Wallich, Hen y C.; Kei , Pe e M.
A icle
The Role o Ope a ing Guides in U.S. Mone a y Policy: A
His o ical Re iew
K edi und Kapi al
P o ided in Coope a ion wi h:
Duncke & Humblo , Be lin
Sugges ed Ci a ion: Wallich, Hen y C.; Kei , Pe e M. (1978) : The Role o Ope a ing Guides in U.S.
Mone a y Policy: A His o ical Re iew, K edi und Kapi al, ISSN 0023-4591, Duncke & Humblo ,
Be lin, Vol. 11, Iss. 1, pp. 30-52,
h ps://doi.o g/10.3790/ccm.11.1.30
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/292807
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The Role o Ope a ing Guides in U.S. Mone a y Policy:
A His o ical Re iew*
By Hen y C. Wallich and Pe e M. Kei , Washing on
The ope a ing echniques employed by he Fede al Rese e o imple-
men mone a y policy since he end o Wo ld Wa II ha e unde gone
subs an ial e olu ion. This p ocess has been guided by a numbe o
impo an de elopmen s: (1) he " edisco e y o money", ollowing an
ex ended pe iod in he 1930's and 1940,s du ing which mone a y policy
played a ela i ely mino ole; (2) he b eaking away o he Fede al
Rese e om T easu y con ol in 1951; (3) a ious new analy ical in-
sigh s in o he wo kings o mone a y policy; and (4) he ad en o
in la ion as a pe sis ing — hough p esumably no pe manen — ac
o li e. The shi away om he gold exchange s anda d owa ds loa ing
a es, on he o he hand, had li le e ec on he choice o Fede al
Rese e ope a ing echniques.
The ocus o his essay is on he pa icula ope a ing echniques used
o implemen Fede al Rese e open-ma ke policy. Since open-ma ke
a es, on he o he hand, had li le e ec on he choice o Fede al
no deal wi h seconda y ins umen s, such as he discoun mechanism,
and changes in ese e equi emen s. No does i seek o e alua e he
successes and ailu es o open-ma ke ope a ions in achie ing hei
ul ima e policy goals — o employmen , p ices, economic g ow h, and
he balance o paymen s.
I is impo an o no e ha he Fede al Rese e's app oach o open-
ma ke policy has been subs an ially in luenced by he o ganiza ional
s uc u e h ough which hese ac ions mus be decided and ca ied ou .
Policy decisions a e made by he Fede al Open Ma ke Commi ee
(FOMC) which consis s o i e o he wel e p esiden s o egional
Fede al Rese e Banks, along wi h he se en membe s o he Boa d o
Go e no s. The se en p esiden s who a any one ime a e no membe s
* The iews exp essed he ein a e ou own and do no necessa ily e lec
hose o he membe s o he s a o he Boa d o Go e no s o he Fede al
Rese e Sys em.
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The Role o Ope a ing Guides in U. S. Mone a y Policy 31
ne e heless pa icipa e in hese mee ings. The logis ics o b inging his
g oup oge he is one eason mee ings o dina ily a e limi ed o one a
mon h.
Be ween he mon hly Fede al Open Ma ke Commi ee mee ings —
which a e held in Washing on — policy is implemen ed by he Manage
o he Sys em Open Ma ke Accoun a he Fede al Rese e Bank o
New Yo k. Because o he complex and decen alized na u e o his
policy mechanism, i has been necessa y o de elop explici and a he
o mal p ocedu es, bo h o exp essing policy decisions eached a mee -
ings and o delega ing hei execu ion be ween mee ings o he
Manage .
I. Wo ld Wa II Pegging o he Yield Cu e
on U.S. Go e nmen Secu i ies
In connec ion wi h he inancing o he Second Wo ld Wa , he Fede al
Rese e, a he eques o he T easu y, had unde aken o main ain
app oxima ely he le el and e m-s uc u e o in e es a es p e ailing
when he wa began. While his decision was c i ical o he e icien
inancing o he wa , i made i di icul o he cen al bank o pu sue
i s adi ional unc ion o managing he na ion's supply o money and
c edi .
To ul ill i s commi men o "peg" in e es a es, he Fede al Rese e
had o s and eady o buy (o sell) T easu y secu i ies in he seconda y
ma ke when o e ings (o bids) by o he in es o s h ea ened o o ce
yields o ise (o all) app eciably ela i e o he "pegged" s uc u e1.
The Fede al Rese e did no buy secu i ies di ec ly om he T easu y,
bu i s suppo ope a ions in he seconda y ma ke in e ec gua an eed
he T easu y a eady demand o he new secu i ies issued o inance
he wa .
1 The cha ac e is ics o his yield s uc u e we e a 3-mon h a e o 3/8 pe
cen , a 7- o-12-mon h a e o 7/8 pe cen , and a 20-yea a e o 2-1/2 pe cen .
This s uc u e was b oadly belie ed o e lec liquidi y p e e ence — he ea
ha long- e m a es migh ise and he consequen desi abili y o in es o s
seeking o a oid capi al losses o s ay wi h sho - e m asse s. I was widely
ecognized ha pegging o such a a e s uc u e was in e nally inconsis en .
I long- e m secu i ies we e expec ed o emain uly pegged un il ma u i y,
he e was no poin in holding any secu i y wi h a lowe yield bu no lowe
isk. Howe e , anyone who ac ed on his heo y and bough he 2-1/2 pe cen
bonds o Sep embe 1972 on he p esump ion ha Fede al Rese e pegging
had emo ed he isk o in es ing a he long end o he ma ke would ha e
seen his bonds dep ecia e o a low o 78-24/32 in ea ly 1960.
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32 Hen y C. Wallich and Pe e M. Kei
Du ing he wa , in es o s — indi iduals, inancial in e media ies,
non inancial co po a ions, and all he es — had willingly acqui ed
T easu y secu i ies because many al e na i e uses o hei unds we e
being ci cumsc ibed by wa ime con ols. A e he wa , howe e , many
in es o s sough o dispose o hese holdings. This o ced he Fede al
Rese e o acqui e all o e ings ha h ea ened o push yields abo e
he o icial "pegs". In he p ocess, bank ese es, bank c edi , and he
money supply we e all expanded.
