Regional President Speech

• I., y ALLAN SPROUL, President, Federal Reserve Bank, New York IT was during the last half of the was recognized that these appeared to RAR¥fepression thirties that the concept of be low rates for the financing of the open market operations was expanded war. On the other hand, an unfor- 5 1952 to include some responsibility for tunate experience with a 4 billion maintaining order in a Government issue of notes and bonds in 1942, security market swollen by the deficit showed that failure in finance was financing of the depression years. likely if investors had before them a When the Second World War began prospect of rising rates, and an incen- in 1939, this responsibility became tive to delay purchases. It was de- really important, since it was essential termined, therefore, to make it pub- to avoid any impairment of the Gov- licly clear that the war should be fi- ernment's credit, no matter how diffi_ nanced at level, not rising rates of cult its circumstances. The short lived interest. It was finally decided to nervousness in the security markets at permit the Treasury bill rate to rise to the beginning of the war found the ½ of 1 per cent, to shorten slightly Federal Reserve Banks buying 5 00 the maturity of 2 ½ per cent bonds, • ALLAN SPROUL million of Government securities in and to maintain a «pattern of rates" Author of the timely and well expressed four weeks, an open market operation between these two basing points. In thoughts 011 this page and several pages which follow is a ew York banker, who like many which brought their total holdings to this way the Federal Reserve System other good ew York b.111ker:;. hails from 2.8 billion. This was a temporary embarked on a fixed rate support pro- somewhere else. In Allan Sproul's case the situation and substantial orderly mar- gram, as well as an orderly market somewhere else is an Francisco where he was ket purchases were not again necessary program in its open market operations. born, March 9, 1896. He was graduated from until the United States entered the war And in order to assure the rapid sale of the University of California in 1919, complet ing his college course a/ter serving in the in December 1941. Even then our all Government securities which had to U1tited tales Army during 1918, as a pilot in purchases were trifling, in the light of be offered to finance the war they the Air ervice. our more recent operations. We ac- were, in effect, given many of the One year following his graduation /row col quired about 70 million of Govern- attributes of cash. It was quickly lege Mr. proul entered the employ of the Fed eral Reserve Ba11k of an Francisco as head of ment securities and our total holdings realized that this sort of mixture of the Division of Analysis aud Research. In 1924 soon leveled off at about . 2.2 billion. cash and securities and this sort of rate he became Assistant Federal Reserve Agent and During the subsequent period of war structure would result in playing of Secretary of the bank and continued in these finance it became a prime duty of the the «pattern of rates", and that either offices until 1930. Mr. Sproul joined the Federal Reserve Bank Federal Reserve Banks to see that the short rates would have to rise gradually of ew York in March 1930. His first office member banks had adequate reserve at or long rates would have to decline. there was Assistant Deputy Governor and Sec all times to enable them to purchase The Treasury would not agree to any retary, his work as Assistant Deputy Governor such Government securities as the increase in short rates at that time, and being largely in the foreign function of the Treasury had to issue to finance the so there was a gradual decline in long bank. During 1934 and 1935 he was Assistant to the Governor and ecretary, and -beginning war, and could not sell to non-bank Arate s. in April 19 3 5 he also directed the foreign investors. In these circumstances, it operations of the bank. In January 1936 was necessary to shift the emphasis T the end of the war and in sue- Mr. proul was named a Deputy Governor, among the factors determining credit ceeding months Treasury bills were and in March 1936 he was appointed to the policy; the maintenance of a ready still selling at ½ of 1 per cent, while newly created offi ce of First Vice-President. market for Government securities be- the yield on the longest Government 111 this office, Mr. proul was chiefly con cerned with the formulation of policy and came the paramount, rather than an bonds reached a low point of 2 .12 with the general administration of the bank. incidental, guide to policy. The role per cent on April 6, 1946. Meanwhile, He did 11ot relinquish his supervision of the of finance wa to get out of the way of during the six years of the war, the foreign operations of the bank until 1937, production. We had to place reliance public debt had gone up from 42 however, and from eptember 1938 until o vember 1939 he directed open market opera on other controls to prevent or restrain billion to 278 billion. The money tions in bills and securities. During this latter inflationary pressures. supply ( demand deposits adjusted and period he was also Manager of the System's It should be remembered that we currency outside banks) had increased Open Market Account. On January 1, 1941, Mr. proul became the President of the Federal entered the war after a long period of from 3 6 billion ( 12 / 3 1/39) to $10 2 depression and of tremendous excess billion ( 12 / 3 1/45 ) · The Govern- Reserve Bank of New York, the office which he 110w holds. He is also Vice-Chairman of the reserves and low money rates. Rates ment security holdings