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Llliam McChesney Martin, Jr., Papers
ox 26/Folder 3
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Federal Reserve Bank of St. Louis
Series V, Subseries D
Hearings, January-July 1962
_H_E_A_R I_N G_S
(54)
(55)
1962
(Folder 1,
Page
1)
Joint Economic Committee
(Wright Patman, C h r m . ) . . . . Presidents' Economic
Report
2p.m
House Banking and Currency
Committee (Brent Spence,
Chairman)
H . R . 10162, Special
Borrowing Arrangements of the IMF
10 a.m
(56) . . . . Subc. on Economic Stabilization, Automation, and Energy
Resources, Joint Economic
Committee (Henry Reuss,
Acting Chairman)
Investigation of Business Inventories,
10 a . m
(57)
(58)
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Federal Reserve Bank of St. Louis
House Banking and Currency
Committee (Brent Spence,
Chairman)
(Chairman Spence absent;
Wright Patman chaired
the hearing)
H . R . 12080 re interest
rates on deposits of
foreign governments
and central banks
1/30/62
2/28/62
7/13/62
7/17/62
Subc. #1, House Banking
and Currency Committee:
(Chairman Spence absent;
Congressman Barrett, of Pa.
chaired the hearing)
Three banking bills:
H . R . 7796 and H . R . 8874,
and S. 1771
7/19/62
SEE FOLDER 2
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JOINT ECONOMIC COMMITTEE
Chairman--Wright Patman (Texas)
Vice Chairman--Paul H. Douglas (Illinois)
Members:
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Federal Reserve Bank of St. Louis
John Sparkman (Senator from Alabama)
J. W. Fulbright (Senator from Arkansas)
William Proxmire (Senator from Wisconsin)
Claiborne Pell (Senator from Rhode Island)
Prescott Bush (Senator from Connecticut)
John Marshall Butler (Senator from Maryland)
Jacob K. Javits (Senator from New York)
Richard Boiling (Representative from Missouri)
Hale Boggs (Representative from Louisiana)
Henry S. Reuss (Representative from Wisconsin)
Martha W. Griffiths (Representative from Michigan)
Thomas B. Curtis (Representative from Missouri)
Clarence E. Kilburn (Representative from New York)
William B. Widnall, Representative from New Jersey)
(Excerpt from Jt. Economic Committee hearing, Ja. 30, 1962)
Representative Boiling.
Mr, Martin, the reason for this question is
sheer ignorance and the purpose is information.
There is no other purpose
to this. At the bottom of page 10 you say "The Stabilization Fund has
acquired holdings of some major European countries, and undertaken transactions in the market with the aim of defending the dollar from speculative
forays".
On page 11, the third paragraph says "As one step in such cooperation,
the System is now prepared in principle and in accordance, " et cetera.
I would like to know what kind of transactions in the market with the aim
of defending the dollar they are.
What kind of transaction is it?
What
happens ?
Mr. Martin. I think it has to be looked at on an ad hoc basis. I want
to make it clear, Mr. Boiling, that the Federal Reserve is not anxious to
engage in this type of activity. It is only because we feel we have a responsibility. With convertible currencies as they are today, currency values -including that of the dollar—are more subject than for a long time to
speculative movement.
I used here a term that I happen to like, forays.
If we held some of these currencies (and the amounts and variation in them
would have to be on an ad hoc basis), we might be able, by disposing of the
currencies, to minimize or offset these temporary speculative movements.
The Treasury Stabilization Fund has experimented with this kind of
operation since March of this year, in a very small way, and we have come
to the view that however we should acquire these currencies -- and it is
not possible to spell it out here -- what we are aiming our activities at is
to keep the speculators from unseating us, to try to minimize speculative
movements.
We would need to operate in a variety of ways.
But we have
resources in addition to what the Stabilization Fund has.
We do not claim
that this is going to correct our basic deficit.
You will notice I went out
of my way to state that.
Representative Boiling. I understand, but I mean exactly what I said
at the beginning.
I do not understand how this works. I do not want you
to say anything you should not say, but I want to know what you do, within
the bounds of what you should or should not say.
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Federal Reserve Bank of St. Louis
Mr. Martin, Well, we could open an account with some foreign
central bank and hold in that account either pounds, lire, francs, or
other currencies, depending on the curcumstances.
That would put us in a
position to dispose of them if there was a sudden need for them* That is
a simple type of operation. Another possibility would be for us to make
reciprocal currency transactions with foreign central banks; in the language
of the street, these are "currency swaps. "
Last March and April the
pound sterling had quite a problem at the time of the re-evaluation of the
guilder and deutschmark. There were a lot of movements and the central
banks did cooperate at that time to minimize the impact of that in a variety
of ways, I do not think you can spell out in advance precisely what you
might do, nor ought we to spell out magnitudes for this type of operation
because we are operating in a goldfish bowl. We would report what we do
in our Federal Reserve statements from time to time but we ought not to
be indicating ahead of them what the limits are or what we are going to do.
If you do that, then you are inviting the speculator to take advantage of
your operations.
Representative Boiling. I think that answers my question.
wanted to be sure that I understood. Thank you.
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I just
For release on delivery
Statement of
William McChesney Martin, Jr.
Chairman, Board of Governors of the Federal Reserve System
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Federal Reserve Bank of St. Louis
before the
Joint Economic Committee
January 30, 1962.
Mr. Chairman:
My comments today on economic and financial developments will
be directed toward the two central problems on which the nation's efforts
should be focused in 1962.
One is domestic; the other, international.
The first problem is to move economic activity higher and unemployment
lower.
The second is to strengthen our position for dealing with the ad-
verse balance of international payments of the United States.
For the time being, at least, some of the requirements for dealing
with these two problems may seem to be in conflict.
But for the long pull,
the more basic needs are the same, because they are the fundamentals on
which all enduring economic growth must be based.
The prime need is a steady increase in productive efficiency.
achieving it carries other requirements.
But
Among them are investment in
new and improved plant and equipment to turn out better products at lower
costs; savings, to facilitate that investment; and stability in the value of
our money, to induce those savings.
That, of course, is just part of the chain reaction that can be set
into motion by progress in meeting these needs.
The surest way to get sales expansion leading to expansion of output,
and output expansion leading to expansion of job opportunities, is to give
the consumer a break by offering him more for his money.
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In my judgment, much of our postwar economic trouble has been
brought about by pricing consumers out of the market instead of into it.
Increasing our productive efficiency offers the most promising avenue for
correcting that process by providing a gain for business and labor to share
with the consumer--as business and labor should do, in their own long-term
interests*
These are matters that seem to me worth bearing in mind in considering
the problems and performance of the economy, domestic and international,
in recent times.
Taken as a whole, 1961 was a year of vigorous economic advance-happily free from an accompanying upswing in general prices, a fact that
bolsters prospects for further growth.
Total economic activity, as measured by gross national product data,
and industrial production both moved into new high ground.
Gross output
rose about 7-1/2 per cent from the fourth quarter of 1960, and 8 per cent
from 1961's first quarter low.
Industrial production advanced 12 per cent
over the year, and 13 per cent from the February low.
f
The consumer
price index moved up approximately one-half of one per cent, but wholesale
price indexes dipped below their year ago levels.
Meanwhile, credit expansion in general was greater than in any previous year except 1959,
Funds advanced in credit and equity markets
totaled about $50 billion, well above the $40 billion of i960 although far below
the $61 billion of 1959, a year of record-breaking credit demand, Interest
rates moved within a relatively narrow range.
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Federal Reserve Bank of St. Louis
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Credit expansion by commercial banks approximated $15 billion,
a record surpassed only in 1953, and then by a narrow margin*
Loans
accounted for some $6 billion of that total, although loan demands were
moderate as they usually are in the early phases of an economic recovery.
Investments, also following a characteristic course, increased
about $9 billion,
But even though the number of people holding jobs rose again to
record level, unemployment failed to respond to general improvement
in demand as rapidly or as greatly as had been hoped*
Not until near
the end of 1961 did unemployment show an encouraging drop, to about
6 per cent of the labor force from the 7 per cent level at which it had
held for almost a year.
Even so, the number of long-term unemployed
continued relatively large, totaling about 1, 5 million in the seasonally
adjusted figures at the end of the year.
With the rising levels of income and business activity now taking
place, total employment should expand further this year and absorb
into gainful activity many of those currently classified as unemployed
as well as new entrants into the labor force.
To assist this process,
we must stay attentive to changes in the composition of the working force,
a matter to which your Committee is alert, as demonstrated by the
development of much pertinent new information at recent hearings of
your Subcommittee on Economic Statistics,
In 1961, from the recession's February low to the end of the year,
about one million persons were added to nonfarm payrolls.
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Federal Reserve Bank of St. Louis
This
virtually restored the level of nonfarm employment to the pre-recession
high.
Yet in manufacturing industries, although employment in December
1961 was well above the low point of the previous winter, there were onehalf million fewer factory workers than when the rscession began in the
spring of I960,
At the same time, industrial production was greater
than ever before in our history*
Thus some of the employment patterns of the recession and recoveries since 1953 seem to be repeating themselves.
After each recession,
total employment has rebounded to new record levels, but fewer factory
workers have been needed to produce an increased volume of goods.
The decline in the number of blue-collar job opportunities even while
white-collar job openings were increasing has been an important factor
causing the rise in persistent unemployment since 1953.
If we are to
realize the full benefits of our increasing productivity, we must solve the
difficult problems of transition and adjustment for the displaced workers,
many of whom lack the skills and training required in the expanding sectors
of the economy.
The fact that long-term unemployment has been disturbingly large
over the last decade, even during periods of high-level activity and rising
prices, indicates that the problem it poses is too complex to be solved
by any single or simple approach.
It is evident that our economy requires continuing, sustainable
growth, attended by an ever-rising level of overall demand to provide
an ever-rising number of job opportunities for our steadily growing
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Federal Reserve Bank of St. Louis
- 5-
population,
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But it seems equally evident that we require specific steps to
make headway against the problems posed by certain types of structural
unemployment that are not readily responsive to general monetary and fiscal
measures.
Special programs to increase occupational and geographical
mobility are necessary for this purpose.
Training and retraining under
management, labor and Government supervision would greatly benefit workers
who need new skills to adapt more readily to changing technology.
Both em-
ployers and employees would gain from better provision of information on
the current and prospective job market— that is, where job openings may
be found, and where qualified workers can be located.
Let me turn now to the second problem cited at the start.
The deficit
in the balance of international payments, although much reduced from that of
the preceding years, rose again in the last part of 1961,
In the first half of the year, the payments deficit had shown encouraging
shrinkage. Net sales of gold from U,S, reserves were only $200 million, The
main reasons for this fairly good result were clear, even at that time: a low
level of imports occasioned by slack demand because domestic business
activity was low; an advance debt repayment to us, by Germany, of more than
half a billion dollars; and a strengthening of confidence in the U, S, dollar
in the wake of a declaration by the President that the Administration was
determined to defend the international value of the dollar.
Nevertheless, it was also clear, even at the time, that we could not
be complacent.
To have the balance of payments in reasonable equilibrium
on the average over a period of years means that we need to have a balance
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- 6of payments surplus, not merely a reduced deficit, at certain times.
The
first half of 1961, when imports were low, was a time when a payments surplus
would have been appropriate,
in 1961.
I do not say that this was a realistic possibility
The point is simply that the good results of the first half of the year
were not good enough, considering the low level of import demand at the time.
Balance of payments pressures again turned adverse in the second half
of 1961, when the deficit began to rise again. Net sales of gold during the
half rose to some $650 million. They might have gone much higher if there had
not been a big increase in foreign holdings of dollar reserves, working
balances, and short-term investments in the United States,
The increase in the overall payments deficit in the second half of last
year also had its special causes.
Confidence in the dollar has been well
maintained, and that was not the trouble.
The causes of the rise in the deficit
lay elsewhere.
For one thing, imports rose sharply from their abnormally low level in
the first half of 1961, advancing to levels about in line with the level reached by
the Gross National Product in the latter part of the year.
Exports held steady:
while those exports financed by aid programs increased, commercial exports
not financed by Government grants and credit fell short of their mid-I960
level.
The failure of commercial exports to increase in 1961 tied in with
the slowing down last year of European economic expansion.
In Europe,
there was an especially noticeable reduction in buying of materials and semifinished goods for inventory.
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Federal Reserve Bank of St. Louis
-7-
It is quite possible that imports will rise further, as business
activity increases here. However, we can also fairly expect that growth
in exports will resume* In fact, the latest export figures, for October
and November, were higher than for any pair of months earlier last
year.
Sooner or later, we need to get a large increase in our export
surplus.
To make this increase in the export surplus come sooner
rather than later, and to make it big enough to count, let me emphasize
again the necessity that we preserve a competitive climate of business
in this country, raise our productivity, hold down costs, and see to it
that our prices are not out of line with those of other producing
countries.
We must also put ourselves into a position to negotiate with our
principal trading partners so as to minimize trade barriers that might
otherwise keep us from achieving this needed increase in our exports.
The task of correcting our balance of payments deficit would become
far more difficult if the countries in the European Common Market were
to maintain high tariff walls against our goods while progressively
moving toward free trade within the Common Market.
In our balance of payments difficulties, however, exports and
imports are not the whole story.
The essence of the problem is that
we have not had a big enough export surplus to cover our commitments
on economic aid and military expenditures abroad, and our outflow of
private loans and investments abroad.
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Federal Reserve Bank of St. Louis
To cover the deficit, we have
C
-8-
,
been called on to sell some gold, and we have had to increase our shortterm liabilities to foreigners* This increase in short-term liabilities
is dependent upon the willingness of foreigners to build up dollar reserves,
working balances, and short-term investments in this country. In reality,
it constitutes foreign lending to the United States. We cannot count forever
and without limit on that sort of lending to support the position of the
U, S« dollar. That is why we must get a better balance between the export
surplus and our outpayments for-economic aid, for military expenditures,
and for private capital outflow from the United States.
In reference to our economic aid commitments and U. S,
military expenditures abroad, let me note that a large part of aid is
being linked to exports, and ways to obtain offsets for part of the
military expenditures abroad are being sought. We must continue to
make every effort to get other countries to take a fair share of the burden
of these costs.
\Vhatever part of these expenditures cannot be linked or
offset must be covered by net earnings in purely commercial trade,
investment income, and other private transactions.
So far, I have said very little about private capital movements,
apart from the buildup of foreign liquid assets in the United States.
One
of the big difficulties in the U. S. balance of payments in 1961 was that
outflows of long-term and short-term capital were still very large, even
though the kind of volatile movement we had in the latter part of I960 was
not much in evidence in 1961.
In fact, net outflows of long-term and short-term capital seem
to have been even larger in the second half of last year than they were
in the first.
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Here I am talking mainly about bank loans and acceptance
-9-
credits, corporate investrrents in subsidiaries, new foreign issues,
and purchases of outstanding foreign securities that offset foreign
purchases of U. S, corporate securities. Along with these, there were
trade credits, and also some "movements of funds" in the sense of
acquisitions of liquid investments or balances abroad, particularly in
Canada*
All told, the net outflow of all the various types, including a
guess
for unidentified movements, seems to have approached $4 billion
in the year 1961. This was only moderately less than the outflow in I960,
and it was more than the overall deficit in our balance of payments in 1961,
While the deficit in the balance of payments cannot be related to any one
single class of outpayments, clearly the capital outflow was an important factor.
Restraining these capital outflows is particularly difficult because
they represent various normal kinds of lending and investing.
These
outflows reflect the ready availability of credit in U. S. markets. Only
in part can they be influenced by the level of short-term interest rates.
By and large, such differences as did develop last year between money
rates here and abroad do not appear to have been a primary determinant
of capital movements either from or to the United States,
On the other
hand, the ready availability of credit at rates competitive with other
markets may have exerted an important influence.
