promotion

sustainable economic growth.


One of the major virtues of credit and

°netary policy in a period of readjustment like the present is its


flexibility, permitting quick adjustment to changing trends and the prompt

^option of counterbalancing action to any unstabilizing developments that

^ay arise.