MONETARY POLICY IN BANKING

Monetary Policy in banking

The Influence of monetary policy, which in recent times in the United States had been almost the exclusive province of the United States has been almost the exclusive province of the Federal Reserve, operate on aggregate spending in the economy. I believe the fundamental objective on monetary policies is to provide conditions conducive to an appropriate rate of growth in demand for services, consumption goods, and investment goods. This rate of growth should be equal to the ability of the economy to produce such goods and services. I admit that it is far easier to state this objective than to achieve it. The distributional effects to monetary actions on various sectors are not usually the primary goals of the policymakers. Although such distributional effects are much less predictable than are the effects on aggregate demand.

The channel through which monetary actions affect aggregate demand is by varying the quantity of money made available to the private sector of the economy. If money is provided at a rate greater than the at which businesses and individuals desire to acquire currency and demand deposit balances, then the effort to exchange these excess money balances for other assets will increase aggregate demand for goods and services. Conversely, if businesses and individuals desire to acquire currency and demand deposit balances faster than the rate at which the total amount of money is increasing, their efforts to build up such balances will result in a decrease in the demand for goods and services.

The primary tool of the Federal Reserve in the conduct of monetary policy is buying and selling securities in the open market. It is useful to summarize shout-term monetary actions within the framework of a concept called the monetary base. When the Federal Reserve increases its holdings of Government securities, which is the dominant source component of the monetary base, the primary uses of the base, currency held by the public and bank reserves, are increased. The growth trend of the money stock, even though shot-term movements in the money stock may also be influenced by changes in time deposits and U.S Government deposits at commercial banks.

Studies of the money creation process conducted at the Federal Reserve Bank of St. Louis as well as elsewhere indicate that the stock of money supplied to the economy could be adequately controlled on a monthly average basis. As techniques for establishing the appropriate amount of money to supply under varying conditions are improved and gain wider acceptance, the fundamental objectives of monetary policy, as I view them, can be met with greater reliability than in the past.

I think it is important to note that during the process of monetary expansion, the credit policies of commercial banks, interacting with forces emanating from the nonbank public, determine the sectors that are first affected. I will return shortly of further discussion of this process.