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The Role Of The Manager Of The Federal Reserve System Open Market Account: 1951-1961

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The Role Of The Manager Of The Federal Reserve System Open Market Account: 1951-1961

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Content 'n
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■•V
70-16,868
HUMPHREY, Joseph. Franklyn, 194-1-
THE ROLE OF THE MANAGER OF THE FEDERAL RESERYE
SYSTEM OPEN MARKET ACCOUNT: 1851-19.51..
University of Southern California, Ph.D., 197Q
Economics, finance
University Microfilms, A X E R O X Company, Ann Arbor, Michigan
@ JOSEPH FRANKLYN HUMPHREY 1970
ALL RIGHTS RESERVED
THIS DISSERTATION HAS BEEN MICROFILMED EXACTLY AS RECEIVED
THE ROLE OF THE MANAGER OF THE
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT:
1951-1961
by
Joseph Franklyn Humphrey
A Dissertation Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(Economics)
January 1970
UNIVERSITY O F SO U TH ER N CALIFORNIA
THE GRADUATE SCHOOL
UNIVERSITY PARK
LOS ANGELES, CALIFORNIA 9 0 0 0 7
This dissertation, written by
J os e p _ h Fran k 1 y n _ H umphyey..............................
under the direction of Dissertation Com
mittee, and approved by all its members, has
been presented to and accepted by The Gradu
ate School, in partial fulfillment of require
ments of the degree of
D O C T O R O F P F IIL O S O P H Y
Dean
DISSERTATION COMMITTEE
Chairman
■ *JU Lit/JT
. 0
ABSTRACT
THE ROLE OF THE MANAGER OF THE
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT:
1951-1961
Since 1951 and the Accord, Federal Reserve officials
generally have been regarded as having responsibility for
securing short-run economic stabilization under the pro
visions of the Employment Act of 1946. While there can be
no question as to the importance of economic stability in
terms of the general welfare of the people, there is some
question as to how effectively monetary authorities have
performed their task and thus promoted economic welfare.
Expressions of disenchantment with the manner in which the
System has fulfilled its responsibilities has usually taken
the form of argument rather than analysis, but all such
studies fail to recognize that at least from 1951 through
1961, the Manager of the Open Market Account was given
considerable latitude in determining the goals, direction
and degree of System policy actions. Indeed, it appears
likely that several of the unanswered questions regarding
the operations of the Federal Reserve can be clarified, if
not resolved, by examining the central role played by the
Manager. One such issue may be the disparity between Sys
tem claims and the actual results of its actions.
While noting the questionable nature of several of
the tools and concepts employed by the System, the major
thrust of the argument, based upon System publications and
the Minutes of the Federal Open Market Committee, is that
the Manager enjoyed considerable independence in his ac
tions. The major reasons for this independence appear to
be: (1) most instructions to the Manager were in non-
quantifiable and essentially undefined terms such as "feel,"
"color," "tone," etc. (2) Instructions were not issued
with statistical references. Items one and two allowed
the Manager to define what the instructions meant. (3) The
majority of the Board's time was spent on non-policy
matters, so that their staff and the Manager played a large
role in policy formulation. (4) Concern by the System
over money-market conditions, and the position of the
Manager in reporting on these conditions, both daily and
at FOMC meetings, further increased the importance of the
Manager. (5) During the period 1951-1961, there was no
rigorous or consistent position of monetary theory or
policy expressed by the System and thus no consistent policy
under which the Manager could operate.
The implications of this evidence take at least two
directions. On the one hand the importance of the role of
the Manager has been under-rated and may provide an
explanation of some of the as yet unresolved issues con
cerning the Federal Reserve. On a more important level,
the circumstances under which one individual, rather than
the duly constituted body made decisions which affected the
entire nation’s economic welfare are quite serious and a
cause for concern and reform.
ACKNOWLEDGMENTS
Recognizing the assistance of many persons in writ
ing this dissertation, I wish to acknowledge my special
appreciation to two.
Dr. Michael De Prano assisted me in so many ways—
with time, patience, and concern— that this could not have
been done without him.
Then there is my wife. She did not do as much typing
and proofreading as some wives— but she was there--and I am
just beginning to understand how much this meant and how
much she really did.
ii
TABLE OF CONTENTS
ACKNOWLEDGMENTS ................................
LIST OF TABLES ................................
CHAPTER
I. THE PROBLEM AND ITS IMPORTANCE ..........
Introduction .........................
Importance of the Problem ............
Hypothesis ..........................
Limitations............ ............
Overview ............................
II. RECENT CRITICISMS AND EVALUATIONS OF
THE FEDERAL RESERVE SYSTEM ............
Introduction................... . . .
The Manager and Free Reserves .........
The importance of free reserves
to the Federal Reserve ..........
Evidence from published
statements .... ..........
Announced changes in policy . . . .
The Manager of the Account .......
Free reserves, money and credit . .
Monetary policy, money and free
reserves .......................
Free reserves ..................
iii
CHAPTER Page
Indicators and Targets ................ 33
The Federal Reserve's use of
indicators..................... 33
The indicator-target problem ....... 36
The money supply as an "ideal"
indicator..................... 47
Commercial bank credit as an
indicator..................... 58
Summaries of Evaluations of the
Federal Reserve System ............ 67
Objectives of monetary policy:
1952-1961 69
The money supply in System
decision-making ................ 72
Total reserves as a measure of System
policy action .................. 76
A utility function of the Federal
Reserve System .................. 78
Summary............................ 86
III. THE MANAGER AND THE STRUCTURE OF THE
FEDERAL RESERVE SYSTEM ........ ..... 88
Introduction ......................... 88
Statutory Guidance ................... 92
The Federal Reserve Act............ 92
The Employment Act of 1946 94
Organization of the Board............ 100
Conclusion.......................... 102
iv
CHAPTER Page
IV. THE MANAGER AND OFFICIAL COMMUNICATIONS
OF THE FEDERAL RESERVE SYSTEM........... 102
Introduction .............. ...... 103
The Federal Reserve System: Purposes
and Functions..................... 107
Annual Reports and Congressional
Hearings........................... 112
Major issues....................... 112
Policy actions in the Annual
Reports..................... 113
The Manager and the directive .... 117
Terms used....................... 120
Free reserves..................... 125
Interest rates . ................ 127
Chronology......................... 13C
January, 1951 through August, 1954 . . . 13C
August, 1954 through April, 1958 .... 138
April, 1958 through December, 1961 . . . 152
Conclusion............................ 162
V. THE ROLE OF THE MANAGER AS SEEN IN
THE MINUTES............................ 165
Introduction . ....................... 16!
Structure of the meetings............ 16!
The Manager and the FOMC................ 171.
The directive....................... 172
The consensus....................... 174
The Minutes........................ 176
v
CHAPTER Page
Restrictions on the Manager's
Operations................. 178
Explicit operational instructions
to the Manager.................. 179
Prices and yields................ 181
Free reserves ................ 183
Money supply................... 184
Interest rates .................. 185
Supervision of the Manager........... 186
The Manager's authority............ 190
The executive committee ............ 191
Requests for advice................ 193
The Discretion of the Manager........... 193
Explicit approval for the Manager
to act on his own................ 196
No instructions or statement of
consensus....................... 203
Vague or non-operational
instructions ................... 205
Explanations of policy actions ....... 206
Interpretations of wording ........... 207
Neutrality..................... 209
Slop........................... 211
Continue the present policy ....... 212
Feel........................... 212
Even keel....................... 212
Semantics....................... 21A
vi
CHAPTER
VI.
Page
Criticisms of the Manager........... 216
Advice of the Manager.............. 219
The directive and instructions
to the Manager.................. 219
The Manager's conception of the
monetary process ................ 224
Specific directions ................ 226
Wording of the directive........... 228
Absence of the Manager............ 230
Availability of the Minutes......... 230
The FOMC, Inflation and Monetary
Theory........................... 231
Inflation......................... 231
Conflict of goals.............. 232
Unemployment.................... 234
Balance of payments............ 235
Monetary theory and policy ......... 235
Forecasting.................... 235
The money supply................ 236
Interest rates .................. 239
Free reserves................... 241
CONCLUSIONS AND RECOMMENDATIONS ........... 244
Conclusions......................... 244
Recommendations ..................... 251
vii
APPENDIXES Page
A. THE DIRECTIVE FORM....................... 253
B. CHANGES IN PHRASE (b) OF THE DIRECTIVE .... 262
C. DEFINITION OF TERMS (MR. SPROUL)........... 266
D. A BRIEF STATEMENT OF CONSENSUS............. 270
E. COMMENTS ON THE EXECUTIVE COMMITTEE........ 292
F. SELECTED INSTURCTIONS TO THE MANAGER........ 295
G. EXPLANATIONS OF POLICY ACTIONS ............. 305
H. SELECTED STATISTICS ...................... 314
BIBLIOGRAPHICAL ENTRIES . ..................... 319
viii
LIST OF TABLES
Table Page
1. A Summary of Policy Actions and Movements
of Free Reserves at Post-Accord Turning
Points....................................22
2. The Association Between Policymakers1
Interpretations of Policy, Changes in
the Monetary Base and Changes in Free
Reserves.................................. 31
1
CHAPTER I
THE PROBLEM AND ITS IMPORTANCE
Introduction
Disenchantment with the manner in which the Federal
Reserve has fulfilled its responsibilities under the Employ
ment Act of 1946 has resulted in numerous critical essays
and studies, and a few positive suggestions. Even the few
relatively systematic appraisals of the System neglect an
important aspect of the workings of the Federal Reserve and
thereby misdirect their attention. It is the contention of
this study, supported by evidence from the Minutes of the
Federal Open Market Committee, that the Manager of the Open
Market Account (explicitly, implicitly, or by default) was
given considerable latitude in determining the goals,
direction and degree of System policy in the years 1951
through 1961. ^ While the ultimate responsibility for any
action taken in the name of the Federal Reserve System must
lie with the System, even partial support for the hypothesis
1
The period after 1951 was chosen because monetary
policy prior to that time was generally circumscribed by the
bond support function. The terminal date of 1961 was the
result of the Minutes not yet being available after that
date. Also see page 7. It should be noted here that Mr.
Robert G. Rouse was Manager of the Open Market Account for
the entire period 1951 through 1961.
2
presented here sheds new light on the workings and analyses
of the System and suggestions for and methods of reform of
the System. Indeed, the reasons or circumstances under
which the Manager might have been given freedom or latitude
suggest the necessity for reform.
Importance of the Problem
Since 1951 and the Accord, Federal Reserve officials
generally have been regarded as having primary responsibil
ity for securing short-run economic stabilization under the
provisions of the Employment Act of 1946. While there can
be no question of the importance of economic stability in
terms of the general welfare of the people, there is some
question as to how effectively monetary authorities are
likely to perform this task and thus promote economic wel
fare. On one level, these questions have to do with the
importance of money in general and monetary policy in par
ticular. Since Keynes, there has been some question regard
ing the importance of money, per se, and concern over
monetary policy as well, at least since the conceptual issue
of "cost-push” inflation was raised. Due to the nature and
1
limitations of this investigation, it must be the working
assumption of this paper that money does matter and that
I
monetary policy does have an important stabilizing effect
upon the economy, even in the face of "cost-push" factors.
On another level, there is also some question as to whether
3
or not the economy can be "fine-tuned," the precise values
of the goals to be achieved, the priorities attached to
these goals, and even the goals themselves. The important—
in fact ultimate— policy question is whether the results of
monetary actions upon the economy occur soon enough and
reliably enough to have a significant stabilizing effect.
Because the issue of economic welfare of the citizens of the
country is involved, and because there is considerable
agreement among economists that the Federal Reserve has
committed errors in timing, extent, and duration of policy
changes, the influence of one individual— the Manager— upon
monetary policy is of major importance.
At present, in order to evaluate the effectiveness of
the Federal Reserve in achieving or helping to achieve
short-run economic stability, one must rely upon statements
of System officials regarding goals, methods, etc., as well
as statistical analysis of actual economic and monetary
variables. Published statements of the Federal Reserve have
been criticized for being secretive, unclear, meaningless,
too few and too late to be of any use. At the same time,
such statements have been used as evidence that the System
emphasized price stability and balance of payments consider
ations at the expense of employment and growth, that they
relied upon faulty monetary tools and analysis (for example,
free reserves and "bills-only") and that they generally
failed to recognize or deal with conflicting goals.
4
Analyses of statistics generally indicate a failure to
achieve economic stability and a general lack of concern for
the variables of maximum employment, price stability, growth
and balance of payments. There can be no denying that these
conclusions, if supported, are important and have signifi
cant implications. However, given that System actions are
not the sole factors affecting the economy and that the
Federal Reserve does not have complete control over monetary
variables, it is also significant that what the System says
and does (or what the outcomes of its actions are) differ.
These latter conflicts are often taken as evidence that the
Federal Reserve does not know what it is doing, does the
wrong thing, or at the extreme, cannot do anything. An
alternative explanation of these circumstances rests on the
independence of the Manager. If he was free to act more or
less on his own, there would be no question that what the
System said and what the Manager did could differ.
Obviously, the fact that the Manager was partially or
wholly able to act on his own within broad limits does not
absolve the System of errors which were made. It also does
not answer questions regarding goals, priorities, or the
conception of the monetary process held by the System or the
Manager. It does, however, raise questions regarding the
circumstances tinder which the Manager could be independent
and thus questions of organization and responsibility. It
raises questions concerning the validity of statements made
5
by the System and suggests a new focus for analyzing the
operations of the System and its attempts to achieve or
facilitate economic stabilization.
Hypothesis
The central hypothesis of this analysis, as suggested
above, is that for most of the period 1951 through 1961, the
Manager of the Federal Reserve Open Market Account could,
within broad limits, determine the goals, direction and
degree of monetary policy. This does not mean the authority
was explicit, complete, or even a conscious act on the part
of the FOMC. It appears that the main reasons for such
action were the structure of the System and communication
within the System, particularly the unwillingness of FOMC
members to express themselves in operational terms. The
Minutes of the Federal Open Market Committee will provide
the primary source of evidence for this contention.
Support for the hypothesis rests upon the following
contentions or premises:
1. Occasionally the Manager was given explicit
instructions to act as he saw fit.
2. Occasionally the Manager was not given any ex
plicit instructions Whatsoever.
3. Generally the Manager was given non-operational
instructions.
a. The Manager was usually told to achieve such
6
conditions as "ease,” "even keel," or "neutral-
tty," or told to operate on the basis of such
terms as "feel," These terms were not verbally
defined by the System nor did the FOMC relate
them to such statistically measurable monetary
variables as reserves, interest rates, or the
money supply. The Manager did give the terms
such interpretations, however.
b. Instructions in terms of the level, range or
direction of monetary variables such as
reserves were qualified by or dependent upon
achieving non-operational conditions in the
Government securities market or the economy in
general.
c. There was general agreement that operating
instructions could not be issued in terms of
specific levels or changes in monetary
variables such as reserves or the money supply.
Non-operational conditions were thought to be
of greater importance than "statistics."
4. The directives, and to some extent the consensus
reached at each FOMC meeting could not be and were
not used by the Manager to carry out the wishes of
the FOMC.
5. The ability of the Manager to explain his actions
and report to the FOMC in non-operational lan
7
guage and the de-emphasis on statistics, increased
the independence of the Manager and reduced criti
cism of his actions.
6. The Minutes themselves, because they were not
available for at least ten days.after FOMC meet
ings and because they were prepared by rapporteurs
rather than being transcripts, could not be and
were not used by the Manager as a basis for policy
actions.
7. There was at least a lack of clarity, and often
disagreement within the FOMC regarding the terms
used to describe policy and the state of the
economy. For example, ‘ •neutrality" meant differ
ent conditions and actions to the various members
of the FOMC and the Manager.
8. The organization of the Federal Reserve System,
particularly the amount of time required for non
policy functions, facilitated and necessitated a
reliance upon staff members and the Manager for
policy decisions.
9. Emphasis on the Government securities market, both
as a means of and occasionally as the end of
policy, placed the Manager— the most knowledgeable
person in the System on market conditions and
operations— in a key position.
10. The ambiguity of the Employment Act of 1946 and
8
the general lack of supervision and guidance of
the Federal Reserve by Congress, resulted in an
atmosphere that did not facilitate rigorous analy
sis of goals, methods, or actions.
11. The Manager was not selected by the FOMC directly
and therefore did not necessarily reflect their
attitudes and opinions.
Some relevant, but secondary, considerations of the
investigation include:
1. The directive and public statements of the System
were not generally valid as indicators of the
attitude of the System or the actions it had taken
or would pursue.
2. The supposed concern of the System over price
stability and balance of payments considerations
was not apparent in actual practice.
3. The use of "adjusted" statistics by those who
analyze the System must be questioned. For the
most part the System was forced to rely on prelim
inary, unadjusted data. Indeed, the figures cited
in staff reports were the same as those found in
the then current statistical section of the
Federal Reserve Bulletin.
Limitations
A study such as this is subject to several important
9
limitations. Among them are:
1. Because the Minutes are the major source of evi
dence for this investigation, their unavailability
after 1961 limits the scope of the analysis and
conceivably the validity of the conclusions
reached. The fact that there is an eight-year lag
in availability raises the question of secrecy and
why the System is unwilling to provide more
current information. The usual explanation by the
System is that it cannot provide information which
would be potentially profitable to those who oper
ate in the market nor which might adversely affect
someone connected with the System. This question
is especially intriguing when, since Jttly, 1967,
records of policy actions of FOMC meetings have
been printed in the Federal Reserve Bulletin with
a ninety-day lag. One can also question why the
Minutes were made available at all. At the 1961
Congressional Hearings on the 1960 Annual Report
of the Federal Reserve System, the Chairman of the
System refused to provide the Minutes to the Com
mittee, let alone the general public. Then, in
August, 1964, the Minutes were made available to
all, the explanation in the August, 1964 Bulletin
merely stating that the System felt the Minutes
should be available to all interested parties.
10
A similar announcement was made in July, 1967,
when it was stated that the records of policy
action would be available with a ninety-day lag.
Apparently the action was taken voluntarily, for
there was no mention of the “Truth in Government1 1
legislation (which would require publication of
such material) in either the 1964 or 1967 an
nouncements or in any other source.
2. The Minutes themselves, unless an FOMC member
presented a written statement for the record, were
the result of rapporteurs and were not transcribed
records of the meetings. As such, they may not
reflect the nuances or perhaps even the actual
meaning of what was said. On the other hand, as
FOMC members had the opportunity to modify or
correct the record before it became final, one
must assume it to be substantially correct.
3. With close to 8,000 pages of minutes to evaluate,
selectivity was demanded. While Appendices D
through G aid in expanding the material which can
be considered, some condensation was required.
Overview
Chapter 11 examines some recent criticisms and eval
uations of the Federal Reserve, pointing out that the role
of the Manager is neglected in these studies, but may answer
11
many of the questions raised in them.
Chapter 111 examines the structure of the System,
particularly as it relates to the Employment Act of 1946 and
the Federal Reserve Act, to determine to what extent the
structure of the Federal Reserve facilitates the autonomy of
the Manager.
Chapter IV analyzes the official publications of the
Federal Reserve to discover to what extent communications
within the System and to outsiders indicate that the Manager
has greater latitude of action than would be normally ex
pected.
Chapter V relies on the actual Minutes of the FOMC
from 1951 through 1961 to provide evidence to support the
preihises and thus the basic hypothesis of this analysis.
Longer quotations from the Minutes are to be found in the
Appendices.
Chapter VI is a brief conclusion based upon the find
ings and also some recommendations for reform.
12
CHAPTER II
RECENT CRITICISMS AND EVALUATIONS
OF THE FEDERAL RESERVE SYSTEM
Introduction
It is the purpose of this chapter to enumerate and
comment upon some of the important questions raised by crit
ics of the Federal Reserve System and to lay some ground
work for succeeding chapters. The issues raised in this
chapter will not be commented upon in depth, for it is hoped
that chapters III through V will indicate that many of the
as yet unanswered questions regarding the System could be
answered by reference to the Manager of the Open Market Ac
count. Indeed, only one known study sees the Manager as
being a key figure in the monetary-policy process. However,
this study of the free reserve concept by Karl Brunner and
Allan Meltzer^ relates the role of the Manager to the impor
tance of the conception of free reserves in System policy
making, and not for the reasons expressed here.
In order to accomplish the purpose of the chapter,
1
Karl Brunner and Allan H. Meltzer, The Federal Re
serve* s Attachment to the Free Reserve Concept, A Staff
Analysis, Committee on Banking and Currency, Subcommittee on
Domestic Finance, House of Representatives, 88th Congress,
2d Session, May, 1964 (Washington: Government Printing Of
fice), 1964.
13
three different, but interrelated aspects of monetary policy
will be discussed:
1. The concepts and tools of monetary policy to be
used in later diapters will be introduced. While
these concepts and the analyses of these concepts
will be critically evaluated, they will be used in
later chapters. This is because the question of
the validity of tools or variables such as free
reserves and interest rates, or what are optimum
targets and indicators, is not the point of this
paper, because technical questions on these issues
have yet to be settled, and because the Federal
Reserve often refers to them.
2. The indicator-target problem will be considered so
that what those within the System use as a basis
of policy action, and why, may be evaluated on a
systematic and rigorous basis. It must be made
clear that while critics of the System are not
agreed upon a solution to the indicator-target
problem, the Federal Reserve seldom even consid
ered the problem and when they did it was on a far
less rigorous basis. Given the analysis in this
chapter then, Chapters III through Vwill attempt
to indicate the rather loose manner in which the
System handled these important issues and the im
plications of such actions for the autonomy of the
14
Manager.
3. Finally, some recent evaluations of the effective
ness of the System in achieving the goals of maxi
mum employment, price level stability, growth in
GNP, and a balance of payments will be considered.
These studies purport to be examinations of the
Federal Reserve and not of the Manager. They are
included to provide some idea of the effectiveness
of the FOMC and to indicate that at least for the
goal of price level stability, the record of per
formance was not encouraging. This is important,
for chapters 111 through V will show that price
level stability was frequently mentioned by FOMC
members as their most important goal. The auton
omy of the Manager may thus explain the discrep*
ancy between the wishes of the FOMC and the actual
outcome of System policy actions.
The Manager and Free Reserves
The importance of free reserves
to the federal Reserve System
The major importance for this investigation of Karl
Brunner and Allan Meltzer*s 1964 study, The Federal Re
serve* s Attachment to the Free Reserve Concept. is their
suggestion that the focus on free reserves, short-run occur
rences in the financial markets and lack of any systematic
analysis of the monetary process resulted in substantial
15
autonomy and authority for the Manager of the System Open
Market Account. However, the intent of their paper was to
examine the role of free reserves in System decision making,
not the role of the Manager. Nonetheless, as their evidence
does support the hypothesis, as the free reserve question is
an important issue which will be touched upon throughout the
paper, and as Brunner and Meltzer's study is recognized as
being the most comprehensive on this issue, it will be
treated at some length. The authors incorporated and relied
somewhat upon the findings of James Meigs,^ and his work
will not be discussed separately.
The purpose of the study, as stated by the authors,
was an:
. . . attempt to develop in more detail the nature of
the conception that guides Federal Reserve actions, the
position of free reserves in their analysis, and the
relevance of the modified free reserve conception as an
explanation of changes in money and credit.3
The authors suggested that while no consistently formulated
framework of the monetary process had been developed by the
Federal Reserve, it appeared from the frequently suggested
connection between free reserves and credit expansion that
jthis conception was accorded a central position in its anal-
i
jysis of the monetary process and as an objective of monetary
policy. They noted that while some recognition of the role
^James Meigs, Free Reserves and the Money Supply
j (Chicago: The University of Chicago Press, 19( j2).
' ^
JBrunner and Meltzer, Free Reserve Concept. p. v.
16
of demand for free reserves had been introduced into the
Federal Reserve's analysis, these newer views often con
flicted with accepted doctrines and that these conflicts had
yet to be resolved. Evidence also supported an extremely
short-run focus that appeared to be in response to events in
the financial markets. These factors, they felt, were the
main reasons why the Manager in practice had substantial
autonomy and authority.
Brunner and Meltzer also collected evidence to sup
port the position that the modified free reserve mechanism
bore little relation to changes in the stock of bank credit
and money and concluded that the free reserve process was
not an appropriate mechanism to alter the money supply.
Evidence from published statements
To indicate the Federal Reserve's attachment to the
free reserve concept, Brunner and Meltzer traced the devel
opment of the concept by examining the views of Riefler,
Burgess and Goldenweiser.^ Noting that some changes have
^Meigs, Free Reserves and the Money Supply: Warren
Burgess, The Reserve Banks and the Money Market. rev. ed.
(New York: Harper and Brothers, 1936);Lauchlin Currie, The
Supply and Control of Money in the United States, 2d rev.
ed. (Cambridge: Harvard University Press, 1935); Winfield
W. Riefler, Money Rates and Money Markets in the United
States (New York: Harper and Brothers, 1930); Emanuel A.
Soldenweiser, "Instruments of Federal Reserve Policy," Bank
ing Studies. Board of Governors of the Federal Reserve
System (Baltimore: The Waverly Press, Inc., 1941).
17
occurred in the "accepted1 ' doctrine, they felt that the
basic conception had almost never been appraised completely.
They distinguished three roles of free reserves, although
they felt the Federal Reserve had not identified such roles,
rhe roles were:
1. The causal role of free reserves. A connection
was said to exist between free reserves and inter
est rates or changes in bank credit.
2. Free reserves might also serve the function of
indicating Changes in the prevailing monetary
situation, particularly modifications of Federal
Reserve policy posture.
3. Closely associated with the indicator (signal)
function of free reserves was the target function
or the practice of incorporating some particular
range of free reserves as a guideline for monetary
policy.
Use of another target or indicator does not mean that
free reserves have been abandoned; but the authors felt that
abandonment of the causal role would destroy the basis for
jthe indicator or target function. Later studies by Brunner
Jand Meltzer indicate this is not necessarily true.
i
I As a policy target the authors felt that
I
free reserves provide the manager with a concept that is
analogous to the ‘money (or Federal Funds) position*
that plays a dominant role as a target for the money
desk men .... we do not contend that free reserves
are the only or most important policy target of the
18
Federal Reserve authorities.**
2ven so, a modified role of free reserves as a policy target
did not mean that they were not an important indicator or
measure of ease or restraint. What is important was that
Che change in targets might signal that the goals of the
System had changed. A bill target, for example, might indi
cate an emphasis on balance of payments problems. At the
3ame time, use of other targets did not mean that free
reserves had been excluded, but merely relegated to a lower
priority.
With regard to free reserves serving as an indicator,
Che observations of the authors are worth quoting at length
as they apply to variables other than free reserves with
isqu&l strength:
It turns out that free reserves could rationally
serve as a signal or indicator in the manner used by the
Federal Reserve only if we possess detailed and reliable
information about crucial links in the monetary process
that are presently beyond our disposal. The required
information must be sufficient to separate the strands
composing the observable behavior of free reserves. In
particular, the component attributable to policy actions
should be separated from the influences on free reserves
emanating from the economy via the public's asset supply
to banks. But in our present situation, i. e., in the
absence of sufficiently detailed and reliable informa-
tion concerning the structure of the monetary process,
no useful indicator function can be rationally assigned
to free reserves on the basis of the free reserve con-
! ception. Indeed, it can be shown that even large
! variations in free reserves cannot safely be interpreted
as modifications of relative 'ease' or 'tightness' with
the usual connotations of accelerated or decelerated
^Brunner and Meltzer, Free Reserve Concept. p. 12.
19
rates of credit expansion.6
As evidence for their contention, Brunner and Meltzer
first referred to published statements of the System which
suggested the causal role of free reserves and qualified use
of the concept as an indicator.? At the same time, there
was some evidence in the published statements which sug
gested dissatisfaction with the concept.
Brunner and Meltzer also sent questionnaires on the
subject to Reserve Bank Presidents and members of the Board
of Governors. Generally, the twelve presidents were more
apt to be skeptical of the use of free reserves as a target,
indicator, and as playing a major causal role in the
monetary process than were members of the Board of Gover
nors. But there seemed to be general agreement that free
reserves were not usually the central target of monetary
policy and weaknesses in the free reserve concept were
acknowledged. There was also some suggestion that the
demand for reserves by banks was being incorporated into the
System*s analysis of the monetary process. But while the
free reserve concept may no longer be accepted as the pri
mary basis for monetary analysis, and while there was evi
dence that it was being reconsidered and re-evaluated, it
was also clear that no reformulation which would provide an
6Ibid.. p. 16.
7Ibid.. p. 22.
20
alternative or a firm foundation upon which to base policy
decisions had been made.
The evidence from the published statements and
questionnaires, as interpreted by Brunner and Meltzer, did
not deny that free reserves were an indicator and at times
a target of policy. At the same time, there was evidence
that it was the availability of credit and not the money
supply which received major emphasis by the System.
To summarize the evidence from official System pub
lications, the authors felt that no detailed or systematic
evaluation of free reserves or any other monetary process
conception had been made and that this had prevented the
development of a useful guide to policy, construction of an
internal evaluation system which might lead to the improve
ment of policy, and a flow of information to those outside
the System which might prove useful in analysis and eval
uation of the effectiveness of monetary policy.
Given this evidence, one might also ponder the
questions: How can a single committee have different inter
pretations of the same policy? How can a particular measure
mean slightly different things to different groups serving
on the same committee and making policy decisions? Doubt
less such disparate views can exist, but their very exist
ence underscores the dilemma faced by the Manager and pos
sibly the latitude he had.
21
Announced changes in policy
As another source of evidence, Brunner and Meltzer
focused on the "Record of Policy Actions" available in the
Annual Reports of the Board of Governors. They maintained
that if indicated changes in policy (from the "Record") are
quickly reflected in the level of free reserves, this sug
gests that free reserves are used as a target or indicator
of policy. On the other hand, if there was no clear con
nection between changes in the level of free reserves and
changes in announced policy, the importance of free reserves
would seem to be diminished.
The method by which the authors tested their hypo
thesis was the construction of an index which measured
policy action changes (based on comments in the "Record") in
terms of a +1 to -1 scale. This index was then compared
with a three-week moving average of the level of total free
reserves. The specific results are summarized in Table 1
which is reproduced from the original study. The conclusion
of the authors, in addition to their basic point regarding
the importance of free reserves, was simply that:
The lesson from this experience seems to be that the
FOMC had a good--perhaps excellent--record in judging
the timing of post-Accord turning points. Whether or
not its judgments between turning points have been
appropriate depends on the relevance of the modified
free reserve doctrine.8
8Ibid.. p. 47.
TABLE 1
A SUMMARY OF POLICY ACTIONS AND MOVEMENTS OF FREE RESERVES
AT POST-ACCORD TURNING POINTS
First Indication of . . .
Date of Turning Point Change in the
(NBER) (Month) Moving Average of
Any Change in the Major Change Free Reserves
Direction of Policy in Policy (week ending)
(day) (day)
July 1953 ......... June 11 ... . June 11 . . May 27
August 1954 ....... December 7 .r. December 7 December 1
July 1957 ...... August 20 . . . October 22 October 23
April 1958 ....... May 27 .... August 19 . August 13
May 1960 ......... February 9 . . March 1 . . March 2
February 1961 .... January 24, 1961, December 19 January 3, 1962
or August 22
Source: Karl Brunner and Allan H. Meltzer, The Federal Reserve's Attachment to
the Free Reserve Concept. A Staff Analysis, Committee on Banking and
Currency, Subcommittee on Domestic Finance, House of Representatives, k>
88th Congress, 2d Session, May, 1964 (Washington: Government Printing ^
Office, 1964), p. 42.
23
The Manager of the Account
At this point in the analysis the authors introduced
the issue of the Manager of the Account and the role he
played in the free reserve process. They suggested that it
was the Manager who carried out the policy of the FOMC and
who thus played a crucial, but perhaps neglected role in the
monetary process. His interpretation of policy decisions
was often vital, they maintained.
Referring to the information available to the Manager
the authors pointed out that he was an informal participant
at FOMC meetings where he could take notes. He was further
guided by a directive and a consensus of the actions taken.
However, it was also noted that discussion at the meetings
was often of a very free nature and there was seldom com
plete agreement about the direction of policy. Furthermore,
even if there was agreement about the direction of policy,
there might be disagreement about how to bring about the
desired change.
There was little or no apparent attempt at most of the
meetings to summarize the statements of the participants
in terms of an objective .... Instead a 1 directive1
is issued or reissued . . . and a statement of consensus
is made .... Such statements do the Manager little
good.9
Directives were issued in light of the discussion referred
to above, and while they may have had subtle connotations to
members of the System, were rather obscure to those outside
9Ibid.. p. 32.
24
Che Federal Reserve.
Although some of the vagueness of the directive might
tiave been cleared up by the consensus (a summary view of
what transpired at each meeting) that was issued to the
Manager, it too was broadly stated, perhaps reflecting the
lack of agreement about goals and procedures among Board
members. The result of such vagueness, Brunner and Meltzer
suggested, was that the Manager was left with considerable
latitude over what was to be changed and considerable
grounds for defense, should his judgment and actions prove
to be "wrong” or unacceptable, that is, contrary to the
expressed wishes of the FOMC. Such latitude, the authors
felt, was probably reinforced by the apparent lack of a
clear-cut conception of the monetary process and FOMC objec
tives.
Brunner and Meltzer then contended that the Federal
Reserve*s conception of the monetary process was responsible
for its poor response to turning points in economic activity.
They also maintained that the actual impact of changes in
policy upon the economy, institutional arrangements, and the
theoretical basis of policy action lent themselves to giving
or permitting the Manager to assume a more important role
than otherwise would be permitted or desired. In fact, the
I
jauthors considered the Manager to be the most important fac
tor in the monetary transmission process. Moreover, the
authors contended, both Managers involved during the period
25
1951 through 1963 expressed opinions about the key role
played by free reserves. As both Brunner and Meltzer felt
that the close correspondence between changes in the average
of free reserves and decisions of the FOMC were not likely
due to chance factors, they concluded that there was little
doubt that free reserves were an important part of the con
trol mechanism of the Federal Reserve.
Free reserves, money and credit
The final section of the report dealt with an analy
sis of the extent to which the actions taken by the Federal
Reserve were capable of altering the stock of money in the
appropriate direction. The authors considered the money
stock or the monetary base to be more important in its
affect on the economy, and a more useful monetary tool than
ather frequently used variables, a point they developed in a
subsequent study, An Alternative Approach to the Monetary
Mechanism.10
It must be said that Brunner and Meltzer present a
very convincing case for the role of free reserves in the
Federal Reserve*s conception of the monetary process. None
theless, some questions do arise.
! In the first place, it is hardly likely that the FOMC
l -------------------
l^Karl Brunner and Allan H. Meltzer, An Alternative
Approach to the Monetary Mechanism. A Staff Analysis, Com
mittee on Banking and Currency, Subcommittee on Domestic Fi
nance, House of Representatives, 88th Congress, 2d Session,
jAugust, 1964 (Washington: Government Printing Office, 1964\
26
or the Manager followed a monolithic approach to pdlicy
formulation. Enough has been said by System officials and
by Brunner and Meltzer themselves to question such an
assumption, although by emphasizing the role of free re
serves, it was sometimes suggested by the authors that the
FOMC did follow a monolithic approach.
Secondly, the validity of the published statements of
the System may be questioned, especially if, as Brunner and
Meltzer contended, the concept of free reserves has several
meanings, and if System officials do not have a consistent
formulation of the monetary process. More will be said of
this below.
Thirdly, the index used by Brunner and Meltzer to
test actual policy was, as will be shown, based on incom
plete or misleading statements and thus may not have cap
tured the actual thrust of policy decisions.
Fourthly, by and large, Brunner and Meltzer focus on
the views of System spokesmen regarding monetary theory and
the causal processes through which open market operations
affect the economy. It must be noted that the views of
Federal Reserve officials sometimes have little relationship
to open market procedures as they relate to targets, con
straints and control periods— that is, open market strategy.
In other words, the expressed view that open market opera
tions affect GNP by influencing some variable, may or may
Lot mean that the FOMC issues precise instructions to the
27
open market Manager to achieve specific values of that
variable.
Fifthly, the evidence presented by the authors to
support their contention seems impressionistic in spots. No
justification is provided for comparing turning points in
free reserves with what they term the "major1 * policy changes
: rather than with what might be considered the earliest date
of a policy change. In fact, their finding that free re
serves change in advance of a decision of the FOMC at five
of the six cyclical turning points would be changed to only
two out of six if the earliest date of a policy change was
used.
More can be and has been said on the relative merits
of free reserves and the monetary base, but that is beyond
jthe scope of this analysis and will not be discussed here.**
In summary, Brunner and Meltzer suggest that the
Manager has considerable latitude to operate as he sees fit
primarily because of the reliance of the Federal Reserve on
:he free reserve concept.
Monetary Policy, money and free reserves
Karl Brunner, in "The Role of Money and Monetary
Policy,"12 seeks primarily to defend what he labels the
i
l^See Jack M. Guttentagj"The Strategy of Open Mar
ket Operations," The Quarterly Journal of Economics. LXXX
(February, 1966), 11-20.
l^Karl Brunner, "The Role of Money and Monetary
28
"Monetarist1 1 position against attacks from the "New View."
In doing so, he provides some evidence regarding the role of
free reserves, the adequacy of policy, and some important
information on the target-indicator problem.
The fundamental question, according to Brunner, is:
"What is the role of monetary policy and what are the re
quirements of rational p o l i c y m a k i n g ? " ^ The "Monetarist"
thesis proposes that actions of the Federal Reserve are
transmitted to economic activity through resulting movements
in the monetary base and the money supply. These movements
then initiate adjustments in relative prices of assets,
liabilities and the production of new assets. Brunner feels
that extensive research in the area of monetary policy, some
of which is presented in the article, has established that:
(1) accelerations or decelerations of the money supply are
closely followed by accelerations or decelerations in eco
nomic activity and thus monetary impulses are a major factor
accounting for variations in output, employment and prices,
(2) movements of the monetary base dominate movements in the
money supply over the business cycle and that movements of
Policy," Review. Federal Reserve Bank of St. Louis Reprint
Series, No. 30, (July, 1968). According to Brunner the
"Monetarists" include himself, Allan Meltzer, Milton Fried
man, Boris Pesek, Thomas Saving, and Harry G. Johnson. The
"New View" is represented by Lyle Gramley, Samuel Chase,
John H. Kareken, J. A. Cacy and Richard G. Davis.
* Brunner, "The Role of Money and Monetary Policy,"
pp. 9-10.
29
the money stock are the most reliable measure of the thrust
of monetary impulses, and (3) Federal Reserve actions domi
nate movements of the monetary base and the money stock over
business cycles.
The "New View" disagrees, playing down the role of
the money stock, emphasizing that policymakers are neither
interested in the monetary base nor do they attach any sig
nificance to it, and contending that cyclical fluctuations
in monetary growth result primarily from the behavior of
commercial banks and the public, not the Federal Reserve.
Brunner presents some new evidence to support his
position and examines the "New View" contentions quite
closely. He concludes that the "New View" has not yet
offered analysis or evidence pertaining relevantly to the
question of variations in monetary growth. In addition, he
feels that the "New View" has not developed, on logical
grounds, a systematic justification for the many statements
which characterize policy in terms of its effects on the
economy. Neither, he feels, has the counter-critique devel
oped a systematic justification for the use of money market
conditions as an optimal target guiding the execution of
open market operations. Brunner contends that the "New
View" claim of lack of interest in the monetary base dis
regards the fact that movements in the monetary base are
under the direct control and are the sole responsibility of
the monetary authorities. Brunner considers the "New View"
30
argument to disregard the fact that actions may yield con
sequences which are independent of motivations shaping the
actions.
Free reserves
Having provided some evidence that changes in the
monetary base contribute substantially to fluctuations in
money growth, and noting that the System asserts that mone
tary policy has been largely counter-cyclical, Brunner
suggests a discrepancy between the actual behavior of the
System and its interpretation of that behavior. While the
discrepancy is important, the emphasis here is on the role
of the Manager in the discrepancy and not, as Brunner
contends, that the System or the Manager focused their
attention on the "wrong" variable. Somewhat surprisingly,
Brunner no longer emphasizes the independence of the Manager
and, in fact, never even mentions it. As evidence for his
position, Brunner constructs a table based on scores
assigned to changes in Federal Reserve policy action,
according to the interpretation of the FOMC.^ In column
two, Table 2, positive scores were associated with sessions
of the FOMC in which it was decided to make policy "easier"
or "less tight," etc., and negative scores with the con*
verse. The magnitudes expressed are admittedly only
14The scores were published as Appendix II to Brunner
and Meltzer, Monetary Mechanism.
TABLE 2
THE ASSOCIATION BETWEEN POLICYMAKERS' INTERPRETATION OF POLICY,
CHANGES IN THE MONETARY BASE AND CHANGES IN FREE RESERVES
Period
(1)
Cumulative Scores
of Policymakers'
Interpretations
Over the Period
(2)
Changes in Free Reserve
Over the Period
(in Millions of Dollars)
(3)
Changes in the
Monetary Base
Over the Period
(in Millions of
Dollars)
(4)
11/49- 5/53 -4.75 -1030 +5216
6/53-11/54 +2.63 + 286 +1321
12/54-10/55 -3.37 - 818 + 345
11/55- 7/56 +1.12 + 352 + 399
; 8/56- 7/57 -1.00 - 44 + 657
8/57- 7/58 +3.50 +1017 +1203
| 8/58- 6/59 -2.12 -1059 + 531
| 7/59-12/60 +2.62 +1239 - 53
1/61-12/62 -0.63 - 428 +3288
Source: Karl Brunner, "The Role of Money and Monetary Policy," Review, Federal
Reserve Bank of St. Louis Reprint Series, No. 30, July, 1968', p. 22.
32
guides, yet Brunner found an almost natural ranking of the
period 1949 through 1962 into sub-periods (see column one).
Columns three and four show changes in free reserves and the
monetary base, respectively. In terms of rank correlation,
there does not appear to be any positive association between
the policymakers1 interpretation or judgment of their stance
and their actual behavior as indicated by movements in the
monetary base. There is even less correlation between the
cumulative scores and the money supply, narrowly defined.
Moreover, the correlation between the monetary base (and the
money supply) and the cumulative scores has a negative
value, suggesting the probability of a systematic divergence
between stated and actual policy (as measured by the base).
On the other hand, the correlation between the interpretedL
tion and free reserves is relatively high. This would sup
port the free reserve hypothesis.
It also should be noted that changes in cumulated
scores and free reserves between periods always moved to
gether and were in perfect direction. By comparison,
co-movement between cumulated scores and changes in the
monetary base are haphazard; only three out of eight scores
aove together. This degree of co-movement between the
i
l^The rank correlation between cumulated scores and
Che monetary base was -0.09; between the cumulated scores
and free reserves it was +0.70 and between free reserves and
Che monetary base it was -0.26. The rank correlation be- I
Cween cumulated scores and the narrow money supply was -0.03
and between free reserves and the narrow money supply was
La. 40.______________________: _____________________________ j
33
scores and the monetary base could have occurred by pure
chance with a probability of .2 or better, whereas the per
fect co-movement between the scores and free reserves
occurring as a matter of pure chance is less than .004. It
appears from this and other evidence that free reserves or
money market conditions are used as an indicator and gauge
of policy.
Indicators and Targets
The Federal Reserve's use of indicators
In the same article in which he discusses monetary
policy and free reserves, Brunner also examines indicators
and targets, contending that money-market variables are not
optimum targets or indicators. He suggests that evidence
substantiating the relevance of the monetary base as a mea
sure summarizing the actual behavior of monetary authorities
is not sufficient to determine whether the base is the most
reliable indicator of monetary policy. The indicator prob
lem is the designing of a rational procedure to determine
which of the possible entities or variables frequently used
for scaling policy yields the most reliable results. In its
technical sense, the indicator problem is "the determination
of an optimal scale justifying interpretations of author-
|.........
j l^Brunner, "The Role of Money and Monetary Policy,"
p. 22. See also, Kenneth Lyon, "The Federal Reserve's
pbjectIves and the Money Supply," paper read at the Western
Economic Association, Corvallis, Oregon, August 30, 1968.
34
itie8' actual behavior by means of comparative statements.!?
The problem has arisen not only because of the ambiguous use
of the terms "indicators," "targets," and "guides," but also
because of inadequate analysis of the logical structure of
the technical meaning of the terms. It is, for instance,
not sufficient to emphasize the proposition that the money
supply can be a misleading guide to the proper interpreta
tion of policy because this proposition can be easily demon
strated for a wide variety of models. The result is a
stalemate.
Brunner maintains that at present the usual solution
to the problem of indicators is a decision based on impres
sionistic arguments or worse. Thus, because the Federal
iReserve operates through credit markets where rates are
determined, or because the interest mechanism is the center
of the transmission process, market interest rates emerge as
the relevant indicator of monetary policy. For example, in
times of rising economic activity, an instruction to main
tain an "even keel" could mean an increasing money supply
and thus the possibility of inflation if "even keel" was
taken to mean relative stability in interest rates. What
ever the reasons for the emphasis on interest rates, Brunner
feels that in recent years there has been a shift in atti
tude which either denies the problem or the possibility of a
l?Brunner, "The Role of Money and Monetary Policy,"
35
rational solution to it. Arguments that the world is very
complex and that therefore one must consider and weigh many
factors are often used to support the contention that a
single scale to interpret policy is impossible. The author
feels that such arguments misconstrue the very nature of the:
problem.
. . . Once we decide to discuss monetary policy in
terms of comparative statements, an ordinal scale is re
quired in order to provide a logical basis for such
statements. A multiplicity of scales effectively elimi
nates the use of comparative statements. Of course, a
single scale may be a function of multiple arguments,
but such multiplicity of arguments should not be con
fused with a multiplicity of scales. Policymakers and
economists should therefore realize that one either pro
vides a rational procedure which justifies interpreta
tions of monetary policy by means of comparative state
ments, or that one abandons any pretense of meaningful
or intellectually honest discussions of such policy.
The problem of uncertainty concerning the nature of
the transmission mechanism and the substantial lags in the
monetary process--the target problem--often obstructs the
solution of the indicator problem. Policymakers do not have:
perfect information, and indeed, the ultimate goals of
monetary policy may not be "visible" to the Manager as he
executes general policy directives. In such a case, as is
contended in this analysis, the policymakers (or the Man
ager) will be inclined to insert a more immediate target
between their ultimate goals and their actions. The cri-
teria for such targets are that they be reliably observable
•^Ibid.
36
with a minimum lag. Given these requirements, it is hardly
surprising that central bankers stress, or at least are
normally thought to rely on money market conditions, with
somewhat shifting weights, as targets guiding the continuous
adjustment of their policy variables. While such behavior
is quite rational, Brunner maintains that the rationality of
a particular target should also be examined.
In terms of this analysis, Brunner's contribution is
his new evidence on the role of free reserves (actually
money market conditions in general) and his statement of the
indicator-target problem which stresses, although not di
rectly or too strongly, the potentially large role of the
Manager in choosing the intermediate target and in making
comparative statements of policy. This role is greater, of
course, the less systematic the analysis of the issues
raised by Brunner.
The indicator-target problem
Next to Brunner's brief summary, the clearest avail
able presentation of the dimensions of the indicator-target
problem is perhaps that of Thomas Saving.^
Saving considers the indicator problem to be impor
tant because the choice of future policy is strongly
influenced by the decision-maker's evaluation of the effects
l ^ T h o m a s r. Saving, "Monetary Policy: Targets and
Indicators," The Journal of Political Economy. LXXV, Part II
(August, 1967), 446-456.
37
of current policy. His example of differences of interpre
tation is worth mention. Take the first six months of 1966.