of the Federal Federal Open Market Committee, which di on Treasury bills were at or near zero, Reserve Banks had nsen from 2.5 rects the open market operations of the Fed and the rate on 26-31 year U.S. Gov- billion (12/31/39) to 24 billion eral Reserve Banks. ernment bonds was 2 ½ per cent. It ( 1/ 2/4 6). It was time to try to retreat from a support policy to an inject rising rates into the shorter end orderly market policy and to try to of the structure in order to keep that Address at dinner given by Federal introduce some flexibility into the portion of the public debt attractive Reserve Bank of Dallas upon the occa- interest rate structure. ot only had to bank and non-bank holders and to sion of the annual joint meeting of its Board of Directors and the Boards of the need for a rigid structure, in order possible new purcha ers. The release of Directors of its El Paso, Houston, and San to facilitate Government borrowing, monetary controls lagged, however Antonio Branches, on November 12, 1948 been removed by the termination of due to the reluctance of the Treasury at the Baker Hotel in Dallas. the war, but it was al o desirable to to make any changes. ot until April Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • 1946 was the wartime preferential dis ing to some restraint upon borrowers and in the light of our commitments count rate, ½ of 1 per cent on ad and lenders, that it would increase the abroad. It is the best policy if we are vances collateraled by Government attractiveness of investments in short not to fail a world which is critically securities maturing within one year, Governments, and that it would thus and perilously divided. We cannot discarded. It was not until July 1947 make it possible for us to sell short allow long term Governments to go that the ½ per cent rate on new maturities from our portfolio while we unsupported, and fall no one knows Treasury bills and the buying and re were buying long. This policy was how far, nor can we risk the increased purchase agreements with respect to helped tremendously, of course, by the sales to us which might follow our such bills were discontinued. It was fact that there was a substantial sur shifting the pegs below par, if we do not until the late summer of 1947 plus in the Treasury cash budget dur not also accept the premise that a that the rate on one-year certificates ing fiscal year 1947-48, which surplus likely collapse of the securities markets of indebtedness was permitted to rise. was used largely to retire Government ( and perhaps the deliberate precipita All during this period, the long term obligations held by the Reserve Banks tion of a depression) would be health 2 ½ per cent bonds were selling at and by the commercial banks. The ful. Nor can we risk impairment of premiums, and we were able tem Treasury cash surplus was the dog and the Government's credit as a result of porarily to continue a policy of orderly we were the tail. Taking dog and tail such a collapse, unless we feel there is markets, as distinguished from a policy together, from November 1947 to No no chance that the Government may of fixed rate support, in the long bond vember 1948 the total amount of soon have to borrow to meet our in market. This situation continued until Government bonds purchased by the ternational ( or our defense) commit the fall of 1947 when the demand for Federal Reserve Banks in support of ments. Whatever we do involves risks capital funds overtook and passed the the Government security market -tha t cannot be a voided. We are amount of accumulated and accumu amounted to $10,904,683,100. Of taking what in our judgment appeared lating savings. By force of market these gross purchases, about $3 billion to be the lesser risks. Our critics think pressures, there being many sellers and resulted from bank sales to us to meet we are mistaken, but I have not yet very few buyers, our policy of main the three successive increases in mem heard one who I thought had taken taining an orderly market was quickly ber bank reserve requirements during into account all the factors and assessed forced in to a policy of fixed rate the past year. Thus, only $ 8 billion of all of the risks. support. In order to minimize the our purchases were more or less "nor volume of sales of Government securi mal" transactions, and as offsets to WHAT do our critics suggest? ties to us, and to emphasize the support these, roughly $10 billion of other Some say that we are wrong to support factor in our operations, we dropped Government securities were sold or re Government securities at par or slight our prices in December 1947, sticking deemed out of our portfolios. The ly above-that this invites selling in a at a 2 ½ per cent issuing rate for difference between $ 8 billion "normal" supported market, whereas if the sup 22-27 year bonds. This meant a mar purchases and $10 billion sales meant port price were slightly below par, say ket price of slightly above par for an absorption of about $2 billion in 9 9, it would deter selling since the those moderately shorter bonds which member bank reserves. This roughly seller, in most cases, would have to were then outstanding. Our orderly offset the rise in member bank reserves show a loss on his sales. Other coun market policy had now merged into a resulting from gold inflows of $1.7 selors, also wise in the ways of timid support policy, as is almost inevitable billion and a return flow of $.4 billion investors, say, however, that another in a market of the size and importance circulating currency. In other words, engineered drop in prices, which would of the Government security market, if sales and redemptions of short term create