Al-PROVED:
A STUDY OF FWERAL H£SliliVE SISTl!>l ,, MOOETARY AND CREDIT f'OUCY ACTIOOS
FROM 1950 TO 1957
by
Joseph Willard Holcomb ,,,
Thesis submit.tad to the Graduate Faculty ot the
Virginia Polytechnic Institute
in candidacy for the degree of
HAS't'ER OF :3CIE1:CE
in
Business Administration
APPROVEDz
Director ot Gl'"aduate Studies Heaa:::u:>Depa.rtment. '<J
Major l'rof essor
January, 1958
Blacksburg, Virginia
11
Table ot Contents
Page
INTRODUCTION • • • • • • • • • • • • • • • • • • • • • . • · vi
CHAl"fER I • • • • • • • • • • • • • • • • • • • • • • • 1
The Problem and its Scope • • • • • • • • • • • • • l
The Problem • • • • • • • • • • • • • • • .... l
Need tor the Jtudy • • • • • • • • • • • • • • l
Delimitation.a • • • • • • • • • • • • • • • • 2
Definitions • • • • • • • • • • • • • • • • • .3
Procedures • • • • • • • • • • • • • • • • • • .3
Review ot Previous Research • • • • • • • • • • 4
CHAPTER II • • • • • • • • • • • • • • • • • • • • • • •
Regulator,r and Advisoey Bodies ot the Federal ReserTe System • • • • • • • • • • • • • • 5
The Board or Qoyernors ot the Federal Reserve System • • . .
The Federal Open Market Committee • •
• • • • •
• • • • • The Federal Reserye Banks • • • • • • • • • • •
5
8
9
The Federal Advisory Cowicil • • • • • • • • • 9
The Presidents• Conference • • • • • • • • • • 9
The Chairmen•s Conference • • • • • • • • • • 10
CHAf'TER Ill • • • . . . . . . . . . • • • • . . . . • • • 11
Moneta.ry and Credit Control towers of the Federal ReserYe System • • • • • • • • • • • • • • 11
Variable Reserve Requirements for Kember Banks • • • • • • • • • • • • • • • • 12
iii
Variable Discount Rates • • • • • • • • • •
Open Market Operations • • • . . . . . . . . . Moral Suaa1on or.Direct Control • • • • • • • <
Variable Margin Requirements • • • • • • • •
Consumer Credit Controls . . . . . . '. . . . . Real Estate Controls • • • • • • • • •
The Interdependeoc• of Credit Control lnstrum.enta tor Maxi nnn Et!ect • • •
• • • •
• • • • CHAPTill IV • • • • • • • • • • • • • • • • • • • • • •
Federal Reaern Syst.. Polley and the Treasury Department • • • • • • •.• • • • • • • •
CHAftER V . . . . .. . . . . . . . . . . . . . . . . . Federal ReserYe System Monet.&1'7 and Credit
Polic71 1950 1956 • • • • • • • • • • • • • •
1950 • • • • • • • • • • • • • • • • • • • •
1951 • • • • • • • • • • • • • • • • • • • •
1952 • • • • • • • • • • • • • • • • • • • •
1953 . . . . . . . . . . . . . . . . . . . . 1954 • • • • • • • • • • • • • • • • • • • •
1955 • • • • • • • • • • • • • • • • • • • •
1956 • • • • • • • • • • • • • • • • • • • •
CHAPTER VI • • • • • • • • • • • • • • • • • • • • • •
Conclusions • • • • • • • • • • • • • • • • • • • •
BIBLIOORAPHI • • • • • • • • • • • • • • • • • • • • • •
VITA • • • • • • • • • • • • • • • • • • • • • • • • •
Page
16
18
22
23
25
26
31
31 Jl
54
59
70
76
s;
lat.
i'Y
List ot Tables
Table I Member Bank Beaerve Requirements • • • • • • • 4S
Table II Margin Bequirematta • • • • • • • • • • • • • 45
Table III Margin Requirements • • • • • • • • • • • • • 62
Table IV Mmber Bank Reserve Requiraenta • • • • • • • 64
Table V Member Bank Reserve Requirement.a • • • • • • • 68
Table YI Margin Requirement.a • • • • • • • • • • • • • n Table VII Selected lconomic Indicators Derind 1rcm
Rational Incaaae Statiatias tor th• Period 1950 • 1956 • • • • • • • • • • • • • 86
v
Acknowl!ds,ements
The author wishes to express his apprec14tion to Dr. B. O.
Kill.er, Dr. Y. o. Johns, and , Protessora ot
Busineas Admin1etration, Virginia Pol.Jtechnic Institute., tor
their helpful auggeetiona and guidance in the presentation of
the material contained in this thesis.
The author is d"JUT indebted to his wite, whose encounge-
ment and personal sacritioe made the oompletion ot this thesis
possible.
lNTROOC'CTIOR
The central banking systa ot the United st.tea, The
Federal ReaerYe SJatell, va~ pr111arlly patterned after the Bum ot
&1gland which wa eat.ablillhed in 1691.. Although the Bank of
England waa not the tiret c1ntral bank establiahed, it vae the
best known an:l met significant at the t1ae of the torwalat.1on ot
the Federal ReaerYe Act or 1913. other central bank• co11tainecl
r .. turee ltlicb were incorporated into the 1ederal ReHne An, web aa the bank not• 9J18te1I or Canada and the check olearanoe
syatea ua ed bf' the 0el'9n bank.
Central banks are unique iruJtitutiona which are g1Yen apea:1al
powers denied to other banking 1natitut1one, and, because of th•
special power• granted theWI, the7 occupy a pi'TOtal position in th9 '
~ and morwt&Jo.r attaira of the countriea in vhid:l thq operate.
The powers given the central bank enable it to exert profound 1a-
nuence on the J1Dnetary and cndit. condition• 1d t.h1n an eoom117.
Pr1ar to the eetabliabaent or eentral b~ .,.i.., •.t.
oountriea relied upon the mechm1 .. of the 1ntemat.1onal aold
standard to atabil1se the fiuotuat.1.ona 1n the ap~ of •lHIT 1a
and betwm the Tariou• countriea. A oount17• s auPP17 of mnq
and ita oouequent econollic well-being depended upon the~
and outwrd tlov ot gold. Vhm gold tlowd into a muntr.r mr appq or mney would increase am when gold tlowed out her nJIP1¥ ot mDJle7 llOuld decreue. Por 11m7 yeara the international aold
-vii-
standard was considered to be eelt-stabilizing and thus the best
mechanism b7 which economic fluctuations of depression and pros-
perity could be controlled.
Gradually, various countries came to realize that their
economic conditions could be controlled to some ex.t~nt by govern-
mental direction or their money supplies. They wanted a .:nore
personal and manageable system which would tend to promote their
own best economic intere3ts. A general systum of central banks
grew out ot the dissatisfactions associated with the gold standard.
The various central banking systems ditf er in organization
and ownership, but, generally, their !Wlctions are quite si.ruilar.
According to recognised authorities,1 the .functions are: ~(l)
supplying and servicing a substantial part or the country's media
ot exchange, (2) providing the raea.ns tor elastioit7 in co;nmercial-
bank monetary reeerves, (J) acting in fiscal ca~acities tor their
governments, (4) side guarding the nation's monetary reservea, and
(5) executing quantitative and qua.litative money-control programs
for purposes or price, income, and employment stabilization."
The Federal Re8erve System is committed, as a.re all agencies
ot the Federal Government, to the provisions of the Fmploymant Act
of 1946. The applicable portion ot the &nployment Act as regards
Federal Reserve System policy is as follov81 "the continuing policy
and responsibility ot the Federal Gonrnment to use all practicable
l. J. Whitney Hanks and Ronald Stucki, Money, Banking, and National Income, p. 244.
-Tiii-
means ••• to promote maximum employment, production, and purchasing
power." Thus, the Employment Act vas instigated. tor the purpose
or combating both infiation and defiation while maintaining a tull
employment econoJ'l\Y. Ml employment is defined by the American
Economic Association Committee on F...conomic Stability as tollowe1
"Full employment means that qualified people who seek jobs at
prevailing vago rates can !ind them in productiv'l activities with-
out considerable de~. It means tu.l.1-time jobs tor people who
want to work full ti..'Ile ••• It does not mean that unemployment ia
ever zero." The Employment Act does not mention price stab1lit7
or income stability and sets forth no methods to be used to achieve
its objectives.
TJ"&ditionally, central banks have been single, non-profit
institutions which serTe as banker's banks or as lenders or last
resort to private borrowers, or both. The Federal Reserve :>ystaa
o! the United States differs from the traditional central banks
in that it may be considered to consist of not one but twelve Fe-
latinl.1" autonomous entities. Thie distinction is ruore academic
than significant as the Federal Reserve System 111&7 be considered
as a single institution consisting of the Board of Govern.ore or the Federal ReserYe System, tho Federal Open Market Co.anittee, and
the twelye Federal ReserYe Banks and their branches. Also, the
Federal Reserve System is a non-profit institution even though it.
has shovn a surplus at times resulting trom operations designed
to make it self-sustaining.
CHAPUR I
THE PROBLEM !MD ?r S SCOPE
The Probl•
The main purpoae of thia atud;y was to detendne the D1>net&17
and credit policy actions of the Pederal Reserve System for the
years 19S0-19S6 and to deternd.ne the timelineaa, eff'ectivenee•,
and overall nsulte of the poliey actiona ciJ.ring the period. Thia
ilm>lved tour minor p:ro blaet 1. to ahow the organizational
atruc'blre or the Federal Reee:rve S;ratem as it rel.a ted to the
execution ot policJ' direotiv••J 2. to determine the monetary ad
credit powers which the Federal Reserve System uaed in intorcing
it• policy decisionsJ .). to set up baaea for the ffaluation ot
the Federal Reserve Sy'etem•a poliq actionaJ and 4. to evaluate
the timellneaa and adequaqr ot poliq actions taken and to draw
conchlaiona theretmm.
lead Per The stud{
The monetal.'7 and credit poliqr actions taken by the Federal
Reaerve System has had a significant influence upon the p:rogrea•
ot the United States• econoJll)". "nl.e ye9.rs studied represented om
ot the mat critical periods or time in the nation• s history and
the policy actioll8 of the Federal Reserve System were extremq
important both to th is country and to the weatem oonntriee in
general. Upon the economic stability of the United States re1W
-2-
the reconstruction and development of those friendly countries
ravaged by war and economic collarse. The success of the Federal
Reserve System's regulatory powers over the banking and other
lending institutions of this country decid~d to a great extent
whether the United .itates would reillain militarily and ;-01itically
strong and this, in turn, detennined how effectively the United
States cculd comrete with the ideologies of economic systems
existing in other naticns.
Delimitations
This problem was limited to the quantitative and qualitative
monetary and credit control powers of the Federal Reserve dystem.
Policy actions of the United States Treasury Department as they
complemented. Federal Reserve System policy actions were included
in the study but only to the extent that they directly affected.
Federal Reserve System policy actions. This is to say that Treasury
Department policy actions of short-run period significance were
included in this study.
This study was further limited to a study of the laws relating
to the Federal Reserve System enacted and placed into effect a.rter
the year 1949, except references to the Federal Reserve Act of
1913. other la.ws and acts that were modified, extended, or allowed
to lapse during the period 1950-1956 have been ;nentioned when
applicable.
-)-
Definitions
"S,.ate., • as used in this wolic, ref era to the Federal Reaern
Syatea, which consists of the Board of GoTernors or the Federal
ReHrve Syate, the Federal Open Marat Comdttee, and the twelve
Federal Reserve Banks.
The •Board" refers to the Board of Governors of the Federal
Reserve System as a single body.
"Collllittee• as used here retera to the Federal Open Market
Condttee aa a single body-.
The "Reaerve Banke" as uaed in this stuc.V" means and includ ..
the tvelve Federal Reaerve Bmka and their bnnohea.
Procedure•
The author used three separate procedures in deYeloping thie
thesis. Firat, the author obtained am read extensJ.veJ.7 the Jll8llT
economics and money and banking text books available to him through
the facilities of Virginia Polytechnic Institute. The port.ions ot
these texts 'that pertained to the theo1'7 and origin of the Federal
Reserve Syatem and central Banking in general li9re noted and used
as backgivund research material. The books also vere used by the
author to determine the regulatory poli9rs or the Federal ReMrYe
System and the results to be expected !rom th•ir e111ployamt.
Second, the irrf'estigator uaed varioua nevapapers, agasinea1
and goverrunental publications available 1n the Virginia Po~
lnatitute Library to gain speeitio intonation eonceming poliq
actions of the Federal Renne System tor the period 195'0-19S6.
The third irocedure, that of writing the report, was acoom-
pliahed after adequate research and stuc:IJ'. The author aeleoted
those material.a llhich were considered satisfactory and pertinent
as data tor the final draft. All 1'1&terial was recheeked for
accura07 and applicability to the purpose ot this thesia.
Rniev ot Previous Research
Previoua research applicable to this theai• was relativel.7
wluminou • in a:> far as Tariou e aeparate period• was concerned.
Many newspapers, magazines, and mieoellaneo us piblicationa indi·
cated specific events that occul"Nd during the period 19S0-19S6, bu.t none rev1_.d the period as a 'llbole nor did they review all
•jor policy actiona of the Federal ReaerTe S)rstn during 8f1T
particular period.
The Board of Govemora, in their annual reports to the
Congresa, covered each year of the period rather ezten81Tely;
howver, these reports did not review the several years on a
cmmlative basis so as to indicate the long-run direction ot pollc7 actions taken.
CHAPl'ER II
REGULATORY AND ADVISOllY BOOI!S 01 'lllE FEDERAL RESERVE SYSTEM
The mnetary and credit policies ot the Federal ReHr'f'e S;y'llta
are directed and coordinated on a national basis by several regula•
tory and advisory bodies. The regulator)" agencies include the
Board of Governors of the Federal lesene System, the Federal Open
Market Collllittee, and the tveln Federal ReaerYe Banke. Cioordina-
ting agencies 1 1n add1 t.i.on to the above bodies, include the Federal.
J.dTiSOIY Council, the Preeidenta' Conference, and the Cbainlfm'•
Conference.
The Board of Oovernor1 of the Federal Resern S,rat•
The Board of Governors ~ the Federal Renrve S;y1t. is com-
posed of aeven appointee• of the Preaident of the United States
and approved bf the United Statea Senate. The Pre1ident, 18 llld.t.ecl
in hi.a selection of 118nbera of this body 1n that he J'lll1' not appoint
more than one Jl'le1'lber from any one Federal Reaene Diatriot and he
mat u:intain a fair reprenntation of the tinanaial,, agricul.tunl,
and a:>mercial interests and geographical di viaione of the United
States. The President'• power to appoint members to the Board ot
Govemore does not carry with it the right or the Praident to
remTa members except, for cau•.
Meni>era of the Board are appointed for tenu of tourtMD
yeara, the tel'N being 11> arranged that only one TacallOJ' vUl
occur during my two year period. Muibere mq mt be reappointed
upon the expiration or their terms of office, nor ~ they accept
81JY position vi.th a me111ber bank if they resign their Board poaitione
before the end or their te:mtS. Such prohibition i• effective tor
t11> years after a resignati.on. The ohiet executift ot the Board
18 appointed tor a fbur year term and ia de•ignated ChaiNan ot
the Board. The Chairman -.y not aucoeed hi:Melt in that ottioe at
the expiration ot hi.a tour year tem.
The Board ie aoneidered to be an independent, non-polit.ioal.1
and non-p.rtiean bod;r or •n of eon11pi011011a knowledge and experi•
enoe in banking and financial tielu.l
Tm vritere2 1.iat the duti•• and reaponaibiliti•• ot the Board
u follcnrat
1. To euperri.•• and ooordinate the actiritiea of the twlft
Federal Reaerft Benke 1n such a way aa to promote the best inter-
eete of all aonoermd.
2. To appoint three ot the cl.us C director• ot eaeh ot the
ReHrn Banke and to deaigrate one ot the• u chairm:n ot the
board ot director•, and one aa Tioe-ohairlnln. The aba1na al•
holda the title of Pecleral. Re"1"ft Agent.
1. lbmtar,y Poliq And Managemnt ot Publio ~. 82ad ConcrMB, 24 Senion, Senate Document 123 (Waah!rwton, 19S2), Part 1, PP• 242-&S.
2. Hanke and Stucld.1 !2• !!!•• P• 2S8.
J. To approw or d:1N.pprove the choice ot president and TI.oe-
preaident ot each Federal Reael"Ye Bank. (These officers are init-
ially' selected by the board of directors ot the respict1"f'e banka.)
4. To interpret the law goYerning the operations or the Re-
sern Banke and to issue regulation• pertaining thereto.
S. To enmine the Reaer"f'e Banka and aupeniae the naJdnat1o11
ot all state-chartered bank• lllhioh are ll8lllbera ot the Syatem.
6. To approYe the annual budgets and salaries paid to ot-
tioere and employees or the twelve BeHne Banka and their branoh••·
7. To represent the Federal Reserve System in it• relatione
vi th wrious govenaent agencies and coad.tt .. a.
8. To initiate changes in reaerTe nq\drna'lta (within th9
limit• established by law) whenever such action is deemed ad"f'i.aabla.
9. To serve in a ajority cai:-cit:y as Jlle1'lbers of the Federal
Open Market Colll!littee.
10. To regulate the 'Vt>lume or credit 'WM.ch lUI' be extended tor
the purchase of securities.
n. To tix the -.'dmm rate ot interest that mmber banks ~
P81' on nvings and tine deposits.
12. To ~ dur~ eaergency period.a the reHrTe requtn..
menta !or manber banks.
13. To supeM'iae and a> ntrol the note iuuea or ea.ab ot the
twelve Reserve Banks.
14. To approve or disapprove the 41acount rate establlllhed b,r'
each Reserve Bank.
15. To establish the boundariee or each Federal Reaene dis-
trict and designate the olaseitication of co111111ni ties tor resene
purposes.
16. 'l'o tormu1ate and encmte motional. credit policies in woh
a wa7 as to promte stability and growth in our econoJllf.
