The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FEIIERA[ RESERVE
BANH OF CI,EVEI,ANII
RELEASE: Friday, JuIy 3, L964, and after
Athens, Ohio -- A better understanding of our econornic systern is essential
in a dernocratic society, President Iil-. Braddock Hickrnan of the Federal Reserve
Bank of Cleveland last night told public schooL teachers attending the l3th annual
Ohio \ilorkshop on Econornic Education at Ohio University.
rrThat
is why
a prograrn such as
yours, which is designed to irnprove the
econorníc understanding of a large segrnent of our society
- our public school
teachers and the boys and girls they teach - is so irnportantrr, he declared.
President Hickrnan in his talk:
Ernphasized the regional nature of the Federal Reserve Systern as reflected,
for i,nstance, in the policy deliberations of the Federal
Open Market Cornrnittee;
Decla.red the independence of the tr'ederal Reserve
poJ.icy rnaking outside the
political arena,
is essential to keeping
and
Asserted the 50 -year record of the Federal Reserve is a good one, an¿
added that a sense of rnodesty and a
spirit of self-criticisrn are crucial to the
overall success of any organízation.
(Cornplete text of President Hickrnanrs talk attached)
Talk by'ü[. Braddock Hickrna
President, Federal Reserve Bank of Cleveland
I3th Annual Ohio Workshop on Econornic Education
Ohio University, Athens, Ohio
Ju.Iy
Z,
1964
MONETARY POLICY--FACT AND FANCY
In a dernocratic society such as ours, it is essential that the people
understand our econornic systern, how it works, and what it can and cannot
do, That is why
a prograrn such as
yours, which is designed to irnprove
the econornic understanding of a rnost irnportant segrnent in our society--
our public school teachers andthe youngboys and girls they teach--is
so
irnpo rtant.
I arn honored,
and pleased, to have the
privilege of participating
with you in this educational effort and to have the opportunity of discussing
the Federal Reserve Systern and the forrnulation of rnonetary policy, I arn
particularly pleased to have the opportunity at this tirne, because this year
rnarks the Fiftieth Anniversary of the Federal Reserve Systern.
'We have
now enjoyed in this nation a half century of a unique kind of independent
central bank--one that blends private and public elernents, that perpetuates
our nationrs basic precepts of Federalisrn (that is, a regional structure
under a nationai policy-rnaking body), and that has
saf
eguards to resist
political intrusion"
The 50-year history of the Federal Reserve Systern is replete with
instances of change--changes designed to help the Fed accornrnodate itself
to the constantly shifting requirernents and objectives of the economy. As
our econorny has changed, so have the policies and procedures of the
Page Z
Ohio Workshop on Econornic Education
JuIy Z, 1964
Federal Reserve Systern. Sorne of these changes were accornplished through
legislation, for exarnple, by arnendrnents to the Federal Reserve Act.
Other changes were accornplished by adjusting our basic philosophy and
by widening the scope and the objectives of our operations, An illustration
of the latter would be the recent introduction of so-called "swap'r operations
designed to defend the
U, S. doIlar in international financial rnarkets.
In rny opinion--and I confess rny bias--the 50-year record of the
Federal Reserve is a good one. Adrnittedly, we have rnade rnistakes but
these were
I
errors rnade by rnortal rnen whose judgrnents are not infallible.
hope that the people
in the Federal Reserve Systern will always retain a
sense of rnodesty about
their lirnitations and about the success of their
efforts" A sense of rnoflesty and a spirit of self-criticisrlr. are crucial
to
the overall success of any organlzation.
Structure and Goals of the Federal Reserve Systern
Now, with these generalities behind us, what specifically is the
tr-ederal Reserve Systern and what are
its goals
and functions as the central
bank of the United States? Sorne of this has already been discussed with you
by Miss Margret Beekel, who is one of the ablest and rnost knowledgeable
of the young econornists at our bank. I shall, therefore, touch on these
rnatters only briefly, and only in relation to the rnain topic of rny discussïon,
which deals with the forrnulation of rnonetary policy.
The basic task of the Federal Reserve Systern
and credit conditions that
is to establish n).oney
wiII help to achieve the broad econornic goals of
Page 3
Ohio W-orkshop on Econornic Education
IuLy Z, 1964
our country. You have heard rnuch about these goals during these past
three weeks. As you know they are: A healthy expanding econorny, stable
prices, rnaxirnurn ernployrnent, and a favorable balance of payrnents,
Achieving these goals is clearly a very difficult task, and no one at the
Federal Reserve thinks that we alone can accornplish very rnuch in these
areas, especially because we only influence the rnarkets for rnoney
credit. On the other hand, we try hard;
and
I think we have rnade
and
sorne
rnodest progress recently towards helping the econorny achieve each of
these goals.