In the circumstances prevailing today, the Federal Preserve has
found it necessary to balance domestic and international factors in
arriving at policy decisions,
The System's responsibility for the value
of the dollar extends beyond domestic price stability to the value of the
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Federal Reserve Bank of St. Louis
-10dollar in terms of gold and of other convertible currencies.
This is
partly a matter of restoring basic equilibrium in the balance of payments,
and partly a matter of preserving stability in exchange rates in international markets*
Until recently official operations by the United States to maintain
the exchange value of the dollar have been limited to purchases and sales
of gold by the Treasury's Stabilization Fund—at $35 an ounce—to foreign
monetary authorities for monetary purposes.
Recent developments,
however, have made it desirable for the United States to play an active
role in exchange markets themselves.
Persistent deficits in our international payments have put very
large amounts of dollars into the hands of foreign holders. This has
made the dollar both susceptible and vulnerable to large and sudden
movements of funds.
Movements of this kind can be touched off by
international political uncertainties, or by bearish or bullish reports
and rumors about economic and financial developments at home or abroad.
With the pound sterling and the main other European currencies again
convertible, to a large extent, funds now can move freely and in large
volume between New York, London, and the financial centers of
continental Europe.
For these reasons, the Secretary of the Treasury decided last
March to use the Stabilization Fund for operations in foreign convertible
currencies, for the first time since the Second World War. The Stabilization Fund has acquired holdings of some major European currencies, and
undertaken transactions in the market with the aim of defending the dollar
from speculative forays.
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Federal Reserve Bank of St. Louis
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These operations have been conducted on a fiscal agency basis by the
Federal Reserve Bank of New York for the account of the Stabilization
Fund,
The resources of the Stabilization Fund for these purposes are,
however, quite limited.
The Federal Open Market Committee and the Board of Governors are
fully cognizant of the increasing importance of international financial
relations for the working of our domestic monetary system.
We further
recognize that, under present-day conditions, maintenance of an efficient
international payments system based on the inter convertibility of currencies
requires close cooperation among the central banks of major industrial
countries and with established international financial institutions.
As one step in such cooperation,
the System is now prepared in
principle and in accordance with its present statutory authority to consider
holding for its own account varying amounts of foreign convertible currencies.
Towards this end, we are now exploring, in consultation with the Secretary
of the Treasury, methods of conducting foreign exchange operations in
v^^sts £^*-—>'
convertible currencies with due^'regard for the foreign financial policy of
4
the United States*
These System operations, along with those conducted by the
Stabilization Fund, would have the primary purpose of helping to safeguard
the international position of the dollar against speculative flows of funds.
They would not and could not serve as substitutes for more basic action to
correct the deficit in this country's balance of international payments.
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Federal Reserve Bank of St. Louis
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The problems I have been discussing have weighed heavily with
those of us in the Federal Reserve in our endeavors over the last year
to keep credit conditions attuned to national needs.
On the domestic side, to help bring about recovery, expansion and
sustained growth in production and employment, the Federal Reserve
has been operating to bolster the banking system's ability to meet all
reasonable borrowing needs*
On the international side, to help hold down the outflow of capital
and gold prompted by the continuing balance of payments deficit, the
Federal Reserve has been operating to minimize drains stemming from
international differentials in interest rates.
Activities in pursuit of these dual objectives were carried out in the
open market for United States Government securities.
Before taking up
these operations, however, I would like to mention one other recent
Federal Reserve action.
On December 1, the Board and the Federal Deposit Insurance
Corporation announced an increase in the maximum rates that banks may
pay--if they choose--on savings and time deposits.
effective on January 1 of this year.
The change became
In general terms, the action authorized
banks to pay 3 1 / 2 per cent on any savings deposit, and 4 per cent on those
left in the banks for a year or more; also, to pay 3 1 / 2 per cent on time
deposits with a maturity of 6 months to one year, arid 4 per cent on those
with a maturity of a year or longer.
There are some 50 million of these
savings and time accounts in the 6, 100 member banks of the Federal
Reserve System alone.
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- 13 -
This action was taken after extensive study and consideration*
In
arriving at its decision, the Board was influenced by a variety of factors. One
of considerable weight was the fact that some short-term balances \vere being
attracted away from American banks by higher rates paid on such balances
in other parts of the world, and that this process contributed, in some
measure, to our continuing balance of paymen ts problem.
Another was
the question of whether there could be any longer any justification for restricting the rate of interest that commercial banks may pay on savings deposits to
a level substantially below that paid by other institutions on similar accounts*
Finally, but by no means less importantly, we were concerned over the longer
run impact of a maximum rate that might limit artificially the rewards received
by small individual savers, whose saving, as I have said before, plays such
an important role in financing the investment vital to our economic growth.
The changes that have been made in rates offered by the banks since
the action took effect have been designed, for the most part, to encourage
genuine saving.
If this continues to be the case, the result should be an
increase in tlxsL/volume of funds available for long-term investment in mortgages, in State and local securities issued to finance expanded community
facilities, and in securities issued by business to finance expansion of
productive resources.
Your Committee may be interested in the results so far of the
authorization for payment of higher rates on savings.
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Federal Reserve Bank of St. Louis
Based on a survey
-14in mid-January of a sizable sample of Federal Reserve member banks, it
appears that about two-thirds of all member banks are offering some
rate in excess of the 3 per cent maximum rate previously in effect.
Regular or passbook savings accounts represent about threefourths of total time and savings deposits at member banks. Some
40 per cent of the banks, holding 70 per cent of total time and savings
deposits, raised their rates on regular savings accounts above 3
per cent. About half of these banks, or 20 per cent of the total, went
to the newly authorized 4 per cent for deposits held over one year.
The other half, generally, are paying 3-1/2 per cent on savings accounts.
Vv ith respect to time certificates of deposit and other time
deposits, arrangements vary widely from bank to bank. But many banks
are now offering up to 4 per cent on one-year certificates, including a
sizable number which have not moved up to the 4 per cent rate on
savings accounts.
Rates of 3 to 3-1/2 per cent are being offered on
six-month deposits, including the negotiable certificates offered by
many of the larger banks.
Some 60 per cent of the member banks still pay rates on
regular savings accounts of 3 per cent or less. If experience with a
previous change in permitted maximum rates can be used as a guide,
any further move toward increased rates on these accounts is likely
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Federal Reserve Bank of St. Louis
-15to be gradual, as it was after the preceding change in 1957.
Now I should like to devote the rest of my remarks primarily
to Federal Reserve operations in the Government securities market
during 1961.
To assure ready availability of credit in the American
economy, the Federal Reserve supplied the banking system in 1961
with reserves in amounts sufficient not only to offset the credittightening effect of gold drains and currency withdrawals but also
to provide additional reserves to meet requirements against
expanding deposits.
Member bank required reserves increased
in 1961 by about $1 billion, while Federal Reserve holdings of
Government securities increased by $1.5 billion in consequence
of open market purchases.
The reserves thus supplied made
possible the near-record expansion of bank credit in 1961.
As a result of that expansion and of increased financial
saving by the public, liquid assets held by consumers and business
increased substantially in 1961, In consequence, the overall
liquidity of the economy showed an
increase about in line with
the expansion in overall economic activity. Although total liquid
assets of the public increased by about 6-1/2 per cent during
1961--compared to the 7-1/2 per cent increase in Gross National
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Product-~demand deposits and currency, the more active elements that
usually are termed the "money supply," increased by only about 3-1/2
per cent*
The pace of increase in the money supply, however, acceler-
ated substantially in the latter part of the year.
The stability that prevailed in interest rates was one of the
striking parts of the financial scene. Interest rates showed only a
moderate increase in the 1961 business upturn, just as they had shown
only a moderate decline during the downturn that began in the spring of
I960. Accordingly, since mid-1960 interest rates have moved within a
relatively narrow range well above the low levels reached in 1958 and
below the high levels reached in late 1959.
To some extent, Federal
Reserve policies and operations, in addition to Treasury operations,
were responsible for this stability. Although the Federal Reserve supplied
reserves adequate to enable expansion of bank credit on the scale earlier
described, it sought to avoid downward pressure on short-term interest
rates.
The Treasury, a heavy borrower, obtained most of its new
money in the short-term sector of the market, thereby putting upward
pressure on short-term rates.
Let me ..note that factors other than official monetary and debtmanagement policies played an important part in keeping the general
level of interest rates during the 1960-61 recession above levels reached
in earlier recessions. These factors included the mildness of the
latest recession and the large volume of new security issues floated
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Federal Reserve Bank of St. Louis
-17by corporations and State and local governments in the first hal€ of
196l» Although 1961 did not witness as great a decline in interest rates at least in long-term rates--as 1958, neither did it witness a sharp
speculative rise and subsequent fall such as that which characterized
1958.
I should like to add, at this point, something on the way the
Federal Reserve System went about supplying bank reserves. Because
of the nation's international payments problem, the System sought to
provide these reserves in a manner that would minimize their effect
upon short-term rates, to which international money flows are
particularly sensitive.
To this end, the Federal Reserve in early 1961 extended the
area of its open market operations to include purchases of longer-term
securities as well as short-terms, in which open market operations
formerly had been confined as a general rule.
The purchase of long-
instead of short-term securities, when circumstances warranted,
served at least to relieve the short-term market from the direct impact
of these purchases on yields, and transfer that direct impact to the
longer-term area.
The $1.5 billion addition to Federal Reserve holdings of
Government securities that I mentioned earlier reflects merely the
net result of gross transactions totaling vastly more.
Most purchases
or sales, in fact, are made to adjust the availability of bank reserves
in accordance with temporary variation in needs, chiefly of seasonal
character.
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-18In its gross transactions over the course of 1961, the Federal
Reserve purchased about $7 billion of Treasury bills and other issues
maturing in less than two years, not including those acquired for brief
periods under repurchase contracts.
Over the same period, it sold or
redeemed at maturity a slightly larger amount of such issues. Purchases
of issues maturing within two to five years aggregated about $1.5 billion,
xvhile purchases of those maturing in over five years amounted to nearly
$800 million, nearly all in the five-to-ten-year area. Sales of issues
in these groups were negligible.
The System also acquired some
securities maturing in over a year by participating in refunding offers
of such securities in exchange for maturing issues, but the effect of any
such shifts upon the maturity distribution of the System portfolio was
more than offset by the approach to maturity of other issues held.
Treasury purchases of long-term Government securities for
investment accounts exceeded in amount those by the Federal Reserve.
They were, mostly, of issues maturing in over 10 years.
The Treasury,
in addition, borrowed much of its new money in the short-term area,
thus helping to maintain short-term interest rates and minimize the
flow of short-term funds abroad.
Most of the purchases of longer term securities by the Federal
Reserve and the Treasury were made during March, April and May,
when aggregate new issues of securities by corporations and by State
and local governments were in heavy volume.
Official (Federal Reserve
and Treasury) operations in that sector of the market doubtless helped to
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keep interest rates from rising in the face of large demands, and thus to
facilitate the flotation of these corporate, State and local issues.
The significance of these operations from the standpoint of market
impact may be indicated by relating their volume to total market transactions in each maturity category of Government securities.
Official
market purchases of Treasury bills and other issues maturing in less
than one year, although making up the bulk of Federal Reserve and
Treasury operations, comprised in 1961 only about 4 per cent of total
dealer sales of such securities (excluding those to other dealers). The
proportion for issues maturing in one to five years averaged 9 per cent
for the year, although in some months official purchases exceeded
30 per cent of dealer sales in this area. In the five-to-ten-year area,
the proportion amounted to more than 20 per cent for the year as a
•whole and in the period from March through July was more than a
third of the total. For securities maturing after 10 years, official
purchases comprised over 30 per cent of all market purchases for the
year and nearly two-thirds of total purchases in the second quarter,
when the bulk of the official purchases were made.
In conclusion, I should like to stress that, along with its
problems, 1962 also brings us opportunities.
Foremost among them
is the opportunity to achieve further progress toward higher economic
activity, lower unemployment, and restored equilibrium in our
international balance of payments.
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Federal Reserve Bank of St. Louis
-zoWe can make the most of that opportunity by working—all of usto bring about conditions that will generate the chain reaction that I
described at the outset--a process that leads from dollar stability to
savings, investment, rising productive efficiency, lower costs, better
prices, greater buying demand, increased production, and expanding
employment.
The prospects for progress are excellent. Let us apply
ourselves to the realization.
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Federal Reserve Bank of St. Louis
Question 1;
Answer:
Has it really been demonstrated that there is an invariable relationship between the relative interest rates among developed countries
and short-term capital movements? Has a thorough study been made of
this subject, and, if so, can this committee have it?
Interest rates represent a cost of money to the borrower and a return
on money to the lender. They are necessarily a factor affecting the movement of
funds—short-term and long-term—between the money markets and capital markets
of developed countries. There is, however, no invariable relationship between
relative interest rates in such markets and capital movements. While interest
differentials can be an important factor in movements of capital, other factors
also exert a conditioning influence.
These other factors include the availability
of credit, the supply of credit instruments of ready marketability, the demand
for credit for borrowers of good standing, and—of predominant importance at some
times—expectational and confidence factors.
Capital movements are sometimes viewed in the narrow context of funds
seeking liquid investment in prime market paper of short maturity. The differences
that existed last year between money rates here and abroad on this kind of paper
do not appear to have been a primary determinant of international movements of funds
of this type. Interest rates in the U. S. markets on this kind of paper were
relatively attractive during most of last year, especially if it is taken into
account that funds placed in sterling in London, where rates were high, had to
incur either exchange risks or a cost of forward cover that was equivalent most
of last year to 2 per cent per annum or more.
The forward exchange mechanism functions as a kind of buffer that allows
interest differentials to persist between international markets on highly liquid
paper. For example, if rates in London applicable to prime short-term market paper
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are 5 per cent and in New York are 3 per cent, the forward rate for sterling
will tend to be at a discount of 2 per cent (per annum) from the spot rate* If
it is less than 2 per cent, there is an incentive for liquid funds to move from
New York to London on a covered basis to gain whatever interest advantage there
may be as against prime short-term investment in New York. On the other hand, if
the discount exceeds 2 per cent by a sufficient margin, short-term funds will find
an incentive to move to New York with exchange risk covered.
In other words, when foreign exchange for future delivery sells at a
significantly different rate from its interest equilibrium level, funds may even
move from a country with high interest rates to one with lower rates if the gain
from selling the currency of the latter at a premium for future delivery more than
offsets the loss from the lower interest rate return on the investment, (in the
example given the forward dollar is at a premium in relation to forward sterling.)
The point, for present purposes, is that forward "cover" of an asset or
obligation in foreign exchange may involve either a cost or a profit, and investors
of short-term funds usually take this into account in deciding in which international
financial center they should invest their funds. Gross differences in the levels
of interest rates in different financial centers therefore do not tell the whole
story.
While there is a tendency for movements in forward exchange rates to
eliminate or at least to reduce the net incentive to move liquid funds from one
center to another, the fact of different structures of interest rates among international markets is also part of the story. With different structures of interest
rates—of money market rates, of bank deposit rates, and of bank lending rates-in different countries, it is unlikely that at any one time all interest rates and
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Federal Reserve Bank of St. Louis
-3all forward discounts and premiums will be in such relation to each other as to
eliminate all incentives for international movements of funds. Moreover, it must
be stressed that forward exchange discounts and premiums are affected not only
by international short-term investment movements, but also by commercial demand
and supply in spot and forward exchange markets. They may also be influenced by
official intervention as well as by free market forces. Since the latter part of
I960, for example, the German central bank has provided special inducements to
encourage outflow from Germany of liquid secondary reserve funds of German commercial banks.
Although the forward exchange rate has an important influence on shortterm movements of liquid funds, it should be recognized that many short-term
capital transactions between markets take place without forward cover. The
incentive or necessity to move funds without forward cover will increase as maturity
of the transaction is extended and its liquidity reduced. In these cases, absolute
interest-rate differentials play an important role, together with other factors
such as the availability of credit and conditions with regard to credit risks.