this loss-sale situation, would ther~ are many sellers and no buyers, Government securities by the Federal a-lso lead to further selling of Govern and if order is to be preserved. Reserve Banks have very largely offset ment securities to prevent possible From November 1947 to March the money market effects of our own further losses. They say the urge to 1948 we added approximately $5 bil purchases of Government bonds, as cut losses is at least equal to or stronger lion to our holdings of Treasury bonds. well as the effects of gold inflows and than the urge to take a small profit. There followed 3 months of market currency returning from circulation. That leads to a second group of calm when no support of long term critics who say that the engineered bonds was necessary. With the special HowEVER, there have been two or decline in prices should be to a point at sale of F and G bonds announced last three important changes in the situa which the yield on long term Govern June and with the calling of the Special tion which are affecting our present ment bonds would be about 2 ¼ per Session of Congress to discuss anti operations and will affect our future cent-that such a yield would provide inflation measures last July, substan operations. Taxes have been reduced, a living for insurance companies and tial sales of marketable Government increased military expenditures have other institutional investors, that faced bonds again found an unwilling market become necessary, a large-scale foreign with a loss on sales and a living wage and we had to resume support. This aid program has had to be continued, on purchases, they would soon become situation has continued since, with and the Treasury cash surplus of fiscal buyers instead of sellers of long term rising concern as to the desirability of 1947-48 has largely disappeared in fis_ Governments, and thus our support our policy, and rising doubts as to our cal 1948-49. What we have now is an problem would disappear. I am not willingness to continue it in the face orderly market policy which almost by going into the social-economic question of persistent inflationary pressures. force of circumstance has become a of "providing a living for institutional We have not been nor are we now market support policy. It is not indi investors". Quite apart from such entirely helpless, however. We have cated by blind adherence to low in broad considerations, this suggestion been attempting-and fairly success terest rates, nor by Treasury insistence resolves itself into a matter of judg fully-to offset the credit effects of on keeping down the cost of servicing ment, or opinion, as to the level at our support of long term Government the debt. It is a policy which the which the whole market, including the bonds, by permitting a further rise in Federal Open Market Committee be institutional investor market, with short term rates. It was hoped that lieves is the best policy, for the present, whatever aid we might give, would this would create some uncertainty in the light of the necessity of main regain approximate balance under pres about the future course of rates, lead- taining high level production at home ent conditions. Would it be at a price Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • of 9 5 and a yield of slightly over 2 ¾ and conceivably this might be a way the immediate future months the per cent or at 91 ½ and a yield of 3 out of the present situation. Finally, changed Treasury position ( from one per cent or at 8 3 ½ and a yield of and on an almost philosophical plane, of large surplus in the budget to one 3 ½ per cent or where? Opinions differ there is the suggestion that we should of small surplus or no surplus) is because no one knows how all kinds buy Government securities only when like! y to be the main element in the and types of investors and investments we wish to put funds into the market effectiveness or lack of effectiveness would react to such a price and yield and sell them only when we wish to of a fiscal-monetary program and an change in a market still subject to take funds out of the market-the element which will seriously compro s{ipport and to administrative deter true open market operation. If we mise the chances of attaining a balance mination of the level of that support. could do that, without running serious of demand for goods and services with risks in a dangerous world, there would the available supply. In other words, THEN there are those who say we be no problem. the cost of waging a "cold war" and should abandon our support program What is the core of our immediate the possibility of a "hot war" are the altogether, perm1ttmg a "natural" problem? Whatever may have been principal factors disturbing the present market to determine its own prices our earlier sins of omission or com general tendency toward stability in and yields; by which they mean, I mission, the core of our problem dur prices and production. suppose, a market as "natural" as a ing the past year has been the fact If that is what we have to cope market can be in which open market that large expenditures for (a) plant with, a tougher monetary policy isn't operations are being used as an instru and equipment, (b) residential, com the answer. It is becoming a problem ment of credit policy. That suggestion mercial, and public construction, ( c) similar to the problems of war finance has a ring of fundamentalism about it, inventories, and ( d) net foreign ex -in which it is essential that the Gov and it is, of course, a good long range penditures, have increased incomes ernment's credit remain undisturbed; suggestion. Eventually we all want to without adding immediately to the