Tbe federal Open Market Coai.tt.ee
The Federal Open Market Comlld. ttee oonsi sta or the eeven -1>ere
or the Bc>ard am five members Vio are chosen b7 the Reserve Banks
in such a manner as to assure adequate representation of each area
of the countl'f • CoJllllittee nnnbera work in close co-operation with
one mother although it my be seen. that the Board, aince it bold9
the •jor1ty position, oould dolllinate Co-.1.ttee act:k>na, but •ch
an eTent would be rare.
The Colmlittee meets in Wal!hington, D.c., four til'll88 a yeu1
or :mre otten it neceaaar.y. The Colmd.ttee•a principal duty 1a to
min the national business and credit llituation in order to cli•
rect purchases or aales of securities troa the S,.t•'• porUolio.
Dq to d&v' transactions are executed under the direcUon of the
Manager of' the Syatea Open Market Account who is an otficer ot thl
Federal Reserve Bank ot New York.
The Banking .lot or 1935 places the open nsrket operationa ot
the twelve Reserve Banks under the direct control ot the Colld.ttee
sime none •Shall engage in open market operations under aeotion.
fourteen or this act except in accordance w1 th the direction ot
and regulations adopted by the CoJamittee." Such dl.recti••• aa the
Committee issues must be •governed with a view to acoonmodating
ccmnerce and business and with regard to their bearing upon thl
general credit situation or the country."
The rederal Resene Bank•
The Reserve Banka are included as a regulatory body due to the
fact that they mq initiate action to ~· discount rates for
•mber banks ld thin their respective Federal BeeerTe districts.
A'l'/¥ proposal by a Reserve Ban1t affecting its rate tor cliaoounting
nmat be approYed by the Board before it becomes effective.
The 18'1.eral .ldviaori Counail
The Federal AdViaory Council a.>naiata of twelve Mltlbera choaen
annually by the board or directors of each ReserYe Bank. Council
meetings are held four times annual.171 or mre often it neceasar:r,
1n Washington, n.c., 1n conjunction with the Board. The joint
••ting is held tor the plrpoae of the Council oonterring with the
brd on general matters of policy and on general buaine1a concU.-
tion• within the econonu.3 The <Jouncil has substantial infiuenoe
(but m real authority') 1n the formnlation ot Sy'atem Poliq.
The Presidents• Conference
The Presidents• Conference aonsiata of the prell1.denta of the
twelTe Reaern Banks. Thia body meets with the Board at least three
). Federal Re..,.... Act of 19131 Section 12.
time a ,-ear and renders advice and reoe1vee imtruotions ho1I the
Jbard.
The Chainan• • Contezrenoe
The board chairmen of the twel't'e Resene Bank• co11priae the
Chairmen' a Conference. The body' Jlleete with the Board troa t1m to
tia to discuaa matters ot 111.1tual interest and to connl:t; 111 th and
ake reco•endationa to the Board.
CHArTEli III
MON:STARY ~iliD Cli.EDI'r COi\jTHOL .FONERJ
OF THE FEDEHA.L HESEHVE SYJTEM
The bade t\11\Ction or the Federal ReserYe System is to make
available a !low of credit and money that will foster orderly
economic growth and a stabl• C'lollar.1" This basic !unction is in
accord with the original I.urpoaes ot the Federal iteserye Act of
19l3, i.e., to proride \he count17 with an elaatic currency, to
provide facilities tor the discounting of comnercial paper, and
to im}Jrove the superri.sion ot the ba.nk1ng syat•.
The i.roper amount o! available credit and monq'is that amount
necessary, at any given time, to foster high emploJaent, a high
level or production, and a stable value for the dollar. Thua, in
an WlStable world, conditions change and a countr.y's economic con-
dition also changes with the result that in order to rwiction pro-
perly, the policy actions or the ..>ystem must be flexible and quick-
ly reactive. This study will be greatly aided by a brier descrip-
tion or the monetary and credit control powers or the System.
Two generally recognized divisions ot the Systea's control
powers are those which are quantitatiYe in nature and those which
l. Board o! Governors ot the Federal Reser-n Syst•, The Federal Reserve S1stem - Purposes and Functions, 1954, P• 1.
are qualit.tiw or aelectiYe in nature. QuantitatiT• powre an
tho•• which oontrol changes in the volum of mney and bank ondi\
in the eoonr:m,r and include nr1able rellft'T8 requU..nts, YU'iabl•
dieoount rate• or the Relel"Ye BmD, opm urket operatiom, end
moral eu.uion or direct action. Qulitat1Ye oontrol.e regulate \be
u• ·w which a YOlUlle ot moDll)" or credit 1a7 be directed, md in-
olude "tViable -.rgin nquinmnte tor ••Clll'it7 traneactiou, aain-
• llDlr credit control.a, and real eetate credit control.e. lbnl aia-
eion 111 so•tim• clua1.t1ed ••• qualitatin oontrol mt the d19-
t1not1on is not sign1fioant t.o th11 •tud.T.
Variabl8 Re""8 l!!CJuire•nt• for Msllbv BmJm
Certain ll1n1:mll reeene requiremnte wre pre•crlhed in the
Pederal Beeel'ft Act or 1913 tor 1811ber bank• aocordinc t,o the
bank•' clu•ilioat1on. The percentage requir111nta •• orig:ll'lll7
stated wre, and ~12
Demnd deP>lli tea C•tnl re891'ft o:lt7 banlm • •••• 13 lle881"'99 c1t7 banlm ••••••••••••• 10 Oount.17'banlnl •••••••••••••••••• 7
U.. depoait•• All .. ..,... bankll ••••••••••••••• 3
Centnl reaene c:l.tiea are Bew York and Chioap, while tM c1198i-
t1cation ot reNl'ft oiti•• refer• to large mtropolitan area• an4
ooant17 bank• are located 1n eul.l. tome.
2. Ibid. P• SO. -
-ll·
The Banldng .lot or 193S authorised the Board to increue n-
•ert'e requirement.a tor member banlat to twio• the ratio• stated 1n
the Federal ReeerY• !ct of 191) ard to reduce requireMnta uininc at any giTen tiM to arq lnel that is not below tba atatuto17'
ratio•• The diaoretion of the Board m¥ be am'CiMd at urr tiae
it de.- appropriate m lo~ a• change• in re1ern requiremnta
are uni.tom tor all b.mm within a group.
Or1ginal.l.71 reHt"ft requUwtenta were establiahed to innre
liqu1d1t7 of bank depoaita. The 't'in now held 1• that Tal"1.ahle re-
•ene requirement• are cleaigned to proTide the s.r-t• 1d. th an 1n-
atrunnt w1 th which to m ntnl the atoak of mnq 1n the llCODOlll' 1
and t.hu1 control cnclit a'failabilit7 b;r alterizW maaber bank n-
nrn nquire•nta.3
To fDl.17 appnoiate t.he ettecta ot Tariable 'blllk reMrn n-
quire•nta on loan and inYest•nt cndit aTU.labilitJ', t.he reader
mllt aoquire at leut an elnmt&17 lmovledp ot how the oontrol
operate•• •In performing ita buio function, the Federal ReM1"ft
~ ohie.Qy on it• abilitJ' to incna• or decrease the nail•
a'bllity, cost, and ~l.um ot bank reeRTe1, llhioh aonaU:tate tl'le
l.epl.q required bald.a ot bank depoli ta. Change• 1n the ftMrft
poaitiou ot bank• atteot directq the tlov of 'bmt oreclit ancl
1Dft97•tda To illustrate, aaeuae that lank I, a -ber bank 1n an
Ji. lbicl. P• 14. -
-lh·
area classed as a reaene city, haa a Cllrrent. requirement to hold
15 per cent or its demarxl deposits as legal rea9"e with its di.9-
trict Resern bank. (The reader recalls that the legal min:lnm
reserve ratio tor reserve city bank8 is 10 per cent.) Aanu that
Bank X receives a cash or check del!llnd depo ai t in the amount ot
1100. With a reserve requirement of lS per cent, Banlt I must de-
posit $1$ with ita Reserve Bank, and is free to loan or invest all
or part or the remaining 18S. It Benlc I me.kea a loan of $8$, the
borrower may redeposit the entire UX>unt in Bank I to hie credit.
In this event Bank X could again lend lS per cent or the 18S, or
$72.2$, deposit~ the r-ini~ $12.'TS with 1te Reserve Bank:.
Tbs process could be continued and result in a llll.tiple expansion
of bank credit. ka¥ action talc1n b7 the Board that wuld 1.ncreaae
or decrease Bank I• a required reserve ratio would alm attact it•
ability' to ext.end credit.
The reverse of the above depoa1 t of $100 1a the vi:tbdrawal. ot 1100 1n currency, to be held b;r the drawer rather tlwl redeposited.
Assuming $100 is withdrawn fro• the. banking rqeta, with a lS per
cent reeerve requirement, the reNrTes or the bank • and of the
banking system as a whole • vill deadnish by $666.67. If the bank•
1ng system held no excess reserves, it 11>uld have to borrow 1t1cb
resel'ft• tro:m the Federal Reaerve System, or it would m. ve to aell
mme of its assets to make up the deficit. Thus, there oan be
Jmltiple expansion or multiple contraction of bank deposits.
•
The extremely simplified example above iii made somellhat nore
complicated lihen one considers that the approximately fourteen
thousand banks in this country are operating under similar eircru.a-
stanoes, differing only in the amount of required reserves they
must bold, and whether they are J11E111bers or nonmembers of the Syatea.
Realistically, demand deposits originating in loans and investm&nta
seldom remain with the bank of origin. ttaually the depositor of
bol"?'Oved tunds draws oheclta against his account 1n f'awr of "9'8riotla
people or institutions woo in turn, deposit the check• 1n varioue banks. Thia proceas result a in Jnany interacting banking trane-
actiona lihich complicates the above example.
The System, b7 increasing or decreasing J1e111ber banks reserve
requirements, greatl.1' inf'luencea the de11ard for Reaene &nk credit.
In the event of intlationar,y tendencies 1n the econoJll71 the Board
mq desire to take re1trictive action in order to tone dom the
credit -.rket and the rate or mnetaey expansion. The Board, 1n
thi1 case, llUO' increase the reserve requirements tor all or ce~
classes ot manber banks. Suob reirtrict:ive actions, if the J!t8111ber
banks atrected were in the position of havjng little or m exoeaa
reserYee, wo'Uld result in member banks 'borrowing tunde tmm their
Resene Banks in order to match the raised legal renne require.
ments. When me11tber banks have to b:>rrow !mm Rese:rTe Banltll to lltM'tr
reserve requirements, euch actions 11111 supposedly leasen their
W"'...llingness to loan fund.a to their customers. The Nftne ot tbi•
action, in ti.Ms 11hen detlationa1'7 tendenciee are dollinant in the
eoonorq, will tend to increase the v.Ullngneaa of banks to extend
credit.
Variable Diaoount Rates
The diaou1aion of nriable resern requirements indicated that
1111111ber bank8 ~ borrow from Reael'Te Banka 1! necessary. Thia 11
true 1n the great •jo:rit7 or oases and no attempt 18 Mde in thia
study to discruH the several except.ions to this privilege. Member
banks ueual.17 borrow from Re881"t'e Banks in order to correct t .....
P<>1"81'7 deficits in the member bank•' account, or because the Board.
increases reee"e require•nt• vben the 11ulli>er banks d> not have
suffiCJient excess reserves to cover the imreaHd requirenente.
Jn important exception to member bank borrowing from ita Re-
aene Bank occurs wen tbe meJl!ber bank has a second line of re-
serves 1n the form of lhort-tel'lft mrketable aeeuritiea vhich can
be sold on the open market and the receipt• credited to ita Re-
eel"t"e Banlc reaene account. Sb.ch holding• ot eeoondarr reaenea "'7 .-her banks, 1! the holdings are relatiTely large and it JU.n7
bank8 _.e in this taYO~le situation, 111.ll t.end to lessen the et•
teots ot ftrlable reserve requirnmt increases and vill1 to aon
extent, leHen the Systea•a use of Tariable diaoount rates u a
method or control.
Member banks -r borrow from Reaerft Banks b,r rediaoounting
cnsto•ra• notes, or the member banks may discount their own notee
to aeoure lle""8 Bmlk loans a> long u the :member bank# haTe
acceptable collateral. Member bank loan• acquired by the aecond
11tethod are called advance•• The discount rate ie the rate charged
member banks tor loans by the BeHl"ft Banke and are expressed &I
percentages. When the 11u1111mer bank discount• a custo111er•1 note "'
reoeivea an adYanoe, the re8Ult ia an increase in the borrowing
bank' a reaerYe account.
The nature ot notes preeented by lmlber banka to Reaern Blnka
is relatiYely 1naignificant to this stu<17. It 1• au1'ficient to
atate that most ooJlllftel'Oial paper ia eligible tor discounting al•
though the rates charged by Reaene Bank• u:r 'f'&l'1 according to
the degree ot acceptabilitJ" ot the J>llPV• A• a general rule, the
paper pledged 11 or prime qualit)" and Yft"f abort •turit;r and is
uaually in the to:nn or Ooverr•nt aeeurit:Uaa.
Disoount privilege• are nonal.17 uaed by ••ber banka onl.7
when temporary aergena;y banking dnelopnenta ariae. Mnber bank•
are usually reluctant to be indebted to the System or to ar11' in-
et.itution because indebtedneu is not in the tradition of Anlerican
banking. In addition t.o t.he t.ypically coneervatiYe nature ot moat
bankers, their reluctance to borrow results r~m the ract. that
borrov.1.ng ia expenaive, and the banker lftUBt take account or the
disposition of depoai tors tltlo ~ be critical ot bort"Ov.U!g bT the
bank. Such conaervative attitudes by bankers 1llll;Y' cnae 11gnifioan\
credit reappraisals b;y the bankers tltlen discount ratea are chan1ll4
it noond.ary renrn1 in the form of 1ecurit7 portfolio• are mt
generall.1 large.
&.ch Reserve Bank may establish its discount rate subject to
review and determination by the Board. The Board uy act11&117
take the 1.n:itiative 1n the determination ot discount rates and
such Board actions appear to be ot major aigniticanoe currentl7
and in the tuture. The right or the Board to take the initiative
in detemining discount rates vas established in 1919 vhen the
Attomq General or the United States ruled that the Board • ••• baa
the right under the powers conte?Ted bT tbe Federal Reaern Act,
to determine • t rates or discount should be charged, from time
to time by a Federal Reeerve Blllk, and, under their powers ot re-
view and detendmtion, to require such rates to be put into ef'teot
by euch Bank.•5 Thus, it wuld appear that change• in the diacount.
rates charged by ReMne Banks; when aich changes are neceesitatecl
by event& affecting the entire country-1 are accomplilhed by the
Board for all practial purposes. Thia 18 further .-rldanced by the
general practice or all Reeerve Banke to charge a unitora di eoourt
OJ>!!! Market Operation
The S;ret• has the authorit.J' to purobaM or sell aecuritiea
in the open market under the provisions o t Bection Fourteen of tba
Federal Reeert'e Act ot 1913. Several olassea or Mcurit1ea are
authorised tor open market operations by the Reserve BenklJ ho,,.,...,
S. 32 Opiniona Att7. Oen., Dec., 1919, PP• 81.
mat neuritie1 traneactions imolve banker•• acceptanoea am
United states Go"Vermnent aecuritiea •. Banlcer•s acceptance• are
drafts, drawn usually by sellers or gooda on a bank llhich ia act-
ing in the instance or a buyer. When the bank •aocepta• the draft
it is actually substituting its own credit for trat of the ~er.
These drafts are readily arketable and are conaid ered to be prl.M
coMMrcial paptr. The Board establishes a J'ld.ni.Jmlln buying rate on
banker's aoceptanoea in mch the aa. Wt1;f as they detel"lld.ne discount
rates tor securities. The Board determines the rates tor diaoount
ot paper, but the actual open marlatt po.rchasea and sales are ao-
complillhed by the Federal Open Market Comd.ttee.
The monetary and credit control powers or the System are
greatJ.y enhanced by Collllflittee operat1ona in the nouritiea market.
Wlwn the Collllllittee, act~ through 1ta S;ystem Open l'.arla!tt .lccou.nt,
po.rchaaea eecuritiea on the open malicet, nch action v1ll ha'ff the
errect ot increaeing Jllellber bank resene balanc .. , and when the
Conmdttee aell• aeouritiea on the open arket -ber bank ruene
acoounta will tend to decreue. For enmpl.e, it the Coaittee ct.e..
a1ree to purchaae ten billion dollars ot Government aeourit1u1 it
plaoea an order with a dealer in aucb securities. The dealer,. ill
turn, purchases the aecur1t1ea on the opm •rketJ i.e., troa 8Jl1'
penon or inatitution that 111 shes to •ell the applicable NCU.ritiea.
The dealer will receive payment txom the S;yat• in the ton of a
1ederal ReeerYe Bank: check which he deposits with a 11811lber bank.
The ant>er bank will depoai t the check 1n i ta reMrYe aoCOllllt. at
its Reserve Bank. The dealer then will draw cheeks on the tunda
he deposited. to pay the sellers of the securities. !a the end
result of the transaction, the Systan• s holdings of Govem.1M1nt
securities are increased by ten billion dollare and the reserve
accounts of member banks are increased in total by ten billion
dollar8.
Carr.ring this example further, the member b&nka with increased
reaerYea now may expand loana and 1nvestMnta. Such actiou v1ll.
cauee a loaa of t'Unds to other member banks which, in turn, .,.,-
expmd their loans and investments. This expansion, if carried
to a logical extreme, could result in the expansion or loans and
investments by several times the •ount of the increased reserrea.
furthermore, such expansion muld pn>bably affect an extensive
geographical. area. Comd.ttee actions of this type could do mch
to ease the credit m nd1 tioNJ of the economy if defiationar,r toroea
were dominant. The reverse of the action deacribedJ i.e. 1 a Ale
Of Govermnent aecuritieS by the Co111Jn1ttee 'llDUld have the opposite
effect on bank reserves and thus 1.nfiatiorary forces could be oo ..
batted. The ReaerYe Banks J'llllSt abide by the deci8iona of the eo.. m:ittee as the Banking Act of 193S pro'Yided that no Reserve :e.nk
•ahall engage or decline to engage in open market operatiou \ln4er
section fourteen of this act except 1n accordance with the direc-
tion ot and regnlat1ol'l8 adopted by the Comittee.• Collllnittee
actiona are to be "governed with a view to accommodating co__..
and business and vi th regard to their bearing upon the generel
credit situation of the country.•
The effectiveness of Committee activities is somewhat related
to the Treasury Department's financing and debt management pol1c1•••
The relationltlip between the Treasury and the System in open market.
operation is discussed in Chapter IV.