The consequences o his abdica ion o Fede al Rese e con ol o e
he supplies o money and c edi came o a head du ing he Ko ean Wa .
Since he public could co e i s wa -in la ed needs o unds simply by
dumping excess holdings o ma ke able T easu y deb on he Fede al
Rese e a "pegged" p ices, he Fede al Rese e — in he wo ds o i s
own Chai man — became "an engine o in la ion". A e a di icul and
p olonged con on a ion be ween he Adminis a ion and he Fede al
Rese e, an "Acco d" was eached wi h he T easu y in Ma ch o 1951
which inally eed he Fede al Rese e om i s linge ing Wo ld Wa II
commi men o "pegging".
II. T ansi ion om "Pegging"
A1 ough he 1951 "Acco d" wi h he T easu y ended he Fede al
Rese e's commi men o main ain igid in e es a e "pegs", he p ocess
o wi hd awing comple ely om o icial suppo o he Go e nmen
secu i ies ma ke occu ed g adually. In pa icula , suppo o he issues
in ol ed in T easu y inancings con inued un il nea ly he end o 1952.
No su p isingly, he e we e di e ences o judgmen wi hin he
Fed al Rese e Sys em as o how apidly and how comple ely he
Fede al Rese e should pull back om ma ke suppo o his ype.
Fea s we e oiced ha upon wi hd awal o o icial buying p ices
Go e nmen bonds migh d op d as ically, o cing inancial ins i u ions
ha had in es ed in longe e m bonds — on he assump ion ha hei
p ices would be s abilized — o su e hea y losses. In addi ion, he e
was conside able conce n ha — in he wake o he "pegging" ex-
pe ience — he seconda y ma ke o U.S. Go e nmen secu i ies migh
no be su icien ly b oad and ac i e o accommoda e he subs an ial
olume o ansac ions needed o implemen an e ec i e mone a y
policy.
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The Role o Ope a ing Guides in U. S. Mone a y Policy 33
To help esol e ques ions aised by hese a ious conce ns, he Fede al
Open Ma ke Commi ee, in ea ly 1952, ini ia ed a b oad s udy o he
U.S. Go e nmen secu i ies ma ke and i s ela ion o Fede al Rese e
ope a ions. While his s udy was in p og ess and he suppo o T easu y
inancings was con inuing, ques ions conce ning he selec ion o app o-
p ia e ope a ing a ge s o he managemen o mone a y policy we e
no conside ed in any sys ema ic way. To some ex en he limi ed ocus
on explici ope a ing a ge s in his pe iod p obably e lec ed a p esump-
ion among he "old hands" on he Commi ee ha he ope a ing ap-
p oach used p io o he "pegging" episode would simply be eins i u ed.
In any e en his, in e ec , is wha happened.
Resul s o 1952 s udy2. The 1952 s udy concluded ha , i he Fede al
Rese e's open ma ke ansac ions we e o be ca ied ou e ec i ely,
hey would consis en ly ha e o ep esen only a ela i ely small sha e
o o al deale ansac ions wi h all pa icipan s in he Go e nmen
secu i ies ma ke . Only when his condi ion p e ails can open-ma ke
ope a ions be ansac ed wi h li le di ec impac on ma ke p ices.
Because he bulk o he Fede al Rese e's ansac ions a e o a "de en-
si e'' ype, i was (and s ill is) conside ed impo an o he FOMC o
be able o in luence bank ese es wi hou signi ican ly dis u bing
secu i ies p ices. "De ensi e" ype ope a ions a e designed o keep he
pos u e o mone a y policy essen ially unchanged by o se ing o ui ous
luc ua ions in bank ese es ha esul om o he ac o s, such as
cu ency lows, adjus men s in loa , and changes in he T easu y's
balance a Fede al Rese e Banks.
The 1952 s udy concluded ha he Go e nmen secu i ies ma ke a
ha ime did no adequa ely sa is y hese necessa y condi ions o an
e ec i e implemen a ion o mone a y policy. Because ma ke p o es-
sionals did no ha e a clea pe cep ion o he easons o gi en Sys em
ac ions in he ma ke , o o he magni ude o ansac ions o expec
in gi en ma ke sec o s, hey we e eluc an o ake in es men posi ions
o hei own in Go e nmen secu i ies o o ca y he in en o ies
needed o p omo e and accommoda e an ac i e olume o p i a e
in es o ading.
Ac ing on hese indings, he Fede al Open Ma ke Commi ee, in
Ma ch 1953, in oduced se e al new ope a ing p ocedu es designed o
imp o e he unc ioning o he Go e nmen secu i ies ma ke . Fi s ,
2 Repo o he ad hoc subcommi ee on he U.S. Go e nmen secu i ies
ma ke .
3 K edi und Kapi al 1/1978
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34 Hen y C. Wallich and Pe e
M.
Kei
o educe ma ke unce ain ies abou Fede al Rese e in en ions, he
Fede al Open Ma ke Commi ee announced ha hence o h ope a ions
would be ini ia ed solely " o e ec ua e he objec i es o money and
c edi policy" and "no o impose on he ma ke any pa icula pa e n
o p ices o yields". To bols e he c edibili y o his p omise, he Fede al
Open Ma ke Commi ee also s a ed ha i would con ine i s ma ke
ansac ions o e y sho - e m secu i ies, p e e ably bills — excep o
he a e si ua ion whe e in e en ion o e a b oade ma u i y ange
migh be needed " o co ec diso de ly ma ke condi ions". In ma ke
ci cles his p ocedu e came o be known as he "bills only" doc ine.
Addi ional cons ain s we e imposed on ansac ions o he Sys em
Accoun Manage a imes o T easu y inancings. Speci ically, he was
di ec ed o e ain a such imes om pu chasing (1) ma u ing T easu y
issues o which an exchange was being o e ed, (2) new issues being
o e ed in an exchange, and (3) any ou s anding issues wi h ma u i ies
compa able o hose o he new issues.
