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TIGHT MONEY, ITS CAUSE, AND ITS CURE
At The Moment
Major Areas of Weakness Being Pointed to by Some
Official and Non-official Spokesmen:
Unemployment - about 4%
Wholesale price index - unchanged
in Sept., down in Oct.
Housing construction - down 22%
rate since Dec.
Industrial production index - off
slightly in Sept.
Retail sales - little change since March
Counter Areas of Strength
GNP - up 8% rate since end of 1965
Disposable income - up 6% rate since
end of 1965
Federal budget
Prices - Inflation
Wholesale - steady 1958 - 1964
Starting rise from mid-1964
(1964 to 1965 at 2%)
C
-2Rises have accelerated (so
far 1966 about 3.5% rate to
Sept.)
Industrial component
since last year 2.3% 1965 year 1.5%. (No
change since July)
Cost of Living
1958 to 1964 - 1.2% annual rate
Feb. to Aug. 1965 - 2%
Aug. 1965 to Feb. 1966 - 3%
Feb. to Sept. 1966 - 4%
The Build-up to Excessive Demand
Over-taxation of our ability to produce
Plant capacity - 93% (over optimum level)
Labor capacity 1.5%
W 1966 Emp.
up
Half of 1965
Unemployment of 4%
Why excessive demand
Government's Concern with Optimum Utilization of
Resources
Production
-3Plant - labor
A necessary influence to long-run stability
Accepted doctrine among economic thinkers
The doctrine in action - from 1961
Public programs
The tax cut - a series over the period
The Vietnam War
The resulting fiscal pressure
The high employment budget
Reinforcement by monetary policy
Normal counteraction absent
Rates of growth of money, 6%
from Apr. to Apr.
Supply fell since Apr. -1.5% rate
The Fiscal-Monetary Mix
Dual expansionary forces
(until recently)
Money Market Reactions - Supply and Demand
Tremendous demand for credit
Government
-4-
Business to meet demand
Past 12 months -17%
Jan. to July - 22%
Some tapering off recently 7% since July
Others
The resulting tightness in money markets
Despite record growth of money
supply
Demand forces rates upward
Policy tight only in sense didn't provide all
What do we do?
of economic intoxication
may lead to
National economic frustration
Everybody has it so good
Close our eyes to threatening
clouds of further inflation
-5-
We^are slow to take chances with
Our present eomfort to do
ed
>ng-run well-
How It Can be Solved - With a Lag
Fiscal adjustment
Reduce spending
Increase taxes - while holding spending
Restore the Fiscal-Monetary Mix
Likely continued upward pressure on
prices
Total demand continues 8%
growth rate
Productive capacity only 4% rate
Price lags
Can Monetary Policy Do the Trick?
Perhaps - If — But
If - economic forces only concern
But - social and political issues involved
-6-
Restrictive monetary - expansive fiscal
Non-selective in impact
Somebody gets hurt - housing
Social to political issues
Then comes talk of legal
control - and the great debate
goes on
Prices continue to move - they
don't roll back
Inflation continues to take its toll
The Solution
Restoration of Fiscal-Monetary Mix
- 7Impact of Higher Rates on Agriculture
Will push current expenses higher
Little effect on current production
Will tend to reduce purchases of
operating capital items
Slow down the rate of increase in
farm land values.
@FedFRASER