'vVhy i.s
the Federal Reserve Systern charged with the responsibility
for regulating the flow of rnoney and credit? The reason is that our type
of econorny has becorne so cornplex and so sensitive that sorneone rnust
regulate the financial rnechanisrn.
This is true not only in the United States
but in all countries of the Free'World" In each country a job such as this
is
done
iargely by a central bank, and in the United States the Federal
Reserve Systern has been given this responsibility.
In, doing the
job,
the
Federal Reserve works very closely with both the U. S. Treasury and the
Adrninistration in the forrnulation and the execution of appropriate
national. econornic policy.
I would like now to give you some idea as to how we do the job-how we forrnulate rnonetary policy to achieve national goaIs, and then how
we irnplernent it.
I will touch upon the frarnework of policy rnaking, how
decisions are rnade, the flow of inforrnation that supports the policy-
Page 4
Ohio 1W'orkshop on Econornic Education
JuIy Z, 1964
rnaking process, the role of decentralization or regionalisrn, and how I,
as the president of the Cleveland bank,
fit into the general picture. Although
rny role seerns irnportant to rne, I arn actually a srnall part of a large
organizatton.
'What
I arn about to tell you can therefore best be interpreted
as a worrnrs eye view of central banking.
Federal Open Market Cornrnittee
At the center of the policy-rnaking process is the Federal Open Market
Cornrnittee, which usually rneets every three weeks in \Mashington, The
Federal Open Market Cornrnittee consists of the seven rnernbers of the Board
of Governors, the president of the Federal Reserve Bank of New York, and
four of the presidents of the other Federal Reserve banks, serving in rotation.
Currently, I arn a voting rnernber of this Cornrnittee, having as alternate the
president of the Federal Reserve Bank of Chicago, Next year the Chicago
president wilI be the rnernber and I will be the alternate. (Presidents of
banks other than New York, Chicago and Cleveland serve once in three
years, ) But even when not voting, all of the Federal Reserve bank presidents
attend the FOMC rneetings. The nonvoting presidents are invited, and are
expected, to attend these rneetings for two reasons:
I.
To keep the Cornrnittee fully inforrned of what is going on in
the various Districts, and
z.
To assure that the Cornrnittee will have the rnost cornpetent
regional thinking on the forrnulation of rnonetary policy.
Page 5
Ohio 'Workshop on Econornic Education
JuIY
Z,
Each president cornes to the rneetings
1964
fully briefed by his research
staff; each president has tapped the knowledge and judgrnent of rnernbers of
his board of directors and of his branch boards of directors; each president,
in addition, regularly talks to business and banking leaders in his area, who
often contribute irnportant insights into business and financial developrnents
as they occur, and sornetirnes even before they occur--in either event,
well before they are reported in the national statistics cornpiled in Washington.
The presidents thus bring a wide variety of background inforrnation
to the Federal Open Market Cornrnittee rneetings, where this rnaterial is
fused with other rnore globai, or aggregative data, to serve as a base for
official policy. I rnight add that
each president has
his own point of view--
whether it is in interpreting current developrnents or in judging what policy
ought to
be.
'W-hen
the Federal Open Market Cornrnittee finally reaches
a
consensus--after all the presidents, the governors, and the official staff
have had
their say--it is, in rny opinion, a reasonable
and balanced judgrnent,
based on the very latest and rnost detailed inforrnation available throughout
the nation. AIso, in rny opinion, the functioning of the Federal Open
Market Cornrnittee is an outstanding exarnple of how a decentralized and
regional systern can contribute to sound and balanced policy rnaking for
our vast and cornplex nation"
and have a close feel of the
Washington
The presidents are close to the grass roots
local situation. The national board in
is near the processing centers for the preparation of broad
aggregative data, and is adept in interpreting these n).easures. Thus,
Page 6
Ohio Workshop on Econornic Education
JuIy Z, 1964
policy is forrnulated on the basis of both locaI
and.
national inforrnation, of
both specific and general data. On the whole, this systern has worked well
and has contribulted irnportantly to
our countryrs growth and stability.
Frorn ûty own personal standpoint, I feel strongly that I have
a
very serious responsibility as a rnernber of the FOMC--as do the other
presidents, and, of course, the rnernbers of the Board of Governors. I
feel it is rny duty to go to Washington as fuily inforrned and as well prepared
as possible, within rny physical and rnental lirnitations.
