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ECONOMIC GROWTH AiMD CHANGE Remarks by Chas. N. Shepardson, Member, Board of Governors, Federal Reserve System, at the Farm Forum in Minneapolis, Minnesota on March 9, 1959. This morning's program, under the genera], subject of "Farming-Past Future," has covered at length many of the changes that have taken place ^ are continuing to take place in the agricultural segment of our economy. % assignment is the subject of growth and change in the economy as a whole. In view of my own background in the field of agriculture and in view of the importance of farming and its interdependence with the rest of the ^onomy, it is inevitable that I, too, may make some reference to agriculture. Nevertheless, I am delighted with this opportunity to take the broader approach for I have long disagreed with the idea that the farmer belongs to a separate class of citizenship with basic interests that differ from those of the remainder of the population. Nothing is further from the truth. There was a time when the farmer was less closely tied to the rest of th ^ e economy. He produced his own tools and power, processed and marketed ® products of his labor. He was largely independent of all other segments of the economy except the services of the preacher, the teacher, and the doc- to This independence of others, how- r, and he sometimes provided even those. eve *, meant that he abi of li Hty. At that was almost solely dependent upon his own resources and time he made up a major portion of our population with most his time devoted to production of food and fiber for his family, with a ttle over for the few nonfarmers who were dependent on him for their living. - 2That situation has changed. With a continuously decreasing propor- tion of our population engaged in fanning, a correspondingly increasing proPortion is dependent on someone else for food and fiber. At the same time ^ e farmer has become increasingly dependent on others not only for the tools materials of production but also for the marketing, processing, and distribution of his products. This same change has occurred, throughout our economy with the result that all segments have become increasingly interde Pendent. This increasing interdependence is an inevitable concomitant of growth. Since we all agree that growth is essential to our nation, the first t0-sk should be to explore what we mean by growth and to discuss the conditions that encourage growth. One kind of growth is simply an expansion of t°tal output in line with expanding population. If we wish to raise our standard of living, however, there must also be an increase an productivity, tha t is, the output of goods and services per person. As I see it, such growth is based on five things. 1. th Specialization of individual effort. This is exemplified by e line assembly and mass production in industry and, in agriculture, by the farmer's concentration on production while others provide his power, Materials, and tools, and still others handle the processing and marketing of his products. Incidentally, it is this specialization and the concentra- tor of many former farm activities into new off-faim industries that have a °counted for much of the decrease in farm population. 2. A^mami £ _technology Which improves productivity through better H^terials, better methods, and the increased use of mechanical power in - 3figce_of human labor. to experiment. This requires imaginative leadership and a willingness A society strongly bound by tradition resists change, includ- ing changes that would improve productivity. Increased productivity is most readily achieved in a society that is both evolutionary and dynamic. In- creased productivity inevitably means that it takes less man power to produce a given item and that some man power can thus be released to produce the new I goods or services that are constantly being developed by a dvnamic technology. Without this development we would lack the man power to produce this constant stream of additions to our comfort or enjoyment. has Fortunately, our country been a dynamic one largely receptive to such changes. Yet even here we see evidence from time to time of the devastating effect of resistance to change on the life of an industry or segment of our economy. For example, our railroads, fighting a Ve I competitive battle for their *y existence, complain that they are constantly handicapped by the feather- bedding rules demanded by labor in an effort to perpetuate jobs for which the re i s iri fr no i o n ger any economic justification. We find another illustration many of the restrictive building regulations which prevent that industry °m availing itself of many cost-reducing methods and materials which have b een developed. an It may be that even agriculture is affected by this resist- °e to change in some of the efforts to support the continued operation of ^economic units that are no longer able to compete in this day of advancing technology in agriculture. We can readily understand the desire of anyone to hold on to the job tha th t he knows and likes and the need in the economy as a whole to cope with e problems of technological unemployment. Yet it is both impossible and - k - desirable to attempt to stem the flow of technological developments if we expect to continue healthy economic growth. With the development