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Statement of

Sherman J. Maisel
Member, Board of Governors of the Federal Reserve System

before the

Joint Economic Committee

December 13, 1965

I am pleased to have the privilege of appearing before the
Joint Economic Committee.

The Employment Act of 1946 and the knowledge

developed in the reports and hearings of this Committee have made major
contributions toward the rapid, orderly, non-inflationary, growth of
the United States economy and toward better public understanding of
the problems involved in maintaining such progress.
I also welcome this opportunity because I believe the inde­
pendence of the Federal Reserve System to be a keystone in our economy's
proper functioning.
full public support.

Maintenance of independence is possible only with
Hearings such as this give the Federal Reserve

System an opportunity to explain the complexities of monetary policy.
They enable the System to report on its stewardship while helping the
people of the United States to shape their views as to a proper monetary
I am sorry that as a result of these hearings internal
conflicts will receive wide publicity.

However, the action of the

Board raising the discount rate was significant and worthy of a report
to the country.

I trust that the net results will be positive.

I hope

we will gain a better understanding of past action plus improved policies
for the future.


Agreements and Disagreements
I was somewhat unhappy about the action taken by my fellow
Board members on December 6.

However, I want to make it clear that my

dissent was not based on some of the reasons carried in the press.
I do not fear that at this time higher interest rates will lead to an
immediate depression or deflation.
fellow Board members.

I respect the motives of ail my

Each voted according to his own view of how a

better economy could be achieved.

The action was deliberative.

timing did not arise from political or other ulterior motives.


attempt to characterize the votes as based on a belief in "hard money"
or "easy money" is not helpful either.

Each member clearly based his

vote on how he believed the Board could best insure sound money and
sound growth for the economy.
I disagreed on positive grounds.
increase at this time was premature.

I felt that a discount

Furthermore, this action posed a

net threat to long-run price stability.

More specifically I concluded


(1) No sound decision was possible without firm information
on the Federal budget. A delay of one month to await
such knowledge could do little harm. It would enable
us to make a much sounder choice.
(2) To act without far more effort at obtaining agreement
on a coordinated monetary, fiscal and wage-price policy
was wrong. The method and timing of the discount rate
increase decreased its hoped-for impact. It threatened
to introduce undesired, inflationary side-effects. It
made the future development of sound full-employment


policies more difficult. Unilateral action could only
weaken the President’s leadership in a critical war
(3) Two major reasons cited by the majority for immediate
action are, I believe, based on faulty theoretical
reasoning. Their continued use as a basis for policy
can only do harm.
(4) In departing from its normal and publicized policy of
not making discount moves in advance of the market, the
Board invested its recent decision to curtail credit
expansion and raise interest rates with an urgency that
I feel was unwarranted.
If I may, Mr. Chairman, I would like to expand on each of
these four points.

A Month's Delay Seemed Advantageous
It can be no secret that, like people throughout the country,
every Board member has diligently watched each critical economic variable.
Growth this year has been excellent.
our interim goal.

Our balance of payments has moved toward equilibrium,

but not as rapidly as some hoped.
in recent years.

Unemployment has decreased toward

Price pressures have exceeded those

Credit expansion was high.

The strains of growth have been severe.

Continued progress

toward full employment is bound to bring further pressures.


in prices, wages,and credit, distortions have been less than would be
expected for a period of such rapid expansion.

For example in non­

food commodities (those most likely to be influenced by monetary policy)
we note that although the rate of increase since midyear is slightly
over one per cent a year, wholesale prices are only one per cent

higher than six years ago.

Non-food commodity prices in the Consumer

Price Index rose about 3 per cent in the six-year period.
in the past year was seven-tenths of a per cent.

Their increase

The United States

price stability record in this period far surpasses that of almost
every nation in the world.
The credit picture has been mixed.

The major credit indexes

show a high general rate of expansion in the first part of the year.
From June through November, however, commercial bank reserves held
in the System decreased.

An economy expanding at a rate of over 7 per

cent annually received no additional reserves.
Because existing reserves shifted to support time deposits
attracted from other saving sources, total commercial bank credit
continued to expand.

The rate, however, was slower than in the first

half of the year or in the two previous years.

Other individual measures

of credit showed differing reactions to the lowered reserves.


all grew more slowly than in the first half and most at rates below
previous years.
As a result of this moderate credit restraint, interest
rates rose sharply.

On December 3, rates on short-term Governments

were about a half a per cent higher than earlier in the year.


and municipal bonds had risen about as much, while long-term Govern­
ments were up over a third of a per cent.
their thirty-year highs.

All rates were close to


On the whole, one could conclude on December 3 that the
price and credit pictures showed signs of pressure arising partly from
higher demand and partly from a slowing in the rate of credit expansion.
While unwanted price increases threatened, the cooperative effort to
hold the wage-price level undertaken by labor, industry, and the
Government seemed to be working.
The critical forces which would determine price movements
for the next several months appeared to be the relative expansion
rates for total demand and potential output, expectations, and the
success of the Presidents price and wage programs.

