Regional President Speech

FEDERAL RESERVE - TREASURY CONTROVERSY by Karl R. Bopp, Vice President Federal Reserve Bank of Philadelphia before the Graduate Economics Club of Yale University New Haven, Conn. - March 20, 1951 Conclusions: 1. The economics of the particular issue 2. Public Servants in a Democracy a. Intellectual grasp b. How much can we expect of a public servant? I. THE ISSUE: Shall we control the supply of money even though it involves changes in interest rates - or shall we maintain interest rates low even though it is necessary to expand supply of money to do it - or shall we ration credit? A. Why a rise? 1. Cost to Government is direct anti-inflationary results indirect 2» Mistaken notion of cost 1/2% x 250 bill. = li billion tut maturity of outstanding debt 3. Arguaent isn't over 1/S or 1/4% more B. Interest rate theory 1. Marginalism versus absolutes (a) Idea that both savings + investment are inelastic to rates (1) Interest as a cost (2) Interest as an inducement to save (b) What about very large differences in level? (c) What is historical "evidence"? (1) Actual vs. virtual movements (2) Braking a car going down hill 2. The level of rates versus changes Changes influence liquidity Liquidity influences flow of expenditure Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 2 - C. The structure of rates 1. Circumstances leading to positively inclined structure 2. Expectations of change versus certainty 2j% for call money? Actual rates depend on maturities made available D. Summary: Authorities can either (1) control volume of reserves and lost control over price, or (2) control prices but lost control over volume, or (3) ration to do both II. INSTITUTIONS AND PEOPLE A. Precedents on governments and central banks 1. Long run 2. U.S.A.: 1941-1951 m i Federal presses to discontinue 1/2 per cent preferential discount rate Treasury opposed Finally done April 1946 Federal considers elimination of 3/8 per cent bill rate Federal continues to press on 3/8 per cent bill rate 1947-July Treasury concurs on 3/8 per cent rate Toward end of year Board requests added reserve authority Dec. 24 Drop in support prices on bonds 1948-Jan. Increase in discount rates 1 —> 1-1/4 Feb. Reserve requirements ^ 2 per cent at central reserve cities April Request for further reserve powers The simmer interruption In view of System actions, market expected further increases in short rates May 13 Secretary announces June and July refunding stfL-l/8 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - June 11 Reserve requirements t 2 per cent at central reserve cities Aug. Discount rates 1-1/4 1-1/2 July-Aug. Special Session Restore Regulation W Reserve requirements authority increased 4 and 1-1/2 per cent Sept. 16 Board increases reserve requirements 2 per cent on demand, 1-1/2 per cent on time 1949 Recession May Reserve requirements reduced June 28 Statement Aug. 22 Douglas questionnaire Nov. 7 "Materials” volume published Nov. 16- Dec . 7 Hearings Treasury announcement Eccles letter to Committee dated Dec. 1 Snyder testifies Dec. 2 1950-Jan. 13 Douglas Committee Report May 5 Secretary announces June and July refundings into 13-month 1-1/4 per cent notes III. CHRONOLOGY A. Status on August 18, 1950 1. Reasonable difference of opinion as to economic prospects until June 1950 2. Actions a compromise (a) Rates up faster than Treasury desired (b) Rates up slower than System desired 3. Treasury practice of jumping the gun e.g. M^r 13, 1948, and May 5, 1950 Dec. 1949 for Jan. mat. 4. June 28, 1949, declaration of independence - in recession Douglas inquiry as to meaning of statement 5. Statement of positions (a) Douglas report Digitized for FRASER (b) Council of Economic Advisers http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - K - i>. Subsequent developments 1. Events on August 18, 1950 (a) Additional inflation now certain (b) Government's formal position on indirect controls (c) Open-Market Committee decision (d) Treasury action - hoping to forestall? (Prospects: Limited (large) expenditures for unlimited time vs. unlimited expenditures for limited period) 2. Snyder press release of Aug. 21, 1950 3. System dual objective (a) Make refunding a nsuccess” (b) Limit reserves (c) Ngt results (Table p. 5) 4. Snyder ^oard of Trade talk Jan. 18, 1951 5. Vardaman interview - N. Y. Times, Jan. 21 6. Sproul statement, Jan. 22 7. Joint Committee Report Jan. 24> 1951 (a) Slanting question to economists (b) Statement of 400 economists (c) Keyserling pp. 48-49 (d) Lynch pp. 39-40 8. Eccles testimony Jan. 25 9. McCabe Phila. speech Jan. 26 Method of Eccles vs. method of McCabe 10. Snyder hits back at money critics 11. Truman calls in Open Market Committee Jan. 31 (a) White House anticipates action by Open Market Committee? Why? Vardaman? American Banker 12. ^ruman announces "pledge” of Board Feb. 1 (a) Snyder "interprets” 13. Truman releases letter to McCabe thanking Committee for agreeing to support Snyder policy Feb. 2 14. Eccles releases memo of conference saying no agreement had been reached Feb. 3 15. Did Open Market write a letter to Truman? Fib. 7 16. Washington*s birthday in tne Senate (a) 0'Mahoney introduces Clark testimony (b) Paul Douglas* reply Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 5 - 17. White House Conference and memo. Feb. 26 (a) Creates ad hoc group to decide what Open Market Committee should do C. E. Wilson John Snyder Leon Keyserling Tom McCabe (b) Content and implications! of memo. Who prepared? (c) 10 days to 2 weeks to solve - "boxed in?n (d) Reaction to memo 18. Joint announcement of full accord March 3 (a) Treasury announcement of new conversion (b) Martin intercession (c) Interpretation: Joe Livingston 19. Government securities on their own over whole range of maturities March 8 (a) Long terms break par 20. McCabe resigns 21. Martin appointed as successor Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Karl R. Bopp (1951, March 19). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19510320_karl_r_bopp

@misc{wtfs_regional_speeche_19510320_karl_r_bopp,
  author = {Karl R. Bopp},
  title = {Regional President Speech},
  year = {1951},
  month = {Mar},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19510320_karl_r_bopp},
  note = {Retrieved via When the Fed Speaks corpus}
}