of other competitive modes of transportation, no amount of feather-bedding could save th e jobs of passenger crews whose trains were discontinued for lack of patronIncreased availability of gas and fuel oil has cut the market for hard c °al with a corresponding loss of jobs for miners. Attempts to maintain an Realistic price for cotton have cost the farmers of this country an outlet, both foreign and domestic, for the products of thousands of acres of farm land . has cut the dairyman's market for butter in half. And the widespread consumer acceptance of a cheaper spread for bread This leads me to pose two questions - (1) Would we not do better to at tempt to strengthen our competitive position in all segments of our economy b y taking full advantage of increased productivity? (2) Shouldn't we pro- more incentive for the development of more new job opportunities and as sist the workers released from fields of increased productivity to meet the needs of these new jobs rather than trying to withstand the inexorable Assures of progress, only to see the gradual decline of those segments that f a n to adapt to the tide of change?'5 3. As An adequate flow of savings to supply the capital equipment^ I stated earlier, increased productivity is the result of better methods, ^tter materials, and the increased use of mechanical power for human labor. Al1 of these involve the substitution of capital for human labor and no one ^ows better than the farmer the continuing need for increased capital as a ^sult of the technological advance in agriculture. Over the long run, have had a reasonably >adequate flow of savings to meet our capital needs. - 5ability to meet this accelerating need in the future depends in no small measure on our confidence in the fixture value of our savings, a point which 1 ^ n t to touch on further a little later. Suffice it to say for the moment th *t adequate capital formation depends, first, on confidence in the future Va lue of the dollar, and, second, on a rate of return that serves as an in- centive for the saver to invest his savings because the higher the risk, the greater the incentive must be to induce him to incur that risk. I4. a well-distributed Income so as_ to.i^su^e^d^u^_nurchasin^ £Qwer_fco acquire products of new and improved technology. 1 In this connection, would like to remind you that we have made considerable improvement in this A c t i o n and that widespread and comparatively high level consumer buying Power has been one of the strong stabilizing factors in our economy. It se ems to me, however, that we should give further consideration to the most Citable method of sharing the fruits of increased productivity. First, we should understand that growth can never be at a uniform rate throughout our ^onomy nor constant over long periods of time. gr Economic growth, like plant °wth, i s subject to variations in climate and environment. The economic cl imate varies from time to time and from one segment of the economy to Mother, th it is thus inevitable that we should find first one segment and en another forging ahead under favorable stimuli only to run into periods of hel diminished growth at other times. In fact, it is inevitable and even Pful i n the long-term that from time to time we have periods of lessened a °tivity when, in farm parlance, we can have time to prune the sucker wood ° u t of the orchard. Any operation running at full capacity for extended Periods finds itself falling behind in maintenance with efficiency dropping - 6an d costs rising. It is only as demand slackens that we find time to over- h *ul the machine and get it back to its potential efficiency in preparation a future growing period. While we all want to keep those slack periods to a minimum, we must recognize that some are inevitable and that they pro- v ide for optimum efficiency in the long run. It seems to me important that we recognize three legitimate claim- ^ s to the fruits of increased productivity. With no implication as to rel- i v e importance by the order in which I list them, I would mention (1) capital > (2) labor, and (3) the consumer. I mention capital first because with- ° u t capital there would be no means of procuring the tools and materials wh ich make increased productivity possible. It is capital's share of the fr uits that provides the incentive for the saver to accumulate and invest his savings. Labor, too, must have its share if it is to acquire the higher skills required to meet the demands of increased productivity. Cla imants have been generally recognized Both of these though at times one or the other ^ have sought to claim more than its due share. the consumer's share has been completely swallowed up by the first two. on Too frequently, however, Yet ly by recognition of the consumer's share through appropriate nrice or ^ality adjustments can the whole economy benefit. 