Let us define a restrictive policy as one that reduces
aggregate demand and an expansionary one as activity that
increases aggregate demand. Some proxy variable or vari
ables must be used to measure the effect of policy, as the
effect of current policy on aggregate demand is not directly
observable. Now, if interest rates or free reserves are
used as the proxy during the period, monetary policy would
appear to be restrictive. If, however, some money supply
measure is used as the proxy during the same period, mone
tary policy would be characterized as expansive. Noting
that precisely how a past policy is characterized by policy
makers is of no importance so long as their evaluations do
not affect future policy decisions, Saving also recognizes
that in most cases, past actions will be used as a guide for
future decisions, due to the lack of certainty regarding the
deci8ion-making process.
Saving suggests that the goal of achieving an optimal
monetary policy necessitates the specification of targets
and indicators, and that this is where a discussion of the
subject must begin. To do this, Saving employed a model
based on a conditional maximization approach. Monetary
(policy is defined as "the manipulation of certain aspects of
the economy that are under direct control of the monetary
authority, usually called *policy instruments,' so as to
38
attain certain goals that are considered desirable."20 An
objective or goal function is introduced so that optimality
may be defined. This function, whether single-valued or
more complicated, represents the levels of various endoge
nous variables in the system. To complete the model, a
hypothesis of the structure of the economy is expressed.
This is necessary in order that the policymaker may know the
effects of various policies on the endogenous variables.
Given these, the problem is to maximize the goal
function, subject to the hypothesis of the structure of the
system, through the manipulation of policy instruments. The
function representing the structure of the economic system
(F) may be stochastic or non-stochastic.
In order to apply this approach it is usually assumed
that the decision-maker has complete knowledge of the
structure of the economy and the current economic situation.
It is, however, clear that the policymaker has various hypo
theses of F available and furthermore that the values of
many of the important-variables, both endogenous and exoge
nous, are not known until after a considerable time lag. In
short, "... the monetary policymaker does not have com
plete knowledge of either the function F or the non-policy
determined arguments of F."21 it is these two problems
which necessitate targets and indicators.
20Ibid., p. 447. 21Ibid.. p. 448.
39
Saving introduces the target problem by positing a
world where the decision-maker does not know the specific
form of the function F or the values of some parameters.
In addition, he assumes that the position of the variables
of the goal function are available after a lag, but that the
policymaker only knows the direction of the effect of policy
actions on the endogenous variables. Given such conditions,
he feels that it can be shown reasonable for the policymaker
to choose some endogenous variable which is observable with
little or no lag as a target. The policymaker then attempts
to structure his policy actions so that this variable will
assume some predetermined value.
Two reasons may be cited for the use of target
variables. In the first place, because the exact structure
of the economy is unknown, the precise effect of any given
policy cannot be obtained from the structure. Nonetheless,
it could be that there is a reasonably certain relationship
between some observable endogenous variable or variables and
Che goal variables, even if there is uncertainty regarding
Che exact effect of the policy instruments on the goal
variables. In this case, the policymaker selects this en
dogenous variable or variables as his target and modifies
his policy instruments in such a manner as to cause the
target variable to assume the desired value. Under the
theory, this level of the target is consistent with opti
mization of the goal variables. In the second place, the
40
goal variables can only be observed after a lag. As a
policy must be pursued until the effects of that policy can
be observed on the goal variables, it may well be that
during the period between the Implementation of policy and
observation of the effects of policy, various exogenous
events occur which will substantially modify the effect of
the policy from what it otherwise might have been. With the
introduction of a target variable, the effect of exogenous
changes may merely modify the magnitude of the policy action
necessary to cause the target variable to assume some value.
In short, some of the uncertainty inherent in unobservable
goal variables can be removed by using a target.
Saving feels that to perform effectively a target
variable must be:
... (1) readily observable with little or no lag,
(2) rapidly affected by the policy instruments, and
(3) related to the goal variables in the sense that
policies resulting in the target variable taking on
certain values must in turn result in the goal variables
taking on certain values.22
In sum, while use of the target does require an
objective function and a hypothesis about the structure of
Che economy, it does not require complete knowledge of the
structure.
But one cannot stop here. Use of endogenous vari
ables entails the risk of non-policy-induced changes in the
variable. Changes in the target for reasons other than
22Ibid.. p# 449.
41
policy action could very well result in an inconsistency
between the goal and attainment of some target value. As
an illustration, Saving suggests a case Where the goal is
reduction of unemployment and the target is the interest
rate. Policies to reduce the target and thus raise employ
ment may have undesirable results if, during the period of
policy action, the investment schedule shifts so that the
equilibrium level of interest is reduced below the target
level.
In order to compensate for non-policy induced changes
in target during the policy action period, it is necessary
to have an indicator of the effect of the policy being
pursued. What is necessary is a separation of changes in
the target into exogenous changes and policy effects, or,
this normally being impossible, the use of some other
variable or variables which reflect the policy effect. This
indicator must be mathematically independent of the target
in that it must not be a scalar multiple. It must be such
that "(1) exogenous changes other than policy changes that
affect the target variables do not affect the indicator or
(2) if these exogenous variables do affect the indicator,
their effect must be swamped by the policy e f f e c t ."23
| As with the target, the indicator requires a hypo
thesis of the structure of the economy and some idea about
23Ibid., p. 450.
42
Che objective function. It too must be easily observable
with little or no lag, rapidly affected by the policy
instruments and should be related to the target and goal
variables. It is also necessary that the indicator provide
at least qualitatively correct results as future policy
decisions depend upon the present estimation of the effect
of policy.
In sum, the indicator can separate the other exoge
nous effects from the policy effect, if the indicator is
chosen so that the other exogenous effects only influence
Che target variable.
Saving next considers how monetary policy is charac
terized. Referring to the various words used to describe
policy ("tight," "easy," etc.) he suggests two fundamentally
different ways of interpreting them. In the first place,
Che terms may merely be taxonomic devices for classifica-
Cion. This approach is useful as a summary of the policy
Ltself, but it must be recognized that terms such as "loose"
or "tight" are then determined by level of the instruments
and not by the net effect of policy. With purely taxonomic
policy statements, the classification of policy has no
{affect on subsequent policy actions because future policy
{action depends upon the effect of policy and how this effect
i
is interpreted, not merely on the classification of policy.
On the other hand, the terms referred to above may describe
a policy’s effect on some endogenous variable or variables.
43
This second use of the term differs from the first as it is
determined by the net effect of policy on some variable
thought to be important. In addition, a policy is only
restrictive or expansionary in terms of a specific structur
al hypothesis and criteria for characterization, and can be
expansionary under one hypothesis and restrictive under
another. In this second case, a particular description will
affect the decision to continue or change a policy because
it reflects the policymaker*s view of the effect of current
policy. Saving makes no attempt to estimate in just what
manner the terms have been used by the Federal Reserve.
Clearly, the information is important, even if, as is likely,
System officials use the terms in more than one way.
Moving to the problem of the choice of the "best1 *
indicator, Saving cites the work of Brunner and Meltzer (see
p. 36) who, given their structure of the economy and their
goal function, judged the money stock to be the "best1 1
indicator. Saving also compares several indicators to
determine an optimum variable, his goal being the maximiz
ation of real income which for him means attaining and main
taining full employment. His structural hypothesis is one
in which the level of income is affected ultimately only by
the level of aggregate demand, policy is thus characterized
by its effect on aggregate demand, and in this case a good
indicator would reveal the direction and magnitude of the
effect a policy is having on aggregate demand. The rela-
44
Cionship between the goal function and aggregate demand
indicates the appropriateness of the policy. In the struc
tural hypothesis, it is assumed that of the four variables
considered, interest rates are negatively related to aggre
gate demand, while' free reserves, the money stock and the
monetary base are all positively related to aggregate
demand. It is also assumed that both inflation and defla
tion reduce real income so that in inflation the policy is
to reduce aggregate demand while in deflation it is to in
crease aggregate demand.
Given this framework, Saving finds that as the
interest rate is pro-cyclical, it will tend to indicate a
policy is affecting aggregate demand in the desired direc
tion when the actual effect is just the opposite. The
situation here is that the exogenous effect is in the same
direction as the desired policy effect and thus the cyclical
effect can swamp the policy effect and lead to a situation
where the actual policy is in the wrong direction although
the indicator, dominated by the total effect, says it is in
the proper direction. The possibility for this type of
situation is greater, of course, the greater the cyclical
effect on the rate of interest. The problem is simply that
one cannot separate the cyclical effect from the policy
effect. This problem would be solved if one could know what
the interest rate or rates would have been in the absence of
policy.
45
Due to its relationship to the rate of interest, the
level of free reserves moves countercyclically. However,
once again there is a situation where the cyclical effects
nay outweigh the policy effect, since increases in free
reserves increase aggregate demand and decreases reduce
aggregate demand. Thus, for example, a downswing in eco
nomic activity results in increased desired free reserves by
banks because of expected currency drains and a decrease in
Che rate of interest. Free reserves will then show that a
policy is expansionary when in truth it may be contraction
ary. This problem could be solved if the policymaker knew
Che banks* desired level of free reserves.
The money stock is also pro-cyclical, but, for
example, in a downturn, when the money stock is decreasing,
Che money stock indicator has a cyclical effect that makes
policy appear to be restrictive even vdien it may be expan
sionary. It turns out that using the money stock as an
indicator results in policy that is either more restrictive
or more expansionary than that which normally would be
desired by the policymaker. It is this feature of the money
stock indicator that makes it superior--in terms of the
minimax criterion employed by Brunner and Meltzer--to
interest rates or free reserves which tend to lead to policy
Caking the wrong direction.
The monetary base, Saving feels, need not move
cyclically at all, and as long as policy action is confined
46
to open market operations, could be the ideal indicator in
the sense that changes in the monetary base only reflect
changes in policy. Policy must be confined to open market
operations, since any given stock of base money is consis
tent with some level of aggregate demand only if the dis
count rate and reserve requirements are constant, given the
structure of the economy.
Saving feels that much of the recent controversy over
indicators is due to a failure to distinguish between tar
gets and indicators. At the same time, it is not sufficient
that an indicator merely be related to policy for it to be
••good." Moreover, it is not widely enough recognized that
an indicator must necessarily be distinct from a target.
For example, it does not follow that interest rates would
be a good indicator because the primary effect of monetary
policy occurs via a change in the rate of interest. To be
a reliable indicator, the policymaker must know what the
cate of interest would have been in the absence of policy.
In conclusion, Saving feels that much of the work on
optimal policy suffers because of a lack of complete infor
mation about the economic structure and information lags.
<3iven incomplete information and lags in information trans
mission, the necessity for targets and indicators arises.
However, in order to have reliable targets and indicators,
one must make hypotheses regarding the structure of the
economy and the goals of policy. Saving feels that he
47
he indicated that "... the choice of target and indicator
may be relatively insensitive to changes in structural
hypotheses and goal functions."^ if this is true, targets
and indicators can be found that are optimal over broad
classes of hypotheses of the structure and goals of policy.
The major reservation regarding Saving*s paper is
that it is not clear that the choice of target and indicator
is relatively insensitive to changes in structural hypothe
ses and goal functions— a rather important consideration for
further work in this area. Quite clearly the hypothesis of
the structure and the objective function presented are
simplified and thus perhaps too general.
Saving's article, like Brunner's, suggests some
important insights for those actively involved in policy
determination. However, it shall be made clear that neither
the FOMC nor the Manager considered the indicator-target
issue on a technical level. Moreover, when "targets" were
mentioned the Manager and the FOMC were usually speaking of
free reserves or interest rates (the validity of which may
be questioned), or they were characterizing policy in such
non-operational terms as "even keel," or "status quo."
The money supply as an "ideal" Indicator
In an article published prior to Saving's, Karl
Brunner and Allan Meltzer contended that quite different and
^Ibid., p. 456.
48
even opposing information is suggested by the various mea
sures of the effect of monetary policy. Because of this,
they felt it was important to compare the information pro
vided by some of the variables frequently proposed as indi
cators, as interpretation of current policy vitally affects
the direction of future policy.
They stated their case in a series of questions:
. . . What information about monetary policy is con
veyed by the position of, or changes in a particular
variable? How do we choose from among the many avail
able time series those that are to be watched more care
fully than others? By what criteria do we decide that a
particular variable is a good or better indicator of
current or recent monetary policy?25
The authors suggested that many of the analyses of
monetary policy usually begin with a particular hypothesis,
usually assumed to be well established, on how policy re
lates to prices and output. These analyses then usually
proceed to derive policy implications from the particular
hypothesis, followed by steps to select a policy goal, mea
sure various lags or forecast future policy actions. Two
major points were made about such investigations by the
authors:
1. Policy conclusions in these cases depend upon the
particular hypothesis selected.
2. The measurement of lags depends upon separate
^Karl Brunner and Allan H. Meltzer, "The Meaning of
Monetary Indicators," Monetary Process and Policy, ed. by
George Horwich (Homewood, 111.: Richard D. Irwin, Inc.,
L967), p. 187.
49
hypotheses covering (a) some estimation of an
underlying theory of economic activity or policy
making behavior, and (b) some estimation of the
structure of the remainder of the economy.
The authors, on the other hand, emphasized their
relatively incomplete knowledge of the structure of the eco
nomy. In particular, they noted the lack of estimates of
many of the parameters of a general-equilibrium macro
scon omic model, of the speeds of adjustment of many of the
variables, and also of the distribution of the effects of
nonetary policy over time. Once again, several questions
were raised, this time focusing more on the state of incom
plete information:
What information does the policymaker have available
to decide on a future course of action, or to judge the
present or recent position of the economy7 How does he
assess the results achieved by past policy or likely to
be achieved in the near future? How does he decide
whether his policy has resulted in relative ease or
restraint?26
Brunner and Meltzer decided that rather than wait
until such time as more complete information was available
or "give up" and rely on strict monetary rules, they would
attempt to better utilize existing information, recognizing
that it was incomplete and uncertain. This alternative to
the questions raised by : them led them to the indicator prob
lem. This is defined as a concern with the relative merits
26Ibid.. p. 188.
50
of some variables which are often used to indicate the
current direction of monetary policy or the future effects
of current policy.
To set up the general problem areas, the authors
considered a situation where there is a fully identified and
generally confirmed theory of the macroeconomic process and
where the objective or social utility function is also
i
known. The indicator in this case is fully known and
becomes an index of monetary ease or restraint, merely
measuring the change in the monetary policy variables that
have been altered.
Differences between this situation and the one that
obtains in the present economy are fairly obvious. In the
first place, the nature of the social utility function is
not known and is therefore a matter of choice. Secondly,
some hypothesis about the macroeconomic process must be
presented. At the same time, even given an hypothesis about
the structure, little is known about the values of the para
meters that might be used in the various hypotheses.
Changes in the structure can change the value of the indi
cator. Thirdly, changes in institutions and institutional
procedures can affect the paths and impacts of policy.
Fourth, with complete knowledge, all that must be done is to
determine the appropriate indicator for evaluating policy.
With less than complete information, this is no longer true.
It is now necessary to make some sort of choice concerning
51
the indicator. It may be desirable to select either
policies or indicators which require a minimum knowledge
about the structure of the System, or it may be considered
more important to choose an indicator that reduces the
possibility of seriously misinterpreting the effects of
policy action. The point is then brought out that many of
what are now called indicators cannot serve in that sense
with regard to the indicator function introduced by the
authors. The main reason for this is that most are endog
enous variables and thus their position or rate of change at
any given point of time reflects more than the effects of
current monetary policy. In addition, at any point of time,
the position or rate of change of such variables reflects
incomplete adjustment to some longer-run position which
would be the result of a response to previous changes in
policy or other exogenous activity.
The procedure then, is to attempt to compare or rank
some indicators, given the fact that this is possible if the
investigator is not wholly ignorant of policy goals and the
structure of the System.
In order to appraise the effects of policy action and
to rank various endogenous variables which might be used as
indicators, it is still necessary to construct a theory of
the structure of the economy and a utility function.
The authors proceeded to specify a general macroeco
nomic model, readily admitting that their description of the
52
macroeconomic relations was not a specific enough hypothesis
to construct the ideal indicator function, primarily because
little is known about the values of important parameters in
the equations and the speeds of adjustment of the variables.
On the other hand, their model is quite valid for a wide
range of structural hypotheses, particularly those of the
real sector.
While the macroeconomic relations do not constitute
a specific hypothesis, the authors felt their investigation
provided enough information so that some tentative conclu
sions could be made concerning frequently used indicators.
This is true because the comparative rankings of the indi
cators considered is not felt to be greatly affected by the
specific hypotheses used to describe the real macroeconomic
system. Their utility function is quite simple: it is
assumed that utility is a monotonically increasing function
of real income, and the only goal of monetary policy is to
increase real income; the problem of trade-offs among goals
Is eliminated. An index can thus be constructed that per
mits ordering and comparing monetary policy.
In that part of the function of the "true'' indicator
which provides all the information required to order
monetary policy under the given hypothesis and the simple
goal, the authors introduced a number of ratios which
Lnclude all the monetary policy variables, a combination of
Lnterest elasticities on the credit market and the output
market and a parameter equal to the ratio of the money
supply (baroadly defined) to bank earning assets. However,
reliable information is not available for all the compon
ents. As such, the "true" indicator, which would be used as
a basis of comparison, cannot be computed accurately. All
this suggests that the availability of several monetary
policy instruments increases the amount of information re
quired by the decision-maker— information that is not always
available. There is, then, a trade-off between having a
variety of policy instruments and the requisite information
needed to utilize the instruments. Brunner and Meltzer felt
a good case could be made for restricting policy instruments
to changes in the adjusted base until such time as the
required information became available. This is especially
true since extremes of economic activity usually result in
changes in the discount rate, etc.--changes which may be
capable of swamping the indicator. Until we can estimate
the effects of changes in these other instruments upon the
indicator and the pace of economic activity, the authors
contended we should substantially restrict our use of such
tools.
Because the true indicator cannot be constructed due
to lack of information, the authors evaluated, in terms of
their model, variables were often used as indicators. They
pointed out, however, that as these variables are endogenous
and consequently affected by other movements in the finan-
54
cial and output markets, they are not necessarily better
simply because they can be measured. In fact, separating
the effects of policy action on these variables from the
effects of other exogenous forces may often require more
(often unavailable) information than is required to con
struct the true indicator.
The first variable to be considered is the money
supply, narrowly defined. Brunner and Meltzer did not con
sider it ideal in that it does not accurately record the
magnitudes of changes in policy variables and in addition,
is affected by changes in other exogenous variables. For
example, those policies which lead to an expansion of the
money supply, also lower the prices and yields of financial
assets with the result that a given percentage change in the
monetary base results in a smaller percentage change in the
money supply than would be suggested by the true indicator.
The difference, of course, depends upontthe size of the
interest elasticity of the monetary multiplier. At the same
time, relative to the ideal indicator, the money supply
seems to overstate the direct effect of changes in other
policy instruments. Thus, while it does appear that changes
in monetary policy action and the currency ratio are
dominant, it still remains to separate out the effects of
monetary policy from other exogenous forces if the money
supply is to closely approximate the ideal indicator.
Other monetary variables (commercial bank credit and
55
broadly defined money) perform much like the money supply.
However, as the elasticities of the multipliers of these
two other definitions of money with respect to interest
rates and real income are larger than those of the money
supply, these two variables both over- and under-state
differences between themselves and the true indicator more
than does the money supply.
Because of their generally accepted role in the
transmission process, interest rates are often considered a
good candidate for an indicator. However, Brunner and
Seltzer felt that interest rates may be a very poor indi
cator precisely because of their central place in the trans
mission process and the influence upon rates of other exog
enous factors.
Generally, of course, lower interest rates are
associated with an expansionary monetary policy, and vice
versa. There are two important consequences which result
from this interpretation under the authors' structure. In
Che first place, the effects on the indicator when monetary
policy operates through instruments other than open market
operations are such as to exceed the true Indicator value.
This can be solved by eliminating all other policy instru
ments, but then there would be no need for any indicator as
monetary policy would be measured correctly by the relative
change in the adjusted base. Secondly, in their structure,
Che use of interest rates as an indicator results in changes
56
in fiscal and other exogenous variables being attributed to
monetary policy. In short, the use of interest rates as an
indicator neglects the powerful influence on interest rates
of new issues of interest-bearing debt, changes in the stock
of real capital and other exogenous actions--influences
which can easily swamp those signals the true indicator
would show.
The final variable to be considered is free reserves.
Considering the effect of a change in the monetary base on
free reserves, Brunner and Meltzer pointed out that changes
in the base also modify interest rates, and that the effect
of interest rates on free reserves is quite large. In
addition, the sign of the response is opposite from the sign
of free reserves. Thus:
When free reserves are negative, the free reserve
indicator exaggerates the magnitude of expansive policy
actions and under-states the size of contractive pol
icies. Positive free reserves have precisely the
opposite effect. They cause the free reserves indicator
to overstate the size of reductions in the base and
understate the size of i n c r e a s e s .27
At the same time, because of the mathematical structure of
the hypothesis, changes in policy instruments other than a
change in the base lead to a misstatement of policy. This
is especially true for changes in the rediscount rate and
when interest rate changes are induced by changes in a
policy instrument.
27jbid., p. 202.
57
While none of the variables considered indicates the
actual impact of monetary policy actions on real income,
there are variations in their degrees of explanation. Thus,
in the absence of knowledge about the structure of the
economy, some strategy to choose among imperfect alterna
tives must be selected. The strategy Brunner and Meltzer
chose was a minimax procedure, in which the "best" indicator
was that one which had the minimum-maximum deviation between
the actual effect and the indicated effect using the
structural parameters of their model. That is, the worst
possible outcome attributable to incomplete knowledge was
minimized. Using this criterion and given the structure
and goal they postulated, money supply turned out to be
"best."
An alternative solution is suggested in the form of
an approximate indicator that combines two indicators, one
more responsive and the other less responsive than the
ideal. While this approximate indicator does have advan
tages, they are outweighed primarily by the fact that it
depends upon the particular class of hypotheses and goals
selected, and that some of these functions require consider
ably more information than was the case with the selected
indicator candidates.
The conclusion reached is that while the solution
proposed is neither exact nor ideal, it is less misleading
than several other variables used to describe monetary
58
policy. This is particularly important because future
actions are based upon the interpretation of current events.
If these interpretations are false or misleading, so will be
the policy decisions, with the result that substantial
variation in economic activity may occur.
The limitations of the analysis described above are
relatively clear and were readily admitted by the authors.
The model is not stochastic, the objective function is
limited, not all parameters are reliably known, and the
structural model does not even pretend to closely match that
found in the United States. Also, as with Saving, it was
not made clear why the conclusions they reached are valid
for a wide range of structural hypotheses; in fact they
appeared to say the opposite in some of their discussion.
Commercial bank credit as an indicator
A more recent study of targets and indicators is that
of George Kaufman, senior economist for the Federal Reserve
3ank of Chicago. Kaufman investigated the theoretical role
of indicators, noted the difference between indicators and
Intermediate targets, and presented results of seme prelim
inary tests to differentiate among alternative monetary
policy indicators.
Defining indicators as “economic variables which
measure the contribution of specific economic policies on
their ultimate targets in isolation of all other forces
59
simultaneously impinging on these t a r g e t s ,"28 the author
eliminated the ultimate targets of monetary policy from
consideration as indicators due to the large number of other
factors which affect these variables and the fact that
monetary policy affects them only after a lag. With com
plete knowledge, of course, such limitations would dis
appear. Kaufman's task in a world of incomplete knowledge
was similar to Brunner and Meltzer's— to construct a frame
work within which, given the present state of knowledge,
alternative indicators may be systematically evaluated.
Kaufman then introduced what he called intermediate
targets of policy, or what Saving simply referred to as
targets. He felt that because of the long transmission
process between policy action and the ultimate target, and
because of the many lags involved, the policy-maker finds it
to his advantage to be able to direct policy actions at
variables which are closer to the immediate impact of policy
than are the ultimate targets. However, an optimal inter
mediate target requires greater knowledge of the economic
structure, particularly the path from monetary policy action
to the ultimate target, than is true of an indicator. Such
information is necessary if a given change in the intermed
iate target is to result in a desired change in the ultimate
28Qeorge G. Kaufman, "Indicators of Monetary Policy:
Theory and Evidence." The National Banking Review, IV (June,
1967), 17“
60
target with any degree of certainty. At the same time,
there is no particular need for the intermediate target to
be a financial variable, and Kaufman felt it probably would
not be as the intermediate target is further out in the
transmission process and thus closer in nature to the ulti
mate target.
But while recognizing the confusion that can arise
through failure to properly distinguish between target and
indicator, Kaufman was not as adamant as Saving. Instead,
Kaufman maintained that optimal intermediate targets need
not be optimal indicators and vice versa, and that some
variables may perform both tasks equally well. He contended
that it is easier and more fruitful to investigate appro
priate indicators than to select optimal intermediate tar
gets as it is easier to make reliable statements about the
direction of relationships among variables than it is to
make statements about the values of parameters.
Moving to the evidence of preliminary tests to
differentiate among alternative indicators of monetary
policy, the author restated the five criteria of an optimal
indicator as he saw them.
1. The indicator must be an important link in the
monetary policy transmission process.
2. It must be influenced primarily by the central
bank.
3. It must be subject to minimum feedback from the
61
real sector.
4. It must be available frequently and soon after
policy action.
5. It must be positioned near to immediate central
bank action.
Although the indicator must be related to the ulti
mate targets (production, employment and prices), the
relationship need not be known exactly. All that is neces
sary is that the direction of the relationship be known and
that the relationship be relatively stable. The indicator
thus tells relative changes in policy, not whether the
policy is appropriate.
The five criteria suggest financial variables, and
Kaufman selected this type, breaking them down into two
main categories: interest rates and money supply measures.
Several of the frequently specified indicator variables were
considered. These are:
1. Three-month Treasury bill yields.
2. Long-term Treasury bill yields.
3. Narrow money, that is currency and demand deposits
adjusted.
4. Broad money, that is narrow money and time depos
its at commercial banks.
5. Liquid assets, that is broad money plus deposits
at mutual savings banks, share capital at savings
and loan associations, U.S. Government savings
62
bonds and nonbank holdings of U.S. Government
securities maturing in one year.
6. Bank credit.
7. Member bank borrowings from Federal Reserve Banks.
8. Free reserves, that is member bank excess reserves
less borrowed reserves.
Kaufman felt that it was generally agreed that these
eight variables satisfied the optimum criteria of easy
availability, being an important link and being in the early
part of the transmission process. He then applied multiple
regression analysis to determine how well the variables
satisfied the criteria of minimum feedback and primary
influence by the central bank. Given a single equation
which specifies both central bank action and real sector
forces, he suggested that the optimal indicator would have
a high partial correlation with central bank actions
(reflecting primary influence by the central bank) and a low
partial correlation with the real sector (reflecting minimum
feedback with the real sector).
The fact that a low correlation with real sector
forces appears to conflict with the criterion of important
linkage in the transmission process (which implies a close
correlation with the ultimate target) was dismissed due to
the lag in impact of monetary policy on the real variables.
That is, if monetary variables have their greatest impact
several months after their initiation, it is not inconsis-
63
tent to have a high correlation between the indicator and
the lagged ultimate target and a low correlation between the
indicator and the current value of the ultimate target.
As a first approximation, Kaufman suggested that
central bank actions and real sector forces may each be
captured by a single variable— member bank reserves— because
the three major tools of monetary policy have their initial
impact on this variable. Justification for this hypothesis
was the explanation of the monetary transmission process by
the Federal Reserve in their pamphlet The Federal Reserve
System: Purposes and Functions. The fact that the three
tools— open market operations, reserve requirements and the
discount rate— affect member bank reserves differently, was
corrected by adjusting reserves for changes in reserve
requirements. The tools were thus reduced to one instru
ment. Although total reserves adjusted for changes in
reserve requirements were themselves sometimes used as an
indicator of policy, Kaufman specified them only as an
instrument of policy action because of their singular
importance in describing central bank action and because
less was known about the relationship of reserves directly
with the ultimate policy targets. This meant that the
indicator to be tested must be further out in the trans
mission process.
Because only the direction of the relationships be
tween the indicator and the ultimate targets were to be
64
determined, a complete structural model was not necessary.
Instead, the basic relationship merely related the indicator
to toal member bank reserves adjusted for changes in
reserve requirements and GNP or industrial production.
Reserves were postulated to have their major impact on GNP
with a six to nine month lag and were therefore considered
to be independent of income in the formulation.
Kaufman felt the evidence was quite clear from both
level and first difference regressions. Money supply
measures (numbers 3 to 6 above) were more closely related to
Federal Reserve action and less affected by feedback from
the real sector than either interest rates or reserve
position measures. However, none of the variables tested
fully satisfied the criteria outlined above. The signs of
the relationship between the various reserve measures were
as would be expected from economic theory.. The partial
correlation coefficients between reserves and money supply
measures were on the whole greater than those between
reserves and interest rates or reserve positions. In
addition, the partial correlation coefficients between
reserves and money supply measures were generally greater
than between money supply measures and real sector forces.
Interest rates and reserve positions were more closely
associated with the real sector than with total bank
reserves.
An ordering of money supply measures indicates bank
65
credit satisfies the criteria best and liquid assets worst.
This superiority is dramatically evident from the first
difference regressions.
Kaufman attributed the superior showing of bank
credit to a profit maximization concept. Banks respond
rapidly to changes in reserve positions by moving into or
out of the large variety of investments open to them as the
circumstances may dictate. Bank credit is probably more
under the control of the commercial banks than other forms
of the money supply which are probably more related to the
actions of the public. It is also true that there has been
a wide variety of liquid investments open to banks during
the period under consideration and thus the ability of banks
to find outlets for their excess reserves has been rela
tively independent of the level of income.
Evidence was cited to indicate why interest rates and
free reserves (which are closely related to rates) do not
perform well. "Rates . . . are affected by real sector
forces more closely, to a greater degree and for a longer
period of time than by monetary forces."29 However, even
though his investigation indicates that interest rates leave
something to be desired as indicators, Kaufman, contrary to
Saving, Brunner and Meltzer, felt they might prove to be
superior intermediate targets due to their apparently key
29Ibid.. p. 6.
66
role in linking the financial and real sectors.
Several disclaimers to the findings were also noted.
In the first place, bank credit is importantly affected by
real sector forces and is not always highly related to
changes in reserves. The limited results in this respect
Kaufman attributed to the simple criteria, the simple tests
and the limited number of indicator variables actually
tested. Secondly, the author felt that considerably more
empirical work was needed to support three important
assumptions of the analysis, namely that of the indicator
being an important link in the transmission process, that of
the reasonable stability between the indicator and ultimate
target variables, and finally, that of a lag of at least one
month between a change in the indicator and its impact on
income.
These considerations not withstanding, the conclusion
of the paper was that 1 1 . . . quantities of financial
assets, particularly commercial bank assets, reflect central
bank actions to a considerably greater extent than either
the price and yields of such assets or measures of reserve
positions.1 '^
In addition to the restrictions noted throughout the
paper, two other limitations should be noted: 1) Kaufman
relied on the statements of the Federal Reserve for a
3°Ibid., p. 7.
67
description of the strategic role played by reserves. The
danger of doing this has been noted and will be discussed at
greater length below. 2) Although aware of the problem, he
did not adjust total reserves for changes in the deposit mix
(that is, time deposits versus demand deposits), a fact
which may be of considerable importance, since it may result
in a change in the slope of the trend over the long-run if
changes in the mix were very great. The I960»s have pro
duced rather large changes in the mix.
Summaries of Evaluations of the
Federal Reserve System
Few critics of the System have based their analyses
on anything more than rough graphical comparisons of eco
nomic indicators and monetary measures and most have been
private value judgments or observations, occasionally
supported by reference to published statements of System
spokesmen with regard to their policy actions. Similarly,
the System has relied primarily on a literary defense of its
past policy actions. As Johnson and Dewald note:
Out of such ill-defined and slippery semantic debate,
little can be expected to emerge in the way of positive
knowledge about the monetary policy that has been pur
sued and its relation to the objectives of economic
policy.31
33-Harry G. Johnson and William G. Dewald, "An Objec
tive Analysis of the Objectives of American Monetary Policy,
1952-1961," Banking and Monetary Studies. ed. by Deane
Carson (Homewood, 111.: Richard D. Irwin, Inc., 1963),
p. 172.
68
The analyst must be wary of normative judgments of the
System's record and even those studies which are based on
the statements of the authorities. These latter usually do
not provide more than a very general response, and are open
to the limitation that one is in effect judging the actions
of the System by what its members claimed after the fact.
Such answers may be rationalizations demanded by the exi
gencies of bureaucratic survival. Analyses of statements
and publications issued by the System provide little evi
dence that the monetary authorities act in any specific
manner (see chapters III through V).
More recently, however, several attempts have been
made to go beyond mere value judgments or textual criticism
and to observe what the authorities actually did in response
to changes in unemployment, prices and income. These
attempts are most relevant to the present investigation and
will be examined here. All of the articles discussed here
attempted, either through a reaction function type of
approach or the more sophisticated conditional maximization
model, to describe or determine what past monetary policy
was and what current policy is. Although the attacks on
this problem varied in method, all were seeking to discover
how the Federal Reserve responded to changing economic
conditions, what variables best described this response, and
what variables best described the effect monetary policy had
on the pace of economic activity. None, however, examined
the role of the Manager.
69
Objectives of monetary policy: 1952-1961
The stated purpose of Johnson and Dewald was to
determine the objectives that governed monetary policy in
the United States in the period 1952-1961 and the lag in the
translation of those objectives into concrete monetary
policy.
The authors saw the monetary authority responding to
certain key economic variables--namely price stability, high
employment, economic growth and a satisfactory balance of
payments— to each of which it attached a weight in order to
determine its monetary policy. They assumed that the degree
to which each objective was attained was reflected by a
statistical indicator of the performance of the economy and
that the System governed its policy by reference to the
statistical indicators of achievement of the objectives and
the weights attached to the objectives. They further
assumed that the response of monetary policy to changes in
the performance of the economy was subject to a distributed
lag.
The authors made use of the reaction function in
vented by Reuber^ to relate the statistical indicator of
monetary policy to the statistical indicators of the degree
32g. L. Reuber, "The Objectives of Canadian Monetary
Policy, 1949-1961," The Journal of Policital Economy. LXX1I
(April, 1964), 109-1337
70
to which the various objectives of policy had been achieved.
To apply this approach, the authors specified statistical
indicators for both monetary policy and the performance
characteristics of the economy relative to the objectives
listed above. For indicators of monetary policy Johnson and
Dewald chose the money supply (the total of demand deposits
and currency), free reserves, the Treasury bill rate and the
Treasury long-term bond rate. For the performance charac
teristics of the economy, the consumer price index, the
unemployment percentage, the balance of payments deficit and
real gross national product were employed. Statistical re
gressions were performed on quarterly data for the period
1952 through 1961 using a two-step regression program.
The regression of the money supply on the various
economic performance variables yielded better statistical
results in terms of multiple correlation coefficients and
significance of regression coefficients than did the
interest rate or reserve position indicators of monetary
policy that were considered.
In the authors* words, they were
. . . able to find reasonably good statistical explana
tions of changes in the money supply in terms of a
lagged reaction of the money supply to changes in sta
tistical indicators of the performance of the economy
relevant to the main objectives of economic p o l i c y .33
Using the money supply as the control variable, it appeared
33johnson and Dewald, "American Monetary Policy,"
p. 180.
71
Chat during 1952-1961 unemployment and economic growth were
the main concern of economic policy while balance of pay
ments was not. The price level did not have the influence
on the money stock that was statistically significant at the
five percent level, but the direction of influence was in
accord with a priori expectations.
When free reserves, Treasury bill rates and Treasury
bond rates were substituted for the money supply, the
results were considerably different (shorter) with respect
to the responsiveness of policy indicators to performance
variables. However, the degree of explanation was uniform
ly lower. For free reserves, none of the resulting coeffi
cients was significantly different than zero at the five
percent level. However, the relationships of free reserves
and unemployment and free reserves and real GNP were
counter-cyclical, although those of price level movements
and balance of payments deficits were not.
When the Treasury bill rate was used as a measure of
achieved Federal Reserve monetary policy, the coefficients
for the unemployment rate and for real gross national pro
duct were statistically significant, but the coefficients
for the consumer price index and the balance of payments
deficit were not.
For the last measure, the Treasury long-term bond
rate, the results were statistically significant for all the
coefficients except for the balance of payments deficit. In
72
addition, only in this last case were all the relationships
cetween the key economic variables and the measure of accom
plished Federal Reserve policy consistent with a priori
sxpectations.
All of the regression results reported showed a
strong influence on monetary policy of the percentage of
unemployment, and a less strong, but statistically signifi
cant influence of GNP. Conversely, neither the price index
cor the balance of payments was consistently a statistically
significant determinant of the monetary policy variables.
These results suggest that neither price stability nor
calance of payments were major goals and that the System did
cot give ''undue" consideration to price level stability
3uring the period in question.
The money supply in System decision-making
In a paper originally prepared for the Money and
banking Workshop at the University of Chicago in 1964,
George Kaufman, following somewhat the line of analysis of
Johnson and Dewald, attempted to develop a supply function
of money in which the decision-making process of the Federal
Reserve System was made clear. His supply function was
different in that it did not merely assume the money supply
to be determined exogenously by the System, nor by the
commercial banks on the basis of a reserve base determined
by the Reserve banks.
73
Assuming that the System does not affect the money
supply randomly, Kaufman also postulated that unlike most
other suppliers, price does not play an important role in
Federal Reserve decisions to provide money. Rather, he
suggested that the System could be assumed to affect the
supply of money in response to "(1) the needs of business
and (2) the difference between actual levels of economic
performance and some target levels of p e r f o r m a n c e ."34 The
needs of business he felt could be approximated by income,
while performance targets could be stated in terms of eco
nomic growth (target GNP minus GNP in constant dollars),
prices, unemployment, and balance of payments. The Federal
Reserve was assumed to affect the money supply in a stabi
lizing manner and an attempt was made to recognize that
commercial banks can independently affect the supply of
money, and would do so, for example, by increasing the
supply of money when interest rates rose.
The equations involved were fitted as a first approx
imation by a step-wise least-squares regression for quarter
ly data for the period 1952-1962. Kaufman did not include
balance of payments deficits as an independent variable,
feeling that payments were not an important target during
S^George G. Kaufman, "The Supply of Money: A Supply
Function Explaining Federal Reserve Behavior" (mimeographed
material, Federal Reserve Bank of Chicago, January, 1964),
p. 2. (Hereinafter referred to as "Supply of Money.")
74
the time period involved. The remaining target variables
were selected on the basis of ’ ’past performance" and offi
cial statements of the System and the so-called actual
targets determined on the basis of best fit. It was assumed
that, with the exception of balance of payments consider
ations, the years 1952 through 1962 represented a period in
which there was no significant change in either the targets
pursued by the Federal Reserve or the weights assigned to
the targets. Furthermore, Kaufman assumed that there was no
a priori reason to assume that the money supply schedule
shifted greatly in the period. Three alternative defini
tions of money and a reserve measure were specified as de
pendent variables. 35
Kaufman found that the target measures which yielded
the best regression fits closely matched those most fre
quently stated by Federal Reserve officials--a four percent
unemployment target, a three and one-half percent annual
growth rate and a price target of one and one-half percent
annual increase. All three definitions of the money supply
and bank reserves were statistically significant when re
gressed on income and either the target income or the target
unemployment figure. That is, the R^'s were .94 or higher,
35xhe definitions are: demand deposits and currency,
currency, demand deposits and time deposits at commercial
banks, and a liquid asset series compiled by the Federal Re
serve System. Member bank reserves, adjusted for changes in
reserve requirements are also specified.
75
the standard errors of the estimate ranged between one and
two percent of the value of the dependent variable at the
mean and the estimated coefficients were at least twice
their standard errors. The signs of :the coefficients were
consistent with the assumption that monetary policy was
stabilizing with respect to income, growth and unemployment.
With the introduction of a price target, only the regression
of the narrow definition of the money supply yielded coef
ficients at least twice as large as their standard errors
and of the expected sign. The unexpected signs of the coef
ficients when the alternative definitions of the money
supply and bank reserves were included may suggest that the
Federal Reserve gave priority to growth and unemployment
rather than prices when there was a conflict. Finally, as
the short-term Treasury bill interest rate was positive and
statistically significant only for the narrow definition of
money, it may also be true, as Kaufman noted, that interest
rates are more closely associated with demand for assets and
may better be specified in demand rather than supply
functions. Kaufman concluded that the regressions do:
. . . emphasize the differences between the narrower
and broader definitions Cof money}, particularly with
respect to prices and interest rates. Demand deposits
and currency, alone, were supplied in a stabilizing
manner with respect to both prices and the utilization
of resources and may be considered the definition of
money favored by the Federal R e s e r v e .36
36Kaufman, "Supply of Money," p. 11.
76
Total reserves as a measure of System policy action
Thomas Havrilesky, in a recent article investigating
monetary policy action, attempted to develop and estimate a
reaction function for the Federal Reserve System for the
period 1952-1965. As with Johnson-Dewald and Kaufman, this
function related an indicator of monetary policy to vari
ables traditionally thought to affect monetary policy:
level of income, the unemployment rate, the general price
level and the balance of payments. The purpose of the
investigation, in addition to developing the reaction
function, was to provide information on indicators of mone
tary policy and the response of policymakers to the explana
tory variables and to establish some of the groundwork for
longer-run monetary policy strategy.
Noting that in previous similar studies the dependent
variables did not indicate that balance of payments had a
significant impact on monetary policy (and in some cases
neither did prices), Havrilesky further recognized that some
indicators were ambiguous in the sense that they might
reflect phenomena which were independent of monetary policy.
He attempted to determine an indicator which would encompass
the entire thrust of conventional monetary policy (that is,
be statistically significant for all explanatory variables)
and which would be unambiguous in his use of the term. Thus
tiis first criterion for the "preferred" indicator was that
non-monetary policy forces affecting it could be assumed to
77
be known and thus compensated for. Secondly, the indicator
should reflect changes in the three conventional tools of
policy (open market operations, discount rate changes and
reserve requirement changes). By elimination, this sug
gested that adjusted total reserves might be a preferred
indicator.
The explanatory variables assumed to affect monetary
policy were the unemployment percentage, the general price
level, and from 1958 on, the balance of payments deficit or
surplus. Furthermore, the System was assumed to supply the
increasing transactions demand for money by modifying ad
justed total reserves so that they grew in some relation to
increases in the level of income. Havrilesky squared the
variables to be used in order to more fully capture policy
reaction.37
The results of the study suggested that the System
or at least "monetary policy" responded to the avowed goals
of price stability, full employment and economic growth.
However, here too, no single measure of the balance of pay
ments considerations seemed to have a dominant influence on
37Thomas Havrilesky, "A Test of Monetary Policy
Action," The Journal of Political Economy. LXXV (June, 1967),
299-304. Introducing prices in the form (P-P*) where P
equals actual price levels and p‘ is the price level goal,
Havrilesky assigns a WPI value of 92 to P' for the period
1952-1957, and 100 for the period 1958-1965. Such values
for P* insure that (P-P') will be positive and therefore
that squaring the divergences in order to more fully capture
policy reactions will not "hide" any negative figures.
78
policy. As with other studies, this suggested that no one
measure of balance of payments was used exclusively during
Che period under investigation. Thus, according to Havri
lesky, the test results do not "falsify" the basic hypo
thesis that the real variables responded to the indicator
within one quarter nor the secondary hypothesis that ad
justed total reserves reflect minimal feedback (are unam
biguous) and yet capture all the tools of policy.
£ utility function for the Federal Reserve
John Wood presented the most complete model of Fed
eral Reserve behavior, although a somewhat different one
than those considered previously. Rather than concentrate
on the reaction function approach, Wood's analysis was an
application of the conditional maximization approach to the
formulation of policy. His work was thus in the tradition
of Tinbergen, Theil, Holt and others.
The general approach adopted by Wood is summarized by
him as follows:
We will suppose the Federal Reserve to possess a
utility function relating its conception of the public
welfare to income, employment, price levels and the
balance of payments. We will then assume that the Fed
eral Reserve manages its portfolio of government securi
ties in such a way as to maximize utility subject to the
constraints imposed by its view of the structure of the
economy, including its forecasts of the exogenous vari
ables entering the system. This is analogous to the
conditional maximization approach that traditionally has
been applied in economic theory to the behavior of con
79
sumers and firms.
The major hypothesis under examination was that the
Federal Reserve had actually been behaving in a manner that
resulted in policies similar to those which would have been
produced by following the sophisticated conditional maximi
zation approach.
The basic process through which the model was devel
oped was to construct: (1) a "plausible" utility function
for the System and (2) a system of equations which described
the System's conception of the structure of the economy.
The procedure then was to maximize the utility function sub
ject to the constraints of the hypothesized economic
structure. The resulting equation, which could be used to
explain at least one aspect of System behavior, was esti
mated by ordinary least squares and two-stage least-squares
on the basis of quarterly data for the period 1952-1963.
Wood accepted System goals as maximum output (real
income), price level stability, employment, and the balance
of payments. In addition, Wood introduced as a short-term
objective maintenance of orderly conditions in the govern
ment securities market. Maintenance of orderly conditions
referred to movements in interest rates brought about by
factors other than those related to long-term trend or
38john H. Wood, "A Model of Federal Reserve Behavior,"
Monetary Process and Policy, ed. by George Horwich (Home
wood, 111.: Richard D. Irwin, Inc., 1967), p. 136.
80
cyclical developments.
As a plausible representation of System preferences,
Wood constructed an asymmetrical static quadratic disutility
function.
The constraints under which this preference function
was minimized were represented by a system of equations
relating each of the five target variables to:
. . . (1) an intermediate financial variable through
which the Federal Reserve thinks it affects economic
conditions, (2) the Federal government surplus, (3) the
balance of trade (primarily for balance of payments
reasons), and (4) recent changes in the target vari
ables. 39
The intermediate financial variables were most important as
they were the link between open market operations and real
economic activity. The actual intermediate financial vari
able might be the money stock (broad or narrow), total bank
reserves, unborrowed reserves, free reserves, etc. Lagged
values of the target variables were included to account for
the use of unsophisticated projections.
The final preliminary step was introduction of the
monetary policy instrument which was to be explained in the
model. The instrument selected was the change in the quan
tity of government securities held by the System. As an
indicator of credit and monetary tendencies, Wood chose a
free reserve measure. The justification for the use of free
reserves was that it • * . . . appears to be foremost in the
39Ibid.. p. 140.
81
minds of the formulators of monetary policy.,,40
One feature of the ordinary least-squares analysis
was an attempt to estimate how much of the variation in
Federal Reserve holdings of securities was attributable to
what Roosa termed defensive (that is, avoiding mechanical
disturbances that could interfere with the smooth function
ing of the monetary system) as opposed to dynamic operations
(using the potentialities of control over the reserve base
of a fractional reserve banking system to help promote eco
nomic growth within a pattern of sustained stability) of the
System. Wood's evidence suggested that, in terms of his
model, open market operations were 'predominantly concerned
with defensive operations, that is, with all factors affect
ing average free reserves other than System security hold
ings .
In terms of the stated purpose, Wood's ordinary
least-squares analysis suggested there was an important
counter-cyclical element in open market operations in
addition to that involved in defensive operations. It
appeared that on volume, open market purchases during the
period under review tended to be positive during contrac
tions and negative during expansions after compensation for
the defensive component of open market operations. The only
exception to this was the expansion of 1961-1963 (1963 was
40Ibid.. p. 144.
