"Monetary Policy": A Comment
ONE of Keynes' less controversial judgments has seemed to be his recommendation that the scope of central bank open market dealings be widened to include a greater variety of debts. Professor Hansen has reminded us that within the last two years, by design rather than through the legal hampers and traditional straitjackets that Keynes deplored, the monetary policy of the Federal Reserve System has reverted to the limited base of short-term dealings.' Though the issues are clear and the conflict joined, and despite the importance of the problem from the standpoint of public policy and correct principle, it is most distressing that the question has largely escaped scrutiny in the professional journals. We are indebted to Professor Hansen for provoking discussion and inviting rationalization of the behavior of responsible officials. My comments are directed mainly to the open market policy of dealing in the short-end of the market rather than to Hansen's perceptive review of postwar monetary events and his efforts to impart perspective and to correct loose generalization and interpretation of policies over this period. Several of my remarks aim only at supplementing his views, at some places giving added emphasis and at other points elaborating further implications of the present program. On one matter there may be a difference of principle. Partial abdication of fiscal agent functions. Professor Hansen indicates that, whereas new private flotations enjoy underwriting support, the instruction that the Open Market Committee refrain from dealing in comparable maturities during a period of Treasury financing constitutes an abdication of fiscal agent functions performed by the Federal Reserve System for the Treasury. Hansen inclines to the position that this abdication is only partial, for the System professes its readiness to correct a disorderly situation. Considering the vagueness and hedging of the latter injunction, and the fact that for over a month prior to the mid-Februarv I 0o g financing the I'4 ner cent issue of 1978-83 was permitted to slide by over three points without intervention, the current abdication seems to be more rather than less complete. It is astonishing that this policy emanates from individuals who have derived much of their experience from investment markets, as in the case of Chairman Martin, a former President of the New York Stock Exchange. It would be extraordinary for investment bankers to relinquish their right to stabilize the market while in the throes of a new financing venture. If the principle is sound in private finance, the Open Market Committee directive is an unnatural restraint to place upon the Reserve System in its role as fiscal agent for the federal government. Perhaps it is an opening wedge to challenge all investment-stabilizing actions. The proposal is hardly calculated to whip up great enthusiasm among investment bankers best informed on the practice. The Open Market Committee attitude is not without bearing on Treasury financing. Without the occasional assistance of the Reserve System an encore for the bond-market consternation of late April I953, when the 314 per cent, thirtyyear offering went to a discount before issuedate, is conceivable. If such a situation were to occur again while memories of this debacle are still fresh, the abstemious ordinance might pave the road for future lagging subscriptions and financing failures. To surmount the artificial handicaps placed in its path the Treasury would have to underprice a new issue, prof erring terms more generous than the underlying market facts would warrant. Bonuses and premium gratuities would be the unwitting result of Reserve primness.
- DOI
- 10.2307/1925432
- Volume
- 37 (3)
- Pages
- 292
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