When i announced hese modi ica ions o i s app oach o T easu y
inancings, howe e , he Fede al Open Ma ke Commi ee s a ed ha
i was s ill p epa ed o main ain an "e en-keel" in mone a y policy
du ing inancing pe iods. In o he wo ds, he Fede al Rese e would
e ain om any ac ion a imes o T easu y inancing which migh be
in e p e ed by ma ke pa icipan s as a change in mone a y policy.
Subsequen modi ica ions o 1953 es ic ions. The 1953 "bills only"
doc ine was iewed by some membe s o he Fede al Open Ma ke
Commi ee a he ime as essen ially a empo a y measu e in ended o
ease he ansi ion om "pegging". Ac ually, howe e , he cons ain
was main ained un il ea ly 1961. Mo eo e , du ing he in e ening
pe iod Sys em ope a ions we e ex ended o longe e m secu i ies —
o help "co ec diso de ly ma ke s" — on only wo mino occasions.
The 1961 decision o end his p ocedu e was p omp ed by a special
si ua ion ha de eloped du ing he 1960 - 61 ecession. Sys em e o s
o comba he ecession h ough an "easy" money policy had exe ed
downwa d p essu e on U.S. sho - e m in e es a es a a ime when
highe sho - e m a es ab oad we e encou aging capi al ou lows and
ending o augmen a la ge U.S. balance-o -paymen s de ici . To help
minimize he downwa d p essu e on U.S. sho - e m a es, he Fede al
Rese e sold T easu y bills in olume om i s po olio and hen o se
he esul ing d ain on bank ese es wi h ma ke pu chases o longe
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The Role o Ope a ing Guides in U.
S.
Mone a y Policy 35
e m Go e nmen secu i ies. In addi ion, when he e was a need o add
o he o e all supply o bank ese es, he Sys em o en me he need
h ough pu chases o in e media e- and long- e m secu i ies a he han
bills. The U.S. T easu y bols e ed his Sys em e o o main ain he
bill a e by concen a ing he bulk o i s cash bo owing du ing he
pe iod in T easu y bills.
Many analys s ou side he Fede al Rese e Sys em in e p e ed his
ab up 1961 shi in ope a ing echnique o an emphasis on pu chases
o longe e m secu i ies as e idence ha he Fede al Open Ma ke Com-
mi ee was ying o " wis " he yield cu e on U.S. Go e nmen
secu i ies. Ac ually, in he Fede al Open Ma ke Commi ee's iew,
a oiding a dep essing e ec on bill a es was he p ima y conside a ion.
In any e en , econome ic s udies sugges ha he powe o open-ma ke
ope a ions o wis he yield s uc u e — aising sho and lowe ing
long a es — is minimal. Mo eo e , any empo a y e ec he Sys em
"swaps" may ha e exe ed on long- e m a es in 1961 was comple ely
swamped by he o se ing in luence esul ing om he massi e T easu y
ad ance e undings being unde aken a he same ime.
Since 1961, he Fede al Rese e has con inued o make pe iodic ans-
ac ions in longe e m U.S. Go e nmen secu i ies. And in Augus 1971
i s ope a ions we e ex ended o he ull ma u i y spec um o he ma ke
o Fede al agency secu i ies as well. Howe e , hese ansac ions in
longe e m secu i ies ha e been es ic ed exclusi ely o pu chases;
ha e occu ed only a imes when he Fede al Rese e needed o supply
ese es; and ha e been ypically — hough no always — limi ed o
si ua ions in which deale s we e willing selle s o secu i ies a close o
p e ailing ma ke p ices.
Since hese cons ain s on Sys em ope a ions in longe e m secu i ies
a e now well unde s ood by ma ke pa icipan s, such ansac ions no
longe c ea e he ypes o unce ain ies ha p e ailed jus a e he
1951 "Acco d". Mo eo e , as economis s ha e come o unde s and be e
he o e iding impo ance o ma ke in e es a e expec a ions in de e -
mining he ma u i y s uc u e o secu i y yields, ou side p essu e on he
Fede al Rese e o s ep up i s pu chases o longe e m secu i ies as a
means o " wis ing'* he yield cu e a imes o economic ecession ha e
g ea ly diminished.
"E en-keeling" oday. The impo ance o he Sys em's "e en-keel"
commi men on T easu y inancings — o iginally an a oidance o mone-
3*
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36 Hen y
C.
Wallich and Pe e
M.
Kei
a y policy changes du ing oughly h ee weeks, ou imes a yea —
has also diminished in ecen yea s. In he la e 1950's and ea ly 1960's
his commi men was pa icula ly impo an , because T easu y e und-
ings ope a ions we e concen a ed in la ge qua e ly inancings, and
he p ices and coupon a es on new issues in ol ed in hose ope a ions
we e se se e al days in ad ance o he o e ing da es. In hose ci cum-
s ances, he e undings we e ulne able o any upd i in ma ke in e es
a es ha de eloped be ween hei announcemen and o e ing da es.
Du ing ecen yea s, howe e , i ually all o he T easu y's new
ma ke able deb o e ings ha e been auc ioned. Since auc ions se he
a es o new issues on he ac ual da e o o e ing, a he han on he
announcemen da e, and allow he ma ke , a he han he T easu y, o
de e mine he p ice once he T easu y has se he olume o be sold,
he possibili y ha a inancing will no be ully subsc ibed because o
las -minu e shi s in ma ke a es has been minimized. Because o he
emphasis on auc ioning and o he deb managemen inno a ions, he
need o cons ain mone a y policy ini ia i es close o T easu y inancing
pe iods has been educed.
III. Re u n o T adi ional Ope a ing Ta ge s3
A e he sp ing o 1953 — wi h he majo ansi ion ques ions aised
by he abandonmen o "pegging" ai ly well esol ed — he Fede al
Open Ma ke Commi ee began o ocus mo e conce edly on he ques ion
o app op ia e ope a ing a ge s. I soon became clea ha he gene al
e ms like "neu ali y'', "ac i e ease", and " es ain " which membe s
had been using o cha ac e ize hei policy p e e ences needed much
mo e explici de ini ion o be meaning ul.
