The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Release on Delivery
(Approximately 7:00 p.m. EDT,
Thursday, May 14, 1959.)
ECONOMIC GROWTH WITHOUT INFLATION
Address by C, Canby Balderston,
Vice Chairman, Board of Governors of the Federal Reserve System
Before the Economic Club of Pittsburgh,
Pittsburgh, Pennsylvania,
May 14, 1959.
ECONOMIC GROWTH WITHOUT INFLATION
Unemployment, price stability and economic growth have become
Objects of popular debate0
It is asserted by some that a stable dollar
a
nd enough economic growth to provide an acceptable level of employment
a
re incompatible.
It is my own conviction, however, that price stability
is necessary for high employment to be sustained.
Perhaps our most urgent
domestic necessity is to protect the purchasing power of the dollar while
Providing widespread employment opportunities.
Both for the protection of
those who live on fixed incomes, like pensioners and school teachers, and
f
°r the benefit of those who need steady work to support themselves and
their families, we must—as indeed we can—achieve high employment without
inflation.
Inflation is not an effective long-run means of creating job opportunities,
But on this point thinking is confused0
A recent letter
asked "How can industry expand, buy machine tools and provide jobs for
Us
millions of unemployed when you guys create tight money?
Haven't
ari
y of you men got the guts to stand up for an expanding money supply and
Sundance of credit to encourage production and help make jobs?"
A blunt
answer to this heart-felt query is that the mere running of the printing
Presses or its modern equivalent, the ballooning of bank credit, does not
Foster productivity improvement and higher standards of living0
In other
c
°untries and even in our country, highly trained ability has been diverted
f
rom producing goods to making money out of speculating on inflating prices0
speculative activity does create some employment to be sure, but not employment that lastso
Eventually inflation endangers and disrupts job
stability for it is during inflationary booms that the seeds of deflation
a
re sown.
Nor vail inflation cure structural unemployment that stems
from shifts in the use of resources,
A dynamic economy forsakes the
for the new, and so one may expect rapid economic growth to bring
about some unemployment of a structural sort.
Currently, unemployment is less than during last year's recession, but it continues to plague the mining regions and areas dependent upon heavy industry.
The list of cities with one out of eight
Workers jobless contains the long-suffering coal towns of Scranton,
Wilkes -Barre and Huntington.
These have been joined by Buffalo, Erie,
and even Detroit, which has been the epitome of American initiative and
tf&ss production know-how.
The rate of unemployment 20 months after the
last cyclical peak in economic activity is only slightly above comparable
experience in 1948-50, but is higher than the 1953-55 experience by
about one percentage point.
Such a comparison may comfort statisticians
not the families afflicted.
Even though further expansion will tend
put the idle to work as overtime fails to satisfy the demand for
labor, an unemployment level of about /{.million beings should lead us
question whether job opportunities would not be greater if some prices
*ere lower.
As expansion continues, the rising investment demand stemming
industrial research and management initiative requires an increased
flow of savings.
If we are to remain competitive at home and abroad, we
s
hall need not only capital for implementing technological advance, but
c
°mpetitive prices as well.
Competition is, of course, a relative matter,
do our products compare with those of other countries as to quality,
- 3 Price and promptness of delivery?
While ours have improved, foreign-
made products may have been improving even more rapidly.
Early this
year our exports were dov/n one-fifth from early 1957. This decline may
b
e explained, in part, by cyclical developments abroad which reduced
foreign demands for our raw materials and finished goods,, At the same
time, there is clear evidence that our cherished advantage in some types
machinery, as well as in autos and certain other mass-produced items,
has been diminishing.
This is a situation that will not be cured by
ignoring it, or by the mere passage of time, or by passing laws. The sole
solution lies in keeping our costs, including labor costs, competitive
so that American firms may produce what enough people want, at prices
they are willing and able to pay.
Prices were buoyant during the recent decline and subsequent
recoveryo
In the recession, the industrial-price average fell only 0.6
Per cent, though prices of crude materials slipped considerably as they
had during 1953-54.
However, prices of farm products and foods went up
sharply early last year.
As a result the total wholesale price index
rose one per cent even while business was contracting.
Since the turn-
around in business activity in May 1958, the average of industrial prices
has risen about 2.5 per cent and is now nearly 2 per cent above the pre^ous all-time high.
Though some capacity of human resources and manu-
facturing plants has remained unused, average industrial prices have
risen sooner and faster than in the two previous recoveries when prices
3id not advance at a significant rate until after output had regained
^ s previous peak.
One may ponder the question:
have we paid the fee
- 4 for an adjustment we didn't get?
Or are some selling prices still to be
Pushed downward by competitive pressure?
Last fall, Congress1 Joint Economic Committee canvassed econoniists as to their views concerning the reconciling of u n e m p l o y m e n t with
price stability.
It sent questionnaires to members of 150 college econo-
^ c s departments.