82
the terminal date of the study) in which open market opera
tions were positive. It would thus seem that while balance
of payments were becoming worse during this period (suggest
ing sales of securities) other goals outweighed this objec
tive of policy in impact on the preference function. With
a high r2 and a significant Durbin-Watson statistic, it
appeared that the System reacted strongly to recent GNP and
price level changes, to Treasury debt management operations,
changes in the balance of trade and other factors affecting
the average level of free reserves other than Federal
Reserve security holdings.
Nonetheless, Wood was unable without independent
verification, to estimate the relative weights, or trade
offs, between different targets. Thus, for example, if the
income target was quite high, the System might purchase
large quantities of securities in order to bring about a
large increase in the adjusted level of free reserves either
because the weight attached to the income target was high
relative to the weights attached to other tsirgets or because
the effect of the adjusted average level of free reserves on
income was very small.
Since several of the explanatory variables were de
termined jointly with the explained variable (average System
holdings of U.S. Government securities), two-stage least-
squares analysis was utilized to obtain more consistent
estimates of the parameters. The results of this estima-
83
tion, while not as encouraging as those from the simple
least-squares, did substantiate the fact that the variables
mentioned above, with the exception of balance of payments,
were significant at the 0.05 level.
Wood's concluding remarks are worth quoting at
length:
The results presented above suggest strongly that the
Federal Reserve, in its conduct of open market oper
ations, responds in a systematic fashion to recent
movements in such target variables as GNP, the balance
of payments, unemployment, and prices, and to changes in
GNP and balance of payments targets. While the pre
ponderance of Federal Reserve action is aimed at
smoothing variations in 'other factors affecting re
serves,* a small but statistically significant part of
its behavior is in direct response to the targets and
target variables specified in the Employment Act of
1946 . . , .The evidence presented indicates that the
Federal Reserve possesses a welfare function that may
not be unreasonable in light of the provisions of the
1946 Employment Act and other manifestations of the
desires of the electorate. The data suggest also that
the response of monetary policies to variations in tar
gets and predetermined variables has been fairly rapid,
at least when viewed in terms of quarterly data.41
Some general comments and criticisms of these studies
can be made, recognizing that not all the comments apply
with equal force to all the studies, especially Wood's.
In the first place, none of the studies examined the
role of the Manager, although this was outside the scope of
the investigations. What is important for this analysis is
the general finding that price level stability and balance
of payments targets did not appear to be consistently
41ibid.. p. 156.
84
statistically significant. This is important in light of
information to be presented in which it is quite clear that
the FOMC at least placed much weight on these targets.
Perhaps the Manager did not.
Secondly, as suggested by Brunner and Saving, the
studies presented here presuppose a solution to the "indi-
catbr" problem--that is the need to have some sort of index
ordering the relative thrust of policy actions if compara
tive statements are to be made. The studies here implicitly
assumed that the comparative thrust of policy actions was
known and could be measured, when in fact this was what they
sought to determine.
Thirdly, the comments of Johnson and Dewald with
regard to interpreting the results of these types of studies
should be noted:
In the first place, the statistical indicator of
monetary policy selected may not correspond with the
true monetary control variable, and its correlation with
the independent variables may reflect endogenous rela
tionships other than policy reactions; for this reason
also the monetary indicator most highly correlated with
the independent variables is not necessarily that which
the monetary authorities were in fact seeking to con
trol. Consequently, the results have to be read as con
ditional on the validity of the monetary policy indi
cator selected. In the second place, assuming that the
monetary policy indicator selected is the correct one,
the coefficients relating it to the independent vari
ables may in part reflect the monetary authorities'
assessment of the trade-offs between objectives actually
existing in the structure of the economy, as well as
their preferences among the policy objectives them
selves. Finally, the technique assumes that both the
structure of the economy and the way in which monetary
policy is integrated with other policy instruments in
85
stabilization policy have not altered substantially
over the period.42
Another criticism is related to the fact that the
studies relate to accomplished rather than intended policy
and may thus lead to biased results. That is, the stock of
money, free reserves, the Treasury bill rate, the Treasury
long-term bond rate, and other measures used are influenced
by Federal Reserve actions, but also by the response of the
banks and public as well. As such, the studies may be
suggestive of Federal Reserve behavior only if the inter
mediate financial variables under study are completely or
nearly completely controlled by the System and manipulated
as an instrument of policy. Kaufman, by explicitly intro
ducing desired values of target variables does make some
improvements, but he is still open to the criticism that the
dependent variables he considers are influenced by forces
other than Federal Reserve officials. However, even if the
variables under observation are controlled by the System,
estimates of coefficients will be “inconsistent" if the
Federal Reserve succeeds in influencing the relevant eco
nomic variables in a period less than that under obser
vation. That is, the use of quarterly data may "hide" in
formation and distort estimations if the System reacts and
the economy responds in a period of time less than three
months. Quarterly observations then can only capture
^Johnson and Dewald, "American Monetary Policy,"
p.174.---------------------------------------------------
86
average System response to average System forecasts and
estimates.
While Wood's study was considerably different than
the three reaction-function approaches, his analysis is
still subject to some of the criticisms noted here, espe«s
cially the indicator problem.
Summary
In terms of the purpose of this chapter, Brunner and
Meltzer's analysis of free reserves raised some questions
about the validity of the use of free reserves in monetary
analysis and decision-making. More importantly for this
study, the authors suggested that the use of free reserves
was of vital importance in allowing the Manager great lati
tude in the decision-making process. That part of Karl
Brunner's study of monetary policy which dealt with free
reserves provided additional evidence concerning the key
role of free reserves and money market conditions in the
System's analysis. The conclusions reached in these studies
will be helpful in evaluating actions taken by the FOMC and
the Manager and the freedom of the Manager to act on his
own.
Those articles which dealt specifically with the
indicator-target problem did not result in agreement about
the , , optimum, , indicator or target. However, they did sug
gest the magnitude and complexity of the problem and also
87
raised some questions concerning the use of comparative
statements of policy ("easy1 1 versus "tight1 ')» the validity
of using a multiplicity of scales to judge policy, and the
appropriateness of using money market measures (free re
serves and interest rates) as indicators or targets. These
considerations are important for it will be shown that
neither the FOMC nor the Manager rigorously or systemati
cally analyzed the indicator-target problem. Moreover, when
money market measures were not being used as targets, the
Manager was directed in terms of comparative statements such
as "ease." Directions phrased in such broad and undefined
terms greatly broadened the latitude within which the
Manager had to operate.
The final group of studies suggested that more
attention was paid to employment and income than to prices
and the balance of payments during the period 1952 through
1962. As the System did emphasize price stability in their
discussions, directives and public statements, the poor
statistical showing of price variables suggests System
actions were different from intentions. This discrepancy
can be explained by the independence of the Manager and his
attention to the money market.
38
CHAPTER III
THE MANAGER AND THE STRUCTURE OF
THE FEDERAL RESERVE SYSTEM
Introduction
With few exceptions, official Federal Reserve state
ments and publications provide only indirect evidence that
the Account Manager and his staff, not the FOMC, determine
and execute policy. While the direct evidence will be noted
when applicable, the general approach in this chapter will
be to emphasize the ambiguous legislative framework within
which the System operates and the heavy non-policy demands
on Board members* time. It is suggested that these factors
are conducive to and indicative of a general lack of control
of the monetary process by those given explicit responsi
bility to act on such matters. The result is that staff
members, particularly the Manager and his staff, play a much
larger role than normally recognized in monetary policy
decisions. At the extreme they are in effect making and
carrying out monetary policy.
The ambiguity of the legislation affecting the System
will be examined specifically in terms of the issues of
price level stability and preoccupation with interest rates.
89
System concern over price level stability is considered in
the light of evidence presented in Chapter II that the
System did not accomplish this goal too successfully during
the period 1951 through 1961 and the implications this
failure to accomplish an important System goal has for a
discussion of the independence of the Manager. Preoccupa
tion with interest rates is included to support the conten
tion that the System was market oriented and that this
orientation increased the importance of the Manager.
The specific issues to be discussed are:
1. It is not at all clear what the goals or objec
tives of the System are. In the first place there
are no statutory guides in the legislation which
concerns the Federal Reserve. Nor has the System
in its own publications made clear what it is
seeking to accomplish. The various and sometimes
conflicting goals mentioned in The Federal Reserve
System: Purposes and Functions are instances of
this lack of clarity.
2. There have been no statutory guides, nor any
recognition by the System of means by which to
weigh various objectives, establish priorities or
trade-offs among goals, or select among various
objectives when and if they do come into conflict.
For example, the issues of inflation and deflation
were not mentioned in either the Federal Reserve
90
Act or the Employment Act of 1946, yet there is
substantial evidence that the System was con
cerned with price level stability and considers
this one of its most important objectives.
The result of items one and two has been rather
broad power for the Federal Reserve to select its own goals
and the priorities assigned to them. However, rather than
increase flexibility, as was one reason for the rather
general statements in both acts, the outcome has been ad hoc
decision-making, failure to assign priorities, and lack of
recognition of potential and actual conflicts among goals.
In actual practice this is reflected in the Manager being
directed to "play it by e a r , " ' * ' especially when the outlook
is uncertain.
3. There has been no pressure or action to examine
the compatibility or incompatibility of monetary
and fiscal policies. This does not mean that
there have not been conflicts between the Federal
Reserve and the Treasury--the Accord, the issue of
bond support after the Accord, the "bills only"
policy and the very issue of the independence of
the System argue against this. What is meant is
■^Board of Governors of the Federal Reserve System,
Minutes of the Federal Open Market Committee and the Execu
tive Committee of the Federal Open Market Committee: 1936-
1961 (Washington: Exhibits and Publications Division,
National Archives and Records Service, 1968), p. 5, April 5,
1961.
91
that within the government and the Federal Reserve
there has been very little effort to anticipate or
consistently approach such conflicts or incom
patibilities again partially due to the vagueness
of the goals which the System must pursue.
4. The organizational structure and non-monetary
duties of the Federal Reserve interfere with its
responsibility to formulate and execute monetary
policy. For example, up to ninety percent of the
Board's time is spent on non-monetary policy
matters.
The recently available Minutes of the Federal Open
Market Committee will be referred to sparingly in this and
the following chapter in order to document the case made
only with materials available to the general public.
To provide a framework of reference for latter
chapters, some idea of what the Manager is theoretically
supposed to do is useful. Actually, there is not much
information on the "job description" of the Manager. It is
suggested that it would be cumbersome for the FOMC actually
to execute the transactions to implement its policies. To
perform this task, the Committee has designated the Federal
Reserve Bank of New York as its agent, and a senior officer
of the Bank approved by the Committee is appointed Manager
of the Open Market Account. The Manager has the responsi
bility of carrying out policy as determined by the Commit-
92
tree— of making purchases and sales in the market to imple
ment the Committee^ directive. He also keeps the Committee
informed of conditions and developments in the money market
and of the transactions executed for the Open Market Ac- ,
count. Daily, weekly, and tri-weekly written reports
summarizing factors affecting bank reserves and the availa
bility of funds in the money market, and developments in the
Government securities market are submitted to members of the
Board of Governors and the presidents of the Reserve Banks.
The Manager and his officers are also in frequent telephone
conversation with various members of the Committee and their
staffs.
Statutory Guidance
The Federal Reserve Act
The Federal Reserve System was designed as a service
agency for banking and commerce; its purpose was to achieve
a semi-automatic adjustment of the money supply. The
authority for the System is the Federal Reserve Act, as
amended, which delegates Congressional responsibility with
regard to determining matters involving coinage and regu
lation of the value thereof to the Federal Reserve. But due
to the changing structure of the economy and some legis
lation, the System has become as well a policy-making insti
tution with major responsibility for national economic
stabilization. Neither the Federal Reserve Act nor the
93
nor the Employment Act of 1946 are adequate for the expanded
duties of the System.
In terms of present day responsibilities, the initial
statement of purpose in the Federal Reserve Act leaves much
to be desired:
To provide for the establishment of Federal Reserve
banks, to furnish an elastic currency, to afford a means
of rediscounting commercial paper, to establish a more
effective supervision of banking in the United States,
and for other purposes.2
Indeed, the only guide is the phrase "to furnish an elastic
currency." One might, in fact, suggest from this statement
of purpose that the System should be pro-cyclical, that is,
provide adequate money and credit in times of rising busi
ness activity and vice versa.
A 1933 amendment of the Act does not significantly
clarify the objectives of the System. The section which
states the governing principles of the FOMC declares:
(c) The time, character, and volume of all purchases
and sales of paper described in section 14 of this Act
as eligible for open market operations shall be gov
erned with a view to accommodating commerce and business
and with regard to their bearing upon the general credit
situation of the country.
Once again, the Congress was not explicit in speci
fying goals to be achieved or standards for the instruments
^Board of Governors of the Federal Reserve System,
Federal Reserve Act As Amended through July 3, 1967, with an
Appendix. Compiled by the Legal Division of the Board of
Governors of the Federal Reserve System (Washington: Board
of Governors of the Federal Reserve System, 1968), p. 1.
^Ibid., p. 40.
94
to be used in performance of the duties delegated to them.
"Accommodating commerce and business," can be interpreted as
a pro-cyclical directive, and specifying "eligible paper,"
is a small step forward in terms of the tools to be used.
The Employment Act of 1946
As the Federal Reserve comes under the purview of the
Employment Act of 1946, it must also be considered in terms
of its direction. While the goals of the Employment Act of
1946 are now generally accepted, there was some confusion at
the time of the Act as to what they meant. This confusion
existed with regard to what the general goals meant, and to
what specifically "maximum employment, production and pur
chasing power" refer. There are, actually, only two rela
tively clear-cut goals; "maximum employment" and "pro
duction." Even these goals are rather meaningless, as what
is less than maximum employment and production were not
specified. The vagueness attached to "maximum purchasing
power," requires no additional mention. From the stand
point of the Federal Reserve, far greater importance must be
levied on consideration of what was not mentioned in the
Act:
1. Prices, price stability or price levels.
2. The Federal Reserve and/or monetary policy.
3. Money.
4. Conflicts between goals and thus, conflicts be-
95
tween the Treasury and the System.
5. The priorities or weights attached to the goals,
or the possibility of changing priorities or
weights.
6. International monetary conditions and/or the basic
balance of payments situation.
7. What the terms themselves meant in specific,
statistical terms.
With regard to what was not mentioned specifically,
but what was implied by the term purchasing power, one is
enlightened, but not necessarily satisfied by the response
of the System to a question raised in a Congressional hear
ing:
Within the broad range of discretion left the Federal
Reserve System by the Congressional directives enumer
ated in the reply to question A-l Cthe Employment Act],
it can be said that the long-run purpose which the
System seeks to further is to minimize economic fluc
tuations caused by irregularities in the flow of credit
and money, foster more stable values, and thus make
possible the smooth functioning of monetary machinery so
necessary to promote growth of the country and to
improve standards of living. This statement of purpose
in layman's language applies to the credit and monetary
principles set forth in the Congressional declaration of
policy in the Employment Act of 1946.4
The insertion of the terms "foster more stable values,"
should be noted. Further support to the suggestion that
United States Congress, Joint Economic Committee,
Subcommittee on General Credit Control and Debt Management,
Monetary Policy and the Management of the Public Debt. Re-
plies to the Subcommittee Report, part 1, S'Zd Congress, 2d
Session, August, 1952 (Washington: Government Printing
Office, 1952), p. 212.
96
price stability was of prime importance and was interpreted
by the System as part of the Employment Act was provided by
the Chairman of the System in a later Congressional hear
ing.-* The comments by the Chairman indicated the degree of
incompatibility among the goals of price stability, maximum
employment, economic growth and balance of payments consid
erations. The Chairman's comments also indicate that at the
time of the hearings (at least) the System felt that the
goal of price stability took precedence over the goal of
full employment. Moreover, it is clear from his statement
that the System assumed and acted upon the assumption that
price stability was a prerequisite to full employment and
growth. The point is not really whether price stability was
a goal of the Employment Act, but where and for what reasons
the System was able to take upon itself the responsibility
for answering such questions as: (a) Did the System have
the right or obligation to impose a policy aimed at re
straining "excessive" price and wage demands (what author
ity or means did it have for deciding which are excessive?),
which might result in unemployment, to achieve its goal of
price stability? (b) Was it the responsibility of the
Federal Reserve to restrain or inhibit institutional
5United states Congress, Senate, Committee on Fi
nance, Investigation of the Financial Condition of the
United States. Hearings before Committee, 85th Congress, 1st
Session, August 13-16, 19, 1957 (Washington: Government
Printing Office), part 3, pp. 1310 and 1407.
97
rigidities (represented by ••unwarranted" wage and price
demands) by means of tight money? (c) Should the goals of
maximum employment and production be the main targets, and
price stability maximized within these constraints as far as
possible? At least part of the reason the System presumed
to answer these questions was a result of the lack of
clarity of the 1946 Act.
In all due fairness, it must be noted that the mem
bers of the System were not unaware that, "A possible weak
ness in the declaration of policy contained in the Employ
ment Act of 1946 is that it makes no specific mention of
policy to prevent inflation," although they went on to say,
"The declaration of policy in the Employment Act implicitly
includes the objectives of restraining excessive and unsound
expansion." They concluded their recognition of the inade
quacies of the Act with the statement:
. . . one can hardly conceive of circumstances in which
the general welfare would be fostered and promoted and
maximum production or purchasing power would be "main
tained" if prices were highly unstable. . . .
,... . on the other hand, if there is any widespread
doubt that the policy declaration has this meaning then
it would be desirable to amend it to include a more ex
plicit reference to the objectives of longer-run mone
tary stability.6
The point of this is that while System members did recognize
that there may be doubt as to the objectives stated in the
^Monetary Policy and the Management of the Public
Debt, p. 237.
93
Act, and while they did suggest a solution to what they felt
was an omission, it is clear that they regarded price sta
bility as a goal although they were not too successful in
achieving it.
Other such goals beyond the explicit purview of the
Employment Act include the moderation or elimination of
balance of payments imbalances and the effect of the System
on the prices and yields of financial assets, that is,
interest rates. While there is no mention of stability in
external balance of payments in the Employment Act, and
While the System has taken action in this area without ex
plicit authority, it has acted with at least the implicit
sanction of Congress, the Treasury, and several adminis
trations. The interest rate question is a greater problem.
For years after 1951, the System denied that pegging bond
prices or even interest rate stabilization was a goal, even
though it acknowledged its responsibility to ' ’ keep an even
keel" during Treasury financings and to prevent disorderly
markets. This second acknowledgement is telling in light
of denials by the System that it would and could affect
rates. Most of these denials came before Congressional
hearings and usually before Representative Patman of Texas
who suggested repeatedly that the System favored higher
rates due to its bias towards banking.7 The fact that the
7United States Congress, Joint Economic Committee,
Employment. Growth and Price Levels. Report of the Joint
99
System could and did affect rates in operation “nudge" or
“twist" in the absence of legislative authority, could only
provide fuel for the critics and raise doubts as to the
motives and actions of the Federal Reserve.
In addition to these unstated goals, there have been
pressures of varying degrees on the Federal Reserve to in
clude within its scope of responsibility, other objectives.
These include: (1) keeping the money market at an "even
keel" at times of new Treasury issues, (2) avoiding "exces
sively high" interest rates, (3) aiding the Treasury in its
task of managing the Federal debt, (4) making the System
attractive to member banks,® (5) protecting the money market
from random shocks (disorderly conditions), and (6) pro
tecting the residential construction industry.9
Finally, the 1946 Act did not and perhaps could not
state specific values of the goals to be achieved. The
Economic Committee, 86th Congress, 2d Session. January 26,
1960 (Washington: Government Printing Office), Appendix.
®The Commission on Money and Credit, Money and Cred
it : Their Influence on Jobs. Prices and Growth (The Report
oF the Commission on Money and Credit. Englewood Cliffs,
N. J.: Prentice-Hall, Inc., 1961), pp. 76-77. See also,
United States Congress, Joint Economic Committee, Review of
the Annual Report of the Federal Reserve System for the Year
1960. Hearings before Committee, 87th Congress, 1st Session,
June 1-2, 1961 (Washington: Government Printing Office),
pp. 133-146.
^United States Congress, Joint Economic Committee,
Standards for Guiding Monetary Action. Hearings before Com-
mittee, 90th Congress, 2d Session, May 8-9, 15-16, 1968
(Washington: Government Printing Office, 1968), p. 5.
100
System also consistently declined to state what it felt to
be acceptable targets for policy goals. This is particular
ly true of unemployment percentages.
Organization of the Board
Another feature of the System which undoubtedly
influences its effectiveness is its organizational structure
and its responsibilities in fields other than those of
general monetary policy. Both the massive Staff Report of
the Joint Economic Committee published in 1959 and the Com
mission on Honey and Credit published in 1961 recognized the
problems in these areas from salaries and prestige to co
terminous appointments and lack of delegation of subsidiary
tasks. An example of organizational difficulties is the
fact that responsibility for reserve requirement changes
lies with the Federal Reserve Board, responsibility for open
market operations with the FOMC, and responsibility for
discount rate changes with the Reserve Banks and the Board.
Such overlapping responsibility does not facilitate coordi
nation in the use of tools. Another example is the over
lapping responsibility in bank regulation and supervision,
an important matter, as much of the Board's time is spent on
these issues. In fact, as the Commission on Honey and
Credit reported:
^Investigation of the Financial Condition of the
United States. Part 6. pp. 1901-1904.
101
Apart from the instruments of general monetary
policy, the Board has important regulatory powers over
member banks and some other financial institutions— for
instance in the administration of the Bank Holding Com
pany Act and of the anti-trust laws as applied to banks,
in the approval and disapproval for branches, mergers,
and the like. These powers are vested in the Board, and
the Board appears to treat them as non-delegable. Their
exercise is exceedingly time consuming.il
This statement was reiterated by Governor Robertson:
The volume of work related to supervision and es
pecially to mergers is so great as to occupy all of the
time of some of the Governors. For the most part, this
work has no essential relationship to the problems for
which a central bank presumably exists. And these other
problems, meanwhile, have become increasingly complex
and taxing upon the energies of the Board.12
The result of the time apparently willingly spent on
subsidiary tasks is that the actual importance and influence
of the staff advisors is far greater than might be expected.
This is particularly true of the Manager and his staff due
to their knowledge of and proximity to the financial mar
kets. In fact, this reliance on advisors is readily ad
mitted by those on the Board: "It is no reflection on the
Chairman and other members of the Board to suggest that they
have neither the time nor the talent to originate policies
such as these"^3 (referring specifically to the "bills only"
policy). Here is an area where Board members can be freed
1 *Commission on Money and Credit, p. 87.
12C. R. Whittlesey, "Power and Influence in the Fede
ral Reserve System." Economica, new series. XXX (February,
1963), 42.
13Ibid.. p. 39.
102
of some of the subsidiary duties they perform--duties more
ably handled by lawyers— so that they can devote more time
to general monetary policy. It also seems that this is a
rather frank admission that the Manager and his staff are
indeed responsible for important aspects of monetary policy
formulation.
Conclusion
This chapter has stressed that the organization of
the Board and the many non-policy duties result in the dele
gation of a great deal of policy formulation (both direct
and indirect) to the Board staff and the Manager. In
addition, it appears that neither the Federal Reserve Act
nor the Employment Act of 1946 provide adequate statutory
guidance for the expanded duties of the System. Finally,
it seems the System was greatly concerned with price level
stability, perhaps to the exclusion of other goals. This
suggestion conflicts with the conclusions of the studies in
Chapter II— a conflict which might be resolved by emphasiz
ing the importance of the Manager.
103
CHAPTER IV
THE MANAGER AND OFFICIAL COMMUNICATIONS
OF THE FEDERAL RESERVE SYSTEM
Introduction
Utilizing the same sources of information as Chapter
III, Chapter IV will examine the confusing and contradictory
manner in which the Federal Reserve communicated both in
ternally and externally. While there has been considerable
dissatisfaction with the manner in which the System has in
formed the general public of its decisions and the reasons
for its actions, it is also clear that difficulties in
communication existed within the System. The result of this
is that the Manager, who must know what the FOMC decides, is
often without clear direction. Thus the Manager is forced
to interpret what the FOMC desires or act on his own.
The issues to be discussed here are:
1. Terminology employed within the System is often
vague and imprecise, meaning one thing to some
individuals and another thing to others. Examples
can be found in such terms as "short-term,1 ' "feel"
and "tone-*" and in such concepts as "bills only."
The use of such terminology has interfered with
104
communication, facilitated disagreement, prevented
clear lines of authority and process from devel
oping, and permitted policy actions to be des
cribed in several ways. For example, if the
Manager takes action which might be counter to the
expressed wishes of the Committee, the Manager may
explain his actions by stating that he was react
ing to the "feel" of the market. Moreover, as the
Manager does not receive a written copy of the
minutes of each FOMC meeting until some time after
each meeting, and since the minutes are not a
transcript but the result of the efforts of
rapporteurs, he must rely on his own notes of the
meetings or indeed "play it by ear." The termino
logical difficulties being discussed suggest that
the Manager's notes may not reflect the "spirit"
or actual intent of the FOMC.
2. Vague and confusing terminology and statements are
also found in System reports to the general
public. This may reflect the terminological
difficulties within the System. An example of
such confusing terminology is the interchangeable
use of "credit" and "bank credit"--terms which
have quite different meanings. But while the
ambiguous statements may hide or disguise the
motives and reasoning of the Federal Reserve (they
105
may be deliberately misleading) they also serve to
prevent accurate evaluation of System actions and
positive suggestions for reform, and in addition
can serve as a basis for potentially dangerous
second-guessing. Finally, these vague statements
can serve both the critics and apologists of the
System equally well, with the result that little
weight can be placed on the arguments of either
side.
3. Compounding the difficulties involved with con
fusing terminology, most of the descriptions and
explanations of System actions (at least up until
the past few years) have been available to the
public far too late to be of any use, a report of
a meeting in January, 1959, for example, not
being available until around June, 1960.
Taken together, points two and three result in a
situation in which the System's responsibility to dispel
potentially disasterous rumors and speculation and to in
still confidence in the financial markets is hampered. In
deed, it may be that these circumstances actually create
crises or encourage rumors. That is, the tardy public
statements, the fact that the System at times seems to say
one thing and do another, and the general ambiguous nature
of System statements often lead to harmful rumors and lack
of confidence, rather than the other way around. The bond
106
crisis in the summer of 1958 may be a case in point.
4. It appears that there was, at least during the
period under review, no systematic attempt by the
System to study goals, objectives, or their pos
sible conflicts (and the corollary problem of
trade-offs).
5. It appears that there was, at least during the
period under review, no systematic attempt by the
System to determine whether specific monetary
actions taken promoted selected objectives, or to
determine the efficacy of the monetary tools used.
Similarly, it appears that there was no systematic
attempt to analyze the monetary process. As will
be pointed out, the System emphasized some mone
tary guides and indicators in preference to others
(notably free reserves and interest rates), but
there appears to be no reason for or consistency
in their choices. The main thrust of the argument
is that little if any systematic attempt was made
to evaluate whether specific actions taken and
specific tools used actually facilitated achieve
ment of System objectives, no matter how specified
or defined. The result of this lack of analysis
is illustrated by statements that the System must
examine and respond to changes in a wide variety
of variables. Surely some economic indicators are
107
more important at some times and less important at
others, but there is no indication that such
weighting takes place.
To substantiate these issues, this chapter will first
examine The Federal Reserve System: Purposes and Functions.
This will be followed by an examination of other Federal
Reserve publications and a brief chronology of the period
1951 through 1961.
The Federal Reserve System:
Purposes and Functions
The foreword of the first edition of this publication
maintained that it was an authoritative statement of the
purposes and functions of the Federal Reserve System. If
this statement is true, then much of what the Federal
Reserve claims in Purposes and Functions must be examined in
the light of further evidence. While the Federal Reserve
has been more outspoken than other central banks, this has
not necessarily resulted in greater clarity or understand
ing.
The first edition of Purposes and Functions was
printed in 1939, well beyond the focus of this study. The
second edition was printed in 1947 and it is assumed to
represent the purposes and functions of the System until
1954, the year the third edition was published. The final
edition that would have relevance to this study was pub
108
lished in 1961. Whatever the dates, however, something may
be gained from considering the four publications involved.
In the 1947 edition, the goals of the System were to
• ’ help prevent inflations and deflations, and to share in
creating conditions favorable to sustained high employment,
stable values and a rising level of consumption," and also
to see that "the money supply is neither too large nor too
small for the maintenance of stable economic progress.
The difference between the 1939 and 1947 editions is the
substitution of "sustained high employment" for "full
employment" and the introduction of "stable values" or the
goal of price level stability. The wording of the 1947
edition, with the exception of stable values, reflects the
wording of the Employment Act quite closely. In 1954, the
wording was changed slightly so that the objectives were: to
"help counteract inflationary and deflationary movements,
and to share in creating conditions of sustained high
employment, stable values, growth of the country, and a
rising level of consumption.The only change was sub
stitution of the word "counteract" for "prevent." Testimony
^Board of Governors of the Federal Reserve System,
The Federal Reserve System: Purposes and Functions. Second
edition (Washington: Board of Governors of the Federal Re
serve System, 1947), pp. ix and 1.
^Board of Governors of the Federal Reserve System,
The Federal Reserve System: Purposes and Functions. Third
edition ^Washington: Board of Governors of the Federal Re
serve System, 19§4), p. 1.
109
before Congressional committees has established that "sus
tainable" refers to the absence of price inflation. For
example, growth accompanied by inflation is not sustainable
as the inflation will lay the framework for a downturn in
the economy.3 The 1961 edition did not differ substantially
from the 1954 edition in terms of goals or objectives,
although there was greater emphasis on growth, secular ex
pansion of the money supply, and mention of "relatively
stable" prices.
Some further points are worth mentioning. In the
first place, there was no recognition in any of the editions
of any conflict (actual or potential) among the objectives.
Nor was there any mention of the complementary or conflict
ing tasks of the Treasury and the System, and thus no men
tion of policy mix. Finally, international considerations
and balance of payments problems received little or no
attention. This was especially surprising with regard to
the 1961 edition.
As stated in the three editions which pertain to this
study, there was not much confusion in presentation of the
goals of the System. On the other hand, not much was added
to the general goals prescribed in the Employment Act. It
is clear, however, that price stability was introduced as a
specific goal, and in fact the System*s definition of
3Investigation of the Financial Condition of the
United States, pp. l3lTT~and 1467.
110
"sustainable" actually defines all other goals in terms of
price level stability.
While the goals of the System as stated in Purposes
and Functions may be clear, if somewhat innocuous, a con
siderable deal of confusion existed with regard to the
question of whether the System was to be concerned with
monetary policy or credit policy or both. Simply stated,
money (whether broadly or narrowly defined) is a bank lia
bility, while bank credit is an asset. To go further,
credit, taken by itself, generally refers to lending by any
economic unit, and there are several economic units besides
banks--financial and non-financial— which extend credit.
Thus, controlling the money supply and bank credit would
confine the System to operating through commercial banks,
recognizing, of course, that the System is not the sole
influence on the money supply, however defined. On the
other hand, the Federal Reserve has neither the responsibi
lity, authority nor, except in emergencies, the tools to
control credit in the general sense of the term.
It was by no means clear, in any of the editions,
with just what the System was to be concerned, or even of
what they considered the money supply to consist. The 1939
edition was fairly clear on this issue. The System was to
regulate "money and credit," money being defined as narrow
money and credit as bank credit. To the extent that the
creation of money parallels bank credit extension (which
Ill
they assumed), this is straightforward. In 1947, however,
the 1939 position was modified substantially. Defining bank
money as both time and demand deposits, they made the
following statement:
For a general idea of the functions of the Federal
Reserve, however, the two kinds of money, pocket money
and bank money, should be considered together, because
both kinds originate in bank credit, over the volume of
which the Federal Reserve exerts a regulatory influence.
Because bank deposits constitute the major part of our
money supply, and because both deposits and currency are
closely related to loans and investments of banks in a
manner described later, the phrases 'money supply' and
'volume of bank credit' as used in this study generally
mean the same thing, namely, the means of payment owned
by the people of the country.4
In the 1954 edition the situation was again modified.
The principle function of the Federal Reserve was then to
regulate the flow of "credit and money." At the same time,
money was redefined so as to exclude the time deposit por
tion from the money supply. While credit was once again
explicitly included, it was not made clear what the term
referred to--all credit or bank credit.
Federal Reserve actions affecting the credit market
are directed for the most part to the functioning of
banks. Such actions influence the market as a whole,
however, since they affect the availability of funds to
other lending institutions, their attitude towards pro
spective borrowers, and their appraisal of investments
The 1961 edition did clarify the situation by
referring consistently to bank credit and money, although it
^Purposes and Functions. Second edition, pp. 5-6.
^Purposes and Functions. Third edition, p. 4.
112
did not suggest that the System felt it was only to regu
late bank credit. Thus one is not very enlightened about
precisely what the System feels it regulates (money, bank
credit or both), how it regulates what it regulates and why.
Annual Reports and Congressional Hearings
Ma1or issues
As noted in the introduction, the major issue to be
discussed here is the lack of clarity or precision with
which the System communicated to outsiders and the impli
cations of such lack of clarity. The inability of those
outside the System to disentangle contradictory statements
and understand the terminology employed by the Federal Re
serve is itself quite serious. However, it is suggested
here that these difficulties also exist for those within
the System. As a result, the Manager, who is guided by and
must rely upon vague and imprecise terminology has great
latitude in which to operate, for the terms may mean one
thing to him and quite another thing to other FOMC members.
In fact, it has been publicly admitted that the Manager
cannot operate on the basis of the directive of the FOMC
alone:
Chairman Patman. Now, as manager of the account, if
you had been manager of the account instead of being
president of the bank, could you have taken that just by
itself and interpreted it as to what the Board actually
meant? fit1 ' refers to the directive.j
Mr. Hayes. I do not think a manager would ever be
expected to interpret the directive as a sentence with
out the full context of all the discussion and the con
113
sensus of views on additional details of operations that
were appropriate . . .
He certainly could not operate on the basis of this
directive alone.6
In this section the contradictory nature of state
ments in the Annual Reports and the imprecise nature of the
directives will be noted, followed by a discussion of the
general terminology of the System.
Policy actions in the Annual Reports
Until the Accord, there was virtually no Federal
Reserve policy in the sense that the bond support function
greatly circumscribed their actions. Nonetheless, the
Annual Reports suggest that the System actually was engaged
in counter-cyclical policy. While the explanations in the
Annual Reports at first glance appear to be meaningful,
closer examination reveals that the explanations were vague,
often contradictory and as a result, meaningless. Such
reporting makes it appear that the System is engaged in
strong positive action whereas its carefully worded dis
claimer says just the opposite. This may be beneficial to
the System in its attempts to justify its actions, although
it hardly facilitates communication.
An example of this contradictory writing may be
found during a period when the System was supplying reserves
at a rate of $400 million per month. While the money supply
^Review of the Annual Report of the Federal Reserve
System for the Year 1960. pp. 49-50.
114
was not increasing as rapidly as might be expected due to
a large gold outflow, there was no doubt that credit was
being aggressively supplied to commercial banks. The Annual
Report for 1951 contained the following comment:
... the Committee and the Board of Governors announced
a policy of using all the means at their command to
restrain further expansion of bank credit . . . Endea
vors to absorb bank reserves and to restrain credit
expansion had been made through sale of other securities
from the System account . . . and a rise in short-term
securities yields has been permitted to occur in the
market . . . '
In the same paragraph it was also stated that:
However, holders of Government securities continued to
offer them in the market in large volume and, in order
to prevent declines in their prices, Federal Reserve
purchases during December 1950 and January 1951 were
substantial, thus adding to bank reserves and providing
funds for continued expansion in commercial bank loans,
which, by the end of January 1951, had risen by approxi
mately 7 billion dollars since August of 1950.
Many more examples of confusing, if not contradictory
explanations by the System may be found in the standard form
of the directive from the FOMC to the executive committee
(see Appendix A) and from the executive committee to the
Federal Reserve Bank of New York.
Two aspects of the directive may be considered: the
general form and the action clause. The general form of the
directive remained essentially unchanged from 1951 through
1961. The action clause or phrase (phrase b after June,
Board of Governors of the Federal Reserve System,
Thirty-Eighth Annual Report of the Board of Governors of the
Federal Reserve System (Washington: Board of Governors of
the Federal Reserve System, 1952), p. 96.
115
1953) did change and it is this phrase which provides the
best information (in a relative sense) as to what the inten
tions of the System were.
Consider first the general form of the directive. As
the directive was not changed from August, 1950 through
March, 1953, any one during the period may be used.
The executive committee is directed ... to arrange
for such transactions for the System open market
account ... as may be necessary, in the light of cur
rent and prospective economic conditions and the gener
al credit situation of the country, with a view to exer
cising restraint on inflationary developments, to main
taining orderly conditions in the Government security
market, to relating the supply of funds in the market to
the needs of commerce and business, and to the practical
administration of the account ... 8
The wording of the directive from the executive committee to
the Manager of the account varied only slightly in wording
and not at all in substance. The point is that taken as
they stand, these are not really directives at all. In ef
fect, the responsibility for policy was turned over to the
Manager of the account and his staff. While, as shall be
seen later, the discussions in the FOMC and executive ses
sions did give more specific guides to the Manager (for ex
ample, during most of 1951 specific prices and yields on
Government securities were to be maintained) the directive
as published was meaningless. Indeed, it was worse than
meaningless as it misrepresented the priority of objec-
tives--from August, 1950 through most of 1951, maintenance
8Ibid.. p. 95
116
of specific prices and yields on Government securities, not
"restraining inflationary developments" was the primary ob
jective. Futhermore, due to the length of time between the
meetings and the publication of the Annual Reports, the in
formation, whatever its value, was in no sense current. As
such, rumors and speculation were encouraged, rather than
discouraged.
The action clause was similarly misleading. During
the period August, 1950 until March, 1953, there was no
change in the phrase "... with a view to exercising re
straint upon inflationary developments, ..." This is
most unusual, for during the period the System broke away
from its subsidiary role to the Treasury and actively pur
sued its own policy of flexible response. Furthermore, by
any measure--money supply, interest rates, free reserves,
etc.— the System was not engaged in the same policy over
this 3l-month span. The outside observer is not enlightened
by relying on the Annual Reports. Consider the explanation
given for the form of the directive at the March, 1951 meet
ing of the FOMC.
. . . the change in policy described above [.the Accord^
did not require any change in the directive for the
reason that the direction issued at the meeting of
August 18, 1950, was changed in the light of the policy
adopted at that time, to provide that open market opera
tions should be carried on with a view to exercising re
straint upon inflationary developments, as well as for
the other purposes stated in the previous direction.9
9Ibid.. pp. 98-102.
117
Comparing this brief statement with the January 13,
1951 direction (see p. 115), the observer is not quite sure
what is meant or what policy is being pursued or will be
pursued. Does it mean that reserves will continue to be
supplied at the same rate as before? Whatever the answer,
it probably did not matter too much, for the public would
not be able to see the March, 1951 directive until June of
1952, far too late to be of any use. The major issue, how
ever, is just what the System was saying and at this point
the question cannot be answered. Of perhaps greater diffi
culty is the answer to the question of why it hid what it
was doing so successfully in contradictory verbiage. Per
haps the long dominance by the Treasury led the Federal Re
serve to be very cautious when that dominance was removed,
and perhaps, although the thrust of this paper is to the
contrary, the language was clear to those within the System.
In any case, exactly what the System was doing and why re
mains in doubt.
The Manager and the directive
The issue of the lack of clarity find preciseness in
the internal communications of the System is more fully il
lustrated in the directive given to the Manager. The state
ment of Vice Chairman Hayes (see p. 112) to the effect that
the Manager cannot operate on the basis of the directive
alone has already been mentioned. Indeed, the Manager could
118
not and did not rely on the directive alone. Mr. Rouse
commented to a Joint Economic Committee that he and his as
sociates took notes at FOMC meetings to supplement the di
rective. The Manager had to take his own notes because the
Minutes are prepared by a rapporteur, not by transcription
of actual conversation, and because the Minutes are not com
piled in time for the Manager to rely on them in day-to-day
operations.^® At least up until the time the Minutes were
available to him, the Manager relied on his own notes and
it has already been indicated that he interpreted what was
said differently from members of the FOMC and undoubtedly
differently from the rapporteurs who wrote the Minutes. The
Manager, then, unable to rely on the directives alone, had
to rely on his own notes, impressions, and perhaps the
Minutes when they were available. His latitude in which to
operate was thus quite broad.
There were attempts at the 1961 Joint Economic Com
mittee hearings to elicit from those engaged in actual open
market operations, the way in which the directive served as
a guide. The conclusion of discussion with Mr. Rouse and
Mr. Robert Roosa (then at the New York Bank) did not shed
much light on the issue. Their statements were quite ex
plicit as to how open market operations were conducted, but
■ ^Review of the Annual Report of the Federal Reserve
System for the~" Year“T9'6u, opT cit., pp. 2!i, and 371
119
did not indicate how the directive served as a guide— they
simply could not give operational meaning to statements in
the directives, especially in terms of degrees of change.
In point of fact, the evidence goes further than de
scribed, emphasizing the "feel” of the market, the need for
the Manager to be free to respond to the "tone" of the mar
ket, and suggesting that the more uncertain the economic
picture, the more latitude the Manager should be given to
act on his own. Mr. Rouse*s comments offer even more in
sight, even if providing little satisfaction for those who
look for an indication of System policy.
Representative Griffiths. Are the directions of the
Federal Open Market Committee so vague that they are not
easily understandable?
Mr. Rouse. Mrs. Griffiths, they involve a great many
factors wktch are diverse .... As I indicated in my
statement, you can start from as is, we start from now,
and we are having a meeting of the Open Market Committee
here and we consider these various guides, such as rates
in the market, we consider the degree of where bank re
serves are, are they deficient or are they in surplus.
We consider the whole variety of factors. It is
really quite an impressive presentation that is made to
the Committee and which they, in turn, make to each
other, the individuals on it, and so all these factors
are considered at each meeting, but there are times, we
will say, like last fall, When the international situa
tion becomes, perhaps, more heavily weighted than at
other times; all these factors are considered throughout
the period, but you get into a degree of weighting the
various factors. Precise measurement in terms of num
bers is not really the kind of guide that I would find
satisfactory as indicating a general degree or direc
tion, of restraint or ease, as the case might be, and
the consideration of interest rates and the like.
Under these conditions we keep in close touch with
the members of the Committee, and since they understand
the movement of these various factors, we seem to get
120
along pretty well in understanding each other.
Perhaps those within the System do get along pretty
well in understanding although the amount of time spent on
non-policy matters and the heavy reliance on the staff
raises questions about this fact, but these comments do seem
to explain why the communication within and without the
System is as unspecific and imprecise as it is. Few would
agree that Mr. Rouse's explanation was satisfactory— if any
thing it confuses the situation more. Such action facili
tates or even encourages lack of rigor in analysis and de
scription, and is in effect a "blank check" for the Account
Manager. The control by the FOMC over the market is thus
severely weakened, no matter how competent and well meaning
the Manager might be.
Terms used
Another major source of confusion regarding the
System involves the terminology employed by it in its com
munications. Indeed, one finds it difficult to agree with
the statement of Vice Chairman Hayes in 1961:
Mr. Pat man. . . . When you begin to put it [[policy]
into effect, your first actions will indicate, and they
[[the financial community] will know. But the people,
the public generally, will not know; is that a correct
impression or not?
Mr. Hayes. I think it is generally incorrect, Mr.
Patman.
. . . Well, Mr. Patman, if I may answer in this way:
U-Ibid., p. 31. See also, pp. 2-44, 51, 54-56, and
148.
121
It seems to me a truism that a specialist looking at
a given set of data may get more out of it than a lay
man who has no background on the subject.
What I meant to say when I felt that your conclusion
was generally incorrect was that there is no reason why
anyone who cares to study the subject and takes enough
interest to get the background and to understand the
terms, there is no reason why any such person, whether
he be a dealer in the market or a student in the uni
versity or anyone else, there is no reason why he cannot
take those data that are available and get just as
accurate a picture of what we are doing as somebody who
is in t h e m a r k e t .12
Aside from the fact that Hr. Hayes himself says one
must understand the terms (the point of this section),
testimony by Chairman Martin at the same hearing suggests a
somewhat different picture than that offered by Mr. Hayes,
although hedging on the basic point:
Mr. Patman. . . . The point is, don't you think, that
language should be plain enough for anybody to under
stand, and not restricted to people who are specialists
in the market?
Mr. Martin. Well, I always like to see plain lan
guage, and we are glad to get suggestions--that is one
of the benefits of this hearing--I would like to see the
language as clear as it can be.
So far as meaning more to sophisticates or to those
who are experts than it does to a farmer, let us say, in
Nebraska, I think that also applies to anybody who reads
the baseball box scores or about anything else.
Chairman Patman. That is quite different, Mr. Mar
tin.
Mr. Martin. A man absorbed in baseball can get more
out of the box score than somebody who is not.
Chairman Patman. . . . You are in this, whether you
want to be or not. This affects everybody.
Mr. Martin. All right. I asked for it.1J
The discussion then centered around whether or not access to
12Ibid., p. 51.
13ibid., pp. 105-106.
122
the Minutes would facilitate better understanding of System
actions. No answer was given to this question.
The issue of terminology is an extremely important
one, involving not only those in the money market or the
academic or congressional critic, but the man in the street
as well. The importance is stressed by the Commission on
Money and Credit:
The case for more complete and timely disclosure is
partly that accurate information would perhaps be less
dangerous than the rumors that are continually circu
lating about what the Federal Reserve policy is today or
is likely to be next week . . .
In terms of this analysis, however, the terminology employed
by those in the System is most relevant for the problems it
has caused the System internally and the latitude it has
implicitly given the Manager. There is some evidence, for
example, that the conflict over the Accord, and the whole
issue of the "bills-only" policy (actually found in the
statement of continuing operating policy passed in March,
1953) was due in large part to confusion between the parties
as to what they were talking a b o u t .15
The issue being discussed here revolves around the
terms used, such as "ease," "restraint," "tightness,"
"neutrality," "even keel," and even "short-term." Regard-
1^Commission on Monev and Credit. pp. 19-21.
l^Marriner Eccles, Beckoning Frontiers, ed. by Sidney
Hyman, 1st ed; (New York: Alfred Knopf, 1§3T), pp. 434ff.
123
less of what Mr. Hayes implied in 1961, it is not a simple
matter to determine what these words mean, even if one knew
that System policy was to be one, for example, of "ease."
Does the word "ease" refer to higher free reserves, lower
reserve requirements, lower interest rates, a faster rate of
growth in the money supply, a lower discount rate, some
combination of these things, and if so, what combination?
The difficulty involved with a word which would seem to have
a generally accepted meaning, especially in the financial
community, serves as a case in point.
Representative Reuss. . . .Mr. Rouse, would you give
me please, your definition of short-term Government
securities? What are the maturity figures?
Mr. Rouse. As of this time, 1 would class short-term
Government securities as securities maturing within 5
years; intermediate securities--
Representative Reuss. You disturb me a bit, if I may
interrupt you. We are talking about the English lan
guage, and that does not change from time to time.
Mr. Rouse. Well, it is a matter of opinion sir . . .
Short may be 5 years at times, and it may be long at
times. I said as of now, as of now. . . . Let me
illustrate it, sir, by saying that, we will say, at the
onset of a war, where everybody wants out, they want
liquidity, short may mean tomorrow or today; it does not
mean tomorrow or next week or next year or 5 years from
now. But there are times when short to investors means
up to 5 years.
. . . This may be a misunderstanding, Mr. Reuss, but
a good many people in the System consider short-term
securities to be those maturing within 15 months; some
regard them as Treasury bills only. But, generally
speaking, we will say 15 months; that stems from our
repurchase agreement machinery which provides that re
purchase agreements may be made against securities
maturing under repurchase, or resale contracts if you
will, maturing up to 15 months. They regard those as
short-term securities, and that is the nearest thing to
a definition that we have in the System to my knowledge.