Gol'lllllittee open market operationa have a direct infiuence on
the volume of member bank discounts with Reserve Banks. When the
S;rat• purchases securities in the open market there tends to be
a s1 gnificant decline in the System' 8 hol,.ing 8 or member bank die-
counts. Conversely, sales of securities in the open market tend
to increase member bank disco'Unts. The relationship is due to the
fact that 1! MEnber banks are in debt to the System when it pm--
chases securities, the member banks tend to direct at least part
or the resultant increaaed reserves to reduce their debt. Thi• 11
to sq tlw.t member banks will repa;r their own debts rather than
enter into extensive loan and inftstment operations. On the ot.ha
hand, sales of aeouritiea by the Co-1ttee will tend to re8Ult. in
increased member bank borrowing espec:1.ally if the ••ber banlal,
1n general, m not possess excess reserves.
Open 118 rlcet operations are generally preferred as inatnmente
ot control by bankers. This ie due to the conservative nature of
bankers 1n general who do not like direct governmental restrain\
placed on them. The Committee's actions are impersonal in nature
ae concerns the individual banker. True, bankers can be and usual•
ly are a!f ected by open market operations, bot the only agencies
direotl;r oontrolled by Committee actions are ti. Reae?"V'e Bank••
}t)ral &asion or Direct Action
Another quantitatiTe mnetary an:! credit control instruMDt of
the S;ratem ia the uae or mral maaion or direct action. Moral
suuion refers to the influence exerted on the aftilabili ty ot o.re-
dit by the Board lben it appeals for ptiblic co-operation. Snch
appeals are general in nature and do not apply to IAlfT one partiau•
lar 1nat1 tution. Direct action reters to the Board's contact w1 th
individual banking or other leniing inatitutiona and are designed
to bring about desired changes in the availability of credit.
J. detailed atud;y of thia instru..nt of control is not naoe ...
sa17. Su.rfice it to state that the Board so•t1mee ia8t1 .. letters
and requests to bank• urgi..q', them t.o carefully consider loan appli•
ea ti.om in order to avoid creating undue inflatiom. r:r Jre88Urea b7 lending for speoulatiw parpoeea or tor other non productift rea•
eons. The Banking Act of 1933 gives impetus to direct action b'7
the Board by empowering the Board to auspend diecounting privilegea
tor individual banks that operate unsoundly or unsa.tel3". il• 1
the Board •Y suspend all discounting privileges for a mni>er bant
that d19obe;ya it• orders, and the Board ..,.. remft the officer• or
directors, or b>th, of an;r member bank founi quilt7 ot unu.t• and
unaound bank~ practices.
Variable Margin Bequirement•
The Congreaa authorised. the ~to regulate credit a4Tanee4
b;y banker• or brokers to their O'USto•r• tor stock purchaaea, b7
passage of the Securitiee bchanp Aot ot 1934. Thi• qualitatiYe
oont.rol iutrmnent extenda to noDll&llber aa vell as •llber banU.
lb" ••r11D nquiremnt• 11 •ant that portion ot the puraba•
price of a seaurit7 that mat be paid tor b.1 the purchaser, or, it.
raters to that portion of the purchase price of a securit7 tbat 1111if
not be loaned the purchaaer by a bank or a broker. The purpo• ot
the Board• a aontrol over •rgin nquirell8nta, as provided in aeo-
tion aoven of the Sec:uritie• hcbmge Act, arises boa the Board'•
reapon81bil11;J' to take restrictive action tD prevent undue use of
credit 1br the speculative oarr;r1.ng of, or tradilw in, leGUritiee,
real estate, or oomroditiea.
The Federal Reaerve Systa1a regulations "T• and WU" eatablillh
margin requirement control. Regulation "T" applies to loans bJ'
broken, deal.era, ant me:mbera of national •curii;J' acbangea. le-
plation -u• appl.iea to loana b7 bank• tor purchases of aeeuritiu.
An increase in M1"gin requirements froa, tor inetance, 6o per omit
to 7S per cent 110uld mean that pu.robasers of securitiee or •pea•
latore muld have to use mre of their om funds for their par-
chaaea. Margin requirements of 100 per cent would cam• Mourit7
apeoulation to cease aa investors 110uld receive no credit. aubn
•Y be vill.ing or even arud.oua to extend credit to all cuatoare,
but it •rein requirnenta are raiaed b)' the Board the bubr S.
Hftl'q 111d.ted in credit expmaion, at least in thi• one eeptn\
of the eoono1tr •
. Couuar c"41t Contzola
Thi Preaident of the United st.ate•, by ExacsutiTe Order in
191al, tint authorised th• Board to reBtrain and control the a-
tentSon or oredit •d• b.r bults, other lending instit;utiou, aat
OODIJUmr credit OOntl"Ol• baT• be• UM in time of ftlergmG7 to
npplaent general oredit oontnl ••nr•• ot the s,,..i.. Con-
..., oredit oontrol• are unalq entoraed 1n tiae• llben then 1•
a soaroitq ot aorunm.r it.., u in war time, 'tlbil• th• pircba8-
U. power of comUMn 111 increasing, tbu• rest.n.ining utenaiw
prioe inanaMa.
Real Estate Credit Co&l"Ola
The qualitatiw oontrol inlltruamt concerning real estate
credit i• a relatiwq new aontrol inatrmient, being f1rn Mtal»-
lilibed b.r tM Det-.e Jadnation .let or 19SO. Oen~, the
brd i• not authoriaed to control eithw oomn.mer oredit or ..t estate oredit unleas 1peo1tioall7 directed. to do ao b.r the C...
ll'UB• leal estate credit control, when it 1a au1horiaed, 18 ti•
reotecl tow.rd the elltablilhment of .Sni•m dow ~· m4 -
turiti•• ot loans on pirclw.sea ot or addition• to real eatate«
The Interd!pendence Of Credit Control Instruante For Max1•m ltt~
The use of UJ7 one instrmnent of credit control alone UJ" be
sufficient tor controlling minor variations in the direction of
the econoJrtY' toward intlation or defiat:l.on. When major changes are
desired, hoveTer, the use of all instruments authorised ie necea-
eary tor •'d•• credit restraint or credit eaae. For eDllple, 1t
the S;rstem wishes to restrain the •ount of credit availability to
tne -.xim• extent poesi.ble, 'b7 affecting M11ber bank reael""ft bal•
ances, the Board 110uld probably' tab action to increue reaene
requirements, raiae d11count ratea, and UM J10ral suasion, while
the Committee would make extensive salaa of aeouritiea on the open
..mt. ill of these actiona wuld be necessary to innuenoe cred-
it reatraint to the maxlmum extent p:>asible. It the uae ot all
authorised controls were not sutticient to have the desired renlt•,
the !Tata 110uld probably request additional emergency powers troa
the 0ongrtt98 •
The Syata'• oonatant problem, other than reoognising in1'la•
Uonary or detlationar;y pressures in the eoonoJl!Y, is the d.etend.-
nat:l.on of jllst how moh force to use, and men to use it, to bring
abou.t stability. The use or the diaeu.ued control lfte&nrea can be
a dangerous operation since it appears to be much mre e&87' to re.
vane 1.ntlationary tendenciea in the econo1111 than to NYeree detl&-
tion&rT tendencies.
CHAPTER IV
P'EDERJ.L RESERVE SYSTEM POLICY
AND THE TREASURY DEPAR!Jo1EIT
The policy activities of the Treasury Departltent of the
United States exert a tremendoua influence upon the e!fectiveneea
ot Syetem monetary and credit oontrol policy-, if, indeed, 'l'reaa-
ury policy does not determine Syatem policy at times. The close
interdependency of the two agencies vas established primarily aa
a result of the great financial burden of the Qovenmtent in the
ae ccessful pursuit of the Second World War. As a result of the
huge public debt at the present tilne1 this interdependency- con-
tinues to pereiet, although to a somewhat lesser extent.
Treasury policy, in connection with debt 1lllll'lllgemnt, JrOat ot•
ten atteota System open market actiTities. The relationah1p can
readilJ' be seen if the reader asSUMs that ti. S,-atea 1• obligated
to npp:>rt Treasury refunding and new finano~ activities, nch
as was the case in World War n. Su.oh an obligation 'muld result.
in the S,.stea•s establishment and maintenance of a firm market. tor
Oo-lermnent securities. A fi.rll market could only- be maintained U
the SJ'ltem stood ready to purchase Treasur:y offerings at price•
high enough to keep the cost of the public debt. at a lov level.
The price support p:>licy for Government eecuritie• vould be 11t1cth
as to auure the sale ot all Treasur.r ottering& at par. It the
·27·
market security rates on general aeouritiea would rise, reaulting
in low yields on aecurities, the System• s support policy W>Uld be
ineigni!ioanta however, if the market evidenced generally lov
prices, resulting in high yields, the support policy of the S,..ata
would be verr important indeed in order to assure succeasM trea-
aury debt nanagement operations at low ooat.
When the Sy-eta, through the Federal Open Market Connittee,
purchuea Government securities, it pays tor the aecuritiea b7 uae
ot a Federal Reserve Bank check. Thia checlc, in tum, ie depoeited
in JlelJi>er banks and results 1n increased reMrnta tor lllel'llber banks
generally.l So long as System policy supports the Treasury bond
market, the S,atem lo••• JIOSt of 1 ts control over member bank c1"94-
it npansion by the variable reaerTe requirements instrument. Aleo 1
since Tnuurr aecm.r1t1ea of ahort-tena nature are used by' many
banks as a second line of reserve, S,stem support of the Govern-
ment bond market assures bankers that, if' the need ariaes, they
can sell their securities to the S,yatem at par. Jbst bank• nov
hold large portfolios of such aecuritiea 'Which makes the System'•
variable diacount rate policy relatively ineffective as a credit
restraint inst:ruJ1ent. In other 'WOrds, when infiationary tendeno1"
are dollinant 1n the eoonolll)" the Syatem loaaea much of its aontrel
power if it J11Uat support the Government securities arket becaun
1. Supra, P• 26.
by pu.rchasing Treasury of'terings 1 t:he System automatioall.7 in-
creases member bank reaerne and pzonotea credit expansion by the
banks. Since full employment is assumed in periods ot infiation,
the prioe level must increase and the purchasing power of the dol-
lar would decrease. Production wuld not increase as the reault
ot wch Syetan actions because capacity is assumed to be relatiTeq
1':1.xed 1n the short-run period.
The question of Treaaur,.•Federal Reserve relations in regard
to the System's Oovenunent aecurit7 market mpport program 11 dia-
cuaeed later in this stuct;y.2
Another 81.gniticant relatiorutiip existing between the S,-et•
and the Treasury concema the intlov and outflow of gold in the
econoiv. A detailed discussion or the quantit7 or money in the
econo117 cbea not awear to be necessar;r tor the purpose ot this
study. Gold iMpOrts or exports fn:>11 this country af!ect maber
bank reserves and in this vq influence the availablliq of credit
1n the eoomnv. For example, a aeller o t goods to a foreign coun-
try reoei•e• payment in gold. When the gold ie reoeiTed the seller
mst tum it oTer to the Treaaur,.. The Treasury makes payMnt to
the seller by means ot a check drawn against a Reserve Bank. Tha
aeller deposits hi8 check 1n a meJtber bank and the llallbe!' balk re-
deposit. the check in its ReaerYe Bank, thus increuing it• reserft
2. Intra, P• 60.
position by the amount of the check and increasing the poasibilit.J'
tor credit expension.
b outnaw or gold has the opposite ef.f'ect. Purchasera of
gold from the Treasury pay tor their purchases by drawing on th.air
accounts at C0111m9rcial banks. Such a withdrawal ot tunda :f'ro•
commercial banks could easily' result 1n reetricted availab1lit7 of
credit generally if the exportation of gold was sutf'iciently great.
The d1 ecu ssion concerning gold imports vas 1noluded in this
etud7 because the effect or gold imports on bank reserves can be
~tl7 nodif'ied by Treasury actions to • ateriliae• e;old import.a.
The Treasury •sterilizes" gold 1.Jl!porte by taking action• 11h1ch will
offset increases to member bank reserves • nch as eelling aeour-
itiea in the open market in the exact amcn2nt as the value or the
gold i.Jllported. Aleo 1 the Treasury rray decide not to iaame g> ld
certificates in return tor the imported gold. The Federal Re•ne
System would be paid by the expedient of a reduced liability tD
the Treasury.
Treasury policy mq al!O reenforce System policy in the area
of taxes, b>th pera:>nal and business. If the Systan ie using all
the controls within its pawer to combat 1nfl.ationa17 preasuJ"e 1n
the econonv, a general tax level increase would aid greatly. .lot.
uall7, the Congress vould initially ant horize tax mea1JUres, but the
Treasury would be tm operating agenq tor carrying the tax prograa
through to completion.
In concluaion, co-operation by the Treasnry and the System 1•
to ~ greatly desired tor ti. reasons indicated above.
CHAPl'D Y
P'EDIRAL RISIRVI stSTIM H>NETAR!'
AND OR!DIT POLICit 19S0-19S6
!be 1Mr 19SO, p:ntduced a ~mtration of independence 'b7 the s,..t.a that had not been nidenoed sine• prior 1D 1940 when
th• nation beoam germineq alan.d abollt poeeible Uni tad State•'
1nwl.,..nt 1n the ..r raging in la.rope. No etepa of 1117 real •ir nitioance wre taken b;y the S,yatea to pl\)olaiJI ita indepmdence of
Trea8UJ7 leadership after 19401 u Tream17 polioie• in aupport ot
the wr ettort. beo.M ooaplateq dndnant. l'or the entire var and
postwar periods until 19SO 1 the 97•t• tollowd the 'freallUJ"7' •
lead, which actuall.7 meant that S,.t• pollCT action t.o control the
mne:r nppq end bank credit we dependent upon the direction of
TnaSUJJ' po liq. There were mlD1' differences ot opinion bet11MD.
the t110 agenciee, ainly oonoerning 11hether poliCV" llhou.ld be di•
not.eel toward keeping the coat of Nn&ging tbl public debt low bJ' M.intainS.ng low interest rates, or to aotinlJ' coabat 1ntlaUoUJ7
and detlationar.r tendenoie• in the econoJIT bJ' fiuible mm7 ...,,..,..
ilt.bougb the System Mde no a:igniticant mn• toward in4IJpm.
deme ot poliq action until .luguet, 19$01 a algn:111oant eftnt ...
curre4 1n ear}7 Jmuary, 195'0 which toNtold or d.raMtio ennt•
t.hat wre t.o follow. A Congressional joint nboomittee, bad9d
b;r Smator Paul H. Douglas, studied the tiecal and mnetary aitua.•
ti.on of the nation, the relationehips between the Syataa and t:he
Treuury Depart•nt, and the S,-ate• and ita place in the Govern-
ment. The Douglas Comittee hea.riJlll wre open and drew much pib-
llo attention and comment.
Marriner Eccle1, a f'onmr chairman and then a member of the
Board teatif'ied before the Douglas Colllftittee on Dec•iber 21 19491
and .tated.t •In mald.ng a cheap money market tor the Treamry1 we
cannot awid Nking it tor everybody. All W>netary and credit
reatn.inta are gone under euch conditions. The Federal ReHl"ft
beco•• Bimpl.y an engine or inflation.• Mr. Eccles teatimn,y 1 and
the teatinDD,Y of others, led to Nl'lY public comments an:l article•
on the aubjeot.
The Douglu Comd ttee Report 1 teelt appeared to supprn"t the
System in the S,.atea•a supposed battle tor independence of poliq
aot.iona. The final report of the Douglas Cosnittee read, in partal
•1t 11 the v1ll of Congrees that the priar,y paver and respon-
eibilit7 tor regulating the supply 1 availabilit7 1 and coat of
credit in general shall be vested in the d~ constituted. m-
thori tie1 of the Federal Reserve System, and that Treuur;r
actions relative t.o money, credit, and transaction• in the
Federal debt shall be •de coneistent with the policies ot
the Federal Reserve."
1. Senate Doc. 129, 19$0, 8lst Congress, 2Dl Sees., P• 2.
•Thus, t.he Collmittee believes that the level or interest
rates should be determined by mnetary rather than 117' tieoal
authorities.•
The Co11J111ttee 1 s recommendation was not acted upon by the Congress,
but it appeared to be verr significant when indepmdent actions by
the Syatem took place in August, 19$0.
The year 19h9 was a period 1n lilieh a mild recession in the
•CODOJ!\Y errled and a sw1tt recoverr gained mmentum. Syetem polia;r 1
which had been expans1.onary in nature, was slowly :ioodif'ied in Nov-
ember, 19491 and became directed toward a reveraal. or easy mne;r
and easy bank credit. Br the end of_ the year and into the t.lnt
quarter of 19501 the Board noted that the eoonomio a1 tuation then
preTailing was good in the minds of mat consumre and buaineumn
and waa expected to be even better throughout 19S0.2 There appear-
ed to be llttJ.e evidence to support a ooncluaion that the recentl.7
ended rece1sion had seriously harmed many consumre or busine••••
lbnet&rT and credit policy 1 that had so recently been expan-
aive 1n nature, waa f'ocuaed on nndit,ying the inflationary pre1aure1
that had appeared. The S7atem• a intent. was to restrain the •UT
credit policies of the banking system and thus tone down the •r.ket
tendencies toward too rapid an expansion. il though the intent ot
2. Board of Governor ot the FRS, Federe.l Reserve Bulletin, A~., 19$01 P• la.
.34 ..
the 87ete appqred to be evident, the results ot actions taken in
the firat halt of 19$0 were relatiwly passive.