To help mee his need, some Commi ee membe s began o suppo
hei exp ession o policy p e e ences a Fede al Open Ma ke Commi -
ee mee ings wi h a mo e comple e spelling ou o he analy ical eason-
ing h ough which hei judgmen was eached. Usually, hey hen
speci ied an explici se o nea - e m inancial condi ions which hey
belie ed would be consis en wi h hei desi ed policy app oach. The
pa icula condi ions speci ied usually included desi ed le els o changes
3 The ul ima e " a ge '' o policy is a a o able pe o mance o he economy
as e lec ed in ou pu , p ices, and employmen . The inancial a iables used o
de ine desi ed policy anges, and e e ed o he e as " a ge s", a e me ely
means o achie ing his b oade end, and no a ge s in any inal sense.
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The Hole o Ope a ing Guides in
U. S.
Mone a y Policy 37
in key sho - e m in e es a es, plus ela ed o als o membe bank
bo owing and excess ese es a Fede al Rese e Banks. O e ime he
excess ese es-membe bank bo owing ela ionship began o be ex-
p essed as a desi ed ange o "ne ee" o "ne bo owed" ese es4.
Howe e , while he s a u nished g ea suppo ing de ail on ecen
economic and inancial e en s, no in eg a ed p ojec ions we e p o ided
sugges ing how al e na i e se s o ne ese e and money ma ke a e
speci ica ions we e likely o be e lec ed in he beha io o money, bank
c edi , and bond yields and how, unde hei in luence, he economy
i sel migh e ol e. Each Commi ee membe was le o judge o
himsel he likely esul s o his p oposed ac ions.
In he la e 1950's and ea ly 1960's some membe s began o ques ion
he Commi ee's emphasis on money ma ke condi ions and ne ese es
as ope a ing a ge s o open-ma ke policy. They no ed, in pa icula ,
ha he same le el o ne ese es could mean a he di e en hings
abou he e ec s o policy a imes when c edi demands a banks we e
s ong han when c edi demands we e weak. An e o by he Fede al
Rese e o main ain a gi en le el o ee ese es a a ime when he
banks, acing s ong c edi demands, we e ying o use up hei ee
ese es h ough c edi expansion would lead o mone a y and c edi
expansion. A simila Fede al Rese e e o o hold ee ese es cons an
when banks, acing weak c edi demands, we e willing o see hei ee
ese es ise would lead o con ac ion.
This poin was d i en home by de elopmen s in ea ly 1960 when he
money supply and o al ese es a banks con ac ed app eciably du ing
he ini ial phase o he 1960 - 61 ecession. In ha pe iod he Fede al
Rese e was eluc an — o balance-o -paymen s easons — o educe
he Sys em discoun a e in line wi h declines in sho - e m ma ke
a es. Wi h he ela i e cos o ma ke sou ces o unds hus declining,
banks elec ed o epay bo owing om he Fede al Rese e as hei
cus ome s' loan demands d opped o . The Manage o he Sys em open-
ma ke accoun — ollowing he Fede al Open Ma ke Commi ee's in-
s uc ions o hold ne ese es in a gi en ange — did no pe mi ne
bo owed ese es o decline as apidly as banks wan ed. Thus, he
Manage held back on he p o ision o nonbo owed ese es, and o al
4 When excess ese es exceed membe bank bo owings, he ne posi ion
o he banking sys em shows " ee'' ese es; when bo owings exceed excess
ese es, he e a e "ne bo owed" ese es.
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44 Hen y C. Wallich and Pe e M. Kei
only so long as hese ope a ions — o o he ma ke ac o s — do no
push he weekly a e age Fede al unds a e ou side i s speci ied ange —
usually a sp ead o 50 o 100 basis poin s. I g ow h a es o M and M2
(weigh ed in some manne , in la e 1977 app oxima ely equally) appea
o be emaining ou side he Commi ee's desi ed anges, and he Man-
age 's ac ions o coun e his de ia ion ha e mo ed he unds a e o he
uppe o lowe limi o i s ange, he mus eques new ins uc ions om
he Commi ee.
So long as he unds a e emains wi hin i s speci ied ange, he
Manage does ha e leeway o espond o e idence ha weigh ed g ow h
a es o M± and M2 a e app oaching o mo ing ou side he limi s o hei
anges. He will usually begin o ake o se ing ma ke ac ion when he
agg ega es mo e subs an ially in o he uppe o lowe hal es o hei
anges. As a esul , he Commi ee's cu en ope a ing p ocedu es do
encou age he Accoun Manage o espond somewha mo e sensi i ely
o de ia ions in g ow h o he agg ega es om desi ed a es han was
he case in he la e 1960's and ea ly 1970's. I should be ei e a ed,
howe e , ha he ull e ec on M and M2 o a change in he unds a e
occu s, no wi hin he one-mon h in e mee ing pe iod, bu cumula i ely
o e a pe iod o oughly six mon hs.
VI. Ope a ing P oblems in he Use o Mone a y Ta ge s
Wi h he Fede al Rese e now placing subs an ial emphasis on he
mone a y agg ega es as policy a ge s, i has had o decide how o deal
ope a ionally wi h a numbe o di icul concep ual and s a is ical ques-
ions. A selec commi ee o academic expe s desc ibed he essen ial
equi emen s o an e ec i e agg ega es a ge as ollows:
"In conduc ing mone a y policy, he Fede al Rese e should use as an
in e media e a ge ha mone a y o al (agg ega e), o hose o als, h ough
which i can mos eliably a ec he beha io o i s ul ima e objec i es —
he p ice le el, employmen , ou pu , and he like. Which o al o o als bes
sa is y ha equi emen depends in u n on (1) how accu a ely he o al can
be measu ed; (2) how p ecisely, and a wha cos s including unwan ed side
e ec s, he Fed can con ol he o al; and (3) how closely and eliably changes
in he o al a e ela ed o he ul ima e policy objec i es8."
