Regional President Speech

K. R. Bopp before Banking Seminar Columbia University« April 7. 195L REICHSBANK OPERATIONS 1876 - 191À INTRODUCTION A. Two-fold purpose of this discussion 1. Methodology of research illustrated 2. Develop general principles of central banking 3* Only casually concerned with episode per se B. How I got interested in the problem 1. Request for memorial article for H. G. Brown Had many fragments on Reichsbank - first met Haggott in Berlin in 1932-33 2. Initial assumptions: a. Control over reserves of banks the key - Keynes, Harris b. The Reichsbank one of the gréât central banks 3. Therefore problem became how did Reichsbank control reserves of commercial banks 4. Disillusionment 5. Bank of France article for H. G. Brown C. Impelled to return to Reichsbank study Proof that Reichsbank did not control reserve balances of member banks A. Did not publish data on except occasionally Why? Management did not focus attention on B. Could not have controlled at predetermined level had it wished to do so Why not? Table VI p. 73 C. Control of balances (even if possible) not = to control over primary reserves D. Variable primary reserve proportions by German commercial banks Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 2 - II. An alternative solution: The ReichsbanV was weak A. That was Keynes conclusion B. But it achieved the primary purpose through some difficult times throughout the period - convertibility'. III. Another alternative: Rationing - qualitative control A. Tempting appeal of this alternative Whatever we cannot explain on the basis of objective evidence, we attribute to variations in administration of discounting - about which unfortunately we have no precise knowledge. It simply must have been true - BUT was it so in fact? B. No direct conclusive evidence Rules published but what about administration of them? Annual reports - barren Steno. Reports of Reichstag - how I chanced on them C. Circumstantial evidence - discount procedures 1. Relation of head office to the branches a. Relative importance of the two (1) No. of branches: 1876 - 182 branches 19U - AB7 ■ (2) Relative volume of business Head Branches Office Bills bought 20% 80% Average holdings 6—8% 92-94* i.e. Head office bought shorter bills b. Control over the branches (1) Annual conferences and reports (2) Approval of larger lines of credit (3) Compensation of branch managers (&} Reasons for method of sharing profits (b) Implications (c) Evidence of implications Complaints of customers that they 870 required to discount. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - 2. Relation of Reichsbank to money market - note p. 9 a. Relative magnitudes (1) Volume of bills drawn in Germany (2) Volume purchased by Reichsbank (3) Volume held by Reichsbank (U) Conclusi ons: (a) Always enough more to expand (b) Always held enough to contract b. Procedural matters (1) Large commercial clientele as well as bankers and Government (2) Collecting agency (3) Many second-grade bills c. Statements of Reichsbank officials (1) von Dechend p. 25 (2) Havanstein n (3) R.B. I p.28 d. Assumptions on which bankers operated (1) Deutsche Bank p. 26 (2) Dresdner Bank " (3) Contrast with J. W. Gilbert p. 27 (4-) Implications D. Conclusion: Reichsbank did not use qualitative controls IV. Rate policy and the cost of credit A. Statements on importance of the Rate by top officials p. 29 B. Four periods in rate history 1. Aftermath of monetary reform 2. Early 1880»s to middle 1890»s 3. Rapid expansion middle 1890*s to 1907 4. Crisis and reappraisal of policy 0. Aftermath of monetary reform 1. Michaelis theory of an automatic rate 2. Large total and small gold reserves Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 4 - D. Easy money and preferential rates 1830-1895 1. Background a. Slow economic development b. Large Reichsbank reserves c. Common official rate 3% never beyond % preferential as low as 7$ 2. Reichsbank and independent banks of issue &. Theory (1) Other banks would operate for profit and might exceed limit (2) Reichsbank would operate in public interest and • *. would not - except in emergencies - exceed its limit b. Operation (1) Full investment policy of private banks (2) Public service of Reichsbank c. Complaint of Reichsbank and lack of comprehension; full investment policy of others increased Reichsbank control It introduced preferential rates and thereby aggravated ease in market - when it thought market already too easy Idle real resources vs. Idle cash reserves in Reichsbank p. 37-38 E. Rapid expansion 1895-1907 1. Background a. Rapid economic development b. Rate as low as 3% uncommon; rates beyond 5% frequent c. Decline in reserve ratio of Reichsbank 2. Seasonal variations a. Causes b. Widespread recognition of necessity of meeting c. Evidence the actions were not in line with theory (p* 45) d. Why not? (1) Rapidity of secular growth obscured (£) Fear that international crisis sight cooe in fall and threaten convertibility (3) Latent concern about issuing taxable notes Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 5 - e. Attempts to solve (1) Discounting versus Lending (Lombarding) (a) Differences between (I) at official + i - 1% rate (II) to maturity for exact period needed (III) collateral not eligible as for notes collateral (b) Results: Discount short bills Borrow rather than discount long bills (2) Require borrowing for mim. no. of days: 3,5*8,14 days (a) Results: (I) Continue to borrow, bit lend funds as repaid Strains were followed by extreme care (3) German Bank Inquiry of 1908 (p. 50) (a) Increase fiduciaiy limit at quarter days Regular limit M550 million Quarterly n M750 n (4) May, 1911 - Loewe suggestion - make borrowing more expensive (a) Charge interest for 10 days + time used (b) Results: (I) Discount long bills (p. 52) (II) Borrow before the 27th of the month (5) New Loewe suggestion: (a) Make discounting more expensive too (b) Not followed (c) Implication| if it had been (1) Market had to have funds somehow and yet (II) Make more expensive each method used F. Crisis and reappraisal of policy &rtegratioii into general principles of ceot-ral baring Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Karl R. Bopp (1954, April 6). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19540407_karl_r_bopp

@misc{wtfs_regional_speeche_19540407_karl_r_bopp,
  author = {Karl R. Bopp},
  title = {Regional President Speech},
  year = {1954},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19540407_karl_r_bopp},
  note = {Retrieved via When the Fed Speaks corpus}
}