September 29, 1964 FOMC Minutes

FOMC minutes

Mr. Mitchell said he would like to emphasize that the proposed directive had been drafted specifically to avoid a commitment to any particular theory of monetary causation. Both the views of those who felt the impact of policy ran from reserves to the money supply to economic activity, and the views of those who felt it ran from reserves to bank credit to credit conditions to economic activity, were accommo dated under the proposed format. Whatever one's analytical preference, there could be no argument with the proposition that the System's policy was effectuated by changes in the reserves made available to the bank ihg system. Such changes influenced both the money supply and the banking system's contributions to total credit flows. The common ele ment in both theoretical structures was bank reserves, and this was the reason that element 3 contained a statement of the policy intent of the Committee in terms of reserves rather than of either the money supply or bank credit. In the very short run, Mr. Mitchell continued, the System's own participation in financial markets could be a critical element in the supply and demand for specific financial instruments and, of course, effects engendered by System operations had an influence expectational markets. But the longer-lasting impact of policy was in all credit reserves resulting from open market operations, through changes in bank and the ways in which the banking system made use of them. the System committed analytically by the specification, Neither was in reserves behind private demand deposits, Mr. in element 3, of growth All that the proposed directive asked of those who Mitchell said.

preferred a money supply line of causation was that they be willing to specify the desired rate of expansion in each category of bank deposits and of currency. This was set out clearly in the "trial" directives. For those who preferred analytically the asset side of the ledger, the sum of the reserve growth specified for each type of bank liability determined the growth in total bank credit, enabling proponents of this point of view to adjust or compensate for those changes in bank credit which reflected diversions of credit flows from other instruments into time and savirgs deposits at commercial banks, thereby focusing on the expansion of bank credit attributable primarily to expansionary or con tractive monetary policy. Mr. Mitchell remarked that the Comm.ttee could not avoid the fact that reserves were related by law to deposits rather than to some asset or group of assets, and that net reserve availability therefore was affected by changes in the Treasury balance, shifts of funds between time deposits and other liquid claims, and the absorption or release of reserves by the currency component of the money supply. The purpose, of the approach recommended for element 3 was that it and advantage, for the systematic analysis of the behavior of these various provided aspects of reserve utilization. Finally, Mr. Mitchell said, he would not want to give the that this proposal provided an easier way to operate or that impression it would sprout, grow, and flourish in the span of a few meetings. More than anything else it was put forth as a framework for accommodat ing the use of better intelligence and more advanced analytical techniques

and a clearer understanding of linkages between monetary action and the real economy. Chairman Martin said he though Messrs. Ellis, Mitchell, and Swan had done a splendid job of setting forth the basic problems that the Committee faced in formulating monetary policy. They also had indicated an area in which the Committee had received a great deal of criticism from the outside--criticism to the effect that it did not make clear what its objectives and purposes were, and what it intended to achieve. He thought Mr. Bopp had been right when he used the word "experimental"; in the Chairman's view anything the Committee might do in this area had to be experimental. Such an experiment, far from making the work of the Committee and staff easier, would make it harder. Chairman Martin said that he had seen an early draft of the memorandum commenting on criticisms of the proposal that would be dis tributed today. On reading it, he had been impressed by the fact that on some occasions in the past he had not thought through all of the implications of a possible course of action because of the difficulty of the problen. And at times he had tended to feel that it was easier debates on the specific words to be used in the direc not to engage in tive. But he thought that all members should make a sincere effort to before concluding that the Committee could grapple with these problems not improve the formulation of its directives which, after publication, would provide the basis for evaluations of the policy decisions made.

Chairman Martin then called for distribution of the memorandum of comment on criticisms of the proposal, bearing today's date. He suggested that the discussion be continued at the meeting of October 20, on a topic-by-topic basis rather than in a go-around. It might be found desirable to carry that meeting into the afternoon, but because this was not certain he did not think it was necessary at this time definitely to schedule an afternoon session. No objections were made to the Chairman's suggestions. Thereupon the meeting adjourned.