The only spec11'ic poliey actions taken by the Syatem trom JloT-
ember 1 1949, to July, 19$01 were taken by the Federal Open Marke\
eo.d.tte1. .l1 a restrictift measure the Co-1.ttee eold l.S billbn
dollar• ot long-ten TreaSUJ')" bonda.3 DnJ'irw thi• period there
wa a •i«niticant nonbank imeator•' denand tor lont-t81"11 nCUJ'l-
itie• 'Illich the Co-1.ttee action helped to aatiar,,. ilm 1 the
action we taJatn to reduce 1111Htber bank re1erTe position• and thua
curb credit expansion. The restrictin action tlken •• largel.7
nnll1tied b7 Co-S.ttee purohuee ot llhort-tel"ll CloYeitwnt seoar-
it!e• ~ the sum period. The purchaee or 1.6 billion doll.an
ot short-tam NCUritiea, made tor the purpoae of .. ting an in-
creased delrand tor tundll aa the recovery gained mmentlDll (a!ll to
aid in Trea1Ur7 refunding a) re1Ul ted in little change in the
S,yste I 8 portfolio .4 The beginning of the second halt ot 19$0 did not leann the
9yate.1 a teara 'ot a too 8Vitt]3' ~ eOODOJV'• Wholesale and
ooD.8Uller prio•• had rilMlll rapidly and the eooDDJV was prodncing at
a near cai:acit.r level. Bink• and other lending inatitutiou wre
apanding loans and investment.a as quiokl1' as their legal ruerna
J. Hank• and Studd.1 op. cit., P• )li6.
)a. Loe. o1t.
would allow. Excess reserve balance& tor member banks which had
been 676 million dollars in April, 1950, and 526 million dollars
in May, 19$01 we:-e further reduced in June, 19$0, to 4)6 million
dollars.S Excess reserves, though dwindling, were still very large
and bankers generally felt tree to expand loans and investments
even further. The only significant restrictive element affecting
member bank reserves at that time was a moderate outnow of f:Old
from the eoonom,y.
With the announcement of the invasion of South Korea, the
nation went on a furious b.lying spree in anticipation or .t'uture
shortages of consumer and industrial goods. The buying activities
?JShed. the rising price levels even :f'urther. So furious was the
activity that the President of the United States, in a message to
the Congress on July 19, 19$01 pointed out that there was a defin-
ite need to restrain credit expansion. He called upon buaines8118!l1
laborers, farmers, and oonsuJners for sensible and restrained ac--
tiona. Restraint or purchasing power became en eBSential part ot
the nation' a defense program llhich was baaed on a pay-as-you-go
policy.
Both the System and the Treasury responded to the call tor con-
trolled restraint in the so-called •10 per cent war.• On the fiscal
aide, the Congress enacted a broad increase in taxes on personal
5. Board o! Governors of the FRS, Annual Report, 19$01 P• 59.
-36-
and buaine•tt income 1n September, 19$0. ilao' en exceas profit•
tax was enacted. by the em or the ;rear.
The S;rsta announced its intention to act1Tel;r restrain bank
·credit on August 18, 1950. The announcement was in the tom or a
joint etatellent issued by the Board and the Connittee which read,
in part16
"Within the past six veeka loans am holdings ot corpor-
ate and nmicipal securities 1-ve expanded by 1.$ billion dol•
1ara at banks in leading cities alone. Blich an expansion un-
der present corditiona 1s clear'.cy exceaain. In view ot thia
de'f'elopnmt and to lllP!X'l't the CloTel"ftllent 's decision to rely
1n major degree tor the ilnediate future upon fiscal and cred-
1 t Jneasurea to aurb infiation, the Board of GoTernora of the
Federal Reae!"ff S,yatem and the Federal Open Market Comittee
are prepared to use all the mean• at their command to re-
strain tnrther expanllion ot bank credit consistent with the
policy of nintaining orderly condiUoM in the Goftl'DllMH&
eecuriti•• narket.•
The aboTe joint etat9lllent was significant beaauH ot it•
atrongq worded intent to enrciee all 11Dnetuy- and C?'9dit control
powers at its conund to curb infiation. Even more aigniticant,
ho111m1r, vaa an announcement made in the 8Ule August 181 19SO 1
lltat-nt to the effect that "the Board ot OoTernora of the Federal
6. Ibid., P• 88.
Reserve Sy-at.ea today approved an increase in the diacount rate of
the Federal Reaern Banlc of New York from 1 1/2 per cent. to 1 3/\ per cent effective at the opening of busineu 1bndq1 August 21.•7
Following thia policy announcement, the diacount rates at all le-
serTe Banks were increased by the sue amount. The clear intent. of
the policy actions by the Board vas to re strict borrowing bT wb9r
banks at the Reserve Banke tor expansionary purposes and to Mk•
such borrowing as wul.d occur mre expemive.
An announceaent ot an increase in ReHrve Bank dismunt mt••
11Duld not have appeared too drastic if' it had not oom lfithin the
hour or a Treasury anmuncement that it voold exchange approxiMte-
11' 13.6 bill1on dollan in nev thirteen-lllonth Treasury note• at an
interest rate of 1 1/4 per cent tor four iuuea ot Oonrmnent IMtC\1JIW
ities •turirg in Septeaber and October, 19So.8 When the diaoount.
rate is increased, such an action wul.d generally' result in an in-
creaae in the interest rates on prim business loans, aecuritJ- mtes,
and banker' 11 acceptances. The financi&l. world was acute}1' awre of
the •ignitioanoe of the two announoemm.t.a as it appeared that the
'f.Nuuey ws requesting cheap 110ney while the S,Stea appealed tor
tight monq.
7. ~·• P• 88. 8. The Hew York 'l'ilnea, August 191 19$0, Sec. J, P• l.
-38-
When the securities market closed f'or business on Monday,
August 211 19$01 the System had signified a new spirit ot indepen-
dence by allowing the buying prices on short-term Government a ..
curities to !all and thus 1 the yield on those securities to rise.
Thia was a signal that the System's support of Government security
prices was at an end.
Concurring in the above actions in the Government securitiea
market, the Committee felt tha.tt9
"• •• open market operations should be conducted primaril.7
'With the view to restraining further increa::ses jn bank
reserves. At the same tir.te1 they should, to the extent
necessar;r 1 carry au t the existing policy o.f maintaining an
orderly market for Government securities. It was recognised
that the endeavor to prevent ad.di tions to bank reserves in
the face of grow.if.€ demands for bank loans ~uld result in
higher short-term rates in the money market.. The higher
rates w:>uld not oncy be an inevitable result ot more :re-
strained buying by the Federal Reserve but would also help
to discourage sales and ene>urage holding and b~ ot
short-term securities by banks and others."
The action or the Board in raising discount rates made it
necessary for the Committee to purchase eight billion dollara ot
9. Board ot Oovemors, Annual Report, 19$0, op. cit. 1 P• 87.
Government securities maturing in September and 0ctober1 1950.lO
The purchase assured the success of the Treasury refunding op-o
erations described. The pur~~ase activity was expansionary in
effectJ however, the System sold about seven billion dollars of
short-term Government securities in August, 1950, to help offset
th.e purchases.11
The Defense Production Act of 19$01 provided additional.
powers to the System for the control of mnetary and credit ex•
pansion. Specifically 1 the Act authorized the System to employ
consumer credit and real estate credit controls. Consumer cred•
it controls had previous)Jr been used by the System in times or
emergency, but control over real estate credit was an entirely
new area of aoncentrat1on.
Because of the responsibility imposed by the Defense Pro•
duct.ion Act, the Board reissued Regulation "W", effective SeJ>-
tember 181 1950. Regulation "W" established m1.nin&un doa pay-
ments and maxi.mum maturities on installment credits extended tor
the purchase of certain major durable goods &Leh as autombilea,
refrigerators, stoves, and other electr::ca.J. s.ppliances. P'or
exam.pl.a, the m:i:nim.um down payment on automobiles vaa set at
io. Ibid., p. 10. -ll. Hanks and Stucki, op. cit., P• 347.
33 1/3 per cent with a 'NlCiJm• inatell•nt credit •turit,- ot
twnt7-one mnthll.12
Regulation of real. estate credit as establilhed b7 the adopt-
ion of Regulation "X", on October 6, 19SO, etteetin Oct.ober 121
19SO. The power to regulate real estate credit was ori~ the
responsibility of the Pre1ident ot the United States under Section
6o2 ot the Detenae Production Act of 19SOJ haweTer, the Pre11den\1
b7 Exacutin Order llo. 10161, dated Septaber 91 19SO, delegated
thlt authority tor 1.mplemnting auch controls to the Board. lJ With
the new power• 1 the Board was enabled to regulate the term on
which real estate loans oould be made, insured, or guaranteed b7 JPederal agencies and the terma on 11hich credit could not be eo in-
sured or guaranteed and extended in connection vi th construction
or other iaproTem nta to real pmperty started after Augu.t 31 19S(>.
The Board as required to obtain the concurrence of the Housing
and Hoae Finance A.~.atrator in regulationa oo ncerni.ng re11dent.-
1al real estate credit as the powers ot oontrol extended only to
one-and-t110•t•ily residential dwllinga .14 The economic ai tuation exieting in the nation 1n llo'nJlber,
19SO, ws characterised b7 a definite easing in the 19rlmt dwnd
tor oonlftllll8r durables, and credit expanaion which vas due. pri.ur.l1J'
12. Board ot GoTernon, Annla1 Report, 19$0, op, oit., P• 71,
1). Ibid., P• 71'. -a. loo. cit.
to the unfounded rears of civilian shortages that existed in June1
July"1 and August. The e!tecta ot Regulations "WW and "I" could not
be adequately aeseaaed at that time. While the upward awing in
eoonomic activity had somewhat abated, the trend was still upward.
and the wlume of consumer demand for goods am credit was still
aboTe that prevailing before the Korean outbreak incident.15
In a letter to member banks, dated November 17 1 19$01 the
Chainan or the Board declared "commercial banks can alao do their
part 1n bringing about restraint of credit by advising borrower•
to avoid overstocking of inventories and to postpone unneceasaJ7
busineas expansion and by discouraging various types or loans that
do not make a definite contribution to the defense etf'ort. The
aacritioe of some eaminga at this time is a anall price to pq for
the de.tenee of the dollar which is or paramunt importance •• 16
Thus, the control inatruaent for the use of mral suasion vas again
employed by the B.Tat•·
The only other important policy" actions taken by the S,.llt• in
19$0 vere those that amended Regulations '¥' and "I". The amend•
ment to Regulation "W" was to generally tighten credit ter1111 and
down pa.yants. Regulation "X" was amended to include mltiunit
15. u.s. Dept. of Connerce, Office of BttsineBS Econotdca, aJ"!f ot Current Buaineas, November, 19$0, p. 1.
16. Board of Governors, Anmlal Report, 1920, op. cit., P• 97.
-42-
properties or both residential and non re3idential nature, e!!ect-
1 ve in January, 1951.17
The close or the year 1950 round the nation continuing its ex-
pansionary economic activit;r. Kuch of the increase was due to the
expansion of Qoyenunent programs resulting from events that took
place 1n lorea. Income continued to rise as did conmercial loans
and commercial inventories. The price movement, which had leyeled
ott to some extent in October, 19501 was toll.owed by general in-
creases 1n November and December, 1950.18 This was the situation
facing the S;retem when it began its 1951 operations.
The first halt or the year 1950 had bean a period of anxious
waiting tor the Syt1tem as the rapid post receesional period ot 1949
gained expansion&ey" momentum. The second halt ot 1950 resulted in
rather drastic and sweeping quantitatiTe and select1Te control ac-
tiona b;y the System. The great economic expansion wae not caused
entirely by the Korean conflict but was datinitel.T accelerated be-
cause of it. By November, 1950, the increased economic actiYit;r
ot the nation with its innationaey tendencies appeared to be some-
what abated. However, in December, 1950, activities reversed the
17. Ibid., pp. 74-T/.
18. U. s. Dept. ot Commerce, Office of Business Economics, SurYef ot Current Business, December, 1950, p. l.
moderating trend as the Chinese invasion of Korea caused new buying
sprees and expansionary business plans to formulate. A state ot
national emergency was declared by the President of the United
States on December 16, 1950. The President's economic goals tor
the 1-ediate future consisted of increased defense appropriations
and the direction of scarce materials into defense production
channela.19
The first half or 1951 was thus opened with the nation engaged
in feverish economic activity and possessing inflationary tendencies
that seettdngly could only get vorse instead of better. EJftployment
and output were at record levels, prices and incomes were rising,
and the 1.mbalance betwen supply and demand in the market was
broadening.
Syatelll policy actions during the 1110nth of January, 19Sl, vere
switt and emphatic as they had to be in euch a crucial period.
Specific policy action• taken by the S;yate111 included an increase
in member bank reserve require111ents 1 en increase in margin require-
menta, an extension of Regulation •rw to tighten real estate credit,
and open market operations designed to support the Oovernnent aecur-
itiu Mrket with as little expansionaey effect as poaaible.
Regulation "X", Residential Real Estate Credit 1 ws extended
in scope to provide for J11Ultiunit residential properties t.o co•
19. U. S. Dept. of Co1lltnElrce, Office of Business Ecommica, ~ of Current Business, January, 1951, p. 1.
under the control of the Board, et.fective January 12, 1951. The
Regulation was again aMended 1 effective February 151 1951, to in-
clude control over nonresidential properties. 20
The System took action to increase member bank reeerve re-
quirements in January, 1951. Reserve requirements were increased
by 2 per cent on demand deposits for all tnember banks during the
month, while the reserve requirements for time deposits were in-
creased by 1 P'r cent at reserve city banks and central reserve
city banks. The new reserve requirements imposed ll'l&XiJmlm limits
on all except central reserve city banks.21 The rather drastic
increases in reserve requirements refieoted the Board's apprehen-
sion of the very rapid increase in bank loan expansion in 19$0.
Br the end o.f 1950, business loans had ircreased in the &J11>unt ot
four billion dollars as compared 111. th a year previous - an increase
of ab> ut 30 per cent• 22
Regulation "T", Extension and Maintenmce of Credit by Bankers,
Dealers, and Metnbera of National Securities Exchanges, and Regula-
tion "U", Loans by Banlcs for the Purpose of Purchasfog or Carrying
Stooks Registered on a National Securities Exchange, ver,.e 8l1Clded
by the Board on January 16, 1951, effective January 171 19$1. The
20. Board of Governors of the Federal Reserve System, Annual Report, 19$1, P• 82.
21. ~., P• n. 22. &J.sineas Week1 Business OUtlook, January 6, 1951, P• 9.
Etrective date ot change
In eftect Jan. 1, 1951
1951 • Jan. 11 .. Jan. 16 - J'an. 2$ - Feb. l
TABLE I
MEMBER BANK RESERVE REQUIREMENTS
let denm:nd depoaita Central Reserve ReaerYe
Citz Banka City Banke
22 18 23 19 23 19 24 20 24 20
Country Banke
12 12 13 1.3 14
s 6 6 6 6
Bourcet Board of 0offrl'l0ra of the P'RS, 1nnual Report, 19$1, P• 71.
a. All member bank•
Regulation T ReeJ.ation U
TABLE II
MARGIN ~UIREMENTS (Per Cent of Market Value)
Feb. 11 1947 Mar.291 1949
7S 7S
Mar. JO, 1949 Jan. 16, 19Sl
so so
Etf'ectin Jan. 17, l!Sl
7; 7S
Sourcet Board o! Govemore of the FRS, A.mm.al Report, l!Sa P• 72.
amend.Mnta increased margin requirements under both regulations
t.rom SO per cent to 75 per cent, applicable to both purchases of
seauritiea and short sales. 23 The amendments were made primaril7
to publicize the Board 1 s anxiet7 concerning increased stock market
activit," and opportunities existing tor speculation at that time.
The effect vas psychological rather than real as nnst trading in
securities was being accomplished in cash rather than by borrowing.24
The Committee announced on August 181 19501 in a joint state-
ment with the Board, that it wuld uee all the J1Eans at its cxnmra1d
to restrict bank credit expansion, consistent with the policy to
maintain an orderly OovermnEl'lt securities market. 25' The CoJDl!d.ttee
bad tried to restrict expansion of bank reserves through i ta activ-
ities in the open u.rket but had met lli th litUe succeas as Treasury
refund1nga and sales by institutional investors had actually expand•
ed member bank reaervea up to Jarniaey 1 19$1. 26
On February 14, 19511 the Chairman of the Board issued a let-
ter addreesed to all commercial banks declaring indoraement tor a
voluntary credit reatraint program as fornilated by the .American
23. Board of Governors FRS, Ammal. Report, 1951, op. cit., P• 81.
24. Business Week, Reserve Board Boosts Margin Requirenents, Jan. 201 1951, P• 104.
2s. Supra •• P• 45. 26. Board or Governors FRS, Annual Report, 1951, op. cit., p. 96.
Bankers• .Association. 27 The program was educational in nature,
stressing thrift and economy in banking actiYities.
The mnth ot January 1 19$1, was a month of CX>rtfiicting pro-
posed solutions concerning policy by the System and the Treasur,r.
The 'l'reasu17 desired restrictive credit control of a selective na•
ture on behalf of the System as, in the eyee of the Treasury, the
Government securities market was being hanBd by the System' s use
ot quantitative controls, and t."le Committee• s refusal to directly
support the OoYernment securities market. System ideas on the
proper use of restrict.1..Ye credit controls called for the use of
all control powers at its command. An open struggle resulted be·
tween the two agencies with the climax being reached as the result
of a called meeting by the President of the United States for the
purpose of reachi~ some sort of arreement between the Treasu17
and the Syste11. The meeting with the President took place during
the first week of February, 19$1, for the express purpose of
reaching some agreement as to the degree of support the System
110u1d give to the maintenance of the prices ot TreaBUry securities
offerings. 28
Shortly after the Treasury - System meeting, the President
forwarded a letter to the Chaiman of the Board indicating hie
27. Board of Governors of the FRS, Federal Reaerve Bulletin, March, 19$1.
28. Business Week, TreaSU17 Wins. Feb. 101 19$1. p. 2h.
appreciation for the promised aupp:>rt of the Government securities
market by the System. The President's assumption that such a pro-
mise had been made appeared to be open to question as the Board,
in effect, held that no such agreement had been conswu.ted. 29
Open public debate on the discord of the Treasuey and the
System. was rather partisan and vehement. A Board member, Marriner
Eccles, publicly denied that any agreement had been made concerning
Sy-stem support for the Government securities market, and, to sup-
port hia contention, he made public the minutes or the Presidential
meeting.JO On the other hand, the Secretar, ot the Treasury, in
an address before the New York Board of Trade, on January 191 19Sl,
hit at the Board's efforts to check credit expansion by stiffening
short-term interest rates, sayingtJl
•The Treasury is convinced that there is no tangible
evidence that a policy of credit rationing by means of small
increases in the interest rates on government-borrowed tunds
has had a real or genuine effect in cutting down the wlume
of private borrowing and in retardinp 1.nfiationary pressures.
