Monetary policy ; Economic stabilization ; Federal Reserve System

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English

Research Papers in Economics

SEPTEMBER 1937 FEDERAL RESERVE BULLETIN 827
ing by $270,000,000 in the preceding eight
months to a peak for recent years of $1,560,-
000,000. There was little change in July.
Loans on securities by reporting member
banks to others than banks and brokers
showed small changes over this period.
Notwithstanding the recent decline in cus-
tomers' debit balances, borrowings by stock
exchange firms, which had increased by
$250,000,000 from the end of August 1936
to the end of April, had shown but a small
decline by the end of July. The failure to
reduce borrowings as advances to customers
declined reflected a decrease in customers'
credit balances. These balances declined by
$125,000,000 from the end of January to the
end of July, following a corresponding in-
crease in the preceding five months of rap-
idly advancing stock prices.
Appointment of Class C Director at
Federal Reserve Bank
On August 20, 1937, Mr. Thomas B. Mc-
Cabe was appointed as Class C director of
the Federal Reserve Bank of Philadelphia
for the unexpired portion of the three year
term ending December 31, 1939.
OBJECTIVES OF MONETARY POLICY
On August 2, 1937, the Board of Governors
sent to the Chairman of the Senate Com-
mittee on Agriculture and Forestry the fol-
lowing statement in response to his request
for an expression of the Board's views with
regard to a measure pending before the Com-
mittee :
From time to time the Board of Governors
of the Federal Reserve System is asked for
its opinion of bills pending in Congress that
would establish a central monetary authority
and direct it, as a primary objective, to
achieve and maintain a specified domestic
price level. In these bills it is generally as-
sumed that the stated objective may be at-
tained exclusively through monetary control,
and responsibility for accomplishing the end
sought is, therefore, placed upon the mone-
tary authority.
The Board assumes that, while price sta-
bilization is stated as the objective of such
proposals, the authors regard stability of
prices merely as a means toward a more im-
portant end, namely, the lessening of booms
and depressions and the increase in the na-
tional output and well-being, in the belief that
through the maintenance of a stable price
level the broader objective will be achieved.
The Board is in full agreement with the
ultimate objective of the proposals to pro-
mote economic stability, which means the
maintenance of as full employment of labor
and of the productive capacity of the country
as can be continuously sustained. The Board,
with the broader powers conferred upon it
by the Banking Act of 1935, performs essen-
tial functions necessary to the achievement
of this objective.
As to the adequacy and efficacy of the
means provided by the proposals to achieve
this objective, the conclusions reached by the
Board are briefly stated in the following dis-
cussion.
Price stabilization not an adequate objec-
tive.—That wide fluctuations in the price level
are disastrous is beyond question and deter-
mined efforts should be made to prevent such
fluctuations as would endanger economic sta-
bility. The Board is convinced, however, that
the broader objective of maximum sustain-
able utilization of the Nation's resources can-
not be achieved by attempting to maintain a
fixed level of prices, and that, therefore, price
stability should not be the sole or principal
objective of monetary policy.
Stabilization of individual prices by mone-
tary means is not proposed, nor would it be
feasible. Proposals for price stability neces-
sarily refer to some index or average of
prices. There is no general agreement on the
question of what constitutes a satisfactory
price index for this purpose, although the
general wholesale commodity price index is
often suggested.
No matter what price index may be adopted
as a guide, unstable economic conditions may
develop, as they did in the 1920's, while the
price level remains stable; business activity
can change in one direction or the other and
acquire considerable momentum before the
changes are reflected in the index of prices.
There are situations in which changes in the
price level would work toward maintenance
of stability; declining prices resulting from
technological improvements, for example,
may contribute to stability by increasing con-
sumption. There are other situations when
Federal Reserve Bulletin: September 1937828 FEDERAL RESERVE BULLETIN SEPTEMBER 1937
the restoration and maintenance of relatively
full employment may be possible only with an
advance in prices. Correspondence between
price stability and economic stability is not
sufficiently close, therefore, to make it desir-
able to restrict the objective of monetary
policy to price stability.
The inadequacy of price stability as a guide
to policy may be illustrated by a situation
when the index rises owing to an advance in
agricultural prices. Such a rise might result
from a crop failure in the United States, or
from a short world crop while the harvest in
this country was bountiful and full employ-
ment prevailed. If the maintenance of a fixed
price level were the sole guide to monetary
policy, a restraining policy would be indi-
cated in both cases, although in the former
case such a policy might result in a general
business decline, while in the latter case it
might or might not be justified, depending on
other circumstances.
Inasmuch as the management of the coun-
try's monetary system is not an exact science,
since it involves forecasting and dealing with
many uncertainties, it is essential in deter-
mining an objective to leave scope for judg-
ment and discretion.
Monetary contribution to economic sta-
bility.—Monetary authorities may contribute
to economic stability by exerting an influence
to maintain a flow of funds conducive to as
full a use of the country's productive re-
sources as can be continuously sustained and
to keep the banking machinery of the coun-
try in sound condition. The Board recog-
nizes that even an adequate supply of money
will not perform its functions adequately if
the banking structure through which it must
operate is in an unsound condition, and that
a sound banking structure cannot be sus-
tained if the supply of money is insufficient,
and a deflation is under way. The Federal
Reserve System, therefore, must work toward
economic stability through its influence both
on the flow of money and on the soundness of
banking conditions. The Board is aware of
the limitations on the effectiveness of this in-
fluence which arise from the multiplicity of
laws and jurisdictions as well as from the
divided responsibility for supervision under
which the banks of this country function.
Monetary control alone cannot accomplish
economic stability.—An attempt to make
either price stability or the broader objective
of economic stability the particular concern
of the Federal Reserve System, without rec-
ognizing the fact that the attainment of the
objective would require the cooperation of
other agencies of the Government, is imprac-
tical.
The Federal Reserve System can regulate
within limits the supply of money but there
are other factors affecting prices and busi-
ness activity fully as powerful as the money
supply. Many of these factors are non-mone-
tary and cannot be controlled by monetary
action. Their effect on business activity may
express itself in an increased or decreased
rate of use, or turnover, of the existing sup-
ply of money as well as in a change iji the
supply itself. The influence that the Federal
Reserve System can exercise over the interest
rate has an important bearing on business
activity, but it may be entirely offset by other
factors.
It is essential to recognize the limitations
on the effectiveness of monetary policy.
Monetary factors are only one of the groups
of forces affecting business activity.
Conclusion.—To sum up, the Board believes
that economic stability rather than price sta-
bility should be the general objective of pub-
lic policy. It is convinced that this objective
cannot be achieved by monetary policy alone,
but that the goal should be sought through
coordination of monetary and other major
policies of the Government which influence
business activity, including particularly poli-
cies with respect to taxation, expenditures,
lending, foreign trade, agriculture and labor.
It should be the declared objective of the
Government of the United States to maintain
economic stability, and it should be the recog-
nized duty of the Board of Governors of the
Federal Reserve System to use all its powers
to contribute to a concerted effort by all
agencies of the Government toward the at-
tainment of this objective.
Federal Reserve Bulletin: September 1937

Objectives of monetary policy

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Objectives of monetary policy

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