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M, S. Szymczak
Member, Board of Governors
of the
Federal Reserve System

of the

Burlington Hotel,
Washington, D. 0.

February 7, 1958.

For release to the afternoon newspapers.

Money and the supply of money are of vital interest to
everybody, in one fashion or another,
Relatively few people, however, go beyond that.

In other

words, generally speaking, people don't realize that money includes
not only currency but demand deposits (checking accounts), since both
currency and checks are used in making payment for goods and services.
It is evident that there must be an appropriate relationship
between goods and services, on the one hand, and money, on the other

if there is too much money in relation to goods and services

available, money will tend to bid up pricesj on the other hand, if
"there isn't enough money in relation to available goods and services

j putting it in reverse, if the flow of goods and services exceeds

^ e flow of money, business activity will tend doxvnward.

As the

demand for further production of goods and services falls off, unemployment will develop and unutilized capacity appears.
It is also evident that the economic situation is never quite

simple as this.
As a matter of fact, it is difficult, if not impossible, to

know exactly and precisely how much money the economy must have in a
given period in order not only to maintain economic stability at a
kigh level of production and employment, but also to allow sufficient
^oney supply to provide for the economic growth of our country.


we must be content with an informed "feel" of the needs of the

onomy for money.


The purpose of monetary policy is to add to or take away
from the money supply, or, frequently, to stabilize the money supply

a given economic situation, always allowing, of course, for the

Necessary means of payment for a growing economy.
Our economy is free, dynamic, competitive, and complex,
is very seldom, indeed, that all sectors of our economy wove in
°ne direction, either up or down.

Generally some sectors of the

economy are remaining stable, others are moving downward, and still
other sectors are moving upward.

It is, therefore, the purpose of

Monetary authorities to judge whether, on balance, the economy is
tending to move upward or downward.
This can be accomplished only by means of statistical and
economic information, and an interpretation of the effect produced by
some sectors of the economy upon other sectors of the economy.


Reason for this is that judgment must be formulated in sufficient
time to that monetary policy can contribute to, rather than hinder
t^e development of sustainable economic growth.

In this connection,

tue rate of turnover of the existing money is an important element

the formulation of policy.

This means the use that the existing

money i 3 being put to.
The amount of money in the economy is generally dependent
the volume of loans and investments made by banks.

ry policy is basically credit policy.

Hence, mone-


The means by which the money supply and credit are affected
varies among different countries.
general monetary instruments,

In the United States, we have three

The first is reserve requirements—the

amount of deposits that are frozen as a required reserve and, therefore, cannot be loaned or invested.
The second instrument is open market operations, which means
essentially purchases and sales of U. S, Government securities in the
open market by the Federal Reserve System.

As securities are pur-

chased, the Federal Reserve pays someone for these securities, and
that money is deposited in a bank.

That much money is added to bank

reserves and becomes the base for an expanded money supply because
the money comes not from another bank but from the Federal Reserve

If the Federal Reserve System reverses the operation and

sells securities, someone has to pay for these securities.


Money is deposited in the Federal Reserve System and, therefore,
taken out of the banking system of our country,

The money supply

tends to be reduced by a multiple amount of this transaction.
The third general instrument of monetary policy is "discounts and advances," and discount rates*

When banks, borrow from

the Federal Reserve System, they obtain a temporary use of Federal
Reserve dollars and thus add to their reserves and the money supply
until they pay off their debt with the Federal Reserve System.
count rates are the price at which, this money is borrowed.


In other

"wordsy it is the cost of borrowing money at the Federal Reserve

System by the banking system.

I use the term "borrow" because most

°f the "discounts and advances" today are advances and not discounts,
and. an advance is borrowings
The two instruments that receive most public notice through
the press whenever a change is announced by the Federal Reserve System
are "reserve requirements" and "discount rates."
tions receive very little public notice.

Open market opera-

Only those who know where to

find, and how to read, the Federal Reserve statement published in the
Press will know whether the Federal Reserve has added to, or reduced,
its holdings of Government securities and, therefore, will know
^nether on balance we have added to or taken away from bank reserves
and the money supply through this channel.
The Federal Reserve has another monetary instrument which
is not general but selective.

It relates to the use of credit in the

stock market—for the purpose of buying or holding securities.


^strument is called margin requirements and the Board of Governors
Has been given the responsibility by Congress to increase or decrease
the amount of credit that can be used for this purpose.

The Board

has a regulation through which it affects such credit extended by
brokers and dealers and another regulation through which it affects
the amount of such credit extended by banks.
These three general instruments and, to a much lesser extent, the one selective instrument are the means by which the System
influences the supply, the availability, and cost of credit and



They are used differently at various times, depending upon

"the given situation.
Since 1953, the System has operated, first, to add to bank
reserves and the money supply and then, in 1 9 %
1957, to apply credit restraint.