Replies were received to 615 of the questionnaires, or
40 per cent of the total number mailed out,,
The first question read as follows:
"Do you believe it feasible
to achieve simultaneously both relatively high employment and relatively
^ g h stability of the general price level?"
Of those responding, 60 per
cent thought this achievement feasible even in the short run.
An even
greater number, almost three-fourths, believed it possible in the long
This expression of informed opinion indicates a widespread belief
that there is no inherent conflict between these two types of economic
lability.
No one expects all individual prices to be stable.
Indeed,
Some movement of individual prices serves an essential economic function.
^
our market economy, it is the normal way of getting a proper distribu-
tion of scarce goods and the most productive allocation of resources.
Stability of the over-all price level is, however, a clearly desirable
goal to the extent that it is attainable.
How stable, then, should one
e
Xpect the price level to be?
The economists polled indicated only a small tolerance as to
desirable price fluctuations.
To the question, "T'hat in your judgment
institutes a satisfactorily high degree of price stability?" less than
- 5half reolied.
Of those who did respond, over 100 expected a maximum
yearly price change of less than 2 per cent in prices to qualify as a
satisfactory performance* another 75 indicated approval of a range no
larger than 3 per cent in yearly price changes,
I assume that the
respondents had in mind random price fluctuations both up and dovm, and
not secular, one-directional price movement.
a
.:,ven though this seems like
high standard, it Irs been more nearly achieved than many recognize.
Since the starting of the federal Reserve System in 1914, 44 ye rs have
Passed.
If the consumer price index is used to measure price variability
during this period, its fluctuations have been less than 3 per cent in
25 of the 44 years.
This 44-year period, however, included some extremely large
Price changes, caused primarily by war financing and postwar readjustments.
If we exclude the two T.,orld ".ars and the period of Korean hostilities,
the standard was met in 24 of 31 years.
Excluding ohese wars, the accumu-
lative price changes since 1914 just about balance out.
Dr. Roland I.
Robinson, of the Board's staff, has suggested that, without the influence
of
war, the current price level might not be far different from that pre-
v
ailing about a half century ago.
If all cyclical movements in activity
could be avoided, we might then look hopefully toward a high degree of
general price stability.
However, as long as there are fluctuations in
inventories or in business expectations, or international crises occur,
it is not reasonable to expect complete stability in the over-all price
Wei,
Continued bias in price expectations is extraordinarily
Managing,
There has spread to consumers an acceptance of the notion
- 6 that creeping inflation is inevitable.
This notion already has been
a
ccepted by too many purchasers of common stocks and real estate, and
ma
y have been overly influential in business decisions.
c
yclically disturbing force.
It is itself a
The risks of inventory accumulation in
e
Xcessive amounts may seem abnormally small to business men if they feel
certain that prices will rise.
ha
Thus one of the classic problems that
s caused business instability is aggravated by lopsided price expecta-
tions.
The price goal that would appear to be appropriate does not lend
^self to precise description.
in
It would be one in which no sharp changes
general price levels would be contemplated, but individual prices
V/
°uld be expected to move.
I turn now to rates of economic growth.
Such rates, once of
interest only to specialists, have now come under general discussion.
rates commonly cited, such as 3, or 4, or 5 per cent per annum,
d u a l l y reflect two factors.
One is the aggregate growth in economic
^sources, of which the principal one is population; the other is the
U r e a s e in per capita productivity.
Uhile total growth may correctly
Measure our capacity to fight a war, the peacetime emphasis should be on
capita gnwth as the determinant of our standard of living and of
over-all well-being.
In recent testimony before the Joint Economic Committee, Dr.
^aymond Goldsmith showed that for the past 120 years our per capita
S^owth had averaged about 1-5/8 per cent per annum.
Possibly a more
^gnificant point developed in his testimony, however, was that growth
^ a s taken place in periods of declining as well as of advancing prices.
~ 7 Although the future growth rate might be increased, his evidence indicated that such a development is largely dependent upon technological
advances bolstered by sufficient capital to take advantage of them.
is
It
less influenced by the level of money or effective demand than is
sometimes assumed.
Healthy growth of the economy can be attained only by a close
gearing of bank credit expansion with that of the economy generally.
Such
growth requires that the central banking system provide enough but not too
m
^ch money to achieve and maintain balanced growth without inflation,,
fte
cent historical research of the National Bureau of Economic Research
s
hows that, while growth rates have fluctuated considerably in the short
the growth process, if measured by decades, has been remarkably dur-
ab
le,
Except for the decade containing the Great Depression, we have had
appreciable growth during every decade for the last 70 yearse
A highly
s
ignificant point brought out by this research is that growth was strong
during the period of falling prices in the last third of the nineteenth
century; and that growth was rapid during the decade of the 1920's when
Prices were fairly stable. This evidence suggests that price stability and
^apid growth are quite compatible.
The essential point is that per capita
growth depends to a considerable extent on improving productivity.
Pro-
activity, in turn, depends on the existence of a flexible economic sysone ready to use advanced technology.