6r This includes the large ° u P of pensioners and others dependent on fixed mcomes, those suppliers of Personal services who have little or no opportunity or possibility of in- c a s i n g their productivity, and those engaged In other productive segments 0f the our economy which happen to be in retarded stages of the growth cycle at moment. - 7$. flemand. Aj^ro d i ict_ jind_ it is not enough to have just adequate purchasing power without a desire on the part of the consumer to acquire the goods or services offered. Fanners are well aware of the effect of changing food habits on the total ^sumption of farm products. of Th Some of these are due to a better knowledge our nutritional needs, some to promotional -activities, and some to price. ese same or other factors have varying effects on demand for all goods and services. tio In short, unless there is a consumer desire for the item in ques- n and a belief that it is worth the price, there is apt to be little sale re gardless of available purchasing power. Mow for a few moments I would like to talk about money and credit Policy as it relates to economic growth, development and stability. Without minimizing the danger of armed conflict and the necessity 0f adequate preparation against such an eventuality, I call your attention to the threat of economic warfare and to the vital importance of maintaining in this country a sound, vigorous, and competitive economy. We have become, in a large measure, the banker of the world and ar ound the world free countries are looking to us to maintain a stable dollar as a basis for TOrid trade. In our attempt to help other countries, we have ^so given those countries advice and about fiscal and monetary responsibility about adjusting their economies to a sound basis. Today we are facing a large deficit in our national fiscal program partly in consequence of adjust ^nts to the recent recession. bei In a number of countries the question is now *g raised as to whether or not the United States can take its own medicine Mother we are going to show the fiscal responsibility that we have been advocating for others. - 8Furthermore, the rising level of prices that has been experienced this country together with marked recover-/ in many other countries is place s us in an increasingly difficult competitive position in world trade. effect of this situation is manifesting itself in several ways. The Agriculture, wi th its tremendous and continuing increase in productivity, must find addi- tional outlets for its products. The physical capacity of the human stomach Places a limit on our ability to increase our domestic consumption of food. Th is means that we must find these additional outlets either in foreign mar- ket s or for use as industrial raw materials, both of which are dependent to a la rge degree on competitive prices. Industry, too, is finding itself Priced out of many former foreign markets and is even facing increased competition from imports in our domestic markets. is increasingly resorting to a device not available to agriculture, namely, the establishment of foreign branches where lower production costs enable thern ti To meet this situation, it to improve their competitive position in world markets. Thus, a con- nuing policy of rising prices results in fewer Jobs and a reduced national income — the very antithesis of the growth that we need not only for a risstandard of living but for the mere maintenance of our present standard X CVv» a rising population. As you all know, there are strong indications of a resurgent fear 0j? inflation. As we contemplate this threat, I think it is important to insider two phases of inflation. act ual shortage of goods and services. 0Ur a One form of inflation results from an True, we are not operating some of Plants at capacity, we are not fully utilizing our labor force, and prices Ppear to be reasonably stable for the moment. However, this apparently - 9stable price level is actually made up of two divergent components. While We depend a lot on averages, they can be most misleading. 111 the earlier period, a drop in agricultural and food prices, masking a ri We have now, as se in other prices that may give us the complacent feeling that this aver- s e is doing b.11 right. Thoje of us who are interested in agriculture should be doubly concerned about this but I also think that the entire country needs to be concerned. The other phase, more ephemeral and yet just as vicious in its effects, is the inflationary psychosis, the growing belief — conviction on the part of some people — in fact, the that inflation is inevitable, having accepted that philosophy, they begin to take steps which they hope hedge against it. st °ck market. but One evidence of that is what is happening in the Apparently, a large number of people — not only individuals businesses and organizations responsible for trust funds, retirement ^ s , endowment funds of one kind or another - have been switching more and pre more of their funds from debt to equity securities. sent earnings? No. Why? Because of Because of prospective improvement in earnings? maybe, but it appears they are influenced mainly by the feeling that Elation is inevitable. Certainly, if we look at the long-range picture we know that over a time we have had a gradual and sometimes not so gradual crawl in prices. ^ also we have had corrective periods. pri th It is true that in recent years °es seldom backed down very far before taking off to new highs although ere have been some occasions when the downward correction was quite severe - 10 However, there were enough corrective periods so that there was always the discipline of possible correction which made most people more cautious in their long-range commitments. But consider what happens if we accept as inevitable the belief that w- are going to have a continuously rising price