Regional President Speech

Presentation by Roger Guffey Federal Executive Board Kansas City, Missouri February 23, 1977 Thank you very much for your invitation to speak to you today. I appreciate this opportunity to discuss with you and to describe briefly our responsibilities at the Federal Reserve &ink of Kansas City. In considering the focus of my remarks, I reflected about the similarities and differences between the agencies represented here today and the Federal Reserve &inks. With our Bicentennial year just completed, it occurred to me that some of you admin­ ister agencies which have provided long and distinguished service throughout much of the 200 years of our nation's history. In contrast, some of you represent agencies which were created to respond to specific needs in the American society which have become evident as the nation has grown and prospered. No matter the lineage, however, you work here in Kansas City to deliver Government services and to provide closer contact between the policymakers in Washington and the citizens of mid-America. At the Federal Reserve &ink, we, too, have a tradition of local and regional service although the Federal Reserve System--the nation's central bank--has had a relatively short life span--the Federal Reserve &inks have been operating only 63 years. Like many of your departments or agencies, the Federal Reserve System was created in response to growth and changes in American society: with the increasing industrialization of the American economy at the turn of the century, and the growing interdependence of the economy, the existence of a flexible money supply that could grow or contract with the needs of a modern economy became essential. After a series of devastating ''money panics"--the last serious one in 1907--in which there was not enough acceptable currency available to fuel the economy, the Federal Reserve System was established to provide elasticity to the nation's money supply. This flexibility -2­ was originally provided through the System's authority to discount commercial bank paper at times when banking liquidity was needed--and conversely--to soak up excess liquidity in banks when necessary. Among other reasons for the System's creation was the improvement of banking supervision to provide confidence in the commercial banking system. Over the years, of course, the role of the Fed has been expanded and one of our most important re­ sponsibilities now is to formulate and implement monetary policy in such a way as to promote a fully employed economy, stable prices, and a reasonable balance in our international pay­ ments. As marry of you may know, there is a fundamental difference between your departments and agencies and the Federal Reserve Bank. Your agencies are purely governmental, re­ sponsible directly to the executive branch. The Federal Reserve Bank, on the other hand, is quite different. The creators of the Federal Reserve System--which includes the Board of Governors of the Federal Reserve System in Washington, the 12 Federal Reserve Banks, and about 5, 000 member commercial banks--put together something unique in central banking. Most central banks in the world are established in such a way as to concentrate their policymaking and operations in the national capital as a governmental function. The Federal Reserve System, in contrast, was designed to blend both the public and private interests into an independent, decentralized central bank and disperse its operations and much of its policy determination among 12 regional Reserve Banks. The choice of such a structure was rooted in the traditional distrust by the American public of any undue concentration of economic and financial power. It is true that the Federal Reserve System does perform many public functions and has many of the characteristics of a governmental entity, but the System was designed to be independent--that is--independent within government. -3­ Let me expand a little on that. The Board of Governors in Washington is a govern­ mental body composed of 7 members appointed by the President and confirmed by the Senate. The Federal Reserve Banks operate under the general supervision of the Board of Govprnors, but they are essentially semi-private institutions. Our employees are not subject to civil service. The capital stock of the Federal Reserve Bank of Kansas City is owned by about 820 member banks in the Tenth Federal Reserve District (Colorado, Kansas, Nebraska, Wyoming, most of Oklahoma and New Mexico, and 43 counties in western Missouri), but the member bank's ownership prerogatives are rather limited, although they do perform the very important function of electing six of our nine directors. Our operations are not funded from Congressional appropriations, but rather from earnings on the System's portfolio of Government securities and--to a far lesser extent--earnings on loans that we make to mem­ ber banks. The System's most important policymaking body is the Federal Open Market Committee, known as the FOMC. The FOMC again blends the governmental and the private: it is composed of the seven members of the Board of Governors and the 12 Reserve Bank presidents, although only five of the presidents are voting members at anyone time. The FOMC's responsibility is to determine the course of the nation's monetary policy. Decisions the FOMC makes and actions the Fed takes to buy or sell U. S. Government securities in the open market strongly influence the availability of money and bank credit in the economy and, ultimately, overall economic activity. Simplified to its bare essentials, policy actions normally work like this: the FOMC may determine that it is desirable to ex­ pand the amount of money and credit in the economy