Preparing for the Federal Open Market Cornrnittee
The focus of
all this rnight be clearer to you if I told you how we
at
the Cleveland bank prepare for a rneeting of the Federal Open Market
Cornrnittee, our procedures at Cleveland. are really quite sirnple
to
describe" Although we continuously study the course of econornic
events,
about a week before each FoMC rneeting we rrlove into high
The
gear.
research staff prepares a com.prehensive, up-to-date background report on
econornic developrnents - -1o cal1y, nationally, and internationally. The
essence of aII of this
is sirnrnered down and distilled into a fifteen-page
surrlr¡lary, which rny staff has dubbed therrtri-weekly, (to reflect the
frequency with which they have to prepare it). Special rnernorand.a are also
prepared by individual staff rnernbers on topics that appear to be of
overriding and tirnely significance, for exarnple, on prices, quality of
credit, and so forth. In addition, the staffs of the Board of Governors in
Page 7
Ohio Workshop on Econornic Education
JuIy 2, 1964
lllashington and of the New York Reserve bank send us reports on significant
econornic developrnents at horne and abroad. Thus we have a cornprehensive
evaluation of national and international developrnents, and a close reading
of regional developrnents as well. Our research departrnent rnakes
a
particularly detailed analysis of regional industries that are of rnajor
significance in interpreting national developrnents, for example, steel,
autos, rnachine tools, and the like.
The staff is always trying to develop ne\lrr techniques of analysis and
special or new kinds of data to irnprove our evaluations--sornetirnes as a
result of rny rrneedlingrr, but rnore often on their own. For exarnple, they
have developed, with the cooperation of rnajor steel producers in our district,
a special series on new orders for steel. This gives us advanee inforrnation
as to what steel production and shiprnents
will be in the rnonths to
and you know how irnportant the steel industry
corne;
is in explaining cyclical
swings in the econorrty, as well as for the health of our part of the country.
In addition to these intensive studies within our shop, rnernbers of
our staff rnaintain close contacts and have ñtany discussions with business
and banking peopJ.e oulLside of our organization, other econornísts, rnarket
research analysts, and the like" Our senior staff rnernbers, in particular,
attend many rneeti,ngs with their counterparts in other organízations. Once
a week they lunch
with l5 or 20 other Cleveland econornists, to exchange
views on current developrnents and trends; once a rnonth the five or six
conì.rïì.ercial. bank
ee
onornists in Cleveland corne to our bank to exchange
Page 8
Ohio Workshop on Econornic Education
JuLy
2,
1964
views on financial and banking developrnents; once every quarter Fourth
District industrial econornists spend a day at the bank reviewing in
developrnents throughout the region and the
depth
nation" There are fitany other
contacts too nurnerous to rnention"
All of these bits
and pieces flow together
in a rnore or less steady
strearn to provide a deep reservoir of inforrnation that goes into the
rnaking of rnonetary pol"icy" The various and sundry parts are put into a
cornprehensive whole, usually beginning on the Thursday prior to the
Federal Open Market Cornrnittee rneeting, when I sit down with the First
Vice Presídent and senior research officers to focus on the rnaterial
that we have at hand. I have ñì.y own views, which I test on thern. And,
of course, I listen to others in the group. In effect, we harnrner out (and
I use the work "harnrneril advisedly) point of view--a consensus--of what
"
we think the econorny is doing and what we feel would be appropriate
rnonetary policy. ïn the end, of course, I arn the responsible party, but
I donrt reach rny
eone
lusions al.one.
After the Thursday rneeting, a draft of a position paper is prepared.
1{e then reconvene on Friday and work on the
hope
draft, arriving at what we
is a cogent, well-reasoned and analytically
sound position paper to be
used at the Federal Open Market Cornrnittee rneeting on the following
Tuesday" If new or di.fferent inforrnation becornes available before then,
appropriate changes are, of course, rnade in the docurnent, sornetirnes
late into the evenings of the night preceding the rneeting.
Page 9
Ohio Workshop on Econornic Education
July 2, 1964
I have díscussed our procedures in sorne detail because they convey,
to rne at 1east, the true strength of the Federal Reserve Systern--the fact
that we are dealing with fact n not fancy or fiction, Our procedures allow
us to check, to review, and to assess, not only what is happening in the
econom.y, but as we1l, the irnpact of I-ederal Reserve policy on business,
banks, and other financial institutions" The lateness of the publication dates
of rnost nati,onal statistics is reason enough for ue to operate as we do--we
need to know about things prornptly as they
unfold--in fact, even before they
unfold, if at atr"l possible. Also, we need rnuch rnore detail than is provided
by the natíonal statistics.
