Regional President Speech

19^1 Advanced Management Conference of the Metropolitan Life Insurance Company, 1:30 p.m., Monday, July 2^, 1961, Nassau Inn, Princeton, New Jersey. MONEY, BANKING AND MONETARY POLICY AS THEY AFFECT THE ECONOMY NATIONAL GOALS OF OUR ECONOMIC SYSTEM. A. Section 2 of Employment Act of 19*^6: "... Federal Government shall use all practicable means ... in a manner calculated to foster and promote free competitive enterprise and the general welfare ... to promote maximum employment, produc­ tion, and purchasing power." B. Money as the instrument of economic freedom. 1. Freedom to earn, spend, save, invest. 2. Spending decisions guide production. (a) Profit and loss economy. Edsel—^ Rambler. 3. Earning and spending decisions. (a) As individual consumers, household, businesses (proprietorships). (b) In voluntary collectives — corporations. (c) In public capacity — Government. C. Full use of resources. 1. Private and public demand. Output at maximum employment and stable price level. 2. No automatic. Fiscal policy. Debt Management. Automatic effects. Policy. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -2- II. THE ROLE OF MONETARY POLICY. A. Adjust flexibly to economic developments. 1. "When demand is excessive, make money harder to get and more expensive. 2. Vice versa. B. Efficiency in use of money mitigates effects. C. Experience shows it works. Affects capital values and whole economy. Wide variety of borrowers/lenders free to choose. THE ROLE OF FINANCIAL INTERMEDIARIES 1. They cannot create money. 2. If they acquire long debt for short debt, the remainder of the economy is more liquid but they are less liquid! 3- Flow of expenditures may be influenced. Velocity may rise; but can't excape monetary authorities. 4. The economy requires less money than otherwise; but quantity can be regulated. 5. True also if, e.g., corporations invest demand deposits in Treasury Bills. 6. Also their actions are affected by conditions in money and capital markets. e.g. — Finance companies. Pressure by banks to repay in tight money periods forces into capital markets at higher rates. Reinforces higher rates. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -3- III. TOOLS OF MONETARY POLICY. A. Deposits as money* work through the banking system. 1. Commercial banks _ Seek loans and investments when they have more to lend, 2. Vice versa. 3* Reserve position as measure of banks' position. Supply, availability + cost. B. Reserve requirements. C. Open Market Operations. D. Discounting. 1. Rate. 2. Administration. IV. GUIDES TO CURRENT OPERATIONS. A. Lags. 1. Between an event and knowledge 2. Between knowledge and decision. 3. Between decision and effects. B. Methods of determining current policy. 1. Past relationships. (a) Population forecasts. (b) Harvard A.B.C. curves% Speculation, business, banking. (c) Leading indicators. 2. Current behavior. Inertia — weather forecast. Miss every change! Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 3« Expressions of current opinion. Expressions of current intentions, 5. No rabbits in the hat. 6. Judgment, OPERATIONAL PROCEDURES. A. Organization for policy-making. 1. Relations to the Government. 2. Central vs. decentralized. (a) A Federal System. (b) A National Policy. B. Reaching a decision, 1. Federal Reserve Banks. (a) Boards of Directors. 2. Board of Governors. 3. Federal Open Market Committee meets every three weeks. (a) N.Y. Memo on operations. Economic memorandum: Staff review of economic developmemts — Credit developments. 12 Presidents and 7 Governors report. Discussion of past three weeks. (b) Decision as to whether to — (1) Continue as is. (2) Tighten — and how much. (3) Ease — and how much. (c) Changes are usually moderate. (1) A little more — a little less. (2) Resolve doubts on one side or the other. (d) The directive. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -5- c. Execution of policy. 1. Manager of the account and daily telephone calls and wire reports. (a) Projections of non-controllable factors. Float — uncollected cash items. Deferred availability cash items. (b) Inevitable errors in projections. (c) How correct for errors — Conduct of an (1) Bring average in line? operation. (2) "What happens on subsequent days? (d) Regular way transactions. (e) Cash transactions. (f) Repurchase agreements. D. Ultimate authority in a united Board of Governors. RECENT POLICY Last overt move to greater restraint — September 11, 1959 — Ratei 3t to 4$. Despite steel strike. Inflationary psychology. I960 Boom assured because of strike. However, no additional restraint on availability. Net borrowed reserves in 400-500 will range until end of year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -6- (1960 ANNUAL REPORT OF BOARD OF GOVERNORS) Digest of Principal Federal Reserve Policy Actions, 1960 • Period Action Purpose of action January- Rcduccd System holdings of To offset the seasonal inflow March