The delusion that fractional changes in interest rates can be
effective in fighting inf"lation must be dispelled from our
minds."
29. Newsweek, February 12, 1951, P.• 59. )0. Keith Hutchiaon, "Everybody's Buaineu", The Nation, 1'e'bruaJ7
31 19$1, P• 109.
Jl Loe. cit.
Thus, it an agreement was reached the principal.a were not aware ot
the tact. or course, such a public displq of discord caueed con-
tusion and arud.ety among the natiom investors and auoh a state of
affairs could not be allowed to continue to exi.at.
On March 4, 19Sl, the Treasury - Federal Reserve accord was
announced which paved the way !or more firm and positive credit con-
tml policy actions by the System. The anmuncement cf the accord
read as .t'ollowst32 "The Treasury am the Federal Reserve S,-stea
have naohed full aocard with respect to debt management and mne-
taiy policies to be pursued in furthering their CCJl!lll)n pll"pO•• to
assure the ncce••.t'ul financing of the Ooverment'• requ1rern9nt• and,
at the 881118 time, to minimize JW:>mtiution of the public debt.• In
addition to the aboTe announcement, the accord provided a oomd.t-
•nt b,f the Board that it would approve no change, during the rellt
ot calander year 19.Sl, 1n the discount rates ot the Re•l"ft Bank.a
without prior consultation with the Treasury and unlees very im-
pelling circ\lJll.Stanoes existed am a request by the Board tor the
co-operation ot the Treasury in seeking from the Congress earl7
supplemental legislation to restrict the expansion or bank cred1t.l3
The practical eftect of the accord was to lover the blJ1'1ng
prices on Ooverllll'lent securities. Before the accord, the S,-•t• had
supported Treuury bonds at peg~ed prices in order to prevent the
32. Board ot Governors or the ras, Anmal Report, 19$1, op. oit.' P• 4.
33. Loe. cit.
securities from. selling below par. Such actions had reduced the
cost or the public debt by keeping the yields on Oovermnent Hettri•
ties low. The practice 1Duld thus tend to be inflationary becaw1e
holders of Government aecrnrities could receive cash, dollar tor
dollar in race amount or, as the Board declaredt "Government n-
curities were given a 'J110ney quality' by support or their prices.•34
The termination of pegged prices on Oovern!llent securities aided
the System very much as the System could then pursue active credit
restraint policies w1 thout having its policy actions largely rmlli-
tied by purchases of Treasury offerings at par. Also 1 the accord
allowed a strengthening of the Board's use of varying discount
rates as a oontrol instrument 1 as short-term Government securitiee,
wlthout System price support were aubject to market rates which
generally were below the Syste111's discount rateJ then at the level
of 1 3/4 per cent.35
The fir st step taken under the accord was a Treasury agree-
ment to exchange a nonmarketable 2 3/4 per cent 11111ue of long•tena
bonds for holders of tvo outstanding issues of loqr-term 2 1/2 per
cent bonds. The outstanding issues totaled about 19. 7 billion dol•
lara of which ab:mt lJ.6 billion dollars was exchanged. Ot the
13.6 billion dollars excha~ed, the System and the Treasury held
5.6 billion. By raising interest rates, the T~asury paved the
31&. )$.
Loe. cit.
Ibid., P• S. -
-$1-
way f'or the discontinuance of System purchases of Govermaent bonds 36 in support or their prices.
March, 1951, also produced a ~w call for the uae of voluntarT
credit restraint. The Defenae Production .let of 19$0, authorised
the President to consult with representatives of industry 1 busineaa,
finance 1 labor, and othet' interests, with a view to encouraging
volantary agreements and progranJ to further the objectives of that
.lot. The Presidential authority was delegated to the Board by'
Executive Order 10161. A Voluntary Credit Restraint Program was
developed by the interested representatives and the Board. The
purpose of the program was to "encourage lending institution• to
extend credit in such a way as to help maintain and increase the
strength of the domestic emno~ throu~h the restraint of infi.at.ion-
ary tendencies and at the same time to help finance the defense
program ..... 37
Syatem policy for the remainder of the first half of 1951 vaa
directed prinw.rily toward ratt.r technical and mderate amaidJMmta
to Regulations "W" and "X". The Collllli ttee •a operations were stab-
ilising innuences in the market, with purchases and. sales f:ro•
the System's securities portfolio about evenly divided trom April
to November, 19Sl. Securities purchase• gene rally ceased with the
)6. Ibid., P• 4. -37. ..!!?!!•• P• 8$.
-52-
exception of those made primarily to maintain orderly market
conditions.
The economic activity of the nation had leveled oonsiderabl.71
as oompared with the first quarter, by the end of the first halt
o! 1951. The level of economic activity oontinued high, but lit-
tle increase had been noted since the close of the first quarter.
A significant exception was the case of the expansion in capital
investment. Inventories were high for consumer's goods in the
soft areas whereas deJ'llllnd had leveled in the durable goods area
due to J!llteriala shortages. Employment was at a record peak with
less than two million persons unemployed. Intlationary tendencies
were still very much in evidence, but the rate of increase in the
decrease of the purchasing power of the dollar had declined notioe-
ab~ .38
Probab'.cy' the MOst significant event during the first half or 1951, vas the Treasury-Federal Reserve accord. The accord was an
ilTlportant factor in changing infiationary psychology because it waa
oon8\1JllJft&ted at a time when cotr.Jnitments by lenders tor future loans
were very heavy. The accord reduced the liquidit7 of lenders and
lessened their desire to sell marketable Government securities tor
loan extention purposes. Generally, the overall effect of the ac-
cord appeared to be of definite anti-inflationary help to the Sy1tea
.38. u.s. Dept. of Commerce, '.)ffice of Business Economics, Sur!!f 2!, Ourrent Business, July, 19$1., P• l.
as trnat in the stability of the dollar was mme what strengthened
both in the United States am abroad.39
The change in the eoonolldc attitudes of the nation resulted
in an abatement ,,r furious conw•r and buaineaa buJi~ sprees tor
COMUMr gooda aM inYentory buildup. So emphatic were the atti•
tudes that in MIJ7 cues innntor,y buildup ll.naoat ha1 ted u busi•
-·-n "lieved their large inventories in the light or pouible
price declines in the then intNdiate tuture.
Restraint vaa the apparent controlling influence in the aeoond.
halt of 1951. Intlat~oDarT pressures and trends renained rather
dormant eTen though total national output continued to expand mderi-
ateq. Credit and JnOnetar,r mntrol measures appeared to play a
•jor part in the trend toward moderation. The use ot moral maaion
that had stressed the importance or expciaion or loana only tor
pu.rpoaee mntrfbuti~ to the national defense appeared to han
been heeded.
Syata policy action• in the aecond half or 1951 were 'ft1'7
moderate in comparison vi th the first half. The 111Jor poliq
actions or the Board invol ve4 rathtJr teohnical amendment• to aon-
nmr credit and real estate oredit regulations ao as to reduoe
the reatrictive effects or the regulations to a minor degree.
Colld.ttee operation vere reduced 1n Mgnitude and 81.gnitioanoe u
)9. Board of CloTernora of the P'RS, Annual Report1 19$1, op. oi'• P• 2.
-54·
compared w1 th the first halt of the year and gene.rally may be
described e.s activities ex>nducive to stability in the Govermnent
aecuri tie e market.
The economic state of the ns.tfan at the close of 19$1 was
good. "Wholesale prices ,in December remained at the level of the
past four mnths and were moderately belov the opening months ot
the year. Consumer prices have mved slightly hi;mer, but price
trends continue to mirror the overall balance of demand and aup1>17
tactors in the economy which was the case in the entire 1econd
half of the year • ..4°
The year 19.52 was an exceptionally good year from an economic
standpoint and a good Y'l&r for the S;yatem as concerned the effec-
tiveness of credit and mnetary policies. In 1952, the nation set
new records in national output, e:mpl07Jllent of both manpcnrer and
phJ'si.cal resources, and pera> nal income and consumption. Tbe gains
were ude w1.thovt further inflation and reflected the System'• ef•
teotiveness in taking timely and adequate measures to achieve
econoldc stabilit:y.41
L.o. u.s. Dept. of Co11D1terce, Office of :&sineas Economic1, Sor!!z ot Current Busineea 1 January, 19'2, p. 1.
lU. Board of Governor• of the FRS, !mm.al Reert, 19$21 P• 1.
System policy was directed toward restraint of credit expan-
sion by forcing member banks to borrow from the Reserve Ban1cs 1n
order to obtain additional reserves. The resultant decrease 1n the
volume and incre1tse in the quality of loans made the SysteJl'I' s use
of variable discount rates a J11Uch more effective instrument of con-
trol than it previously had been.
Although the rate of expansion of co11Mrc1al bank loans was
decreased, that did not mean that there had been any significant
decrease in the demand for bank credit by consumers and busmess-
men. On the contrary, the demand for credj_ t WBs great, but the
satisfaction of the credit dmumds was then being asswned Jll)re and
more b1' nonbank investors.42 Hor did the relative reduction in
member bank reserves affect the orderliness or the Government ae-
ourities T1tarket as higher yields, resulting from lower prices, h.ad
attract"td many nonbank investors.
The only System policy actions taken 1ii'lich affected member
bank reserves were open market oper:-,tions. There were no changes
:made in member bank reserve requirements nor in the discount rate.
The lack of pl&it.1.ve restrictive activities on the behalf of the
System further attested to the effectiveness or previoua restric-
tive actions and t.o the major economic significance of the 19Sl
accord.
42. Loe. cit.
Operations of the Collll"l:ittee during the entire year of 19$2
were significant primarily because ot the timeliness, orderlineaa,
and adequacy of the actions. Outside of various purchases of
Treasury bonds for the purr..ose of mai.ntaining order in the Govern-
rnent securities market 1 11hich were effectively off set by coMparable
sales from the System• s porti'olio, the activities of the Cotmdttee
were relst:lvely routine. The greatest Committee activity occurred
in the opening mnths of the year 81'\d the clos:i.ng JrDnt.lo:ls of the
year. Sales or securities were Jr.sde in the early mnths to absorb
exce.s cash in circulation after the 1951 Christmas season; pur-
chases or securities were made in the later l'tDnths in '1rder to pro-
vide tor the nomal cash needs necessitated by the 19$2 Christl!d
seas:>n. For the year as a whole the System added a mt of about
$00 111illion dollars to its securities portfolio which was normal
and necessary to meet the public's demand for a larger Tolume of 43. currency.
Other significant actions were taken by the System a:>neerning
consumer and real estate credit controls - the first major action
occurred on April 71 19$2, effective April 8, 19$2, vhen the Board
exempted the prescribed 11\ini.muzn down payments and maxbmll loan
value requirements, under Regulation "W" 1 for all listed artial ..
having a cash !-Tice of less then $100. The reason tor the action,
43. Board ot Governors of the FRS, ~al Report, 1922, op. cit., P• 4.
·57-
according to the Board, was to s:i.:mplify the a1m1n1strat1on of Regu•
lation "W".b4 General editorial comments appeared to agree with the
Board' a conte;1tion of intent, but trerc alao appeF.red to be a signi-
ficant degree of pressure n:rected tows.rd the Board for easing con-
trols. MJst of the pressure appeared to come from labor union ot-
ficials and automobile dealers who clt.jmed that their best inter-
ests were not being served by tight controls on consumer credit. hS On !~ 2, 1952, the Board took further action to ease its
strict credit controls by 'Withdrawing its previous appeal to bank•
ers and other lending institutions to restrain credit and loan
expansion as .Provided by the Progr8.Jl'l. for Voluntary Credit Restraint. k6
Effective May 121 19$21 the Foard requested the applicable inati•
tutions to refrain from acting pursuant to and 1n accordance with
47 the Program.
The suspension of Regulation ''W" 1 Consumer Credit, occurred
on Yzay 7 1 1~2, as a result of the decision o! the Board. '!'he
stated reason for the suspension o,f Ret,'l11etion '",,,., a temporary
control instrument in the first place, was the generally good con-
dition of t.lie econo11t1• Inflationary pressures had dilniniahed aa
4S. 46. 47.
Ibid., P• 80. -BuaineH Week, Easing Credit, Apr. 12, 1952. p. 20.
Supra., P• 6.).
Board or Governors of the FRS, Annual Re:t0rt, 19$2, op. eit., P• 61.
-58-
the balance between the supply and the demand for consumer gooda
bad been satisfactorily established. 46 Regulation "X", Real Estate Credit, was amended, effective
June 11, 1952. The arnendn:ent reduced the minimum down paYJlenta
reqt:ired on family dwellings in general. "The Board considered
these i.Ctions to be appropriate· because of tendencies toward great-
er st£l.bility in the econoJey" generally and because, in contrast with
the situation a few months earlier, most materials needed for real
estate construction were in adequate supply and labor, both sld.lliad
and unGilled, w&.s ret:0rted to be available through the 'country • .49 ·'.Jne other very significant event occured during the year 19521
~hich further reflected upon the re.spective duties of the Trea8U1'7
and the System. The Congressional Joint Colllllittee On >bnetary
Folley And The ~.anagement Of The Public Debt,, COJllX)~ known as
the Patm.m Committee, opened hearings on ftl.arch 10,, 1952. In earlJ'
July, 19~2 the Patman Committee reaffirmed that nonetary and ontd1t.
policy was the resJX>nsibility of the Syatmn and that the System. vu
not dependent upon Treaau ey debt management policy in carrying out
those responsibili ties.5° The decisions of the l'atman CoJll!litt.e
were very similar to those of the Ihuglas Colllittee vhich reported
1n January, 19$0.Sl
so. 51.
Ibid., P• 82. -Ibid., P• 64. -Business Week, Fed. va. Treasul"l, July 5, 1952. P• )O.
Supra •. , P• 40.
A.bout the o~ discordant note or serious <XI neequence that
existed at the close of 1952 vas the sharp expansion of consumer
credit that had taken pace after the suspension or Regulation ¥,
ConllUJfter Credit, in May, 1952. "Since the lilting ot cont.role,
expansion or consumr debt has been unusually rapid, with the UD11llt
outstanding reaching 22.8 billion dolara at the end of No't'elllber,
an increase or more than three billion dollan or about on .... aixtb, ·
since March as compared w1 th a .6 billion dollar rise in the like
period of 1951.•52 Thus, the Ter,. large increaee in aoDSUJ1er debt
that occurred after Regulation "W"•a euepended gave eYidence to
the ettectiveneaa of selective credit control instruaents or that
mture.
System policy actions were mainly in the reTerae in 1953 aa
co~ with the previous ·three years. In 19$3, the Syetem' • 80-
called •tight JnOney po liq,• ueed to <XI nt>at infia tionary tendencies
so prevalent in previous years, gave way to a gr"adual eaaing ot
BtOnetar.r and credit restrictions as infiationary forces in the econ-
orq were diminished. The System's pri1118l7 concem during the great-
er part or 1953 was that or maintaining a balanced econo.,. and u-
auring that defiationary pressurera did not arise.
$2. u. s. Dept. of Co111merce, Office of Busineas Economics, Sur!!,[ ot Current Bueineea, January, 1953, p. 2.
The reasons for the change in attitude of the System were not
bard to aHees. Defense and private expenditures tor oonawnption
am investment were large ctur~ the early part of 19$). When the
military activitq subeided and finally ceased in Korea, re-enlu•
ationa and adjustments, both private and f:!PVernmental, took place.
Businessmen, vho had been actively building up their im'entorie1
of industrial and consumer products, then began to 11Drk f'rom ~
ventoriea. The great expansive activity of the p-evious three
years was reduced vi th the result of a smaller national. output and
less employment. Another significant element in the economy na
the relatively high yields (resulting from low prices) on both
governmental and prime C01Wll9roial securities existing at the close
of the year.5'3
Systna credit policy tor the year vae adapted to the deaoribed
economic events that took place. The first quarter of 19$3 re-
sul ted in a riee in the discount rate tor all Reserve Bank• floa
1 3/4 per cent to 2 per cent. The Board took the aetion beoauee
metnber bank borrowing from the Syat• vaa very large during 191;2
and the first quarter of 19$) estimate waa tor continued borrowing
at relative~ hi.gh l.evela. The Board f'elt that an increaM in tht
diacount rate wuld diacourage the extent of borrowing and thus
turtber the Syatem1 a policy or credit restraint.Sh
SJ. Board of Oovermrs of the PRS, Annual Report, 19SJ, PP• 1-2.
Sh. Ibid. 1 PP• 82-83. -
-61-
The COllllllittee also operated in accordance with the then cur-
rent restrict.iv• program ot the S7t1t•. During the tirst quarter,
the major aotion ot the Committee was to sell approximately 800
mUJ.ion dollars ot securities on the open market. 55 That action
absorbed the large seasonal circulation ot money in the econaq
and further restrained expansion ot member bank reaervea. By' with-
holding additional reserve• .trom the member banks, the Committee
strengthened the control potential. ot the Board's uae ot variable
discount rates.
The Comittee met on March 4-S, 1953, and directed that Com-
111.ttH policy in the future would be toward •correcting a disorder-
ly situation in th• GoTenuaent securities market" rather than tor
the purpose ot "maintaining orderly conditions in th• Government
securit7 market." 'ftda announcement did not impq a change in
policy direction, but it did impJ.T a change in operating techniques.