Price movements

of the past year could be considered as normal and logical given the
rapid rate of expansion.

They offered no evidence as to how prices

might react in a period of steady expansion at full employment.
Most projections of demand and supply available when the
Board made its decision were in balance.

In all forecasts, however,

a recognized critical problem was inexact knowledge as to next year's
growth rate for Federal expenditures and revenues.

Depending on growth

in the Federal budget, the country's demand might expand either more
slowly or somewhat faster than capacity.
The Federal Reserve had no special information as to likely
changes in the budget.

Since, in attempting to formulate a correct

policy for next year, the budget figures are critical, it seemed to me
improper to make a drastic monetary change until this information
became available.

Re-enforcing this reasoning was the fact that

although a one-month delay was technically feasible, an increase in

discount and interest rates would be irreversible for a considerable

The arguments for immediate action seemed weak.

The Need for Coordination
A more significant reason for urging a delay than incomplete
information was my belief that this action failed to give sufficient
weight to the necessity for a proper coordination of fiscal, wageprice, and monetary policies.
It would be interpreted by many as an attack by the Federal
Reserve on the national consensus or program for meeting price pressures.
Some would feel that the Board was assailing recent governmental policies.
Others would assume that the Board did not accept maximum full-employment
growth with stable prices as a national goal.

Raising the discount

rate would be interpreted as a view by the Board that because full
employment increeses inflationary problems, restrictive monetary
policy must be invoked at its mere approach.
More important, I felt that a failure to coordinate was an
irresponsible use of our independence.

It reduced the choices on

national policy available to the President.

We 'were informing him

that monetary policy would be tighter, leaving him to adjust fiscal and
wage-price policy accordingly.
Many people recently have argued that the country can achieve
a proper level of total demand by a policy of high interest rates offset
by high budget deficits.

They point out that each dollar of demand


cartailed by higher interest rates can be offset by a budget deficit.
As a fiscal conservative and a believer in leaving the maximum of
choices to our market economy, I dislike this theory.
I personally think that in the current situation, adjustments
through fiscal policy might be more advantageous.

The country may be

better off with lower deficits and lower interest rates.
is great enough, we may need a budget surplus.

If demand

Increasing interest

rates primarily penalizes growth and improvements in urban life.


tends to restrict modernization of plant and equipment, growth in
housing, and the expansion and rebuilding of vitally needed State and
local improvements.

It increases the Federal deficit.

It makes the

task of the small businessman more difficult.
But more important than my own beliefs is the fact that I
dislike attempting to impose them unilaterally on other parts of the

I would have preferred to explore all possible channels

in an attempt to get a coordinated program.

The Board1s freedom to

act requires that it use responsible statesmanship in achieving better
economic policy.
History has shown that dividing the monetary from the fiscal
functions of government is wise.

Otherwise the creation of money to

fill the public purse can become an engine of inflation.

Because the

Federal Reserve has a unique responsibility for maintaining monetary
integrity, we must work as hard as possible to make certain that it
is used properly.


The costs of conflict botwaen monetary, fiscal, and wage-price
policy are high.

Achieving sound policies which will enable our

economy to grow with stable prices at full employment is a most diffi­
cult task.

In such decisions, the Federal Reserve System has a vital

It must remind other agencies of the need for monetary probity

and must insist that the value of the dollar be maintained.


our independence and right to act should be used primarily as a valuable
ace in the hole.
the System.

An unnecessary use of power may dangerously weaken

The weapon of independence is clearly a major bargaining

However, because mouetary and fiscal policies are necessarily

interdependent, national goals may more easily be achieved if the
ability to act leads to a coordinated program rather than independent

Weapons held in reserve may be more powerful than those

committed at the earliest sign of conflict.
It also seemed clear that a precipitate action by the Board
in the light of recent history would decrease its hoped-for deflationary

People might mistakenly believe that the action was taken on

far firmer grounds than it was.

They might assume that the Board was

convinced that inflation was imminent.

This sudden action could easily

cause a rise in expectations and a sharp run-up in demand.


might not understand the significant difference between banks raising
their prices and unions and other industries doing likewise.
might feel justified in demanding higher wages or prices.


To some people's surprise my views on the requirements for
evaluating the total (both direct and side-effeets) results of this
interest rate action have been highly influenced by Senator Robert Taft.
As a member of your Committee, he pointed out on numerous occasions
that tax (and by implication, interest) increases have three separate

(1) Demand is decreased, thus tending to reduce prices.

(2) Costs are raised, tending to raise prices.

(3) The changed situation

(announcement effect) may lead to independent price increases.
Most people concerned with the discount change stress only
the first factor:

that is, that higher interest rates make credit more

People decrease their desires to purchase equipment, plants,

houses, autos, etc.

The lowered demand for goods means a lowered

demand for employment.

There is less pressure for wage and price hikes.