Representative Reuss. But up until now, in telling
me the definition of short-term, intermediate terms, and
125
long terms, you were giving me your own definition?
Hr. Rouse. I was.l®
While the difficulty may for all practical purposes appear
1:0 have been cleared up in the latter statements by Mr.
Rouse, it is well to remember that he was Manager of the
account and that the System had at that time gone off the
"bills-only" policy which previously had restricted it to
dealing in securities maturing in less than fifteen months,
preferably bills. In such an instance, the Manager’s
definition carried significant weight.
While there is a great deal of ambiguity in System
terminology, extended reading can sometimes reveal what the
System does mean by its more general statements. For
example, in written replies to the 1961 Joint Economic Com
mittee hearings, the System indicated that "relating the
supply of money in the market to the needs of commerce and
business" referred to the counter-seasonal activities of the
Board--a fact which one would have had a difficult time
reading into the words themselves.
Four reasons may be suggested for the difficulties
involved with the terms used.
1. The same terms are used differently at different
times.
2. The same terms may apply to different objective
IfrReview of the Annual Report of the Federal Reserve
System for the Year lff60. pp. 19-^1.
125
situations and therefore imply different actions.
3. No matter what the words mean to those within the
System (and there is some disagreement within the
System) they undoubtedly mean different things to
the many individuals outside the System. More
over, Mr. Rouse's statement indicates less than
unanimity of opinion within the System.
4. In addition to the above comments, it must also be
noted that the words are often misused by those
commenting or reporting on the System. However,
whatever the reasons for the difficulties which
exist with regard to terminology, the Federal
Reserve is largely responsible for the lack of
clarity and more importantly, is wholly respon
sible for any delegation of power to control or
influence general economic activity which might
result therefrom.
Free reserves
In addition to the confusion which exists regarding
the terminology employed by the System, there is a lack of
clarity with respect to some tools and variables frequently
mentioned by the Federal Reserve.
The difficulties associated with the theoretical
validity and use of free reserves as a signal or indicator
of System policy were discussed in Chapter II. The fact
that a change in the level of free reserves may be indica
tive of a change in policy does not outweigh the fact that
the level of free reserves is a poor indicator (similar
levels probably meaning different things at different times)
nor that free reserves may give the wrong signals to the
Federal Reserve if they do use them as indicative of the
degree of ease or restraint in their internal decision
making. The issue of the validity of the use of free
reserves is not of central importance to this study. Nor
is the question of whether or not the System relied on free
reserves to be discussed now, although there is considerable
evidence that they did play a key role. Instead, the
crucial issue is whether FOMC members and the Manager
understood the concept and each other in the use of the
concept.
For example, in a statement to the Joint Economic
Committee in 1961, Chairman Martin stated:
We have endeavored to make this period of easy money as
effective and as productive as we could make it. It has
been in effect now, this policy, for over a year, and
there has been a turnaround in the reserve picture of
$1 billion, from minus $500 million to plus $500 million
in a year. That is a very dramatic turnaround.17
Later testimony brought out the fact that the reserves to
which he referred were free reserves. Now, taken as they
stand, the comments of the Chairman are interesting only in
that they suggest that free reserves are being used by the
17Ibid.. p. 61.
_27
System as an indicator of conditions in the market.
However, one must consider that between May 13, 1953 and
June 24, 1953, for example, free reserves changed from a
minus $692 million to a positive $862 million, a turnaround
of $1.5 billion in a month1 Or, in August, 1958, the System
was to move in the direction of eliminating free reserves
(then $405 million) in three weeks. Not only was such a
move misleading in terms of the directive and description of
policy as found in the Annual Report for 1958, but it
represented a turnaround of free reserves at an annual rate
of $10.5 billion. If a change in free reserves of $1 bil-
lion in a year is described by the Chairman as dramatic,
these moves must be phenomenal. Yet:
Rarely, if ever, would policy be reversed abruptly or
changed drastically at one meeting of the Committee from
that in effect at the preceding meeting, except in
dramatic circumstances such as, for example, an outbreak
of war.18
At the time of both these moves, nothing as dramatic as an
outbreak of war was occurring. With comments such as these,
one can only question the accuracy of communication within
the System.
Interest rates
There is also a fair amount of obscurity regarding
the Federal Reserve's position on interest rates. There
have been several instances in which the Federal Reserve has
18Ibid.. p. 24.
T28
denied that it does affect or even can affect interest
rates. For example, Chairman Martin has said, "In a private
economy they [interest rates] are established by the inter
play of market forces.1 ' 19 These statements were usually
accompanied by explanatory statements to the effect that the
purpose of Federal Reserve action was solely to affect bank
reserves. It was occasionally mentioned that the effect of
supplying or removing reserves might have some effect on
rates. The reason for such claims may have been due to the
fear of appearing to act in a manner calculated to increase
the earnings of banks, or it may have been due to the annu
ally renewed policy which said, among other things, that it
was not the policy of the FOMC to support any patterns of
prices or yields in Government securities.
Once again, however, the statements do not agree with
themselves, the facts, nor with statements made by different
members of the System. In the first place, it was well
known that the System had the power to affect rates; this
was part of the conflict of the Accord. Moreover, the
statement of continuing operating policy initially made in
March, 1953 actually stated that it was "not now" the policy
of the Committee to support any pattern of prices and
1^Employment Growth and Price Levels. Part 10,
p. 3387. See also, Part d>A ("The Government's Management of
its Monetary, Fiscal, and Debt Operations," July 24, 27-30,
1959) pp. 1109, 1101, 1315-1316, and 1491; and Study paper
19 ("Debt Management in the United States," 1960).
129
yields. This implies that it had affected rates before and
could do so again. Secondly, the Committee did refer to
interest rates several times in the period 1951-1961. For
example, on March 4, 1958, the Committee decided how best to
implement and maintain the current posture of monetary ease
•'without further depressing Treasury bill rates." Thirdly,
the System was forced out of its no-interest-rate-influence
policy by "Operation Nudge." Prior to the attempt to
"twist" the yield curve, the System maintained that it had
no effect on rates; yet as the Kennedy policies were ac
cepted (apparently willingly by the System) it had to admit
that it could and was affecting rates. Even so, the System
still occasionally contended that it was not affecting
rates.
In much of this discussion . . . there has been a
mistaken overemphasis placed upon the levels of interest
rates, as if some particular level of rates could be in
themselves an objective of monetary policy. This is not
the case. What the Federal Reserve is seeking to do is
not to set some particular level of rates for either
short- or long-term securities, but rather influence the
flow of funds in international and domestic channels.20
In the first place, this might suggest that movements of
interest rates would not affect the flow of funds between
countries. Secondly, at the same time the System was making
public statements that it was not affecting rates, using
them as an objective or attempting to maintain a certain
20Review of the Annual Report of the Federal Reserve
System for the Year lff60. pp. 13 and 1(3.
130
level of rates, it was instructing the Manager to look at
rates, operate in terms of rates, and maintain rates within
specific ranges. For example, on December 19, 1961, the
Minutes report:
Following additional discussion, Chairman Martin
restated his conception of the consensus of the meeting.
As he saw it, the consensus was along the lines of con
centrating on a bill rate in the upper part of the
range of 2%-2-3/4 per cent and trending toward a slight
ly less easy money condition, without overt action.
It could also be argued, of course, that some of the
statements made by the System just do not agree with the
facts. Changes in reserves do affect the supply of funds
and the System continued to support the market after the
Accord. It would seem that some members of the FOMC were
not sure of what they were doing, at least with regard to
interest rates. The result was that once again the Manager
was left to act on his own.
Chronology
January. 1951 through August. 1954
While still under the action clause to "restrain in
flationary developments," the System started to firm or
tighten monetary policy in the Spring of 1952, almost a year
after the Accord. Prior to that time, few steps had been
taken to implement the directive. Beginning in April, 1952,
2^-Minutes of the Federal Open Market Committee, p.
76, December 19, 1^61. See also Appendix D.
131
a year and a month after the Accord, most measures of mone
tary conditions began to reflect this move to tightness.
While such a move was not inconsistent with the action
clause (in fact to be consistent such action should have
been taken earlier) there was little or no explanation given
for the move that took place at that time.
An idea of the degree of firmness can be judged by
examining several indicators of policy. During the period
March, 1952 to March, 1953, essentially the period of re
straint, free reserves dropped $1,192 million, or an average
monthly decline of over $99 million. Required reserves rose
by $505 million and member bank borrowing by $895 million.
The discount rate was raised from 1.75% to 2.00% early in
1953, and the yield on three-month Treasury bills rose from
1.65% to 2.08%. Moreover, the rate of growth of the money
supply dropped from 6.12% to 2.97% seasonally adjusted, and
from 6.13% to 3.16% using unadjusted data.22
While the move to firmness cannot be denied, the rea
son for such a move at that time was unclear. Indeed, given
the benefit of hindsight, there were no more valid economic
reasons for a firmer policy in the spring of 1952 than in
1951, and it may be that the move in 1952 was not publicized
^unadjusted money supply data are used in referring
to the period prior to March, 1955, as adjusted data were
not generally available or published by the System until
that time.
132
for that very reason. One certainly does not learn much by
examining the comments made at the time. Testifying before
the Joint Committee on the Economic Report on March 11,
1952, Chairman Martin explained: M ... at the moment
there is no necessity for any further measures to restrain
inflation. Inflation, 1 think, is asleep at the moment.M
Then a little later on, after agreeing that an increased
discount rate would mean a firmer policy, he added, "...
and in our judgement, it is not necessary to have a firmer
policy at the present time."23 The March, 1952 meeting of
the FOMC as reported in the Annual Report, supports the
Chairman's c omment s.
The direction to the executive committee quoted above
was adopted therefore, with a view to continuing the
policy which had been pursued for several months. . . .
Continuance of this policy was based on the Committee's
judgment that no major disturbances in the market in
either direction were to be expected in the near future,
that while additional restrictions on credit seemed
unnecessary at the time, relaxation of restraint was not
called for, and that measures adopted should continue to
be such that they would act to restrain any resumption
of inflationary pressures.24-
Given this directive, the FOMC moved toward tightness.
Outsiders might have guessed something from the com
ments on the directive at the June, 1952 FOMC meeting. At
23Monetary Policy and the Management of the Public
Debt, pp. l6l-l02.
24-Board of Governors of the Federal Reserve System,
Thirty-Ninth Annual Report of the Board of Governors of the
Federal Reserve System (WashTngton: BoartJ of1 Governors of
the Federal Reserve System, 1953), pp. 91-92.
133
Least it appears that the System was aware of what it was
doing.
At the time of this meeting, economic activity was
continuing at a high level . . . the situation was one
of approximate balance with inflationary pressures po
tential rather than active. . . . The System's policy
of "neutrality" had become increasingly one of restraint
as credit demands had expanded. Some relief had been
given by putting funds into the market during temporary
periods of stringency. . . . However, a major part of
the reserve funds needed . . . were obtained through
borrowing by member b a n k s .25
The policy of restraint was continued until April of
1953. By the end of 1952, free reserves were a minus $800
million, growth in the money supply had slowed even more,
and member bank borrowings had risen to $1,593 million. In
January of 1953, the discount rate was raised to 2%, bring
ing it more in line with the average yield on Treasury
bills, then at 2.08%. The result of this last move on the
already tight money market was a wave of selling of securi
ties by banks which was concentrated on the Government bond
market. From January, 1953, through April 18, 1953, $4.4
billion of Government securities were sold by banks while
loans of commercial banks increased by $1.6 billion and bank
portfolios of other securities remained almost unchanged.
Then, on April 13, 1953, the Treasury offered a thirty-year
3^% bond. This seems to have been of major significance,
for criticism of the Federal Reserve and the Treasury
reached new heights and was widespread in its composition.
25Ibid.. p. 92.
134
The prime rate was increased shortly thereafter, and the
bond market slumped further; the new 3%% issue was notably
weak. The money supply, unadjusted, had fallen by over 3%
by Hay, 1953, and free reserves were a negative $692 mil
lion.
Action by the System was abrupt and dramatic, even
though the general level of economic activity was quite high
and would continue to be so for another four months. For
example, the decline in the unadjusted money supply was
reversed, and free reserves were changed from a minus $692
million on May 13, 1953 to a positive $862 million on June
24, 1953, a shift of $1.5 billion in a month.
The speed and magnitude of the reversal in policy,
especially when no indications of a downturn were noted in
FOMC meetings, raises several questions. The directive of
the June 11, 1953 FOMC meeting was not particularly clear or
helpful in this respect (what “deflationary tendencies?"),
nor were the explanatory statements which followed the
directive change.
In terms of credit policy, the foregoing directive
placed emphasis on “avoiding deflationary tendencies
without encouraging a renewal of inflationary develop
ments (which in the near future will require aggressive
supplying of reserves to the market)," . . .
. . . Commodity prices have remained fairly stable
for some months, while output had continued at a very
high level and had actually increased slightly further
since March. Financial markets, on the other hand, had
been unsettled at times during the spring months, par
ticularly late May, and throughout the period since
March there has been an undertone of concern about
135
potential declines in economic activity.26
This directive can be used to support the contention
that the System was wonderfully prescient ("potential de
clines in economic activity") or merely fortunate to have
responded to the crisis in bond prices that occured in
April-May.27 Collateral evidence from the Minutes is help
ful here, supporting the second contention rather than the
first.28 xt would appear that the bond crisis forced the
System to ease at the time it did, and that concern over
economic declines were related to the bond price fall and
not to substantive evidence that the economy was rapidly
weakening. In fact, the statements in the Annual Reports
stress financial markets rather than the real sector. More
over, while the National Bureau of Economic Research indi
cators did show a slow-down approaching, this series (and
others like it) were not well thought of and apparently not
26j}0ard of Governors of the Federal Reserve System,
Fortieth Annual Report of the Board of Governors of the
Federal Reserve System "^Washington: Board of Governors of
the Federal Reserve System, 1954), p. 92.
2?Milton Friedman and Anna Jacobson Schwartz, A
Monetary History of the United States; 1867-1960
(Princeton, N.J.: The Princeton University Press, 1963),
pp. 612-614.
28friinutes of the Federal Open Market Committee. The
entire period, March, 1953, through November 1953 must be
read to learn that bond support ("correction of disorderly
markets") was the main concern in the Spring of 1953, and
that the downturn was not mentioned by staff economists
until late in 1953.
136
used by the Board and its staff.29
Whatever the reason, most indicators show the massive
action by the System in the 16 months from May, 1953 to
August, 1954. Not only were securities purchased in large
amounts, but reserve requirements were dropped twice and
the discount rate lowered twice also. While the money
supply did not respond with as much vigor as might be hoped,
the decline in rate of growth from 1952 to 1953 was replaced
with an increase in 1954. Free reserves increased by $1,335
million over the sixteen month period, member bank debt was
at a minimum and loans, investments and Government security
holdings by banks were up by dramatic amounts, $13.0 billion
and $6.2 billion respectively. In addition, bill rates were
down from 2.08% to 0.92%.
August, 1954, marked the trough of the cycle which
actually began in December, 1949. This cycle, at least the
part from 1951 onward, illustrates the contentions made
earlier in the Chapter. The official public record is in
consistent and unclear. Policy actions do not fit the ex
planations given and conflicts among objectives and the
priorities of given goals were simply not mentioned or were
given misleading or inaccurate status.
One other striking set of facts emerges which sug
gests that the Federal Reserve was not as insensitive to
29Ibid., Mr. Ralph Young (senior staff economist) p. 5,
October 25, 1955.
137
outside criticism as is often claimed. Prior to the Accord,
System policy could be characterized as no-policy, although
they undoubtedly had more power and ability to influence
economic conditions than they cared to admit or exercise.
The break with this policy of no-policy was the Accord. But
for all the fanfare accompanying the Accord, a closer read
ing of the relevant material suggests that it was not the
dramatic break with the past as is so often suggested. In
deed, the four basic points of the Accord are hardly start
ling. The point that is the most telling is the last:
It was expected that during the remainder of the year
the Federal Reserve discount rate, in the absence of
compelling circumstances not then forseen, would remain
at 1-3/4 per cent and that the Federal Reserve would
operate to assure a satisfactory volume of exchanges in
the refunding of maturing Treasury issues.30
Thus the Treasury had not completely relinquished its
interest rate preoccupation especially since the Treasury
officials who were opposed to the Accord would remain in
office for over a year. The Federal Reserve's victory was
not clear cut, nor did they push their independence too far
that first year. Free reserves were maintained around the
$500 million level for over a year and member bank borrowing
rose slowly. Reserve injections essentially matched the
slow increase in required reserves. At the same time, rates
moved up quite slowly, bill rates from 1.4% to the 1.6%
30j4onetary Policy and the Management of the Public
Debt, pp. 79-36, 97, l6l-TS2,"T2lf f and 463-9S4.
138
range, and longer-term Treasuries from the 2.5% to the 2.7%
range.
One year later, just following the vote of approval
of the Joint Economic Committee, the Federal Reserve moved
to tighten monetary policy. It was not, however, until
January, 1953, with the old Secretary of the Treasury out of
office, that the discount rate was raised.
The final event of interest centered around the 3% 7 < >
thirty-year Treasury issue of April, 1953, The outcry from
all sectors, as noted above, was quite intense, and less
than a month later, the System moved toward ease.
August. 1954 to April. 1958
The second cycle in the period under review--this one
complete— lasted from August, 1954 through April, 1958, bot
tom to bottom. The downswing began in August, 1957 and was
rather sharp, but also rather brief, lasting only eight
months.
There are similarities between the actions of the
System in the period 1952-53 and 1955-57, and in its de
scriptions of its behavior. Unlike the 1949-50 period, the
System moved to a firmer policy almost as soon as the cy
clical bottom was reached in August, 1954. This degree of
restraint was increased during the summer of 1955, and with
one exception, continued firm until June, 1956. Although
longer than the period of firmness in 1952-53, both periods
139
ended with the economy moving "sideways," and both coincided
with sharp attacks on the System's policy of restraint.
From August, 1954 through July, 1955, commercial
bank loans increased some 14%, a growth partially offset by
sales of $2.6 billion of Government securities. During this
period of growing required reserves, the System apparently
chose not to supply them freely, letting market forces
cause restraint. Free reserves fell by over $600 million
and market rates rose, Treasury bills from .92% to 1.6%.
Member bank borrowing did not increase very rapidly (only
$200 million), while the money supply rose by 3.76%, sea
sonally adjusted, and 3.96% unadjusted, for the eleven
month period. For the year 1955 as a whole, the money sup
ply, seasonally adjusted (1955 was the first year seasonally
adjusted data became generally available and consistently
referred to), grew only 2.66 percent. This may be compared
with the rate of growth of the seasonally adjusted money
supply in 1953 (1.57%) and 1954 (2.35%). The figure of
0.89% increase for the year 1956 and minus 0.88% for 1957
illustrates the degree of restrictiveness of policy with
regard to the money supply variable.
Once again, one searches in vain for an unambiguous
explanation of the policy being pursued. While the direc
tive was changed occasionally throughout the cycle, it often
bore little relationship to policy. For example, until May
10, 1955, the directive (action clause) read, "... with
140
a view to fostering growth and stability in the economy by
maintaining conditions in the money market that would
encourage recovery and avoid the development of unsustain
able expansion." This directive hardly reflected the facts,
for by May, 1955, recovery had been completed and a new
period of growth was underway. The directive was the same
as that in effect to May 10, 1955:
The change to eliminate the word "ease" from the
Committee*s directive and to adopt the wording set forth
above reflected the view of the Cnmmittee that, while
the economic situation was developing satisfactorily,
easy credit was no longer necessary to foster recov
ery . . . [after some concern was expressed over unsus
tainable expansion--"the development of an inflationary
situation"--the FOMC concluded] . . . This would con
template a gradual reduction in the volume of free
reserve funds of banks from the level that had pre
vailed, and some increase in the cost and decrease in
the ready availability of credit. On the other hand.
the change in directive at this meeting did not call
for pursuit at this stage of credit restraint or of
firmness in the money market. -31 (emphasis mineT”
From July, 1955 through November, 1955, pressure was
sharply increased, and, with the exception of December,
1955, maintained through May of 1956. In the four months
between July and November, free reserves fell almost $600
million to around $500 million net borrowed reserves. To
expand their rapidly growing loan portfolios, commercial
banks sold $2.5 billion of Governments' and increased their
borrowing by some $500 million to $1,016 million. The
^Board of Governors of the Federal Reserve System,
Forty-Second Annual Report of the Board of Governors of the
Federal Reserve System (Washington: Board of Governors oF-
the Federal Reserve System, 1957), p. 90.
141
money supply was virtually unchanged (up 0.16%), but
Treasury yields jumped from 1.62% to 2.50%. A poor
Treasury refunding caused the System to intervene with con
siderable magnitude in late November and early December,
1955, but pressure was re-introduced soon after. The
directive remained the same from August 2, 1955 until Janu
ary 24, 1956, throughout the period of intervention. An
example of the confusing and contradictory language employed
by the System during this period may be found in an expla
nation of the renewal of the directive on November 16, 1955,
before the market intervention;
Under these circumstances, the Committee renewed the
existing directive with the understanding that, while it
was trying to move in the direction of maintaining
tightness, it should not be concerned if operations in
the open market during the immediate future did not
achieve as great a degree of tightness as had existed
recently.32
As pressure was renewed after the bond support
action, there was even more question about the significance
of adding the phrase "taking into account any deflationary
tendencies in the economy," to the August directive in
January, 1956. Observers were to be further perplexed when
this phrase was dropped in March, 1956, reinserted in May,
1956, and then dropped again on August 7, 1956. From
November, 1955 to May 1956 free reserves were maintained
around minus $500 million, the money supply hardly moved,
32Ibid., p. 109.
142
rising by 0.22% (and declining by 0.89% in may), Treasury
bill yields moved up 36 basis points, member bank borrowing
hovered around $1 billion, and banks sold some $4.3 billion
of securities to increase their loans. A change in the
policy of restraint appears to have coincided with an in
crease in the discount rate in April, 1956, even though it
was ostensibly a technical adjustment designed to bring the
discount rate more in line with market rates. The rate had
been moved from 1-3/4 to 2%% from August, 1955, through
November, 1955. In April, it went to 2-3/4% in ten dis
tricts and to 3% in the remaining two. Public criticism of
the action was widespread and the System response was quite
abrupt.
The move to ease that began in May, 1956, was
accompanied by the reinsertion of the phrase, "taking into
account any deflationary tendencies in the economy."
However, the "deflationary tendencies" phrase apparently did
not mean too much, as it was dropped in August, 1956, while
the System was still easing. In fact, the move to ease
continued through January, 1957. Free reserves rose by
$77 million per month or $620 million, and member bank
borrowing declined by $567 million during the same period.
While interest rates continued to rise, the rate of expan
sion was considerably slower. Even the money supply in
creased, although not until after August. All this was
interesting, especially considering the explanation given
143
for the August 7, 1957 change in directive.
. . . Nevertheless, the composit of information con
firmed the view presented at the previous meeting that
economic activity had renewed an upward slant. Wage and
other costs were tending upward. Demand pressures con
tinued strong. With settlement of the steel strike,
business psychology was clearly on the buoyant side and
prices of commodities were gently firm to rising. . . .
It appeared that there was danger in misdirected use of
resources, optimism as to management's ability to pass
along higher wages and other costs into higher prices,
over-commitment of credit based on discounting of the
future and a cumulative deterioration in the quality of
credit . . .
In concluding that it was no longer appropriate to
retain in the directive the instruction to take into
account deflationary factors, the Committee also dis
cussed other measures that might be taken to strengthen
credit restraint, including the possible desirability of
action.by the Federal Reserve Banks to increase discount
rates.33
While the Banks did raise the rate in late August,
and while the money supply did grow at a rate of only 0.89%
for the year (as contrasted with 2.66% for the prior year),
the situation was one of ease after August, the money supply
experiencing most of its increase after that date.
The contradictions between the official published
record and the actions of the Committee are puzzling, as
they suggest that the System did not know what it was doing
or chose, in retrospect, to make the record look better.
Either situation leaves something to be desired.
Policy became increasingly tight in February, 1957
33goard of Governors of the Federal Reserve System,
Forty-Third Annual Report of the Board of Governors of the
Federal Reserve System (WasKin gt on: B o ard of Govern or s' o£
the Federal Reserve System, 1958), pp. 35-36.
144
and continued to be tight at least through August. Once
again this followed on the heels of testimony before the
Joint Economic Committee (in January, 1957) where spokesmen
for the System admitted that they might have been too easy
in the second half of 1956.34- From February, 1957 through
August, 1957, nonborrowed reserves dropped by over $1 bil
lion, and although required reserves also declined, free re
serves fell by $578 million. Member bank borrowing rose
from $406 million to $1,005 million, and the money supply
declined by 0.15%, the net decline for the year as a whole
being 0.88%. The directive had begun to change in November,
1956, the phrase "recognition should be given to additional
pressures in the money, credit, and capital markets result
ing from seasonal factors and international conditions,"
being added to the action clause. The FOMC meeting of
January 8, 1957 changed this to recognition of "unsettled
conditions," and on March 5, 1957 to "recognizing uncertain
ties" in business, financial and the international situa
tion. The explanatory remarks for this directive (the March
5, 1957 directive remained in effect until November, 1957),
with the exception of June and July, also suggest that the
economy might be slowing down, "losing its upward thrust,"
^United States Congress, Joint Economic Committee,
Subcommittee on Fiscal Policy, Federal Expenditure Policy
for Growth and Stability. Hearings before Subcommittee, 85th
Congress, 1st Session, February 5, 1957 (Washington:
Government Printing Office, 1957), p. 606.
•'moving sideways," etc. The words certainly do not corre
spond with the action taken. Moreover, one is puzzled by
the final and most dramatic action--the raising of the dis
count rate from 3.00% to 3.507® in late August, early Sep
tember. This increase came at or shortly followed the peak
in business activity, was the largest since the end of the
War, and followed months of reports that the economy was
slowing down. However, the decline was not mentioned in
the Minutes until late October, 1957, and even then it was
not felt to be too important.
The easing that began in late October accompanied or
followed political attacks on the System, but this time the
record indicates a somewhat slower response. Phrase (b) of
the directive is a case in point. Although it showed signs
of retreating from the policy of restraint, a clear-cut
acknowledgement of the recession was not made until March 4,
l958--a month before the cyclical bottom. Thus, on Novem
ber 12, 1957, the System was to "foster sustainable growth
without inflation by moderating pressures on reserves" on
December 17, 1957, to "cushioning adjustments and mitigating
recessionary tendencies in the economy," and finally, on
March 4, 1958, to "contribute further by monetary ease to
resumption of stable growth." Explanations in the Annual
Reports did not clarify the situation either. On October 1,
1957, for example, the explanation given the renewed
directive read in part:
146
... an increasing number of business observers were
suggesting that the major expansive forces had been
spent, that pressure of inflationary forces was in the
process of lessening and even of dispersing, and that the
prospective movement in activity was a decline. ... On
the other hand, the reports to the Committee at this
meeting did not present a picture of settling or a de
clining economy. There was considerable feeling that
while inflationary clouds could be breaking up, it would
be premature to conclude they had been scattered. . . .
The views of the Open Market Committee at this meet
ing were that there should be no change in policy or in
the Committee's directive at this meeting. In reaching
this conclusion, the Committee did so with the under
standing that, in carrying on transactions for the Sys
tem open market account, an effort would be made to con
tinue the same degree of restrictive pressure that had
been sought during the preceding three weeks.35 (empha-
sis mine.)
Some changes were shown in the October 21, 1957 meeting of
the FOMC which renewed the existing directive, but which
had the following qualifications: "although general policy
was not to be changed appreciably, it should tend on the
easier side from where it had been in recent weeks," what
ever that might mean. Actually, the act of easing had
begun.
A glance at some statistics seems to point to a con
cern over inflation leading to the sluggishness of the Sys
tem's response. Data from the 1957 and 1958 Federal Reserve
Bulletins indicate that the unemployment percentage (the
System actually did not compute this percentage) actually
dropped from 5.01% in June, 1957, to 3.79% in October. The
^Board of Governors of the Federal Reserve System,
Forty-Fourth Annual Report of the Board of Governors of the
Federal Reserve System (Washington: Board of Governors oi "
the Federal Reserve System, 1958), pp. 51-52.
147
rate started to rise in November, 1957, reaching 8.34% in
February, 1958. Although these figures are not adjusted
for seasonal influences, their movement does coincide with
expected a priori hypotheses of the actions and timing of
Federal Reserve response. The behavior of prices was a
different matter. The consumer price index, on a 1947-1949
base year, rose each month from January, 1957 through July,
1958. Wholesale prices rose by almost the same percentage
point increase over this period, although they did drop
temporarily during the period Septeraber-October, 1957.
Farm prices rose over the period, but their growth was also
interrupted during September and October, 1957. The indus
trial production index fell continually from its August,
1957 peak of 145 to a low of 126 in April, 1958. Actually,
the production index had been 147 during November and De
cember, 1956 and 146 during January and February, 1957.
The data suggest that the System felt the rise in prices to
be of more importance than the decline in the industrial
production index. In addition, on the basis of these unad
justed data, there was no conflict between unemployment and
price stability until October-November, 1957, the months in
which the easing began.
Reference to the Minutes for this period may provide
the missing information. It should be noted that there is
no reference to •'cost-push" or "administered-price" infla
tion and the System's inability to deal with these factors.
148
Selected Comments from the Minutes
of the Federal Open Market Committee;
September, 1957 through January, 1958
Date __ _____ _____ _________________
9/10/57 (Mr. Young) "The prognosis of pessimism of
•informed financial circles* seems far out
of focus in terms of the recently develop
ing situation."
(Mr. Hayes) "It would be premature, too, to
lessen the degree of real restraint just as
we seem to have a fair chance of realizing
the price stability which we have worked so
hard to achieve by maintaining a vigorously
restrictive policy through these recent
months of sideways motion in the physical
output of the economy."
(Mr. Martin) "After stating that he had no
real idea whether business was going up or
down at the moment, the Chairman commented
that he had been fishing the past few days,
and that the thought had occurred to him
that 'the System had the fish on the hook.'
Its policy of restraint is now understood
from one end of the country to the other.
. . . The Chairman went on to say that he
did not think the problem of inflation had
been solved and he doubted that this would
occur until there had been a modest correc
tion of past excesses. He did not know when
such a correction would come, but there had
been many excesses in the course of the past
eighteen months and adjustments would have
to be made at some point."
10/1/57 (Mr. Young) "While it was possible that
prices and activity generally are at a crest
and that the next broad movement of prices
and activity will be downward, the recent
figures are far from clear that such a de
velopment is becoming an actuality."
(Mr. Martin) "He observed that he had vis
ited with seven Ministers of Finance and six
Governors of central banks at the annual
meeting of the Boards of Governors of the
International Monetary Fund and the Inter
national Bank for Reconstruction and Devel
149
opment during the past week. He was im
pressed with the unanimity of their views
that inflation in each instance had gotten
ahead of them, that it was the primary
problem in their countries, and that there
would be no way of coping with the inflation
other than a little decline in business."
11/12/57 (Mr. Thomas) "Recent financial developments
have reflected the indications of slackening
in economic activity discussed by Mr. Young.
They help to corroborate the likelihood of
abatement of inflationary pressures. . . .
Evidences of abatement of inflationary
pressures present an occasion for a recon
sidering of the general direction of System
policy. To some degree the slackening may
reflect the intended and desirable conse
quences of the restrictive credit policy in
limiting the use of bank credit to meet in
vestment demands not covered by savings. To
a large extent, however, the slowing down
may be viewed as an inevitable reaction to
unsustainable elements in the previous ex
pansion. For example, one of the main rea
sons for the prospective decline in business
and capital expenditures is that productive
capacity in so many lines is now in excess
of sales.
Monetary policy could have prevented
these developments only by exerting more
restraint on expansion. An easier policy
would have stimulated overexpansion, specu
lation, and rising prices, and thus made the
inevitable reaction more severe than it
might otherwise be."
(Mr. Martin) "The Chairman said that he did
not wish the foregoing remarks to be mis
understood. He believed that the adjust
ments now taking place would prove to be
salutary, and if the inflationary movement
had gone further, the unraveling process
would have been much more difficult."
12/17/57 (Mr. Martin) "These chickens of inflation
are coming home to roost now, the Chairman
said, but he did not think they were coming
back in a way that would make it completely
hopeless to keep the henhouse in order."
150
1/7/58 (Hr. Robertson) “None of us wants a reces
sion, let alone a depression--not even to
purge us of our past sins of inflation.
. . . But we should do with an eye to the
future--a future which, in my opinion, will
present for us inflationary problems of a
magnitude greater than those of the past
decade. ... A few months ago we were
fighting inflation. If there has been some
pause in the necessity for the fight, pos
sibly we should feel gratified rather than
frantically taking steps to bring back the
conditions we were so recently fighting."36
Examination of the period August, 1954 to April,
1958, suggests conclusions similar to those reached for the
earlier period, at least with regard to official Federal
Reserve publications.
1. There was little correspondence between the pub
lications' descriptions of System behavior and
the action actually taken.
2. There did seem to be a response by the Federal Re
serve to outside criticism, especially from the
Executive and Legislative branches of the Federal
Government.
3. The official reports of the System were too late
to be of much use in dispelling uncertainty, prob
ably leading to behavior based on speculation and
rumor--behavior which most would expect a quasi
government al agency working in the public interest
to limit.
36Minutes of the Federal Open Market Committee. See
the period fromOctober, 195/ through February, l958and
Chapter IV._______________________________________________
151
4. The language of the official reports was at least
confusing and in many cases misleading. There
would seem to be no logical basis for such report
ing unless the officials were unaware of what they
were doing (evidence does not support this claim)
or they were trying to disguise their actions so
that the most interested parties could be appeased
by quoting the sections of the Annual Report that
supported their case. If this latter is the case,
two possible results are: (a) neither side will be
placated, (b) the Federal Reserve officials might
be charged with being unable or unsure as to their
purpose or the means of carrying out their objec
tives. Evidence in favor of point (b) would raise
questions as to the efficacy of the System. It
might also mean, given the fact that action was
taken, that some person or persons other than the
FOMC was actually making policy decisions.
5. At points in time when there were conflicting ob
jectives or goals (the fall of 1957, for example)
the System was unwilling or unable to recognize
such conflicts or to suggest what considerations
might prevail in a weighting of priorities. Such
lack of action might have been a result of: (a)
lack of knowledge that conflicts existed and
weighting must be done; (b) knowledge that con-
152
flicts did exist but that the grounds for judging
priorities were not established; or (c) the fact
that the System was fully aware that a major
weighting of priorities was involved and that a
decision on these grounds had to be made (at least
within the confines of the System), but was un
willing to publicize such views and decisions too
strongly for fear of censure.
April. 1958 to December. 1961
The final period to be discussed included one more
complete cycle and the beginning of another. The complete
cycle began in April of 1858, and ended in March of 1961,
bottom to bottom, and the second cycle started in March of
1961. Both the 1957-58 decline and the 1960-61 decline were
rather sharp, but also rather brief, with fairly rapid re
coveries.
The response of the System to the upturn beginning in
April, 1958, was quite rapid, although the policy of re
straint begun in the latter part of May, 1958, was delayed
due to the intervention of the System in the Government bond
market crisis in the summer of 1958. Although the directive
of March 4, 1958, was retained in April and May, there was
some evidence of the restrictive policy which was soon to
begin. Although the Committee committed itself to main
taining an "even keel," it also stated that it was consid-
ering how best to implement and maintain the then current
133
posture of monetary ease "without further depressing Treas
ury bill rates." As there is some indication that at least
some members of the Committee felt there was some relation
or connection between free reserves and interest rates, ^7
this suggests that the System would move to reduce free re
serves if bill rates eased. Bill rates did dip and free
reserves fell by $195 million within the next three weeks.
By early June, there was some concern in financial centers
that the System was heading away from a policy of ease. At
the same time, a sizable projected federal deficit and a
large mid-June Treasury refunding operation were announced.
Although the official record of the FOMC maintained it was
not backing away from a policy of ease and that it did not
wish to indicate publicly that it was backing away from
such a policy,38 the rumors persisted and bond prices
dropped, even after the Treasury entered the market to sup
port the prices of the then current issue. Of course the
desires of the FOMC not to depart or even appear to depart
from the policy of "ease" were not known until March, 1959--
too late to have had any impact on the market. In any case,
as bond prices fell further, and as Congressmen protested,
i — — 1 mm m ■■■ in
37Minutes o£ the Federal Open Market Committee.
Meeting of May 26, l93£, pp. 6-9.
3^Board of Governors of the Federal Reserve System,
Forty-Fifth Annual Report of the Board of Governors of the
Federal Reserve System (Washington; Board of Governors of
the Federal Reserve System, 1959), p. 51.
154
the System intervened on July 18, 1958, departing from the
policy of purchasing short-term issues, specifically Treas
ury bills. It eventually purchased some $1.2 billion of
securities and the market steadied. Because it appears that
jcommercial banks were not involved in the crisis (their
holdings of securities actually increased during the period),
and System purchases were of a relatively small volume, it
would seem that a clearer and more timely statement by the
System of its intention to continue a policy of ease might
have prevented the necessity of intervention and the sub
sequent need to control or reduce the reserves thus provided.
By the end of July, the bond market had steadied and
it became increasingly clear that the economy was in an up
swing. The directive on July 29 was modified, the action
clause to the effect that redundant reserves created by
System intervention earlier in the month be recaptured. The
directive was changed again on August 19, this time, among
other things, the System had as its action clause, "fos
tering conditions in the money market conducive to balanced
economic recovery." The emphasis seems to have been more on
"balanced" than "recovery," for in the explanatory comments
following the directive change, the apparent recovery, the
large federal deficit and speculative or inflationary
psychology were emphasized. Moreover, the rediscount rate
rise by the San Francisco bank was noted and felt to be
"consistent with the action taken by the Open Market Commit-
155
Cee in deciding to move toward reduced reserve availabil
ity.” Later in the same paragraph this same action was ex
plained:
Notwithstanding the substantial number of unemployed
persons, the data presented indicated that the rate of
expansion in the money supply in the immediate future
should be tempered and that operations for the System
Open Market Account should move in the direction of
lower free reserves. . . . The fact that seasonal in
fluences would be working in this direction through the
Labor Day weekend suggested that, without too much pres
sure, the System Account might be able to move in the
direction of the elimination of free reserves by the
time of the next meeting.39
Once again, "recovery" hardly seems the word to des
cribe the general economic situation, and would certainly be
misleading if the System were to allow free reserves to fall
by $405 million in three weeks. The directive simply did
not bear much, if any, relation to the action taken if the
explanatory comments are to be taken at face value. While
free reserves were not eliminated by Labor Day, 1958, they
were reduced by over $300 million in three weeks--a "drama
tic" shift in policy. A written reply to the Joint Economic
Committee in June, 1961, describing the situation in 1958,
further confuses the issue.
The latest occasion when a policy directed toward
tempering the rate of monetary expansion was instituted
by the Federal Reserve was in the later part of 1958
and the first half of 1959 . . . when inflationary psy
chology emerged as a threat to sustained progress.
... it was not until August 19, 1958 . . . that a
change was made in the directive away from a policy of
substantial ease appropriate for continuing recession
39Ibid., p. 61.
156
but not for recovery.
. . . Not until May, 1959, however, did the Commit
tee* s directive call for a positive policy of restraint
on inflationary credit expansion.
. . . Thus, changes in monetary policy, like changes
in the economy itself, usually are gradual rather than
sudden and sharp. Ccommenting on the December 2, 1958
meetingj . . . Although the Committee's directive, as
renewed at that meeting ^remained the same] ... its
conclusion contemplated letting market developments
tend to increase restraint within limits consistent with
the policy directive and the broadening economic recov-
To the extent that System actions may be described by
changes in free reserves, the period July, 1958 to February,
1960, may be described as one of restraint or continuing
firmness. Free reserves fell or were lowered by $1,103 mil
lion through July, 1959, with some slight increase from
July, 1959 through February, 1960, resulting in a decline
over the entire period of over $900 million. The decline in
the period July, 1958 through September, 1958, alone was
$452 million. Member bank borrowing grew accordingly, by
$367 million from July through September, 1958, and by $707
million over the entire period. While commercial bank loans
rose by over $17 billion, some $8 billion of securities were
sold. The seasonally adjusted money supply rose 1.33% from
July 1958 to February, 1960, an annual rate of only 0.7%.
Interest rates, not surprisingly, rose; yields on ninety-
one day Treasury bills from 0.91% to 3.96%, and on long-term
Treasury bonds, from 3.36% to 4.227«. Official accounts from
^OReview of the Annual Report of the Federal Reserve
System for the Year lff 6 6, pp. 24-36.
157
the Annual Reports did not aid those interested in analyzing
the actions of the System during this period. The written
reply to the Joint Economic Committee is illustrative, as
is a further exchange between Mr. Alfred Hayes and Represen
tative Patman of Texas.
Chairman Patman. . . . and you state there that open
market operations should be conducted with a view to--
"fostering sustainable growth in economic activity and
employment while guarding against excessive credit ex
pansion."
Then you say:
"This replaced the clause of the directive that had
been in effect since May 26, 1959, calling for opera
tions with a view 'to restraining inflationary credit
expansion in order to foster sustainable economic growth
and expanding employment opportunities.'"
Just what difference do you see in the two, Mr.
Hayes?
Mr. Haves. Well I see a considerable difference.
The May 26, 1959 directive, as you can see, put the
first emphasis on restraining inflationary credit expan
sion. It was adopted at a time when pressures were very
great in the credit markets, and there was a general
fear of excessive credit expansion and possible infla
tionary developments.
The directive on March 1, 1960, while keeping an eye
on this possibility of excessive credit expansion, rele
gated that to a subordinate clause, and put the primary
emphasis on the growth aspect.41
It should be made clear that some members of the Com
mittee were opposed to the move to restraint that was noted
in the explanatory comments in the meetings after August,
1958, addressing themselves to the point that if a policy of
increased restraint was to be followed, this policy should
be made known to the public. This appeal was apparently not
accepted by the majority.
4LIbid., pp. 49-50.
158
As policy became increasingly firm in March, 1959
(free reserves fell by more than $104 million in less than
two weeks and then continued to drop throughout April and
May), there was no immediate recognition of this fact other
than the comment that:
The foregoing considerations led the Committee to
conclude that the policy directive should be continued
without change, with the understanding as expressed by a
majority of the Committee that about the same level of
restraint should be maintained on bank reserves as at
present and that any doubts on the part of the Account
Manager regarding transactions to be affected should be
resolved on the side of r e s t r a i n t . 4-2
From March 3, 1959 to May 6, 1959, net borrowed re
serves rose from $46 million to $317 million, dropping some
by the May 26, 1959 meeting at which time the directive was
modified to read "... to restraining inflationary credit
expansion in order to foster sustainable economic growth and
expanding employment opportunities." Some insight into what
this might mean may be gained by referring to an explanatory
comment at that meeting.
Although the firmer tone desired by the Committee was
not expressed in terms of a specific target of net bor
rowed reserves ... it was noted that additional re
straint could be brought about in the next few weeks by
letting natural forces take their course ... it ap
peared that under such a procedure net borrowed re
serves, which recently had been running in the neighbor
hood of $250 million, would move upward toward the $500
million level.43
42Board of Governors of the Federal Reserve System,
Forty-Sixth Annual Report of the Board of Governors of the
Federal Reserve System (Washington: Board of Governors of
the Federal Reserve System, 1960), p. 39.
43ibid.. p. 46.
159
The directive of May 26, 1959, remained in effect
through February, 1960, despite the protestations of some
board members, particularly Governor Mills. Although net
borrowed reserves did not move much in the latter part of
1959, they did drop to around $500 million and remained at
that level after June, 1959. From May, 1959 to March, 1960,
the seasonally adjusted money supply dropped 1.26%.
The directive change in March, 1960, does not appear
to represent a significant change in policy. The directive
in effect was replaced by the one noted above in the dis
cussion between Mr. Hayes and Representative Patman. Accom
panying the rather vague change were rather vague reasons
for the change. The explanatory notes of that meeting cited
a decline in sales, a weak stock market and a drop in the
[
seasonally adjusted money supply as reasons for the changes,
yet the remarks begin with the comment that:
National and regional reports at this meeting indi
cated continuance of underlying economic strength, with
evidence lacking to suggest that 1960 would be other
than a prosperous y e a r .44
Once again the observer is bombarded with a set of
comments and statistics which do not facilitate analysis.
From March through July, 1960, free reserves jumped from a
negative $485 million to $120 million. During the same
44uoard of Governors of the Federal Reserve System,
Forty-Seventh Annual Report of the Board of Governors of the
federal Reserve System i t Washington: Board of Governors of
the Federal Reserve System, 1961), p. 42.
160
period the money supply declined 0.35%, while the yield on
ninety-one day Treasury bills fell from 4.66% to 3.39%. On
the other hand, loans were increasing at an annual rate of
6%, and the broadly-defined money supply at a rate of 4.3%.
Despite the somewhat contradictory statistical evidence,
one must question why the System turned to ease well in ad
vance of the 1960-1961 downturn. Faced with similar moves
to ease by the System before (in terms of bill rates or free
reserves) one could cite almost supernatural prescience, or,
if somewhat less altruistic, one could mention the volume of
criticism that descended on the System just prior to its
turnaround. In addition, 1960 was an election year. Once
again, the Minutes indicate that the System did not rely on
NBER type indicators. Whatever the reason, ease was clearly
sought throughout the remainder of the year and into 1961,
when the money supply began to rise at a rate of 3.96%.
The directive was changed in August, 1960, although
there was no evidence of a change in policy action, and
apparently no real substantive change in thought. The key
phrase was changed from "fostering sustainable growth in
economic activity and employment by providing reserves
needed for moderate bank credit expansion" to "encouraging
jmonetary expansion for the purpose of fostering sustainable
growth in economic activity and employment." There was
some disagreement with this change, basically on the grounds
that the modified directive did not represent a sufficient
161
modification in the course of open market operations. Judg
ing from the language, one could only agree. The only other
change in 1960 came in October, when "current international
developments" were considered— the first official public
recognition of the balance of payments problem that had been
developing since 1958. This recognition notwithstanding,
explanatory statements do make clear the fact that domestic
objectives were to receive the highest priority. Concern
over the attention to be given domestic objectives was again
voiced in March, 1961.
The directive was changed four times in 1961, and
|
with the possible exception of the December 19, 1961 direc
tive, all represented various urgings about the need for
monetary ease and showed concern over international factors.
i
|As the wording in all four directives did not change much
and was rather ambiguous in any case, little need be said |
j
about this period. Only one interesting and intriguing
change in wording may be noted. On April 8, 1961, the di
rective was modified to encourage expansion of bank credit
and the money supply, from its previous charge to encourage
monetary expansion. On August 22, 1961, it was "encouraging
credit expansion," which turned into "providing reserves for
bank credit and monetary expansion" on December 19, 1961.
Although the words do have different meanings and implica
tions with regard to policy action, they were apparently
used interchangeably--a potentially confusing use of
162
terminology.
Conclusion
Evidence presented in this chapter indirectly but
strongly suggests a number of contentions about the role and
importance of the Manager.
1. Although responsible for carrying out the wishes
of the FOMC, it has been indicated that the Man
ager could not rely upon the directives of the
FOMC nor upon the Minutes. as they were prepared
too late to be of any use. Instead, he had to
rely upon his own notes of FOMC proceedings, or
the notes of his subordinates. This evidence com
plements the criticisms of outsiders regarding the
ambiguity or lack of clarity of System publica
tions.