and undertake to purchase government or government agency securities in the open market. When the purchase is made, the securities _ are paid for by a check drawn on a Federal Reserve Bank which becomes a deposit in a com­ mercial bank. -When that check is deposited--at that point--new bank reserves have been -4­ created and new money is available to the commercial bank to expand its loans or invest­ ments. We have created fuel for economic expansion. Conversely. when the FOMC decides to contract the supply of money and credit. it sells securities from the System's portfolio and the Federal Reserve accepts a check drawn on a commercial bank in payment for the transaction. At that point. the amount of that check is deducted from the bank's account (and the entire banking system). Bank reserves actually evaporate. A contraction of the money supply has occurred. We have taken away the fuel. Even from this very simple description of the process and potential impact,of monetary policy decisiQIls. I hope it is clear that monetary policy can and does exert a tremendous in­ fluence on the national economy. Likewise. fiscal policy decisions--that is. the Government's taxing and spending decisions--also have a powerful influence on the level of economic activity. You are all aware of the effect of the spending activities of your own agencies as they purchase goods and services locally and nationwide. Even now the Carter administration is making de­ cisions about using Government programs for the purpose of economic stimulus and Congress is working on its plans. too. The economic effects of these fiscal decisions will be among the factors considered by the Federal Reserve as it determines the path of monetary policy over the coming months. Some of you may be asking yourselves right now: why is it important that the Federal Reserve be independent within Government? Couldn't Congress or some agency simply make and implement decisions about expanding or contracting the money supply? In answer. I'll just say this. In a nation in which the governmental processes are characterized by a well-developed system of checks and balances. it seems to me quite proper. and even necessary. to separate the money spending functions of government from the money creating functions. The lessons of history--and current events--testify clearly that nations with central banks which are politically dominated by either the executive or legislative branches of government have poor records at -5­ controlling inflation. when political forces usurp the money creating process in a nation, new money is created to finance politically desirable projects instead of relying on the taxing authority to pay for those projects. The result is rampant inflation, a weakened financial structure, and often collapse. As we at the Federal .Reserve Bank analyze the regional and national economies in order to develop our position with respect to what monetary policy ought to be in prepara­ tion for an FOMe meeting, the importance of the independence of the Federal Reserve is highlighted. Let me assure you that Federal Reserve policy inputs start at the grass roots, that these inJ;?uts are backed by facts and analyzed and refined by objective professionals, that they are not colored by short-run political consid~rations, nor are they subject to manipulation by spec ial interests. In support of this independent policy view, we gather economic intelligence from many sources, including our seven states, using banking arid economic statistics as well as con­ tacts with businessmen, bankers, and others with their fingers on the region's pulse. Re­ cently for exampl~, our staff surveyed the region concerning the effects of the harsh weather and energy shortages on employment, production, and so forth. The information collected was part of the input to the FOMe meeting held last week as our Bank took part in the policy development process. The decisions made last week by the FOMe are designed to achieve a level of money and bank credit in the nation as a whole which we believe most appropriate for the economic and financial environment we see. Just what is that economic environment? What will be the economic and financial con­ ditions within which your employees will be asked to continue or to increase their purchase of U. S. savings bonds in the year ahead? By way of background, in just a few weeks, the nation's economy will reach the second anniversary of the start of the current economic recovery. The recovery has been broad -6­ and has been enjoyed by nearly all sectors of the economy over the past two years, despite the so-called economic pause of 1976--a pause, incidentally, which was to have been expected by historical precedent. The pause or slowdown experienced last year was eased to some extent by stimulative fiscal actions as Federal spending picked up late in the year, but many observers--including myself--believe that the increase in business activity in recent months resulted from the workings of normal self-corrective forces in the economy. In any case, positive economic news continues to appear on several fronts. Consumer spending has shown vigorous increases--demonstrating public confidence-­ while homebqilding has strengthened noticeably. Industrial production has made some good gains in recent months. While the rate of inventory a.ccumulation by businessmen has slowed, this development indicates a better balance between sales and inventories and it sets the stage for additional economic expansion in the months ahead. Although the recent weather related problems have undoubtedly aggravated production schedules as well as the short-term unemployment situation, employment for the year as a whole in the nation