The Pressures on American Monetary Policy

389 Pages·1995·12.714 MB·English

by  Thomas Havrilesky (auth.)

TIlE PRESSURES ON AMERICAN
MONETARY POLICY
Second Edition
THE PRESSURES ON AMERICAN
MONETARY POLICY
Second Edition
by
Thomas Havrilesky
Duke University
Springer Science+Business Media, LLC
Library of Congress Cataloging-in-Publication Data
Havrilesky, Thomas M.
The pressures on American monetary policy / by Thomas Havrilesky.
-- 2nd ed.
p. cm.
Includes bibliographical references and index.
ISBN 978-94-010-4285-7 ISBN 978-94-011-0653-5 (eBook)
DOI 10.1007/978-94-011-0653-5
1. Monetary policy--United States. 2. Board of Governors of the
Federal Reserve System (U.S.) I. Title.
HG540.H38 1995
332.4'973--dc20 95-1081
elP
Copyright ~ 1995 by Springer Science+Business Media New York
Originally published by Kluwer Academic Publishers in 1995
Softcover reprint of the hardcover 2nd edition 1995
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system or transmitted in any form or by any means, mechanical,
photo-copying, recording, or otherwise, without the prior written permission of
the publisher, Springer Science+Business Media, LLC.
Printed on acid-free paper.
To my parents,
Mike Havrilesky and Pauline Duranko Havrilesky
TABLE OF CONTENTS
Page
PREFACE ix
INTRODUCTION 1
CHAPTER
One The Pressures on Monetary Policy: 11
An Overview
Two Executive Branch Pressures on 28
Monetary Policy: 1914-1994
Three Legislative Branch Pressures on 83
Monetary -Policy: 1914-1994
Four Is the Federal Reserve Responsive 118
to Monetary Policy Signaling from
The Administration
Five Is Federal Reserve Responsiveness 158
to Signaling Propelled by Congressional
Threats or Chairmen's Allegiances
Six The Causes of Signaling from the 202
Administration and Threats from
Congress to the Federal Reserve
Seven Monetary Policy Signaling from Congress 227
to the Federal Reserve
Eight Banking and Other Private Sector 255
Influences on Monetary Policy
Nine The Power of Appointment and 288
Monetary Policy
Ten Monetary Reform 332
INDEX 371
PREFACE
The basic motivation for this book is my lifelong interest in the
relationship between political processes and macroeconomic outcomes,
especially in the area of monetary policy. Nowadays, monetary policy is an
area where political considerations are believed by scholars to regularly impact
upon economic results. In contrast, when my interest in this subject began
thirty years ago, the scholarly literature on monetary policy hardly ever
mentioned systematic political influences. My dissertation at the University
of Illinois in 1966 and my first article (in the Joumal of Political Economy in
1967) addressed the modeling and estimation of the concerns that propel
monetary policy.
In the political and economic turbulence of the period from the late
1960s through the early 1980s, it became clear that the directions taken by
monetary policy were changing with some frequency. My research during that
period dealt with models of monetary policy. In attempting to measure these
changes, it suggested that monetary policy reactions to the state of the
economy were not stable over time. During this period I became interested
in reforms which might reduce the resulting instability in the economy. For
example, my 1972 article in the Joumal of Political Economy suggested
systematic penalties Federal Reserve officials who failed to meet the goal of
monetary stability by tying their budgets or salaries inversely to the rate of
inflation.
By the late 1970s it became obvious that (despite the elegant eqUilibrium
models which were popular in the scholarly journals at the time) monetary
x THE PRESSURES ON AMERICAN MONETARY POLICY
policy's reactions to the state of the economy shifted in a rather irregular
pattern. What were the reasons for this apparent instability? One reason
seemed to be that the adverse side effects (on interest, exchange and
unemployment rates) of the redistributive programs of politicians resulted in
episodic bouts of pressure on the Federal Reserve for monetary expansion.
However, up until this point the only evidence regarding political pressures on
monetary policy was anecdotal. Moreover, there was a large volume of
similarly anecdotal evidence which suggested that Federal Reserve officials did
not respond to these pressures. Clearly, only hard statistical evidence could
help to resolve the issue.
By the mid 1980s I became convinced that sufficient data were available
which would allow one to test if and how changes in monetary policy are
related to political phenomena. Since that time my research program has
been to investigate and to measure the political and private sector pressures
on monetary policy and to estimate the extent to which the monetary authority
assimilates and responds to them. This book reflects the results of that
research program.
While addressing a program of this magnitude requires knowledge of
economic history and political and monetary institutions together with modern
macroeconomic theory, a good deal of progress was made by following up
hunches with time-consuming empirical work. Without the help and inspira
tion of my colleagues in encouraging my hunches and my students in providing
the manpower to follow up on them, this process could never have succeeded.
I have been assisted by discussions of my research program with readers of
earlier drafts of this book. These discussions have been invaluable and
stimulating. Readers of all or parts of the book include: Elmus Wicker, Chris
Waller, Robert Auerbach, Kevin Grier, William Barnett, Neil Beck, Richard
Froyen, George Kaufman, Ray Lombra, Ed Kane, Roy Weintraub, Robert
Eisenbeis, Thomas Mayer, James Buchanan, Phil Brock, Thomas Willett,
Raburn Williams, Edward Tower, Dudley Wallace, Martin Bronfenbrenner,
