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¡-II'RARY ()F THE
ruDERAL
[tEstRy[ tsAltK 0F n[FVFI,lNn
FEDERAL RXSERVE BANK
OF CI,EVETAND
OIEVELAND
1,
0Hr0
0ctober ll+, 19h9
The Honorable Paul- H. Douglas
Chairman of Subcommittee of
Joint Comni-ttee on the Economic Report
The United States Senate
lVashington, D. C.
Dear Senator Douglas:
{
to your request of August 22, T am subnitting herewith
the issues raised 1n youzt questionnaire, E-11 of August
].:91.9. For general reference, I enclose a document entitled ttDraft
Repli-es to Questionnaire Addressed to the Presidents of the Federal
Reserve Banks by the Subcommittee of the Joint Congressional- Corn¡nittee
on the Economic Report.rl
Pursuant
my vJ-ews on
tr{Ihen your questionnaire was received by the Presidents of the
Federal Reserve Banks, the Chairman of the Conference of Presidents,
Chester C. Davis, Federal Reserve Bank of St. Louis, after consulting
with the other presidents, appointed a special corunittee consisting of
Allan Sproul, Federal Reserve Bank of New York (Chairnan), Alfred H.
l\rilliams, Federal Reserve Bank of Philadelphia, and H. G. Leedy, Federal
Reserve Bank of Kansas Cit¡ to consider preparation of a general report
that could be used as backgrorurd by all the presidents in preparing their
individual replies. the Special Comrnittee of Presidents appointed a
special Research Conmittee composed of economists from seven of the
Federal Reserve banks to assembJe factual information and draft replies
vrhich, ih its opinion, would express the consensus of the Federal Reserve
bank presidents. Considering the shortness of the time avail-ab1e for
dealing with the many fundemental issues raised b3n your inquiry, I think
that the Special Research Conmittee has done an effective job in submerging individual differences and developing a well-rounded and reasonably coordj-nated positi-one
ï
in
subsüantial agreement with most of the position taken in
and shalL confine my personal rcplies to those questions on
rvhich I disagree or on vrlrlch I belleve some modification in viepoint or
ernphasis to be desirable. The numerical and al-phabetic reference to
am
that report
The Honorable PauI H.
Douglas -2-
October lJ¿,
lr9lt;9
in rny replies is the sane as that used in the Draft Rep1ies.
r. - 3. cite the more important occasions v¡hen the pol.,rers and
questions
policies of the systen have been inadequate or inappropriate to accomplish the purposes of ühe System.
0n the whole, f agree with the Draft Reply and even vrith the statenent that rlthe polrer of the System to absorb- aótua] or potential excess
reserves has been inadequate ,because l(-)(-)ê use of open market operations
and discount rates r,vas inhibitecl b¡r a desire to avoid j-nterference vr¡.ith
the management of the publ-ic debt ¿nd adversé effects on the publicrs
appraisal of Government obligations.n
f bel-ieve the statement to be a correct representation of the facts
vrith regard to the attitude of a najority of thðse in thc Systern charged
rrith responsibility for policy but i am iot fully in syrnpatíry r,rith that
position because, as r indicatc in my reply to questioñ Ír. - l. belo.w,
r bel-ieve more'detcrrnined steps coul-d and should have bcen talcen to
absorb some of the excess reserves through usc of open marlcet operations
and a rnore frexibre policy as to support prices of governmcnts.
rr. - 1. Túoul-d a monetary and debt management policy v,¡hich v,rould
have produced higher
from January l)la6 to
pressures ?
iirterest rates during the period
late IghB have lessened inilationary
r am n agreenent with the Draft Reply which states that such a
po1Ícy lvoul-d have enabled the Treasur¡r ana- trre Federal Reserve system
to pursue a more restrictive monetar¡ and debt-nanagernent policy than
that lvhich vras actually undertaken. I also agree with the conciuding
sentences that it is difficult to conjecture hovn effective a policy
of further tightness vrould have been áuring the thrce postwar
yearso
ty opinion, some of the steps finalry tãten by the systern sÍroul_d
It
have been taken soorÌêTo Hovr far lve courd have gone vrithout precipitating the undesirable consequences in the marùets that sornã feared.,
no one lcnows. r have been disturbed by the extent to which people in
key rnanagerial positions in banks, insurance conpanies, trust cornpanies,
and elselvhere in the financial and business lvorlã, to Áay nothing of the
lay public, appear to have accepted the doctrine that an
invariabl-e maintenance of Government bond pricãs at or above par is essential to the
financial- soundness of the country. To me, this is a doctrine out of
keeping with the history of our financial past and unfortunate in the
restrictions that it puts on the functionj-àg of our financial machinery.