2. Evidence was presented that the terms employed by
those formulating and executing policy mean dif
ferent things to different people— for example
"short-term"— suggesting the likelihood that the
Manager's interpretation of what he was to accom
plish varied from the wishes of the FOMC. Once
again it would seem that the difficulties in com
municating to outsiders is a reflection of diffi
culties in internal communication.
163
3. Lack of discussion or confusing discussion about
the means by which policy was to be accomplished
suggests that decisions in these matters was left
to the Manager.
4. Variations in what was actually done and how such
actions were described— for example, the fact of
rapid reversals in policy in the light of comments
that such turnabouts did not occur— suggest that
the FOMC was unaware or unsure of the actual ef
fect of policy actions. As the Manager did carry
out policy, the conclusion is that he was relying
upon himself and his own staff in decision-making,
not the FOMC.
5. Examination of official statements of the System
also show them to be vague, contradictory, and too
late to be of any use to the public in general as
well as to the Manager. In addition to the im
plications this has with regard to policy deci
sions, this also means that the System could not
fulfill its responsibility to add stability to
financial markets by creating confidence and dis
pelling rumors.
6. Along the same lines, there were no public state
ments which indicated a systematic attempt by the
Federal Reserve to outline goals, objectives con
flicts among goals and objectives, compatibility
164
between the Federal Reserve and the Treasury, or
the tools and methods used by the System. How
ever, there did seem to be much attention paid by
the System in its publications to the goal of
price stability.
Chapter V will examine the issues of Chapters III and
IV relying upon the evidence found in the Minutes.
165
CHAPTER V
THE ROLE OF THE MANAGER AS SEEN IN THE MINUTES
Introduction
The Minutes of the Federal Open Market Committee
support the hypothesis that the Manager of the Open Market
Account had considerable latitude and leeway in pursuing the
policy of the FOMC. At the same time, the Minutes indicate
that this autonomy was not complete. In this chapter, after
some general statements about FOMC meetings and the relation
of the Manager to the FOMC, evidence of factors restraining |
the Manager will be presented, followed by evidence support
ing the hypothesis that many of the actual policy decisions
of the Federal Reserve from 1951 to 1961 (at least) were
made by the Manager.
Structure of the meetings
Before considering the evidence found in the Minutes«
it seems appropriate to present a general outline of the
pattern of FOMC meetings. As the executive sessions (as
long as the executive committee was in existence) were simi-
llar in form to FOMC meetings, they may be described as one.
It should be obvious that there were variations in this
166
structure; the form described here actually is more repre
sentative of the later years of the period under considera
tion.
The Manager of the Open Market Account usually opened
each meeting with a report on his actions and the state of
the bond markets (Federal, state, local and corporate) since
the prior meeting. His report was, with three or four ex
ceptions, accepted unanimously. Following this report mem
bers of the Board staff analyzed general economic develop
ments, past and projected; money and credit market condi
tions, past and projected; and from 1959 onwards, often a
report on gold and international capital transactions.
These oral reports supplemented and emphasized points made
in confidential written reports from the Board staff which
members received prior to each meeting.
Following these preliminaries was the "go-around"--
comments on current economic conditions and suggestions for
future policy by the twelve presidents (even though they all
could not vote, all presidents or their alternates were
heard) and the seven Board members. The President of the
New York Bank, or his alternate, began the discussion and,
unlike other president's, his views were primarily national
rather than regional. Board member views were national in
scope. At the end of the "go-around" the Chairman summa
rized these views in a consensus, often asking the Account
Manager for comments. This consensus was then related to
167
the directive which was published in the Annual Report, and
if it was felt necessary, phrase (b) of the directive was
modified.
Occasionally other policy matters were then dis
cussed, although this was rare. Comments were entertained
on reserve requirement changes from time to time, and es
pecially after 1953-1954, discount rate changes were dis
cussed and debated, although the FOMC (as a body) had no
authority to make such changes.
The length of the meetings grew over the years as
did the number attending, transcript pages running around
twenty pages per meeting in 1951 to nearly seventy in 1961.
For the purpose of the investigation the important
points to note about the FOMC meetings are: (a) the Account
Manager's report of his actions in carrying out policy was
always confirmed, ratified and approved and rarely (two or
three times in eleven years) questioned, (b) The reports of
staff members were most comprehensive--virtually every eco
nomic indicator was mentioned. On the other hand, there was
systematic organization of indicators, studies such as
those of the National Bureau of Economic Research being re
garded as "too mechanical."1- (c) As starting speaker, and
I
as representative of the most important Bank, the President
of the New York Bank generally set the tone of the important
^Minutes of the Federal Open Market Committee. Mr.
■Ralph Young, page 5, October 25, 19571
168
"go-around," and although his views often conflicted with
other comments, they were normally quite close to or repre
sentative of those of the Account Manager, (d) Although
the Federal Reserve Act merely states that: ‘ 'The Chairman
of the Board, subject to its supervision, shall be its ac
tive executive officer,'^ his role of stating the consensus
and his ability to terminate discussion give him broader
power than those who formulated the Act apparently felt nec
essary. In short, there was little question, especially
after the retirement of Allan Sproul of New York, as to who
was in charge of the meetings. Although there is no ques-
3
tion about the power of the Chairman, the point here is
that a good deal of his apparent control, in terms of actual
operations (and therefore policy) lay in the hands of the
Manager. This was due, at least in part, to the activities
in which the Chairman had to engage (some on his own voli
tion) if he was to maintain or expand the power base from
which he operated. This meant that he, even more so than
other Board members and presidents, was unable to be fully
informed of monetary theory or the impact of the use of
various instruments of monetary control.
For historical perspective, several other points are
^Federal Reserve Act. Section 10, paragraph, p. 29.
^Michael D. Reagan, "The Political Structure of the
Federal Reserve System," The American Political Science
Review. LV (March, 1961), pp. 64—76;and C. R. Whittlesey,
pp. cit.
169
worth noting, (a) The policy of Government bond price sup
port did not officially terminate until March, 1953, when
the "continuing operating policy statements" were adopted.
This does not mean, however, that prices were supported
until March, 1953, or that they were not supported at any
time afterward. The "continuing operating policy state
ments" were the basis for the so-called "bills-only" policy.
(b) There was no consensus formulated, or noted, until late
1952, and no consistent formulation until mid-1953. This
was due to the concern over bond prices until that time.
(c) The "go-around," in which the Board members and district
presidents could express their opinions, did not begin, or
was not noted until March, 1953, and did not become a fea
ture of each meeting until later in that year, (d) Much of
the period 1951 through 1953 consisted of a dialogue between
Chairman Martin and Vice Chairman Sproul. While Mr. Sproul
did much of the talking, this was apparently due to the fact
that Chairman Martin was stilX becoming familiar with the
workings of the System, (e) Contrary to the opinion of many
professional economists, money supply figures were almost
always mentioned, although the emphasis placed on these
figures varied. Surprisingly, a three percent growth rate
in the "narrow" money supply was a target in the period
1951-1954,^ although after 1954, it was not considered an
^Minutes of the Federal Open Market Committee. Mr.
Martin, pp. 9-1^7 November 23, l953.
170
important goal or even an important economic variable until
the period 1959-60. (f) The Federal Reserve usually took
care not to interfere with Treasury financing operations and
more often than not attempted to insure that they would not
be a failure. This does not mean that bond prices were sup
ported, or that there was any stated practice vis-lt-vis
Treasury operations, but it did mean occasional lapses of
the "bills-only" policy and temporary interruptions in mone
tary policy when pursuing such policies during Treasury fi
nancings were thought to be detrimental to the Treasury.
(g) International movements of gold and capital were occa
sionally noted, but were not the subject of any real and
continuing interest until mid-1959. (h) One cannot help but
be impressed by the importance attached to price movements
(particularly inflation), free reserves, and interest rates.
System action was often deemed necessary to prevent or com
bat inflation, and actions to be undertaken by the Manager
were often expressed in terms of free reserves and interest
rates changes. Employment, growth and balance of payments
difficulties were only infrequently cause for concern (and
then often treated questionably). Other indicators of mone
tary conditions paled beside the attention given to free re-
I
serves and interest rates, (i) The System generally focused
its attention on developments in the money and capital mar
kets rather than developments in the economy as a whole.
171
The Manager and the FOMC
There is no question that the Manager carried out
System policy. The concern here, however, is to attempt to
assess how much discretion was left to the Manager in his
choice of indicators, targets, the magnitude of open market
operation, and even, perhaps, the alternate goals of mone
tary policy. A general background discussion of the rela
tions of the Manager to the FOMC and the control exercised
over him by the FOMC is necessary before considering more
specific examples of his role.
The Manager was selected by the New York Bank of the
Federal System, subject to approval of the FOMC. As such he
was immediately responsible to the New York Bank, and was
not a member of the FOMC. As noted above, however, he
played an important role in FOMC deliberations, providing
detailed reports of past operations, current conditions in
the securities markets, and projections of future movements
in reserves, factors influencing reserves and the prices and
yields of securities. These reports were an essential part
of the background information relevant to decision making,
although projections prepared by the Manager*s staff did not
coincide with those of the Board's staff. In addition, the
Manager supplemented his written reports with oral briefings
at each meeting, and was often asked to advise or comment on
statements of FOMC members, the consensus, and the direction
and means of achieving policy.
172
During the "go-around" the Manager took notes of
comments and opinions. These, his impressions of the con
sensus and the directive were the main written guidelines
between meetings, the Minutes not being available until at
least ten days after each meeting.^ The Manager thus had to
rely on rather informal records for most actual operational
decisions. Occasionally the Manager was not even present at
the FOMC meetings and in these cases had to rely on the
notes and impressions of his representative.
The directive
The directive itself (see Appendix A) has attracted
much attention due to the fact that it appeared in the
Annual Report and appeared to give some indications as to
the changes in System policy. Several studies, most notably
Brunner and Meltzer's paper on the free reserve concept,
have attempted to use this as indicative of changes in poli
cy. But as they have pointed out, the statements of policy
in the directive were often so broad that they were meaning
less, were at times uninterpretable, and occasionally did
not coincide with changes in policy. They do not point out
the fact that the public was not even able to see the direc
tive until the Annual Report was published, and at times
this meant a delay of up to eighteen months.
While the form of the directive changed over the
5Ibid.. Mr. Robertson, p. 77, March 3, 1959
173
period, the changes were not significant, with the possible
exception of the one in December, 1961. What may be sig
nificant or is at least puzzling is that the statements in
the first paragraph, especially phrase (b), were quite broad
and general. Phrase (b) was the •'action'1 clause which re
ferred to current policy; other phrases in paragraph one
were of a continuing nature. On the other hand the second
(and when in existence, the third) paragraph was quite spe
cific with regard to the maximum amount the portfolio could
change, or the amount of gold certificates that could be ex
changed with the Treasury, etc. It might seem that these
limits on how much the portfolio could change were in effect
the "real" directive, as the limits were much more specific
than phrase (b). However, further examination indicates
that the limits were rarely changed and that changes bore no
relationship to changes in economic activity. Furthermore,
the Manager set the limits. Thus, if there was any signifi
cance in the limits, it was another example of the indepen
dence and importance of the Manager. During much of the
period, the Manager was also constrained by the type of ma
turity in which he could deal. The form of the directive
(having some extremely specific portions and some quite
general ones), the fact that occasionally phrase (b) was
rather specific, the fact that changes in (b) did not always
coincide with changes in policy and the admission to a Con
gressional committee that the Manager could not rely solely
174
on the directive in carrying out policy and the desires of
the Committee (see above, p. 112 and 113) are rather puz
zling. Reference to the Minutes helps explain why the di
rective was made more specific at the last meeting of 1961
(outside complaints and the impact of the Congressional
hearing in 1961), but they do not explain the occasional
long discussions over changes in phrase (b) that would not
be made public for at least a year or comments to the effect
that the wording of the directive did not matter.**
The consensus
A partial answer to this dilemma may be found in ex
amining the consensus. As has been noted, the consensus,
when it was stated, was an attempt by the Chairman or his
replacement to summarize the views of the FOMC and to indi
cate what direction and magnitude future policy should take.
While the consensus was usually stated broadly, occasionally
specific targets were mentioned and not infrequently a range
of free reserves was mentioned. The reason for the general
lack of specific targets in the consensus, with the possible
exception of free reserves, which were by far the most pre
dominate target, was lack of agreement over what the optimum
target of monetary policy should be. Not only is this clear
from the conflicts found in the Minutes: it was also frankly
stated by System spokesmen that one could not rely on one
^See footnote 83 below.
175
single target variable.^ While this may be true, it implies
that the FOMC and Board staff have thoroughly examined
available alternatives and this claim cannot be supported
(nor refuted) by reference to the Minutes from 1951 through
1961. The point is, however, that lack of examination of
alternatives, lack of investigation of the effects of System
actions on bank portfolios and the public and lack of agree
ment as to immediate targets resulted in the use of such
statements as "greater restraint," "less ease," "color,"
"tone," and "feel" of the market or in the extreme, leaving
it up to the Manager's discretion.
Thus the Manager had a considerable amount of "lee
way" in choosing the target or targets he desired. With
several possibly conflicting targets and guides he could not
achieve them all, but he was given reasonable grounds for
explaining why some suggested targets were not achieved.
This latitude, plus possible "errors" in projections of
float, gold flow and Treasury cash balances among others,
provided an opportunity to explain deviations in policy and
may account for the fact that the Manager never had to ex
plain his actions in terms of the specific statements of thei
Committee, and was hardly ever questioned at all in his ac
tions.® Those instances when the Manager was explicitly
7Review of the Annual Report of the Federal Reserve
System for the Year 1960. p. 3l.
8Ibid.. p. 32.
176
given discretion to act on his own, given "leeway," or told
to "play it by ear," obviously reduce the power of the Com
mittee over the Manager and its ability to critically evalu
ate his action.
This evidence, combined with testimony of the Manager
that:
precise measurements in terms of numbers is not really
the kind of guide that I would find as satisfactory as
indicating a general degree or direction of restraint or
ease as the case might be, and the considerations of
interest rates and the like9
raises some questions not only as to the autonomy of the
Manager but to the FOMC*s conception of the monetary process
and its ability to accomplish its purpose.
The Minutes
Before using the Minutes as evidence of the hypo
thesis to be examined here, three statements made by the
FOMC in 1961 concerning the usefulness of the Minutes as a
source of information to outsiders should be noted.
1. A verbatim transcript of FOMC meetings was not
made--the Minutes were a compilation (except when
a member submitted a written statement) by a group
of rapporteurs, or roughly, reporters. Thus in
many cases, quotations are not as "direct" as they
might appear.
2. Point one notwithstanding,
9Ibid.. p. 31.
177
The Minutes contain a full account of the pro
ceedings at the meetings, including the partici
pant's statements. However, a person will fre
quently compress his remarks by omitting matters
of background perspective that are fully under
stood by others present at the meeting, but which
might lead to misinterpretation on the part of one
merely reading the minutes without the advantage
of having been present . . .
3. The minutes contain statements by individual mem
bers which are often made to raise points of dis
cussion or to probe the possibilities of different
courses of action in implementing System policies.
These statements do not necessarily represent a
firm view of the individual member ... 10
These comments have some bearing on the use of the
Minutes as evidence, although they are not as restrictive as
they first appear. (l) The fact that the Committee main
tains that the Minutes contain a full account of the pro
ceedings, including the participants' statements, means that
the rapporteurs' statements may be taken as valid, espe
cially as all members have an opportunity to ammend the rec
ord before it becomes official. (2) One might question what
'•background perspective” refers to and whether such matters
are indeed "fully understood." There is no need to press
this point. (3) It is fairly clear where individuals raise
points of discussion or suggest different courses of action
and where firm statements of opinion are made.
It must also be remembered that the sheer volume of
the Minutes requires some selectivity of examples and that
lOMinutes of the Federal Open Market Committee, pp.
69ff, August 8, 1$?>1.
178
extensive support for a given point in terms of direct ref
erence is not feasible due to the space limitations of this
analysis. Moreover, some of the points mentioned are not
mutually exclusive, and the evidence may support more than
one argument. Appendices D through G summarize much of the
relevant information from the Minutes.
Restrictions on the Manager's Operations
There were several important ways in which the Man
ager's discretion and autonomy were circumscribed during the
period under review. However, at least one of the controls
over the Manager was illusory, and the complaints on his
autonomy and attempts to restrict the activities of the Man
ager are at least indicative of the fact that the FOMC real
ized the latitude he possessed. The fact that such com
plaints and attempts to control the Manager's activities
appear throughout the period indicate that the FOMC was
somewhat unsuccessful in their criticism.
In this section, the following points will be dis
cussed: (1) For some periods of time between 1951 through
1961 the Manager was given definite, explicit instructions
regarding what he was to accomplish. For example, during
|l95l, he was to hold bond prices and yields at a specific
level. (2) The Manager was subject throughout the period to
supervision by the FOMC and the New York Bank management,
and, while it existed, the executive committee. (3) There
179
were some direct complaints concerning the Manager*s auton
omy; some feeling he acted as more than an agent. (4) The
reasons given for abolishing the executive committee in
volved concern over the lack of control by the FOMC over the
Manager. (5) In some cases the Manager specifically asked
the FOMC for advice on what he was to do.
Explicit operational instructions to the Manager
The key word here is "operational," in the sense that
an objective measure of whether or not, or to what degree, a
certain policy or instruction has been accomplished, exists.
Maintaining the price or yield of a certain Government se
curity maturity and even a certain level, range, or direc
tion of movement in free reserves, total reserves, or the
money supply are considered operational instructions. Taken
in this manner, the term "operational" would not apply to an
instruction to "ease" or "restrain," "play by ear," "keep an
even keel," "maintain a certain color, tone or feel," to
"continue the present policy" or "maintain the status quo."
It is indeed important, although not relevant here, that in
terms of open market operations some of the operational
guides suggested above are more easily achieved than others;
ja level of total reserves is more easily achieved than mov-
I
ing the money supply, however it is defined. A distinction
must also be made between failing, for some reason unfore
seeable at the FOMC meeting, to achieve a specific opera-
180
tlonal objective or target (this becomes more likely the
further removed the objective is from pegging or support)
and relying on whatever variables happen to be moving in the
"correct" direction, as evidence that a somewhat ambiguous,
non-operational instruction has been achieved. Appendix G
provides several relevant examples of the unexplained use of
various indicators at various times to support a contention
that "ease" or "tightness," etc., had been achieved.
It is clear from the Minutes, if not from other
sources, that during the period 1951-1961, several opera
tional targets were used in instructing the Manager, al
though they were not used consistently or continuously and
there was little if any justification for their use. A
brief chronology of the operational guides used indicates
that during 1951* the prices and yields of bonds were to be
pegged, and that from 1952 to late 1953, there were no
operational guides used, although there was some concern
over the securities market. From 1953 through 1961, free
reserves (or net borrowed reserves) were the predominant
operational guide, with the money supply occasionally used.
In 1961, emphasis began to be placed on maintaining certain
levels of interest rates.
There were primarily three operational guides em
ployed during the period: the price and yield of Govern
ment securities, free reserves, and the narrowly defined
money supply. Of these three, only maintenance of the price
181
and yield of certain Government securities was truly opera
tional in the sense that the objective was definable and un
ambiguous. That is, not only were there differences of
opinion with regard to the merit of free reserves (or net
borrowed reserves) and the "correct" definition of the money
supply (broad or narrow), but also these two objectives
usually were either accompanied by qualifying statements
(see appendices D and F), or, in the case of the money sup
ply, definitely of secondary importance when it appeared in
the consensus.11' And, if one considers the continuing in
struction to "correct a disorderly (securities) market" as
pertinant, even this is ambiguous and undefinable, as deter
mination of what constituted a disorderly market was left up
to the Manager (although he had to notify the FOMC before he
acted).
Prices and yields
The Accord did not result in complete abandonment of
the Government securities market by the Federal Reserve--in
fact until November 14, 1951, the System continued to sup
port price levels of all maturities, an operation which
jusually resulted in clear-cut instructions to the Manager.
For example on March 3, 1951:
lllbid., pp. 34 and 37ff, June 14, 1960.
iZlbid.» July 15, 1958 through July 25, 1958 (all
telephone meetings on the bond crisis of that year). See
especially, p. 4, July 18, 1958.
182
Mr. Williams then moved approval of the instruction to
the Federal Reserve Bank of New York proposed by Mr.
Eccles except that the price below which the restricted
issues would not be permitted to decline be fixed at 99.
This motion was put by the Chair and carried unani
mously, and Chairman McCabe advised Mr. Sproul by tele
phone accordingly.13
Even in this period, however, instructions were not always
so clear, especially during periods in which the Treasury
Was not "in the market." Thus on April 9, 1951:
... it was agreed that, beginning on Monday, April 9,
1951, the New York Bank would be guided by the existing
instructions of the executive committee to maintain an
orderly market, it being understood, however, that the
Bank would "play by ear" having in mind that prices
would be permitted to decline but that, depending on the
pressures that might develop in the market, it might be
necessary to be an aggressive rather than passive factor
in the market.14
In general, though, open market operations were car
ried out with a view to maintaining specific prices. From
June, 1951 to November, 1951, this meant that the bill rate
should not be allowed to rise far enough to interfere with
the 1-7/8 percent rate on Treasury certificates and the rate
on the longest-term restricted issues was not to be allowed
to fall below 96-3/4.^
November 14, 1951, marked the termination of outright
support and instructions in terms of specific prices of
Government securities. The Account Manager, Mr. Rouse
^-^Ibid., p. 6, March 3, 1951.
l^Ibid., p. 7, April 5, 1951.
1-5ibid., p. 3, June 27, 1951; p. 9, August 8, 1951;
and p. 9, September 25, 1951.
183
explained,
It was his view that in the light of existing conditions
it should be the policy of the committee to conduct its
operations on the basis of the accord reached with the
Treasury last March and that if long-term bonds should
decline below 96-3/4 in response to market influences
they should be allowed to do so as long as the movement
was an orderly one. There was unanimous agreement with
Mr. Rouse's statement.16
"Support" was replaced by "neutrality" which at that time
was defined as a policy
. . . under which market forces of supply and demand
are permitted to have their effect with a minimum of
System intervention except to the extent necessary to
promote orderly market conditions.17
Free reserves
With the exception of one or two references to spe
cific interest rates,18 the major operational guide used by
the Federal Reserve from 1952 through 1961, was free re
serves. As noted above, however, this guide was not used
continuously or consistently, was the object of some criti
cism within the System and its use was never, at least in
the Minutes. justified or explained. This latter point is
important for there was a fair amount of discussion over
the validity of the "bills-only" policy and the use of the
money supply as a target, but only occasional references to
j 16ibid., Mr. Rouse, p. 10, November 14, 1951.
|
17ibid., p. 12, February 29, 1952.
^For example, the entire meeting of June 11, 1953
was devoted to a discussion of the stability of interest
rates and bond prices.
184
free reserves in these terms. Other qualifications of the
use of free reserves as an operational target have to do
with the fact that in many cases they were of secondary im
portance, that although exact free reserve levels were
occasionally specified, deviations (often of significant
magnitude) from these levels were not questioned, and fi
nally, that if free reserves were only used as a guide and
not a target, they were not really of operational impor
tance, because the Manager was not bound to obtain any par
ticular figure or range of free reserves.
As free reserves were often included in one manner or
another in the discussions and the directions of the FOMC,
and as they will be discussed separately below, it would be
of little use to reference all occasions when they were used
operationally. Actually there were less than fifteen meet
ings from 1952 through 1961 in which the Manager was given
unequivocal instructions in terms of a range or trend in
free reserves.
Money supply
Very little attention was paid to the money supply as
jan operational goal, although apparently a three percent
jannual growth rate was considered as an ultimate target in
early years. Evidence for this is found in direct state-
^ Minutes of the Federal Open Market Committee, p.
52, May 6, 1956.
185
ments in the Minutes and occasional references to the fact
that many projections of free reserves were based on a three
percent growth r a t e .20 While this may have been part of the
background information available to all members, the manner
in which such information was presented speaks against this,
and in any case the Manager was not directed to achieve such
a figure. Moreover, statements of the FOMC regarding the
money supply do not appear until 1957-1958, and then usually
imply that it must be increased with no specifics involved.
Finally, the Manager and the Vice Chairman both felt that
month-to-month changes in the money supply were not opera
tional. 21-
Interest rates
In the latter part of 1960, interest rates again
began to achieve importance as a target of open market oper
ations as international capital flows drew more attention.
Directives to the Manager were not issued in terms of achiev
ing a certain short-term rate, but they did set limits
below which rates should not fall or urged that pressures
should be applied so that rates would rise. Even in this
jperiod interest rates were not the sole preoccupation of
policy (especially during the 1960-1961 recession) and
20ibid., Mr. Martin, pp. 9-10, November 23, 1953; Mr.
Sproul, p. 7, December 28, 1954.
2libid., Mr. Rouse, p. 43, February 9, 1960. See
also, footnote 73 below.
186
guides were not always completely operational, but they did
provide more guidance than most of the direction given from
1952 through 1960.
Supervision of the Manager
A second area of control over the Manager was his
supervision by the FOMC, the executive committee (while it
existed) and the Federal Reserve Bank of New York.
In actual practice, the eleven o*clock call served as
a measure of control over the autonomy of the Manager.
Daily at 11 a.m. a member of the Board or one of the eco
nomic Advisors to the Board, one of the presidents currently
serving on the Committee, and the Manager of the Account or
one of his officers engaged directly in supervising opera
tions of the trading desk, met to discuss the day's plans as
outlined by the trading desk. At this point the actions
suggested by the Manager or his assistant might be ques
tioned by the others involved regarding how well the planned
course of action fit into the consensus or the directive.
This device and the daily telegram outlining the discussion
to those not directly involved would seem to provide con
siderable control. However, based on what is known of the
period 1951 through 1961, there does not appear to have been
a clear, consistent, and tested conception of the process by
which open market operations and other observable market
phenomena affected desired bank portfolios and the public
187
and no clear statement of FOMC objectives. In such a case
only judgment, not analysis, could be used to interpret
current market information (which might be misleading on a
day-to-day basis anyway) and relate this to the consensus
and the directive. Moreover, under these circumstances, the
Manager could refer to a considerable number of market
occurrences which suggested to him that the action he pro
posed was an appropriate interpretation of the prior FOMC
meeting consensus.
It would thus seem that the judgment of the Manager
must ultimately have been accepted or the will or judgment
of the Board or the president imposed on the Manager. As no
records are kept of these calls, it is impossible to deter
mine how often such conflicts occurred, the Manager being
overruled. The Minutes reveal that the Manager's actions
were questioned less than five times during the eleven year
period, and in the one case where a member refused to "ap
prove" past actions (he did not fail to "ratify" them), the
member stated that he did not inform the Manager of his
feelings earlier because he did not wish to impose his
views on the M a n a g e r .22 The general feeling was that the
Manager was "on top of the market," and therefore was the
lonly one really qualified to make day-to-day decisions.
22ibid., Mr. Robertson, pp. 4ff, November 22, 1960.
See also: Mr. Martin, p. 31, June 11, 1953, and Mr. Sproul,
p. 5, September 15, 1952.
188
Even if the Manager did take comprehensive notes,
another problem arises from the fact that, while there may
have been agreement about the direction of policy, fre
quently there was disagreement concerning the methods of
realizing the direction and magnitude of policy c h a n g e s .23
Disagreement over whether policy should be based on the
money supply, interest rates, total reserves, free reserves,
"color," "tone," and "feel," etc., grew over the years, and
there were few attempts to reconcile or to summarize the
conflicting objectives, although free reserves were fre
quently used as a target objective. The more difficult the
agreement on an objective appeared to be, the more it was
stated in terms of "color, tone, and feel^" or "play it by
ear." These disagreements concerning methods, perhaps more
than disagreements over direction, resulted in considerable
latitude for the Manager.
Many of the comments in the Minutes regarding super
vision of the Manager by the FOMC (and there was little
said) were attempts to restrain his actions, with the im
plication that he was not completely within their control.
Such statements were made prior to the abolition of the ex-
jecutive committee, most of them occuring in the spring and
(early summer of 1953, during the bond crisis of that period.
i
The first real concern regarding the Manager occured
23ibid.« Mr. Martin, p. 7, August 23, 1955.
189
in the March 1, 1953 meeting, in a report of a subcommittee
investigating the bond market. It stated:
The Subcommittee finds many anomalies in the struc
ture and organization of the FOMC, particularly ...
the delegation of the management function to an indi
vidual Federal Reserve Bank. It recommends that the
Committee re-examine and review its present organiza
tion, and in particular that it consider the advantages
and disadvantages that would ensue, were the Manager of
the Open Market Account made directly responsible to the
FOMC as a whole, and not, as at present, responsible
through the Federal Reserve Bank of New Y o r k .24
While this recommendation was never acted upon, it was made
clear in the next meeting regarding this recommendation that
the Manager was to act to correct a disorderly situation
only after a full vote of the executive committee. Although
it remained the Manager's responsibility to determine what
constituted a disorderly market, he was required to convince
the members of the executive committee that such a state
existed before he could act--a fact that might have been im
portant in the following few months.
And yet, on April 24, 1953:
Mr. Evans stated that he felt the understandings in
this connection should be clearly spelled out in the
minutes of the meeting; . . . that the System account
would not operate in the market except to correct dis
orderly conditions or for credit reasons and that ac
tions in either case would be taken only after the
executive committee had given careful consideration to
existing conditions and had specifically authorized such
action. . . . Chairman Martin stated that while the
minutes of the meetings of the executive committee could
! be written to bring out fully the understandings
reached, he did not feel that the instruction given to
24Ibid., p. 29, March 1, 1953
190
the New York Bank could be changed in the manner sug
gested by Mr. Evans since it was essential that there be
flexibility in order to carry out the general credit
policy of the committee.25
On June 11, 1953, the Manager was criticized for
failing to inform the executive committee that a disorderly
situation existed in the bond market, even though there was
some question that disorder had existed. With the exception
of the discussions relating to the abolition of the execu
tive committee and complaints regarding the validity of the
directive, no other remarks concerning supervision of the
Manager appear.
The Manager's, authority
There were few direct complaints that the Manager had
exceeded his authority. One such complaint has been noted
in regard to the bond crisis. Other complaints or criti
cisms will be noted below on the basis that all were made by
an individual member and did not result in action by the
FOMC to limit the scope of the Manager. The only instance
in which action by the Manager was noted to have resulted in
measures confining his activities was in December, 1953,
when the Account had engaged in "swapping" securities, an
activity felt to be contrary to the continuing statement of
operating policy, as "swaps" were not for the purpose of
releasing or absorbing reserves.
25Ibid., pp. lOff, April 24, 1953.
191
The executive committee
Prior to June, 1955, FOMC meetings were held quar
terly, with the bulk of operating decisions made by the ex
ecutive committee which met at least once a month. There is
no doubt that the organizational structure that included the
executive committee involved difficulties in communication,
especially since greater attention was paid to monetary
policy after the Accord. There may also have been some
political or personal reasons for the actions taken. In any
case, what is important here is that the executive committee
was another link in the chain of command from the FOMC to
the Manager and thus removed him somewhat further from FOMC
control. This was certainly part of the reason, or at least
justification for the action taken. It was noted above that
the organizational subcommittee in March, 1953, suggested
that the Manager be made more directly responsible to the
FOMC. This recommendation did not result in any immediate,
specific action, but it was brought up in September, 1953:
CMr. Johns2 Let•s give the Manager of the Account
all the discretion he must have in order to operate
the account but let's not put him in the position of
bearing the entire brunt and let's not put the entire
Open Market Committee in the position of saying we have
put the Manager in a position of responsibility and of
our just being a defender of the fact that the Manager
has carried out our instructions. ... I am aware of
the fact that the executive committee of the Open Market
Committee is a non-statutory body. I have some doubt
about the degree of discretion and policy making which
can be, or at least ought to be, delegated to the
192
executive committee.26
It was not until March of 1955, however, that a con
certed campaign was carried on to eliminate the executive
committee— perhaps due to the recession of 1953-1954, which
called the System into action after the September meeting.
As the comments of the March 2, 1955 meeting are quite long,
portions are produced in Appendix E. Officially the FOMC
voted dissatisfaction with the organization of the System.
It was expressed in the meeting that the Manager was se
lected by the New York Bank, was an officer of that bank,
and was more accountable to that Bank than to the FOMC or
the System as a whole. It was felt that more direct control
over the Manager, other than the ability of the FOMC to dis
charge him, was needed. No decision was made at that meet
ing, and the vote of dissatisfaction was quite close.27
After comments were made concerning the elimination
of the committee in April and in May, action was taken in
June with little discussion, and only a few expressed reluc
tance or disagreement. The change appeared to have been
purely organizational. The Manager was still selected by
26ibid., Mr. Johns, pp. 14 and 19, September 24, 1953.
27iiChairman Martin observed that he did not feel that
jit was desirable for either the executive committee or the
FOMC to run an operation of this type as it had today, where
important actions were voted without having a meeting of
minds of a substantial majority of the members." Ibid.,
p. 5, June 11, 1953. Apparently Mr. Martin had changed his
attitude by June, 1955.
193
Che New York Bank, and as will be shown below, was not more
strictly controlled, but was explicitly given more latitude.
Requests for advice
Requests for advice or guidance were only infre
quently made by the Manager, perhaps because he received no
answers (at least no recorded answers) or was told to "play
it by ear," or to do the best he could. Most of these re
quests were made at the year's end, when many conflicting
factors affecting reserves were operating. One would have
to assume that he made up his own mind in such matters, and
in any case, his decisions were accepted without criticism.28
The Discretion of the Manager
For the vast majority of the period 1951 through
1961, the Manager enjoyed fairly broad discretion of action.
This does not mean that he could or did ignore the wishes of
the FOMC or the executive committee nor that he acted coun
ter to their wishes. But as his instructions were gener
ally quite vague, as there was disagreement over goals and
especially actions to be taken to achieve goals, and as
committee members, due to lack of time or for other reasons,
were not in agreement on the monetary process (what tools
and targets should be used when), the Manager had consider-
28Ibid.. p. 37, August 23, 1955; and Mr. Rouse, p.
14, March 29, 1955.
194
able latitude in the extent to which he achieved objectives
and in his ability to explain his actions.
The issues to be discussed concerning the Manager's
discretion are: (1) In some cases the Manager was given
explicit instructions to act as he saw fit. (2) Occasion
ally no advice or instructions were given the Manager and/or
there was no consensus. (3) In the majority of instances
the Manager was instructed to undertake vague or non-
operational (in the sense used here) actions. In this cate
gory would be instructions to continue the present policy,
since it was not always clear what the current policy was.
(4) When issued vague or no instructions the Manager often
explained his actions by reference to other variables or to
non-operational variables in order to escape criticism. An
example of this might be a statement to the effect that
while free reserves had risen and short-term interest rates
had fallen, the "feel" of the market remained tight (see
Appendix G). (5) The terminology used in directing the Man
ager and in general discussion was susceptible to several
interpretations--a fact occasionally recognized by FOMC mem
bers themselves. (6) Occasionally there were complaints
about the lack of control over the Manager or his actions,
i
revealing his latitude to act with discretion. (7) Expand
ing point (6), with only one exception, the Manager's ac
tions were always approved, and his actions were usually
195
defended when there were complaints. (8) The Committee,
usually the Chairman, often asked the Manager for advice,
particularly on how to word the consensus and directive so
that he might accomplish what the group desired. (9) Some
what complementary to point (5) was the fact that the direc
tive was attacked as a poor means of communicating between
principle and agent and that it did not specify what the
Manager was to do, nor did it accurately reflect the atti
tudes of the FOMC. (10) Not only is there question as to
what the FOMC believed regarding their theory of monetary
policy or monetary control, there is even less evidence
suggesting on which premises the Manager operated. (11) The
Manager and his spokesman definitely did not want instruc
tions in specific or operational language. (12) It was
brought out a few times that the words used in instructions
to the Manager and in the directive were of little conse
quence, so long as everyone understood the general approach
to be used. (13) There were several meetings, quite under
standably, when the Manager was not present, and hence he
had to rely on his representative for information on what
was decided. This is important if the sense of the meeting
was emphasized rather than operational instructions. (14)
The Minutes, upon which the Manager was to rely, took at
least ten days to prepare. This meant the Manager had to
rely on his own notes or his representatives' notes until
they were available.
196
Explicit approval for the Manager to act on his own
In actual practice, the conceptual distinctions be
tween no instruction, an instruction to do as one sees fit,
and vague— that is, non-operational instruct ions--blur and
become somewhat artificial. When does an instruction become
so vague or contradictory as to be the same as no instruc
tion? Might there be no consensus because the direction of
discussion is so clear that none is needed? Even with no
consensus, is the Manager completely on his own? The dif
ferences are ones of degree, but in any case they all sup
port the hypothesis that the Manager enjoyed great latitude.
As most of the instructions to the Manager between 1951 and
1961 fit into one of the three categories to be discussed
here, there are far too many examples to be included in the
actual text. Appendix D provides a brief statement of the
consensus reached at each meeting--a far more accurate
statement of what the Committee felt the Manager was to do
than the directive. In many of the cases where no consensus
is recorded, the majority of prevailing views as expressed
by the person in charge follow. As many statements which
would otherwise be found in footnotes or direct quotations
are found in this Appendix, and as it does provide a general
i
statement of the attitudes expressed in all FOMC and execu-
Give committee meetings from 1951 through 1961, it will pro
vide the basic reference for the assertions made, unless
otherwise specified.
197
On a few, brief occasions during the period tinder
review, the Manager was given complete, unilateral discre
tion to act as he saw fit to prevent disorderly, or poten
tially disorderly situations in the Government securities
market. The most notable example of this was during the
Middle East crisis of 1958, when the Manager was permitted
to purchase as much of any security as he felt necessary--a
notable exception to the prevailing , , bills-only" policy.
Although an important question with regard to System actions
is whether or not, or to what degree they are market vs.
economy oriented, those instances where the Manager was
given complete autonomy of action to settle a disorderly or
potentially disorderly situation in the Government securi
ties market were generally exceptions to normal policy
operations. However, as some important issues were raised
in these exceptional periods, they cannot be categorized
simply as exceptions and thus forgotten.
An important area of discretion or autonomy was di
recting the Manager to use his judgment, and giving him re
sponsibility for the color, tone and feel of the market--a
responsibility reiterated throughout the period studied.
While color, tone and feel do not seem important vis A vis
jchanges in reserves, interest rates, or the money supply,
they actually play an important, if not clearly defined
role. As color, tone and feel were continually defended as
198
being more important than statistics,^ giving responsibil
ity for these factors to the Manager not only meant that he
was also given the task of determining what the terms meant
operationally, if anything, but that the Manager could go
so far as to act counter to the wishes of the FOMC, defend
ing his actions on the basis of color, tone and feel.
An early, but fairly complete statement of this con
tention was made in 1954:
Chairman Martin said that the discussion dealt with
one of the most difficult problems before the committee,
that is, with "tone” of the market. In Chairman Mar
tin's view it was necessary for the committee to depend
on the judgement of the Manager of the Account for the
feel of the market at any given time. He stated that
he had been impressed recently with the fact that the
manager of the Account had at times been operating on the
basis of his , , feeln of the market and that in his
(Chairman Martin's) judgement this had resulted in
better handling of the System's operations than when
there was an attempt to adhere closely to projections of
various figures affecting reserves in carrying on opera
tions of the System account.
This was reiterated a month later:
. . . rely on the Manager of the System Account in a
period such as the present, having him base operations
on the "feelM of the market, within the limits of over
all p o l i c y . 3 0
In October, 1956, a similar attitude was expressed
by Chairman Martin regarding the consensus. HThe question
concerned details of operations that revolved around the
word 'feel.' It was very difficult for the Committee to
29see Appendices D and F.
30Minutes of the Federal Open Market Committee. Mr.
Martin, p. 10, October 20, 1^54 and p. £, November 23, 1954.
199
furnish guides to this, the Chairman said, ... 1 1 Con
cluding the statement it was expressed that the Manager
would have to use his judgment to determine whether there
would be free reserves or net borrowed reserves, the FOMC
not being concerned with the choice. "This is what the Com
mittee meant by speaking of the 'feel of the market.'»'3l
The Manager of the account apparently understood and
agreed with these statements as he expressed in October,
1957, in one of those frustrating comments that suggests
much, but which does not carry through:
Mr. Rouse said that he thought further discussion of
this question might be helpful. His tinderstanding of
the Desk's responsibilities was that operations should
depend upon the judgement of the Manager of the Account
based not only upon the figures but also upon the feel
of the market. He pointed out that the latest data
available to the Desk are two days late. In managing
the Account, the actual figures for two days earlier
and the projections are used in evaluating the influ
ences that are at work in the market ... He suggested
that the most important factor in regulating credit
conditions in accordance with Committee is its judge
ment as to the nature of the demand and supply influ
ences shaping the market at any particular time.
Mr. Hayes said that he thought this was an interest
ing point. Mr. Rouse had correctly indicated that many
factors should be considered, but there was the question
how much weight to give to projections, to past per
formance, and to other factors.32
One final aspect of this segment of the Manager's
discretion is the fact that it was fully recognized,
3llbid.. Mr. Martin, p. 31, October 16, 1956. See
also: Mr. Martin, p. 7, April 24, 1957; pp. 4lff, May 7,
1957; pp. 55ff, September 9, 1958; pp. 40ff, January 27,
1959; p. 31, June 16, 1959; and pp. 59ff, March 7, 1961.
32ibid., pp. 6ff, October 22, 1957.
200
although perhaps forgotten at times, that "He did not know
tiow to deal precisely with terms such as color, tone and
feel of the market, Such words might mean one thing to him
and something different to others."33
I A second area in which the Manager was given explicit
instructions to act on his own may be illustrated by refer
ence to occasions when the Chairman, speaking for the FOMC
or executive committee specifically asked the Manager to
state what instructions were necessary for the Desk to
o p e r a t e .34 The most notable example of this occurred in the
summer of 1958, during and after the bond crisis and the
intervention into the crisis by the System. The Manager was
to determine whether a disorderly market existed and then
convince the FOMC that this was true. Once disorder was
established he was to be free to act in correcting it.
What was important about the 1958 crisis was the attitude
of the FOMC, an attitude expressed in a statement by the
President of the New York Bank: "Mr. Hayes said that
although he had never quite understood what a disorderly
market was, he thought the present market was close to
it."35 once disorder was established the Manager was given
33][bid.. Mr. Martin, p. 59, March 7, 1961; pp. 47ff,
January lZTJ 1961.
34ibid., pp. lOff, July 7, 1954; p. 44, September 1,
1959.
35Ibid., p. 4, July 18, 1958.
201
complete freedom to correct it and he informed the FOMC
when, in his opinion, it was corrected. Having been told on
July 29, 1958, to recapture redundant reserves created by
the intervention, the Manager informed the FOMC on August 4,
1958, that they had been re-captured. The Manager then was
jgiven quite wide discretion, for as he himself stated, he
was working without a directive. On the basis of the
"nature of the market," he was told to play it by ear.^ As
Che Manager then left on vacation, this instruction con
tinued for at least a month--more if the consenses are any
indication.
A third area illustrating broad latitude overlaps
somewhat into the categories of no instructions or very
vague ones. These situations were ones in which the Manager
was told to use his judgment ("Turning to the level of
reserves, Chairman Martin stated that it appeared that the
Manager of the Account would have to use his own judgement,")
or in which he would have to rely on the Minutes or be
guided by the discussion that had taken p l a c e .37 Another
area of judgment for the Manager to act as he saw fit
resulted from instructions to continue the present policy.
When such a policy was operational (quite seldom) no
problems existed, but in many cases, as may be seen from
•^Ibid.. entire meeting of August 4, 1958.
3?Ibid.. Mr. Martin, p. 44, September 1, 1959.
202
Appendix D, just which policy was to be continued was
unclear. For example, this instruction might mean to con
tinue what actually had been done since the last meeting,
or to continue what had been requested at the last meeting,
but which unanticipated circumstances p r e v e n t e d .38 These
cases do not represent complete delegation of authority to
the Manager, but as the Minutes were at least ten days late,
the Manager was in effect relying on his notes of the meet
ing or his own judgment.
Resumption of operations in all maturities of Gov
ernment securities in February, 1961, resulted in another
area where the Manager was given virtually neither restraint
nor instructions. The special authorization passed on
February 7, 1961, was initially limited in amount and pur
pose. The Manager could only buy up to $400 million of
securities maturing in less than five years, and $100 mil*
lion maturing between five and ten years and purchases other
than bills were to keep short-term rates up, but not
necessarily to nudge longer-term rates down. By April, 196],
the Manager was free to move in all maturities, and amounts
were no longer specified. The Manager made it clear that
he wanted his authority noted in the Minutes. In this
particular case there was rather strong opposition from a
few individual members of the FOMC to granting the Manager
38Ibid.. Mr. Robertson, pp. 59ff, February 7, 1961.
virtually complete autonomy— but to no avail. One discus
sion at the July 11, 1961 meeting expresses the point quite
well. Note that the Manager was absent from the meeting:
In further discussion, Mr. Hayes said the main
reason for preparing and distributing the July 7 memo
randum was that he thought there was not sufficient
clarity in the Committee's instructions to the Desk and
that the Desk had been given almost an impossible job
in deciding how much to do in the longer term area . .
In reply, Chairman Martin said that while he had a
great deal of sympathy with the problems of the Desk,
sometimes he felt that the Desk did not have quite
enough sympathy for the problems of the Committee. . .
No one, he said, was more sympathetic than himself with
the problems of the Desk; no one, he felt, had inter
fered less with the Desk. However, the Desk had to
assume some sense of direction, and not only at the
point when it wanted to accommodate itself. . . .
In response to a question by Chairman Martin, Mr.
Marsh said that he understood the basis of procedure
quite well. The Desk would continue to have its diffi
culties, when it got into special situations, in
deciding exactly what it could do. However, the Desk
would try.39
A final area of discretion given the Manager was
with regard to which dealers with whom he would transact
open market operations. Although it was hoped that such
transactions would be on the basis of "best price," the
final decision, at any time, was up to him.^O
No instruction or statement of consensus
Several of the entries in Appendix D note that no
consensus was reached in the FOMC or executive committee
39Ibid.. pp. 59ff, July 11, 1961. The same atti
tudes were expressed through the year 1961.
40lbid.. p. 43, March 4, 1953.
204
meetings. At the same time, most of these entries are
followed by a general statement of instructions. This
apparent conflict can be explained by the fact that even in
most of the cases where a consensus or instruction was not
specifically stated (perhaps the fault of those responsible
for preparing the Minutes). there were some general con
cluding remarks made by the Chairman or his representative.
While these statements were not presented as representing
a consensus or an instruction, they did, apparently, carry
some weight. Also, even if there were no explicit instruc
tions to the Manager, a consensus was probably made in the
sense that the Manager formed his own conclusions on the
basis of his impressions and his written notes. This latter1
case, of course, supports the general contention being made
here, and would be further strengthened on those occasions
when no consensus was reached (or not recorded) and the
Manager was absent.It is also quite probable that for
all practical purposes, some of the instructions to con
tinue the present policy represented no real consensus or
instruction, even when such directives also included con
sideration of other factors. Finally, instructions to the
Manager to use his own judgment or to act on the basis of
4-lAugust through October, 1958, represents a period
of no consensus followed by the absence of the Manager and
no consensus, followed by instructions to continue the same
(that is the previous) policy. Such instructions would
appear to lack operational significance as there was no
stated policy to follow.
205
what was said at the meeting represents a non-consensus.
It may even be that some of the actual statements of con
sensus or instructions to the Desk were tantamount to no
consensus, in that the instructions were meaningless or
non-operational. Illustrations of the absence of instruc
tions or consensus would be meaningless. Appendix D pro
vides examples of the contentions made here.