A very important category of short-term capital movement takes the form
of lending by U. S. lenders to foreign businesses, banks and governments, in some
cases in nonindustrial countries. This kind of capital movement depends on various
factors, including the changing needs of borrowers for such accommodation, the
nature of bank-customer relationships, and the availability of bank credit here
and elsewhere. With regard to this type of capital movement, it is important not
to overemphasize the role of interest rates per se. Nevertheless, it is important
to recognize that if U. S. interest rates are competitive with those abroad and
other factors are operating to make the services offered by U. S. lenders attractive
to foreign borrowers, short-term capital outflow will take place. Such conditions
obtained in 1961.
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Federal Reserve Bank of St. Louis
Investors motivated by speculative objectives may move funds internationally
not only in short-term forms but also for the purchase of long-term securities and
equities on a temporary holding basis. Such holdings are to be sold when short-term
capital gains are realized or if capital losses are experienced. Accordingly,
expectations of changes in long-term interest levels and market prices of bonds or
in prices of equities may contribute to international capital flows that are essentially short-term but not necessarily closely related to short-term interest-rate
differentials.
Movements into liquid investments by U. S. nonfinancial corporations
may also vary with changes in corporate policies related to their liquidity positions. Moveover, some movements may be influenced by tax considerations primarily.
As a continuing assignment for the information of the Board of Governors,
the Board's staff analyzes currently international movements of short-term funds
with a view to assessing the various forces affecting them. The period over which
such analysis has been pursued is necessarily relatively short since the major
European countries did not attain full external convertibility until the end of 1958*
Also, the influence of interest-rate differentials on the movement of short-term and
other funds during this period has been obscured at times by such developments as
the repercussions on the exchange markets of the upward revaluation of the German
mark and Dutch guilder in March 196l and by market uncertainties regarding the dollar
and sterling associated with the balance-of-payments problem of the United States and
the United Kingdom. The continuing staff analysis of these factors has not been
brought together in a single study suitable for submission to the Committee and it
would be premature to do so at this stage.
It is believed, however, that the fore-
going discussion outlines the considerations involved in the analysis in a manner
responsive to the question asked.
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Federal Reserve Bank of St. Louis
-5Question 2: To the extent that it is felt that short-term capital in this
country goes overseas because of higher short-term interest rates
abroad, to what extent are we now, at the highest diplomatic and
financial levels, trying to get the other great trading nations
of the world and of Europe, particularly, to do what we are
apparently doing here in this country, namely, using fiscal means,
spending and taxing, as a primary method of fighting inflation,
thus putting less of a burden on monetary policy and requiring
lower interest rates than otherwise would be the case?
Answer:
As Secretary Dillon has already indicated, effective international
cooperation to prevent or limit excessive capital and monetary reserve movements
has been one of the dominant themes underlying the financial discussions in
recent months in the OECD in Paris, and in the periodic discussions among central
bankers at the monthly meetings of directors of the Bank for International Settlements in Basle.
In all these discussions, the effects of differences in levels
of short-term interest rates prevailing in different countries, desirable and
undesirable, has been one of the subjects receiving attention.
The desirability
of some coordination between countries of fiscal and monetary policies with a
view to developments in other countries is increasingly recognized as a necessary
condition for a viable system of inter-convertible currencies.
Indicative of
this development, several European countries, starting as far back as the fall of
I960, made deliberate efforts to reduce the levels of their short-term rates—
partly in consideration of our problems, but more immediately because largescale inflows of funds were tending to defeat the aims of their own domestic
stabilization policies.
Nevertheless, the fact that,for reasons already given, the interrelation
of interest rates and short-term capital movements is not clear cut indicates that
there is no strong case for urging on other countries a priority for fiscal policy
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-6over monetary policy as a means of influencing their internal situations. Moreover, while a stronger fiscal policy should normally make possible a somewhat
easier task for monetary policy, the two are not completely substitutable one for
the other. An effective stabilization program requires both types of policy.
Particular countries will undoubtedly find it necessary to adapt their policy mix
in accordance with the shifting internal and external problems they individually
confront, though at all times giving account to their longer run stabilization and
growth objectives.
Undue stress by other leading countries on fiscal policy might produce
results fully as unsatisfactory, from the standpoint of maintenance of their
maximum employment and their contribution to international payments equilibrium,
as those that would be brought about by undue stress on monetary policy.
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Federal Reserve Bank of St. Louis
-7Question 3: Is there not an important difference "between the so-called basic items
in a balance of payments—trade, services, military expenditures,
government investments and private capital investment--and those items
reflecting short-term capital movements? Is not a flight of shortterm capital due to discrepancies in interest rates a different kind
of money movement not necessarily reflecting fiscal or monetary
irresponsibility on the part of the country having somewhat lower
interest rates? If this is so, might it not be worth while to see
if we could not erect a new principle of international monetary
morality along the following lines: Central bankers are welcome to
demand gold for any of the deficits caused by basic structural shifts,
but, if the deficit is caused, and to the extent that it is caused,
by one of these innocent short-term capital outflows, central bankers
should not, in the interest of the free world monetary system, demand
gold in the same amounts and quantities as they otherwise might.
Answer:
The discussion of the first question indicated that international movements
of short-term funds respond not only to interest-rate influences but are also
affected by various other factors. It was noted that movements of short-term
credit are influenced by borrowers' demands and by the availability of credit in
one lending country or another as well as the competitive cost of credit as between
countries. While movements of funds for short-term investment in liquid forms are
naturally affected by interest-rate differences among developed countries, the
influence on such fund movements of the interest-rate differences is modified by
the action of forward exchange markets. Finally, expectational and confidence
factors at times give rise to large-scale speculative movements of funds that are
committed on a short-term basis.
In the answer to the second question it was noted that international
discussions of the effects of national policies on international payments have
given due attention to interest-rate relationships, but have also concerned other
influences affecting international payments flows. National policies in other
countries, it was suggested, may influence the U. S. balance of payments in various
ways. Short-term capital movements, therefore, cannot be viewed in isolation from
other forces shaping a country's balance of payments.
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Federal Reserve Bank of St. Louis
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Progress has been made in the past year toward effective measures of
international cooperation to deal with emergency or temporary situations that
might threaten the stability of the international payments mechanism. The principle
underlying such cooperation is not that short-term capital movements, per se, call
for a special kind of treatment.
The principle is rather that any large and sudden
drain on a major country's monetary reserves represents a threat to the functioning
of the international monetary system/, and that all countries have an interest in
forestalling or coping with such threats to the system.
Short-term capital movements, partly motivated by confidence factors,
are characteristically an important contributory cause of the large and sudden
drains on a country's monetary reserve position that are here in question.
Such
adverse changes in reserve position are less likely to occur when a major country's
fiscal and monetary conditions are in approximate equilibrium with those of other
countries and when its international payments on current and long-term capital
accounts are in sustainable balance.
The Basle arrangements of March 1961 to help the United Kingdom cope
with a sudden and wholesale outflow of short-term funds, and equally the recently
concluded agreement between ten industrial countries to stand ready to lend their
currencies to the International Monetary Fund under certain circumstances, are
evidence of a spirit of international cooperation and inter-responsibility in
making the mechanisms of international payments work satisfactorily.
But the
viability of this kind of international cooperation depends very much on the ability
and determination of countries that receive assistance to play their full part,
through appropriate domestic and foreign economic policies, in bringing their own
international payments into reasonable and durable equilibrium.
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Federal Reserve Bank of St. Louis
-9While these arrangements do make for economy in the world's use of gold
as a means of final settlement in international payment s, there is no way under the
existing organization of monetary systems among the major countries to obviate,
automatically, demands for final settlement in gold. Gold has a statutory role
assigned to it in the monetary systems of these countries; it is a means of international settlement that in fact has general acceptability; and it has the prestige
of long tradition in performing international settlement functions. The monetary
authorities of each country, in the light of their trusteeship responsibilities, are
obliged to give account to the allocation of their reserve resources between gold
X
and other assets eligible to meet reserve needs.
A country whose payments are in deficit on current and long-term capital
accounts cannot safely disregard short-term capital outflows as an additional element magnifying its over-all deficit and affecting its monetary reserve position.
Nor can it ask other countries to abstain from converting to gold those accretions
to their reserves that are related to the capital outflows --even if it were conceivably possible to determine that certain capital flows had resulted from interest'
rate differences. Consistent application of a principle that gold should not move
with short-term capital flows would work to the disadvantage of a deficit country
in some circumstances, as for example at a time when it might need to attract
inward movements of capital as one way of overcoming its deficit in international
payments.
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Federal Reserve Bank of St. Louis
Miss Muehlhaus
the Honorable Paul H. Demglas,
Uaitsd Ststea S«nat«,
Washington %%$ B. G.
Dear Senator Bougla«t
Bearing my appearance before the Joint Bconomic Committee
on January 30, 1962, you raised with ne the following question:
"Instead of having fixed exchange rates, why would
it not be ft good thing for the western world to adopt a
fluctuating exchange rate? ?hen you wouldn't have to
worry about your balance of payments or gold reserves,
lou would hare exchange rates fluctuate according to the
relative balance of iiports and exports, daisa and
debits, and you would get an automatic adjustment."
After sane exchange between us* you requested that the staff of the
Board of Governors prepare a memorandum on the subject for the benefit
of the GoMBittee.
1 an herewith transmitting the requested paper. It was
prepared wider the general direction of Dr. Halph A. loung, Adviser
to the Board ami Director, ^ivisdon of International Finance,
Hr. Kobert L. Samaons, Adviser in that Division, had responsibility
for sifting and digesting the professional literature which advances
a ease for a system of flexible exchange rates* Dr. J. Herbert Furth,
also Adviser in our Division of International Finance, carried main
responsibility for preparing a critical evaluation of the arguments
against flexible exchange rates, and by Implication expressing the
case for fixed exchange rates. The product of their respective analytical work has been aerged into a single paper, the case for and against
a system of fixed exchange rates was net prepared separately, because
the arguoents would have beam repetitive.
the problems encountered in dealing with the many-sided
question you raise are necessarily complex and an answer to It needs
to be fonralated with care and balance. Consequently, the paper has
taken a considerably greater amount of time ami effort then either
you or I originally planned for it. In view of your long experience
as an economic scholar, I know that you fully appreciate the analytical
difficulties of the task, which account for the tine taken in its
preparation.
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Federal Reserve Bank of St. Louis
The Honorable Paul H. Douglas
-2-
fhe nature and purpose of tin paper made It necessary to
swMarise the arguments in terms of their practical applicability,
rather than to pursue their theoretical foundation*. In any ease,
rigorous theoretical treatment would hare required a much more
elaborate and tine-consuming effort*
the paper will be studied with interest by the aeabere of
the Board of Governoref and will be made available to a broader
audience by publication in ma early issue of the Federal ieserve
Bulletin. But, as you requested, It Is submitted strictly as a
staff memorandum. Its single objective Is to llloainate the issue
of fleaelble vs* fixed rates of foreign exchange as a matter of
national policy.
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Federal Reserve Bank of St. Louis
Sincerely yours,
(Signed)ffin.UcC. Martin, #•;
Jr.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
April 17 1962
The Honorable Wright Patmnn,
Chairman, Joint Economic Committee,
Washington 25, D. C.
Dear Mr. Chairman:
During my appearance before the Joint Economic Committee
on January 30, 1962, Senator Douglas raised with me the following
question:
"Instead of having fixed exchange rates, why would
it not be a good thing for the western world to adopt a
fluctuating exchange rate? Then you wouldn't have to
worry about your balance of payments or gold reserves.
You would have exchange rates fluctuate according to the
relative balance of imports and exports, claims and
debits, and you would get an automatic adjustment."
After some discussion, Senator Douglas requested that the staff of
the Board of Governors prepare a memorandum on the subject for the
benefit of the Committee.
I am herewith transmitting, for the use of the Committee,
twenty copies of the requested paper. It was prepared under the
general direction of Dr. Ralph A. Young, Adviser to the Board and
Director, Division of International Finance. Mr. Robert L, Sammons,
Adviser in that Division, had responsibility for sifting and digesting the professional literature which advances a case for a system
of flexible exchange rates. Dr. J. Herbert Furth, also Adviser
in our Division of International Finance, carried main responsibility for preparing a critical evaluation of the arguments against
flexible exchange rates, and by implication expressing the case
for fixed exchange rates. The product of their respective analytical work has been merged into a single paper. The case for and
against a system of fixed exchange rates was not prepared separately,
because the arguments would have been repetitive.
The nature and purpose of the paper made it necessary to
summarize the arguments in terms of their practical applicability,
rather than to pursue their theoretical foundations. In any case,
rigorous theoretical treatment would have required a much more
elaborate and time-consuming effort.
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Federal Reserve Bank of St. Louis
The Honorable Wright Patman
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The paper will be studied with interest by the members
of the Board of Governors, and -will be made available to a broader
audience by publication in an early issue of the Federal Reserve
Bulletin* But, as Senator Douglas requested, it is submitted
strictly as a staff memorandum. Its single objective is to
illuminate the issue of flexible vs. fixed rates of foreign exchange
as a matter of national policy.
I am sending a separate letter to Senator Douglas, together with a copy of the paper.
Sincerely yours,
(Signed)
Wm. McC. Martin, Jr.
Win. McC* Martin, Jr.,
Chairman.
Enclosures.
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A SYSTEM OF FLEXIBLE EXCHANGE RATES:
PRO AND CON
Reconstruction of the international payments mechanism following
World War II was based, and continues to be based, on a system of fixed
par values for all major currencies.
The International Monetary Fund,
established under the Bretton Woods Agreements of 19^1- "to promote international monetary cooperation," was founded on this principle. Any
change in the system would have sweeping consequences for international
economic relations and through them for the domestic economies of the
free world. Nevertheless, advantages and disadvantages of flexible
versus fixed rates have continually been discussed inside and outside of
academic circles.
Advocates of a system of flexible exchange rates argue that
it would provide each major country with a mechanism for prompt and
sensitive international payments adjustment. They believe that this
mechanism would greatly reduce — but not entirely eliminate — the
constraints on domestic financial policies imposed by a system of fixed
rates of exchange. The adjustments in the balance of payments that would
occur under flexible rates would be more efficient and less likely to
have adverse side effects than adjustments under a fixed rate system,
they contend.
Opponents of a system of flexible exchange rates maintain that
the system would have serious disadvantages rather than advantages.
They believe that such a system would require more rather than less
restrictive domestic financial policies in order to achieve sustained
economic progress. Unless countries paid close attention to their balance
of international payments, exchange rates would fluctuate violently,
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disrupting international commerce and investment. If applied to key
currencies, a system of flexible rates would eliminate these currencies
as means of international payments and as reserve assets.
According to classical economic theory, a major advantage of
the pre-191^ gold standard was that it provided an effective, although
slow, mechanism of adjustment for the "balance of payments through the
fairly direct tie between the amount of a country's gold holdings and
its supply of bank credit and money. A country with a balance of payments surplus received gold, its bank credit and money expanded relative
to the gold-losing deficit countries, and its money incomes and prices
tended to rise. While this adjustment was taking place, an equilibrating
movement of short-term capital also tended to occur, because interest
rates tended to rise in the deficit countries, thus attracting funds from
the surplus countries.
After a time imports in the surplus country would tend to rise
and exports to fall; the reverse would take place in deficit countries.
Balance in international payments would thus be restored.
Under modern systems of managed currency convertibility, so
the argument of the advocates of a system of flexible exchange rates
runs, this mechanism of adjustment does not have its former effectiveness because of the tendency of prices and wages to resist downward
adjustment. And monetary authorities pursue policies geared to full
employment, economic growth, and domestic price stability, while tempering,
cushioning, or offsetting balance of payments developments that might
frustrate the achievement of domestic stabilization objectives.