The expe s' epo iden i ied h ee concep ual bases ha migh
logically be used as policy a ge s. One is o ega d money as "co es-
8 Imp o ing he Mone a y Agg ega es, Repo o he Ad iso y Commi ee
on Mone a y S a is ics, Boa d o Go e no s o he Fede al Rese e Sys em,
page 7.
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The Hole o Ope a ing Guides in
U. S.
Mone a y Policy 45
ponding o he asse s ha a e he non-in e es -bea ing ia issues o he
ul ima e mone a y au ho i y" — o he "mone a y base". In he Uni ed
S a es his base consis s o ci cula ing cu ency, plus ese es (deposi s)
held a Fede al Rese e Banks by comme cial banks ha a e membe s
o he Fede al Rese e Sys em.
The second base iden i ied is o iew money as asse s ha a e used as
media o exchange. T adi ionally, his de ini ion has included cu ency
in ci cula ion plus demand deposi s a comme cial banks (o Mx). The
hi d base is " o ega d money as asse s ha se e as 'a empo a y abode
o pu chansing powe * and a e, o a e eadily con e ible in o media o
exchange"; in o he wo ds, i encompasses bo h he ansac ions and s o e
o liquidi y unc ions o money. The epo no ed ha many schola s
iew his hi d base as mo e closely and eliably ela ed o ul ima e
policy objec i es han he o he wo. Howe e , he epo also no ed
ha his base has he mos ambiguous empi ical con en o he h ee —
in he sense ha i could co espond o a wide ange o b oade agg ega e
possibili ies9.
Unde exis ing da a collec ion a angemen s, cons ain s imposed by
he imeliness wi h which s a is ics become a ailable ha e led he
Fede al Rese e o exp ess i s wo-mon h in e mee ing policy a ge s
exclusi ely in e ms o M and M2, wi h ela ed in o ma ion p o ided
on he mone a y base. While da a on he b oade M's and bank c edi
a e a ailable only a e signi ican ly longe ime lags, M3 and bank
c edi ha e been used — along wi h M and M2 — when se ing he
Commi ee's longe e m 12-mon h g ow h anges.
Accu acy o measu emen . The accu acy-o -measu emen es ci ed by
he academic expe s as necessa y o a good policy a ge is be e
sa is ied by he mone a y base, which poses ew measu emen ambi-
gui ies, han by M and M2. Measu emen o he M's is complica ed,
because public holdings o money canno be iden ied di ec ly. They ha e
o be es ima ed om bank eco ds which un o una ely a e no always
epo ed consis en ly and pose ce ain p oblems o de ini ion and con-
solida ion. Mo eo e , deposi da a o banks ha a e no membe s o he
Fede al Rese e Sys em a e a ailable only o b ie qua e ly bench-
ma k pe iods. Be ween benchma ks hey mus be es ima ed om a
a he ske chy sample.
9 Possibili ies ci ed included M2 and M3; M4, and M5 (M2 and M3 plus la ge
CD's); plus a numbe o o he pe mu a ions ha combine deposi - ype ins u-
men s wi h liquid ma ke secu i ies.
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46 Hen y C. Wallich and Pe e
M.
Kei
While hese p oblems appea o ha e in oduced some unce ain y in
measu emen o he agg ega e supply o money ou s anding, hei impac
on sho - un changes in ha supply gene ally appea s o ha e been qui e
limi ed. Thus, measu emen p oblems do no appea o ha e been a majo
limi a ion in selec ing an e ec i e policy a ge .
On he mo e c i ical ques ion o e ec i e con ol, he Fede al Rese e
has ound i qui e di icul o exe close sho un con ol o e Mx and
M2 wi hou isking unwan ed side e ec s on in e es a es. Also, ela ion-
ships be ween he mone a y a ge s and he ul ima e objec i es o policy
ha e p o ed o be subs an ially less p edic able desi ed.
Con ol o he agg ega es. Fede al Rese e e o s since 1970 o con ol
g ow h in he M's ha e placed he g ea es emphasis on Mi10. These
e o s ha e been complica ed, howe e , because he a io (o mul iplie )
be ween bank ese es and M ends o a y, depending on he o m he
g ow h in M akes.
When g ow h in Mx assumes he o m o an expansion o cu ency-in-
ci cula ion, his c ea es an equi alen dolla - o -dolla d ain on he
supply o ese es a ailable o he banking sys em. Bu when he M
inc ease e lec s a g ow h in bank demand deposi s, he inc eased need
o ese es is less han he ise in deposi s due o he ac ional ese e
na u e o he banking sys em. Simila ly, since exis ing egula ions call
o a highe ese e equi emen a he ma gin as a gi en bank's o al
deposi s expand, he inc eased olume o ese es needed by he banking
sys em o suppo a gi en dolla g ow h in demand deposi s will be
di e en depending on he sizes o he banks a which he deposi g ow h
occu s. Finally, i banks as a g oup change hei ela i e desi e o hold
excess ese es, he a io be ween ese e g ow h and money g ow h
can be changed.
E en i he Fede al Rese e could accu a ely o ecas he cu ency
and deposi mix he public was likely o demand and hence he ese e
g ow h needed o accommoda e some speci ied g ow h in M^ i would be
eluc an o o ce he inancial sys em o con o m o his igid g ow h
pa e n. Since demands o Mx also end o be qui e a iable in he sho
un — due o a a ie y o ins i u ional conside a ions ha o en a e no
e y esponsi e o sho - e m changes in in e es a es — any igid
10 While he Sys em Accoun Manage has ecen ly been di ec ed o weigh
M and M2 equally when e alua ing hei ac ual g ow h pa e ns in ela ion
o he Commi ee's desi ed anges, he ac ha M2 includes M± s ill places
he g ea es e ec i e weigh on M
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The Role o Ope a ing Guides in
U. S.
Mone a y Policy 47
Fede al Rese e commi men simply o supply he ese es i s p o-
jec ions o he deposi mix showed would be needed o achie e a desi ed
a e o g ow h in M could be expec ed o p oduce ma ked sho - un
luc ua ions in ma ke in e es a es.