1956, and most of

In the opinion of the System the

economy in the period 1955-57 moved very fast on the up side and,
therefore, money and credit had to be restrained from adding to the
inflationary potential.
Since mid-October, on the other hand, the System has supn
plied reserves to the banks through open market operations by buying
Government securities; has reduced its discount rates from 3-1/2 per
cent to 2-3/h

per cent; and has reduced margin requirements from 70

Per cent to 50 per cent.
There has been considerable talking and writing about a
reduction in reserve requirements.

The American Bankers Association

has recently given much public notice to its plan for a legal change
in reserve requirements.

The proposal calls for a reduction of all

member bank reserve requirements over the next several years to a
level of 10 per cent on demand deposits and 2 per cent on time
deposits, with Federal Reserve authority to vary the demand deposit
requirement betx^een 8 per cent and 12 per cent.
also be counted as reserve.

Vault cash would


This new p].an compares with the present requirements of
5 per cent on time deposits at all member banks, and on demand deposits 20 per cent, 18 per cent, and 12 per cent respectively at
central reserve city (i.e., New York and Chicago), reserve city,
and so-called "country" member banks.

Agitation has been especially

great to remove the present disparity between reserve requirements
in New York and Chicago and in reserve cities.
The economic situation is of concern to everybody—especially at this time.

Industrial production fell by 6 per cent between

August and December, and has probably continued downward since that

About 3-1/2 million were unemployed in December, which repre-

sents a million more than a year earlier.

There is clearly con-

siderable excess capacity in many sectors of our economy.
Economists differ as to what this means; some say that this
situation will get worse; others say that it is purely temporary and
soon will get better.

Whatever happens in the future, the situation

is of immediate concern to the Federal Reserve System and, accordingly,
the Federal Reserve System has been easing the credit situation for
some time now.
While timing of monetary policy is important, flexibility
°f monetary policy is, likewise, important.

The Federal Reserve

System must be ready at all times to move in either direction at any
given time, depending upon its interpretation of the current economic


Fiscal policy—Government expenditures, taxes and the
management of the public debt—are also very important to economic
stability at a high level of production and employment.

It is plain

to see that as the Government spends more, that money is either taken
•fi"om the people in the first instance through taxes, or borrowed
through the issuance of securities.

Sizeable orders given by the

Government to industry are likely to increase production and employment,

The community is, therefore, watching to see what happens in

Congress to the budget proposed by the administration, and, also,
whether or not the debt limit will be lifted, and by what amount.
Increasing the debt limit does not necessarily forecast
deficit financing (that is, spending in excess of tax collections)
because a primary purpose of the increase in the debt limit is to
k'lve the Government more leeway in borrowing money in anticipation
tax collections.
There are those who say that taxes should be reduced and
deficit financing should be engaged in by the Government in order

stimulate the economy as much as possible through this means.

There are others x^ho say that taxes should not be reduced and deficit
financing need not be engaged in; that the budget should be balanced,

en though at a high level of expenditures.

Regardless of one's

Reeling on this matter, it is a fact that the proposed budget is
higher than it was last year.
" o the economy.

This, in itself, will be a stimulus


Thus, we in the Federal Reserve System will be watching
the developments in the economy as they occur during the next several
weeks and months with special care so that we may note economic developments and take as promptly as possible appropriate monetary action that will aid economic recovery.
As indicated by the President in his economic report, two
immediate concerns are potential wage and price increases.


President has asked that both labor and management, being aware of
the present economic condition, should not add further disturbance
to the economy by either wage increases that add to costs or by
Price increases not based on cost increases.

For, as you know, the

over-all cost of living has not been reduced—it is still at an alltime high.

This is, therefore, a major problem at this time, as

recognized by the President.
Your interest in small business is shown by your serving
°n the Advisory Committee in this district,
In this connection, I am told that during the past three
years in which the Small Business Administration has been in
existence it has approved 8,597 business loans for a total of
^398,000,000 and 6,916 disaster loans for a total of $71,700,000.
The Small Business Administration has l£ regional offices
and the Richmond regional office, composed of the same area as the
Fifth District of the Federal Reserve System, has approved hlS
business loans for

lkk,000 and 821 disaster loans for $5,862,000.

Tlierefore, it is natural for you to le concerned with the
batters that I have discussed, because you must adjust your policies
You will also be interested in knowing that the Federal
Reserve is conducting a thoroughgoing study of credit to small

This study, when completed, will be made available to


We shall not formulate judgments about this matter until

we have the benefit of the results of this study.
Monetary authorities can never rest; they must be constantly
alert and always ready to act in whatever direction the situation may
require action, because money is the hub of our economic wheel.


is a public responsibility and, therefore, policy must be conducted
in the public interest.
I am glad to be with you and I shall be glad to answer
whatever questions you may wish to ask, so far as I am able to do so9