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Federal Reserve Bank of St. Louis
-2aThis line of reasoning leads to the conclusion that balance
of payments equilibrium no longer is brought about by quasi-automatic
economic forces, nor is it considered an economic policy aim of first
importance. It is taken into account only as a limiting condition of
domestic policy that has to be met if a country is to maintain a stable
value for its currency in terms of gold and other convertible currencies.
In this context, it is argued that a system of flexible exchange rates
would offer more freedom to pursue the major domestic goals of economic
policy without incurring unduly adverse international effects.
In this paper the mechanism of international adjustment under
a system of flexible exchange rates participated in by the major industrial
countries, including the United States, is evaluated. First a system of
flexible exchange rates free of any official intervention and with no
limits as to the possible range of exchange rate fluctuation is described.
Then a modified system in which official governmental intervention to
temper or limit exchange rate fluctuations would be in operation is
considered. Finally, the case against any system of flexible exchange
rates is presented. The major premises and arguments of the case for
such a system are critically assessed, with special attention to the
consequences it would have for the dollar.
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The Case for Flexible Exchange Rates
Two assumptions underlie the case for flexible rates: First,
that the participating countries will be able to pursue domestic financial
policies -- fiscal and monetary — that sustain high levels of domestic
economic activity, balanced economic growth, and relative stability of
domestic price levels. Second, that each country in the system will
permit others to adjust their balance of payments by changing exchange
rates without resorting to exchange controls, to protective trade measures,
or to competitive exchange rate adjustment in defending its economy against
any unfavorable effects of any changes in the foreign exchange values of
other currencies.
The Foreign Exchange Rate as a Price
The theoretical case for the superiority of completely flexible
rates over fixed rates rests on simple postulates.
The foreign exchange
rate is a price that should be permitted to perform the normal functions
of a price. Its immediate function should be to balance supply and demand
in the foreign currency market,, In doing so, it would establish a relation
between domestic and foreign prices and costs that would induce longer
run changes in the production, investment, and consumption of goods moving
in international trade in a way that would foster and maintain balance in
external payments.
In any market, there is some price that will clear the market,
in the short runa
In markets where supply or demand is unresponsive to
price change in the short run, price fluctuations may sometimes be more
violent than is necessary to restore or maintain long-run equilibrium.
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Federal Reserve Bank of St. Louis
Price changes may also be destabilizing if demand and supply are
stongly sensitive to expectations about future influences on the
market. Thus, a price decline may reduce deamand (and increase supply)
if a further decline is anticipated.
The price of foreign exchange differs from the price of a
single commodity in that it represents to both buyers and sellers
command over a whole basket of goods, services, real capital assets,
and claims payable in a foreign or the domestic currency.
Thus, the
demand or supply of a foreign currency is derived from many specific
needs or motivations. As a composite demand or supply, each will
be responsive to small changes in price.
Consequently, changes in foreign currency prices under a
flexible exchange rate system could be expected to produce relatively
prompt adjustment in the supply of and demand for foreign exchange
and thus in the balance of payments. If balance of payments adjustment
could be achieved under a flexible rate system without interfering with
domestic stabilization policies or unduly burdening other trading
countries, such a system would have advantagesgreater than any possible
disadvantages attributable to the rate changes themselves.
The Mechanism of Adjustment
The mechanism of adjustment under a system of exchange rates
that would be permitted to fluctuate freely, without government limitation
or intervention, involves two major types of international transactions —
the movement of goods and services, mainly merchandise, and the movement
of capital, mainly short-term. The theoretical effects on merchandise
trade.will be treated first. For simplicity, the adjustments of a deficit
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country wiH be used as an illustration. (The adjustments necessary for
a surplus country under a flexible rate system would be the reverse.)
Unless the governmental authorities supported the rate by
selling gold or foreign exchange, a deficit country would find its
currency becoming less valuable in relation to other currencies, the
demand for it falling relative to the supply of it. What changes in
prices would result would be influenced by the elasticities of supply
and demand, and by the importance of the deficit country as a world
supplier or purchaser of specific commodities. But in general, price
movements along the following lines might be expected.
Effects on imports. The prices of the deficit countryfs
imports, in terms of its own currency, would tend to rise. This rise
would reduce its purchases of imported goods. How great the reduction
would be would depend on the price elasticities of demand for such goods
and the elasticities of domestic supply of competitive goods.
The higher prices for import goods would encourage the
expansion of domestic production of competitive goods, insofar as
domestic goods were substitutable for imports, and thus reduce imports
even if total demand for these goods were not reduced by the increase
in prices. The rapidity and extent of the response would depend on
how widely elasticities varied from commodity to commodity. Elasticities
would also vary with the state of the business cycle -- especially with
the presence or absence of unutilized capacity in the import-competing
industries. Responsiveness to import price changes would be specially
affected by the length and complexity of the production process for the
competing domestic goods.
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—o~
If foreign exporters were able and willing to reduce their
prices in terms of foreign currencies (maintain their prices in terms
of the depreciating currency) in order to keep their import markets,
adjustments would be less. But there would still be some reduction
in foreign exchange expenditures, even if the quantity of imports did
not fall.
Economists differ on whether the effects on imports of exchange
depreciation under a flexible rate system would vary from the effects on
imports of outright devaluation under a fixed rate system. Expectations
about further exchange rate changes would be very different in the two
situations, and the effects of the different expectations are difficult to
predict. But if one opposes flexible rates on the grounds that they would
not affect foreign exchange expenditures on imports, one must also argue
that exchange devaluation could never be justified for a similar reason.
Effects on exports. Effects on the exports of the deficit
country would depend on the organization and structure of its production
and the competitive position of its export products in world markets.
For one-product countries facing relatively inelastic demand schedules,
especially for principal exporters of the particular commodity, exchange
depreciation might reduce the foreign exchange proceeds of exports.
But for industrialized countries, with diversified exports competitive
with similar products of other industrialized countries, the result
would probably be some increase in exports. The increase would be the
larger, the greater the imderutilization of existing capacity.
The effect on prices of export goods in terms of domestic
currency would vary from commodity to commodity. Probably export prices
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-7in terms of domestic currency would rise, on the average, but not by
•
so much as the depreciation in the external value of the currency.
For internationally traded export commodities, the price
rise would be inversely proportional, or nearly so, to the reduction
in the external value of the currency. For other commodities, the
price rise would depend on the relative importance of exports to
domestic demand.
If the price rise for export goods fully offset the depreciation
in the value of the currency, the effect would be two-fold.
Unless the
domestic demand for such goods were completely inelastic, the amount sold
at home would fall, thus freeing more production for export. It seems
reasonable to assume that such an adjustment would come rapidly. But
even if it were delayed, profits in the export industries would rise,
and enterprises in these industries would bid actively for resources
for export production with eventual beneficial effect on the balance of
payments.
On the other hand, if the rise in price did not fully offset
the depreciation in value of the currency, foreign buyers would enjoy
a lower price in terms of their currencies, and domestic producers would
thus enjoy an increase in foreign orders. How large the increase would
be would depend on whether competitive foreign producers would accept
the situation without lowering their own prices. If prices declined all
around in international markets, and world demand was price elastic,
the total market would expand and the exports of the depreciating country
would presumably rise pari passu with such expansion.
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The speed of adjustment on the export side would thus depend
on (l) the extent of the rise in domestic prices of export goods, (2)
the rapidity with which domestic production could be expanded (clearly
greater in a recession than in a boom), (3) the elasticity of domestic
demand for export goods, and (k) the response of foreign competitors to
any reduction of prices in terms of foreign currencies. It seems reasonable
to assume, however, that significant marginal adjustments would respond
with workable promptness to small changes in exchange rates. Such adjustments might also lead to the exportation of products not previously exported.
The structure of production and foreign trade is constantly
changing. Thus data on past effects of exchange rate changes on exports
is not particularly helpful in trying to predict what would happen under
a generally applicable flexible rate system. Advocates of such a system
must generally resort to a priori inductive reasoning and thus must also
believe that the price mechanism for goods and services will work through
the foreign exchange mechanism, as it does admittedly — although not
always to everyone's satisfaction -- in a domestic market for goods and
services.
Countercyclical effects. If a country committed and accustomed
to a flexible exchange rate mechanism were to experience a balance of
payments deficit and domestic recession simultaneously, depreciation of
its currency internationally could result in special advantages. In a
recession, the possible effects of depreciation on both exports and
imports would tend to stimulate total effective demand at home. Domestic
production of import-competing and export goods would be directly
stimulated, and purely domestic output would receive a secondary stimulus.
An adverse effect of the currency depreciation would be to alter
the terms of international trade — making it necessary for the deficit
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-9country to give up more of its own output in exchange for a given
quantity of imports. The expansion in domestic output induced by the
currency depreciation, however, would tend to counter adverse effects
on domestic standards of living.
A general system of flexible exchange rates would not
automatically result in currency depreciation if a recession of about
equal amplitude hit all countries at the same time. In this situation
exports and imports would drop in approximately the same proportion. Thus
exchange rates would tend to remain unchanged, and the effect of the
recession would be the same as it would be under a system of fixed
exchange rates.
Effects on capital movements.
Even if it be granted that
under flexible rates the balance of payments would be adjusted through
changes in the trade account, there remains the problem of capital movements. Would not the currency depreciation generate expectations of
further depreciation and thus set in motion capital movements that would
in themselves produce such further depreciation? Would not this, in turn,
lead to unwarranted, unneeded fluctuations in exchange rates and to a loss
of confidence in future exchange values with a consequent disruption of
the processes of international trade and investment? The proponents of
a flexible exchange rate system argue that these consequences would not
follow.
Admittedly, volatile capital movements are greatly influenced
by psychological and expectational factors. The only experience the world
has had with flexible rates has been under an international currency system
where flexible rates were the exception rather than the rule* There
has always been at least one currency, the dollar, freely convertible into
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-10gold at a fixed rate, except for a "brief period in 1933-3^• For this
reason, it is impossible to guess what might have happened in a world
of flexible rates.
If the principal countries promoted a reasonable degree of
stability in economic activity and prices, =/ and there were no
significant direct controls, wide fluctuations in exchange rates would
not be expected to occur. So long as a currency was freely convertible
into goods and services for export, at relatively stable prices, it
could not depreciate far before it would begin to appear a bargain both
to traders and speculators in property values. At this point, some
stabilizing speculative trade and capital flows could be expected to
set in. If these developments failed to occur, it would be because the
speculators distrusted the fiscal and monetary policies of the government
or the basic economic forces shaping the internal structure of the economy.
Large flows of volatile speculative capital occur even under
the present fixed rate system, notably when a large part of the market
believes that a specific exchange rate is overvalued or undervalued
and hence cannot be or will not be long maintained.
If determination
of the exchange rate were left to the market, speculators would have to
analyze all the factors entering into the demand for and supply of
exchange. Market opinion might then not be nearly so unanimous as it
sometimes seems to be at present. Moreover, any movement into a currency
would begin immediately to increase the cost of that currency, thus raising
the possibility of loss as well as gain in the minds of the speculators.
I/In the absence of such policies, any system of exchange rates — fixed
or flexible — would tend to break down.
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-11Under a system of fixed exchange rates with narrow spreads, the possibility
of loss is present but much less so. If apprehension of risk turned out
to be the market reaction, such a response would tend to dampen, and
eventually reverse, any speculative movement of funds between international money and capital markets not warranted by relative price changes.
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-12A Modified System of Flexible Rates
Up to new a completely flexible rate system has been discussed,
It has been assumed that there would be no intervention in the exchange
markets by the authorities, and hence no need for official reserves of
gold or foreign currencies. However, such a system is hardly realistic.
Proponents of flexible rates usually acknowledge that they would allow
for some official intervention to smooth out short-run fluctuations or
to provide for some stability in the flow of import payments and other
payments to foreigners in the event of unpredictable or unavoidable
short-run fluctuations in foreign exchange receipts. Such a modified
system of flexible exchange rates would, however, be faced with two
problems.
First, what assets would be used as monetary reserves? The
key trading countries might want to use only gold, believing gold would
be more likely to retain its value in relation to the domestic currency
and to the currencies of other industrial countries. However, countries
might be willing to hold reserves in other important currencies which
have proved stable enough to inspire confidence that this stability
would continue. Or if central banks would not hold reserves in foreign
currencies as a regular matter, they might still, as a matter of central
bank cooperation, engage in reciprocal currency transactions temporarily
to enable the participating central banks to intervene in the foreign
»
exchange market in behalf of their currencies.
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-13Second, would not there have to be some rules of the game for
official intervention, especially for actions to avoid competitive
depreciation?
If these problems could be solved, an international system of
modified flexible rates might offer not only the advantages discussed
earlier, but also the following advantages:
Changes in Rates vs. Changes in Reserves
With flexible rates, a country could let flows of volatile
short-term capital affect the exchange rate instead of affecting its
international monetary reserves. Changes in reserves stemming from
international capital flows, even if a central bank offsets their impact
on domestic credit by open-market operations, may undermine public
confidence in the monetary system and consequently upset the credit
and exchange markets. As things are, changes in exchange rates within
moderate limits might be preferable to changes in reserves.
Management of Reserves
Under a system of flexible exchange rates, the monetary
authorities of a country could regulate their reserve holdings on the
basis of the economy's financial needs. They could buy or sell gold
or foreign exchange &f they continued to hold foreign currency reserves
despite exchange risks) whenever they thought it appropriate and
advantageous without regard to effects on the exchange rate. However,
if the operations were interpreted as official efforts deliberately to
depreciate a country's currency, other countries participating in the
flexible currency system might retaliate.
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Speed of Adjustment
With flexible exchange rates, monetary authorities would not
be so tempted to defend on overvalued or undervalued currency and thus
delay a necessary rate adjustment.
Such delays tend to impair a country's
monetary reserves and slow the adaptation of its domestic economy to the
requirements of external "balance. Under a fixed exchange rate system,
the exchange rate "becomes a symbol of national prestige. A devaluation
is considered as evidence of some failure of the government's economic
policy and as a "breach of faith with the public.
Consequently, devaluing
or revaluing a currency in terms of gold and other currencies becomes
a last resort, to be resisted as long as possible.
Sometimes countries
have imposed, or reimposed, or tightened exchange controls rather than
devalued the currency. When devaluations or revaluations occur in major
countries, they tend to be a disruptive factor in international trade and
finance. Under a flexible exchange rate system, if a currency was overvalued or undervalued, depreciation or appreciation of the rate would
come soon and, unless there was speculation, would have a chance of being
moderate.
Size of Reserves
If a system of flexible exchange rates were universally adopted,
many countries could operate with smaller international monetary reserves
in gold or foreign currencies than they presently hold. For a country
would not have to protect its monetary system against a persistent,
large-scale reduction in the volume of its reserves. If exchange rate
adjustments could take care of most fluctuations in its balance of payments,
more of a country's national wealth could be invested in domestic production rather than in holdings of gold or short-term claims on foreign countries.
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-15Such a change would be particularly important for less developed
countries. They would no longer need to grant credit to the United
States and the United Kingdom by holding more monetary reserves than
they needed for working balances in dollars and in sterling.
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-16The Case Against the System in Either Forra
The arguments for a flexible exchange rate system need
critical evaluation, particularly on the possible effects on the dollar.
Such an evaluation leads to the following main conclusions.
1. The rigidities of the present economic system are not
so pervasive that modern economies cannot, within reasonable periods,
adjust to temporary disequilibrium in the balance of international
payments under a system of fixed exchange rates.
2. A system of flexible exchange rates would not free participating countries from having to watch their balance of payments
and monetary reserves. In fact, because of the uncertainties of
exchange rate fluctuations and instabilities, they would have to pay
more attention to then than under a system of fixed exchange rates.