In p ac ice, he Fede al Open Ma ke Commi ee has been unwilling
o seek such close sho - un con ol o e g ow h in he money supply.
This eluc ance e lec s he Commi ee's belie ha he sho - un ol-
a ili y in ma ke in e es a es likely o esul om such a policy would
isk g ea e dis up ion o he economy han he sho - un ins abili y in
money g ow h a es he policy was seeking o a oid.
When incoming da a show a sudden la ge accele a ion o slowing in
money g ow h a es, he Commi ee mus decide whe he he change is
simply a empo a y abe a ion likely o be soon e e sed, o ep esen s
a mo e undamen al change in money demands ha s ems om a basic
adjus men in he pe o mance o he economy. I he Fede al Open
Ma ke Commi ee ac ed immedia ely o coun e an obse ed change in
money g ow h, and he change hen p o ed o be empo a y, he ac ion
could end o be des abilizing and equi e a subsequen o se ing adjus -
men . Since Fede al Open Ma ke Commi ee ac ions a ec he public's
willingness o hold money wi h a lag h ough hei in luence on in e es
a es, such a p ocess o a emp ed ine uning could a imes p oduce
pe e se esul s.
To minimize his isk, he Fede al Open Ma ke Commi ee ypically
has adop ed an in e media e posi ion. Con on ed wi h an unexpec ed
o e shoo o unde shoo o i s money g ow h a ge s, he Fede al Open
Ma ke Commi ee has aken mode a e ac ion, nei he ully igno ing
no ully esponding o he miss, un il he unde lying g ow h endency
can be di e en ia ed om he noise o sho - e m abe a ions in he
da a. This app oach, o cou se, poses some isk ha needed coun e -
cyclical policy ac ions will be less imely han desi ed. Bu he Commi ee
belie es ha he accen ua ed sho - e m in e es a e ola ili y likely o
esul om any ins an e o o achie e g ea e ine uning o he
agg ega es poses a g ea e isk. This Commi ee judgmen has been
bols e ed by Fede al Rese e esea ch which sugges s ha empo a y
abe a ions in money g ow h a es c ea e ew di icul ies o he eco-
nomy so long as desi ed g ow h a es a e e ec i ely a ained o e
pe iods o wo o ou qua e s.
Rela ionships o ul ima e objec i es. Rela ionships be ween he mone-
a y agg ega es and measu es o ul ima e economic ac i i y ha e p o ed
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48 Hen y C. Wallich and Pe e M. Kei
o be subs an ially loose in p ac ice han is ypically implied by eco-
nomic heo y. This appea s o ha e been pa icula ly so o he mone a y
base. Fo M and M2 changes in he a io o money o GNP (o he income
eloci y o money) ha e been somewha mo e s able. Bu bo h Mx and
M2 ha e exhibi ed signi ican shi s in eloci y a c i ical poin s.
Looseness in he ela ionship be ween g ow h o Mx and GNP has
been accen ua ed in ecen yea s by a numbe o impo an ins i u ional
inno a ions ha ha e encou aged he public o shi ansac ions balan-
ces om he non-in e es -bea ing demand deposi s ha a e included
in M o new ypes o in e es -bea ing ansac ions accoun s ha a e
included in M2 and Ms. In New England, o example, sa ings and loan
associa ions and sa ings banks ha e been au ho ized o p omo e in e es -
bea ing NOW accoun s ha pe mi holde s o use "nego iable o de s o
wi hd awal" e y much as hey would checks. And e en c edi unions
ha e begun o o e "sha e-d a " accoun s ha se e much he same
unc ions. In o de o emain compe i i e, some comme cial banks ha e
ecip oca ed by o e ing NOW accoun s o hei own.
In he ace o his expanded compe i ion among banks and o he ypes
o h i ins i u ions, he Fede al Rese e and he Fede al Deposi In-
su ance Co po a ion ha e sough o keep he condi ions o compe i ion
among ins i u ions o di e en ypes easonably balanced by elaxing
some o he ea lie es ain s on comme cial bank o e ings o sa ings
deposi s. Fo example, whe e p e iously comme cial banks had been
allowed o o e sa ings accoun s only o indi iduals and nonp o i
ins i u ions, hese accoun s can now be ex ended o businesses and S a e
and local go e nmen s as well. In addi ion, holde s o sa ings accoun s
ha e been allowed o ans e unds by elephone om sa ings o de-
mand deposi s — ins ead o being equi ed o make ans e s by mail
o in pe son as was he case be o e. Finally, a p oposed egula ion has
been published o commen which would pe mi banks o o e o e -
d a p i ileges on checking accoun s, unde an a angemen ha co e s
a deposi o 's o e d a wi h an au oma ic ans e o unds om his
sa ings accoun .
All o hese inno a ions encou age he public o economize on M , by
holding mo e o hei ansac ions balances in a ious in e es -bea ing
o ms o M2 and M3. In addi ion, mu ual unds a e now o e ing sha es
in pools o money ma ke asse s ha can be liquida ed on demand. These
se e he liquidi y unc ion o money e y e ec i ely and o ha ex en
help he public o economize on holdings o M2 and Ma as well.
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The Role o Ope a ing Guides in
U. S.
Mone a y Policy 49
The public's expanded eso o in e es - bea ing ansac ions accoun s
has s eng hened he case o use o a ela i ely b oad measu e o money
as a policy a ge . The pa icula b oade measu es ha ha e been
a ailable, howe e , pose impo an p ac ical ope a ing p oblems o hei
own.
Fo example, while la ge nego iable bank ce i ica es o deposi (CD's)
a la ge banks — on which he e a e no in e es a e ceilings — a e
excluded om M2 on he g ounds ha hey beha e mo e like secu i ies
han deposi s, simila la ge ce i ica es issued by smalle banks emain
in M2. The di e ence o ea men is explained by a lack o imely da a
on CD's a smalle banks. Since he na u e o hese o he CD* is much
he same as hose a la ge banks, howe e , hey, oo, should p obably
be excluded in p inciple om M2.