ïrith sirnilar procedures being followed at other Reserve banks and
at the Board of Governors, it is not surprising that the deliberations of the
Federal Open Market Cornrníttee are detailed and enlightening. In rny own
case, Ï feel strongly that I arn contributing to these deliberations on
policy rnaking. If I di.dntt, I would not be at the Cleveland bank. It is
the very nature of what I have described that convinces rne of the strength
of our regional decentralized systern.
In a sirnilar senge, the case is very strong for keeping the
Federal. Reserve independent. Independence of the tr'ederal Reserve is
essential to keeping policy rnaking outside of the potitical arena. More-
over, the cornplexity of our econornic af.f.airs argues strongly for the
t¡le of objeetive process that we have.
Page I0
Ohio \il-orkshop on Econornic Education
July Z, L964
The independence that we have is not absolute, it is only relative, but
it is nevertheless essential. to the rnaking of sound policy" This view is
shared ín rnany high and authoritative places. For exarnple, Secretary of
the Treasury Dillon stated recently, and I quote:
rrExperience
has taught the wisdorn of shi.elding those who rnake
decisions on rnonetary policy frorn day-to-day þressures .
Almost all
countries still find it useful. to rnaintain independence for their central
banks within the
governrnent .
The necessity to test policy proposals
against the views of an independent tr'ederal. Reserve is, I believe, the
begt insurance \¡ve can have that the claims of financial stabil.ity wilt
never be neglected"rl
"Independene eo " of
course, does not rnean I'aloofness. rr The Federal
Reserve is not independent of the tr'ederal Governrnent--but is only independent within the Governrnent. The Federal Reserve has been delegated
the responsibili.ty for carrying out rnonetary policy by the Congress; but
that delegation does not cover all phases of governrnental activity affecting
the econorni,c and financial clirnate" For exarnple, the Treasury has vast
powers in the international fleld and it is absolutely essential that the
Federal Reserve and the Treasury work closely together on rnatters affecting:i"nternati"onal finane
e, the international balance of payrnents, and our gold
positi,on. Furllherrnore, it ig essential that the tr.ederal Reserve and the
Treasury both conforrn to the requirernents of the foreign policy of the United
Page I I
Ohio 'Workshop on Econornic Education
Juty 2 , 1964
States as established by the President of the United States and his Secretary
of State. The Treasury is also the biggest borrower in our country, and in
our operations in the money market we can no more ignore the needs of the
T::easury than a private bank can ignore the needs of its irnportant cugtorners.
The independence that we have in the Federa,l Reserve Systern, our
regional strueture, and the heavy and sobering responsibilities which the
Systern bears, account
for a large part of the successful record of the past
50 years--and our healthy influence on the nation's econornic
life. It also
helps to explain the fundarnental strength and resilience of the Federal
Reserve Systern as well as the high caliber of the people who serve it.
Conclusions
I hope that you will atternpt to understand rnore about this cornplex
area of rnonetary ûÌanagernent, and will irnpart your knowledge to your
students. You teachers should assist your students to achieve greater
insights into our econoû).y, and should help to inforrn the public about our
rnajor
ee
onornic institutions" W'e at the Federal Reserve Bank of
Cleveland wi"II continue to try to do whatever we can to help you develop
a bette¡: grasp of our banking and rnonetary systern and of our econornic
systern as a whole.
The genuine interest of the Cleveland bank in econornic education is
revealed by the fact that our research staff is always available to talk to
groups sueh as yours--as Míss Margret Beekel has done in this prografil..
Page IZ
Ohio W-orkshop on Econornic Education
JuIy 2, 1964
Each surnrner since I have been at the Cleveland bank, a rnernber of our
staff has addressed the \Morkshop at Ohio University. In addition, a vice
president of our bank is currently serving on the Board of Directors of the
Ohio Council on Econornic Education. Frorn what he says, he is doing an
excellent job--or at least thatrs what he tells rne.
Our young people rnust be taught how and where to locate accurate
econornic inforrnation; taught how to interpret and present facts objectively;
and taught how to detect when others either
thern to support pet theories.
'We need
distort lacts or rnisrepresent
to irnprove the studentrs ability
to distinguish between econornic f act and fancy, Econornic interpretations
and econornic policy rnust be honest and objective.
For aII of these reasons, I arn particularly pleased to
see you take
tirne out of your busy schedules to irnprove your knowledge and understanding of econornic affairs.
It is you on whorn the real burden of
education lies. I arn confident you will train our young people well--train
thern to be accurate and responsible in their econoûric appraisals.
@FedFRASER