3. Whatever advantages may be claimed for flexible exchange
rates, they would be more than offset by disadvantages if the system
were applied to currencies widely used as means of international payments and as international reserve assets.
U. Flexible exchange rates would involve a serious risk that
destabilizing forces generated by exchange rate fluctuations would
become uncontrollable.
5. Flexible exchange rates would make international trade and
investment transactions more uncertain and hence more costly.
6. By impeding the international division of labor, the system
would retard economic growth throughout the free world.
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-177. The limited supply of gold and the risks of keeping monetary
reserves in foreign currencies of fluctuating value would hamper the
intervention needed to make a modified system of flexible exchange rates
workable. Reaching agreement on effective rules of the game would also
be difficult.
Role of Economic Rigidities
The contention that the present economic system has become
inflexible from cumulating rigidities is exaggerated. Downward adjustment
of average prices and wages do encounter resistance.
But international
imbalance generally arises from price and cost differentials in particular
export or import industries.
earnings
Individual prices and, to a lesser degree,
still fluctuate downward as well as upward.
Quite recently, the impact of increased imports on U.S.
prices and wages has been important in helping to restore competitiveness
in various branches of U.S. industry, in curbing inflationary tendencies,
and in strengthening the U.S« balance of trade. This experience shows
that there continues to be a powerful mechanism of international payments
adjustment under modern convertible currency conditions generally
comparable to that which existed under the old gold standard.
Domestic Policy Constraints
Arguments that flexible exchange rates would tend to produce
adjustments in line with sustained economic activity and relatively
stable prices always assume that exchange rates would fluctuate only
moderately because the principal countries participating in the system
would successfully pursue policies to achieve stability.
But if they
tried to do so, the countries would still have to watch their balance
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-13-
of payments and monetary reserves. They could not disregard limitations
imposed by adverse international payments flows any more than they can
\onder a system of fixed exchange rates. Indeed under a system of
flexible exchange rates, ignoring adverse flows would risk even more
serious effects than under a system of fixed, exchange rates.
Even if a country followed appropriate domestic stabilizing
policies, flexible exchange rates would make all international trade
and investment commitments uncertain. For reasons connected with
temporary, cyclical, or even seasonal movements in international payments,
exchange rates might at any time break out of their established range.
The full faith and credit of governments would no longer stand behind
currency values, and confidence that any breakout of an established range
would result in a quick return to that range would be lacking. International traders and investors, therefore, would need to incur a
speculative risk in all transactions. The costs of such risks would
have to enter into prices of exports and imports and into calculations
of expected returns on investments.
A system of fixed exchange rates, with narrow fluctuations
about parities, can be supported by the same policies for economic
stability that advocates of a flexible rate system claim would result
in a limited range of exchange rate fluctuation. Since the full faith
and credit of governments are pledged in support of currency values,
international traders and investors can act in full confidence and
with least fear of risk in currency values.
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-19Special Hazards for Key Currencies
International economic activity need not "be seriously affected
if a currency that is little used or held by foreign traders and investors
fluctuates.
The country having such a currency and its trading partners
will, however, tend to carry on international trade and finance in foreign
currencies with fixed currency values, if such currencies are available.
The fact that the value of its own currency is unstable will handicap
the country in the development of its trade and financial institutions,
and lead to a distribution of economic activity between domestic and
foreign trade geared to internationally changing currency values. These
effects would be much more disturbing if the key currencies also fluctuated,
If a key currency fluctuated freely in relation to gold as well
as to other currencies, it could no more function as a standard of
economic calculation and as a store of value. Other countries with
fluctuating currency values would lose their yardstick for the conduct of
foreign trade and finance. Their businessmen, investors, and public
administrators would face a double handicap: there would not only be
uncertainty about the value of their domestic currency, they would also
risk more in their international transactions.
If international currency values should fluctuate, private and
public transactors might turn to gold as the standard for economic
calculation and for storing value. This development would put great
pressure on the limited market supply of gold. The supply not only is
small in relation to the demands that might be generated; it also cannot
be adjusted to the needs of international commerce and investments as
the supply of dollars and sterling can.
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-20-
The large amounts of dollars and sterling that foreign monetary
authorities now hold as reserves and as working balances would become
subject to uncertain exchange risk. Even if private transactors would
keep their holdings, foreign monetary authorities could hardly do so.
The period of transition to a system of fluctuating exchange rate for
key currencies would bring danger of a scramble for gold. The system
would be put under great pressure from flows of volatile funds, with the
price of gold bid up to unforeseeable levels.
Uncontrollable Destabilizing Forces
Advocates of flexible exchange rates underrate the risk involved
in permitting rate fluctuations without clearly defined limitations.
What might happen if the United States, with its present
large international payments deficit, adopted a flexible exchange rate
system? If it did not continue to pursue stabilizing domestic policies,
or if its price and cost structure were seriously out of line, the dollar
would tend to depreciate continuously instead of fluctuating within a
narrow range about a stable value.
Even if the United States tried to stabilize its domestic
economy, and its prices and costs were not too rigid, the economic
and financial forces generated by flexible rates would make it uncertain
whether this effort could be realized. When the dollar exchange rate
began to deviate considerably from its customary level, the market might
well no longer expect a return to that level but rather would count on
progressively wider deviation. Once market behavior became geared to
such expectations, it could easily give rise to cumulative movements in
financial markets far more difficult to contain than under a system of
fixed exchange rates.
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Thus, the dollar would tend to depreciate despite efforts to
pursue stabilizing policies.
Continuous depreciation could lead to
speculation against the dollar, which in turn would accelerate the
decline in the dollar exchange rate.
In this event, markets for internationally traded commodities.,
would become highly speculative, because with each further decline in
the exchange value of the dollar their prices in terms of dollars would
rise. The increase in the costs of foreign raw materials would raise
costs in domestic industry. In addition, industries producing both for
domestic and foreign markets would feel the pressure of increased foreign
purchases at bargain dollar prices. A cost-push, demand-pull inflation
would start.
Speculative activity in the stock market would rise, credit
demands would expand, and interest rates would come under sharp pressure.
Domestic inflationary pressures would increase as holders of
foreign dollar assets tried to liquidate their holdings before the
depreciation of the dollar in terms of foreign currencies progressed.
They could do so only by converting their assets, as fast as possible,
first into money and then into exportable goods. They would thus add to
the upward pressures on interest rates as well as on prices.
Expectations of a continued accelerating decline in the dollar
exchange rate would presumably lead to hoarding of foreign currencies
by domestic traders and speculators.
The hoarding would depress the
dollar in terms of foreign currencies even faster than it would reduce
the domestic purchasing power of the dollar.
In consequence, exports would be sold at bargain rates. Although
the volume of exports in terms of domestic resources would increase sharply,
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-22-
export proceeds in foreign exchange would increase much less and might
even fall. Payments balance would therefore have to come primarily
through the drop in the volume and foreign exchange value of imports.
This drop in imports, together with the deterioration in the terms of
trade, would hurt domestic consumers. Moreover, the drop in imports
of producers1 goods would handicap the expansion of domestic production.
These disturbances would arouse inflationary processes at
home. They might set in motion a self-propelling inflationary spiral,
with any increase in inflationary tendencies tending to lead to a further
decline in the external value of the dollar. This in turn would further
strengthen internal inflationary pressures.
Two special elements of the U«S. balance of international
pajTuents would add to the harmful effects of a depreciation of the dollar.
First, while the current merchandise balance might improve, depreciation
of the dollar would increase the burden on the Federal budget and on the
domestic economy generally of those payments abroad for military
expenditures and economic aid that must be converted into foreign
exchange. Second, continuous depreciation of the dollar might make
it ever more attractive for foreigners to borrow in the United States,
3.ess attractive to invest in dollar bonds„
Thus, the net outflow of
long-term capital, at present already a major factor in unbalancing our
international payments, would be further stimulated.
Costs of International Commerce
A system of fluctuating dollar exchange rates would also harm
other countries of the free world. For a fluctuating rate would in
many ways increase the costs and risks of international commerce.
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-23Instead of being able to conclude international transactions
on the basis of a stable key currency, everyone engaging in a trade
or investment transaction would need to speculate on a possible change
in the value of the dollar between the time a commitment was initiated
and the time it was concluded.
Compared with a fixed parity system with
narrow fluctuations (1-1/2 - 3 per cent around par) the transactions
risk of this system would be much greater.
For transactions to be consummated quickly the exchange risk
could usually be avoided by arranging for forward cover. But the cost
would be high because a system of flexible exchange rates would probably
bring expectations that fluctuations in currency values would be fairly
wide and continuous, and thus lead to high forward premiums or discounts.
There are well developed forward markets in only a few currencies. Some
international trade and credit transactions would have to be on an uncovered basis if undertaken at all.
For long-term transactions, forward coverage would not be
available. Nonspeculative long-term credit transactions would, therefore,
be severely handicapped by the risk of fluctuating currency values and
so might become virtually impracticable.
Handicaps to Economic Growth
More basically, our objective of advancing prosperity at home
and abroad through world trade based on the best international division
of labor would be significantly handicapped.
Under a system of freely fluctuating exchange rates, international price relationships would tend to vary more. It would become
difficult to rely on international price comparisons in making long-range
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investment plans for allocating resources between industries producing
for the domestic markets and for exports. Even small changes in exchange
rates, say, about 10 per cent, would upset any estimate of relative cost
and price advantages in different countries, especially since the^changes
might be quite unpredictable.
Insofar as extreme fluctuations in industrial output and
employment caused by sudden reversals of international competitive
positions could be overcome by protectionism, pressures for such
protectionism would develop and appear compelling. But if instituted, the
trade barriers could only result in slowing economic development and
growth internationally.
Possibilities of Intervention
Advocates of a system of flexible exchange rates usually concede
the desirability of some official intervention to influence the
abruptness and degree of fluctuation in international currency values.
But intervention presupposes the availability of monetary reserves in
foreign currencies. Unless monetary authorities of different countries
would incur the risks associated with a flexible exchange rate system,
only gold and currencies borrowed from other reserve banks could be
used for such intervention. If reserve or central banks were not
willing to enter into cooperative arrangements, only gold sales and
purchases would remain. Without enough gold, the system would be without
adequate facilities to moderate exchange rate fluctuations in response to
vo3.atile and speculative flows of payments.
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-25Concluding Remarks
No responsible government would or could long permit its
econor^r and its international relations to incur the adverse effects
that are more likely to occur under flexible than under fixed exchange
rates without trying to take preventive or corrective action. Sooner
or later it would be involved in efforts to reestablish monetary stability,
both internally and externally — even in an effort to return to a
mechanism of fixed rates.
These efforts would eventually mean abandonment of automatic
exchange rate adjustments. Both alleged advantages of a system of
fluctuating rates -- the advantages of automatic balance of payments
adjustments and the advantage of making domestic policies independent
of balance of payments and monetary reserve considerations — would thus
have proved illusory.
Board of Governors of the Federal Reserve System,
Division of International Finance,
April 13, 1962
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Federal Reserve Bank of St. Louis
Miss Muehlhaus
Hareh a?t 1962
the fcforwafel* Wright Patssan,
Chairman, 4olnt Hconosde
25, 0* C.
ftr* Ctadonaam
y <mr Ooemltt««* » r«c«iit
th« hrwiid^cit1^ Ecouoadc ^ort, S«i*tor r
He to wipplj for th« u»« of th* Co««itt««
m •tn»tur*l mi«^il^««at» I am «»el<MdJig 20 copies
af a iMi»JA'Hi>di»i on this rabj^ctj prepared1 % Mar**y
a senior eeofi^eigt IB the Board s Bi-rieloa o
a cc^>y of tM« i«tter atid tlie
Sioeerely yours,
(Signed) Win. McC. Martin,
f h» ioBorabl®
'United states
feaahiisgt^n 2S» ^
Seme Aspects of Structural Unemployment
Much of the recent controversy relating to the causes of
unemployment has largely been concern.ed with definitions, measurements and the time periods to be used in evaluating the impact of
structural, frictionai, and cj^clical factors on changes in unemployment. A major difficulty and one which has resulted in differences of
opinion is the inadequacy of the current labor force statistical series
as a measure of the amount and changes in structural unemployment.
While the available data do provide substantial information on trends,
levels, characteristics of the employed and unemployed, they do not
directly indicate the causes or forces which make for unemployment.
Also, as has been well documented in the Bureau of Labor
Statistics recent study on Terminology, Measurement and Analysis of
Unemployment, nresented to the Subcommittee on Economic Statistics
of the Joint Economic Committee, the specific meaning of structural
unemployment is extremely vague and has a variety of definitions.
At times, structural unemployment has been identified with long-term
unemployment 5 some experts have identified it with technological
change, others with shifts in consumer demands, international competition, or changes in the composition of the labor force.
It is little
wonder, with uncertainty as to definitions and inadequate data to
measure these definitions, that differences in judgment as to the
magnitude of structural unemployment have occurred among those who
are concerned with the policies required to alleviate unemployment.
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Fortunately, however£ there is more agreement and less
dispute at the policy level. Where misunderstandings have arisen
they have usually been due to a tendency to approach the problems of
unemployment from different starting points which often are thought
to lead to clear-cut alternative policy choices. However, when the
various apDroaches are examined in this complex area there are fewer
choices than appeared to be the case at first glance. For instance,
it has frequently been emphasized that the problem of increasing the
mobility of labor by a better functioning of the labor market could be
handled more easily under conditions of expanded over-all activity.
This is undoubtedly true. The Board of Governors of the Federal
Reserve System is and has been pursuing a monetary policy which has
as one of its major aims the maximum utilization of our growing
industrial and manpower resources.
The opposite side of the coin also has validity.
It would,
under current conditions, be much easier to achieve maximum enployment
with a relatively stable price level, if we were able to remove
limitations which handicap the reaciy flow of the unemployed worker
into useful job opportunities. Such action would unquestionably help
prevent inflationary pressures developing short of our desired goals.
The threat of inflation and the inadequacy of broad monetary and
fiscal policies to curtail unemployment which is selective or structural
in nature have been major obstacles to the reduction of persistent
unemployment.
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-3Measures continue to be required to reshape and increase
the mobility of certain groups ih the labor force. These conclusions
are not new but have been frequently stated by a large majority of
those in labor, management and Government who have expressed opinions
on this subject in recent months/* (See attachment)
If we take the appropriate measures based on the broad
consensus which now exists on policies to be directed toward the
elimination of the causes of persistent unemployment, rather than
to overplay differences of emphasis of measurements and definitions,
we could well be on our way toward reaching our goals of full employment and price stability simultaneously.
Evidence of substantial structural shifts in occupations
and industries in recent years has been extensively reported to the
Joint Economic Committee, and many other committees of Congress.
Mr. Ewan Clague, the Commissioner of Labor Statistics, only recently,
and in considerable detail, gave testimony to the Subcommittee on
Economic Statistics on December 18, l?6l, to the effect that "In
recent years there has been a dramatic shift in the pattern of employment in the United States." These shifts have resulted in a substantial
rise in persistent unemployment in the postwar period evident in both
good and bad times.
Of course, changes in the structure of industry and occupations
are nothing new. "What is new in the recent situation is the large
absolute decline in employment since 19^3 of almost 3 million industrial
blue-collar workers; while employment in services, trade and Government,
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Federal Reserve Bank of St. Louis
c
-Itmostly white-collar groups, rose by 7 million.
There has not been
as large and as absolute a displacement of workers in industrial
employment or a shift awsy from blue-collar employment at any other
periods of our history when over-all employment was rising.
Mining and railroad employment began to decline soon after
the end of World War II and in manufacturing industries the decline
became evident after 1953.
By early 1962 production worker employment
had declined by over 2 million workers or one-sixth although manufacturing output rose about one-fifth.
Immediately after the Korean hostilities it was thought that
the decline in factory onployment was temporary and mainly due to the
curtailment in defense industries.