M2 and Ma also include ce ain ypes o smalle CD- ype accoun s ha
a e subjec o in e es a e ceilings, o e highe yields in e u n o
ex ended ma u i ies (ou o se en yea s), and ca y subs an ial penal ies
o ea ly wi hd awal. These accoun s, oo, a e mo e compa able o
ma ke secu i ies han hey a e o he ansac ions and sa ings- ype
deposi s mos ypically iewed as money.
Rela ionships be ween changes in he b oade M's and GNP a e u he
lawed by he dis o ions which in e es a e ceilings on ime and sa ings
accoun s some imes in oduce in o deposi lows. In si ua ions whe e
yields on compe ing ma ke secu i ies ise om le els below o le els
abo e ceiling a es on deposi accoun s, g ow h in M2 and M3 can slacken
ab up ly. No only a e cu en sa ings lows di e ed o he highe
yielding ma ke secu i ies, some h i accoun s accumula ed a lowe
a es in he pas may also be edi ec ed o ein es men in ma ke
secu i ies. In he opposi e si ua ion, when a es on liquid ma ke secu i -
ies d op h ough o icial ceilings o le els signi ican ly below hose
a ailable on h i accoun s, lows o deposi a y ins i u ions a e ypically
augmen ed. Fo his eason, obse ed changes in g ow h a es o M2 and
M3 ha e o be ca e ully e alua ed o judge how much o he indica ed
shi may simply be a ibu able o dis o ions in sa ings lows a ising
om a bi a y changes in ma ke yields ela i e o deposi a y a e
ceilings.
These p ac ical di icul ies o selec ing a mone a y a ge wi h p e-
dic able links o GNP eemphasize a con inuing s and o Fede al
Rese e hough , ha he e is no single o mula o ope a ing a ge
ha can be elied on o wo k e ec i ely in all ci cums ances. Fo his
4 K edi und Kapi al 1/1978
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50 Hen y C. Wallich and Pe e
M.
Kei
eason he Fede al Rese e has ypically hedged i s commi men o any
gi en ope a ing a ge — by checking obse ed pe o mance agains
o he ele an economic da a o de e mine whe he he p esumed linkage
be ween ha a ge and economic ac i i y is in ac wo king as expec ed.
The u u e e olu ion o Fede al Rese e mone a y policy echniques is
un o eseeable, depending as i does in la ge measu e upon de elopmen s
in he economy, especially he deg ee o which in la ion can be o e come.
Bu he p ac ice o no commi ing i sel en i ely o any one ope a ing
echnique, which is deeply ounded in his o y, is likely o con inue.
Zusammen assung
Die Rolle de S eue ungsg oßen in de ame ikanischen Geldpoli ik:
Ein his o ische Rückblick
Diese Bei ag behandel die S eue ungsmaßnahmen und mone ä en O ien-
ie ungsg ößen ü die ame ikanische Geldpoli ik sei dem Ende des Zwei en
Wel k ieges. Wäh end de spä en 30e und wäh end de 40e Jah e spiel e
die Geldpoli ik eine ela i unbedeu ende Rolle. Ende de 40e Jah e mach e
die Poli ik eine s a en S ü zung des Ma k es ü S aa sanleihen, om
Scha zam ges eue , die US-Zen albank zu einem „In la ionsmo o ". Die
1951 zwischen de Fede al Rese e und dem Scha zam ge o ene „Abma-
chung" s ell e die Unabhängigkei de Geldpoli ik wiede he . Um einen
Rück all in eine ma k wid ige Fes se zung de Zinssä ze zu e meiden, be-
schloß die US-Zen albank An ang 1953, ih e O enma k geschä e au We -
papie e mi seh ku ze Lau zei zu besch änken. Diese Poli ik wu de un e
de Bezeichnung „bills-only"-Dok in bekann . Mi de Aus ich ung diese
O enma k geschä e au unmi elba e mone ä e Ziele, insbesonde e au
ku z is ige Zinssä ze und „ eie Rese en" de angeschlossenen Banken
(membe banks), e such e die US-Zen albank eale Ziele wie Wachs um,
Vollbeschä igung, P eisni eaus abili ä sowie das Zahlungsbilanzgleichge-
wich zu beein lussen.
Nachdem die Fede al Rese e sich zunächs au ku z is ige Zinssä ze und
eie Rese en es geleg ha e, s ieg sie An ang de 60e Jah e au sogenann e
Zwischenziele um, indem sie sich au das Geldmengenwachs um und au die
Zunahme de Bankk edi e konzen ie e. Inne halb diese En wicklung wu -
den zunächs Bankk edi - und spä e Geldmengenziele zu Beg enzung de
Zinssa zen wicklung eingese z , wobei jedoch dies seine G enzen and, wenn
g a ie ende Folgen ü die Geldmengen- und K edi expansion d oh en. Spä-
e wu den die Rollen on Geldmenge und Zinssä zen e ausch mi mone-
ä en Zielen als Haup au gabe und Zinssä zen als es gese z e Besch änkung.
Die wachsende Bedeu ung, die den Geldmengenzielen wäh end de 70e Jah e
zukam, wa ein Spiegelbild de wachsenden In la ion und de Möglichkei , daß
un e diesen Bedingungen nominale Zinssä ze ü die Geldpoli ik keine e -
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The Role o Ope a ing Guides in
U. S.
Mone a y Policy 51
läßliche Rich schnu da zus ellen b auchen. Jedoch blieb die US-Zen albank
dabei, sowohl die Zinssä ze als auch die Geldmenge als O ien ie ungsg ößen
in Be ach zu ziehen.
Un e den e schiedenen Geldmengenkonzep en wu de de Geldmenge Mi
(Ba geld und Sich einlagen) besonde e Beach ung geschenk . Mi Blick au
das nachlassende s abile Ve häl nis zwischen eine sei s Mi und ande e sei s
den Zinssä zen und dem Einkommen, das man ab 1974 es s ellen konn e,
wu de jedoch M2 (Mj plus Te min- und Spa einlagen bei comme cial banks)
gleiches Gewich zugemessen.
