Regional President Speech

Lecture I MOHETAKT AMD FISCAL POLICY Outline of Lecture by KARL R. BOPP Vice Présidait, Federal Reserve Bank of Philadelphia before the y if 1956 Executive Program in Business idainistration Graduate School of Business, Columbia University Arden House, Harrioan, Mew York July 26-27 and September 20->21, 1956 I* Our conaaon objective: stable economic growth Am The method of authority versus the method of cholee B. Ve hove a money economy 1. Spending money is like casting rotes for use of our resources 2m Freedom to choose 3. let want enough rotes east to utilise available resources C. Relation of fiscal, debt management, and monetary policies ftt flow of expenditures D. Obligations under Bqp^iyment Act of 1946 II* Fiscal policy A. Older idea 1. Government concerned only with its own fiscal problems 2. Decided vhat it wasted to do and how much it would cost 3m Passed taxes to pay 4. Annual balance, except for a* Extraordinary items (1) Vars (2) European capital budgets bm Tariffs for protection Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 2 - B. Newer idea 1* Government has a general economic responsibility 2. Fiscal policy has important repercussions on the economy a« Sheer magnitude Fed. expend, fiscal 195© - 1^6 billion ¿>£3 { /0r State and local = billion 3^1 > X (Hew Seal b. Tax atructjjre^^^ ^. ^ Recovery ^ and Reform) c. Expenditure structore / C. Compensatory fiscal policy 1. The idea (effects on business confidence) — €L 2. Automatic - or "built-in11 - stabilisers a. Nature of Federal tax system - revenues heavily dependent on individual & corp. incomes e.g. Fiscal 195^ Direct 019 indiv. Soc. Sec. Corp. b. Expenditures Social Security Support programs 3* Discretionary: a. Political aspects 4. Limits a. The budget process (1) Agencies now vorking on budget for Fiscal 19# f 7 (2) By September 195^ departmental esti­ mates doe for 19 5ft 9 (3) Budget Bureau review (4-) President subnits in Jan. 1957 (5) Budget year begins July 1, 195$ b. Projections - 18-24 months in advance Fiscal Projections and Realizations M w l Taar July 1. 1955 - Jtete 30. 1956 Final as Original 1st* Revised Revised Revised Reported Jan. 1955 A*g. 1955 Jan. 1956 May 1956 July 19 BMaipta 60.0 62.1 64.5 67.7 68.1 <a..u 63.8 <*.3 65.9 66*4 nr gvnlgtf - 2*4 - 1.7 .2 + 1.8 + 1.75 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - o* Secure flexibility thru administratire control? Dangers d. Tax rates apply to calendar year The more flexible you make it, the harder for business to plant 5. Conclusion: a. Powerful, but not very flexible b. But should not have big deliberate unstabilising effect III. Debt Management policy A. Size of debt and changes in it a result of past fiscal policy 1, Responsibility of Congress 2. Debt ceilings 3« Debt primarily a result of wars and depressions U.S. Public Debt Outstanding ($ billions) June 30, 1916 . . . . . . $ 1.2 1919......... 24.5 ) 11 successive annual 1930 ......... 16.2 ) reductions 1939 40*4 + 5.5 guarant. Feb. 28, 1946 ......... 279.2 April 1949......... 251.5 low.................. 275.0 approx. 4. Present status Total debt about . . . $275 billion Non-market......... 127 iff " (Incl. 11 b. conv.) TOUR INTEREST IS IN Mazketables B. Alternative principles (no rabbits in the hatl) 1* Lowest interest cost a. Obviously don't make any issue "too sweet" b. But if this is BASIC objective , (1) Pressure on monetaxy authority - pre-Accord (Costs of Gov*t nake all credit cheap and plentiful goods and serr.Tj (2) Also tends to rising interest structure so issue shorts - end with basket of quicksilver c. Of course, it makes for ease of flotation Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 2. Tailor issues to investor demand ^ . . a. Hice sounding title « *' ♦<**- Of course, need judgment as to available funds and investor groups b. "Investor demand” not absolute (Ownership Chart p* 32-3) c. What it eomes down to is Cl) On demand for funds: other borrowers would get what they want and Treasury would get what is 3*ft i.e. short-teims in boom and long-tems in depression d. Aggravate the business cycle 3. Counter - cyclical (compensatory) a. Intellectual appeal Vary liquidity to suit requirements of the economy b. Some problems - need to predict economic future (1) When do you issue long terms? (a) In prosperltyl - But (i) Risk of failure - other demands are then strong (ii) Means when rates are high: successive issues at higher rates. Also late prosperity issues will go to premium (iii) Hard to explain to unsophisticated audience (b) In depression? No (i) For fear of aggravating depression but funds are plentiful then (2) What about economic conditions when bonds mature? (a) Make callable - but not for nothing (3) Illustrate with problem of savings bonds - economy would best be served if people bought during inflation - but is individual? c. Some hope if cycles remain moderate in amplitude 4* Debt management can make a modest contribution 5. Has to manage in market as fixed by central bank Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 5 - IV. Monetary policy A. Basic principle: to influence the flow of expenditure by changing the supply, availability, and cost of money and credit. 1. Central bank given authority to issue money and to determine the conditions under which it will do so 2. Demand deposits, the commercial banking system, and the key role of reserves B. Objective is not to achieve any given quantity of money or any given rate of interest but, as Chairman Martin phrased it, to influence the supply, availability, and cost so that "the supply and flow of credit is neither so large as to induce destructive inflationary forces nor so email as to stifle our great and growing economy." C. The instruments of policy 1. Open-market operations - put money into the market or take it out directly. 2. Discounting Market takes initiative effect on availability 3. Reserve requirements 4.. Selective credit controls D. How the System operates Federal Open Market Committee meets every three weeks *>. s Continue as is Tighten - and how much (3) Ease - and how much c. Changes ure usually moderate (1) A little more, a little less (2) # Resolve doubtq on one side or the other (L ¿CAMri t L TU. dL*AJ x. ♦ Manager of the account and daily telephone calls and wire reports ^ ^ '* " a. Projections of non-controllable factors H*#** b. Inevitable errors in projections c. How correct for errors (1) Bring average in line? (2) Vhat happens on subsequent days? d. Regular way transactions •. Cash transactions Digitized for FRASER http://fraser.stlouisfed.org/ f. Federal Reserve Bank of St. Louis - 6 - £$. What to watch for a. The critical importance of reserves and interest rates b. Total - a growing economy needs more - unless requirements are reduced c. Excess reserves d. Borrowings e. Net excess (free) or net borrowing f. Question of distribution money rates i w i - . - • • » k :.. » * w ■ *4 A. Stable economic growth means flexible fiscal, debt management, and monetary policies B. Restraint is never popular C. Reason to hope we may achieve but 1, People were sure of this in the new era of the 1920's. Are we, too, deluding ourselves? 2. Is "full-eraployment" consistent with stable prices - or economic stability? Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Karl R. Bopp (1956, July 26). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19560727_karl_r_bopp

@misc{wtfs_regional_speeche_19560727_karl_r_bopp,
  author = {Karl R. Bopp},
  title = {Regional President Speech},
  year = {1956},
  month = {Jul},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19560727_karl_r_bopp},
  note = {Retrieved via When the Fed Speaks corpus}
}