Roger Waud, Richard Timberlake, Milton Friedman, Murray Wiedenbaum,
Henry Chappell, Rob McGregor, William Keech, James Granato, John
Gildea, Alex Cukierman, Thomas Ferguson, Wyatt Wells, Robert Schweitzer,
Manfred Gartner, Otmar Issing, Roland Vaubel and Jurgen von Hagen. Of
this list of colleagues, John Gildea, Henry Chappell and Roger Waud were
indispensable.
Computational and proofreading assistance were provided by Beth Ann
Beck, Paul Harrison, Dek Terrell, Alex Hartemink, Todd Gilmer, and Stan
Preface xi
Paskoff. Research assistance came from Heather Havrilesky, Maria
Lawrence, John Haldi, Jason Jordan, Tony Rojas, Carlos Acevedo, Brian
Abell, Charles Medrano, Roberto Laca, Chip Gage, Gene Hayes, Matt Neidel,
Charles Wickliffe, Carmen Jones, Jon Blank, Ed Mitchell, Matt Bernstein,
Tom Opdycke, Lisa Herskowitz, Tim Miller, Steve Rosen, Ted Broomfield,
Craig Welter, Suzanne Bryan, Hoyt Morgan, Bo Hyde, Tomas Fernandez,
Scott DiCristina, Ming Shu, Seung J ae Noh; Ben Saunders, Dan Hanks, Sergio
Lagunes, Omar Rehman, Rob Campenella, Jason Clauss, Michael Urban,
Jonathan Blaustein, Naoki Nagashima and Debra Regan. Special thanks go
to Paul Harrison and Alex Hartemink whose statistical skills helped immense
ly in putting the final package together.
Typing and editorial assistance were provided by Forrest Smith, Jean
Hyslop and Joyce Hemphill. Boundless credit goes to Joyce Hemphill for her
patience and skill in managing this book's production process. I would like
to thank the Federal Reserve Board for releasing the directives of the Federal
Advisory Council and the Duke University Research Council and the National
Science Foundation for grants which financed parts of this book.
Thomas Havrilesky
Durham, North Carolina
INTRODUCTION
The Organization
This book deals with American monetary policy. In order to understand
the subject one needs to know about the workings of the Federal Reserve
System. This introduction provides an overview of the organization and
structure of the System.
The structure of the Federal Reserve System was designed to disperse
power along regiona1lines, between the private sector and the government,
and among bankers, businesspeople, and the public. This has resulted in the
evolution of the Federal Reserve System to include the following entities: the
Federal Reserve Banks, the Board of Governors of the Federal Reserve
System, the Federal Open Market Committee (FOMC), the Federal Advisory
Council, and the member commercial banks.
Federal Reserve Banks
Each of the twelve Federal Reserve districts has a Federal Reserve Bank
in a city in the district, some of which have several additional branches in
other cities in the district. The three largest Federal Reserve Banks in terms
of assets are those of New York, Chicago, and San Franclsco--combined they
hold over fIfty percent of the assets of the Federal Reserve System. The New
York Bank, with over thirty percent of the assets, is the most important of the
Federal Reserve Banks.
2 THE PRESSURES ON AMERICAN MONETARY POLICY
Each of the Federal Reserve Banks is a quasi-public institution owned
by the private commercial banks in the district who are members of the
Federal Reserve System. Member banks are required to have purchased stock
in their district Federal Reserve Bank. The dividends paid by that stock are
limited to six percent annually. Banks are located in Boston, New York,
Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis,
Kansas City, Dallas, and San Francisco. Branches of Reserve Banks have
been established in twenty-five other cities. The Board of Governor's offices
in Washington are the System's headquarters. Each Bank has its own board.
Each board has nine outside directors: three Class A directors, who represent
member banks, and three Class B directors, who represent the public, are
elected by the member banks in each Federal Reserve District. The Board
of Governors appoints three Class C directors, who also represent the public,
and it designates one of these three as chairman and another as deputy
chairman of the Bank's board. No Class B or Class C director may be an
officer, director, or employee of a bank, nor may Class C directors be
stockholders of a bank. Each branch of a Reserve Bank has its own board of
directors, composed of five or seven members. The majority (three or four,
as the case may be) are appointed by the head-office directors, and the others
by the Board of Governors.
The twelve Federal Reserve Banks have nine nonmonetary policy
functions: They (1) clear checks, (2) issue currency, (3) withdraw currency
from circulation, (4) evaluate bank merger applications, (5) make discount
loans to banks in their districts, (6) serve as liaisons between the business
community and the Federal Reserve System, (7) examine state member banks,
(8) collect data on local business conditions, and (9) conduct research on
topics related to the conduct of monetary policy.
The Federal Reserve Banks are also involved in monetary policy in five
ways: (1) they indicate the discount rate (to be reviewed and determined by
the Board of Governors), (2) they discount loans to banks, (3) they each select
one commercial banker to serve on the Federal Advisory Council, and (4)
their Bank Presidents have a vote on the twelve-person Federal Open Market
Committee (FOMC), which directs open market operations (the purchase and
sale of government securities). The President of the New York Federal
Reserve Bank always has a vote in the FOMC, while the four votes allocated
to four of the other the district banks rotate among the remaining eleven
Presidents. The remaining members of the FOMC are the seven members
of the Board of Governors who are appointed by the President of the United