I believe that a tighter policy could have teen follolved which l-,¡ould
have pernritted so¡ne issues to go moderately bel-olv par so that the country
could have adjusted its thinking on thc matter of rnoney rates, security
The Honorable Paul H. Douglas
-3-
October
Il+, I9\9
prices, and fj-nanciar soundness to changing conditions. r recogni_ze
that such a program would have involved certain risks but I believe
they should have been taken.
Ïüh1le bclieving that a tightcr policy should have been follonred, I
by no means confident that it lvould have had any materially different
effects than did the policy that was actually follor,ved duri.ng the first
three postwar years. As the Draft Rep1y statcs on page If. - 3.5 a more rcstrictive policy would have r estrained nore effectively those expendi-tures
whj-ch depended upon the use of borrol'red funds. The most irnportant of 'bhese
expenditures were in construction and real estate and in busincss itself¡
liberality in the usc of credit in construction ancl real estate was fostered by Congressional policy, and more restrictive Federal Reserve actlon
rnight have resulted in a direct countermandate of the Congress or in
Congressional action to provide special governmental financing facilities
thus nurrifying, at least in part, Fcderal Reserve action. Business
demand for credit grelv out of the need for inventories and additional or
renovated plant and equipment. i¡ühile sone speculation in inventories may
have occurred, most of the incrcase in the postwar period appeared to be
necessary in order to pernrit industry and trade to function more efficientlyr The expansion or renovation of plant and equiprnent reflected the
need of business to expand capacity to rneet the largé postwar demand for
goods and senrices and we have a record of accomplishment in catching up
with thcse demands which is highly praiseworthy.
am
A rnore restrictive monetary and credit polic¡r night havc led to a
moderation i-n the rate of capital expenditures. A reduction in the rate
of capital expenditures might have resulted in theír being spread out
over a longer period of time so that they rnight not have reached such a
high peak in 191+8 and night not have declincá so much in 19L9. Had such
been the cese, inflationary pressures from this source might have been
reduced and a more stable employment situation night have occr¡rred. On
the other hand, capacity ¡,voul-d not have been incrãased so much and thus
the inflationary pressures resulting from consumer denand night have been
maintained over a longer period and havc becn reflected in higher pri.cesr
Criticism of our busj-ncss leadership might also have been more severe
because of an alleged slorrrrness in expanding capacity to a point nadequatsrr
to serve the necds of the nation. OnJ-y a few months ago the stcel indusbry
lvas under such attack.
ïTI. - 3, â¡
b.
be the principal advantages and
disadvantages of restoring circulation of
gold coin 1n this country?
trtrhat v,¡ouId
Do you
belicve
this
should be done?
the Honorable Paul H. Douglas
October 1l+,
19119
I
arn not in full agreernent with the Draft Reply to this question.
I realize that it may not be practicable to restore circulation
of gold coin j-n thi-s country imnediately when the rest of the world is
not on the gold standard and lvhen political and economlc uncertainties
throughout the 'u¡orld v¡ould be conducive to the hoarding of gold coin,
I do bebeve that ',ve could and should liberal-ize the provisions of Iaw
and regulation with respect to the ovnnership of gold by our citizens,
ï believe that steps could be taken to pernit people to buy, hold and
selI gold nore freely in thls country without endangering our financial
WhiLe
soundness.
IV. - 1. â¡
changes, if any, should be made in the
reserve requiremcnts of member banks?
TVhat
Ï an not in agreement with the recommendaüion contained in the
Draft Rep]y. The present s¡rsfg¡ of reserve requirements is by no means
perfect and from time to time the Federal Reserve System has had cormrittees
study thr-is question. However, sufficient agreement to justify change has
never been secured on any proposal for deternring reserve requiremcnts.
Recently a technical staff System comnittee submitted a proposal for a
new system of rescrve requirements based on type of deposits rathcr than
on location of bank, as at present. The rccornmend.ation in the Draft Reply
to yorr questionnaire is essentially that proposal. f do not bel-ieve that
the particular proposal has been given enough study by the banking systenr
and particularly by parties other than those directl-y connected ¡rith the
Federal- Reserve System to waruant its consideration at this time. The
banking system has adapted itsclf to the existing method of reserve requirements, and banking relationships have developed around them" The
advantages claimed for tìre proposal do not appear to'me to be sufficient
either in character or in probability of achievement to waruant the disturbance to the banks that would result in rnaking the change. f wouLd
favor legislation pernitting nrember banlrs to count vault cash as a part
of their reserves. Th-is v'¡ould help to remove some of the present inequlties claimed in the system of requirements. Othervl"ise, I am in favor
of letting the entire question of reserve requirements rest unless there
can be an approach rnade to the subject in a marurer which would give
opporùunity for participation by a wide group of interested parties such
as bankersl associations, state bank supervisors and others.
The Honorable Paul
II.
Douglas
-5-
October Il+,
fV. - 1. b.
be nade in the
Reserve to alter
rnember bank reserve requirements?