Vague or non-operational instructions
The majority of instructions to the Manager or the
Desk fall under the classification "non-operational." Some
examples of this have already been given, but appendices D
and F provide more complete and comprehensive examples. The
fact that instructions were occasionally given in terms of
ranges or levels of variables is not, per se, considered to
be non-operational, due to the lack of control by the System
over some of these variables. Rather, what is emphasized
are the many qualifications for achieving those levels and/
or the general manner in which instructions were issued.
Figures were de-emphasized and even ignored. Instead,
policy actions were characterized in non-operational, verbal
terms such as "ease," "tightness," "even keel," "slop,"
"topping," "restraint," "status quo." "neutrality," "tone,"
"color," "feel," and "behavior." These words were essen
tially undefined (see Appendix C for a notable exception)
and subject to changes in meaning over time. As a result,
thedecisionastowhatJthewordsmeantandwhether~ornot__
206
the instructions had been achieved was up to the Manager.
Instructions to continue present policy would also fit into
this category, further extending the illustrations.
Explanations of policy actions
On the basis of the type of instruction issued to the
Desk, one might expect that the Manager would explain his
actions and describe the markets with which he was concerned
in similar non-operational terms. This was precisely the
case. The result of this was that it was difficult to
criticize the Manager's actions and he was in effect given
greater latitude in which to operate.
Before illustrating the point made here, it must be
noted that the Manager did not always report verbally on
what he had done or on the state of the market, especially
in the early periods under study. He did file a written
report which was not included as part of the Minutes. At
the same time, it is not suggested that all or even any of
the comments made by the Manager in explaining his actions
were rationalizations or excuses. The nature of the Man
ager's task, even under the most ideal conditions, forced
him to deal with non-predictable factors.
As will be discussed below, the Manager particularly,
and some FOMC members in general, were opposed to the state
ment of instructions in specific operational terms. This
not only affected the nature of instructions given to the
207
Manager but also the characterization of policy or actions
which had occurred, and resulted in a minimization of
reference to and the importance of operational variables.
Surprisingly, perhaps, free reserve figures were often
given little emphasis in reporting what had been done,
although they were the predominant operational variable
mentioned in instructions. If anything, interest rates
seemed to be the most important variable mentioned, although
they were secondary to verbal characterizations such as
"tightness" or "ease."
Not only did the Manager usually receive his
instructions and report his actions in non-specific terms,
he also relied on non-operational characterizations to
explain why something had or had not been done. Thus, even
if he was told to achieve some level of free reserves, he
could point to some other factor to explain why that level
had not been achieved. In terms of his independence and
latitude, this is the crucial point. Appendix G, a collec
tion of brief statements and paraphrases of such explana
tions, provides considerable evidence for this contention.
Interpretations of wording
It need not be stressed too strongly here that the
wording used to instruct the Manager and to describe policy
was unclear and non-operational. The confusion over what
"short-term" meant to the Committee (Chapter III) and the
208
classic statement in the January, 1955 meeting are
indicative.
Chairman Martin referred to Mr. Rouse's comment that the
market had been 'tight but not too tight,' and he
inquired whether it would also be correct to say that it
had been 'easy but not too easy.' Mr. Rouse responded
that this statement also would apply.^2
There is no question that outsiders had difficulty in
understanding System statements and publications for these
reasons. By now, there is some evidence that there is
ambiguity within the System as well. (See pages 198 to 201
and Appendix D.) The point to be made here is that differ
ent interpretations did exist (with fairly obvious impli
cations for managing the account), that this was at least
partially recognized, and that some attempts were made to
develop more or less standard interpretations, but that
these attempts were not particularly successful. Mr.
Sproul's statement in January, 1955 (Appendix C) illustrates
this contention— although it is perhapd the clearest state
ment available, it was not adopted, and in any case it is
non-operational, although not as vague as some guides. The
terms to which he referred include "ease,1 1 “restraint,"
"tightness," "color," "tone," "feel," "behavior*" "even
keel," "status quo." "neutrality," "topping" and "slop."
^ Minutes of the Federal Open Market Committee, p. 3,
January 23, 1955.
209
Neutrality
A fairly detailed examination of the term "neutral
ity" may illustrate, though not resolve, the issue involved.
As early as August, 1951, it was indicated that:
In the ensuing discussion it was the consensus that,
on the basis of the present policy of neutrality, the
bill rate should not be permitted to increase to a point
where it would adversely affect the 1-7/8 per cent rate
on the two outstanding issues of Treasury certifi*-
cates.
By April, 1952, the term was interpreted in a rather
different manner:
Chairman Martin said that it was important to con
sider what the Committee meant by "neutrality" and how
one might judge when operations had absorbed a suffi
cient amount of reserves to fit into this policy . . .
Mr. Rouse said that he had interpreted the action
taken at the last Committee meeting strictly, but that
he would include in a definition of "neutrality" the
withdrawal, to the extent possible, of reserves that
were provided by an inflow of gold or a return of cur
rency from circulation, or which were released through
repayment of bank loans. He would also include, to the
extent possible, the withdrawal of reserves that were
put into the market during a period of Treasury
financing . . .
There followed a discussion of possible standards for
measuring neutrality during which it was suggested that
a test might be a volume of member bank borrowings at
the Reserve Banks of around $400 to $500 million.^4
A month later, when the money market was classified
as being "tight" the term was used in the following manner:
System operations endeavor to maintain a situation
where there is a moderate amount of borrowing at the
Reserve Bank and in which market forces of supply and
demand are permitted to have their effect with a minimum
^Ibid., p. 8, August 8, 1951.
^Ibid., pp. 9ff, April 4, 1952.
210
of System intervention except to the extent necessary
to promote orderly market conditions. . . .
Mr. Sproul pointed out that there were hazards in
taking any fixed figure as a guide in this connec
tion. . . . The question, he said, is one of keeping
the commercial banks coming to the Federal Reserve Sys
tem in terms of discounting operations rather than
always relying on open market sales.45
By June, 1952, it was clear that neutrality meant
that banks were expected to come to the discount window for
funds and in July it was stated that '•. . . our policy of
neutrality, so called, has already started to become a
policy of restraint."46 in August, 1952, a different tack
was taken:
At the conclusion of the discussion, it was agreed
that in continuing the present general policy of
neutrality, which would mean restraint on undue credit
expansion, the management of the account should consider
whether it was preferable to supply additional reserve
funds promptly in order to avoid some further tighten
ing of money market conditions prior to announcement of
the forthcoming Treasury financing with the thought that
any purchases made during this period would be simply
part of total purchases which might be made during the
next two months; or whether a small total volume of
reserves would have to be put into the market in the
next two months if System purchases were held to a
minimum between now and the time the Treasury financing
was announced. There was agreement with the view ex
pressed by Chairman Martin that at this time, at least,
the executive committee should not adopt a more specif
ic guide for operations in the System open market
account than the foregoing.47
Under the same general policy, the definition was
^Ibid., pp. I6ff, May 9, 1952.
46lbid., Mr, Sproul, p. 4, July 22, 1952.
47Ibid., p. 13, August 29, 1952.
211
clarified once again in September, 1952:
. . . stating that the general policy of neutrality
which resulted in placing some restraint on credit
expansion had been interpreted by the executive commit
tee as meaning that only such reserves should be
supplied to the market as were consonant with normal
growth in the economy and which would maintain the money
flow so that the defense effort and the business com
munity were not unduly hampered.48
There was a brief lapse in the policy (that is termi
nology) in November, 1952 when it was suggested that the
policy of restraint should be continued and perhaps
strengthened.49 In January, 1953, it was recognized that
the policy of neutrality had become, and should be called
one of restraint, pure and simple. No change, however, was
made.50
Slop
"Slop" was another term employed, although infre
quently, to describe the market. The first mention of it
was in January, 1954. No answer, however, was given to the
query by the Chairman if the market was too sloppy, or what
the term meant until June, 1954. Prior to that time, slop
had been defined simply as funds "chasing themselves around
the market.»
48Ibid., Mr. Martin, p. 3, September 25, 1952.
49Ibid.. p. 3, November 25, 1952.
^®Ibid., p. 7, January 6, 1953; pp. 7ff, April 8,
1953; p. 5, May 6, 1954; and Mr. Riefler, p. 11, May 13,
1953.
212
Mr. Rouse felt that in determining whether there was
a sloppy market it was of importance to know whether
banks felt it desirable to invest their funds in the
short-term market . . .
CMr. SproulJ The term sloppy market involved the
question whether further injections of reserves would
bring about or help bring about further credit demands
that would stimulate production and employment, or
whether they would only generate increases in demand
deposits and reduction in money market rates of
interest without any stimulating effect on the eco
nomy. 51
Although not particularly operational or measurable,
this, at least in terms of those involved with open market
operations, satisfied the FOMC.
Continue the present policy
Another area of disagreement, at least within the
System, related to directives to continue the then present
policy. There were several questions as to what the
current policy was--whether it referred to what had hap
pened, what had been suggested should happen at the pre
vious meeting, or something e l s e . 5 2
Feel
"Feel" was yet another important word used to direct
the Manager. Extremely vague, this word also took on
meanings that differed over time or depending upon who used
the term. Thus at one point,
51Ibid., pp. 8ff, June 23, 1954.
•^^Ibid., "go-around," January 12, 1960; 11 go-around,"
March 22, 1960; and "go-around," May 9, 1961.
213
. . . and the feel of the market will involve respon
siveness to signals given by interest rates as to where
pressure may be building up, and to signals given by
the temper of lenders and borrowers which might influ
ence production, employment and price level.53
Somewhat later, “feel" meant:
... by whether or not the seasonal demand for credit
seems to be adding significantly to tightness in the
money market, and by whether signs appear of gray mar
kets, inventory hoarding, overtime work and other evi
dences of increased inflationary p r e s s u r e s .54
At other times, the Manager was merely directed to rely on
the feel of the market generally.
Even keel
'•Even keel" is one of those terms used which appears
to be obvious, if rather non-operational. The word,
however, was not quite so obvious to those on the FOMC.
This is fairly clear from the following references to the
Minutes:
Chairman Martin said that he did not think the com
mittee was contemplating a "status quo" program: it was
shooting at an "even keel" during the period of the
Treasury's financing. The Treasury's offering should
not appear either to be floated by the Federal
Reserve or hindered by the Federal Reserve. In other
words, the Federal Reserve should be "in absentia" as
far as possible. As to how to achieve this ideal,
Chairman Martin said that he had no precise answer. . . .
Mr. Rouse stated he understood this to mean that in
general operations would try to keep the free reserve
position on an even keel in the immediate future.
(1955)55
53xbid., p. 8, December 7, 1954.
54jbid., Mr. Sproul, p. 25, October 4, 1955.
55ibid., pp. I3ff, January 25, 1955.
214
In 1959, the question was again raised (as it had
been several times since 1955) by Mr. Bryan. Mr. Bryan did
not know what was meant by an "even keel" policy--whether it
should be measured by free reserves, net borrowed reserves,
the feel of the market or the intuition of the Account Man
ager. Mr. Rouse responded that it was a mixture of those
things.
The final statement, representative of the attitude
of those involved in this discussion, is worth stating.
... He ^Chairman Martin] then went on to say that
an even keel policy, as debated from time to time at
Committee meetings, seemed to mean many different things
to different people. However, he was talking about the
feel of the market generally, and he felt there was a
reasonable meeting of the minds on what the Committee
intended to do.56
Semantics
As might be expected, there were some differences of
opinion as to just what some of the words used meant. The
fact that these differences existed did not lead to many
attempts at greater clarification.
The following two statements illustrate some of the
difficulties encountered by the System and an attempt by the
Chairman to clarify the situation with the use of semantics.
Chairman Martin suggested that "orderly growth" would
mean a stable economy, and he added the comment that it
was partly a matter of the meaning that the Committee
56ibid., p. 36, January 6, 1959.
215
wished to read into whatever words it used in writing
its instructions . . .
[Mr. Robertsonj . . . Growth was inherent in the
whole situation ... stability may be a better
word . . .
[Mr. Balderston] . . . not greatly concerned with the
particular words used so long as the idea was in the
directive.
Chairman Martin stated that the Committee would not
overlook the fact that the directive of the full Commit
tee would be published in the open market policy record.
He also cautioned that changes should not be made which
might be construed as having more significance than was
intended . . .
He [Chairman Martin] emphasized the factor of sta
bility in relation to the Treasury financing, stating
that we were now getting into one of those periods in
which the Committee always seemed to find difficulty in
gauging the market in terms of the phrases it uses--psy-
chology, tone, and color.
Turning to the discussion at this meeting, the Chair
man noted that there had been practically no sentiment
in favor of an increase in restraint. With regard to
the question of what Committee policy had been, he sug
gested that this fell somewhat into the area of seman
tics. The Committee could never quite know whether its
intentions were carried out or to what extent the situa
tion developed on its own a c c o r d .57
Having more or less succumbed to "semantics," it is
not too surprising to find rather vague terms and defini
tions used in several other explanations given by the Com
mittee.
September 22, 1954. With regard to "active ease" its
main technical guide has been the maintainence of a sub
stantial volume of free reserves in the banking system.
April 8, 1953. The rapid expansion of credit going
on in various fields did not support the contention that
there was a tight market, "tight" being only a relative
term.
57ibid., pp. lOff, May 10, 1955; Mr. Martin, p. 34,
June 26, 1956; Mr. Martin, pp. 43ff, April 12, 1960.
216
February 2, 1957. The degree of difference was in
just how the account should handle the forces we refer
to as color, tone, and feel of the market--and now Mr.
Bryan had added the word “behavior." The Chairman felt
this an excellent word.
April 16, 1957. Take the rough edge off restraint.
January 28, 1958. Even keel tipped on the side of
ease.
July 18, 1958. Mr. Hayes said that although he had
never quite understood what a disorderly market was, he
felt the present market was close to it.
February 7, 1961. A difficult problem was involved
in the use of words such as “pegging" or “influencing,"
but under the present circumstances he [Chairman Martin]
felt the System should influence the short-term rate.58
Criticisms of the Manager
The surprising aspect about the Manager's activities
is not that he received a substantial amount of criticism,
but that he received little, it was primarily from Mr.
Robertson, the complaints were generally of no great sig
nificance, and the Manager was usually strongly defended for
the actions he had taken. The defense was not only in di
rect response to comments made at FOMC meetings, but also
related to comments regarding the accuracy of the directive
(see below).
Early criticism of the Manager revolved around his
engaging in “swap" transactions or, in the opinion of some
58Ibid., Mr. Sproul, p. 7, September 22, 1954; Mr.
Evans, p. 5, April 8, 1953; Mr. Martin, p. 39, March 5,
1957; Mr. Martin, p. 13, April 16, 1957; Mr. Martin, p. 35,
February 11, 1958; Mr. Hayes, p. 4, July 18, 1958; and Mr.
Martin, p. 41, February 17, 1961.
217
FOMC members, using too many repurchases agreements to
accomplish policy. The issue of "swaps" was clear cut; the
Manager was prohibited from using them until 1961 when the
continuing authority of 1953 was abolished. The issue of
the volume of repurchase agreements relative to the amount
of outright purchases and sales was never resolved, but left
up to the Manager.
Most of the other criticisms were general, usually
regarding an action which seemed to diverge from the con
sensus. Defenses of actions taken, whether by the Manager
or another FOMC member were rather specific. For example:
(Mr. Robertson) The degree of restrictiveness of
monetary policy has been inadequate during the past six
months. We have been too slow to act in the light of
the upsurge of economic forces with inflationary ten
dencies. Today it is wholly inadequate. . . . This
behavior of the account's operations over the past three
weeks strikes me as crystal clear evidence that we must
find some ways and means of more clearly delineating our
judgements and more specifically fixing targets if our
directives are to be properly implemented. . . .
Mr. Rouse stated that during the week in question
when free reserves averaged negative $120 million, there
was no diminution in the feeling of tightness that
existed in the market.59
In 1961, as the System moved into buying securities
other than bills on a regular basis, criticism of the lati
tude given the Manager increased. This criticism was not
largely directed at the Manager, but at what he would be
59ibid., Mr. Robertson and Mr. Rouse, pp. 12 and 16
respectively, October 4, 1955; pp. 2ff, October 20, 1954;
p. 7, March 26, 1957; and pp. 4ff, November 22, i960.
218
able to do and the fact that the System was relinquishing
much of its authority.
(Mr. Robertson) In addition, he believed it to be
inadvisable for the Committee virtually to abdicate its
authority and responsibility by giving practically
unlimited authority to the Manager of the Open Market
Account (1) to buy and sell securities in any area of
the market up to ten years, as he saw fit, for the
stated purpose of affecting rates as distinguished from
providing or withdrawing reserves from the banking
system, and (2) to engage in "swap" transactions.
(Mr. Robertson) . . . but also because this proposal
represented a further delegation of authority from the
Committee to the Manager of the Account without any plat
or program to guide him in his operations. He didnot
believe the Manager could be expected to carry out the
Committee's unspecified objectives— whatever they were--
solely on the basis of his own i n t u i t i o n .60
These later criticisms were not resolved by the end
of 1961, although some steps were being taken to delineate
what was expected of the Manager.
The surprising aspect of this criticism is that it
was minimal, that such criticism apparently did not cause
the Manager to modify his behavior, and that the Manager
was defended and his explanations accepted in all but one
instance.
(Mr. Robertson) In my view the Account was not admin
istered during the past four weeks in a manner that
accomplished the Committee's objectives, as I under
stood it, to create additional ease in the money mar
ket . . .
In the light of the foregoing, I find myself in a
position where although I must vote to ratify and con-
6Qlbid.. Mr. Robertson, pp. 6lff, February 7, 1961;
Mr. Robertson, p. 59, March 28, 1961. See also: Mr.
Robertson, pp. 25ff, March 7, 1961.
219
firm the transactions of the Account during the past
four weeks because they have taken place and nothing now
can be done about it, I cannot "approve11 them.®1
Advice of the Manager
It has been noted already in several instances that
the Chairman occasionally asked the Manager what instruc
tions would be necessary for him to carry out the decisions
of the C o m m i t t e e .62 xt was also the practice at each
meeting to ask the Manager if he had any questions about
what was expected of him, usually with no affirmative
response.
The directive and instructions to the Manager
While there was little actual criticism directed at
the Manager, there was, somewhat surprisingly, a fair amount
of criticism of the directives, consenses and instructions
given the Manager. Up until 1960, most of the criticism
was not accompanied by suggestions for reform. Instead, the
criticisms were not responded to, or the admitted vagueness
of the directives was defended. It was not until 1960 that
positive suggestions for making instructions more explicit
were stated, and although these suggestions were not acted
upon by the end of 1961, attempts were being made to improve
61lbid.. Mr. Robertson, pp. 4-7, November 22, 1960.
6 2Ibid., p. 5, May 23, 1952; p. 10, July 7, 1954;
p. 36, September 25, 1956 and p. 3, July 15, 1958.
220
communications throughout the latter half of 1961. Two
rather significant points are that: (1) The criticism
arose from Board members and presidents, not the Manager or
the Chairman, and (2) actions for reform accelerated after
public criticism.
Perhaps the earliest criticism of the directive was
made by Mr. Bryan who suggested in 1954 that M. . .a direc
tive to feel the market is not the sort of directive that a
principal can appropriately give to his agent or that an
agent can wisely accept from his principal." Mr. Bryan
amplified this opinion in January, 1955. In neither case
was there any response to his statement.
We have not, I believe, come to grips with that
fundamental and basic difference of opinion in terms of
free reserves, total reserves, or money rates but have
devoted ourselves to a textual change in the directive
that conceals rather than reveals our differences.
That textual change is apparently intended to signal a
change of policy but not in a way that makes reasonably
clear to the executive committee and the agent for the
account what actual policy is intended. . . . £lf I were
the manager and fearful of vague directivesj I would
have no way of certainly proving that I had discharged
my responsibilities and would thus court the danger of
being second-guessed and falsely suspected.64
The problem of the vagueness of the directive was
raised again in March of 1955, only to receive this
response:
Chairman Martin thought there was no way of speci-
^Ibid., Mr. Bryan, p. 20, December 7, 1954.
^Ibid., Mr. Bryan, p. 25, January 11, 1955.
221
fying precisely how operations should be carried
out. . . . The educational processes of all these
instruments was going on steadily in all communities,
just as it was around this table. ... So far as the
instructions to the executive committee and to the
Manager of the Account were concerned, he felt that
they had to be in terms of general directives such as
had been issued in the past, with the understanding that
the Committee did not want "knots'1 to appear on the
tight side, any more than it wanted a loosening of the
spigot to let reserves flow out on the easy side.65
This was to be the general pattern: the consensus
would be criticized because it either contained no figure
or because the figure used was not correct, but would be
defended on the basis of not being able to specify color,
tone, or feel, or as was more often the case, no response
would be made.
Although there was a considerable volume of outside
criticism launched against the wording of the directives,
this did not seem to have too much effect until 1959, at
least with regard to the Committee's instructions. At the
May, 1959 meeting, Mr. Robertson pointed out that upon
reading a draft of the FOMC record for 1958, it seemed to
indicate, "... almost complete unanimity of view. He also
felt that one reading the policy record might wonder what
sort of directions were given to the Manager of the System
a c c o u n t . "^6 He suggested indicating that there was some
Ibid., Mr. Martin, p. 33, March 22, 1955.
66ibid., Mr. Robertson, p. 60, May 26, 1959. See
also, Mr. Leach, p. 51, March 1, i960; "In the meanwhile,
he hoped the Committee would substitute for the 'feel of the
market' some other expression that would convey the impres-
222
disagreement among the Committee, that the Manager did sit
in at the meetings and was thus fully informed on Committee
opinions, and that his actions reflected this awareness.
Mr. Robertson's fears were well grounded for Representative
Patman, referring to a 1960 directive, asked Chairman
Martin:
How do you expect the Manager of the Account in New
York to take this statement here alone and interpret
it--just from this statement, that is? Would you expect
him to do? Csicj
Chairman Martin replied:
Yes, I would, if he is the competent man I think he
is; I think that that gives him adequate information.
This response is revealing when compared to Mr. Rouse's
testimony at the same Hearings that he did not and could
not rely on the directive alone, and that he had to take
notes at the meetings if he was to be able to accomplish
the objectives given him. Indeed, Chairman Martin was to
modify his opinion two months later:
Chairman Martin commented, in this connection, that
the point had been made well this morning about giving
the Desk more precise instructions than in the past.
The Committee has not yet arrived at the means of fully
achieving that objective, and it would be necessary to
continue work on that matter. . . . Upon reading through
the minutes of past meetings and then reading the direc
tives, he must admit to a degree of sympathy with some
of the criticisms that had been made by persons outside
the System. Unless one had the benefit of the full
flavor of the Committee discussions, it must be rather
sion of careful analysis of the situation rather than a feel
for it."
^ Review of the Annual Report, p. 104.
223
difficult to analyze the decision-making process.68
This statement was not made public, but at least the diffi
culty was recognized and the problem discussed.
Attempts at correcting the manner in which the direc
tive was presented stemmed from concern over the inaccuracy
of the words used, how these words appeared to outsiders
and dissatisfaction with the free reserve concept. Attempts
to modify the directive by proposing concrete alternatives
began early in 1960. For example, Mr. Bryan's proposal to
use a target figure of total reserves focused on this issue:
This effort to state a figure will at least--or,
rather, it would if the effort became general around the
table--have the merit of assisting the Account Manage
ment in understanding verbally-expressed intentions of
the Committee without the Account Management's presently
necessary resort to exhausting exercises in intuition,
revelation, and auto-suggestion.69
While there was no agreement on the appropriate ac
tion to be taken by the end of 1961, and while there were
some doubts expressed as to whether a more satisfactory
means of directing the Manager was possible, the issue was
at least being actively discussed and the modified directive
form of December 19, 1961, was one result. It is signifi
cant that some changes were made, to a large extent as a
result of criticism from outside the System.
6 8Ibid., Mr. Martin, p. 51, August 22, 1961.
69Ibid.« Mr. Bryan, p. 22, July 22, 1960. See also,
Mr. Johns, p. 35, April 12, 1960.
70lbid.. Mr. Martin, p. 33, Mr. Hayes, p. 38, Mr.
Wayne, p. 55, Mr. Shepardson, p. 59, December 19, 1961.
224
The Manager* s conception of the monetary process
As the point has been made repeatedly that much dis
cretion was explicitly or implicitly given to the Manager,
it follows that it is vital to determine just how the Man
ager viewed the monetary process--that is, if he based his
actions on free reserves, interest rates, the money supply,
or some other variable. His evaluations of the relative im
portance of price movements, unemployment, growth, balance
of payments and other possible goals is also vital. There
is no doubt that the Manager was primarily concerned with
developments in the Government securities markets.71 From
this it might be expected that his concern would be pri
marily with interest rates, and that he might be "neutral"
with regard to goals.
It is disappointing that not much was said about the
Manager's conception of the monetary process. He accepted
the concept (at least tacitly) of free reserves and reported
actions and conditions in terms of free reserves.72 He felt
he could not be precise in dealing with the money supply (or
7llbid., Mr. Rouse, p. 59, March 28, 1961.
72Ibid., Mr. Rouse, p. 4, August 20, 1957, "... in
his view net borrowed reserves were a symbol, not a target;
it seemed to him that the view of the Committee at the last
meeting had envisaged net borrowed reserves of $600-700 mil
lion." Actually, at the previous meeting, nothing at all
was recorded as having been said about free reserves or net
borrowed reserves. Also, Mr. Rouse described "feel" and
"atmosphere" in terms of a free reserve level on p. 5,
April 14, 1959.
225
anything else).7^ Yet, he was not specific on much, often
defended actions that contradicted directions in terms of
free reserves, and most importantly, did not say much that
was recorded which would give insight into his actual
beliefs. Moreover, as long as Alan Sproul was with the
System, he dominated discussions involving the Manager, and
some evidence regarding the Manager is in Sproul*s, not the
Manager's terms. In any case, the Manager, Mr. Rouse, was
reappointed and did serve throughout the period 1951-1961,
and this period must bear his stamp.74-
In the early period under review, it was the attitude
of the account management that purchases were to be made on
the basis of the "need for reserves" as indicated by the
market.7- *
7 Ibid., Mr. Rouse, p. 43, February 9, 1960, "From
the standpoint of a short-run operational guide to the Desk,
an instruction for this kind of increase in the money supply
would be almost meaningless. The Desk could hardly see $20
million a week in relation to the kind of factors it was
offsetting all the time and would scarcely be able to tell
whether such an objective was being accomplished or not . . . .
in day-to-day operations the Desk could not be guided by
such an instruction."
7 4Ibid., p. 3, May 17, 1951, "Mr. Sproul stated that
he felt he and Mr. Rouse understood the purpose of the sug
gestion for more aggressive operations, that the intent was
to try to bring some upward general atmosphere of confi
dence ... he hoped that later in the year the System
account would be relieved of any need for carrying on sup
port operations in the long-term market ..."
75Ibid., Mr. Sproul, p. 9, August 29, 1952, and Mr.
Rouse, p. 3, December 15, 1953.
226
Other evidence of the theory upon which the Manager
based his actions is found in a comment by Mr. Rouse in
defense of the importance of the Federal funds rate:
However, he referred to the comments made during this
meeting on the bill rate and the discount rate to the
effect that if the bill rate moved down perhaps the dis
count rate should be reduced. Mr. Rouse said that he
did not believe this conclusion followed. The bill rate
is not the guiding rate in this respect, he said, but
rather the Federal funds rate.'®
Finally, there is some evidence that the Manager
felt that free reserves were important and that levels of
free reserves influenced interest rates— free reserves
resulting in lowered interest rates and net borrowed re-
77
serves resulting in rising interest rates. The money
supply was not discussed except as in footnote 73.
Specific directions
Complementing several of the points previously made
is the fact that it was made quite clear by the Manager, the
Chairman, and others, that specific operational instructions
or directions could not and should not be given. Mr. Sproul
was the first to make the point that the committee could
not give detailed instructions to the man who executed
policy in a market situation which changed from day to day
76jbid., Mr. Rouse, p. 28, June 5, 1956. See also,
Mr. Rouse, p. 7, March 26, 1957.
77ibid.« Mr. Rouse, p. 2, September 12, 1961.
Ill
and hour to h o u r .78 The Manager fully agreed with the
position, expressing it as "going with the market." Chair
man Martin also agreed, and his statements of the consensus
often contained a phrase noting general agreement that a
specific figure for reserves or purchases or sales of
securities was not desirable or p o s s i b l e .79
Emphasis on feel, of course, precludes an emphasis
on figures, and this is the case throughout the period.
The following three comments made by three different indi
viduals at three different times illustrate this and other
points as well.
Mr. Sproul in 1954:
Specifically, with respect to open market policy, I
wouldn't try to pinpoint our operations too exactly on
assumed figures of bank borrowing, or excess reserves
or free reserves. These are useful guides, but we know
how wide of the mark they can be. I think we also know
that more important than detailed adherence to some
arithmetical formula, is to have the policy conse
quences of our estimate of the general credit situation
clearly understood.
Mr. Martin in 1957:
While I agree that net borrowed (or free) reserves
constitute the best single statistical measure of credit
restraint, I think that even it has many shortcomings
and that its use must be subject to major reservations.
We are operating in an area where human judgements and
expectations are most important and these are not sus
ceptible to precise formulation.
Mr. Hayes in 1960:
78ibid., Mr. Sproul, p. 5, September 15, 1952. See
also, p. 6, September 25, 1952 and p. 4, February 10, 1953.
79ibid., Mr. Martin, p. 13, and Mr. Rouse, p. 7,
Hay 13, 1^53. See also, Mr. Rouse, p. 10, March 16, 1954.
228
But I think the distinction needs to be kept in mind
between the kind of data to which the Committee can and
does give close attention at each working meeting and
the kind of data that might provide a practical working
guide to the Manager for day-to-day operations. On the
latter score, I believe that our usual instructions
couched in terms of "the same degree of restraint" or
"more" or "less" are sufficiently precise and make it
possible for the Manager to react to changing develop
ments flexibly and in such a way as to carry out fully
the spirit of the Committee's instructions. ... Of all
the tested statistical guides we have available, net
borrowed reserves are still probably the best, but this
guide is certainly a long way from being sufficient by
itself . . . °°
Once again, the Manager is given latitude— from spe
cific figures to non-specifics and feel.
Wording of the directive
It has already been shown that many of the terms
used to describe policy and to direct or instruct the Man
ager are unclear and non-operational, in some cases inten
tionally so. What has yet to be discussed is the attitude
of FOMC members towards the wording of the directive. The
attitude is simply and clearly illustrated by a statement of
the Chairman:
Chairman Martin commented that there had been a great
deal of discussion of the wording of the Committee's
directive and of language of the continuing operating
policies. As he had indicated before, he did not feel
it was practicable to convert meetings of this size into
"drafting sessions." In his view, the language changes
SQjbid.. Mr. Sproul, p. 6, January 19, 1954; Mr. Mar
tin, p. 14, April 16, 1957; and Mr. Hayes, p. 32, March 1,
1960. See also: Mr. Hayes, p. 13, August 21, 1956; Mr.
Hayes, p. 58, May 26, 1959; and Mr. Rouse, p. 60, February
9, 1960.
229
being suggested did not make a great deal of difference
and to a considerable extent represented only a shifting
of words.81
Not only are the implications of this and other simi
lar statements important, they are surprising when it is
considered that only a few months prior to this the Chairman
had expressed concern that the Manager had a difficult time
carrying out instructions that varied in terms of the
"shades of emphasis" placed upon words used by the Committee
members. He went on to say:
I have wondered whether the shifting scene has not
taken the figures and terms out of focus, when you talk
about "ease" and "active ease" and when you remember
that there are these different shades of meaning in our
discussions that are not spelled out in our directives.
... In his opinion, one of the biggest problems of
the Committee was understanding the terms that were used
in describing credit policy and in translating these
terms into instructions or directives contained in the
minutes of the meetings of the Committee.82
Regardless of the concern there was little action
taken to clarify the terms used, and it was generally agreed
that as long as the FOMC members knew what they were talking
about, words were not important. This is not to say that
the directives were deliberately misleading, but that they
8llbid.. Mr. Martin, p. 6, July 12, 1955. See also:
Messers. Mills, Martin, Szymczak and Thomas, pp. 6ff, Janu
ary 11, 1955; Mr. Martin, p. 30, March 27, 1956; Mr. Martin,
p. 35, January 8, 1957; Mr. Martin, p. 39, March 5, 1957;
Mr. Martin, p. 60, August 19, 1958; Mr. Martin, p. 37,
January 26, 1960; Mr. Martin, pp. 47ff, January 10, 1961;
and Mr. Martin, pp. 4lff, February 7, 1961.
82ibid., pp. 6 and 14, January 11, 1955.
230
may not have been indicative of what the Committee was
attempting to do. For example, the proposed directive for
May 24, 1960, "to fostering sustainable growth in economic
activity and employment by providing reserves needed for
moderate credit expansion," was described as: "... a
simple, straightforward statement; it would not state how
much would be done or in any way say that the Committee
would necessarily do anything or change anything.
Absence of the Manager
It could not be expected that the Manager would be
able to attend every FOMC meeting. The only reason for men
tioning the fact that he did not is to question his ability
to carry out the wishes of the FOMC on the basis of the
directive. It has been shown that he could not and did not
rely solely on the basis of the directive nor even the Min
utes. but on his own notes. The notes of his assistant were
available, but undoubtedly did not reflect the same "shades
of emphasis" as those of the Manager. In any case, control
over the Manager and his actions was further weakened.
Availability of the Minutes
It has been noted that the Minutes were at least ten
days in being prepared and thus could hardly be used as a
guide to operations by the Manager. In fact, as of Decem
83Ibid., Mr. Martin, p. 50, May 24, 1960.
231
ber, 1961, the drafting of policy record entries was six
months late. Thus the Manager did not rely heavily on the
Minutes, partially because they were so long in preparation
that he could not rely on them.
The FOMC, Inflation and Monetary Theory
Some comments have been made regarding the System*s
concern over inflation, the lack of rigor with which they
approached monetary policy formulation, and the implications
such actions might have for the independence of the Manager.
It remains to further substantiate and clarify these points.
Inflation
Considerable evidence has been presented to indicate
the System's concern for inflation (see especially pp. 148-
150) and that this concern was not particularly well trans
lated into policy action. Rather than belabor this issue,
this section will attempt to indicate that the commitment to
the goal of price level stability was at the expense of
other goals, particularly employment. In addition, although
FOMC members were apparently aware of the Employment Act,
they did not mention it often (only once) or recognize con
flicting goals within the Act. Instead, the choice seems to
have been price stability before all other goals. It should
be mentioned, however, that in 1960-1961, when there was a
conflict between unemployment and an imbalance of payments,
232
domestic needs were thought to take priority. At the same
time, this was a period of relative price stability.
Conflict of goals
The clearest and only statement regarding a conflict
of goals under the Employment Act of 1946 was made by Mr.
Sproul in 1956. It is worth quoting at length because of
the attitude it expresses and the fact that there was nega
tive response to the statement.
[[referring to a "cost-price" or "inflationary spi-
ral"J In the first case, question could be raised as to
whether it is the responsibility of the central banking
system to make credit easier and cheaper in order to try
to head off a decline in production and employment. The
second and more difficult case would raise questions as
to whether the central banking system should make credit
so dear and difficult to obtain as to cause a decline in
production and employment as the lesser of two evils.
We haven't yet had to run head-on into the philosophy of
the Employment Act of 1946 to that extent and it
wouldn't be easy, so maybe we had better hope that some
degree of economic responsibility on the part of manage
ment and labor will avoid presenting us the problem in
serious form.®^
The question of conflicting goals arose again in Dec
ember, 1958. At this time, unemployment was 6.4% and the
industrial production index was just beginning to rise from
the 1957-1958 low. During the meeting of December 2, con
cern over inflation had been expressed by several FOMC mem
bers. It was felt that there was "some" excess capacity and
"some" unemployment, but more importantly, price crawl to
control. Given this:
®^Ibid., Mr. Sproul, p. 32, March 27, 1956.
233
Mr. Hayes then asked whether the System could afford
to concentrate its attention on one factor, for there
were three or four objectives that he considered about
equal in importance, to which Mr. Shepardson responded
that he did not think the System could afford not to
concentrate on the price factor.
Chairman Martin commented that he too was anxious to
get the unemployed back to work, but in his judgement a
balanced recovery would not come about if price pres
sures in the economy were ignored or if they were
strengthened through following an easy money policy.85
The final example is from the meeting of April 18,
1961. This month marked the beginning of the recovery from
the 1960-1961 recession. At this meeting there was a con
siderable amount of discussion on what was to be included in
the directive. Two members were in favor of including in
the directive some mention of unemployment and the System*s
commitment to eliminate this unemployment. Mr. Irons ex
pressed the attitude of the vast majority.
In his opinion, there was going to be a substantial
amount of unemployment that monetary and credit policy
could not correct. The levels might be higher than they
had been in the past, and he did not care to have the in
the directive an implication that System policy was
directed toward correcting something that he did not
think it could c o r r e c t . 86
The Manager, Mr. Rouse, felt it made no particular differ
ence which proposal was adopted and it was decided by the
FOMC to make no reference to employment or even employment
opportunities because the System or monetary policy could
tiave no influence in this area.
85ibid., p. 39, December 2, 1958.
8 6ibid., Mr. Irons, p. 47, April 18, 1961.
234
Unemp1oyment
The attitude of the FOMC regarding what "acceptable"
levels of unemployment were, also suggests that this goal
was interpreted differently by them than by most economists
and government officials. It should be mentioned that per
centage unemployment figures generally were not calculated
nor mentioned in FOMC meetings. In April, 1954, the cycli
cal bottom of the 1953-1954 recession, Mr. Ralph Young,
staff economist, commented that 3.7 million unemployed
(5.7%) did not appear abnormally high in relation to the
total labor force considering the adjustments which had been
taking place from an overtime economy; or, in June, 1959,
Mr. Hayes, President of the New York Bank, noted the re
duction in total unemployment in May, 1959 and expressed the
opinion that unemployment was now in a range where it no
longer need be considered a serious problem. Unemployment
was then 5.9%.®^ The System also felt that several aspects
of unemployment were beyond its control. For example, in
May, 1960, Mr. Hayes commented that: "Although unemployment
is clearly higher than it should be, the problem seems to be
due in large part to inadequate training and inadequate
mobility of labor--causes which are not easily influenced by
credit availability." This attitude was reinforced by Mr.
Martin, who stated in August, 1958, that the reason there
®^Ibid., Mr. Young, p. 2, April 27, 1954; Mr. Hayes,
p. 12, June 16, 1959.
235
was then more than 5 million unemployed was to be found in
the extent that inflation had dominated the economy over the
prior few years. Monetary policy, he said, had done its
part, but there had been severe budget "flip-flops" parti
cularly in the defense budget.®®
Balance of payments
I The attitude of the System toward the goal of balance
of payments was similar to that on employment. One expres
sion, as it is representative, is worth noting:
One could easily be led into great difficulty, Mr.
Bryan said, if he thought that by the use of monetary
policy, the System could correct a situation it had not
created and that it could not fundamentally and basi-*
cally correct.®9
The context indicates a hands-off attitude toward the prob
lem. The year was 1961.
Monetary theory and policy
The primary focus of concern in this section is that
the System did not appear to have a rigorous or consistent
conception of monetary theory or policy.
Forecasting
The contention of lack of rigor may best be illus
trated by Chairman Martin's comment on August 7, 1956, at a
®®Ibid., Mr. Hayes, p. 16, May 24, 1960; Mr. Martin,
p. 54, August 19, 1958. See also, Mr. Martin, p. 22, De
cember 7, 1954 and Mr. Thomas, p. 21, January 11, 1955.
8 9Ibid., Mr. Bryan, p. 41, January 10, 1961.
'2T6
regular FOMC meeting in which the reasons for policy action
were being discussed:
For example, he [Mr. Martin] had noted in Chicago
last week in a small area near the railroad station, a
great many "help wanted" signs. This "straw" was indi
cative, for during the summer period normally a letdown
in demand for help in an area adjacent to the railroads
could be expected.90
It would be hoped that the direction of monetary policy was
not based solely on impressions such as this.
The money supply
The statements of the System on the money supply
show a rather interesting development. Without commenting
on the theoretical validity of the statements, several will
be noted to indicate the attitude of the System over time.
From 1951 through 1957, it appears the System had
rather definite— although perhaps not totally accurate--
ideas on the importance of the money supply, its relation to
economic activity and how it was defined. The statements
which are available indicate: (1) the necessity for care
ful study of the relation of the money supply to GtfP in the
light of the possibility that the growth in the money supply
required stimulation in order to preserve its appropriate
relationship to G iSIP; (2) the use by the System of a rule of
thumb rate of growth of the money supply of three percent
per year (if business activity rose faster than this,
^Ojbid.. Mr. Martin, p. 32, August 7, 1956.
237
interest rates and prices would rise, if activity was
slower than this, interest rates and prices would fall);
(3) counter-cyclical monetary policy was necessary and
mechanistic growth of the money supply not possible. One
of the clearest statements of the attitude of the System in
this period was expressed by Mr. Ralph Young in 1956.
The slower growth in the money supply this year is
to be attributed in part to Federal Reserve policy.
That policy since 1951 has been geared to counter
cyclical objectives in the short-run and orderly growth
at sustained high levels of activity without inflation
over the longer-run. Counter-cyclical monetary policy
calls for braking pressure on monetary growth and tight
ening pressure on the liquidity positions of individ
uals, businesses, and financial institutions when
aggregate demand is pressing against aggregate supply.
Such pressure is essential to combat inflationary
dangers and to curb financial overcommitment . . .
If the System were pursuing in this period a monetary
policy geared to some mechanistic or constant rate of
increase in the money supply, it would be operating in
an unstabilizing way under present conditions.91
In 1959, a new set of attitudes began to be ex
pressed. Some FOMC members, notably Mr. Johns and Mr.
Bryan, felt the rate of growth of the money supply should
be emphasized, feeling that it was no more general a concept
than "sustainable growth," that it was a better target than
free reserves, but admitting they did not know which defi-
91lbid.« Mr. Young, pp. 4-5, September 25, 1956. See
also, Mr. Thomas, p. 17, March 5, 1957. On the need for
study of the money supply and its relation to economic acti
vity see: Mr. Thomas, pp. 2-3, October 4, 1951, Mr. Mills,
p. 6, September 8, 1953 and Mr. Sproul, pp. 8-10, October
25, 1955. On the three percent rule of thumb, see: Mr.
Martin, pp. 9-10, November 23, 1953 and Mr. Thomas, p. 15,
May 10, 1955.
238
nition of the money supply to use. Mr. Mills and Mr.
Thomas questioned the money supply measure, leaning instead
toward total reserves. Mr. Martin felt some of the concern
over the relation of the money supply to growth, but did
not feel that the present period (it was then November,
1959) was the time to correct it. Moreover, Mr. Martin
stated he was unable to make heads or tails (like many
others) of the money supply on either a quantitative or
qualitative basis and felt velocity was more important.
Finally, Mr. Hayes and Mr. Rouse, who had not made many com
ments on this question up until that time, felt the money
supply could not be used operationally:
From the standpoint of a short-term operational guide
to the Desk, an instruction for this kind of increase in
the money supply would be almost meaningless. The Desk
could hardly see $20 million a week in relation to the
kind of factors that it was offsetting all the time and
would scarcely be able to tell whether such an objective
was being accomplished or not ... in day-to-day oper
ations the Desk could not be guided by such an instruc
tion. 92
This last attitude seemed to prevail, for while the
money supply grew very little over the period 1959-1961
(it actually declined over most of the period) the question
of the importance of the money supply faded. If anything,
then, it seems the attitude of the Manager prevailed.
Ibid., Mr. Johns, p. 13, February 10, 1959; Mr.
Bryan, p. 20, March 22, 1960. Other references are to Mr.
Mills and Mr. Thomas, p. 25, May 5, 1959; Mr. Martin, p. 38,
November 24, 1959, p. 44‘ ; December 15, 1959 and p. 34, June
14, 1960; Mr. Hayes (Mr. Rouse expressed agreement), p. 43,
February 9, 1960.
239
Interest rates
In view of the public denials by the System of their
effect on interest rates (see pages 126-130), it is rather
significant to note that for the entire period in which the
statement of continuing operating policy was in effect
(March, 1953-April, 1961) members of the FOMC admitted the
impact of System policy on rates and that rates occasionally
provided some guide to policy.
It was not until March 3, 1953 that the System--in
private session--indicated that it would not attempt to in
fluence market rates of interest. At that meeting, based
upon a "disconcerting degree of uncertainty" which was said
to exist among professional dealers and investors in Govern
ment securities, the FOMC decided that:
. . . henceforth, it will intervene in the market, not
to impose on the market any particular pattern of prices
and yields but solely to effectuate the objectives of
monetary and credit policy, and that it will confine
such intervention to transactions in very short-term
securities, preferably bills.
to which Mr. Sproul responded,
. . . that whenever the Committee put funds into or
took funds out of the market it necessarily affected
interest rates and that the Committee must have a judg
ment as to how its operations would affect the costs
as well as the availability of credit whether it
operated indirectly or directly on long-term rates.
Any form of assurance as to how the Committee would
operate in the future would, Mr. Sproul said, tend to
bring about a frozen credit p o l i c y .93
^Ibid., p. 31, March 4, 1953 and Mr. Sproul, p. 38,
March 4, 1933.
250
It was not long after this, November, 1953, that it
was stated that if the bill rate approached the discount
rate, this should be regarded as an indication that the
market was tighter than intended and that purchases of
securities would be desirable. However, in May, 1954, Mr.
Mills felt that "a steadily falling bill rate was not neces
sarily a reflection of easy money, since it might equally
well be argued that the softening was a result of a re-
06.
stricted supply of bills." ^ Mr. Sproul, in response to
this, indicated that forcing reserves on banks did nothing
but drive down yields on liquidity instruments but did not
increase the kind of bank lending and capital investment
which facilitated recovery.9- *
Beginning in June, 1954, Mr. Mills began to complain
that the System was preoccupied with the "state of the mar
ket" and had lost sight of national economic policy. Over
a year later, Mr. Sproul expressed exactly the opposite
opinion, feeling that' too much attention was being paid to
free reserves and not enough to the market. Mr. Mills
countered this argument a few months later in terms of an
overcommitment to the market by the System.96
^Ibid., p. 7, November 6, 1953. Mr. Mills, p. 6,
May 26, 1954.
95Ibid., Mr. Sproul, pp. 809, May 26, 1954.
96Ibid.. Mr. Mills, p. 11, June 23, 1954. Mr.
Sproul, pi 25, October 25, 1955. Mr. Mills, p. 33, July
17, 1956.
241
Finally, although some staff economists felt that
"Operation Nudge" could not work too successfully, and
although the System publicly maintained throughout the
period 1960-1961 that it could not and was not affecting
rates, discussions in FOMC meetings indicate something
quite different. For example, on June 6, 1961, shortly
after the' hearings on the 1960 Annual Report.
The Chairman added that he did not think it was possible
to cling successfully to the view that System operations
have no influence on interest rates. This was a view
that the System had gradually gotten itself into, and
he thought it absurd.""'
While it is important that testimony of System
officials at Congressional hearings and Federal Reserve
publications present a different picture than that recorded
at FOMC meetings, the major issue here is the concern over
the market and interest rates, a concern which magnified
the responsibilities of the Manager.
Free reserves
Enough has already been said of free reserves and
their relation to System policy in chapters II, IV and V to
support a contention that they were an integral part of the
Federal Reserve decision-making process. However, it is
not at all clear from the Minutes that free reserves were
without question. Once again, disagreement within the
^ Ibid.. Mr. Martin, p. 61, June 6, 1961. See also:
Mr. Martin, p. 59, March 7, 1961 and Mr. Martin, p. 61,
March 28, 1961.