level without reverses, ^ e minute we all decide that this is inevitable and begin to gauge our a °tions accordingly, inflation won't proceed at a gradual rate — compound itself — abl it will thus hastening and intensifying the effect of the inevit- e reaction. We hear talk from time to time about the cost of money, about high rates of interest. Nobody wants to see a higher price of money than is ne cessary but when we talk about controlling the price of money we are up a ^inst as difficult a problem as we would have in trying to control the pll ce of anything else we use. We accepted price ceilings during the war ^ e r the stimulus of war enthusiasm enf and patriotism. orce price ceilings and rationing today? e s than I am. Do you think we could If you do, you are more optimis- Neither do I believe that we can enforce ceilings on the pric< of money. to meet the justifiable needs of the community. to induce the saving of the funds that we need to provide the capital invest- ^ t Money rates also must abide by market processes if we are going Again I say, if we are going for the continuing growth of this economy together with the growing demands on government, there must be assurance of continuing value and there mus t be incentive in terms of return on the money. - 11 There is another thing aside from money and credit policy that enters into this inflation problem. 1 That is the fiscal problem of our government. h a v e a tremendous budget deficit at the present time, and the budget for next year is now under debate in the Congress. It is not my place to say h °w much we should spend or for what purpose but I would remind vou that it al l has to be paid for in one way or another. In a period of relative pros- perity and record levels of personal income, such as we have at present, it sh °uld be paid for out of current income. trough government borrowing. the pGo Of course it can be paid for To the extent that this borrowing comes from People's savings, the danger of inflation is minimized. But if the Ple, for whatever reason, including lack of confidence as to what govern- "lent securities may be worth in the future, decide not to invest in them, n °t to use them as a repository for their savings, the government then has to turn to bank credit —and undue expansion of bank deposits means in effect Minting press money and further dollar depreciation. era The task of the Fed- l Reserve is that of keeping the expansion of bank credit in balance with the money needs of the economy. An adequate volume of voluntary saving, ^hich goes willingly into fixed dollar obligations, not only serves to keep interest rates at reasonable levels but also helps the Federal Reserve to Perform its task. Here, let me interject a fla tion. bein word about the farmer's concern with in- if it was ever true that the farmer benefited from inflation ty S able to pay off debt with inflated dollars, it certainly isn't today, two reasons. First, in the aggregate, farmers' financial assets approx- imately equal their debts so that any decrease in the cost of their debts is - 12 of fset by a in corresponding decrease in the value of their financial assets the form of insurance, bonds, mortgages, and savings accounts. Second, ^th agriculture as a whole in a position of surplus production and with °ff-farm production items making up an increasingly larger part of his total costs, inflation is bound to have a greater effect on the farmer's costs than on his selling price. of Experience since Korea is a glaring illustration this fact. It is true that farm land values are responsive to inflationary Pressures and land prices have risen precipitately in recent years. Some farmers have sold their land to advantage but they have sold themselves out of the farming business. in *hich they must invest money. For operating farmers, land is a capital asset As the cost of the investment goes up, the °verhead cost of production rises accordingly and the only way farmers as a ^oup can profit from the widespread inflation of land prices is to go 0ut dif of business. Furthermore, this increased investment cost compounds the ficulty for the new farmer tiying to get a toe-hold. In closing, let me remind you that the Federal Reserve System was created by Congress to be the steward of the nation's monetary system. SUc h, it is constantly concerned with the problems of inflation and defla- tiori as they affect monetary stability -and the sustainable growth of our economy. eta As This stewardship is always open to review, as it should be. ry issues are constantly coming up for attention by Congress. Mon- At the foment they are receiving an unusual measure of public scrutiny by Congress ional and Presidential committees and other agencies. In a period of such intense scrutiny, it is important that neither these committees nor the public - 13 ,Qe misled by misunderstanding or erroneous beliefs, such as the one still he ld by some that farmers are benefited by inflation. Only through a full understanding of our basic objectives and a recognition of the inevitability of change in a growing economy, can we be assured of the adoption of pol- ic ies essential to the attainment of our national goal of sustainable economic growth. For this reason, I have welcomed the opportunity to par- ticipate in this program on the theme of "Progress through Change."
@FedFRASER