Operations were outlined u tollowa:S6
(1) Operations tor the Syst• account should be confined. to
t.he ehort end ot the market (not including correction of dis-
orderlJ' markets)J
(2) It ia not now the policy ot the Coamittee to support UT
pattem ot prices and 71eld.s in the Government securities
market •••
55. Ibid., P• 8).
S6. ~·, p. 88.
(3) Pending f\irther study and further action by the Collllit-
tee, it should refrain during a ~riod of TreaSUJ7' financing
tro111 purchasing (l) &!\V' maturing issue• tor which an ex-
chqe is beiiv, offered, (2) when-iesued securities, and
(.3) outstanding issues or COMp&rable maturity to those
being offered for exchange.
Another first quarter happening or significance was the action
taken by the Board to reduce margin requirements under Regulation•
"T" am "Ut'. The Board noted that there had been no au.bstantial
increase in credit purchases or eecuritiea either by brokers, deal•
ers, or bankers. A reduction in margin require.nta would continue
to have an adequatel,y restrictive base that was more in line with
the Board' a monetary policies. Accordingly, -.rgin requirmenta
under Regulations "T" and "U" were reduced from 75 per cent to 50 per cent, effective February 20, 1953.57
Regulation T Regulation U
T>.BLE Ill
M!RGD REQUIREMENTS (Per cent of market value)
Mar. JO, 1949-.Jan. 16, 19$1
Jan. 17, l9Sl· Feb. 191 19$3
75 75
Etf ectiw Feb. 20, 19$)
so so Sources Board or Qovermrs or the P'IlS1 Annual Report, 19!?3, P• 76.
57. toe. cit.
The second quarter of' 19S3 reversed the policy position ot
the System. Policy direction was away from restrictive •tight
noney" activities to a rather neutral to expansionary attitude on
behalf' of the Board. Both the Board and the Connittee took steps
to reduoe the strain of expens1 ve oredi t on the nation• s econom.r
am to assure the avoidance of defiationary tendencies. The new
attitude prevailed throug.'1out the year.
Open market i:m-chaees of' securities in May and June were the
first effort.a l'ftade to guard again.at defiationar;r possibilities.
The Comittee purchased about 900 million dollars of securities in
the open 111&rket during that period for the express purp>se or re-
lie"f'in(!, credit market tensions. The stated direction or Col!lllittee
policy action• as or June ll, 1953, was to be expansionary 1n na-
ture.58 A policy of operating so as to aggressively increaee aem-
bar bank reserves waa approved, both .for the purpose of consumer
arrl rosiness convenience and .tor the purpose or aiding Treasury re-
funding operations.
Purthering the move toward expansion of melt!ber bank rese?"fta,
the Board, on July 2.3, 1953, announced a reduction in all ..mer bank reeerve requirements. •This step was taken in pursuance of
Federal Reserve policy, designed to 1'18.ke available the reserve
58. Ibid., P• 92.
tunda neo••8&17 to meet the essential needs or the econonv and to
help to Jnaintain stability or the dollar ... s9
TABLE I'f
MEMBIR BARI RESERVE RIQU~S
Het ...anc1 deeaita Cenifti
TiM deP!ait1 I Cilitr&l
:lt.teatiw reaern Reeern ReHr'Ye date of city oit;r CountJ7 and 1'8Hrft Count17 ohanp barb bank• bank a ci~ banlal bank•
In etteot Jan. 1, 1950 22 18 12 s s
19$1 - Jan. 11 2) 19 12 6 s Jan. 16 23 19 1) 6 6 Jan. 2$ 21' 20 13 6 6 Peb. 1 24 20 14 6 6
19S3 - July l 24 20 1.3 6 6 .Jul,y 9 22 19 ~ 6 6
Souroea Board ot Oonmor• or tbl ns, Annual ReP!l"ta 19$), P• 7S.
Eoonollic conditions in the nation were good at the clo• ot
the tirat half of 19$), but there vaa no evidence or a booa.
Prioea held steadi)r, emplopmnt was dawn aa compared Y.l. th the 1'1rft
quarter, am the mney market had a slight~ tight tone. 60 .A •re
or leaa stable .tato had been reached, mainly due to decreuect 11111-
tar,r expenditures and the e1'fects of the S;r8te11t1a irertoua reltr!o-
tift oontrols on credit expansion.
S9. Ibid., P• 8J. 6o. Ibid., P• 92•
The Cotnmittee stated in June, 19$3, that its polic7 wuld be
to place emphasis on "avoiding defiationary tendenci•• withotJt en-
couraging a renewal of infiationar;r deTelopments,• rather than •ex-
ercising restraint upon 1.nfiationar,y developll'lents,• as stated 1n 1t• 61
t-\lrch, 1953, 11eeting. In accordance with that poli07, the eo ... mittee made open market i::w-chases of securities of abont l billion
dollars in the period from June to September, 19$). 62
l significant policy statUJ!lent from the Committee was issued
on September 24, 19$3, to the effect that Co111ftittee pollq- th_...
after would be described as directed toward "act1w ease" b;y which
member bank reaerTe• wuld. be increaaed by open llllrket purchuea
ot aecuritiea.63 The Committee was not pe•aimietio regarding the
possible denationary tendenciea that could develop, but it vu
erldent that there was no concern about the possibilit,. of in1'1a-
t1onar;y pressures. .lpproximatel.T 700 million dollara in aeauriU.a
was added to the S;ratem• a portfolio in the aecond halt of .1953. 6b
S,,atml pol1q actions changed tro11 actiTeq e:xpanain aot1T1•
tin throughout mo et of 1954 to cuah1on1ng acti TitiN in the 1an
61. IA»c. a:t.t,
62. J.oc. ait.
6J. i.o. oit,
64. Ibid,, P• 71,
'
quarter. A moderate contraction in business activit1 occurred late
in the last quarter or 1953 and continued at a steady, but not cwa-
ulati ve, rate into the spring or 19$4. The contraction could not
have been described as nan a mild recession as 19$3 was a record
economic year and 19$4 was the second beat business year in the
nation• s hiato17.
The reasons for the upswing in the nation's economy after the
period ot mild contraction lie primarily in Syat811l policies that
were expansionary in nature, Congressional actions to relieve the
burdens of those individuals J10at affected, and in the overall
resilience of the economy to ad.just. Not only was the United states'
eoomm.r in a health;r state, the econo117 of Western &trope was gen-
erally strengthening which accounted tor r18es in American Exports.
Expansionary policies ot the 87atea in the first quarter of
the year were directed toward "promting growth and stability in
the econmn;r by actively maintaining a condition ot ease in the
J10n91 111arket.•6S Syat. activities consisted of exparusionary pnr-
chaaee ot aecuritiea by the CoJIUld.ttee and a lovering or the dis-
count rate.
The mrmal retum of currency following the seasonal busineH
actirtties of late 19$3 was not entirely absorbed by Cond.ttee
actions in the firat quarter or 19$4. 'Net sales of securities b7
the Comittee in the first quarter were about 900 lllillion dollar•
6S. Board of Governors or the FRS, Annual Report, 19Sg, P• l&.
11hich ottaet the naeonal !actors onl.7 in part, and reaulted 1n 66 net increases in •e•ber bank reserves for the period. Al•, the
public demand tor credit in the first quarter diminished and th1JI
contributed to easier reaene po•itiona. The Colllittee continued
to pro111>te busineas expansion by taking relatiTely paaaive poliq
actions durimg the entire first halt of 19Sli.
Board poli07 actiom in the first half of the year vere a-
phaticall;r expansin. The first aigniticant Board action ws it•
approftl of a reduction in the diacount rate, etrectin Pebru81'7 S, 19$4. The new diacount rate •a Ht at 2 1/4 per cent as oollp&J'94
w1 th the p-e'rloue rate ot 2 1/2 per cent. That action reduced tbe
coat ot JllB!llber bank borrowing traa the 8ywteJll and auund -ber
banks of the S,-ate.1 1 desire tor credit ease. 67
Market •curity 71-•ld• declined as th• reBUlt of the Board'•
action to reduce discount rates 1n February, 19Sh. The Board, in
April, 1952', decided to again lllke use the nevq reTiTed etteoti.,.._
••• of variable diaoount rates and coneequent11' approftd a f\1rtber
reduction in ReHrYe Bank di•count rates tro• 2 1/4 per cent te
l 1/2 per cent. 68
On June 21, 19S4, the Board reduoed reaern requir .. nta tor
-ber banks. The mw reeerYe requirellent• resulted in the releue
66. Ibid., P• 6. 67. Loe. o1t.
68. Loe. cit.
or appMxilllately 1.6 billion dollars or previous reaenes. The
great amunt of released reserves was mde both fbr the current.
needs of the eoonom.y and tor future nAeds. In the words or the
Board "... it was realized that this action would supply more maa-
ber bank reserves than were called for at the time. It was taken
with the underste.nding that the increase wuld be pa.rtq offset bJ'
open market operations. Accordingly, during Juq and August s,.tea
holdings of Government securities were reduced by about l bfilion
dollars. "69
TABLE V
MEMBER BANK RRSERVE m;}VIRWF.:NTS
Bet deand del!2aita Tim deposit• Centr&i Centi"ai
Effective reserve ReHrve reserve date ot city city Count1"7 and re1erve Count1'7 change banke banks bank• citl banks bank8
Effect1Te .Jan. 1, 19$0 22 18 12 s s
1951 • Jan. 11 23 19 12 6 s Jan. 16 23 19 13 6 6 Jan. 25 2la 20 13 6 6 Feb. 1 24 20 14 6 6
19$3 - July 1 24 20 13 6 6 July' 9 22 19 lJ 6 6
19$4 - June 16 22 19 13 6 s June 24 21 19 13 s s June 29 20 18 13 s s Aus. l a> 18 12 ~ ~
Sources Board of Govermrs of the P'RS, Annual Rel!2rt, l?Sh, P• 79.
69. Ibid., P• 89.
The third quarter was mch like the second in that then ap.
peared to be no infiationary preuurea present in the 9CODOJl'1 at
t.he time. In Sept•ber t.he Collllllittee again announced that it• ge-
eral poliq actions would be directed toward actiTely u.intain1ng
conditions ot credit eaae in the eoono117. The Co-.ittee, in a oon-. terenoe held on Sept.ber 22, Btated that it •bellned tat in llUP-
J>l.7ing rea•rn• to the mrket in the week• ahead, &UT doubt• ahoulcl
be reaol'Y8d on the aide of ea• rather than the reTerae. a 10 The Comittee .. t again on Dec•ber 7, to rerln the nation'•
econoJd.c oondit1on and to consider the direction of policy tor
the 1-ediate f\lture. There had been an expanaion in the eoom1117'
line• the September meeting, but the Co-1ttM did not con•ider
that tact as reason enough to modify the direction ot 1 ta poliCJ'
directiTea. The Comittee decided that the developing eoonomio
situation vu 111.gniticart. onl,y to the extent that the eo-ittee
wonl.d henceforth abandon ite •actiTe• ean poliq.71
The ecow.>JV at the clo•• ot 19S4 vu in a healtb7 state. • ..
in••• expaneion in the tourt.h quarter indicated that 'bu•:lne•• in-
Tentoriea, that had been in the proceaa ot liquidation, 1IV9 'bG.Jll
increased.
10. Ibid., P• 97.
71. Ibid., P• 96.
Nn recorda were established in 19SS tor practical.11' all eoo-
mJ'lli.c activities as the mild upswi~ in business acti'rl.t7 in th•
fourth quarter or 19$4 expanded into a major eoonolftic boom. In-
dustrial production expanded to a high of 137 per cent of the
·1947-1949 average in the spri~ ot 19SS, and to a record high of
lb4 per cent in Deceaber, 19SS. The December index exceeded the
low point ot 19S4 by 19 per cent. &irployment increased b7 1.8
million 111Dre than in 19Sh. Disposable inco111e exceeded the 19S4 figure by 7 per cent vhile real inoo• allD increaeed signiticaml;r
because of a aurprisirig:Qr mderate inoreaae in COIURlMr prl.oea.
The demand tor credit and 1oan.e from bank• and other lending 1na\1•
tutiona was greatly- increased and the inoreaae in connMr debt ...
greater than the increase in oon11UJ1er inoo•a.72
The S,-.tem adju1ted ita poliay of eas.r oredit to .. t the m.tt-
ly changing ecominic conditions by taking gradual but t1l'll atepe W..
ward eaonoJ'd.c restraint. The Board utilised all the quantitatiw
control pcwers authorized to curb innationary tendenoi••• Co..S.t-
tee actions were relat1Yel7 passift during the ,-ear with ita op.
erations oontined pri.N.rily to activities designed to •derate \be
iJllpact of the ._aonal tact.ors on the 111Dn97 Nrket.
72. Board ot <Jonmora ot the ras, Annual Report, 19SS1 PP• 1-13.
-71-
The Board' a first policy action of the year resulted in ef-
forts to restrain the increasing amount of stock 111arket activ1t7
accomplished on a credit basis that had been observed since early
1~4. Hecauae of the imreasi~ speculative activity, the Board
amended Regulations "T" and "U" to increase margin requ ireJnenta
from the previous rate of $0 per cent to 6o per cent. 73 The in-
crease in margin requirements appeared only to decrease the rate
of increase in speculative stock activities, so the Board, on
April 23 1 19$5, again increased margin requirements. The second
increase was from 60 per cent to 70 per cent.74
Regulation T Reelation u
TABLE VI
MARGIN REQUIREMENTS (Per cent of market value)
Mar. 30, 1949-
Jan. 17, 1951·
Peb. 201 1953-
Jan. 16, Feb. 201 1221 1953
Jan. 4, 19~
50 75 50 ~o ~ 20
Jan. 4, Etfeotift 19'S-
Apr. 221 l~
Apr. 231 l~~
6o 70 6o 70
Source• Board of GoTel"llOrs of the FRS, Annul Report, 19SS, p. 76.
In the second quarter of 1955, the Board took another detinite
atep in its attempts to restrain bank credit and to make ita
73. lbid., P• 82.
74. Ibid., P• 84.
·72-
feelings publicly known concerning the prevailing expansionary
situation. The culllllative effects ot the boom were evident, and
just as evident was the Board• s detemination to uae all available
means at its disposal to curb inflation. An increase in the dia-
count rates for ill Reserve Banks trom l 1/2 per cent to 1 3/4 per
cent waa approved by the Board on April l3, 19SS. 7$
Evidence of the continuing expansion in the econoJl!.Y waa re-
vealed by the oontinued increasing demand tor credit by both con-
8Ul!l8rs and businessmen. The Board noted the situation &M shifted
its policy direction from the maintenance of etabilit7 to reatraint
of potential infiat.ionary developlll8nts. Specific Board action dur-
~ the second half' was effected th.rough changes in the discount
rate, as the variable discount rate had beoome one ot the MOst in-
nuential S,.etem control instruments since the 1951 Treasur,r-S,-stea
a coo rd.
The Board approved increaees in the discount rate three timu
in the mntha of August through November. The first increase vaa
from the r6te of l 3/4 per cent to 2 per cent at all ReaerTe Bank•
except the Federal ReseM'e Bank of ClevelaM which received ap-
proval. for an increase in its discount rate to 2 1/4 per oent. 76
On the same day the Board appl"O'Yed the above increase (August 3,
7S. Ibid., P• 83.
76. Ibid., PP• 86-87.
·73•
19S5) it also approved an increase in discount rates from 2 per
cent to 2 1/4 per cent for all Reserve Banks that wre not alrea~
approved for that rate 1 effective throughout the mnth of Septed>er.17
Once mrc 1 on November 17, 1955 1 the Board approved advances in 'the
discount rates for all Reserve Banks from 2 1/4 per cent to 2 1/2
per cent.78
The Committee vas aware of the expansionary economic situa-
tion but little could be done by the CoBlllittee because of veey
heavy Treasury refundings during the year lbich totaled about fortT
billion dollars. 79 Even though the Collllittee was not obliged to
support the price• of Government securities, it was committed to
operate in such a manner as to stabilize the Jlllrket tor such eeour-
ities. Treasury refunding problems together with the fact that
the general price indexes had c:x:mtinued rather stable 1 led the Cow-
mi ttee to teel that a JTX>re r~stricti ve policy on it.s behalf was
not necessary and 'W&S impractical at the tiine.80
CoJllJll.ittoe actintiea during the remainder of the year were
somewhat complicated by a series of events th£it caused aubeequent
economic developments to be unpredictable. Following it• announce-
ment in late 8UJll!Tler to the effect that no further restrictive
77. Loe. cit.
78. Ibid., P• 88.
79. Ibid., P• 20.
80. Loe. cit..
-74·
action was dec appropriate, the Committee, 1n the face of oontin-
u1ng expansion and some advance in the general price index, decided
ti. t 1 ts best course of action would be to .turther reBtrain addi•
tione to 11l81ftber bank reserves by making as tn purchases as poaai•
ble in the open market. The purchasing inactivity of the Committee
and the effects or the Board's actions 1n regard to 1ncree.s1ng di.,.
count re.tes was considered to be adequate restraint.
The announcement of the illness of the President. or the United
States in the first week of September turther complicated the Co._
mittee• s ability to take positive action in any direction. Iln-
med:1.ately 'following the anmuncement of the President's illness 1
the business activity of the nation reacted as it the optimism ot
the 1-ediate past was reversed. Repercussion was felt in the
stock Nrket and the generally expansive tone of th.e econo_,. ceased.
The Comm:itt.ee took a wait-and-see position in regards to poliq and
issued a statement that any cbubt concerning proper poliey actiol'.a
should be resolved on tbe side or easing restraint. 81
After the econo1117 had passed the first shock resulting boa
the news or the President's illness, optimin and contidenoe ap1n
vaa dominant and expansion continued. The productiTe capacity of
the economy was about reached, which resulted in cost-prioe prea-
sures which, in turn, caused a gradual increase in the general
price indexes. Committee opinions varied as to what the future
81. Ibid., P• lo6.
·7S·
course ot action should be. Finally, it was decided, on October
4, that if' any c:bubts arose, the oourn of policy action should be 62 resolved on the side of restraint.
