Regional President Speech

THE ART OF CENTRAL BANKING by K. R. Bopp Vice President Federal Reserve Bank of Philadelphia before the CENTRAL BANKING SEMINAR held at the Federal Reserve Bank of Philadelphia, Philadelphia, Pa. December 5-7, 1955 Introduction I hope to provoke some arguments and discussions - I expect to "lose11 some of them but that is irrelevant. On the basis of models or logic, I may lose - or win! - so what? Our common goal surely is WISE Federal Reserve Policy. My eaqperience at Missouri: C. J. Anderson and I think of developing idea of Pennsylvania State June talk with Ganby - He will develop - he has a vote - I donft What is possible? Not an artist but an art critic - views are personal - can have in System! Why I have continued to teach - yet not only teach It wonft be difficult to embarrass me - it may not be quite as easy to tell if I am. I shall learn more when I am. Perhaps I am trying to sit where there is no chair. I expect and hope to continue to try till the Old Man with the Scythe cuts me down. YOU have some responsibility for what we think in the Third Federal Reserve District! Make us good! I would like your judgment on: 1) ^ome basic issues 2) Some short-run problems Write every time - without exception - when you think the System (we?) are off the track! I am aware you cannot follow from day to day - but Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 2 - I. Recent revival of faith in monetary policy A. Resumé of history 1. The 1920* s 2. The Great Depression 3. War and Postwar inflation -4. The last three years 5* Present sights a. Where they are focussed Less than 3 million unemployed - growth at 3-4% a year Stable price level b. Relative to earlier periods - in decade of 30*s at no time did we have less than 5 million unemployed; in the past decade never as many as 5 million c. That monetary policy can and should achieve B. Some limitations of monetary policy 1. In the short-run a. Some sudden changes in liquidity preference e.g. invasion of S. Korea. Chinese in army b. But not all e.g. Tightness in mid-1953 2. In the longer-run a. Other factors influencing level and rate of growth 1) Natural resources 2) State of technology 3) Character or spirit of the people a) Inventiveness b) Desire for security b. France vs. Germany 1) 1870-1914 2) Between the wars 3) Since World War II 3* Proper role of central bank Jo help maintain effective demand at rate appropriate to reasonably full use of resources - without inflation. 4. Improper role of monetary policy - structural problems Central bank is interested in - but cannot solve via monetary policy a. Depressed industries b. Depressed areas c. Rate of progress 1) Determined by a) Inventiveness, which increases efficiency of capital b) Investment, or amount of capital 2) Present versus the future Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - II. Mechanism of central bank operations A. Each age has its own approach B. Contemporary opinion holds supply, availability, cost relative to demand C. Possibility of reinterpreting monetary history from this point of view; illustrations 1. The Currency School - exclusive attention on quantity quotes 2, The Banking School - availability quotes 3- Price: a. Denial of its relevance quote b. The Reichsbank 1876-1914- III. Instruments of policy A. Gov. Balderston will talk about objectives and methods of deciding whether to tighten, ease, or remain same. I shall discuss how it can be done. B. ïoû, of course, know the three general instruments of policy and the principles of their operation. These principles assume: ceteris paribus C. Analysis of general controls 1. Discount rate and administration a. Appropriate and inappropriate uses. Difference of opinion on relative weight to cost and rules Martin's Boston speech b. Temptation to write off discount rate except for "psychological" effects When? So high can get credit cheaper elsewhere c. Limits to effectiveness of rate 1) T0 control expansion: when no one is borrowing high rate canft reduce 2) To induce expansion when no attractive loan and investment opportunities are available 2. Open market operations a. Developed to overcome defects of the rate 1) To control expansion - "making rate effective" by forcing market into central bank 2) To induce expansion - make funds freely available, Digitized for FRASER supply more liquidity than the market wants http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 4 - b. Limits to effectiveness of open market operations 1) To control expansion Portfolio of Government securities e.g. Excess Reserves Portfolio Dec. 1935 $3.3 Ml. $2.4 bil. Nov. 1940 6.9 " 2.2 « 2) To induce expansion eligible assets in market authority to buy - now $38 billion Can’t push on a string - severe depression (This led to idea of compensatory fiscal policy - but that is another topic that I shall not discuss.) 3* Changes in Reserve Requirements - first suggested in 1917 a. Affects all members directly rather than through money market b. Limits on authority to change on effectiveness - contingent on willingness to see "tone11 of market change - pushing on string The Fed*s frown is more potent than its smile. 4* Interrelations of instruments Sale of securities may force banks to borrow Their attempts to repqp will be reflected in reduced availability of credit and higher rates Change in reserve requirements not veiy effective unless allowed to affect tone and terms in credit market. (Ve still hzve much to learn about this.) But 1% = $1 billion - may offset part to prevent sudden spasm of tightness or sloppiness 5. A growing and seasonal economy needs more money - reserves in long run from time to time Choice of methods, e.g. next 6 months Relative to demand I Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Karl R. Bopp (1955, December 4). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19551205_karl_r_bopp

@misc{wtfs_regional_speeche_19551205_karl_r_bopp,
  author = {Karl R. Bopp},
  title = {Regional President Speech},
  year = {1955},
  month = {Dec},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19551205_karl_r_bopp},
  note = {Retrieved via When the Fed Speaks corpus}
}