__
242
System indicates some theoretical differences which facili
tated, at least, a broader role for the Manager.
One of the earliest criticisms of free reserves was
that of Mr. Mills, who felt that open market policy think-
ing had been concerned largely with what should be con
sidered an appropriate level of free reserves,"without
taking into full consideration the economic consequences
that stem out from the mechanics of producing such a level
of free reserves.'1" A similar, and somewhat fuller state
ment was made by Mr. Sproul in the later months of the
same year.
Mr. Sproul said that he personally did not think the
Committee should take negative free reserves as the
index of whether it should be tightening or easing the
market, and he did not think the market should be
brought around to believing that the Committee assumed
that negative free reserves represented the index or
that the Committee was relying solely on that index.
In the first place, a good deal depended on the distri
bution of reserves, whether they were concentrated in
reserve cities or central reserve cities or spread out
over the country: also, on whether the existing
volume of negative free reserves was having effects on
the market which were in accordance with or contrary to
the policy the Committee was trying to pursue. The
condition of the money market is not always a direct
resultant of any fixed level of free reserves . . .99
The final statement, and the one that seemed to pre
vail, is hardly reassuring:
Chairman Martin said that these comments pointed -up
the problem of using free reserve target figures at
9®Ibid., Mr. Mills, p. 24, March 2, 1955.
"ibid., Mr. Sproul, p. 18, October 4, 1955.
243
all. However, they had to be used as an indication,
for that was the framework within which the Account
Management had to work. 1-00
•^^Ibid.« Mr. Martin, p. 52, May 6, 1958.
244
CHAPTER VI
CONCLUSIONS AND RECOMMENDATIONS
Conclusions
The followiong conclusions and implications may be
drawn regarding the Federal Open Market Committee from 1951
through 1961:
1. The Manager or "desk" had considerable latitude
to determine both the goals and the policy actions
taken in terms of open market operations. Thus,
during the period, the responsibility for monetary
policy was primarily in the hands of the Manager
of the Open Market Account. FOMC members by and
large abdicated the responsibility given to them
by Congress. Whatever opinion one might have as
to the efficacy of monetary policy with regard to
economic stabilization, the welfare implication
of the duties of the FOMC residing primarily in
the hands of one or a few men are fairly obvious
and somewhat ominous.
2. Congress, having delegated responsibility for
monetary policy to the Federal Reserve System,
was lax in overseeing that body.
245
3. FOMC members relied almost entirely on their
staffs-for the selection of appropriate data
regarding the economy, monetary tools to be used,
and in some instances, the actual formulation of
policy. The use of free reserves and the "bills-
only" policy are two examples.
4. An inordinate amount of time was spent by FOMC
members on matters that did not relate to their
duties in the area of economic stabilization.
5. In analyzing System policy actions, much more
attention should be paid to the role of the
Manager.
6. Selection of the Manager, which is not directly
a function of the FOMC, is a crucial aspect of
monetary policy.
7. Policy directives in particular and Federal Re
serve publications in general, are unreliable
sources of information regarding the System and
its operations. They are late, vague, non-oper-
ational, and not necessarily indicative of the
decisions of the FOMC.
8. As the Manager is independent of the FOMC and as
the directive does not represent an accurate
statement of System policy or opinion, open mar
ket operations do not necessarily reflect deci
sions of the FOMC, nor can the directive be used
as a basis for evaluating, analyzing or judging
FOMC actions.
9. Non-operational terms predominated in instructions
to the Manager from the FOMC. Not only were the
terms non-operational, they also lacked even a
general definition. This was also true of com-*
munications to the general public.
10. Statistical data employed by the FOMC was gener
ally that found in the monthly Bulletin. Use of
"adjusted" statistics in many analyses of the
System fail to take this into account and are at
least misleading, if not invalid.
11. The FOMC, while conscious of their role in
regulating the money supply, did not generally
operate in terms of the money supply. If any
thing, free reserves or interest rates were the
predominant operational variables employed to
characterize and describe policy actions and to
instruct the Manager.
12. Changes in, or the level of the price index were
regarded as being far more important indicators
of the economy for the FOMC than were figures on
employment, growth or balance of payments. While
it is not clear, apparently the Manager did not
share this view.
13. The "market" rather than the economy, was the main
247
focus of System attention. This appears to be
due to the important role played by the Manager,
especially in reporting to the FOMC, and the
general concern of the FOMC for money market
conditions.
The bases for reaching these conclusions, primarily
supported by evidence from the Minutes. are:
1. Most instructions to the Manager were non-oper-
ational, giving him latitude in deciding the
operational meaning of the terms used.
2. Non-operational terms employed were not defined,
further extending the implicit latitude given the
Manager.
3. The validity of the statistical or operational
guides which were used may be questioned. This is
particularly true of free reserves.
4. The key role of the Manager in reporting both at
the daily call and to the FOMC was neglected.
That is, what the Manager did or did not report
coupled with the acknowledged respect given the
Manager as the market spokesman, meant his influ
ence was considerable, even had he not also been
given great latitude in formulating and carrying
out policy.
5. The role of the Federal Reserve Bank of New York
and the president of that Bank was more important
248
than generally recognized. In part this was due
to the fact that the New York Bank selected the
Manager, provided him with a staff independent of
the FOMC staff, and was the scene of open market
operations. Mr. Sproul, in particular, dominated
much of the discussions and decision-making pro
cesses in the period 1951 through 1955.
6. There were no concrete or reasoned statements of
goals, monetary tools or the monetary process
made by the FOMC.
7. Price stability received attention, the general
attitude being, especially after 1955, that the
System could have little effect on employment
levels. While conflicts among the goals stated
in the Employment Act were sometimes acknowledged,
price stability was given priority.
Some of the more important reasons for these circum
stances occurring appear to be:
1. The organization of the FOMC. They key role of
the Manager in reporting to the FOMC, the
acknowledged importance of the manager vis-^-vis
the market, the manner in which instructions were
issued to the Manager; all increased the role
the Manager could play, while at the same time
lessening the control of the FOMC over him.
2. The Board of Governors was required (or chose to)
249
to spend most of its time (see pages 100-101)
engaged in non-monetary policy activities. This
resulted in the staff of the Board of Governors
and the staff of the Federal Reserve Bank of New
York playing a much more important and influential
role in policy decisions and the Governors (and
the Bank presidents) playing a much less influ
ential role than envisaged in the Federal Reserve
Act. The importance of the Manager was thus
expanded even more.
3. For at least the early part of the period, inde
pendence of the System could more accurately be
termed isolation from other economic policy
makers. This was especially true of the relations
between the System and the Treasury, for the bad
feelings generated in the conflict over the Accord
persisted for several years and prevented dis
cussion between the two groups.
4. Changes in the structure of the economy and in
the role of governmental and quasi-governmental
agencies in stabilizing the economy, especially
after the Employment Act, drastically altered the
role and importance of the Federal Reserve. This
modified role was not reflected in a change in the
organization or duties of the System, and to some
extent was not recognized by FOMC members as is
250
evidenced by the lack of attention paid to the
goals of the Employment Act.
5. The Congress, the Employment Act notwithstanding,
did not exert sufficient direction or control over
the System. Failure to mention the Federal
Reserve in the Act, lack of clarity as to what the
goals of the Act were, and the use of such terms
as "sustainable economic growth" by the System
are examples of this lack of control.
6. Although considerable attention was paid to Trea
sury activities, particularly Treasury financings,
there was a notable lack of coordination between
the activities of the Federal Reserve and the
Treasury.
7. Although it was more true of the provisions of
the Federal Reserve Act than actual operations,
there was a lack of coordination of the use of the
major System tools. For example, reserve require
ment changes were in the province of the Board of
Governors, open market operations were up to the
FOMC, and discount rate changes up to the Reserve
Banks, subject to approval of the Board.
Clearly, not all the reasons for the conclusions
’ reached here have or can be stated. The ones which have
been stated were presented in terms of their importance and
the possibility of doing something about them.
Recommendations
251
It is possible that the grant of authority to the
Manager by the FOMC resulted in a more flexible and adequate:
monetary policy than would have been possible were the
actual decisions made by the entire committee. Evidence
on the effectiveness of the System (Manager?) in achieving
the goals of the 1946 Act is not clear (see Chapter II) and
there is no way to determine whether the FOMC or the Mana
ger would have achieved better results. Most economists
and critics of the System would question that System policy
actions from 1951 through 1961 were adequate and responsive
to the needs of the economy. Given this volume of criti
cism and assuming the FOMC should be more in control of
monetary policy, some recommendations, based on the con
clusions reached regarding the period 1951-1961 can be made.
As noted in Chapter I, the fact that the Minutes are not
available subsequent to 1961 precludes extension of the
time period analyzed. Some of these recommendations, and
indeed some of the criticisms may thus no longer be com
pletely applicable.
1. The Manager should be selected on a broader basis;
hopefully by the full FOMC.
2. The Congress should make a more explicit state
ment of what is expected from the Federal Reserve.
This should not be confined to a statement of
252
goals alone.
3. The Congress should make a greater effort to over
see the actions and activities of the System.
4. Federal Reserve Governors should be freed from
their non-monetary tasks (that is, bank super
vision, etc.) so that they might be able to devote
more of their attention and time to policy making.
5. Attempts should be made to work even more closely
with other governmental agencies whose interests
coincide with or complement those of the FOMC.
6. A clearer statement of System goals, potential
conflicts, trade-offs, etc., should be undertaken.
7. Closer control should be initiated over the Mana
ger.
8. Terminology used by the System internally and
externally should be made more operational, or at
least defined more concretely, both to achieve
recommendation 7 and to assist independent analy
sis of System actions.
9. More detailed and rigorous study of the monetary
process and especially the impact of money on the
level of economic activity must be undertaken by
the System.
APPENDIX A
THE DIRECTIVE FORM
March, 1951 through December, 1961
253
254
APPENDIX A
THE DIRECTIVE FORM
March, 1951 to June 11, 1953
Thereupon, upon motion duly made and
seconded, the following direction to
the executive committee was approved
unanimously:
The executive committee is directed, until otherwise
directed by the Federal Open Market Committee, to arrange
for such transactions for the System open market account,
either in the open market or directly with the Treasury
(including purchases, sales, exchanges, replacement of
maturing securities, and letting maturities run off without
replacement), as may be necessary, in light of current and
prospective economic conditions and the general credit
situation of the country, with a view to exercising re
straint upon inflationary developments, to maintaining or
derly conditions in the government security market, to re
lating the supply of funds in the market to the needs of
commerce and business, and to the practical administration
of the account; provided that the aggregate amount of
securities held in the account at the close of this date
other than special short-term certificates of indebtedness
purchased from time to time for the temporary accommodation
of the Treasury shall not be increased or decreased by more
than (dollar amount).
The executive committee is further directed, until
otherwise directed by the Federal Open Market Committee, to
arrange for the purchase for the System open market account
direct from the Treasury of such amounts of special short
term certificates of indebtedness as may be necessary from
time to time for the temporary accommodation of the Trea
sury; provided that the total amount of such certificates
held in the account at any one time shall not exceed
(dollar amount).
255
The Directive Form
March, 1951 to June 11, 1953
Thereupon, upon motion duly made and
seconded, the executive committee
voted unanimously to direct the Fed
eral Reserve Bank of New York until
otherwise directed by the executive
committee:
(1) To make such purchases, sales, or exchanges
(including replacement of maturing securities and allowing
securities to run off without replacement) for the System
account, either in the open market or directly from, to, or
with the Treasury, as may be necessary in the light of cur
rent and prospective economic conditions and the general
credit situation of the country, with a view to exercising
restraint upon inflationary developments, to maintaining
orderly conditions in the Government security market, to
relating the supply of funds in the market to the needs of
commerce and business, and to the practical administration
of the account; provided that the total amount of securi
ties in the account at the close of this date, shall not be
increased or decreased by more than (dollar amount), exclu
sive of special short-term certificates of indebtedness
purchased for the temporary accommodation of the Treasury
pursuant to paragraph (2) of this directive.
(2) To purchase directly from the Treasury for the
System open market account such amounts of special short
term certificates of indebtedness as may be necessary from
time to time for the temporary accommodation of the Trea
sury; provided that the total amount of such certificates
held in the account at any one time shall not exceed
(dollar amount).
256
The Directive Form
June 11, 1953 to June 22, 1955
Thereupon, upon motion duly made and
seconded, the following direction to
the executive committee was approved
unanimously:
The executive committee is directed, until otherwise
directed by the Federal Open Market Committee, to arrange
for such transactions for the System open market account,
either in the open market or directly with the Treasury
(including purchases, sales, exchanges, replacement of
maturing securities, and letting maturities run off without
replacement), as may be necessary in light of current and
prospective economic conditions and the general credit
situation of the country, with a view (a) to relating the
supply of funds in the market to the needs of commerce and
business, (b) to avoiding deflationary tendencies without
encouraging a renewal of inflationary developments (which
in the near future will require an aggressive supplying of
reserves to the market), (c) to correcting a disorderly
situation in the Government securities market, and (d) to
the practical administration of the account; provided that
the aggregate amount of securities held in the System
account (including commitments for the purchase or sale of
securities for the account) at the close of this date other
than special short-term certificates of indebtedness pur
chased from time to time for the temporary accommodation of
the Treasury shall not be increased or decreased by more
than (dollar amount).
The executive committee is further directed, until
otherwise directed by the Federal Open Market Committee, to
arrange for the purchase, direct from the Treasury for the
account of the Federal Reserve Bank of New York (which bank
shall have the discretion, in cases where it deems desir
able, to issue participations to one or more Federal Re
serve Banks) of s.uch amounts of special short-term certi
ficates of indebtedness as may be necessary from time to
time for the temporary accommodation of the Treasury;
provided that the total amount of such certificates held at
any one time by the Federal Reserve Banks shall not exceed
in the aggregate (dollar amount).
257
The Directive Form
June 11, 1953 to June 22, 1955
Thereupon, upon motion duly made and
seconded, the executive committee
voted unanimously to direct the Fed
eral Reserve Bank of New York until
otherwise directed by the executive
committee:
(1) To make such purchases, sales, exchanges (in
cluding replacement of maturing securities and allowing
securities to run off without replacement) for the System
account in the open market or, in the case of maturing
securities, by direct exchange with the Treasury, as may be
necessary in light of current and prospective economic con
ditions and the general credit situation of the country,
with a view to (a) relating the supply of funds in the
market to the needs of commerce and business, (b) to avoid
ing deflationary tendencies without encouraging a renewal
of inflationary developments (which in the near future will
require an aggressive supplying of reserves to the market),
(c) to the practical administration of the account; pro
vided that the aggregate amount of securities held in the
System account (including commitments for the purchase or
sale of securities for the account) at the close of this
date other than special short-term certificates of indebt
edness purchased from time to time for the temporary
accommodation of the Treasury shall not be increased or
decreased by more than (dollar amount).
(2) To purchase direct from the Treasury for the
account of the Federal Reserve Bank of New York (which bank
shall have the discretion, in cases where it deems desir
able, to issue participations to one or more Federal Reserve
Banks) of such amounts of special short-term certificates
of indebtedness as may be necessary from time to time for
the temporary accommodation of the Treasury; provided that
the total amount of such certificates held at any one time
by the Federal Reserve Banks shall not exceed in the
aggregate (dollar amount).
258
The Directive Form
June 22, 1955 to December 19, 1961a
Thereupon, upon motion duly made and
seconded, the Committee voted unani
mously to direct the Federal Reserve
Bank of New York, until otherwise
directed by the Committee:
(1) To make purchases, sales, or exchanges (including
replacement of maturing securities and allowing maturities
to run off without replacement) for the System open market
account in the open market, or, in the case of maturing
securities, by direct exchange with the Treasury, as may be
necessary in light of current and prospective economic con
ditions and the general credit situation of the country,
with a view (a) to relating the supply of funds in the mar
ket to the needs of commerce and business, (b) to fostering
growth and stability in the economy by maintaining condi
tions in the money market that would avoid the development
of unsustainable expansion, and (c) to the practical admin
istration of the account; provided that the aggregate amount
of securities held in the System account (including com
mitments for the purchase or sale of securities for the
account) at the close of this date other than special short
term certificates of indebtedness purchased from time to
time for the temporary accommodation of the Treasury shall
not be increased or decreased by more than (dollar amount).
(2) To purchases direct from the Treasury for the
account of the Federal Reserve Bank of New York (which bank
shall have the discretion, in cases where it deems desir
able, to issue participations to one or more Federal Re
serve Banks) of such amounts of special short-term certif
icates of indebtedness as may be necessary from time to
time for the temporary accommodation of the Treasury; pro
vided that the total amount of such certificates held at
any one time by the Federal Reserve Banks shall not exceed
in the aggregate (dollar amount).
(3) To sell direct to the Treasury from the System
account for gold certificates such amounts of Treasury
securities maturing within one year as may be necessary
from time to time for the accommodation of the Treasury;
provided that the total amount of such securities so sold
259
and such sales shall be made as nearly as may be. practicable
at the prices currently quoted in the open market.b
aThe Executive Committee was abolished on June 22,
1955.
bParagraph (3) was deleted or reinserted as circum
stances warranted.
260
The Directive Form
December 19, 1961
Current Economic Policy Directive
It is the current policy of the Committee to permit
further bank credit and monetary expansion so as to promote
fuller utilization of the economy's resources together with
money market conditions consistent with the needs of both
an expanding domestic economy and this country's interna
tional balance-of-payments problem.
To implement this policy, operations for the System
Open Market Account shall be conducted with a view to pro
viding reserves for bank credit and monetary expansions
(with allowance for the wide seasonal movements customary
at this time of the year), but with a somewhat slower rate
of increase in total reserves than during recent months.
Operations shall place emphasis on continuance of the
three-month Treasury bill rate at close to the top of the
range recently prevailing. No overt action shall be taken
to reduce unduly the supply of reserves or to bring about a
rise in interest rates.
Continuing Authority Directive
1. The Federal Open Market Committee authorizes and
directs the Federal Reserve Bank of New York, to the extent
necessary to carry out the current economic policy direct
tive adopted at the most recent meeting of the Committee:
(a) To buy or sell U.S. Government securities in
the open market for the System Open Market
Account at market prices and, for such
Account, to exchange maturing U.S. Government
securities with the Treasury or allow them to
mature without replacement; provided that the
aggregate amount of such securities held in
such Account (including forward commitments,
but not including such special short-term
certificates of indebtedness as may be pur
chased from the Treasury tinder paragraph 2
hereof) shall not be increased or decreased
by more than (dollar amount) during any
period between meetings of the Committee;
(b) To buy or sell prime bankers' acceptances in
261
the open market for the account of the Fed
eral Reserve Bank of New York at market dis
count rates; provided that the aggregate
amount of bankers' acceptances held at any one
time shall not exceed (dollar amount) or 10
per cent of the total of bankers' acceptances
outstanding as shown in the most recent
acceptance survey conducted by the Federal
Reserve Bank of New York;
(c) To buy U.S. Government securities with matu
rities of 24 months or less at the time of
purchase, and prime bankers' acceptances,
from nonbanlc dealers for the account of the
Federal Reserve Bank of New York under agree
ments for repurchase of such securities or
acceptances in 15 calendar days or less, at
rates not less than (a) the discount rate of
the Federal Reserve Bank of New York at the
time such agreement is entered into, or (b)
the average issuing rate on the most recent
issue of 3-month Treasury bills, whichever is
the lower.
2. The Federal Open Market Committee authorizes and
directs the Federal Reserve Bank of New York to purchase
directly from the Treasury for the account of the Federal
Reserve Bank of New York (with discretion, in cases where
it seems desirable, to issue participations to one or more
Federal Reserve Banks) such amounts of special short-term
certificates of indebtedness as may be necessary from time
to time for the temporary accommodation of the Treasury;
provided that the total amount of such certificates held at
any one time by the Federal Reserve Banks shall not exceed
(dollar amount).
APPENDIX B
CHANGES IN PHRASE (b) OF THE DIRECTIVE
262
263
Date
8/8/50
6/11/53
7/7/53
9/24/53
12/15/53
12/7/54
1/11/55
5/10/55
8/2/55
1/24/56
3/27/56
5/23/56
APPENDIX B
CHANGES IN PHRASE (b) OF DIRECTIVE
"with a view to exercising restraint on infla
tion, "
"to avoiding deflationary tendencies without
encouraging a renewal of inflationary develop
ments (which in the near future will require
aggressive supplying of reserves to the mar
ket) . ”
Executive committee dropped "(which in the near
future will require aggressive supplying of
reserves to the market;."
FOMC dropped "(which in the near future will
require aggressive supplying of reserves to the
market)."
"to promoting growth and stability in the eco
nomy by actively maintaining a condition of ease
in the money market."
delete "actively" from above.
"to fostering growth and stability in the eco
nomy by maintaining conditions in the money
market that would encourage recovery and avoid
the development of unsustainable expansion."
"encourage recovery" dropped from above.
"to restraining inflationary developments in
the interest of sustainable growth."
"in addition to restraining inflationary devel
opments in the interest of sustainable economic
growth should take into account any deflation
ary tendencies in the economy."
same as 8/2/55.
same as 1/24/56.
8/7/56
11/27/56
1/8/57
3/5/57
11/12/57
12/17/57
3/4/58
7/29/58
8/4/58
8/19/58
12/16/58
5/26/59
3/1/60
5/24/60
264
same as 3/27/56 and 8/2/55.
"to restraining inflationary developments in
the interest of sustainable economic growth,
while recognizing additional pressures in the
money, credit, and capital markets resulting
from seasonal factors and international con
ditions.
"to restraining inflationary developments in
the interest of sustainable economic growth
while recognizing unsettled conditions in the
money, credit, and capital markets and in the
international situation."
"to restraining inflationary developments in
the interest of sustainable economic growth
while recognizing uncertainties in the business
outlook, the financial markets, and the inter
national situation."
"to fostering sustainable growth in the economy
without inflation, by moderating the pressures
on bank reserves. 1
"to cushioning adjustments and mitigating re
cessionary tendencies in the economy."
"to contributing further by monetary ease to
resumption of stable growth of the economy."
"to recapturing redundant reserves."
"to keep from having redundant reserves."
"to fostering conditions in the money market
conducive to balanced economic recovery."
"to fostering conditions in the money market
conducive to sustainable economic growth and
stability."
"to restraining inflationary credit expansion
in order to foster sustainable economic growth
and expanding employment opportunities."
"to fostering sustainable growth in economic
activity and employment while guarding against
excessive credit expansion."
"to fostering sustainable growth in economic
activity and employment by providing reserves
265
8/16/60
10/25/60
4/18/61
6/6/61
8/22/61
12/19/61
needed for moderate bank credit expansion.”
"to encouraging monetary expansion for the pur
pose of fostering sustainable growth in econom
ic activity and employment."
"to encouraging monetary expansion for the
purpose of fostering sustainable growth in
economic activity and employment while taking
into consideration current international
developments."
"to encouraging expansion of bank credit and
the money supply so as to contribute to
strengthening of the forces of recovery (that
appear to be developing in the economy) while
giving consideration to international factors."
"to encouraging expansion of bank credit and
the money supply so as to contribute to
strengthening of the forces of recovery while
giving consideration to international factors."
"to encouraging credit expansion so as to pro
mote fuller utilization of resources, while
giving consideration to international factors.”
"to providing reserves for bank credit and
monetary expansion . . . but with a somewhat
slower rate of increase in total reserves than
during recent months." (See p. 260 for a
complete statement.)
APPENDIX C
DEFINITION OF TERMS (MR. SPROUL)
266
267
APPENDIX C
DEFINITION OF TERMS (MR. SPROUL)
The following is a statement made by A. Sproul, Vice
Chairman, Board of Governors, on January 11, 1955 at a meet
ing of the FOMC. Mr. Sproul was then president of the New
York Federal Reserve Bank.
To assist my own thinking, and as a rough approximation of
present meaning I have tried to give some definition to the
terms we have been using.
1'Active ease"
(a) Maintenance of a volume of excess reserves large
enough to assure ready availability of bank
credit, in ample volume for all borrowing needs
meeting ordinary standards of credit worthiness.
This ease should be expected in time to pervade
all credit and capital markets.
(b) The discount rate is at a low level.
(c) Relatively low interest rates at all maturities,
with a tendency toward a continuing decline of
rates whether or not continued declines are
desired as matter of policy.
(d) Short-term money market rates ordinarily far
enough below the discount rate so that access to
reserve funds will be cheaper through the open
market than through the discount window.
(e) Member bank borrowing from the Federal Reserve
Banks only intermittently, and in small volume
by reason of individual bank situations.
"Ease"
(a) Bank reserves and bank credit continue readily
available to meet credit-worthy demands; no need
of allocation of funds, on part of banking sys
tem as a whole, to particular uses because there
is not enough credit to go around; but no pres
sure on the banks to find uses for a continu
ously increasing supply of reserves.
Cb) Discount rates continue at a low level.
(c) Tendency toward decline in other rates of inter-
268
est (existing during period of "active ease") is
checked and some rates advance.
(d) The more sensitive money market rates— Federal
funds, dealer loans and Treasury bills— move up
toward discount rate so that, at times, borrow
ing reserves through discount window may be more
advantageous than through the open market.
(e) Individual member banks borrow with some fre
quency in initial response to expanding credit
needs but a sustained and growing aggregate vol
ume of borrowing is soon relieved through open
market operations.
"Neutrality"
(a) Volume of bank reserves still ample to meet
credit-worthy demands. Market factors allowed
to express themselves in the reserve position of
banks. This would mean, in most instances, no
continuous cushion of excess reserves and the
elimination of free reserves in the aggregate.
(b) Any appreciable change in economic conditions or
over-all credit demands would have a fairly
prompt reflection in more sensitive rates of
interest and, if there were tightening tenden
cies, the sensitive money market rates would be
expected to move above the discount rate.
(c) At some stage, if these tendencies continue, the
discount rate would be moved up toward what
might be considered the middle of its range.
(d) A moderate volume of member bank borrowing might
be outstanding much of the time, but continuing
pressure on the banking system as a whole to
meet its needs by heavy borrowing would even
tually be resisted by open market operations.
"Restraint"
(a) Through absorption of reserves or reluctance to
provide reserves through open market operations,
general awareness would be created that bank
credit is not available in sufficient volume to
meet all of the demands that are being made upon
it.
(b) Pressure of an excess aggregate demand of credit
upon a limited over-all supply would be expected
to cause higher rates of interest, and there may
be a tendency for rates to rise whether or not
intensification or pressure is desired. (Our
experience in early 1953 is an example, perhaps.)
(c) The discount rate would be raised in confirm-
__________ at ion ofthe general policy—o£_restraint.,—to-the_
269
(d) Sensitive money market rates would be close to
or above the discount rate at all times.
(e) A substantial growth of member bank borrowing
should take place, as a result of excess credit
demands, which would only be moderated by open
market operations if the apparent degree of
restraint was becoming too great.
(f) Reserves continue available at all times at a
price— the objective is not to shut off bank
credit or even a net reduction, but to limit
growth so as to avoid inflationary pressures
from the monetary side.
APPENDIX
A BRIEF STATEMENT '
270
CONSENSUS
271
APPENDIX D
A BRIEF STATEMENT OF CONSENSUS
Date of Meeting; Committee (FOMC or executive committee);
Change in Directive; (Ab); Brief Statement of Consensus.
Date FOMC
Ex.
Comm. Ab Consensus3
3/2/51 X X Support Government Bond
prices; long term restricted
bonds to be held at 99.
3/8/51 X X Same as 3/2/51.
4/5/51 X Let prices decline, but in
"orderly" manner. Play it by
ear.
5/7/51 X No directive— basically support
6/17/51 X X Provide upward strength in
bond market. Limit increase
in Federal Reserve Credit out
standing.
6/27/51 X Keep bills in range of 1.58-
1.647o. Don't let longer term
prices fall.
8/8/51 X Keep longest term above 96-3/4.
Don t let bill rate interfere
with 1-7/8% certificates.
8/27/51 X Same as 8/8/51
9/25/51 X Same as 8/8/51
10/4/51 X X Transactions up to executive.
Deal primarily in bills and
short term. Agree not to peg
bill rates. "Watchful wait
ing."
272
Date FOMC
Ex.
Comm. Ab Consensus
11/13/51 X Same as 10/4/51. No fixed
points of decline, keep market
orderly.
11/14/51 X X Same as 11/13/51, plus deal in
bills rather than certificates
if the Desk must supply re
serves .
2/11/52 X No fixed points of decline,
keep the market orderly.
2/29/52 X Keep "neutral,1 1 let supply and
demand operate, but keep the
market orderly.
3/1/52 X X Same as 2/29/52, and the Desk
should try to smooth out the
market over the tax payment
period.
4/4/52 X Have a freer definition of
neutrality (offset factors
affecting reserves), aim at
$400-$500 million discounts.
4/21/52 X Neutrality means moderate
borrowing, let supply and de
mand operate. Keep the market
orderly.
5/9/52 X No directive, concern over
Treasury action was expressed.
5/23/52 X No directive, same as 5/29/52.
6/6/52 X Same as 5/9/52.
6/19/52 X X Neutrality now considered to
to be "tight" money.
7/22/52 X Same as 6/19/52, keep bill
rate near 1.857., borrowing
near $1 billion.
8/29/52 X Same as 6/19/52, add reserves,
if necessary, to avoid tight- |
273
Date FOMC
Ex.
Comm. Ab Consensus
ening before refunding.
9/15/52 X No detailed instructions, do
all that is necessary to make
October refunding a success.
9/25/52 X X Neutrality which now means re
straint on undue credit expan
sion.
10/8/52 X Don't let "knots" or ‘ unemploy
ment develop. Go with the
market but keep it firm.
10/22/52 X Continue present policy--no
consensus.
11/5/52 X Continue present policy— no
real consensus.
11/25/52 X Continue present policy, and
perhaps tighten some.
12/8/52 X X Continue present policy— no
consensus.
12/23/52 X Same as 12/8/52.
1/6/53 X Continue present policy, but
don't hamper refunding. (Neu
trality is now restraint.)
1/27/53 X Obtain modest restraint.
2/10/53 X Continue present policy, but
tend to the tight side.
3/4/53 X Same as 2/10/53. First actual
statement of consensus.
3/5/53 X Same as 3/4/53.
3/25/53 X Open Market Operations are not
to encourage ease— keep the
market tight.
4/8/53 X Continue present policy with
274
Date FOMC
Ex.
Comm. Ab Consensus
as little change as possible.
Keep the market tight.
4/24/53 X Keep borrowing at $1% billion,
if higher than this, then
maybe purchase, if lower, sell.
Keep the market tight.
5/6/53 X X Provide some reserves. Not
too tight. "Play it by ear."
Be guided by the market.
5/13/53 X Provide reserves to avoid
further tightening. No speci
fic amount. No relaxation of
pressure, "feel."
5/26/53 X Keep the market tight, but
don t let it get any tighter.
Feel the way along.
6/11/53 X X X Supply reserves to the market
aggressively on a sharply
rising basis, without embrac
ing an easy money policy.
6/23/53 X Supply reserves— no amount was
specified.
7/7/53 X X Token purchases, no more ag
gressive supplying. (The
portfolio had declined.)
7/22/53 X Continue present policy, no
undue ease or tightness. Sup
ply as few additional reserves
as possible.
8/4/53 X Continue present policy, as
little purchasing as possible.
8/25/53 X No additional ease, keep bor
rowing about equal to excess
reserves. No specific
amounts were given.
9/8/53 X Supply some reserves, emphasis
275
Date FOMC
Ex.
Comm. Ab Consensus
on active ease.
9/24/53 X X X Continue present policy (act
ive ease?), give the Manager
discretion.
10/6/53 X Same as 9/24/53.
10/20/53 X Continue present policy. Some
purchases may be necessary.
Give discretion to the Manager.
11/6/53 X Same as 10/20/53. If the bill
rate is near the discount rate
purchase securities.
11/23/53 X Keep free reserves at $100 mil
lion, small purchase of securi
ties ($25 million), use re
purchase agreements.
12/15/53 X X X No real consensus, Manager to
refer to Minutes. Run-off
holdings to keep free reserves
near $100 million. Up to the
Manager and "feel."
1/5/54 X Continue present policy of
active ease.
1/19/54 X Continue present policy, no
specific figures, be on easy
side.
2/2/54 X X Continue the present policy.
Buy and sell on the basis of
market feeling.
2/17/54 X Continue the present policy of
active ease.
3/3/54 X X Same as 2/17/54, plus, avoid
ing sloppy conditions.
3/16/54 X Continue the present policy,
erring on the side of ease.
276
Ex.
Date FOMC Comm. Ab Consensus
3/30/54 X Same as 3/16/54.
4/13/54 X Keep free reserves in the $300-
$500 million range, selling if
they rise much above $500 mil
lion.
4/27/54 X Continue the present policy and
free reserve level (it was then
$600 million.)
5/11/54 X Continue policy of past few
weeks.
5/26/54 X No consensus, but some concern
over "forcing" ease.
6/8/54 X Continue present policy, no in
crease in ease.
6/23/54 X X Continue present policy of
active ease— no specific free
reserve figures. If inflation,
maybe change policy. Manager
to decide if free reserves too
high and whether or not to re
duce the portfolio.
7/7/54 X Consensus up to Rouse: about
same level as last meeting.
Free reserves $400-$700 million
without fixed limits. May not
be able to hold to that range.
Will run-off and sell if
feasible.
7/20/54 X No consensus— a little "top
ping" may be needed in August.
8/3/54 X Continue present policy. Run
off and sell securities.
8/24/54 X Keep free reserves around $600
million unless undesirable in
terms of general policy, in
which case the Manager is free
to act at will. No consensus—
277
Date FOMC
Ex.
Comm. Ab Consensus
this is a statement of Mr.
Sproul.
9/8/54 X Continue present policy. Keep
to lower of the $400-$700 mil
lion free reserve level. Keep
in mind the limitations of easy
money policy.
9/22/54 X X Continue present policy of
active ease. Err on the side
of ease. Had erred on the
side of restraint in August.
10/5/54 X Continue same policy as past
few weeks. No specific fig
ures.
10/20/54 X Continue present policy, Man
ager bearing in mind what has
been said here.
11/9/54 X Move to lower range of free
reserves (not specified) with
a minimum disturbance in tone.
11/23/54 X Give the Manager discretion to
act in accordance with the
views expressed in the Minutes,,
12/7/54 X X X No consensus stated— reduce
free reserves, rely on the fee',
of the market. Watch interest
rates.
12/28/54
X Move to lower of $300-$500 mil
lion free reserves if possible.
Watch sloppy conditions.
1/11/55 X X X Keep free reserves near $300-
$400 million. Sell and run
off.
1/25/55 X Keep even keel during Treasury
financing. Even keel is not
status quo. Keep in absentia,
but err on the side of ease if
278
Ex.
Date FOMC Comm. Ab
2/8/55 X
3/2/55 X X
3/15/55 X
3/29/55 X
4/12/55 X
4/26/55 X
5/10/55 X X X
5/24/55 X
6/6/55 X
6/22/55 X X
Consensus
anything. Up to the Manager
to decide how to do this.
Continue present policy. Move
to 0 free reserves, hope bill
rate near the discount rate.
Many for continuing the pres
ent policy or no increased
tightness. No knots. No way
specify this practically, up
the Manager in light of the
discussion.
Continue present policy. Man
ager must steer a course be
tween more ease and more tight
ness.
Continue the present policy.
Continue present policy in
terms of reserves.
Continue present policy. Keep
free reserves positive. Keep
an even keel during Treasury
financing. Keep interest rates
steady. Hope operations are
passive.
No need the change policy, but
change policy to indicate re
covery over. Even keel during
Treasury financing.
Continue present policy.
Maintenance of even keel up to
the Manager in light of the
discussion.
No consensus. Continue about
No consensus stated— keep 0
free reserves, watch member
bank borrowing, offset any
swings in reserves.
279
Date FOMCb &b Consensus
the same, watching other
things.
7/12/55 X Continue present policy of
mild restraint. No particular
level of free reserves.
8/2/55 X X No consensus or direction.
8/23/55 X No level of free reserves, but
in direction of continuing
restraint. Manager to func
tion in light of the discus
sion at this meeting.
9/14/55 X Continue general restraint
agreed upon on 8/23/55, add in
err on the side of restraint.
9/26/55 X Telephone meeting on Eisen
hower's health. No longer err
on the side of restraint.
10/4/55 X Same general instruction as
9/14/55 and err on the side of
restraint, net borrowed re
serves of $300 million, money
market rates near the discount
rate, member bank borrowing
around $1 billion and feel.
10/25/55 X Keep up restraint. Rouse:
had kept up even keel during
last three weeks, aim to keep
up pressure and have a little
more.
11/16/55 X No consensus. Give Manager
latitude in adjusting to the
discount rate increase.
11/30/55 X Telephone meeting. Treasury
needs aid in financing. Buy
up to $400 million of 2-5/8
Certificates on when-issued
basis if feel it is necessary.
280
Date
FOMC Ab Consensus
12/8/55
X
Telephone meeting. Up to the
Manager to take care of the
Government bond market as he
sees fit.
12/13/55
X Get back to the program of
restraint of 10/25/55. Up to
the Manager to decide how far
to go.
1/10/56 X Continue present policy,
"watchful waiting," try to get
back to the restraint of 11/55.
1/24/56 X X No real consensus stated. Con
tinue present policy, but
watch economy. Maybe lower
free reserves. Concerned about
possible decline (call it de
flation in directive.)
2/15/56 X No consensus. Manager will
have to watch from day to day.
It will only confuse him if
FOMC tries to pinpoint course
of operation.
3/6/56 X No consensus. Same feelings
as 2/15/56, plus any doubts to
be resolved on the side of
tightness.
3/27/56 X • X
* > * r »
No consensus. No concern about
downturn (deflation) now. Err
on the side of tightness.
4/17/56 X No consensus.
5/9/56 X Keep present restraint. Main
tain existing pressure on bank
reserve positions.
5/23/56 X X Concerned about deflation (real
slowdown in economy), tend to
0 free reserves.
6/5/56 X
Whatever you call them, get net
281
Date FOMC Ab Consensus
6/26/56 X
7/17/56
8/7/56
X
X
8/21/56 X
9/11/56 X
9/25/56 X
borrowed reserves down from
their present level.
Err on the side of ease and
have net borrowed reserves of
around $200 million because of
Treasury financing. Take up
slack if Treasury not in mar
ket. Consider color, tone, anc
the general state of the mar
ket.
Keep net borrowed reserves
around $250 million, watch the
steel strike, keep about as
tight as last few weeks.
X Not concerned about deflation.
Keep an even keel (note it is
hard to keep) until Treasury
is out of the market, after
the financing, err on the side
of restraint and raise net
borrowed reserves with no upper
limit.
Keep net borrowed reserves
around $250 million. No appre
ciable change. Reduce pres
sure if the tone is bad. Do
the best possible under terms
of the general directive.
No overt change. Keep net
borrowed reserves--selling if
need be. Err on the side of
restraint, but keep the market
stable for the Treasury fi
nancing. Careful during
elections.
Play by ear, err on the side
of ease, Manager is to have
latitude. Do whatever is
needed to aid the Treasury.
10/16/56 X
Question now is one of feel.
282
Date FOMC Ab Consensus
Keep an even keel. Watch
closely if bill rate approaches
3.25%. Use judgement as to
whether free reserves or net
borrowed reserves occur.
11/13/56 X No consensus.
11/27/56 X X No consensus. No overt change
in policy.
12/10/56 X No consensus. Don't increase
pressure.
1/8/57 X X Recapture restraint of late
November, watching the money
market. Spirit if not figures
of restraint.
1/28/57 X Follow policy of 1/8/57 that
had actually not been followed.
Net borrowed reserves around
$200-$0 million.
2/18/57 X Continue status quo. Minutes
reflect the different degrees
of emphasis to be used by the
Manager. Net borrowed reserves
around $200 million.
3/5/57 X X Operate on the basis of the
discussion at this meeting.
Look at color, tone, feel and
behavior.
3/26/57 X Err on the side of restraint.
Net borrowed reserves $200-$30C
million. Look at feel and
behavior of the market.
4/16/57 X Keep market stable during
Treasury financing. Up to the
Manager.
4/24/57 X Treasury financing a problem
for market. Let them work it
out. Keep the market tight but
not unreasonable.
283
Date FOMC Ab Consensus
5/7/57 X Continue present policy. No
overt ease or tightness. The
Manager of the account will
have to exercise judgement.
Rouse: will try to keep the
bill rate the same.
5/28/57 X Maintain present restraint, no
overt action either way. The
Manager has maximum latitude
to feel his way.
6/18/57 X Give the Manager as much lati
tude as possible. Feel not net
borrowed reserve figures. Con
cerned over inflation.
7/9/57 X Continue present policy. No
guides— up to the Manager.
Rouse mentions net borrowed
reserve figure.
7/30/57 X Continue present policy— no
increased restraint.
8/20/57 X No change in policy— give the
Manager latitude.
9/10/57 X Base actions on color, tone
and feel. Err on the side of
ease. Some minor ease during
the Treasury financing. $400-
$500 million net borrowed
reserves.
10/1/57 X Continue the same degree of
pressure.
10/22/57 X Look at feel, give Manager lee
way, err on the side of ease.
No overt move. Net borrowed
reserves around $350 million.
11/12/57 X X Moderate easing based on feel.
Net borrowed reserves around
$100-$250 million.
284
Date FOMC Ab Consensus
12/3/57 X Move to lower net borrowed
reserves— how much lower is up
to the Manager's opinion of
color and feel. He should do
the best he can.
12/17/57 X X Move to 0 free reserves. Give
the Manager all possible lati
tude.
1/7/58 X No more ease. Err on the side
of ease, then keep an even keel
during the Treasury financing.
1/28/58 X Keep an even keel during the
Treasury financing.
2/11/58 X Even keel tipped on the side of
ease. The Manager will have to
use his judgement. $200-$300
million free reserves.
3/4/58 X X $400-$500 million free reserves
moving toward $500 million.
3/25/58 X Minimum of $500 million free
reserves.
4/15/58 X $500-$600 million free reserves
as long as reserve positions do
not tighten drastically.
5/6/58 X No knots. Must use free re
serves as guide--keep them
around $500-$600 million.
5/27/58 X Manager not to be bound by
statistics, rely on feel and
even keel.
6/17/58 X Stay about where we are. Man
ager responsible for feel, tone
and color of the market.
7/8/58 X Keep around $500 million free
reserves, plus considering
color, tone and feel. Give
285
Date FOMC Ab Consensus
wide latitude to the Manager.
Rouse: will try to reduce
reserves.
7/15/58 X Telephone. May be disorder in
Government securities market.
Up to the Manager to buy if he
wants to.
7/18/58 X Telephone. Morning. May be
disorder in Government securi
ties. Some against buying
other than bills. Action up tc
the Manager. No public an
nouncement .
7/18/58 X Telephone. Afternoon. Managet
feels disorder exists. An
nouncement made. What and how
much bought up to the Manager.
Peg prices.
7/21/58 X Telephone. Aid Treasury by
buying rights. Up to Manager.
7/22/58 X Telephone. Up to the Manager
if he wants to aid the Trea
sury, but don't pick up attri
tion in advance.
7/23/58 X Telephone. Report on market,
no consensus.
7/24/58 X Telephone. Market steady.
Agree to stay out of market,
end authority to deal in other
than bills.
7/25/58 X Telephone. Report on market,
no consensus.
7/29/58 X X Mop up as many redundant re
serves as possible without
hurting the market.
7/30/58 X Telephone. Report on the mar
ket, no consensus.
286
Date FOMC Ab Consensus
7/31/58 X Telephone. Report on the mar
ket, no consensus.
8/1/58 X Telephone. Report on the mar
ket, no consensus.
8/4/58 X X Redundant reserves recaptured.
Policy up to the Manager. Not
free reserves figures, but play
by ear. Don't get too tight.
8/19/58 X X Desk is to get to 0 free re
serves if possible.
9/9/58 X Tend to 0 free reserves, but
action up to the Manager. Want
the same degree of pressure on
the market and even keel, but
not necessarily the same level
of free reserves.
9/30/58 X Keep free reserves about the
same. Keep an even keel. Give
the Manager to look at color,
tone and feel.
10/21/58 X Continue present policy, do not
move to tightness.
11/10/58 X Stay about where we are. No
set level of reserves. Even
keel during Treasury financing.
Play it by ear.
12/2/58 X Look at the market, not fig
ures. Let the market tighten
with latitude given to Manager
to judge how tight.
12/16/58 X X Keep a little tighter, no fear
of net borrowed reserves. Feel
not figures. Rouse: tighter,
but not too tight.
1/6/59 X With Treasury financing, keep
an even keel. Err on the side
of restraint, but action up to
the Manager.
287
Date FOMC
Consensus
1/27/59 X
Keep an even keel. Up to the
Manager to decide what even
keel means in the light of dis
cussion that took place.
2/10/59 X
Continue present policy, keep
an even keel. Feel, not fig
ures. Degree of pressure is
up to the Manager.
3/3/59 X
Continue the present policy,
erring on the side of re
straint.
3/24/59 X
No consensus. Most for even
keel and present policy.
4/14/59 X
Keep about the same. Feel not
figures. Tone up to the
Manager.
5/5/59 X
Keep even keel until after
Treasury financing, then in
crease restraint.
5/26/59 X X
Increase restraint. Move to
$500 million net borrowed
reserves.
6/16/59 X
Continue present policy— con
siderable discretion to the
Desk on feel. Stay about the
same due to Hearings on the
debt ceiling.
7/7/59 X
Not easy money, but a little
more than erring on the side
of ease. Latitude to Manager
due to hearings.
7/28/59 X
Continue present policy,
neither erring on the side of
ease or restraint.
8/18/59 X
Maintain status quo.
9/1/59 X
The Manager will have to use
288
Date FOMC Ab Consensus
his judgement on open market
operations and reserve
positions.
9/22/59 X Continue present restraint,
allowing for color, tone and
feel. Err on the side of ease.
Give the Manager all the lati
tude he needs.
10/13/59 X Continue present policy.
Watch and wait.
11/4/59 X Continue present policy with
leeway to the Manager. Some,
but not a majority for erring
on the side of ease.
11/24/59 X Keen the status quo with maxi
mum flexibility in the hands
of the Manager to maintain it.
12/15/59 X No consensus— keep about the
same.
1/12/60 X Keep the status quo (a policy
of restriction).
1/26/60 X Keeping an even keel during
Treasury financing up to the
Manager.
2/9/60 X Slight but not visible easing,
necessary to play by ear.
3/1/60 X X Moderately less restraint.
3/22/60 X Even keel during Treasury
financing. Desk should avoid
any indication of tightening
or easing.
4/12/60 X Slight ease, but not overt.
5/3/60 X
In the direction of lower net
borrowed reserves (toward 0).
289
Date FOMC Ab Consensus
5/24/60 X X Trend slightly toward direction
of providing reserves.
6/14/60 X Continue present policy, mark
time, err on the side of ease.
7/6/60 X Mark time, err on the side of
ease. May buy other than bills;
if there are no bills.
7/20/60 X Keep around $200 million free
reserves, a little more ease.
8/16/60 X X Continue present policy. Give
Manager leeway for feel and in
handling reduced reserve re
quirements. Err on the side
of ease. Hope to get the
money supply rising.
9/13/60 X Even keel, latitude for feel,
not statistics. Err on the
side of ease.
10/4/60 X Continue the present policy.
10/25/60 X X Even keel. Don't want cheap
money. Rouse: will stay in
the $300-$500 million range of
free reserves.
11/22/60 X Manager to be guided by the
discussion that had taken
place.