There was, therefore, little
general concern in the sharp expansionary period in 1955 and 1956
when factory worker employment failed to return to the previous
postwar highs of 1953 and unemployment among vrorkers from these
industries increased.
Nonindustrial employment was rising very rapidly,
and was accompanied by one of the sharpest increases in the civilian
labor force for a two-year span on record, as workers entered the
labor market to fill the new white-collar job opportunities.
But
when in the recovery period of 1959 and I960, the unemployment rate
did not go below 5 per cent and industrial employment again fell below
prerecession 1957 levels, there was more widespread recognition and
concern of the significance of the selective declines in employment
which were so heavily concentrated among certain semiskilled and
unskilled occupations in an exceedingly important sector of the economy.
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Federal Reserve Bank of St. Louis
It was the judgment of many informed observers the forces making
for higher unemployment could not be wholly explained by an insufficiency of ag^re^-ate demand.
In 1959, consumer demands were
high and the economy was being excessively stimulated, by a rapid
run-up in inventories before the steel strike, and again in early
I960 when inventories were being replenished.
The employment patterns of recession and recovery obvious
since 195\3 seem to be repeating themselves again this year.
In
Februar3r 1962, although industrial production and GKP were at about
the highest levels in history, following a vigorous recovery, there
were 600,000 fewer factory workers employed than when the recession
began in the spring of I960.
A critical aspect in measuring the magnitude of structural
unemployment is to know what has happened, on net, to the over 2 million
production workers who were displaced in manufacturing; activities
between 195>3 and 1962. This is impossible to answer accurately at
present because our current statistics primarily give us a crosssectional view of the labor force and unemployment at a given point
in time. We would know much more about the various causes of unemployment if we were able to trace the flow of displaced workers as they
moved into other jobs, unemployment, or outside the labor force.
This
can now be done only in a veiy indirect way.
The decline in industrial employment, as best we can tell,
has resulted in a substantial rise in unemployment among experienced
workers who were previously employed in factories and related activities
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Federal Reserve Bank of St. Louis
c
-6as well as some withdrawal from the labor force.
Because of their
specialized skills^ previous experience, and geographical location,
only a small proportion of these workers have been readily absorbed
into the expanding industries.
The available statistics do show that
characteristics and employability of workers released from the declining
inchistries is substantially different from the new entrants and reentrants into the labor market.
They have been mainly adult males,
a hiph proportion of whom are heads of families and were formerly
employed in semiskilled occupations.
Once unemployed their spells of
unemployment tend to be relatively long.
Secretary of Labor Goldberg, in his testimony before the
Joint Economic Committee on January 31* 1962, pointed out that the
long-term unemployed were concentrated in several groups out of
proportion to their number in the labor force.
In l°6l the long-term
unemployed, those unemployed 15 weeks or more, averaged l.f> million
and was the largest number in over 2 decades.
The problem involves,
he testified:
"1.
Ken Li5 years of age and over who represented 1/3 of
the very long-term unemployed, even though they accounted for only
1/U of the total labor force.
"2.
Workers from durable foods industries accounted for
lL$ of the labor force and 2$% of the long-term unemployed.
"3.
Negroes accounted for 2.1$ of persons jobless for over
six months and only 11^ of the civilian labor force.
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Federal Reserve Bank of St. Louis
-7-
"ii.
Semiskilled operators and unskilled laborers represented
l£% of the very long-term unemployed compared to only 2i$ of the labor
force.
In contrast, professional workers made up less than 3% of the
very long-term unemployed even though they account for 11$ of the
labor force.
"5.
Persons with no previous work experience, who accounted
for less than IP of the civilian labor force, made up 9$ of the
persons looking for work for over six months.
These were chiefly
young workers in search of their first job."
"^e growth in the number of workers reporting long duration
of unemployment, and the fact that the hardest hit have been unskilled
and semiskilled males in the middle age groups, indicated by the
Secretary of Labor, confirm other findings that those who were displaced
because of structurrJL factor? have had a more difficult time in
adjusting to new employment opportunities.
They have contributed
significantly to the rising levels of long-term unemployment in recent
years.
Their job needs as heads of families and their limitations in
making a rapid transition to new skill?; or different geographical areas
has resulted in real hardship. Measures to reduce unemployment in
these proups is esneciallj- urgent.
There has also been an increase in recent years in unemployment
of workers who report that their last job was in nonindustrial activities,
In part this is a statistical classification problem.
lifelong
A worker whose
or major experience has been in a declining industry will,
nevertheless, be classified as unemployed in, say, trades and services
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Federal Reserve Bank of St. Louis
-8-
if that was the industry in which he held his last job, even if it
were only of short duration or part-time job.
The greatest cause of unemployment, aside from layoffs in
declining industries, appears to have been the rapid rise in the
number of new entrants or re-entrants into the labor force in recent
years.
These unemployed are more diffuse in origin and not as
concentrated geographically.
An important distinction is that the
characteristics of these unemployed in respect to ape, sex, skill,
educational background and duration of unemployment is substantially
different from those whose loss of jobs can be related to structural
factors.
The unemployed who are associated with the expanding industries
tend to consist mainly of secondary workers; mainly youths and married
women, many of whom supplement family income.
They may have had some
work experience but their spells of unemployment are relatively short.
If they fail to find jobs, they are likely to withdraw from the labor
market.
They almost always seek work in nonincbstrial activities
such as trade or services which employ persons with entirely different
occupational and demographic characteristics than those of the laidoff factory workers.
Recent analysis of labor force movements indicate there are
large potential resources of manpower now classified outside the labor
force.
Knowledge of the complex relationships between changes in
output, labor force and unemployment are uncertain.
It is entirely
possible, under present labor market conditions, for any increase in
demand for labor, more than cyclical in nature, to be largely met by a
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Federal Reserve Bank of St. Louis
-9-
flow of persons into the labor force rather than in a reduction in
high levels of persistent unemployment.
It is therefore a mistake
to think there are simple or precise solutions of oizr persistent
unemployment problems.
Our best judgment continues to be that structural unemployment
has increased over the last decade as reflected in the sharp decline in
industrial employment and an increase in persistent unemployment which
has not been responsive to general monetaiy and fiscal measures even
during periods of high level of activity and rising prices.
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Federal Reserve Bank of St. Louis
The Report of the Conrission on Iloney and Credit, Prentice-Hall, Inc.,
1551, pp. 27,-29-30, 3F7~
"Despite the wealth of detail available on the characteristics
of the unemployed, there are no reliable ways of determining from current
figures how many are unemployed ae a result of which cause. . . .
"What is the prospect for future levels of unemployment?
Unfortunately the trend of unemployment has not been improving. Not
only were unemployment rates higher in 195>9 and early I960 than in
earlier recovery periods, but the proportion of long-duration unemployment has been higher. This long-duration unemployment continues to be
serious in depressed areas, and it has become more widespread. Technological displacement of workers in manufacturing and agriculture has
been heavy, and the total number of jobs in those sectors as a percentage
of total employment has been decreasing.
"Two factors of special importance may make more difficult
the achievement of low-level unemployment in the decade ahead. First,
the expected rate of growth in the labor force increases sharply in
the sixties, compared to the fifties, as the population bulge reaches
the employable age. Many more jobs per year will be required to keep
the unemployment rate low. Second, the pace of technological change,
typified by the term automation, shows no sign of abating; on the
contrary it may be increasing. Mi ether technological change will
create new job opportunities as rapidly as it displaces other workers
is not predictable. In addition, there are the problems of obsolete
skills of some workers and resistances to labor mobility flowing
from such things as nontransferable pensions and labor union restrictions on entry into some occupations.
"The employment problem ahead is formidable. It calls for
effective use of monetary, credit, and fiscal policies to induce adequate
levels of demand and to stimulate economic growth. It also requires
new and imaginative programs to deal directly with structural unemployment'—programs for distressed areas, education and training of new and
displaced workers, an improved job information service. Action is also
needed to ease the burdens of the technologically, unemployed lest
restrictive work practices develop which will inhibit productivity gains.
"Measures which improve the efficiency of labor will also
contribute to growth. Incentives for advancement in income and job
responsibility, effective employment services, retraining programs for
workers displaced by technological change, programs to help move
workers from depressed areas and industries into others, policies to
move marginal farm workers into more productive nonfarm employment,
elimination of redundant workers—all are measures that have favorable
effects upon the growth rate."
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Federal Reserve Bank of St. Louis
President's Advisory Committee on Labor-Fanag orient Policy3 January 11,
1962, pp. 2-3.
"While advancing technology has given rise to new industries
and jobs, it has also resulted in employee displacement; the fact
that new work opportunities are eventually created is no comfort or
help to the displaced individual who cannot, for one reason or another,
secure comDarable or any employment. . . .
"Regarding technological advance in unemployment, it is
clear that unemployment has resulted from displacement due to automation
and technology. It is impossible, with presently available data, to
isolate that portion of present unemployment resulting from these
causes. Whether such displacement will be short-run depends to a
considerable extent on our ability to anticipate and plan for programs
involving technological change and to make better use of various
mechanisms for retraining and relocating workers who find themselves
unneeded in their former occuoations."
Ewan Clague, Commissioner of Labor Statistics, Testimony before the
Subcommittee on Economic Statistics, Joint Economic Committee,
D ec emb er 6, 1961.
"Some analysts believe that the current high rate of
unemployment is entirely a function of inadequate aggregate demand.
This analysis discounts the apparent uptrend in unemployment rates
at the end of World War II to about 19^6 and places all the emphasis
on the rise in unemployment that has occurred in the last U years. . ,
"The other point of view is that structural changes which
have taken place in recent years have had some influence in causing
higher rates of unemployment. In my judgment, this is a factor which
cannot be ignored."
Arthur J. Goldberg, Secretary of Labor, Testimony before Joint Economic
Committee, January 31, 1962.
"Again, to say that we can put all of our people to work in
useful and satisfying activities only or mainly by upsetting our
monetary system, or by massive intervention of the government into
the millions of free decisions which are the basic essence of our
economic system—to say these things is to demonstrate a lack of
understanding of our dynamic system. We do not advocate growth for
growth's sake, nor can we advocate stability for stability's sake.
¥e need both.
."
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Federal Reserve Bank of St. Louis
-3Stanley Ruttenberg, Research Director, .AFL-CIO, Paper presented at
the Annual Meetings of the American Statistical Association,
December 29, 1951.
"It is unfortunate that the problem of our persistent high
levels of unemployment has been framed by some very well-intentioned
people on an 'either-or1 basis—that is, that our problem is one of
aggregate demand rather than structural unemployment. In my view,
it is not 'elther-or'; it is both*
"To achieve full employment we mast simultaneously increase
aggregate demand and address ourselves to the structural problems.
Neither one alone will attain our objective in the years immediately
ahead."
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
-
/ i-
, /Utc-«^/<.,-6 A- -•
• '
19 mz
Memorable Bright I
Chairman, ^oirst Economic Committee,
fcew Senate OfXlce Building,
i £5, B. C,
I «f*p««r®d l»^®r« .roar Conadttee
the racent hearing* on the J-residant's »5cono»ic He;>ortj
I vas ask«d to smppj^ for th« us* of th«
oa two ssibjeets. The flrat, r«qtiested
, related to the achmntagas and ciisa^hra&t&jiae of
exehanga rates In International finnnce* ?h«
aecond, r«qt»i»t«d by S®natcsr Frcooaira, r«lat«d to
t
staff la pr®p«r4ag ti^ two
if atid tls«y will be famished as 80cm «s
as I tiRdarst«Rd this trsmseript of the rwcor^ of th«
is about to go to press* th«^ will not be eo»~
ia tJUa* to be ii*cl*Kl«d in th« printed record of
the
'(Signed) Wm. McC. Martin, Jr?
. Martin, <lr.
This article is protected by copyright and has been removed.
Article Title:
Cure for Unemployment
Journal Title:
The Washington Daily News
Date:
February 3, 1962
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Federal Reserve Bank of St. Louis
Representative Boiling. Mr. Martin, the reason for this question is sheer ignorance and the purpose is information.
There is no
other purpose to this. At the bottom of page 10 you say "The Stabilization Fund has acquired holdings of some major European countries, and
undertaken transactions in the market with the aim of defending the
dollar from speculative forays11.
On page 11, the third paragraph says "As one step in such cooperation, the System is now prepared in principle and in accordance," et cetera.
I would like to know what kind of transactions in the market with
the aim of defending the dollar they are. What kind of transaction is it?
What happens?
hr. Martin. I think it has to be looked at on an ad hoc basis*
I want to make it clear, Mr. Boiling, that the Federal Reserve is not
anxious to engage in this type of activity. It is only because we feel
we have a responsibility* With convertible currencies as they are today,
currency values—including that of the dollar—are more subject than for
a long time to speculative movements. I used here a term that 1 happen to
like, forays. If we held some of these currencies (and the amounts and
variation in them Would have to be on an ad hoc basis), we might be able,
by disposing of the currencies, to minimize or offset these temporary speculative movements. The Treasury Stabilization Fund has experimented with
this kind of operation since March of this year, in a very small way, and
we have come to the view that however we should acquire these currencies—
*U
and it is not possible to spell out here—what we are aiming our activities
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Federal Reserve Bank of St. Louis
-2-
at it to keep the speculators from unseating us, to try to atinlnite speculative movements. We would need to operate in a variety of ways. But we
have resources in addition to what the Stabilization Fund has. We do not
claim that this is going to correct our basic deficit. You will notice I
went out of my way to state that.
Representative Boiling. I understand, but I mean exactly what I
said at the beginning.
1 do not understand how this works. 1 do not want
you to say anything you should not say, but I want to know what you do,
within the bounds of what you should or should not say.
Mr. Martin. Well, we could open an account with some foreign central
bank and hold in that account either pounds, lire, franks, or other currencies, depending on the circumstances. That would put us in a position to
dispose of them if there was a sudden need for them. That is a simple type
of operation. Another possibility would be for us to make reciprocal currency
transactions with foreign central banks; in the language of the street, these
are Ncurrency swaps". Last March and April the pound sterling had quite a
problem at the time of the re-evaluation of the guilder and deutschmark. There
were a lot of movements and the central banks did cooperate at that time to
minimize the impact of that in a variety of ways. I do not think you can
spell out in advance precisely what you might do, nor ought we to spell out
magnitudes for this type of operation because we are operating in a goldfish bowl. We would report what we do in our Federal Reserve statements
from time to time but we ought not to be indicating ahead of them what the
limits are or what we are going to do. If you do that, then you are inviting
the speculator to take advantage of your operations.
Representative Boiling* I think that answers my question. I Just
wanted to be sure that I understood. Thank you.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
Faaxaaryi. IH2.
Daar Mr. Canaarom:
Taaak you for yoar aic« lattor of
February 4 an* 1 mm always ptaa»ad I* accadc
to roojaaats lor coplaa of my atatamavU,
aapa taay win »ror« «aaJai.
H wa* good lo Ttatt wiik
1 will took lorward to taa aaxl aoo«r tmaity to 4o
•o.
Wita all 9004 vtaaos.
CordiaUy yo«ra.
Warn. UeC. MartU, Jr.
Mr* A. H. Caxnaron,
ii Toaf « Stroot,
I.
SArNDEHS CAMKRON UMITK1)
F I F T Y - F I V E YONGE STREET
TORONTO I . C A N A D A
E M P I R E 6-8601
February 6, 1962
Mr. Wm. McC. Martin, Jr.
Chairman
Board of G o v e r n o r s
of the
F e d e r a l R e s e r v e System
Washington, D. C.
Dear Mr. Martin:
Thank you for your letter of January 31.
also like to tell you how much I enjoyed our visit.
I would
I would like to ask a favor of you -- would it
be possible to have someone send me six (6) copies of your
testimony b e f o r e the Joint Economic Committee on January 30.