Summa y
The ole o ope a ing guides in U.S. mone a y policy:
A his o ical e iew
This essay discusses ope a ing echniques and policy guides o U.S. mone-
a y policy since he end o Wo ld Wa II. Du ing he la e 1930's and 1940's,
mone a y policy had played a ela i ely mino ole. In he la e 1940's, he
policy o igidly suppo ing he Go e nmen secu i ies ma ke , manda ed by
he T easu y, made he Fede al Rese e an "engine o in la ion". The 1951
"Acco d" be ween he Fede al Rese e and T easu y es o ed he eedom o
mone a y policy. In ea ly 1953, o a oid elapsing in o "pegging" o in e es
a es, he Fede al Rese e decided o con ine i s open ma ke ope a ions o
e y sho - e m secu i ies, a policy ha came o be known as he "bills only"
doc ine. By ocusing hese open-ma ke ope a ions on immedia e inancial
a ge s, especially sho - e m in e es a es and he " ee ese es" o membe
banks, he Fede al Rese e sough o in luence eal sec o objec i es such as
g ow h, employmen , p ice le el s abili y, and he balance o paymen s.
F om his emphasis on sho - e m in e es a es and ee ese es, he
Fede al Rese e in he ea ly 1960's began o shi owa d so-called in e -
media e a ge s, by ocusing on he g ow h o money and bank c edi . In his
p ocess, i s bank c edi and la e money supply a ge s ini ially we e used
o cons ain in e es a e objec i es, se ing limi s on he la e whene e
he consequences o money and c edi expansion h ea ened o become in-
app op ia e. La e , he espec i e oles o money supply and in e es a es
equen ly we e e e sed, wi h mone a y a ge s as he p ima y objec i e and
in e es a es as he limi ing cons ain . The g owing emphasis on money
supply a ge s, du ing he 1970's, e lec s he moun ing in la ion and he
possibili y ha , unde hese condi ions, nominal in e es a es may no be a
eliable guide o policy. The Fede al Rese e con inues, howe e , o ake
in o accoun bo h in e es a es and money supply.
O iginally, p ima y emphasis among he di e en concep s o he money
supply was gi en o Mx (cu ency and demand deposi s). In iew o he
diminished s abili y in he ela ion o M o in e es a es and income which
began o be el in 1974, howe e , equal weigh has been gi en o M^ (M plus
ime and sa ings deposi s in comme cial banks).
4*
OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/
DOI h ps://doi.o g/10.3790/ccm.11.1.30 | Gene a ed on 2023-01-16 12:42:51
52 Hen y C. Wallich and Pe e M. Kei
Résumé
L'impo ance des ins umen s d'o ien a ion de la poli ique
moné ai e amé icaine: une é ospec i e his o ique
Ce e é ude ai e des ac ions de condui e e des g andeu s moné ai es
d'o ien a ion de la poli ique moné ai e amé icaine depuis la in de la deuxième
gue e mondiale. A la in des années 30 e au cou s des années 40, la poli ique
moné ai e n'a joué qu'un ôle ela i emen insigni ian . A la in des années 40,
la poli ique de sou ien igide du ma ché des emp un s d'E a p a iqué pa le
T éso édé al i de la banque cen ale des USA un "mo eu d'in la ion". En
1951, un acco d en e la Fédé al Rese e e le T éso endi à la poli ique
moné ai e son au onomie. A in d'é i e de e ombe dans une ixa ion des aux
d'in é ê con a ian le ma ché, la banque cen ale décida au débu de 1953
de limi e ses opé a ions d'open ma ke aux i es à ès cou e me. Ce e
poli ique u appelée la doc ine des "bills-only". Pa l'o ien a ion de ces
opé a ions d'open ma ke su des bu s moné ai es, immédia s, en pa iculie
su des aux d'in é ê à cou e me e des " ése es lib es" des banques
associées (membe banks), la banque cen ale des USA s'e o ça d'in luence
des objec i s éels, els que la c oissance, le plein emploi, la s abili é du ni eau
des p ix e l'équilib e de la balance des paiemen s.
Ap ès a oi a ê é sa poli ique de aux à cou e me e de ése es lib es,
la Fédé al Rese e passa au débu des années 60 à des objec i s in e médiai es,
où elle se concen a su l'expansion du olume moné ai e e su l'ac oissemen
des c édi s bancai es. Au cou s de ce e é olu ion, l'on a ê a dans un bu de
es ic ion du dé eloppemen des aux d'in é ê des objec i s pou le c édi
bancai e d'abo d e pou la masse moné ai e ensui e, qui se heu è en cepen-
dan à des limi es lo sque menacè en des e ombées g a es pou l'expansion
du olume moné ai e e du c édi . Pa la sui e, les ôles du olume moné ai e
e des aux d'in é ê u en con ondus a ec des objec i s moné ai es comme
onc ion p incipale e les aux d'in é ê comme limi a ion é abile. L'impo ance
c oissan e consen ie pendan les années 70 aux objec i s de la masse moné-
ai e e lé a l'in la ion c oissan e e la possibili é dans ces condi ions pou les
aux d'in é ê nominaux de ne pas de oi ep ésen e pou la poli ique
moné ai e une ègle sû e de condui e. La banque cen ale amé icaine pe sis a
néanmoins à u ilise comme g andeu s d'o ien a ion an les aux d'in é ê
que la masse moné ai e.
Pa mi les di e s concep s du olume moné ai e, la masse Mj (caisse e
dépô s à ue) béné icia d'une a en ion pa iculiè e. Dans l'op ique de la
dés abilisa ion de la ela ion cons a ée depuis 1974 en e d'une pa e
d'au e pa les aux d'in é ê e le e enu, l'on a cependan acco dé aleu
égale à M2 (Mi plus dépô s d'épa gne e à e me des banques comme ciales).
OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/
DOI h ps://doi.o g/10.3790/ccm.11.1.30 | Gene a ed on 2023-01-16 12:42:51