In addition though, we all recognize that interest is a cost
of doing business.
$70 billion a year.

Gross interest payments in this country total about
Raising a

cost must have some influence on prices.

The announcement effects are expected to be mixed.


any procedures that raised expectations or decreased the ability of
the Administration to maintain its wage-price guidelines would diminish
the desired price influences.
It seemed clear to me that the method used by the Board of
raising the discount rate failed to coordinate monetary, fiscal, and wageprice policy.

It was bound to increase the undesired price-increasing

side-effects at the expense of the hoped-for deflationary impact.


delay of a month to enable the Government to announce a unified policy
would greatly increase the effectiveness of the Board's action.

Improper Reasons
I am also concerned because it appears to me that the reasoning
and action of the majority tend to enthrone as causes for monetary
restraint two pieces of theory which I feel are invalid and dangerous

These are:

(1) the continuing use of higher interest

rates in the United States economy for balance of payments purposes;
and (2) the concept that one must act in advance of changes in demand
for fear that once demand starts to grow it can be contained only
with much higher sacrifices.
I have previously stated my views on the balance of payments

The United States is doing extremely well in restraining

interest-sensitive items through present programs.
creases might simply be matched again overseas.
may have a perverse effect.
would rise immediately.
less competitive.

Further rate in­

Indeed, higher rates

United States interest payments abroad

Higher financing costs would make our exports

Slower growth in this country might make direct

investments abroad--our chief problem area--look even more inviting.
The traditional belief in higher interest rates for balance
of payments reasons assumes either (1) rates high enough to raise
unemployment sufficiently to curtail imports or (2) interest high enough
to change capital flows.

No one admits to desiring the first path.

second path I regard as dangerous and almost impassable.


When the discount rate was raised, the President was in the
process of announcing a revised balance of payments program designed
to bring about the necessary return to equilibrium*
President's program was proper and sufficient.

I believe the

The constant use of

balance of payments as a theme to raise interest rates can only have
a most unfortunate long-run impact.
I am not certain I understand the argument that it was
impossible to delay action for a month or until sufficient information
about demand, prices, and credit became available.
to what we know about most decision processes.

This is contrary

As I understand this

reasoning, it holds that delays and small infusions of additional
credit are extremely dangerous.
conditions in the future.

They lead to highly magnified inflationary

The use of credit gains momentum and runs

away after some critical point.
We must admit that anything, including such results, may be

However, most people who have studied our monetary system

carefully believe such a situation is extremely unlikely to occur.


large-scale credit expansion without added reserves would require peculiar
types of discontinuities in our monetary system.

There is no indication

they exist.

I spent considerable

They have not appeared in the past.

time trying to track down the basis of this idea.

No one I asked on our

staff or among monetary historians or theorists could find any support
for this doctrine.
I concluded that neither the idea of a critical mass of credit
nor the balance of payments argument was a proper basis for policy


The Method of Curtailing Credit Expansion
When it became evident that a majority of the Board felt that
a curtailment of credit was desirable, a question arose as to the best
method of procedure.

This is clearly far more a question of judgment

than of analysis or of values.
change should be avoided.

I felt that an immediate discount rate

The Board has had an established policy of

letting discount rate changes follow the market.

It has stated that it

rarely deviates from this policy unless it desires to stress the importance
of the change and to obtain a magnified effect.

The disadvantages of

decreasing credit at this time seemed sufficiently great.

I saw no

special circumstances requiring a break with traditional policy.
In addition to all other disadvantages, the rate change
method together with the change in Regulation Q, made it possible that
the level of credit and demand would be raised rather than lowered.
The System would have to furnish additional reserves for the transition

A shift from demand to time deposits would mean that the exist­

ing reserve base could support a credit expansion.

As a result, the

action would bring higher interest rates, but at least initially an
undesired increase in real demand could occur.
Given the expressed desire to curtail credit rather than to
ratchet the interest rate structure upward, a more traditional and
simpler approach appeared preferable.

The System could simply determine

not to furnish additional reserves and not to raise Regulation Q.


discount window could have been opened wider to meet urgent needs.
Borrowed reserves have been low by past standards for periods of restraint.

Tighter money and larger borrowed reserves would have led to higher
rates which could then have been ratified by a later discount rate

This would have avoided the uncertainties and misunderstandings

of the present situation.

There would have been time for coordination

with the fiscal authorities.

If no agreement was possible, there at

least could have been an announcement of a joint agreement to disagree.
Mr. Chairman, this concludes my statement.

I want to make

it clear again that while I believe the discount rate change at this
time was incorrect policy, it is a move that can and will be absorbed
by the economy without causing an immediate recession.
We must recognize our limited experience in operating for any
length of time at full employment.

However, the potential gains to

our national welfare from the successful development of policies that
will allow rapid expansion with stable prices are enormous.
that we can think of this action as behind us.

I hope

Now it is time to try

again to work out a better coordinated use of all types of policies
which can help in achieving our national goals.