The general oourse or restraint continued, being directed
primarily at hardening member bank reserYe positiona by purchase
restraint on the part of the CoJllJllittee. Not until the end of Ho..._
ber did any significant statement of policy come from the Conmd.ttee
which changed ita policy position to arry real extent. The cause
for the policy change vas due to antici;ated problems or the Trea·
aur,y in a twelve billion c:bllar retund~ progra. 8.3 CoJIJlittee
poliq, adopted in March, 19$), pro'rl.ded that the Comittee wuld
retrain from purchasing securities lihen Jllllturing i•••• were be1Jw offered in exchange tor the nev series. 64 The CoJllld.ttee ~ted to
deviate from the 1953 policy statell'lmt because •the Colld.ttee could
not ignore the position in which it had been placed by a request
•de by the Secretar;r of the Treasury for assistance directed to-
ward i:rnenting undue cash redemption of the maturing issue and
by the possibility of P8,Y'Chologicel deterioration of the whole -
ourities Nrket if the Treasury offering came to be regarded a• a
82. Loe. cit.
8). Ibid., P• 109.
84. ~pra, P• 75.
tailure.•85 B;y a aplit vote, the Coaittee voted in favor of the
change 1n poliCJ' beoauae of the moeaaity tor increasing -ber
bank reMrn• to proride addi tio._l caah tor the Chriatua 1eaeon
and becauae the Comittee telt that the Treuur;r lw.d priced the
new securities mrreotl.7 in relation to the market aituaUon. TM
Collllllittee• s statutent ws emphatic that the agreement to aid 1n
the Treasury re1\indU. vae not an abandol'IJl&nt of the pre"f'ioua polia;r
but was only a dertation from it. S;retem holdings of 0oTel"m8nt
Hcuritiea increased b.Y' l.67 million dollars as the reeul.t of the
described action.86
On November 17 1 19.5'5, the Board again took action to 1.noreaae
the discount rate of all ReHrft Banka tor the fourth tille in 19$.
The dilloount rate •a increased tro11 the preTioua rate ot 2 1/4 per cent to 2 1/2 per cent, ettectiTe in the latter pert ot lo.,._
ber.87
The clo• ot the 19&1" 19SS vaa oharacteriud by apenaioDaJ7
actiTitiea unparalleled in United states• hiatoJ'7• Prodnot.:lon,
tnnpl.o)'Ml'lt, borrowing, am spending reaorda had all been bloken.
as. Board or OoTernore or the FRS, Annual Report, 19SS, op. •1"· P• 110.
86. Loo. cit.
87. Ibid., P• 88.
-11-
Innat1onar,r tendenciee became obnoue during the year a• ecoDOJlio
ce.pacit7 vaa reached. The ooat-prioe spiral pillhed both 1Dduatr1al
and conswner price• upward, mt the upward mvement of prices vas
relatiTel.7 llild. 88 "The Federal Re1erYe Board policy ot credit.
reetraint, inatituted eari,. in the J9al' and later strengthemd1
helped to check advances in demmd beyond what could be •tched by
additional outpllt.•89
Expansion wa• again the dominant characteristic or the eoo-
no.,-, aa 19S6 prond to be a relati ft extension ot the econo1111 of
195S. The .,.ar began w1 th an :lntenain utilisation ot labor an4
•teriale which lett little prospect tor turther economic growth
during the year. The gross national product tor 19$6, tor ~.
vaa about 412 billion dollars as compared w.1 th about )90 billion
dollars in 1955, but about halt the increase in 19$6 vaa the remlt
ot bigher prices, not greater produotion.90
The demand tor credit tor both bueinea and col18UJl81" needa
expanded lligniticant.17 tor ti. ,.ar, but tlw apanaion we not
neoeu~ re.f'lacted in increaH• in bank borrowing•• ActuallT•
total loans and inYeetllents or commercial bank• incrMHd b;r 4.2
billion ck>llara which, lthen ooMp&nKi 111 th 19$5, refleoted a ali&b'
88. u.s. Dept. ot Colmll"Ce, Of.fie• ot &8ine11 Eoonollioa, S!"'J' ot Current Bua1nee1, Feb1"'1&171 19$6, P• 1.
89. Loe. cit.
90. Board or 0ov .. rnor1 ot the P'RS1 Ammal Repart1 19$§1 P• 2.
-78-
decllne.91 'nle reduction or bank loans probably can be attributed
to Syat.em restrictiYe credit policy as businesses turned more and
more to financing b;r liquidation or securities held by them. Por
example, six billion dollars ot tunda were acquired b;r nontinancial
corporations by liquidation ot Government securitia in 1956, as
compared with 195.5 when Government securities were reduced by on.17
about .500 million dollars.92
Consumer credit expansion was apparent in 1956, but it in-
creased by about. one-third less than in 1955, which renected a
general sl<M down in total consumer credit.93 Consumers round creel-
it tor non-durables and inexpensive articles relatively plentiful.
Much ot the decreue in the rate o! increase in bank borrowings was
caused by higher interest rates prnaillng in the market general.11'
which reduced total mortgage loans tor homes under the Veterans'
Administration loan guarantee. Lenders were not nearly as anxious
to finance "G. I. Bill• homes in 19.56 as thq had previoual.T been
willing to finance because ot Oovemment imposed infiexible int.er-
est rates on such homes.
Aa indicated, interest rates rose appreciably in 1956, re-
fleeting a strong demand tor credit and a limited supply or loan-
able funds. Both long-term and short-term securities were attected
91. Ibid., p. a. 92. Ibi4., P• 5.
93. ~ •• p. 9.
which added to Treasury refunding problems and complicated the 94 issuance of new issusa of Treasurr bills •
.9,rstem policy during the greater part of 1956 was definitel1'
restrictive although some adjustments were made we to changes in
the economic cliJnate of the nation and the seasonal variations in
the demand !or credit. On balance, System policy affected the level
of me?!i>er bank total reserves 'ffr'7 little. Reserves increased b7
about 300 million dollars, ot which about 240 Jdllion dollars re-
neoted new reserve requirements.95
In January, the Committee reatfinled its policy direction of
19!)5 in respect to calling for a policy of restraint on credit ai-
pension. The Committee ooted that there was a general, but oot
large, segment of the ecooontr which expected a oowntum in economio
activity to occur in 19$6, but the Comittee felt that the basis
for such !eel~e were unsupported, at least to the extent nece ...
sary for a redirection or Co•ittee policy directives. .lcco~l.7,
the Connittee sold al:x>ut 1.4 billion dollars of Oovemment aeauri•
tie a in January to abeorb seasonal returns of Cll rrenc;y and to main-
tain about the same degree of restraint. on member bank resernia
that had p:-evailed in Novenber, 1955.96
9b. Ibid,, P• 13.
95. Ice. cit.
96. Ibid., P• 16.
-80-
Optim1•1 which had existed in Jarruary with only the minor
noted exoeption1 had declined s1gn1!1cantl7 by February as the
economic climate becane one of uncertainty. The chmge was caused
pri.nulrily by a realization by the System, and by the nation at
large, that maximum capacity production was rapidly approaching
and that further gains could oome about. much mre slowly than had
been the case for the previous year and a halt.
The Committee, in recognition of the change in eoonomic ell•
Nte, felt that the til'!!e for leveling-off had occun-ed and that
its policy should be directed toward oontinuing restraint while
any detls.tion&r7 tendencies should be taken into account. The
Connitttte noted that bank borrowing had a:rntirrued to be very heav,y
in January and member bank reserve pos:i.tions were such that rtlP8-.Y•
ment.s of indebtedness to the System -would soon begin, attended by
tightened lending policies of the banks involved. Responding to
the change in the attiwde of the economy, the Col'llll'littee bought
small amounts of OoveMU11ent aecuri ties lihich eased the member bank
reserve poeit:ions. 97
The Board also took action to restrain expansionary tenden-
cies in the econo:nr;y when it announced its awroval for an increase
1n the rate of discount by Reeerve Banks. Discount rates were to
be raised.1 effective April 13, 19$61 at ten ReaerYe Banks troa
97. Loe. cit.
2 1/2 per cent to 2 3/4 per cent and at the other two Reserve
Banke from 2 1/2 per cent to 3 ~r cent. 98 Boa.rd feelings were
that the need for restraint was still apparent, especially in the
ce.pit.al expansion area.. The Board's action serverl mt1ce to thoae
but'linesses planning to finance plant and equipment expansion by
the use of borrowed .f'unds, that such funds would cost m::ire to bor-
row than had likely been an ti cipated.
System opinion that a stable periori had been reached in the
economy appeared to be correct, at least for the period from Feb-
ruary through March. In considering the state of economic a.ffaira
on )I.arch 27, 1956, the Committee had to decide whether any future
changes in the direction or the economy wuld be expansiTe or con-
tractive. The decision wae that it any change occurred it V011ld
be expansin as businesSMen continued to actively plan additions
to their plant and equipment facilities. Co11nittee action, in the
light or recent events, was relatively slight as it only directed
that future policy would be directed toward restraint, deleting its
previous statement concerning dafiationaey tendencies. 99
By late May, economic conditions in the nation had not changed
appreciably from the relatively high plateau reached in March.
Even thoufl:h oonsuner and businel!l8 optimism remained high, the Com-
mittee felt that there was then lea exhuberence in the eoonolllT•
98. Ibid., P• 48.
99. Ibid., P• 26.
In particular, the Committee noted that mtoJ1K>b1le sales were &:nm
trom the reoord level or 1955, and large new oar inventories wre
building-up with the result that cutbacke in production were an-
ticipated. Alao 1 the reception accorded new capital issues vas
weak and stock market prices in general had declined sharply.
Again, the Comittee stated that its future policy would continua
to be relat1Tel.y restrictive, but any ctenationary tendencies
would be taken into account.100
The close of the first half or 1956 found the ecomnv eon-
liderably strengthened, at least psychologioall7, as COJl!llE"•d with
mat of the first halt. Arr:! pe88bd.8Jll ertdenoed had been dispelled
to the CoJlllltittee' a satisfactionJ 80 much so in fact, that its fu-
ture polic;r vas directed toward stability in its operations vith
any doubts reBOlved on the side of ease.101
System policy act:Wns in the secord half of 19S6 could be
described as Jldldly restrictive compared with operations in the
first ha1f. By August, the eco MJl\Y had departed. from 1 ts more or
less sidevard movements to expansionary movements with correepond•
ing inflationary tendencies ev1dent. In August, the Co-1ttee
again changed the direction o t it a tutu re policy actions b7 pre-
scribing a policy of "restraining infiationaey d8'ftlopmnta• and
100. Ibid., P• 30.
101. Ibid., P• J).
deletinp: aey mention of consideration ot defiationar;y tendencies 102 within the eeommy.
Boe.rd action f'Mm the period of April to late August wae pae•
sive in so far as specific qualitative controls were eon:erned.
Since the discount r~te :incrf'a.se had been approved in April, there
had been oontimied heavy demands tor credit corresponding with
sustained demands for gooc's and services. Plant and equiptMnt ex-
penditures by btisinessmen continued very strong sJ1d the busineS9•
men were turning mre and ?'!'Ore to c.:nnl!'!ercial banks tor financing
needs rather than to the long-tern seet~rities J11arlmt. The demand
for eredi t created extensive bank borrowings .from the Syetem and
further reduced the liquidity or the banks becat1se their sales ot
secur1ti'3s to obtain reserves and tor epay indebtednee8 •s veey
high. The Board took action to r£>duce bank credit expansion on
August 23, 19$6, when it approved irereases in the d.isoount rate
tor ten Reserve Banks from the previous rate of 2 J/h per cent to
.3 per cent.103 All Reserve Banks had identical discount rates at
tblt time.
Continuing inflationary pressures were evident for the re1taineo
der of the year. Several •straws in the wind" indicated that the
economy was less opt1Jnistic at several points, but theae isolated
deTiationa in the ecnmmic climate were rather short-lind.
102. ~, P• JS. 10~. Ibid v .P• 51.
-84-
Finally, sever.al events of importance occurred toward the
close of the year lf'! ich tended to conf\1se the ecorx:ndc picture.
The Middle East situation had great repercussions abroad and 11'dl.d
reperc~ssions within the United States. Probably the greetest
distn>.ction wns caused by certain indnstries taking a nit-and-see
position with r~gard to expansion plans.
Severi1l strat~gie tndustries had definite expansionary plans
in the tormulat1ve stage in order to be prepared in the event ot
a general 8.I'!!led conflict.
A significant event took place al~ when the CoJ!llntittee di•
rected that its operations wuld not be directed toward actively
e.iding a large Treasury offering to acquire new !'unds, which was
scheduled for November and December. That action signified the
Committee's intention of following the terms of the 19$1 "Accord.•
CHAPTER VI
COOCLUSIONS
"The basic f\lnction ot the Federal Reserve Syatem is to make
possible a now o! credit and money that will foster order~ eco-
nomic growth and a stable dollar."l The Syst• must adhere to tbe
provisions or the Employment Act of 1946 and, like other Federal
agencies, is responsible tor actions that will "••• promote maxi-
mum employment, production, and purchasing power.•2
Selected economic indicators were used to evaluate the effect-
iveness of System policy actions tor the period studied. The eco-
noaie indicators, in the torm of national income statistics and
price indexes, revealed the progress of the econOll1'• Table ID
swnmarizea the economic indicators used in this evaluation.
The y-ea.r 1950 began with the Nation's economy in the midst of
a gradual upturn in economic activit7 as compared with most of
1949. The 1948-1949 recessional period had its low point in mid-
1949. System polic7 actions during the 1948-1949 period had bee
directed toward active ease of money- and credit availabilit7.
l. Board of Governors of the Federal lieeerYe Syst•, The Federal. ~serve Szstem - PJrposea and Functions, Washington I>.C., 19S4. P• 1.
2, Supra, p. VI, Introduction.
TABLB VII
)l::Li ,CT.i!";O ECONU1IC INUICATORJ DERIVED FROM
NATIONAL INCOi-i~ JTA'fL>TIC . .i F01\ Tifr.; h::iUOD
Total National Income (Billions)
Corporate Frorits After Taxes (Billions)
1950 - 1956
1949 ___ 19_5Q-_ l.951 _l.252 1.951 ~-1954 - ).255 _-- __ 19)6 216.2 240.0 277.0 290.2 302.l 299.0 J24.l 34J.6
15.8 22.l 18.7 16.l 16.7 16.0 21.0 21.0
Gross Private Domestic Invest. (Billions) 32.5 51.2 56.9 49,8 50.3 48.4 60.6 65.9
Govt. Purchases-Goods & Svs. (Billions) 43.6 42.0 62.8 77.5 84.5 76.6 77.1 80.2
Employment - Civilian (Mill.ions) 58.7 59.9 61.0 61.3 62.2 61.2 63.2 65.0
Unemployment - {Millions) 3.4 J.l 1.9 1.7 1.6 J.2 2.7 2.5
Prices-Consumer Index {1947-49 • 100) 101.8 102.8 lll.O llJ.5 114.4 114.8 114.5 l.17.7 Consumer Credit {Billions) 17.3 21.4 22.6 27.4 Jl.2 32.3 38.7 4ls9 Jource: U.S. Dept. of Commerce, Business ...itatistics l (Biermial Edition - A sup1 .. lement to the
Survey of Current Business Washington, U.C. 1957.
& a-•
The 11J>awing continued a gradual but steadT progress based
upon a r•surgance or investment activity and strong consumer demand
through June, 1950. SJStam policy action to aid in the progress
ot economic activity was toned down in ear]J 1950. The dystem ap-
peared to be satisfied with the progress made in recovery and aban-
doned its policy ot active ease. Toward llid-1950, System policy
direction took the form o! cautious restraint.
The upswing in economic activity during the first half ot
1950 was strengthened in July by a general upsurge in demand which
detinitel:y caused the economic pattern to be dominated by infla-
tionary tendencies. South Korea was attacked b:y Communist torcee
in July, 1950, and that event gave great impetus to the rise in
economic activi.t7. Pressure on prices developed trom increasecl
demand from all sources. Consumers and businessmen anticipated
short.ages and higher prices. As the last halt of the year pro-
gressed, the spread between total demand and supply greatly
broadened.
National income increased trom. 240 billion dollars to 277 bil•
lion dollars (13.4 per cent) tor the year 1950. Most ot the in•
crease occurred in the last halt ot 1950 because most industriee
were operating at, or near, capacity volume. Excess capacity re-
sulted. trom the recessional period of 1948-1949, when induatr.r op-
erated a less than capacity volume. Very significant was the tac\
that both de!'mse and civ1lian production accounted tor the in•
crease in national income. Civilian production was not cut bacJc
as a result ot the defense program a.a consumer production increa.aed
thl"Oughout the year 1950. Consern.tion programs to divert. essen-
tial materials to the military were to become effective in ea.rJ.T
1951, alter the President's declaration ot a state of national
emergency on December 16, 1950.
A consumer btqing wave occurred in the latter half' or 1950.
Consumers expected. shortages of goods and anticipated.price increases
which only served to push consumer prices upward. The consumer
price index increased from 102.8 to lll.O (8.2 per cent; 1947•
1949 • 100) due to consumer demand for both durable and nondurable
goods. Consumer purchasing power was high due to increased in•
comes resulting trom a swiftly increasing civilian emplopent
status; large holdings ot liquid assets which were liquidated to
support purchases; and, willingness on the part of consumers to
borrow) Unemployment decreased. from J.l mill1ons to 1.9 million•
(.39 per cent) while consumer credit increased troll 21.4 billion
dollars to 22.6 billion dollars (5.4 per cent). The ciT.i.lian la-
bor t9rce decreased by .l million employed because of increased.
armed eervices demand for manpower.
Two highly i;iiportant !acts which explained the tremendous in-
crease in economic activity in 1950 were the great increases in
GtYvernment purchases of goods and services which rose from 42
3. U. s. Dept. or Commerce, Office or Business Economics, S!U"fV ot Current Business, Febru&rJ, 1951, p. 1.
bil.lion dollars in 1950 to 62.8 in 1951 (33 per cent), and the re-
corded increase in gross private domestic investment which in•
creased from 51.2 billion dollars to 56.9 billion dollars (10 per
cent). Increased Governmental purchases were sell explanatol"T•
BuaineHmen invested heavilT in new equipment, thus adding to C&•
pacit7 to produce.