in which continued high taxes and get away from a supported market and flow of goods and services available increased tapping of savings will be advertised commitments as to prices, for current consumption. Savings of required; and, should the situation get and, in a peaceful world, it is not un business and individuals have not been worse, in which the question of con likely that we should find the market large enough to finance this capital trols would again have to be faced, for riskless long term investments bal formation, and some part of it has been controls which this time might need ancing itself at 2 ½ per cent. Mean financed by borrowing from banks, to include some control of capital ex while, however, the chief appeal of the insurance companies, and other lenders, penditures or capital issues. We must abandonment theory is the idea that chose lenders obtaining some of the quit thinking and talking as if the the way to let go of a bear's tail is to funds which they lent by selling Gov immediate reconversion after war has let go. At least you will resolve your ernment securities to the Federal Re been completed, and we can now pro problems one way or another, although serve System. We have been trying to ceed as if we were at peace to do the the solution may be a pretty messy one. make capital out of credit. This sit things we might do if we were com I could go on. This is one of those uation and growing discussion of it pletely at peace. affairs which properly concerns every led to some public doubt as to the In terms of monetary action or one, and on which many people find desirability of our support of the Gov credit control, that means to me that need to express their views. There are ernment security market, and increas ·we shall have to continue with our those who say we should jiggle prices ing public doubt as to our willingness modest policy for the present, buying a bit-not be <so rigid in our support to continue that support if its means long term Government securities so and thus take advantage of the com contributing to inflationary pressures. long as the market lacks suffic,ient petitive spirit of prospective buyers balance to warrant a change from and sellers of Government securities, THE situation calls first, perhaps, for support to an orderly market tech some of whom may make purchases or a reassessment of the prospects of fur nique; and making short term Gov defer sales in the hope of a more favor ther inflationary pressures. The de ernments sufficiently attractive so that able market. This technique is said to veloping and emerging weak spots in the net of our open market operations be effective, sometimes, in floating our economy do not seem to be of the will be no addition, or better some corporate securities which may be a kind which would seriously endanger withdrawal, of funds from the reserves little sticky. One wonders whether it the underlying strength of the current of the member banks. Coupled with applies to a 5 0 billion dollar market as posi cion. However, most of the basic this modest credit policy, we shall have well as to a 5 0 million dollar market? physical business indicators could be to make every use we can of the de Taking a much broader view, there expected to level off ( as they have vices of debt management, to keep are those who say we should continue been doing in recent months) rather pressure on the banks, and we shall to support the Government security than continue to rise, and prices ( and have to work and hope for a fiscal market, but that our support should be all indicators including a price ele policy which will recognize the danger directed solely toward maintaining ment) would be likely to taper off of piling a further inflation on top of orderly conditions in the market, not somewhat-were it not for the de the inflation we have already had. toward maintaining particular prices mands of preparedness for war and If chat seems too modest a policy and rates of interest. That is where we even the possibility of actual war. for those who say they think it is time came in, of course, but experience in That proviso immediately focuses at for the central banking system to dicates that you need more inherent tention on the fact that we are not crack down, or to increase the pressure, balance in the market than has existed blessed with peace, no matter how far or to "get out from under the dom during most of the past year to make we may be from war, and our economy ination of the Treasury', I can only such a policy practical. Recognition of can't and won't function as if we suggest that they might feel different this fact led many others to suggest a were at peace. The thinking and plan ly if they had the responsibility for variety of conversion operations, which ning of consumers and business men policy. I hope so, because to me the would seek to restore inherent balance are affected in varying degrees by this risks they would run, in the light of to the market while retaining the essen situation, and it is already a consider the present world situation, are the tial elements of present support policy, able factor in the Federal budget. In risks of irresponsibility. Reprinted from THE TEXAS BANKERS RECORD, November, 7948 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Allan Sproul (1948, November 11). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19481112_allan_sproul

@misc{wtfs_regional_speeche_19481112_allan_sproul,
  author = {Allan Sproul},
  title = {Regional President Speech},
  year = {1948},
  month = {Nov},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19481112_allan_sproul},
  note = {Retrieved via When the Fed Speaks corpus}
}