In the private sector of the economy, the free choice of the
consumer and the free choice of the businessman dominate the use of our
^sources, as they should.
Consumers have been devoting a smaller propor-
tion of their income to the purchase of the products of factories, where
- 8
-
statistical productivity gains have been great and a larger proportion
to services where there is no statistical measure of productivity.
Car
repairing, hair cutting, and travel have been a growing part of consumer
e
xpenditures.
Our national well-being has scarcely been diminished by
the decision of many citizens to travel in order to secure first-hand
impressions of their own and foreign landsc
This shift from manufactured
Products to services, however, diminishes the statistical measure of productivity increase.
In the public sector, our expenditures should be carefully
tailored to the necessities of international tensions and domestic needs.
Public expenditures simply for the sake of promoting growth could be
illusory and self-defeating.
It is doubtless true that governmental
ex
penditures for fundamental research can contribute to productivity in
the long run, even though in the short run they have little connection
^ith its statistical measurement.
Government spending, however, will not
enhance the savings required to provide the tools and other capital equipment needed by the economy.
Nor will spending dictated by pressure
groups achieve the changes needed for real and sustainable growth—in
"^ct, it may impede such changes.
Rapid economic growth stems from the
lifting of resources, human and material, to new industries and from
^ess productive industries and occupations to those of higher productivity.
A current situation illustrates the difficulty of measuring
^ e nation's productivity, especially in government and
^dustries.
a
in the service
Since 1953, hourly-rated factory workers declined by over
million even though the gross amount of physical product grew substan-
tially.
During the same period the number of public school teachers
increased greatly.
Because of the impossibility of measuring "produc-
tivity" of such government employees, the statistical measures of national product assume it to be unchanged.
Whether or not this be true,
medical and other services have shown qualitative improvement even though
quantitative measurement of thejr productivity eludes the statistician.
Yet most certainly public services such as education and health contribute greatly to the long-run growth and progress of the economy.
To sum up the argument thus far:
inflation does not stimulate
sustainable growth; it just creates a temporary illusion of it.
Real
growth requires that competition do its work both at home and abroad.
Competition must be allowed to produce the kind of flexible change that
brings out the maximum use of resources and does not allow inefficiency
to hide behind the shelter of monopoly or other forms of protection.
Rapid growth requires use of the most advanced technology. That which is
inefficient and outmoded must be abandoned quickly.
To employ some form
protection merely to preserve the status quo, whether through subsidies, tariffs, or featherbedding, is likely to retard growth.
I shall now attempt to show that prudent financial housekeeping is possible under conditions worse than ours.
In fact, there are
some distinguished examples of how effective monetary and fiscal policy
°an be when they work together as a team.
For instance, in Italy, 1947
barked a turning point in post-war financial and economic development,,
p
rior to the introduction of the defense of the lire policy, Italy had
b
een in the grip of a severe inflation.
Between mid-1946 and September
1947 wholesale prices had risen by 150 per cent. The cost of living had
- 10
doubled, and paper money was being issued at a rate faster than the growth
in national income.
A new fiscal policy in combination with a tighter
monetary policy ended this by (l) reducing the budget deficit to a level
at which it could be financed by non-inflationary means (through Treasury
borrowing out of savings, thus ending the resort to the printing press);
(2) restraining the growth of credit to an amount consistent with the
actual growth in real resources.
The effective contribution of Italy's stabilization program in
Scaping from its plight after World War II is indicated by the contrast
between the doubling of the cost of living in about one year prior to 1947,
a
nd the 48 per cent increase in the entire decade that followed.
Since
the restoration of confidence in the currency, bank deposits have increased
s
even-fold.
The real budget d e f i c i t , instead of being 40 per cent larger
than revenue, was only 8 per cent
in fiscal 1958, and last year the
Sold and foreign exchange reserves increased by nearly $700 million.
These
reserves are now the third largest in Western Europe.
It would be tragic if the United Jtates fails to profit from the
experience of other countries, like Italy, Austria and Germany. The painful lesson that inflation destroys savings and liberties was too well
learned by Germans in the hyper-inflations of the 1920's and »40's to be
forgotten soon. Surely our citizens will come to understand the causes
a
nd costs of inflation in time to avoid the consequences. Certainly if
these European countries can overcome the ravages of war sufficiently to
Put their financial affairs in order, our own nation can achieve sound
financial management.
of
ten late to school?
Experience is a great teacher, but why is she so
- 11 Although inflationary price rises, especially of manufactured
articles, tend to be curbed by excess capacity and increased efficiency,
these fundamental economic forces need to be supplemented by observing
Prudence in many directions:
fiscal policy, to avoid spending in excess
°f revenues; monetary policy, to prevent over-expansion of credit; wage
setting and pricing policies, to keep our firms competitive.
There is
easy short cut to sound financial management; nor are there obstacles
that determination and self-discipline cannot conquer0
@FedFRASER