12/13/60 X Continue present policy of
ease, feel being the basic
guide. The majority want the
bill rate as high as possible.
1/10/61 X Keep the status cjuo, but not
sloppy ease. No one can cor
rect the gold outflow except
the new administration.
1/24/61 X Keep the same degree of ease.
Let the minutes guide the
Manager. Look at reserves.
290
Date FOMC Ab Consensus
2/7/61 X Bench mark of policy primarily
the bill rate— don't let it
fall. Use other than bills.
3/7/61 X Same as 2/7/61.
3/28/61 X Continue the present policy.
4/18/61 X X Continue the present policy
and degree of ease, watching
short-term interest rates.
Manager has leeway to act.
5/9/61 X A little less ease, look at
short-term interest rates, give
the Manager leeway. Rely on
atmosphere and free reserves of
$400-§500 million.
6/6/61 X X Free reserves at $500 million,
err on the side of ease, no
slop, rely on feel. Up to the
Manager to decide how to deal
in securities other than bills
(special authorization).
6/20/61 X Err on the side of ease. Up
to the Manager on how to use
the special authorization.
7/11/61 X Free reserves around $500-$600
million. Can't use money
supply, figures. Deal in other
than bills.
8/1/61 X Reduce activity outside of
bills, but this is up to the
discretion of the Manager— no
limit set. Continue the pres
ent policy and degree of ease.
8/22/61 X X Continue the present policy,
but disagree on means.
9/12/61 X Continue the present policy,
don't rock the boat in the
Treasury financing.
291
Date FOMC Ab Consensus
10/3/61 X Continue the present policy.
10/24/61 X Continue the present policy fox
home needs, even keel during
the Treasury financing, err on
the side of less ease, and do
all possible to raise short
term interest rates.
11/14/61 X Continue the present policy,
but not quite status quo. Re
duce free reserves to 0.
12/5/61 X No increase in the pressure on
reserves.
12/19/61 X X Keep short-term interest rates
in the 2.50-2.757o range, get
a little tighter, but no overt
tightness. No specific
reserve figures.
aAlthough the Consenses as stated here are not
direct quotations or full sentences, they do represent con
densed expressions, in the terminology employed by the
FOMC, of the actual consenses.
^The executive committee of the Federal Open Market
Committee was dissolved on June 22, 1955.
APPENDIX E
COMMENTS ON THE EXECUTIVE COMMITTEE
292
293
APPENDIX E
COMMENTS ON THE EXECUTIVE COMMITTEE
March 2, 1955
Mr. Martin: The Open Market Committee's organization
and procedure have grown up like Topsy. They are not laid
out for use in the Federal Reserve Act . . . . In my think
ing— and again I want to say I eliminate all personalities—
that responsibility [managing the account] is shared by all
of the members of the Open Market Committee with respect to
both the management of the account and the manager of the
account. I do not think our present arrangements permit us
to discharge that responsibility adequately.
When I came over from the Treasury, I struggled with
a good many problems concerning the degree of discretionary
responsibility that the management of the account was to be
given. In some directions, I think we have made an enor
mous lot of progress ...
Even though under our by-laws he serves at the plea
sure of the Committee and we could discharge him at any
time as I read those by-laws, I don't think we have this
discretion in fact, except under very special circumstances.
His selection is put up to us by the Board of Directors of
the Federal Reserve Bank of New York as the man they have
selected, one whom they believe to be satisfactory ....
I don't want to magnify this point out of proportion, but I
don't see how we can say that we have management control so
long as we preserve this type of organization . . .
I am not putting this in terms of abuse or of fraudu
lent operations, but I do not consider it proper that the
manager of the account, because he is also a Vice President
of the New York Bank, should be in a position where he might:
have to resist pressure to report operations that the direc
tors of that Bank may wish him to report to them . . .
That account has become much more important than it
was when it was set up a good many years ago. It is now
becoming vital to our operations that we are and appear to
be absolutely clean-cut in the exercise of our responsibil
ity, the shared responsibility of us all. We should be
clear that nobody have any inhibitions with respect to mov
ing at any time to ask for the removal of the manager of the
account, if he feels that request is his duty at that
time . . . (abolishing the executive committee will make the
manager more responsible to the committee as a whole.]
294
Mr. Vardaman: . . . stated that the present status
of the Manager of the System Open Market Account was well
known, that he was not responsible to the FOMC in the first
place, that the FOMC selected the Federal Reserve Bank of
New York as an institution to manage the Open Market Ac
count, and that in so doing it had delegated what was prob
ably the most sacred and important authority given to the
Federal Reserve System by the Congress, namely, the "crea
tion of money and credit 1 through the management of the
Federal Open Market Account. Thus the Open Market Committee
had been removed from direct authority and thereby direct
responsibility for the management of the account.
[Mr. Sproul defended the present organization, noting
that the Manager was presently accountable to the FOMC as
a whole. Mr. Martin disagreed and moved to show on the
record that the Committee was dissatisfied with the present
organization, especially since it was difficult to explain
the then present organization to those outside the System.
Contrary to his statement on June 11, 1953 "Chairman Martin
observed that he did not feel that it was desirable for
either the executive committee or the FOMC to run an oper
ation of this type as it had today, where important actions
were voted without having a meeting of minds of a substan
tial majority of the members." Chairman Martin was satis
fied with a censure vote of six to five against the then
present organizational framework and the executive commit
tee 3'f
*It should be noted that Mr. Rouse was Manager of the
System Open Market Account for the entire period 1951
through 1961.
APPENDIX F
SELECTED INSTRUCTIONS TO THE MANAGER
295
296
5/13/53
pp. 13-14
12/15/53
pp. 2-3
APPENDIX F
SELECTED INSTRUCTIONS TO THE MANAGER
Chairman Martin stated that the Committee
appeared to be in agreement that it was not
desirable to have a specific figure in mind in
connection with injecting reserves into the mar
ket to prevent further tightening ...
Mr. Rouse said that as he understood it, the
instructions, in essence, were that the New York
Bank should put reserves into the market over a
period of time which would be sufficient to
avoid further tightening of the money market.
He understood that none of the members of the
committee felt there should be a relaxation in
the credit situation, that it was the objective
to level-off the situation as far as that would
be possible, that he and Mr. Sproul had dis
cussed the matter fully in the light of the
meeting of May 6. that they were trying to "feel
their way along, and that he felt they had an
understanding of the committee's objectives re
garding purchases in the open market.
. . . While he could not attempt to be pre^..
cise in maintaining a specific figure of free
reserves, it was Mr. Rouse's feeling that the
market has had broad confidence and that oper
ations for the System account had carried out
the policy indicated by the executive committee.
Mr. Mills then questioned how Mr. Rouse would
know what the timing should be in buying bills
in the future, to which Mr. Rouse responded that
the criterion would be largely the attitude of
the dealers— whether they wished to take on more
bills or not. Mr. Mills questioned the ade
quacy of this criterion which would be basing
operations for the account wholly on the fehling
of adequacy of the market itself and not acting
in terms of open market policy . . .
There followed a discussion of the question
of winnowing the consensus of the committee, as
to the proper execution of open market policy,
from the individual views which might be ex
pressed by members of the committee or its
297
9/22/54
pp. 1-2
1/25/55
p. 13
3/2/55
p. 2
5/24/55
p. 26
7/2/55
p.31
staff. At the conclusion of the discussion
Chairman Martin stated that he felt the discus
sion had served the purpose of clarifying the
atmosphere in what was at all times a difficult
operation. [No more was said.3
Reference was made to the general policy
approved at the meeting of the full committee
earlier today at which it was agreed there should
be a continuation of the credit policy of active
ease with the understanding that, in the immed
iate future, any doubts should be resolved in
favor of too much rather than too little ease in
the market, and with the further understanding
that, without guaranteeing particular price
levels in the Government securities market,
adequate reserves should be available to assure
that the current offering of Treasury securities
xtfould be successful.
Chairman Martin said that he did not think the
committee was contemplating a "status quo" pro
gram: it was shooting at an "even keel"during
the period of the Treasury's financing. The
Treasury's offering should not appear either to
be floated by the Federal Reserve or hindered by
the Federal Reserve. In other words, the Federal
Reserve should be "in absentia" as far as pos
sible. As to how to achieve this ideal, Chairman
Martin said he had no precise answer . . .
. . .Mr. Rouse stated he understood this to
mean that in general operations he would try to
keep the free reserve position on an even keel
in the immediate future.
. . . namely, that the committee endeavor to
continue about the present degree of tightness or
ease in the money market . . . and that it be
understood that action would be taken either to
bring about greater ease or less ease in the
market within the terms of the Committee's
general directive, depending upon what seemed
necessary at the time.
. . . with the understanding that the commit
tee would leave to the management of the System
account the problem of maintaining an "even keel"
in the light of the discussion at this meeting.
. . . Rather, the objective appeared to be to
continue the present policy of "mild restraint. '
298
8/23/55
pp. 35ff
10/25/55
pp. 25ff
12/13/55
p. 21
Whatever action or emphasis was necessary to
"keep the situation on an even keel should be the
goal of the Committee for the next three weeks.
It was very difficult to measure degrees of
tightness, Chairman Martin said, but the Commit
tee should not be carried away with any parti
cular level of free reserves as a goal. This is
the consensus and direction.
Chairman Martin said that it would not be
possible to specify at this meeting exactly the
level of negative free reserves that should be
maintained over the next three weeks but that .
the level should be in the direction of continu
ing restraint.
Mr. Rouse stated that the feeling of the New
York Bank was to allow free reserves to decline
to a point where there would be quite apparent
market effects before injecting additional
reserves through open market operations . . .
While the question [whether or when to buy
billsj was not further clarified by further
discussion, Mr. Rouse stated that he thought
the New York Bank could function satisfactorily
in the light of the discussion at this meeting.
Chairman Martin said that this pointed up the
problem that the Committee had been wrestling
with for the last several years. He did not
know how it could be resolved. None of the mem
bers of the Committee thought of these figures
as exact goals; they were target figures only.
It seemed to him that, whatever was used as a
guide, the majority opinion expressed today
leaned on the side of restraint, but not drama
tically. He thought this might be as good a
summing-up as the Committee was likely to get at
the moment . . .
Mr. Rouse said, in response to a question
from Chairman Martin, that he thought the intent
of the Committee was reasonably clear from the
discussion. There had been an even keel during
the last three weeks and the Committee would
like to keep up the pressure during the next
three weeks and have a little more.
[with regard to getting back to a program of
restraint.j
This would include the understanding that in
the present situation the desk should have some
latitude in deciding how far to go in applying
1/24/56
pp. 16ff
3/6/56
p. 38
8/21/56
p. 34
10/16/56
pp. 31ff
299
restraint.
Also, I have the strong feeling that none of
us can gauge the economy very accurately. When
we deal in fine degrees, we are falling into the
error ... of giving a little credence to the
idea that monetary policy can do more than it
can, and that we can turn the faucet on or turn
off the faucet and can achieve a precise objec
tive. ... We may say that we should maintain
the pressure we now have in the market but I do
not believe we or the public knows what the de
gree of pressure is that we are maintaining.
[Mr. Martin.]
It was very difficult for the Manager of the
Account to operate under such circumstances, he
said, but he did not think that any useful pur
pose would be served in voting on a more speci
fic policy directive.
Chairman Martin noted that Messrs. Erickson
and Irons had emphasized the point that the Ac
count Management should use the "feel^ of the
market in its operations in this particular
situation. He agreed that it was necessary to
depend on the Account Management to do the best
it could within the framework of the Committee s
general policy. In the immediate future, this
should be with the understanding that the Com
mittee wished the Account Management to make
every effort to avoid indicating an appreciable
change in policy through the open market oper
ations, recognizing that it would be very diffi
cult to carry out this program.
Chairman Martin said that the comments today
indicate a clearer consensus than the Committee
had shown at the last several meetings. . . .
The questions concerned details of operations
that revolved around the word "feel. It was
very difficult for the Committee to furnish
guides to this, the Chairman said, ... if in
the judgement of the Management of the Account,
the positive free reserve figures were necessary
in relation to maintaining the same degree of
tightness that the Committee had been trying to
have, he would not be bothered by their appear
ance. This was what the Committee meant by
speaking of the "feel of the market.' All mem
bers of the Committee might not agree on the
level of free reserves or net borrowed reserves
300
1/8/57
p. 37
1/28/57
pp. 30ff
4/16/57
pp. 14ff
5/28/57
p. 36
9/10/57
PP. 34ff
at which that degree of tightness would be ob-.
tained, but for the immediate period ahead the
Committee must rely on the judgement of the
Management of the Account.
He [Mr. Rouse] felt that it would be possible
to accomplish a return to the situation that
existed in early December or the latter part of
November in terms of the spirit, but not perhaps
in terms of the figures, of net borrowed re
serves .
. . . The consensus of the Committee seemed
clear: that we should endeavor to follow the
policy that we thought was to be followed three
weeks ago but which some now felt had not been
followed. This was a difficult period, Chairman
Martin said, and his thought was to attempt to
maintain the status quo until the Committee could
see more clearly into the spring developments.
. . . Take the "rough edge" off the present
policy of restraint. . . . While I agree that
net borrowed (or free) reserves constitute the
best single statistical measure of credit re
straint, I think that even it has many short
comings and that its use must be subject to
major reservations. We are operating in an area
where human judgements and expectations are most
important and these are not susceptible to pre
cise formulation. . . . This [take the rough
edge off the present policy of restraint] was
easy to say, he noted, but almost impossible to
administer, and the Committee should have great
sympathy with the Management of the Account under
this type of operation. . . . Now the Committee
was facing a Treasury financing. This did not
mean that it should resolve errors on the side of
ease, the Chairman said, but he would not like
to see a billion dollars of net borrowed reserves
and heavy discounting at the time of the Treasury
announcement.
. . . His own feeling was that the Committee
should maintain the present degree of restraint,
taking overt action in neither direction, and
letting the Manager of the Account have the
maximum latitude to feel his way in the market.
[Mr. Martin.]
... He could not help but be conscious of
the load that the Committee placed on the Manager
301
10/22/57
p. 43
12/17/57
p. 41
1/7/58
pp. 5Off
of the System Account, he said, noting that the
Committee issued a directive and then expected
the Manager to keep in mind the minority and
majority views expressed.
After stating that he had no real idea
whether business was going up or down at the
moment, the Chairman commented that he had been
fishing the past few days and that the thought
had occurred to him that "the System has the fish
on the hook." Its policy of restraint is now
understood from one end of the country to the
other. We must not get too tight and snap the
line. This had nothing to do with a change in
general policy, he noted, but it did involve a
problem for the Manager of the System Account
who had to carry on operations on the basis of
tone, color, and feel of the market.
... Be that as it may, Mr. Hayes said that
he thought it clear that policy was to give the
manager of the System Account considerable lati
tude, to resolve doubts on the side of ease, and
not to emphasize figures too much because of the
importance of some of the other factors.
He did not think that what the System was now
doing was in the nature of giving a hypodermic
but rather was more in the nature of a sedative.
If he thought a hypodermic was needed, he would
be in favor of a different approach from what we
had taken. . . . Without making a business fore
cast, the Chairman reiterated that it seemed to
him that the posture of the System must be very
clear at this time if it was to fulfill the role
of wanting to minister to the patient in every
way it could, of not contributing to unemploy
ment, and of not taking the line that unemploy
ment was desirable.
He thought there should be positive free
reserves because this seemed to be the only con
sistent position. However, he would not want
free reserves to be so positive as to indicate
that the Committee was actively pursuing a more
easy policy than it had been pursuing to date.
The Chairman said that he recognized this was a
difficult order to give to the Manager of the
System Account in the light of the magnitude of
funds floating around. . . .Mr. Rouse said he
thought the Desk could operate along the lines
the Committee desired.
2/11/58
pp. 32ff
5/6/58
p. 52
5/27/58
p. 41
6/17/58
p. 37
7/8/58
pp. 49ff
11/10/58
p. 30
1/6/59
p. 36
302
[With regard to an "even keel tipped on the
side of ease."]
He did not believe that we could measure the
degree of ease closely and he recognized that
the Manager of the System Account would have to
use his judgement.
Chairman Martin said that these comments point
up the problem of using free reserve target fig
ures at all. However, they had to be used as an
indication, for that was the framework within
which the Account Manager had to work. As he
saw it, the majority would favor a slight easing
of the present free reserve level, and that, he
said, was about the best he could do to state
the matter.
In terms of approach, this position contem
plated that the Account Management was not going
to be bound by the "statistics" but would try to
take account of the feel of the market in order
to maintain an even-keel operation. The posture
of the System was one of ease and it should con
tinue to be such.
... He then expressed the view that the best
thing to do for the next three weeks would be to
try to follow the color, feel, and tone of the
market and not get unduly easier or tighter. He
felt that the Account Management had done a good
job in this respect during the past three weeks,
responding when it had to respond.
Chairman Martin then said that there appeared
to be agreement on the part of all that the
feel, color, and tone of the market must be an
element. In terms of the level of free reserves,
he suggested that "around $500 million" was
probably as well as the matter could be stated.
Stay about where we are.
He then went on to say that an even keel
policy, as debated from time to time at Committee
meetings, seemed to mean many different things
to different people. However, he was talking
about the feel of the market generally, and he
felt there was a reasonable meeting of the minds
on what the Committee intended to do.
303
8/18/59
p. 30
9/22/59
p. 31
11/24/59
p. 38
1/12/60
p. 56
2/9/60
p. 60
3/22/60
p. 42
Chairman Martin summarized the meeting by-
saying that the majority clearly favored main
tenance of the status quo, with no change in the
discount rate or in the policy directive at this
time. One or two who had spoken were slightly
on the side of ease, but this was offset by
others who were somewhat on the side of further
restraint, so the situation tended to balance
out.
. . . but he did not believe that the Commit
tee could get perfection and he did not believe
that it should ask the Desk to get perfection in
its operations. Tone, color, and feel in the
market were too difficult to measure. ... It
was desired the same degree of restraint was to
be maintained, allowing for tone, color, and
feel in the market, with a clear majority resol
ving whatever deviations there were from that
policy on the side of ease and in favor of giving
the Manager of the System Account the latitude
that Mr. Hayes had requested for him.
Chairman Martin said he shared some of the
apprehension that had been expressed about the
money supply and the relationship of credit to
growth, but he did not believe this was the time
to correct it. It was, however, something to
which the System should be aware.
The Chairman then said that clearly the con
sensus of this meeting favored maintaining the
status quo, with maximum flexibility in the hands
of the Manager of the Account to maintain the
status quo.
[On an even keel]. The question, he sug
gested, involved a matter of deliberateness. It
was desirable to express shades of.differences,
but he questioned whether there was any prcise
way of defining. The Desk, he observed, already
has enough difficulties. LMr. Martin.j
tMr. Rouse on the consensus of slight but not
visible easing.!
It might be a confusing situation. It would
seem necessary to play by ear to a considerable
extent.
Chairman Martin then said he understood from
the go-around that the Committee would favor
continuing the existing policy directive, and
304
4/12/60
p. 39
10/4/60
p. 44
11/14/61
p. 57
that, while there were views plus or minus here
and there, it was the general consensus that the
Desk should do the best it could to avoid an
indication of tightening or of easing.
. . . Chairman Martin said he thought a fairly
good case could be made that the general eco
nomic picture required that some attention be
paid to making additions to the money supply.
How such additions might be brought about, he die
not know, but the reason he considered it impor
tant was that monetary policy and debt manage
ment policy had now come together for the first
time in a long period . . .
Turning to the discussion at this meeting,
the Chairman noted that there had been practi
cally no sentiment in favor of an increase in
restraint. With regard to the question of what
Committee policy had been, he suggested that this
fell somewhat into the area of semantics. The
Committee could never quite know whether its
intentions were carried out or to what extent the
situation developed on its own accord. CThe
policy was to be one of slight, but not visible
easing .3
He [Mr. Martin] wished only to emphasize the
point that had been made that the Account Mana
ger should operate on the feel and tone of the
market and not the statistics. The dead hand of
statistics had been responsible for many of the
System's difficulties.
The Chairman went on to say that he thought
the consensus of this meeting was rather clear.
It did not contemplate, perhaps, quite the main
tenance of the status quo, but certainly it
would not favor any change in the directive or
the discount rate at this time.^ A minority
leaned toward a shift of emphasis to total re
serves, but he questioned whether the Committee
wanted to shift its sights substantially until it
knew more clearly what developments were going
to occur.
APPENDIX G
EXPLANATIONS OF POLICY ACTIONS
305
306
(By the
Consensus on
7/22/52
Response on
8/29/52
Consensus on
4/8/53
Response on
4/24/53
Consensus on
5/6/53
APPENDIX G
EXPLANATIONS OF POLICY ACTIONS
Account Manager Unless Otherwise Noted)
Maintain the bill rate near 1.857o, keep
borrowing around $1 billion. Continue policy
of neutrality.
(the approach had been] . . . one of pro
viding reserves to the market in response to
what seemed to be the needs of the market,
rather than trying to maintain or fix or
improve or harden interest rates . . . the
guide had been the need for reserves, modi
fied during the period of Treasury financing
when the need for supporting the refinancing
was the parallel objective.
Attempt to have as little change as pos
sible in open market operations.
Mr. Sproul added that as he interpreted
the discussion at the April 8 meeting of the
executive committee, it was suggested that
member bank borrowings be kept in a range
around $1-1/2 billion and it also was indi
cated that funds might be put into the mar
ket to offset Treasury operations, increases
in currency in circulation, a decline in
float, and foreign transactions. He would
interpret this to include the effect on bank
reserves of possible Treasury financing.
In the meantime, it was his [Mr. Martin's]
understanding that :the committee was in
agreement that operations should be carried
out along the lines of the foregoing dis
cussion regarding the injection of some
reserves into the market, without, however,
any understanding as to the amount of such
reserves that might be needed to keep the
market from becoming too tight. He felt that
the quantity of purchases could be left to
the judgement of the Manager of the Account
who could "feel his way" in the market.
Response on
5/13/53
Consensus on
5/26/53
Response on
6/11/53
Consensus on
11/23/53
Response on
12/15/53
Consensus on
12/15/53
Response on
1/5/54
Consensus on
3/3/54
Response on
3/16/54
Consensus on
5/11/54
Response on
5/26/54
307
Mr. Rouse . . . felt some further pur
chases of short-term securities for the Sys
tem account would be advisible without having
any fixed amount in mind at this time.
Keeping the market tight but keeping it
from getting any tighter is a useful guide
for the Manager. He should Mfeel his way.”
Lon unsettlement and extreme "tightness"
in the Government securities market.3 If
reserves were going to do the job, Mr. Rouse
felt the reserves had been available.
Keep free reserves near $100 million, pur
chase about $25 million of securities.
While he could not attempt to be precise
in maintaining a specific figure of free
reserves, it was Mr. Rouse's feeling that the
market has had broad confidence and that
operations for the System had carried out the
policy indicated by the executive committee.
Mr. Mills then questioned how Mr. Rouse
would know what the timing should be in buy
ing bills in the future, to which Mr. Rouse
replied that the criterion would be largely
the attitude of the dealers--whether they
wished to take on more bills or not.
There should be some run-off of securities
to hold free reserves at $100 million.
Free reserves had ranged from $300 to $600
million, but the market was not unduly easy.
Continue the present policy of active
ease.
The market is actually easier than it
appears because the mortgage market and con
sumer credit markets are filled. If there
were to be any optimum figure it would be
something like $250 to $300 million of free
reserves but that the test was to have an
adequate amount of reserves which would
"grease the way" for credit expansion.
Continue the policy which had been in
effect for the past few weeks.
The account had purchased securities. The
need to do this was not established in view
of the difficulty of precise anticipation,
but the account had acted to err on the side
of ease.
Consensus on
6/23/54
Response on
7/7/54
Consensus on
8/3/54
Response on
8/24/54
Consensus on
8/24/54
Response on
9/8/54
Consensus on
11/23/54
Response on
12/7/54
Consensus on
1/25/55
Response on
2/8/55
308
Continue the present policy of active
ease. This would mean free reserves should
be in the range of $400 to $700 million.
In response to Chairman Martin's question
as to how he arrived at the conclusion that
the recent level of free reserves was about
right, Mr. Sproul stated that in his opinion
the perofrmance of the money market and of
the economy generally seemed to indicate that
monetary policy was doing all it could do to
foster whatever tendencies there were toward
recovery and to combat whatever downward
tendencies existed in the economy, without at
the same time piling reserves on reserves
and thus merely bringing down the level of
rates on short-term credit instruments.
Continue the present policy, run off some
securities, sell some securities.
[The Manager was criticized early in the
meeting for being too "tight" in a period of
active ease.] Free reserves had actually
been greater than suggested. Distribution
was poor, leading to a misleading tightness
in central reserve city banks. The tightness
in central reserve city banks was caused by
banks creating loans and investment beyond
amounts justified by increases in their de
posits .
Have free reserves around $600 million,
but let the Manager decide exact figure on
the basis of his judgement.
Maldistribution of free reserves prevented
their flow to central reserve city banks and
lowering them as much as had been desired.
The Manager has discretion to act in
accordance with the views expressed in the
Minutes. "Play by ear."
[the Manager had been criticized for rely
ing on "feel ]. Feel is only one factor—
free reserves, money rates and others are
considered.
Mr. Rouse stated that he understood this
to mean that in general operations would try
to keep the free reserve position on an even
keel in the immediate future.
Excess reserves are high, so the market
is not as tight as free reserves indicate.
309
1/8/57
Consensus on
3/5/57
Response on
3/26/57
Consensus on
4/24/57
Response on
5/7/57
Consensus on
7/9/57
Response on
7/30/57
Consensus on
8/20/57
Response on
9/10/57
Consensus on
5/27/58
Response on
6/17/58
Consensus on
11/10/58
accomplish a return to the situation that
existed in early December or the later part
of November in terms of the spirit, but not
perhaps in terms of the figures, of net
borrowed reserves.
Handle operations in the best way possible
in the light of the discussion that had gone
on at this meeting.
In response to criticisms that the Desk
had purchased securities when no clear need
existed Mr. Rouse felt there was a risk in
allowing the market to remain tight in this
period. There was more pressure than the
figures indicated. The Treasury financing
was doubtful when first announced, and we
had to make sure it was successful. On a
weekly basis, the net borrowed reserve fig
ures were actually tighter thanjmost wanted.
Net borrowed reserves of $425 million looked
too tight.
Keep the market tight, but not unreason
ably so.
The Desk had kept the market tight.
Continue the present policy.
Actions were dominated by the Treasury
and perverse net borrowed reserve movements.
The bill rate moved up, offsetting how net
borrowed reserve figures. There was no ease
due to low net borrowed reserves.
No change in policy sought. Prefer net
borrowed reserves closer to $400 to $500
million than $600 million.
The market had been tight as far as Mr.
Rouse could tell. Although it looks less
tight in terms of net borrowed reserves,
this was not so.
The posture was one of ease and should
continue to be such. Do not be bound by any
statistic, but rely on feel.
The Desk had purchased securities, but
the bill rate rose nonetheless.
Stay about where we are. Restraint de
sired, but keep an even keel during the
Response on
12/2/58
Consensus on
12/2/58
Response on
12/15/58
Consensus on
12/15/58
Response on
1/6/59
Consensus on
1/6/59
Response on
1/27/59
Consensus on
4/14/59
Response on
5/5/59
Consensus on
11/24/59
Response on
12/15/59
310
Treasury refinancing.
There will be net borrowed reserves soon,
but the market will not be too tight, it
just looks that way in terms of net borrowed
reserves.
Let natural forces tighten the market,
give latitude to the Manager.
The market is tight, bill rates have
risen, and the market is actually tighter
than the figures suggest. On the basis of
feel, it is about as tight as the Committee
would have wished.
Keep the market a little tighter. Try to
get net borrowed reserves. Operate on the
basis of feel rather than figures.
The market is tighter, but there has been
little effect on rates.
Keep about the same degree of restraint,
keep an even keel during the Treasury refi
nancing, err on the side of restraint.
Actually it is up to the Manager.
The market is tight, the bill rate being
up.
Keep about the same degree of restraint.
Operate in terms of feel rather than any
specific figure of net borrowed reserves.
Rely on the discretion of the manager in
maintaining tone about what it is. Keep an
even keel.
Mr. Bryan . . . did not know precisely
what was meant by an even keel policy.
Should it be measured by net free reserves,
net borrowed reserves, the feel of the market;
or the intuition of the Manager.
Mr. Rouse replied that he thought it was
a mixture of the things mentioned by Mr.
Bryan.
The Chairman said that clearly the con
sensus of this meeting favored maintaining
the status quo, with maximum flexibility in
the hands of the Manager of the Account to
maintain the status quo.
Bill rates had declined some, but the
market was firmer. Operations were even
more complicated at this time of year by the
change in Regulation D. Projections were
311
Consensus on
1/26/60
Response on
2/9/60
Consensus on
5/3/60
Response on
5/24/60
Consensus on
6/14/60
Response on
7/6/60
Consensus on
7/6/60
Response on
7/26/60
Consensus on
7/26/60
Response on
8/16/60
Consensus on
11/22/60
Response on
12/13/60
Consensus on
5/9/61
more difficult to interpret. As a result,
he had relied more heavily than normal on
feel. It seemed that reserves were working
their way to money centers, but it was hard
to tell. Uncertainty was reflected in rising
interest rates, and this had affected act
tions.
Keep an even keel.
The market was tight, even though interest
rates declined. This got into color, tone,
and feel.
Move towards lower net borrowed reserves,
that is towards 0 net borrowed reserves.
Net borrowed reserves and total reserves
indicate ease, but the market is by no means
easy.
Continue the present policy, mark time,
err on the side of ease.
Open market operations were mixed. We re
in net borrowed reserves now, and will get
free reserves soon.
Mark time, err on the side of ease.
Despite free reserves, the money market
was fairly tight. The Treasury financing
hurt. The money supply may have risen.
Keep free reserves around $200 million--
try for a little more ease.
With regard to the money supply, Mr.
Rouse stated that this was to be hoped for
Cthat it would rise] although, as Mr. Noyes
had pointed out, it was a little difficult
to figure on.
... he [Mr. Martin] would suggest that
Mr. Rouse be guided by the discussion that
had taken place.
We have had pervasive ease, but the bill
rate was not unduly lower and was now rising
some.
Continue the present policy and degree of
ease. Watch short-term rates and give the
Manager leeway.
312
Consensus on
5/24/55
Response on
6/6/55
Consensus on
e/e/55
Response on
6/22/55
Consensus on
8/23/55
Response on
9/14/55
Consensus on
9/26/55
Response on
10/4/55
Consensus on
6/26/56
Response on
7/17/56
The tone of the market is good,
had been kept.
An even keel
Consensus on
12/10/56
Response on
. . . the committee would leave to the
management of the System account the problem
of maintaining an "even keel" in the light
of the discussion at this meeting.
We have had an even keel, even though we
have net borrowed reserves of $117 million.
There has been no appreciable change in tone.
There was no real consensus at this meet
ing other than to try to keep free reserves
at 0 and to offset any "swings" that devel
oped.
Statistical ease was greater than actual
ease.
While the question [whether or not or
when to buy bills] was not further clarified
by further discussion, Mr. Rouse stated that
he thought the New York Bank could function
satisfactorily in the light of the discussion
at this meeting.
[the Account] . . . felt reasonably suc
cessful in accomplishing the objectives
indicated by the Committee.
Continue the present policy of general
restraint, but do not err on the side of
restraint.
Mr. Rouse also stated that during the
week in question when free reserves averaged
negative $130 million, there was no diminu
tion in the feeling that existed in the
market, ["feeling refers to a feeling of
tightness .J
Keep net borrowed reserves around $200
million, operate also on the basis of the
color, tone and general state of the market.
What we are really after, Mr. Rouse said,
is a degree of feeling in the market rather
than any particular figure. We have had and
are having at the moment the tightest
situation in New York that has existed in a
long time. Float is hurting the situation.
No aDnsensus was stated.
He felt that it would be possible to
Response on
6/6/61
Consensus on
8/1/61
Response on
8/22/61
Consensus on
10/3/61
Response on
10/24/61
313
The money market was easy, short-term
rates were up some. Banks have plenty of
reserves for loans and investments and the
fact that they weren't using them was due to
other factors. Total reserves, required
reserves and non-borrowed reserves reflect
ease.
Try to reduce activity in dealing in other
than bills. Continue the present policy.
Give the Manager great latitude as we don't
want to tie the Manager with too specific
instructions. Try for ease.
The money market is firm, but somewhat
easy despite large sales of securities. The
reduced free reserves and higher interest
rates led some to think the System was mov
ing from a policy of ease.
Continue the present policy. Some FOMC
members for less ease so that the bill rate
might rise.
Open market operations have been confused
by reserve adjustments. Free reserves were
lower, but there had been no decrease in
ease. The bill rate has not risen.
APPENDIX H
SELECTED STATISTICS
314
315
APPENDIX H
SELECTED STATISTICS FOR THE PERIOD 1951-1961
Date
GNP
(in $ Billion)
Per Cent
Unemployment
Currency and
Demand Deposits
(in $ Million)
Free Reserves
(in $ Million)
Bank Reserves
(in $ Million)
Three Month
Treasury Bill
Rate (Per Cent)
Bond Rate
(Per Cent)
1/51 4.24 116,200 613 18,088 1.387 2.39
2/51 4.08 115,200 297 18,907 1.391 2.40
3/51 319.0 3.56 113,400 471 19,207 1.422 2.47
4/51 2.90 114,100 672 19,304 1.520 2.56
5/51 2.63 114,400 152 18,892 1.578 2.63
6/51 327.8 3.20 114,760 664 19,309 1.499 2.65
7/51 2.96 115,800 562 19,229 1.593 2.63
8/51 2.52 116,700 412 19,174 1.644 2.57
9/51 330.9 2.60 117,400 383 19,396 1.646 2.56
10/51 2.61 120,200 821 19,868 1.608 2.61
11/51 2.98 122,100 389 19,794 1.608 2.66
12/51 337.1 2.74 124,500 169 20,310 1.731 2.70
1/52 3.43 123,500 723 20,470 1.688 2.74
2/52 3.49 121,300 330 19,995 1.574 2.71
3/52 339.7 3.02 120,500 578 20,207 1.658 2.70
4/52 2.68 121,000 283 19,777 1.623 2.64
5/52 2.61 121,300 65 19,767 1.710 2.57
6/52 342.6 2.90 121,300 130 20,140 1.700 2.61
7/52 3.12 121,900 -468 20,535 1.824 2.61
8/52 2.57 122,100 -383 20,306 1.876 2.70
9/52 345.3 2.31 123,000 95 20,514 1.786 2.71
10/52 2.07 125,700 -400 20,611 1.783 2.74
11/52 2.27 126,800 -875 20,744 1.862 2.71
12/52 361.1 2.29 129,000 -870 21,180 2.126 2.75
1/53 3.12 127,300 -640 20,958 2.042 2.80
2/53 2.93 125,200 -672 20,520 2.018 2.83
3/53 362.0 2.72 124,300 -614 20,416 2.082 2.89
4/53 2.58 125,000 -631 20,007 2.177 2.97
5/53 2.11 124,500 353 19,897 2.200 3.09
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Per Cent
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GNP
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Per Cent
Unemployment
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Demand Deposits
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Free Reserves
(in $ Million)
Bank Reserves
(in $ Million)
Three Month
Treasury Bill
Rate (Per Cent)
Bond Rate
(Per Cent)
317
Source: Federal Reserve Bulletin
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• a • V a a a a a • • a • • • • • • a • a a a •
ON4 3 * 03 03 4 3- to 03 to 034 3 -4 3 ' 03 to 034 >4 3 * to 03 ON 03 to 4 3 - VO4 3 *
t-J U l U l 0 O ON U l 00 to to 0 O *o 00 to 00 00 VO4 3 *v o4 3 * 03 U l 03
O O
043*
to 00v o00 ■O 0 00 to to4 3 *
ON VO ONO 'H* to4 3 ' V 0 4 3 ' ON
4>4>4>03 03
• • • • a
U l t o I-1 V O 03
O O H v O U l
to vo 0 0 0 0
4^ 03 03 43* 4> 03 03 03 03 03 03 03 03 03 03 03 03 03 03 4> 4^ 4> 4^ 4>- 43* 43-43> 43'43'
• • • • • • • • • • • a - - - - -
O V O V O O O V O O O O O O v jO O O O
O N O O O O tO O O C O U O O O H V D
OOVOVOOO^lOOVOl—*1—*0t003
OOLoMtOVOONVOON^IOOtO'O
to t—11 —1 to I —1
vl to H ON O
Date
GNP
(in $ Billion)
Per Cent
Unemployment
Currency and
Demand Deposits
(in $ Million)
Free Reserves
(in $ Million)
Bank Reserves
(in $ Million)
Three Month
Treasury Bill
Rate (Per Cent)
Bond Rate
(Per Cent)
318
319
BIBLIOGRAPHICAL ENTRIES
A. BOOKS
Burgess, Warren Randolph. The Reserve Banks and the Money
Market. Revised edition. New YorE! Harper and
Brothers, 1936.
Cagan, Phillip. Determinants and Effects of Changes in the
Stock of Money. New York: Columbia University Press,
Currie, Lauchlin. The Supply and Control of Money in the
United States. Second revised edition. Cambridge,
Mass.: Harvard University Press, 1935.
Eccles, Marriner. Beckoning Frontiers. Edited by Sidney
Hyman. First edition. New York: Alfred Knopf, 1951.
Friedman, Milton. A Program for Monetary Stability. New
York: Fordham University Press, 1959.
_______ , and Anna Jacobson Schwartz. A Monetary History
of the United States: 1867-1960. Princeton, N.J.:
The Princeton University Press, 1963.
Rnipe, James L. The Federal Reserve and the American Dol
lar: Problems and Policies. 1946-1964. ChapelHill,
North Carolina: The University of North Carolina
Press, 1965.
Meigs, James. Free Reserves and the Money Supply. Chicago:
The University of Chicago Press, 1962.
Moore, Geoffery H. (ed.). Business Cycle Indicators.
2 vols. Princeton, N.J.: The Princeton University
Press, 1961.
_______ , and Julius Shiskin. Indicators of Business Ex
pansions and Contractions. New York: ColumbiaUni
versity Press, 1967.
Riefler, Winfield W. Money Rates and Money Market in the
United States. New YorE Harper and Brothers, 1930.
320
Tinbergen, J. On the Theory of Economic Policy. Amsterdam:
North Holland Publishing Company, 1952.
B. PUBLICATIONS OF THE GOVERNMENT,
LEARNED SOCIETIES, AND
OTHER ORGANIZATIONS
Brunner, Karl and Allan H. Meltzer. An Alternative Approach
to the Monetary Mechanism. A Staff Analysis. Commit-”
tee on Banking and Currency, subcommittee on Domestic
Finance, House of Representatives, 88th Congress,
2d Session, August, 1964. Washington: Government
Printing Office, 1964.
_______ . The Federal Reserve*s Attachment to the Free
Reserve Concept. A Staff Analysis. Committee on
Banking and Currency, Subcommittee on Domestic Finance,
House of Representatives, 88th Congress, 2d Session,
May, 1964. Washington: Government Printing Office,
1964.
Goldenweiser, Emanuel A. "Instruments of Federal Reserve
Policy,1 1 Banking Studies. Board of Governors of the
Federal Reserve System. Baltimore: The Waverly Press,
Inc., 1941.
Board of Governors of the Federal Reserve System. Annual
Report ( s . ) of The Board of Governors of the Federal
Reserve System. Washington: Board of Governors of
the Federal Reserve System, 1952-1962.
_______. Federal Reserve Act As Amended through July J3,
1967. with an Appendix. Comiled by the Legal Division
of the Board of Governors of the Federal Reserve
System. Washington: Board of Governors of the Fed
eral Reserve System,,1968.
_______ . Federal Reserve Bulletin(s). Washington: Board
of Governors of the Federal Reserve System, January,
1951-April, 1969.
_____ . Minutes of the Federal Open Market Committee and
the Executive Committee of the Federal Open Market
Committee: T936-1961. Washington: Exhibits and
Publications Division, National Archives and Records
Service, 1968.
321
_______ . The Federal Reserve System: Purposes and
Functions. Second edition. Washington: Board of
Governors of the Federal Reserve System, 1947.
_______ . The Federal Reserve System: Purposes and
Functions. Third edition. Washington: Board of
Governors of the Federal Reserve System, 1954.
_______ , and the United States Treasury Department. The
Federal Reserve and the Treasury: Answers to Questions
from the Commission on Money and Credit. Englewood
Cliffs, N.J.: Prentice-Hall, Inc., 1963.
The Commission on Money and Credit. Money and Credit:
Their Influence on Jobs. Prices and Growth. The Report
of the Commission on Money and Credit. Englewood
Cliffs, N.J.: Prentice-Hall, Inc., 1961.
United States Congress, Senate, Committee on Finance.
Investigation of the Financial Condition of the United
States. Hearings before Committee, 85th Congress, 1st
Session, August 13-16, 19, 1957. Washington: Govern
ment Printing Office, 1957.
_______ , Joint Economic Committee. Employment, Growth and
Price Levels. Report of the Joint Economic Committee,
86th Congress, 2d Session, January 26, 1960. Washing
ton: Government Printing Office, 1960.
_______ . Review of the Annual Report of the Federal Re
serve System for the Year 1960. Hearings before Com
mittee, 87th Congress, 1st Session, June 1-2, 1961.
Washington: Government Printing Office, 1961.
. Standards for Guiding Monetary Action. Hearings
before Committee, 90th Congress, 2d Session, May 8-9,
15-16, 1968. Washington: Government Printing Office,
1968.
_______ , Subcommittee on Fiscal Policy. Federal Expendi
ture Policy for Growth and Stability. Hearings before
Subcommittee, 65th Congress, 1st Session, February 5,
1957. Washington: Government Printing Office, 1957.
_______ . Joint Committee on the Economic Report, Subcom
mittee on General Credit Control and Debt Management.
Monetary Policy and the Management of the Public Debt.
Replies to the Subcommittee Report,-H2d Congress, 2d
Session, August, 1952. Washington: Government Print
ing Office, 1952.
C. PERIODICALS
Angell, J. W. and others. "Controversial Issues in Recent
Monetary Policy: A Symposium," Review of Economics
and Statistics. XLII (August, I960), 245-2TFF.
Bach, G. L. "Economics, Politics and the Fed: A Critique
of the Report by the Commission on Money and Credit,"
The Harvard Business Review. XIX (January-February,
19627, 81-91.
Barger, H. "The Prospects for Federal Reserve Policy,”
Journal of Finance. XV (May, 1960), 278-79.
Bronfenbrenner, Martin. "Statistical Tests of Rival Mone
tary Rules," Journal of Political Economy. LXIX
(F ebruary, 19 6l), 1-14.
Brunner, Karl. "A Schema for the Supply of Money," Inter
national Economic Review. II (January, 1961), 79-109.
_______ . "Institutions, Policy and Monetary Analysis,"
Journal of Political Economy, LXXIII (April, 1965),
197-218.
_______ . "The Role of Money and Monetary Polic," Review,
Federal Reserve Bank of St. Louis reprint series
number 30, (July, 1968), 8-24.
_______ , and Allan H. Meltzer. "Some Further Investiga
tions of Demand and Supply Functions for Money,"
Journal of Finance. XIX (May, 1964), 240-283.
Cacy, J. A. "Alternative Approaches to the Analysis of the
Financial Structure, Monthly Review, Federal Reserve
Bank of Kansas City, (March, 1968), 3-10.
Chase, Samuel and Lyle Gramley. "Time Deposits in Monetary
Analysis," Federal Reserve Bulletin, LI (October,
1965), 138 O' -T4'0 '6' .
Culbertson, J. M. "Friedman on the Lag in Effect of Mone
tary Policy," Journal of Political Economy, LXVIII
(December, 1960), 617-621.
Davis, Richard G. "The Role of the Money Supply in Busi
ness Cycles," Monthly Review, Federal Reserve Bank of
New York, L (April, 1968), 63-73.
323
Friedman, Milton. "The Lag Effect of Monetary Policy,"
Journal of Political Economy, LXIX (October, 1961),
447-466.
Guttentag, Jack. "The Strategy of Open Market Operations,"
The Quarterly Journal of Economics, LXXX (February,
1966), 1-30.
Havrilesky, Thomas. "A Test of Monetary Policy Action,"
The Journal of Political Economy, LXXV (June, 1967),
299-3W.
Johnson, Harry G. "Monetary Theory and Policy," The Ameri
can Economic Review, LII (June, 1962), 335-364.
Kareken, John H. "Commercial Banks and the Supply of
Money: A Market Determined Demand Deposit Rate,"
Federal Reserve Bulletin, LIII (October, 1967), 1699-
T7TT.
Kaufman, George G. "indicators of Monetary Policy: Theory
and Evidence," The National Banking: Review, IV (June,
1967), 1-11.
Mayer, Thomas. "Monetary Theory: New and Old Looks: Dis
cussion," The American Economic Review, LI (May, 1961),
57-59.
_______ . "The Inflexibility of Monetary Policy," Review
of Economics and Statistics, XL (November, 1958), 358-
374.
Modigliani, Franco. "Some Empirical Tests of Monetary
Management and of Rules versus Discretion," Journal of
Political Economy, LXXII (June, 1964), 211-245.
Reagan, Michael D. "The Political Structure of the Federal
Reserve System," The American Political Science Re
view, LV (March, 1961), 64-76.
Reuber, G. L. "The Objectives of Canadian Monetary Policy,
1949-1961," The Journal of Political Economy, LXXII
(April, 196477“109-132.
Ritter, L. S. "Official Central Banking Theory in the
United States, 1936-61: Four Editions of The Federal
Reserve System: Purposes and Functions," The Journal
of Political Economy, LXX (February, 1962), 14-29.
324
Rosenblatt, S. M. "The Federal Reserve System After Fifty
Years," Quarterly Review of Economics and Business. V
(Fall, 1965), 69-83";
Saving, Thomas R. "Monetary Policy: Targets and Indica
tors," The Journal of Political Economy. LXXV, part ii
(August, 1967), 446'^5’ 5^
Whittlesey, C. R. "Power and Influence in the Federal
Reserve System," Economica. XXX, new series (February,
1963), 33-44.
D. ESSAYS AND ARTICLES IN COLLECTIONS
Brunner, Karl and Allan H. Meltzer. "The Meaning of Mone
tary Indicators," Monetary Process and Policy: A
Symposium. George Horwich, editor. Homewood, IlT.:
Richard D. Irwin, Inc., 1967. Pp. 187-217.
Johnson, Harry G. and William G. Dewald. "An Objective
Analysis of the Objectives of American Monetary Policy,
1952-1961," Banking and Monetary Studies, Deane Carson,
editor. Homewood, 111.: Richard D. Irwin, Inc., 1963.
Pp. 171-189.
Wood, John H. "A Model of Federal Reserve Behavior,"
Monetary Process and Policy: A Symposium, George Hor-
wxch, editor. Homewood, 111.: Richard D. Irwin,
Inc., 1967. Pp. 135-166.
E. UNPUBLISHED MATERIALS
Kaufman, George G. "The Supply of Money: A Supply Func
tion Explaining Federal Reserve Behavior." Chicago:
Federal Reserve Bank of Chicago, 1964. (Mimeographed.)
Lyon, Kenneth. "The Federal Reserve's Objectives and the
Money Supply." Paper read at the Western Economic
Association, Corvallis, Oregon, August 30, 1968.

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Creator Humphrey, Joseph Franklyn (author)

Core Title The Role Of The Manager Of The Federal Reserve System Open Market Account: 1951-1961

Degree Doctor of Philosophy

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, Finance,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor DePrano, Michael E. (committee chair), Elliott, John E. (committee member), Ward, Richard A. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c18-408274

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