Regional President Speech

K. R. Bopp prepared outline. Material in parentheses are notes he made on his copy when leading the discussion at the Presidents' Conference on March 1, 1955. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Hap - You have asked for an informal discussion. I appreciate Leif your invitation. I wish I had answers, but I do not Allan communicate with any burning bush. A1 Wilbur Hugh CONFERENCE OF PRESIDENTS OF THE FEDERAL RESERVE BANKS Malcolm Hap March 1, 1955 DC Oliver THE DISCOUNT RATE AND ITS RELATIONSHIP TO THE CREDIT MARKETS Gavin Bob * Hap - It is a pleasure to introduce discussion - informal. Cecil From time to time I have talked with you - may call on you. Outline of Introduction to the Discussion I. Historical background tablish F.R. Banks A. Initially discounting was considered the most important iscount com'l paper function of the Federal Reserve Banks (both for itself Elastic currency and to provide an elastic currency) and the discount supervision ) rate was considered the most important tool. B. During the 1920's open market operations were given an increasingly significant role and became, in fact, the primary tool, (or at least equally important as discounting and the rate) erhaps inevitable C. While Government security prices were pegged, emphasis but tragic) was shifted to changes in reserve requirements. (An inevitable but tragic interlude) D. With the Accord, the System began a systematic reap­ praisal of all instruments. 1. Open market operations - almost Immediately (Committee report published in Flandss 2. With the flurry in discounting during the period Hearings) have been on committees of restraint in 1952 and 1953, attention was forking on these matters - directed to the discount rate and the discount nd have squirmed! mechanism. (Led to Revised Reg. A - in its initial draft ut we all have a job and final draft c do ! That concerns the rules or administration) (what is peculiar about discounting?^ II* / A crucial feature of discounting - and its implication A. Discounting is the chief means by which member banks may take the Initiative in influencing the volume of reserves (or excess reserves) with which they operate. Other factors that determine the volume of reserves are largely beyond the Influence of the member banks: currency, gold, float, Treasury balances, the open market portfolio, reserve requirements. B. We can't say much that is very useful about the rate until we have decided how Important we want discounting to be and the degree to which we want to regulate it through administration of rules. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis We shall come back to each! This is merely presenting the spectrum. 2 - - :There are real people who favor each degree The Range or Spectrum[of emphasis - I shall be Devil's advocate at times III. Alternative degrees of emphasis on discounting - with some implications for rate policy A. All credit is via discounting - extreme I (The only avenue - outside of A. Discounting as a major means of providing the market gold!) with reserves. 1. During the 1920's when the level of member bank reserves was $2-$2^ billion, the volume of borrow­ ing was usually above billion and reached more than $1 billion In 1928-29, so that members as a whole were generally borrowing from 20 to 25 per (at least) cent or more of their required reserves. At the present time the level of required reserves is $l8-$20 billion. 2. This decision would envision a sizable amount of borrowing at all times with rather wide fluctua­ tions to accommodate the seasonal flows of cur­ rency, etc. 3 • Some pros: (a) One of the four enumerated purposes of the Federal Reserve Act is "to afford means of rediscounting” - "commercial paper” to be sure, but still rediscounting. (b) Would tie member banks more closely to Reserve Banks. (c) Would put funds into the banking system directly where they are needed rather than in the central money market.(in the hope that they would trickle out where needed) if. Some cons: (a) Will destroy the "tradition against borrowing" - a desirable characteristic for bankers to have. (b) m view of the liquidity habits of banks and the tradition against borrowing, this state of affairs could not be brought about over night. Even if desirable (c) It really can't be done - will have continual Contractive effect and reduced availability of credit. (d) Will reduce ability of System to make fine adjustments. ilf it can be done (e) Borrowing will be subject to widespread abuse. (f) Difficult or impossible to police impartially. 5. Implications for the rate Rate would have to be placed and kept relatively low in the galaxy of rates. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - B. Discounting as a principal method of influencing the availability of credit. 1 . The volume of discounting would virtually disappear in periods of active ease and might rise - to perhaps $2 billion - in periods of active restraint. 2. Some pros: (a) Makes use of the tradition against borrowing. (b) Essentially what the System has done in the past. Some cons: (a) Gives discounting too small a role - or alternatively - too large a role. »ally what was done in the l Implications for the rate .920» s - and lore recently. (a) Really makes open market operations the Itability of total reserves primary instrument. lisct-^» Open Market portfolio (b) Rate would lag behind changes in market rates and would be changed relatively infrequently. C. Discounting as a method of daily adjustment. (Has never been discussed, P Harold Roelse) 1. Open market operations are not adaptable to day to neral notion that they day adjustments. tre very flexible - text- (a) Although they can be made in amounts precisely boks say so - we know. specified in advance, (b) There is no way to determine accurately how large they should be. Magic in the rate (its elation to maricet rates) 2. Discounts are available precisely where and to the Ither. Policy - should extent they are needed - and allowed by the System. e tighten or ease and how ach - is still the problem! 3» Would be integrated with more extensive use of t is not answered by teenies! repurchase agreements. here do you want to go? / k. Implications for the rate The rate would have to be kept close to market rates - which in turn, however, are greatly eConcerting - but reason your job influenced by open market operations. This Si more valuable - your abilities might imply that closer attention be paid to )jre scarce than Congressmen!/ market rates (as contrasted with the volume of free reserves) in determining open market operations. Even so, changes in rate would probably be more frequent than in recent years. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 4 - D. Limit borrowing to real emergencies evil's Advocate So long as member banks can take the initiative in borrowing, they can escape any pressure the System The "real” problem is wishes to impose. (E. S. Shaw in "Money, Income : b control of M + M^- as and Monetary Policy", p. 2lk, says: "Rediscount uch - there are too many is a breach in the armament of monetary control... tidden and gradual changes Unless rediscount is restrained, monetary control the demand for cash is a fiction.") lances (e.g. Korea - or Merse June 1, 19531) The Discounting would normally be at very low levels eal problem is control of with the discount window kept open essentially to isB terms under which this discharge the responsibility of "lender of last enand can be satisfied, resort." bat is essentially the rate f interest. Permit tighten- Implications for the rate ig with Korea - but not 1 1953 me , ) Rate always high relative to market rates - and possibly tight administration of rules as well. IV. Implications of recent rate history (What would an historian say?) Think of our actions - not in terns of politics - but in terms of history.1) A. Until the Accord, the System was really following the emergency principle. It should be remembered this was the period when the System was limited in its use of open market operations. The rate was raised relatively early in terms of market rates to indicate the System's view as to the need for restraint. B. Since the Accord, the System has been following the principle of influencing availability. Rate changes have lagged behind changes in market rates - at times considerably "behind. But changes in the rate have been made to reflect the System's judgment as to the degree of desirable restraint or ease. This raises the question as to whether the volume of "free" reserves is an appropriate guide or whether attention should be directed to market rates as such. (if you favor A or D - market rates not very important - except in A keep discount rate' low enough and in D keep discount rate high enough1 (But B + C - pay more attention to market rates and conduct open market operations to control theml) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Karl R. Bopp (1955, February 28). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19550301_karl_r_bopp

@misc{wtfs_regional_speeche_19550301_karl_r_bopp,
  author = {Karl R. Bopp},
  title = {Regional President Speech},
  year = {1955},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19550301_karl_r_bopp},
  note = {Retrieved via When the Fed Speaks corpus}
}