1. cr
Under v,rhat conditions and for lvhat purposes
siroul_d the Federal_ Reserve use this pol.rer?
ìl'lhat changes,
if any,
]..9L+9
shoul_d.
authority of the Federal_
The authority to alter member bank reserve requirenents ís a clumsy
and unsatisfactory i-nstrument of credit control. It affects all banks
and requj-res or perrnits adjustments lvhich may have unhealthy gcneral
effects and be harrnful in many inclir¡idual inãtances. The use of this
authority, tirercfore, can be justified onty in exceptional cascs and
calls for a degree of discrirnination difficrrlt of altainment. As the
Draft Reply indicates, requirements should bc altered only to take care
of those situations in v,¡hich excessive liquidity or tightness could not
be compensated for by open marlret operations v,riihout eñgagi-ng in purchases
and oales of such rnagnitude as to have seriously detrimõnIal-effeóts on
money markets, securi_t¡r markets, and business and Govern¡nent finance.
Such situations lvould j-nclude unusually hearry and sustaincd iinports or
exports of gold. I believe, therefore, that the powcr itsel-f ãhou1d be
used rarely and not as a substituüe for ordinary ópcn nrarket operations.
0n that basis, r do not believe that additionar por,vers or changes in
existing povrers are necessary. Bcnkers, gcnerally, vrould apprcciate our
gi.ving the nrattcr a rest cure and letting them feei that, they ha.ve a
stable basis of reserves on vrhich to operate.
rv. - 1. d'
ïIJ:at polver, if any, shoul-d ilre Federal Rescrve
have relative to the reserve requirements of
nonmember banks?
r am in agreernent with the Draft Reply to this question, However,
I reiterate the position taken in my innnediately preceding replies ¿rat
the whol-e subject of reserves should be given a-rest crre. Ii legislatj.on
should be considered, such legislation shoul-d include application of the
same general type of reserve requi-rements to aI1 banks.
rv. - 2. o.o should the Fedcrar Reservc have the permanent
pot'rer
to regul-ate
consumer credit?
f do not believe that the Fecleral Reserve should have pernanent
power to regulate consumer credj-t as f am not at all convinóed that it
j-s necessary, vr.iso or practicable thus to police this field of human
activity. I am not satisfied that there aie advantages to be derived
The Honorable Paul H.
Douglas -6-
October ]..l+, I9b9
from use of the power sufficient to offset the disadvantages i-nherent
an irritating interference with normal business transactions.
in
IV. - 6.
legislative changes would you reconmend
any such deficiencies? (i,e. in legal power
Federal- Rcserve System objectives.)
Trrhat
to correct
to accomplish
in any replies to questions fV. - 1. and IV. -2.,
to the recommendations in the Draft Replies for legislation changing the nethod of deternrining rescrve requirements and
granting authority to the Federal Reserve to exercise control over the
volume of Ínstalment credit. lltlhile a mrnber of other changes could be
suggested which vr¡ould be conducive to more efficient and more economical
operations, they are of rni-nor signÍficance to the ach:icvement of Fedoral
Reserve policy objectives. f belicve that the System can do a good job
I
As indicated
anr opposed
under existing authority.
W. - 5, âr
b.
changes, if any, shoul-d be made in the powers
of the Federal Reserve to lend and guarantee l-oans
to nonbank borrowers?
tralhat
Should either or both of these powers be possessed
by both the Federal Reserve and the Reconstructj-on
Finance Corporation? If so, why? If not, why not?
Ï an in disagreement with the position takcn in the Draft Reply to
the first questlon. I do not believe that our present authority to lend,
or, in effect, guarantee loans to nonbank borrol',¡ers needs change at t hr-is
time. Àt the Federal Reserve Bank of Gl-eveland we have been able to
operate effectively under the provisions of the act and do not feel that'
it i-s unduly restrictive. Rather, we feel that the restrictions novr in
Section 13b of the Federal- Rescrve Act are wise and desirable.
lrl
.-6.
êr
14hat would
be the advantages and disadvantages
of establishing a National Monetary and Credit
Council of the type proposed by the Hoover
Commission?
b.
Co
0n balance, do you favor the establ-ishment of
such a body?
If so, vuhat should be its
composition?
The Honorable Paul H. Douglas
-7-
October
il+,
191+9
I have rescrvations about the value, effectiveness or desirability of such a Council and, on the whole, would be inclined to
oppose its creation. Should one be established, however, I believe
it should be purely advisory and reportorial. For this reason its
membership should be inclusive of.a11 Federal lending and supervisory
agenci-es and not restricted to just a few as suggested in the Draft
Rep1y.
ï hope that the material herewith subrnitted will be helpful to
your corunittee and that you will call on me if I can give further
infornation or expression of vÌews¡
Sincerely yours,
Ray Mr Gidney
President
Enc1.
@FedFRASER