It has long been my contention that our rotten
long term bond market in Canada results in large part from the
domination in the volume of trading by the activities of the Central
Bank for it's own account and for government funds.
We are going to have a Royal Commission going
into a number of matters and 1 thought your remarks of this date ,
following on a departure from the old "Bills p r e f e r a b l y " policy,
could be used to supplement the papers written by Winfield
R i e f l e r in November, 1958, and Ralph Young and Charles Yager
in August, I 9 6 0 .
Thanking you, I am
AHCameron
/mfo
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Federal Reserve Bank of St. Louis
Airmail
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Federal Reserve Bank of St. Louis
February 8, if62.
Pear Jean:
I was sorry you got away before we
could have our dinner and Cyntaia loo was
sorry to miss you. However* I 414 write our
mutual friend, Jacques Rueif , and I had bees
hoping to vis it witti boffc him aad you the
tatter part of tfais mootb in Paris, Unfortunately, I now fi@£ 1 can't gel away at this
juncture so will have to p oat pone this pleasure taetU a later date.
1 thought you might be Interested
te my testimony before tae Jotet ^coaumic
Committee, particularly the references to
foreign exchange, $o am enclosing a copy.
Cordially yours,
Wat. McC. Martia, Jr.
Enclosures
Mr, Jean Mormet,
$S Avemiie Focb,
Paris KVle, Fraaee.
WRIGHT PATMAN, TEX., CHAIRMAN
RICHARD BOLLING, MO.
HALE BOGGS, LA.
JL
HENRY S. REUSS, WIS.
MARTHA W. GRIFFITHS, MICH.
THOMAS B. CURTIS, MO.
CLARENCE E. KILBURN, N.Y.
WILLIAM B. WIDNALL, N.J.
U\
f\\\ftV t>
titi
XL-U 1 111 V V jJ5J
WM. SUMMERS JOHNSON,
EXECUT.VE DIRE=TOR
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Federal Reserve Bank of St. Louis
- _
^
fif
f ft
fr
flfltttffrn
Ul
i l| V
^illlltU
ttStfftf^ff
eQ'Idl V23
JOINT ECONOMIC COMMITTEE
PAUL H. DOUGLAS, ILL., VICE CHAIRMAN
JOHN SPARKMAN, ALA.
J. W. FULBR1GHT, ARK.
WILLIAM PROXMIRE, WIS.
CLAIBORNE PELL, R.I.
PRESCOTT BUSH, CONN.
JOHN MARSHALL BUTLER, MD.
JACOB K. JAV1TS, N.Y.
JOHN w. LEHMAN, DEPUTY EXECUTIVE
(CREATED PURSUANT TO SEC. 5(a) OF PUBLIC LAW 304. 79TH CONGRESS)
DIRECTOR AND CLERK
January 19, 1962
Mr. William McChesney Martin, Chairman
Board of Governors
Federal Reserve Board
Washington 25, D. C.
Dear Mr. Martin:
Enclosed is a copy of the Committee's full
agenda of the hearings on the President's Economic
Report.
We shall be looking forward to hearing your
testimony.
Sincerely,
0
i
Wm. Summers John
Executive Director
Johnson - 5171
FOR RELEASE
MONDAY NOON, JANUARY 22, 1962
CONGRESS OF THE UNITED STATES
JOINT ECONOMIC COMMITTEE
Representative Wright Patman (D., Texas), Chairman of the Joint
Economic Committee, today announced the Committee's schedule of hearings on
the President's Economic Report as follows:
SCHEDULE OF HEARINGS ON THE
ECONOMIC REPORT OF THE PRESIDENT - 1962
**Jan. 25 (Thurs.) 10:00 A.M.
A.M.
Council of Economic Advisers
*Jan. 26 (Fri.)
10:00
*Jan. 30 (Tues.)
10:00 A.M.
2:00 P.M.
Secretary of the Treasury
Chairman, Federal Reserve Board
*Jan. 31 (Wed.)
10:00 A,M.
2:00 P.M.
Secretary of Lib or
Secretary of Health, Education and Welfare
**Feb. 1 (Thurs.)
10:00 A.M.
Secretary of Commerce
*Feb. 2 (Fri.)
10:00 A.M.
A panel of economists on "Wages and Prices^:
Prof. Otto" Eckstein, Harvard University
Prof. Ben William Lewis, Oberlin College
Dr. Gardiner C. Means, Economic Consultant,
Vienna, Va.
*Feb. 5 (Mon.)
10:00 A.M.
A panel of economists on "Fiscal and Monetary
Policies":
Dr. Edward M. Bernstein, Edward M. Bernstein
Associates, Washington, D. C.
Prof. John G. Gurley, Stanford University
Prof. Richard A. Mis grave, Princeton
University
Prof. Raymond J. Saulnier, Barnard College,
Columbia University
A panel of economists on " v t m s
and Growth" :
Dr. Gerhard Colm, National Planning
Association, Washington, D, C.
Prof. Raymond W. Goldsmith, Yale University
Prof. Daniel Hamberg, University of Buffalo
Dr. Leon H. Keyserling, Conference on
Economic Progress, Washington, D. C.
2:00 P.M.
Director, Bureau of the Budget
** - Room 1202, New Senate Office Building
* - Room P-63, Capitol Building, Old Supreme Court Chamber
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(MORE)
- 2*Feb. 6 (Tues.)
10:00 A.M.
*Feb. 7 (Wed.)
9:30 A.M.
2:00 P.M.
**Feb. 8 (Thurs.)
10:00 A.M.
A "Summary" panel of economists:
Prof. Alvin H. Hansen^ Visiting Professor,
Yale University
Prof. Theodore W. Schultz, University of
Chicago
Prof. Henry C. Wallich, Yale University
National Association of Manufacturers
Chamber of Commerce
Committee for Economic Development (CED)
AFL-CIO
American Farm Bureau Federation
National Grange
Farmers Union
** - Room 1202, New Senate Office Building
* - Room P-63, Capitol Building, Old Supreme Court Chamber
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Federal Reserve Bank of St. Louis
** *
Johnson - 5171
PL.. RELEASE
MONDAY NOON, JANUARY 22, 1962
CONGRESS OF TBE UNITED STATES
JOINT ECONOMIC COMMITTEE
Representative Wright Patman (D., Texas), Chairman of the Joint
Economic Committee, today announced the Committee's schedule of hearings on
the President's Economic Report as follows:
SCHEDULE OF HEARINGS ON THE
ECONOMIC REPORT OF THE PRESIDENT - 1962
**Jan. 25 (Thurs.) 10:00 A.M.
Council of Economic Advisers
*Jan. 26 (Fri.)
10:00 A.M.
Director, Bureau of the Budget
*Jan. 30 (Tues.)
10:00 A.M.
2:00 P.M.
Secretary of the Treasury
Chairman, Federal Reserve Board
*Jan. 31 (Wed.)
10:00 A.M.
2:00 P.M.
Secretary of Labor
Secretary of Health, Education and Welfare
**Feb. 1 (Thurs.)
10:00 A.M.
Secretary of Commerce
*Feb. 2 (Fri.)
10:00 A.M.
A panel of economists on "Wages and Prices":
Prof. Otto Eckstein, Harvard University
Prof. Ben William Lewis, Oberlin College
Dr. Gardiner C. Means, Economic Consultant,
Vienna, Va.
*Feb. 5 (Mon.)
10:00 A.M.
A panel of economists on "Fiscal and Monetary
Policies":
Dr. Edward M. Bernstein, Edward M. Bernstein
Associates, Washington, D. C.
Prof. John G. Gurley, Stanford University
Prof. Richard A. Misgrave, Princeton
University
Prof. Raymond J. Saulnier, Barnard College,
Columbia University
A panel of economists on "Investment and Growth":
Dr. Gerhard Colm, National Planning
Association, Washington, D. C.
Prof. Raymond W. Goldsmith, Yale University
Prof. Daniel Hamberg, University of Buffalo
Dr. Leon H. Keyserling, Conference on
Economic Progress, Washington, D. C.
2:00 P.M.
** - Room 1202, New Senate Office Building
* - Room P-63, Capitol Building, Old Supreme Court Chamber
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(MORE)
- 2*Feb. 6 (Tues.)
10:00 A.M.
*Feb. 7 (Wed.)
9:30 A.M.
National Association of Manufacturers
Chamber of Commerce
Committee for Economic Development (CED)
2:00 P.M.
AFL-CIO
**Feb. 8 (Thurs.)
10:00 A.M.
A "Summary" panel of economists:
Prof. Alvin H. Eansen, Visiting Professor,
Yale University
Prof. Theodore W. Schultz, University of
Chicago
Prof. Henry C. Wallich, Yale University
American Farm Bureau Federation
National Grange
Farmers Union
** - Room 1202, New Senate Office Building
* - Room P-63, Capitol Building, Old Supreme Court Chamber
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Article Title:
Add Dillon: Treasury Secretary Dillon Hinted to Congress That
the Administration Would not Oppose an Increase in the Federal
Reserve System-s Discount Rate if Necessary to Halt a Further
Flow of Gold and Dollars Abroad
Journal Title:
Dow Jones Ticker
Date:
January 30, 1962
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Federal Reserve Bank of St. Louis
i'ebrusry 6, 1962
To
Chairman Msrtin
From Robert Le Cardon
subject: iestimorty of rroiesccr
John G. Gurley before Joint
Economic Committee on February 5
In view of the frequent assertions that the recent changes
in Regulation Q will raise interest rates, members of the Board may be
interested in the following extract from testimony by Professor John G.
Gurley, of Stanford University, before the Joint Economic Committee on
yesterday morning:
"-x- # -x- My feeling is that this will not have much upward pressure on the general level of interest rates, and
it might even tend to lower interest rates on the average.
"If the extra demand for time deposits is at the expense of the demand for money holdings—checking deposits
and currency—then there will develop an excess demand for
prime securities, for bonds and other types of primary debt,
because commercial banks will have additional excess reserves
to demand primary securities, without there being an extra
desire by anyone else to sell securities. The excess demand
for securities would tend to lower the general level of
interest rates.
"However, if the additional demand for time deposits
is at the expense of the public's demand for primary securities
themselves., or for claims on other financial institutions, the
extra demand for these securities by commercial banks will be
more than offset by an additional support of securities coming
either directly from the public or from financial institutions
which have suffered withdrawals of funds. This would tend to
raise the general level of interest rates.
"But it can be shown that, for every dollar involved,
this latter effect is significantly smaller than the former
one, so that if the funds going into time deposits come
fairly evenly from money balances, primary securities, and
claims on other financial institutions, the net effect is
very likely to be downward pressure on interest rates
generally or at least little effect one way or the other.
"Moreover, if the funds going into time deposits represent
an increase in planned saving, further downward pressure will
be exerted on interest rates generally.
"It might well be that savings and loan associations and
other financial institutions will raise their deposit rates.
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"Some already have. One effect of this, however, is to
increase the probability that funds flowing into time
deposits come from money balances which earn no interest
at all, in which case interest rates on securities would
tend to fall,
"It is also possible that commercial banks and other
lenders will raise interest rates on certain types of loans
which are negotiated in monopolistic markets. If so, the
likely net effect, considering all the factors I have
mentioned, is some change in the structure of interest rates
without much, if any change in the general average of interest ra.tes."
cc: Each Board Member
Messrs. loung, Thomas, Molony, Fauver, Knipe, Sherman,
Noyes, and Hackley.
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Federal Reserve Bank of St. Louis
February 5, 1962
Subject: Hearings before Joint
Economic Committee on the President's
Economic Report.
The Joint Economic Committee this morning heard from
a panel of four economists, discussing fiscal and monetary
policies. One point in the discussion may be of special interest to the Board of Governors*
Professor Raymond J. Saulnier registered "dismay" at
the proposal in the President's Economic Report to synchronize
the term of office of the Chairman of the Board of Governors
with that of the President. His formal statement contains the
following comments on this proposal:
"The principle that should guide us in these
matters is that our central banking system should
be in the hands of men who are both technically competent and who will perform their vitally important
duties without reference to political considerations.
I believe the present arrangement affords greater
assurance of achieving these ends than would the
arrangement which the president desires. Under our
system of government the President heads a political
party and he is pledged to give effect to a political
program adopted in a party convention. How could a nonpolitical administration of our central banking functions be maintained under a system which would virtually guarantee a change in the Chairmanship with
every change in the Presidency and would time this
change so as to occur in the atmosphere of our most
partisan political discussion. Speaking quite
respectfully, I must say that this would be a very
great mistake."
cc: Each Board Member
Messrs. Young, Thomas, Molony, Fauver, Knipe, and Sherman
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Federal Reserve Bank of St. Louis
January 31, 1962
To
Chairman Martin
From
Robert L. Ca
Subject: Testimony of Secretary
of Labor Goldberg before the
Joint Economic Committee on the
President!s Economic Report,
this morning.
SecretarjK f?oldberg departed from text to appeal for an
early settlement of f^gotiation/ between management and labor in
steel, ahead of expirlnkpnjl^fce of/current contract. He welcomed
union's decision to call Joiicy"committee together early next week
and Mr. Blough!s statement yesterday that he was ready to cooperate.
He emphasized early settlement is vital to avoid inventory accumulation and purchases of steel from foreign sources. He pointed out
that foreign producers may agree to supply steel only if U* S» steel
users agree to long-term purchase contracts.
Secretary Goldberg also emphasized labor's interest in
price stability (see also pp. 6 and 7 of attached statement) and
appealed for "statesmanship" in the steel negotiations.
In response to questions from Senator Javits, Secretary
Goldberg said he felt the atmosphere is now conducive to settlement
without a strike.
The formal statement (on page 19) also contains the following comment, which may particularly interest Board members:
"Again, to say that we can put all of our people to
work in useful and satisfying activities only or mainly
by upsetting our monetary^system, or by massive intervention of the government' into the millions of free
decisions which are the basic essence of our economic
system—to say these things is to demonstrate a lack of
understanding of our dynamic system,"
cc: Each Board Hember
Messrs„ Young, Thomas, Molony, Fauver, Knipe, Noyes, and Sherman
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Federal Reserve Bank of St. Louis
January 26a 1962
To
Chairman Martin
From
Robert L. Cardon
Subject: Testimony of Budget Director
Bell before Joint Economic Committee
on January 26.
1. Monetary Policy. In discussing whether the modest surplus in the budget submitted for fiscal 1963 might "pinch off" the
current recovery, Mr. Bell gave two reasons why he does not believe
this will happen. His first reason was that the shift from a budget
deficit to a budget surplus will not be as sharp as in the recovery
from the 1958 recession. His second reason was: "there is no reason
to expect the sharp change towards a tight money policy that took
place in the last expansion. With the good record on price stability
so far in this recovery, and with the absence of any indication of an
early resumption of inflationary pressures, the monetary authorities,
within the constraints imposed by balance of payments considerations,
should be in a better position to continue their policy of monetary
ease than they have been in previous postwar recoveries."
Chairman Patman referred to the portion of the statement
quoted 1 above after Mr. Bell had finished his presentation. Chairman
Patman s reaction was that the best reason for not expecting a return
to a tight money policy is that we are already following a tight money
policy, tighter even than in the Eisenhower Administration. As evidence,
he cited figures showing both short-term and long-term interest rates
higher than in certain periods of the Eisenhower Administration.
Mr. Bell differed with this conclusion, saying that monetary policy
"continues to be one of relative ease".
2. Balance of Payments. Senator Bush asked Mr. Bell whether
the precarious balance in the proposed new budget might not contribute
to our balance of payments difficulties. Mr, Bell answered that confidence in our economic policies rests not so much on whether we have
a big budget surplus as on whether we are following policies leading
to reasonably full employment and price stability. Senator Douglas
took the position that our balance of payments difficulty can be solved
by persuading the other developed countries to carry a bigger share of
defense costs and foreign aid and by persuading the wealthy classes in
underdeveloped countries of Latin America to assume their proper share
of the responsibility for developing their own countries. He expressed
the hope that "international bankers" would persuade their own governments to meet these responsibilities rather than11 wringing their hands"
over our economic policies.