U.S. Government securities of reserve funds, mainly from by about $1.6 billion. Mem­ the post-holiday return of ber bank borrowings at the currency from circulation, Federal Reserve Ranks while permitting some reduc­ dropped from an average of tion in borrowed reserves. $900 million in December to $635 million in March. Late March- Increased System holdings of To promote further reduc­ July Government securities by tion in the net borrowed ré­ nearly SI.4 billion. Member serve positions of mOnber bank borrowings at Reserve banks and, beginning in May, Banks declined to an average to provide reserves needed of less than $400 million in for moderate bank Credit and July. monetary expansion. June Reduced discount rates from To reduce the cost of bor­ 4 to 3 Vi per cent at all rowed reserves for member Reserve Banks. banks and to bring the dis­ count rate closer to market interest rates. July Reduced margin , require­ To lower margin require­ ments on loans fof purchas­ ments from the high level in ing or carrying listed securi­ effect since October 1958 in ties from 90 to 70 per cent of recognition of decline in vol­ market value of securities. ume of stock market credit, outstanding and lessened danger of excessive specula­ tive activity in the market August Authorized member banks to' count about $500 million of their vault cash as required reserves, effective for country banks August 25 and for To provide mainly for sea­ central reserve and reserve sonal needs for reserve funds, city banks September 1< and to implement 1959 legis­ lation directed in part toward Reduccd reserve require­ equalization of reserve re­ ments against net demand quirements of central reserve deposits at central reserve and reserve city banks. city banks from 18 to 17 Vi per cent, effective September 1, thereby releasing about $125 million of reserves. August- Rcduccd discount rates from To reduce further the cost of September 3 Vi to 3 per cent at all borrowing from the Reserve Reserve Banks. Banks and reduce the differ­ ential between the discount rate and market rates • of interest. August- ‘Bdqght or sold at different To encourage bank credit November times' .varying amounts of and monetary expansion by Government securities with a meeting changing reserve net increase in System hold­ . needs and offsetting the im­ ings of about $lv* billion, pact of a large gold outflow including securities held un­ without exerting undue der repurchase agreement downward pressure on short­ and issues with short ma­ term Treasury bill rates that turities other than Treasury might stimulate further out­ bills. Member bank borrow­ flow of funds. ing declined further to aver­ age below $150 million in Ortober and November. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ).m.p 05:2 - ECIVRES ERIW( -7- {Digest of Principal Federal Reserve- Policy Actions-, I960) Period Action Purpose of Action Late Authorized member banks November- to count all their vault cash December in meeting their reserve re­ quirements and increased * reserve requirements against net demand deposits for country banks from 11 to 12 per cent. The net effect of To provide, on a liberal basis, these two actions, effective for seasonal reserve needs, to November 24, was to make complete implementation of available about $1,050 legislation directed in part million of reserves. toward equalization of re­ serve requirements of central Reduced reserve require­ reserve and reserve city ments against net demand banks, and to offset the deposits at central resery$ effect of continued gold out­ city banks from 17 Vi to 16% flow, while avoiding direct per cent, effective December impact on short-term rates 1, thereby releasing about that might stimulate further $250 million of reserves. outflow of funds. Sold U.S. Government se­ curities except for seasonal purchases in last week of December. Member bank borrowings at the Reserve Banks averaged less than $90 million in December. RESERVE SYSTEM BOND PURCHASES "N Y At the direction of the Chairman of the Open Market Committee of the Federal Reserve System the Manager of the System Open Market Account announced: "The System Open Market Account is purchasing in the Open Market U. S. Government notes and bonds of varying maturities, some of •which will exceed five years. "Price quotations and offerings are being requested of all primary dealers in U. S. Government securities. Determina­ tion as to which offerings to purchase is being governed by the prices that appear most advantageous; i.e., the lowest prices, net amounts of all transactions for system account will be shown as usual in the condition statements issued every Thursday. "During recent years transactions for the system account, except in correction of disorderly market^ have been made in short-term U. S. Government securities. Authority for transactions in securities of larger maturity has been granted by the Open Mar­ ket Committee of the Federal Reserve System in the light of con­ ditions that have developed in the domestic economy and in the U. S. Balance of payments with other countries." Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -8- System moved toward ease or less restraint_ Before the economy over-all turned down because — 1. Inflationary psychosis subsided - dormant at least. 2. Competitive buyers markets - unused manpower unused plant and equipment. Could have credit for real growth without inflation. VI. PROPORTION AND PERSPECTIVE ON OUR INTERNATIONAL POSITION. A. Improve our competitive position at home and abroad. 1. Regain our leadership in innovations — new products. Home market — compact car. Foreign market — what they want. 2. Quality of product. 3- Competitive prices. Control of costs. B. Avoid inflation at home. C. Maintain confidence in the dollar. D. Influence foreign behavior. 1. We generously and successfully helped the west to reconstruct. 2. Rising international liquidity. (a) Reduce barriers against U. S. imports. (b) Aid in development — especially Germany. 3. Review our government expenditures abroad. E* The business cycle and the balance of payments. Convertible currencies. Interest rates. Gold movements* Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -9- CRITICISM FOR NOT MOVING FAST OR FAR ENOUGH? Letter dated July 24, i960 from C. Lowell Harriss, Professor of Economics of Columbia University: Dear Friend: In glancing through the FEDERAL RESERVE BULLETIN last night, I noted that you are on the FOMC. This note may be a presumption, but I send it with the best of intentions. With many people, I suppose, I have been sharing disquiet about the business picture. The immediate outlook may be tinged by gloom from the stock market. Yet business ought to be expand­ ing more, I feel. And last night when I looked at the figures of the money stock over recent months and years — I do not ordinarily keep up with matters of this nature — the very slow rate of growth seemed to be not consistent with what I should consider best for the economy. Perhaps if the "Fed" gave a bit more encouragement to money growth, the economy would be better. And I say this recognizing my long record as one who thinks we should pay quite a price to prevent inflation. Please be assured of my very best personal wishes. FOR MOVING TOO FAST: BARRONS1s, August 22, I960: Against this sober setting the recent moves by the Federal Reserve begin to look less like a calculated risk, as they com­ placently have been described, than a wild gamble with the nation’s solvency. For whatever else it may achieve, easy credit invariably works to postpone or prevent the adjustments in prices and costs without which no country for long can remain competitive. Thus it tends to perpetuate the very conditions which inexorably lead to debasement of the currency. By easing credit the Fed has appeased its critics and, perhaps, helped stave off an impending recession. However, it has done so only at mounting peril to the dollar and the long-range national interest. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -10- THE SHORT-RUN1 Hiatus from difference in cycles. Convertible currencies — interest rates _ and gold movements. IF WE HAD: Inflationary psychology — Rising prices. Deteriorating trade position. Full use of resources. Large fiscal deficit. Low gold reserves. Then, to compound with easy money would, indeed, be hazardous. But surely with the reverse, the dangers from easier credit are less than those from tight credit. Cycle in Europe and United States. Proportion and perspective on our International position. Flight from the dollar to gold simply have not had. Balance of payments position. Our trade position — Great improvement since second quarter of 1959. At $4 billion annual Auto imports — except V.W. & Renault rate, mostly exports! exports Our businessmen have been adjusting — Still a problem. WHAT CAN BE DONE ABOUT OUR UNFAVORABLE BALANCE OF PAYMENTS? 1. Influence behavior of foreigners. We helped them - generously - reconstruct — and successfully! (a) Rising international liquidity. Reduce barriers vs. U. S. Imports. Aid in development — especially Germany! The lesson of Germany. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -11- (b) Review our expenditures abroad. Families of servicemen. (c) Avoid inflation at home. (d) Improve competitive position at home/abroad. QUALIFICATIONS OF CENTRAL BANKER. Open mind — but not draughty! Tough skin. Know when to stop! Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Karl R. Bopp (1961, July 23). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19610724_karl_r_bopp

@misc{wtfs_regional_speeche_19610724_karl_r_bopp,
  author = {Karl R. Bopp},
  title = {Regional President Speech},
  year = {1961},
  month = {Jul},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19610724_karl_r_bopp},
  note = {Retrieved via When the Fed Speaks corpus}
}