has been growing rapidly and as a result personal income is showing higher rates of growth. These generally positive signs indicate to me that further strong gains in economic activity are likely during 1977. The data indicate that consumers do have money to spend and they are spending it, but that they are adding to their debts cautiously. Credit for automobiles and homes is in ample supply and housing starts and auto sales reflect that situation. As con­ sumers spend, businesses also will be encouraged to spend to replace inventories and for new plant and equipment. Even though it appears that we can be reasonably confident that 1977 will be a good year for the nation--I must sound a note of caution--the unemployment rate is far too high. And inflation, which extracts a harsh penalty on everyone in the nation, remains a serious threat. -7­ We have made good progress against inflation, as consumer prices rose only about 5 yer cent in 1976, versus 7 per cent in 1975 and 12 per cent in 1974, but we must guard against rekindling inflationary pressures in the months ahead. As the pace of economic activity quickens in 1977, the potential certainly exists for upward pressures on prices. Because the economy appears to be on a clear and positive growth path, but with infla­ tion remaining a serious concern, it would be wise in my judgment for the Administration and Congress to give serious thought to the ultimate impact of the economic stimulus programs which are now being considered. Several questions come to mind. For exp.mple, is there really enough slack in the economy to absorb the proposed stimu­ lative actions, or would such programs just add new pressures on prices? In my view, if the economy does indeed perform strongly in 1977 as many observers anticipate, then we may not need an energetic economic boost from fiscal policy. And what about timing? Should any serious stimulus be considered for 19781 In any case, the tax rebate program now before Congress undoubtedly will increase the expected Federal deficit and could lead to an over­ burdening of our financial markets. thus driving interest rates up sharply which serves to dampen economic activity. While the devastating impact of the harsh winter on the eastern part of the nation is fresh. and the drought in the western states threatens to affect food production and. ultimately, food prices, the temptation to provide strong remedial actions undoubtedly is very great. We hope that Congress and the Administration will weigh carefully any prescriptions for economic stimulus to make sure they take account of the ever-present dangers of inflation. Given the economic and financial situation now--characterized by strong current and prospective economic activity reflecting consumer and business confidence, and also char­ acterized by relatively stable financial markets, it appears an ideal time to encourage your employees to purchase U. S. savings bonds through payroll savings. In addition to the tra­ -8­ ditionally good reasons for savings bond purchases, including thrift, safety, convenience, and patriotism, I'd like to mention two other reasons equally important to the consumer and to the Government. First, for the consumer--savings bonds provide an attractive yield of 6 per cent when held to maturity, a good return compared to most other savings instruments available to con­ sumers. With passbook savings rates about 5 per cent, and short-term money market rates well below 5 per cent, savings bonds are indeed a good investment, even without the several tax advantages they enjoy which increases their real yield. Finally.--and this is a factor very important to those of us involved in public economic policy--broad public ownership of the Government debt through savings bonds acts to stabilize the debt base. Such wide ownership provides the Government with a dependable, long-term foundation for its national debt structure. Millions of Americans buy savings bonds and hold them an average of six years. Since about one fifth of the public debt is in the form of savings bonds, the stability of this portion of the debt allows the Treasury to go to the market less often than would otherwise be necessary. This eliminates some of the serious impacts of Treasury financing on the nation's financial system and allows financial markets to marshal resources to help provide the guidance and direction to the economy which is required in our free enterprise economic system. Thus, savings bonds are critical to good debt management. In summary, your support and encouragement of the payroll savings plan for savings bond purchases by the employees in your agencies can provide an important impetus for thrift, safety, and financial well-being among these people, but it also can be of significant service to your Government in its debt management problems. In conclusion, I should tell you that if I've inspired you about savings bonds, then I've been standing here making a lot of work for our staff at the Federal Reserve Bank. Because at our Kansas City office we issue all of the savings bonds for western Missouri and Kansas-­ -9­ almost $600 million worth last year--and all of those new savings bonds you sell will mean additional work for our staff in 1977. Let me assure you, however, when it comes to issuing savings bonds, we are delighted to play our part.

J. Roger Guffey (1977, February 22). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19770223_j_roger_guffey

@misc{wtfs_regional_speeche_19770223_j_roger_guffey,
  author = {J. Roger Guffey},
  title = {Regional President Speech},
  year = {1977},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19770223_j_roger_guffey},
  note = {Retrieved via When the Fed Speaks corpus}
}