The 375tem and the Treasury took actions designed to combat
infiationary pressures existing in the Nation's econo~. The
System raised discount rates at all Reserve banks in August, 1950,
!or the purpose of control.l.ifl8 conswner credit expansion. 'l'he
System also appealed to consumers to use restraint in purchaDes ot
consumer goods. Federal Open Market Conmittee were expansive as
the System sold 7 billion dollars in securities in August. The
sales were of feet because the System purchased S billion dollars
in securities in order to support the Government securities price
level. The only truly effective control measure instituted by the
System occurred in 3eptember and October when Regulation "W" and
Regulation 11X" were placed in effect to regulate consumer credit
and real estate credit respectively. Treasury fiscal requirement•
resulted in broadened. personal and business tax rates, effective
October l, and the establishment of an excess profits tax in late
l9SO. The increased business tax rate and excess profits tax re-
sulted. in a reduction in corporate profits attar taxes tl'olll 22.l
billion dollars to 18.7 billion dollars (a decrease or 15.4 per
cent) tor the period 1950-1951.
-90-
Continued expansion in the economy was the keynote in 1951.
It was gratifying that only a moderate increase in inflationary
rressure was evident throughout the year as compared with 1950.
National income increased from 277 billion dollars in 1951
to 290.2 billion dollars in 1952 (an increase of 5 ~er cent) which
reflected a slackened rate of production increase. ~everal factors
caused the trend, the first of which was a reduced de;nand for goods
in the consumer sector of the economy. Government purchases also
were rt:duced. but this renected shortages of materials for produc-
tion rather than decreased military demand for goods.
Consumer purchases declined even though incomes increased as
em~loyment increased. Reasons for the decline in the rate of con-
sumer blzy'i.ng were (1) manifested in the fact that shortages of con-
sumer goods which were anticipated in 1950 did not develop; (2) a
~sychological resistance to the consumer ~rice increases in 1950
was aHarentJ (.3) Regulation 11 '11 11 was very effective in dela,,:ing
consumer ~urchases. It was only in the reflection of higher ~rices
prevailing during 1951 that the value of consumer purchases in-
creased at all. In real terms, volwne slipped about 1 per cent
below that of 1950.
Gross private dooestic fovestment was recorded as 56.9 bil-
lion dollars in 1951 as compared with 51.2 billion dollars in 1950
for a 10 per cent increase. The great increase in investment was
in the form of new capital equipment, a~ fixed business investment
set a new record. Inventory accumulation in 1951 was very low,
which helped contain consumer ;.rices, a~ the increased. inventories
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caused by the consumer buying wave in 1950 remained on dealers
shelves during raost of 1951. Residential housing construction was
down from 1950 levels because of the effects of Hegulation "X".
The consumer price index and consumer credit showed only mo-
derate gains from 1951 through 1952 due prLnarily to decreased
consumer demand for consumer goods and due to the System's tight-
ening of consua1er credit controls throughout the year. Further
efforts to restrict consumer credit availability took the form of
an increase in me:.her bank reserve requirements in January, 1951,
and an increase in ,:iargin requiren1ents in the sa.cue month.
Very significant, as it affected consumer credit availability
through bank re:.;erve positions, was the :.Jystem-Treasury "accord"
in March, 1951. The "accord" allowed. the .System to better use its
open market oi;erations to control reuerve levels of inember banks
by reversing the 3ystem 1s policy of fir:n SUJ..-1 ort of government
securities prices.
National income increased fro:n 277 billion dollars in 1951
to 290.2 billion dollars (an increase of 10 per cent) in 1952.
The increase was due ~rimarily to goTurnm.ent purchases of goods and
services which increased fro:a 62.8 billion dollars in 1951 to 77.5
billion dollars in 1952 (an increase of 20 rer cent). These ex-
penditures rose primarily because of the impetu5 of national de-
fense expenditures and a large increase in nondefense purc!,ases
caused by increased price suaorts to the farm sector. About one-
half of the increase in national income was due to rising price
levels.
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Gross t:rivate domestic investment droi:,ped from 56. 9 billion
dollars in 1951 to 49.8 billion dollars in 1952 (20 per cent).
The drop was due to a decline in invest:nent for defense suprorting
plant and equipment. Also, the accumulation of consumer goods
inventory was greatly reduced.
Consumer rrice levels advanced moderately because of increas-
ing employment with increasing incomes. The consumer price level
rose from 111.0 in 1951 to 113.5 in 1952 (1947-1949 • 100). Em-
ployment increased fro::i. 61.0 million in 1951 to 61.J million in
1952 (. 5 rer cent). The total civilian labor force increased from
62.9 million in 1951 to 6J million in 1952.
The Nation's economy produced more commodities and services
in 195.3 than in any prior year. !·reduction for both civilian and
defense uses was higher with the output of durable goods advanc-
ing most noticeably in both categories. National income increased
from 290.2 billion doll~rs in 1952 to 302.l billion dollars in 1953
(4 per Cent). Of the increase Of 12 billion dollars in Da.tional
income, Government purchases accounted for 7 billion dollars as
Government purcha,es increa::;ed from 77.5 billion dollars in 1952
to 84.5 billion dollars in 1953.
Gross i;rivate dome;:;tic investment remain·'d close to the level
set in 1952 as it increased fro;n 49.8 billion dollars in 1952 to
50.J billion dollars in 195). New plant and equirment anJ new
residential housing led in increased investment in the i-ri vate
sector.
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Total e:nployment increa:..ed from 61.J mllion in 1952 to 62.2
million in 1953 for a total gain of .9 million. The increase was
slight because the total labor force increased. from 63 million in
1952 to 63.8 million in 1953 for an increase o! .8 million. With
the increase in employment there occurred an increase in conswner
incomes. Consumer buying advanced in pro.1-ortion to the eXIJansion
in national income. Consumer credit advanced from 27.4 billion
dollars in 1952 to 31.2 billion dollars in 1953. The increase in
consumer credit was due to the elimination of Regulation :rw 11 in
early 1953.
Consumer prices advanced. fro:n UJ.5 in 1952 to 114.4 in 1953
(1 per cent) which was a very modest gain for such a prosperous
year. Reduced !art:\ prices and keener co;:ipetition in the commodi-
ties :narkets helped to stabilize the price level. The modest ad-
vance in conswner prices that did take rlace was due to increases
in prices of services purchaGed b~.- consumers. Consumer demand for
nondurable goods was strong. Dividend payments remained at about
the 1952 level which added to the already expanded inco:ne of
consumers.
A complete about-face in 3yste:n policy direction was initi-
ated in July, 1953 a3 the result of the cessation of armed conflict
in Korea. The .Syste,:i took action to make me:aber bank reserves more
plentiful and thus make credit extension easier. ~iost important
as an expansionary .:ieasure was a reduction in reserve requirements
in July, 195.3, which freed about 1.2 billion dollars of member
-94-
bank re3erves. This reduction tended to increase banker's willing-
ness to extend consumer and business loans. ~11rther action was
taken by the Committee to ease mEMber bank reserve rositions by
net purchases of securities on the open market in the amount of
1.7 billion dollars from July through December, 1953.
'fhe nation's eoono~ expe:·i~nced a moderate decline in 1954.
The downturn in uconomic activity has been aptly called a period
of readjustment a.s the business sector took a 11wait-and-see'' at-
titude in the face of uncertainty that followed the end of Korean
defense in mid-1953.
Total national income declined fro1u 302.l billion dollars in
1953 to 299.0 billion dollars (a decrease of 1 per cent). The re-
duction of 2 billion dollars re..;ulting from a decline in private
invest:!1ent fro•ri 50.3 billion dollars in 1953 to 48.4 billion dol-
lars in 1954 (4 per cent) was due to investor's doubts about future
Governmental siending policy.
ConsUJUers continued to 3Jend in 1954 at about the rate as in
1953. Even though une.111loymcnt advanced from 1.6 !llillion in 1953
to J.2 million in 1954 (50 J-·er cent), consumer's incomes did not
suffer to any significant extent. Also, the civilian labor force
increased from 6).8 "dllion to 64.4 million. ..>everal factors com-
bined to keep consumer inco·nes rather steady: (1) a reduction in
pe.rsonal income taxes, (2) an increatie in Govern:nent transfer pay-
ments (mainly unemployment compensation), (J) no reduction in
-95-
dividend P"1JRents by corporations, and (4) greatly increased Gov-
ernmental !arm-support paymenta.
Corporate profita after taxes did not sutf er to any great ex-
tent following the downturn in economic activity due prim.aril.7 to
the elimination ot the exceas protits tax in 1954.
Conawner prices vere steady 1n 1954 as compared vith 1953
because of low farm product prices and increasing competition a-
mong dealers in consumer products. The only reason why the con-
sumer price index increased from l.lJ+.4 to 114.8 between 1953 and
1954 was because ot increased pricn tor serYi.cea (194.7-1949 = 100). •
S7stea policy actions were directed toward expansion or bank
reserYes and increased credit ava1labi11t7 tor the first three
quarters or 1954. Discount rates and member bank reserve require-
ments were reduced in 1ebruaJ71 1951+ and in Mq, 1954 respective-
ly, in order to supply the banking system vith additional reserYea
with which to expand credit and loans.
Th• fourth qlaal"t.er or 19S4 signaled. a reverse of the dOlfllturn
in th• Nation's econorq. Inventory accumulation slowly began.
The introduction in the f'all of 1954 ot new 19.55 model aut.omobilee
gave impetus to increasing businessmen's optimism. tor the future.
National income advanced from 299 billion dollars in 1954 to
a 324.l billion dollars in 1955, an increase ot 8 per cent in a
sin&le peacetime year. An increase in gro•a private domestic in-
vestment trom 48.4 billion dollars in 1954 to 60.6 billion doll.ara
-96-
in 1955 (20 per cent) wac la:·gely res1)onsible for the advance in
r.ational income. About half the- increase in private .:..nvestment
represented additions to business inventories while residential
and industrial plant construction accounted for the rest. The
durable goods industries, which suffered the most in the 1954
downturn, gained the most in 1955.
Employment ir.crea.sed from 61.2 million in 1954 to 6).2 million
(2 per cent) in 1955. The total civilian labor force increased
from 64.4 million in 1954 to 65.9 million in 1955 which accounted
for most of the increase in employment. Corporate rrofits increased
from 16.0 billion dollars in 1954 to 21.0 billion dollars in 1955
(25 rer cent). Most of the 5 billion dollar L'1crea5e in corf,orate
profits were retained as dividend raym.ents increased by only 1
billion dollars in 1955 as cor:it-:ared with 1954. 'fhe only ,;ector
not enjoying the pro3~erous ~eriod was the far.n ~ector a3 farm in-
comes declined for the fourth consecutive year.
The mos'.. significant fact about the recovery of the Nation 1 s
econotey" in 1955 was that consurner rrices actually declined from
114.8 in 1954 to ll4.5 in 1955. Frices were held stable because
unused industrial caµacity existed at the first of the year which
allowed increa5ed r-roduction as conswaer deaand increased. The
Federal budget was balanced Lt 1955 which le:;sened inflationary
Civilian consumer purchases played the key role fr, the 1955
upturn, especially in the home construction and automobile
-97-
industries. Consumer credit increa3ed fro:n J.2.J billion dollars
in 1954 to J8.7 billion dollars in 1955 (17 per cent). Fully two-
third.s of the 6.4 billion dollar increase in consumer credit was
represented by new automobile J-taper.
System policy action was very effective in controlling infla-
tionary rressures on the Nation's economy in 1955. Margin require-
ments were increased twice during the year in order to halt an in-
crease in speculative investor activity. Disco\.Ult rates, designed
to discourage bank credit exfa.nsion by making bank borrowing more
expensive, were raL>ed four times during the year. Open market
operations were directed toward sales of securities in order to
contract bank reserves. The r'ederal Open Market Cornmittee, how-
ever, purchased about as much in securities as it sold because ot
the Jystem 1 s obligation to maintain oreerly conditions in the
Government securities market.
The nation's economy eXJJa.nded further in 1956 but the expan-
sion in output was 'l1atched by an Ufturn in price levels that fol-
lowed a four year period of relatively stable prices.
Total national income increased from J.24.1 billion dollars in
1955 to 34J.6 billion dollars in 1956 (6 per cent). About one-
half of the 1956 gain in national income was the re3ult of price
increases. Not all industries shared in the Nation's increased
national income. Leading the industries which suffered most was
the automobile industry and the home construction industry. New
car sales dropped sharply in 1956. New ho:ne construction suffered
-98-
because of higher construction costs. Also there appeared to be
a trend toward ,nore exf;ensive homes which caused many prospective
home owners to delay building. Fann incomes also suffered as had
been the case every year since 1952.
E~ployment again increased in 1956, from 6).2 million employ-
ed in 1955 to 65 million employed in 1956. The increase in em-
ployment was accompanied by an increa3e in the nation's civilian
labor force from 65.9 million in 1955 to 67.5 million in 1956.
Unemployment actu&lly decreased by only .2 million. As a result
of the increased employment there were increased incomes. Con-
sumers sr:ent their increased incomes in pro1·ortion to their wage
increases.
The consumer price index increased from 1.11+.5 in 1955 to ll7.7
in 1956 (J.2 per cent; 1947-1949 = 100). Industry was producing
at capac.i.ty volumes in 1955 and in 1956 which resulted in a re-
duction of the rate of out1ut :t:r man-hour in 1956 at3 em:r;loyment
increased.
Gross :i:-rivate domestic ir.vestment increased from 60,6 billion
dollars in 1955 to 65.9 billion dollars (8 per cent). Investors
attempted to increase productive capacity to meet increasing con-
swner demands for good3. Business plant and equipment investment
was very high while inventory accwnulation remain~.:d steady, In-
vestment dernand exceeded savings which resulted in an increase in
interest rates.
-99-
Corporate profits after truces were 21 billion dollars in 1955
and remained at the 21 billion dollar level in 1956 a3 the nation's
output increased. ·This was duo to increased production costs which
kept pace with increa:5ed national output, Corporate dividends did
increase by 1 billion dollars in 1956 which only served to increase
inflationary pressures,
System credit controls were very effective in r,:ducing bank
credit extension. Investors turned :nore and 1;1ore to non-banking
sources for invest:nent funds. Also, self-financing took place in
industry as corporate securities were liquidated to obtain invest-
ment fmids,
Open market operations were restrictive in the first half of
1956. 3raall sales of securities increased the Fre.:;!Jure on credit
extension by tightening member bank reserve levels. Discount
rates were raised in April, 1956 to further restrict credit
availability.
The nation's economy appeared to level off by mid-1956. The
Jy~item 1 s monetary and credit policy direction for the remainder of
the year was passive which continued the condition of relative
"tightness" in the money market,
For the most fart, the policy actions enforced during the per-
iod studied were concerned with those powers that had been recog-
nized as belonging to the System, either on a routine basis, or on
an emergency basis, such as Hegulations "W 11 and 11 X". Jystem policy
-100-
activity concerned itself with the extensive use of those recog-
nized rowers with varying degrees of emphasis.
l-'robably 1 the most ... ;ignificant event, for the period studied,
was the Treasury-Federal rleserve Jystem accord or 1951 and its
aftermath. The author is of the oi;inion that the "accord" was
the most practical. and logical instrument available tor the pre-
servation of the independent character or the System from the dom-
ination of the 'rreasury and the Executivti, and that only the "ac-
cord" served to prevent the Jystem from truly becom.'\.ng an "engine
ot inflation". Following the "accord", conflicts between the Tre-
sury and the Jystem over monetary policy were resolved in favor
of the System.
The research and study connected with this report indicated
that the Jystem, as organized and sup~rvised, was exceptionally
well staffed with competent and dedicated men of integrity and
foresight. The Board, the Commit.~eA, and si.;eci.f'ic individuals
were occasionally charged with actions that were both too little
and too late, by so:ne writers. ""'uch charges, standing alone,
possibly contained sor:1e element er truth. However, well lmown is
the principle that it is much easier to in~titute restrictive mea-
sures to retard excessive economic expansion than it is to effect-
ively cause a rebirth of expansion if restrictions prove to be so
great as to create attitudes of vesdimism in industry. The author
noted that when the ne~"<i tor expansionary policy action was indi-
cated, the Jystera took relatively emphatic and timely action to
-101-
correct the deflationary tendencies. ~hen restrictive actions
were indicated, the 3ystem appeared to act wisely and with suffi-
cient promptness to correct those inflationary disorders.
The period 1950-1956 was characterized priniarily by expan-
sionary pressuree resulting from the Korean conflict and the
continuation of the so-called "cold-war". Intlationary pressures
are generally assumed to be present in an economy when there is
full employment of labor along with :naximum capacity production
by industry. The 3uccess of the ;;;ystem•s policy activities during
the period Jtudied was indicated by the ~ystem•s positive compli-
ance with objectives of the Employment Act of 1946.
The turning points of policy action direction in the study
were many. l'robably the major turning point occurred when the
Treasury-Federal Reserve 3ystem accord was publicized. in 1951.
The "accord" represented the independence of the System in rela-
tively definite terms, and set the basis for more positive use by
the System of the powers to control money and credit which have
been generally attributed to it. The Korean conflict was definite-
ly another major turning point.
The need for further intensive study of the principles of
central banking is imperative when one considers several ot the
many proble!lls that appear in this study and ponders the various
solutions applied. The sentiment of the author is expressed veI7
well in the statement made by Mr. Allan Sproul in a speech made
-102-
on December 29, 1955, which reads, in part:4
''What I would now like to see is a renaissance in
the study of money and banking in general and of central
banking in particular. I would like to ::.ee a fresh and
thorough examination of our existing banking and credit
machinery and our money and capital markets. I would
hope that out of such a study and examination would come
new ideas and new proposals which would give shape and
direction to future public policies and private actions. 11
4. Sproul, Allan, "Uefiections of a Central Banker", Vital Jpeeches of the Da,y, February 1, 1956. p. 244-249.
-103-
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