3. Unemployment. Senator Proxmire again developed his
position that we should not rely too heavily on fiscal policy to solve
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our unemployment problems. Mr. Bell agreed that we cannot simply rely
on increased Government spending to lower the unemployment rate and
indicated that measures tailored specifically to meet! unemployment^
such as the Area Redevelopment Act and the President s proposals on
training programs., are the best solutions to the problem,.
k» Regulation Q. Senator Sparkman again expressed concern
over whether the recent change in Regulation Q, relating to the interest
ceiling on time and savings deposits, will have an adverse effect on
home building. iur0 Bell pointed out that it had not yst resulted in
increased mortgage rates and expressed the hope that the continued
availability of mortgage funds would operate to keep mortgage rates from
going up. Senator Sparkman indicated he did not mean to be critical of
the change in Regulation Q but urged Mr. Bell to watch the situation
carefully^ and Mr. Bell agreed to do so.
cc: Each Board Member
Messrs. Thomas, Young, Molony, Fauver, Knipe, Sherman, and Noyas
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Federal Reserve Bank of St. Louis
January 26, 1962
To
Chairman Martin
From
Robert L. Garden
Subject: Questioning of Council
of Economic Advisers by Joint
Economic Committee at afternoon
session on January 25 o
!• M22£l^ZJ?22^£Z». Congressman Patmsn cited figures from
Table B-l|7 in the Annual Report of the Council of Economic Advisers to
show that yields on AAA corporate bonds rose from 3*20 in 1953 to 3*60
in 1955, to 3o89 in 1957, to ii,Ul in I960, and dipped slightly to ii<»35
in 196l» He asked how the Council could conclude that an easy money
policy was in effect in 1961 with interest rates remaining so high.
Mr* Tcbin answered that the availability of bank reserves made conditions ^relatively easy" and that expectations of inflation tended to
hold interest rates up. He indicated that thes3 expectations are being
dissipated and he hopes that this will tend either to lower long-term
rates or at least to prevent a rise as the recovery quickens.
Senator Proxnire used several arguments to support the conclusion that monetary policy is still too restrictive. He contrasted the
3-1/2 per cent increase in the money supply between I960 and 1961 vith
the 8 per cent increase in gross national product. He was prepared to
concede that a 3-1/2 per cent increase in the money supply would correspondent roughtly with proper long-term growth rate and that therefore
monetary policy was neutral f.?om a long-range standpoint, but he argued
that it was actually restrictive from the short-range point of view
during the recovery in 1961. He also argued that interest rates have
stayed high and that this is a common-sense teat of whether monetary
policy is too restrictive,, He also argued that, in evaluating the
porlfolio ofthe Federal Reserve Banks from the standpoint of whether
purchases of longer-term obligations were made in a degree sufficient
to permit reductions in long-term rates while maintaining relatively
high short-term rates3 a comparison should be made of holdings of
five years and over rather than one year and over. He alleged that a
comparison on that basis would show that the System has not been "going
all out" to achieve the greatest possible degree of monetary ease consistent with our balance of payments situation. All of these arguments
were directed at the basic proposition that Senator Proxmire is-MBM/IT
prepared to support attempts to achieve economic growth through fiscal
policy unless he is convinced that monetary policy is being fully
utilised to accomplish this purpose,
2. Taxation of Savings and Loan Associations. Congressman
Patman indicated that the proposals to change the tax treatment of
savings and loan associations is an effort of the commercial banks to
destroy institutions which fill a social need that the banks, themselves, have failed to meet* He said that savings and loans are at a
competitive disadvantage with banks in that savings and loans must maintain in effect a 100 per cent reserve and that they cannot create the
money they lend, as can banks. Mr. Tobin disagreed on these two points.
Congressman Patman, however, asked the Council to consider the desirability of prohibiting commercial banks from making real estate loans and
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Federal Reserve Bank of St. Louis
-2indicated that he cannot understand the reasoning which apparently has
led the Administration to help the banks in their effort to "muscle in"
on the savings and loans. Chairman Heller indicated that he expected
the savings and loan associations will continue to be the most important
source of funds for housing and should not be :rshielded from competition".
Senator Bush argued with the proposition that individual commercial banks can create money and sought to correct the impression that
the banking system, as a whole, can create money beyond the limits established by the Government through tho Federal Reserve System's control
over bank reserves. This generated a discussion of whether banks should
be permitted to hold Ua S, obligations, with Senator Bush taking the
position that it would seriously hurt the marketing of these obligations
if the banks did not take them, Mr. Tobin saying that this was not
necessarily the case, and Congressman Patman contending that banks
should be prohibited outright from buying obligations with "money they
create", Congressman Patman suggested that the Federal Reserve Banks
should buy the obligations instead of member banks0
In the course of this discussion, Congressman Patman again
advocated repealing the prohibition against commercial banks paying
interest on demand deposits, and Mr, Tobin indicated there might be some
merit in Congressman Patman1s suggestion.
3» Presidej^^^j^de^^ro^rjiTU Senator Pell asked whether the
brief discussion of thel trade adjustment program in the Economic Report
and in Chairman Heller s statement indicated any feeling that the program was not of major importance, Chairman Heller said5 "No", that
this was just done in the belief that the President's message to
Congress (transmitted on January 25) would be a better place to explain
the program.
Congressman Curtis warned that we must be careful not to bargain for mutual tariff concessions only to discover that they may be
rendered meaningless by the imposition of trade quotas. He feels the
President's message failed to make this clear.
U. Balance of Payments> Senator Bush indicated he considers
our balance of payments problem to be of "overriding importance", more
important than balancing the budget. He pressed Chairman Heller for
estimates of our balance of payments and our trade balance in 1962.
Chairman Heller and Mr. Gordon indicated they are making every effort to
develop reasonable forecasts but held out no hope of achieving accurate
forecasts very soon. Mr. Gordon did express the view that one factor
operating to improve our margin of exports over imports will be improvement in our price levels compared with those of our principal competitors.
He feels that ours have been stable since 1958,-while our competitors1
have been going up.
cc: Each Board Member
Messrs. Thomas, Young, Molony, Fauver, Knipe, Sherman, and Noyes
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Federal Reserve Bank of St. Louis
Jrnunry 25, 1962
i'o
Chairman Martin
From Robert L. Cardon
Subject: Testimony of Council of
Economic Advisers before Joint
Economic Committee this morning
on Presidents Economic Report
1. Monetary Policy. Two features of Chairman Heller's statement, itself, may be worth noting. First, on page 2 and on page 8,
monetary policy is treated as part of the Administration1s program, rather
than as an independent function of the Board. Secondly, the statement
appears on page 6 that "Since the stimulus of rising government expenditure
will be moderate and declining, government monetary and credit policies
can appropriately maintain conditions favorable to private borrowing and
spending."
Senator Douglas asked Chairman Heller what plans the Administration has in reserve to deal with unemployment in case the forecasts in
the Economic Report for economic recovery are not realized. Chairman
Heller replied that the Administration has no secret weapon up its
sleeve but will rely on the usual tools available, citing, as an example,
a policy of monetary ease. When Senator Douglas asked whether the
Federal Reserve Board had contributed to monetary ease in 1961, Chairman
Heller answered, "Yes," that this had been done by holding free reserves
at a level of ^500 million and by open market purchases throughout the
maturity range.
Senator Douglas commented that the success in achieving price
stability in 1961 indicated that many people hold unreasonable fears about
inflationary effects of monetary policy.
Amendment to Regulation Q. Senator Sparkman expressed concern
about the recent change in Regulation Q, increasing the maximum permissible interest rates on time and savings deposits. He said that he had
heard that many savings and loan associations are raising their dividend
rates as a result of this change, particularly on the West Coast, and
he asked Chairman Heller whether this would not result in a general increase in mortgage rates, with a consequent adverse affect on housing.
Chairman Heller replied that the change should stimulate savings, that
there is some indication that commercial banks which are paying higher
rates on time and savings deposits are more aggressively moving into
mortgage loans, and that this will tend to maintain stability in mortgage rates. He pointed out that some economic choices are hard to
make and that one factor in this change was the necessity for trying to
retain foreign balances in commercial banks. He expressed the hope that
this aim can be harmonized with the goal of maintaining a strong housing industry, and he agreed, at Senator Sparkman's request, to watch the
situation carefully as it develops*
Congressman Widnall later asked whether the change in Regulation Q would not hurt the sale of Government bonds. Chairman Heller
replied that this would not necessarily result in any over-all increase
in interest rates, that all it did was to narrow the gap between rates
paid by savings and loan associations and commercial banks.
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-2Presidentts Trade Programa Senator Bush asked whether any
reciprocal cuts in tariffs by the European Common Market and the
United States would hurt our balance of payments situation by stimulating imports into the United States. Chairman Heller replied that he
felt that reciprocal reductions would boost our exports more than our
imports, Mr. Kermit Gordon added that, if we do nothing, the discrimination against United States1 experts into the Common Market will steadily
increase,as their external tariff would remain static while their internal
tariffs went steadily down. He said, also, that, if nothing is done,
United States1 manufacturers would enter the European Common Market
through direct investment rather than through exports,
Amendment to Employment Act of 19U6, Senator Bush asked
Chairman Heller whether he would favor amending the Employment Act of
19U6 so as to specify price stability as a national goal. Chairman
Heller replied that he felt that the importance of achieving price
stability is implicit in the Act and that amendment is not necessaryj
that he would neither oppose it nor endorse it*
Congressman Boiling later said that he was "restraining kirnself" from pushing an amendment to specify economic growth as a goal and
asked Chairman Heller if he felt that was also implicit in the Act, and
Chairman Heller replied that he did0
The hearings recessed to resume at 2 P.M> Of course, this
memorandum is not intended to cover everything that was said this
morning but Just those points that seerr..-d of particular interest to
the Boardo
cc: Each Board Member
Messrso Thomas, Young, Colony, Fauver, Kni,je., Sherman, Noyesj,
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Federal Reserve Bank of St. Louis
CEXECUTIVE OFFICE OF THE PRESIDED!
(
COUHCIL OP ECONOMIC ADVISERS
WASHINGTON, Do C.
FOR RELEASE
THURSDAY
JANUARY 25, 1962
STATEMENT OF WALTER W. HSLtER^ CHAIRMAN
ACCOMPANIED BJf
KERMIT GORDON AND JAMES TOKEN, MEMBERS
BEFORE
TEE JOINT ECONOMIC COMMITTEE
January 25, 1962
In testifying on the Administration's first Annual Economic Report,
I should perhaps open with a few words on its approach and composition
— what the President's Report and the Council's Report are trying to do
and say. You vUl have noted that the report has been split into two
separate parts. This follows essentially the practice of the early 1950!a
in contrast with the single Presidential report in recent years« The two
parts are:
lo The President*s Report; This is a broadsweep statement
of econoaic policy* performance, prospects, potential, and
program — a report by President Kennedy to the Congress
in compliance with the requirements of Section 3 of the
Baployment Act of 19^6» In it, the President spells out
in considerable detail his legislative recommendations in
the field of economic policy.
2o The Council*s Report; This is a searching — but we hope
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ff/O
not forbiddaa -- examination of the rationale of this
Administration's economic policy — its factual, philosophical, and analytical foundations, its accomplishments to date,
its expectations, and Its complex challenges for the future.
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Jfy brief opening statement is designed, not to summarize the two
Reports, but to focus the Committee's attention on a few of the principal
facts and issues which shape economic prospects and policies in 1962«
Recovery in 1961
A year ago, the economy was still in the grip of its second recession
in three years. Nearly 7 percent of our labor force and 20 percent of
our industrial capacity were idle. Actual output was running about $50
billion -» or ID percent — short of the economy's potential* The case
for expansionary policy measures was clear and compelling*
To provide stimulus and substance for the recovery, the Administration early in 196l; (l) successfully sought the cooperation of Congress in
enacting legislation to expand purchasing power and create jobs; (2) accelerated Federal orders and payments on a vide front; (3) pursued policies to
ease money and credit; and (4) followed an expansionary budget policy«
With this well-timed and forceful support from Government policy, the
UaSo econoay again demonstrated its resiliency in a vigorous recovery. By
the end of the year, new records were set in production and incone (all
figures at annual rates):
1, from a recession low of $501 billion in the first quarter,
gross national product rose to $5&2 billion in the fourth
quarter* Inventories, government purchases, and fixed investment (including residential construction) each rose by
$3 billion; consumer expenditures rose by $13 billion; only
net exports fell (by $1 billion).
2. The industrial production index (1957*100) rose from 1D2.1
in February to 115.2 in December.
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3» Per capita disposable income rose from $19^*0 in the first
quarter to $2032 in the fourth, crossing the $2000 mark
for the first time*
40 Wages and salaries and other labor inccme increased from
$28l billion in the first quarter to Just over $300 billion
in the fourth.
5<> Profits before taxes increased frcm $39°6 billion in the
first quarter to an estimated $50-billion-plus in the fourth»
60 Farm inccme (operators8 net income frcm farming) increased
from $02*0 billicai in 1960 to $13.1 billion in 1961, an
average rise of nearly $350 &i net inccme per farm*
The seasonally adjusted rate of unemployment fell from 6.8 percent in
February to 6.1 percent in December, and the number of areas of substantial
labor surplus, from 101 in Maxch to 60 in December (out of a total of 150 )0
Prices, over-all, remained remarkably stable for a period of vigorous
recovery-> For the first time in any postvar recovery wholesale prices
fell (by 0»7 percent) In the first 10 months of recovery* The consumer
price index rose only 0»6 percent frcm February to November.
Finally, confidence in the dollar was restored0 In 1961, the over-all
deficit in our international accounts was cut by about one-third frcm 1960fs
level of $3=9 billion, and the deficit in basic international transactions
was cut by about two-thirds» GoM losses of $1«7 billion in I960 were cut
in half in 1961*
The Unfinished Business of Economic Policy
Yet, satisfaction with our progress to date is tempered with concern
over the important unfinished business of economic policy»
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First, recovery has carried the economy only part of the way to the
Employment Act's goal of "maxliagn production, employment, and purchasing
power*" Even at $5^2 billion, production is still 5 percent below the
economy's potential; unemployment is intolerably higi; and the Nation's
purchasing power, or real income, falls correspondingly short• A recovery
that carries the economy to full employment and cuts deeply into the bitter
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'core of depressed areas and displaced workers — at the same time continuing
to maintain reasonable price stability — is the first order of business of
economic policy. Indeed, it is the indispensable first step toward our
ot&er economic objectives«
Second, beyond full, recovery lies the recurrent risk of recession»
Tb& uncomfortable facts of economic history bear witness: our postwar
record — though incomparably better than that of the 1930 *s — has been
marred by four recessions, three of them in the brief span of seven years.
More than $200 billion of potential output has been lost in our postwar
recessions. fb avoid such losses in the 1960*s and beyond — to keep
recessions short and shallow if they occur — the President has called for
stand-by programs of accelerated capital improvements and temporary income
tax cuts and a strengthened unemployment compensation system.
2hird, while moving toward full and sustained use of the economy's
present productive capacity, we must also take other steps to expand its
future potential* The rate of growth of the U.S» economy in recent years
has lagged not only behind its early postwar pace but behind the growth
of the world's other major industrial countries. We must make the 1960*s
a decade of faster economic growth so that we may improve the quality of
life at home and meet our responsibilities of leadership abroad. A growth
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rate exceeding k percent will be needed in the I960e a merely to absorb into
effective employment the net additions to our labor force. A rate of fr~
percent lies vithin the reach of private and public policy in this decade.
^^^^^^••^•••^••••SMMHVHH^B^Hi^^^^^
Fourth, persistent international payments deficits and gold outflows
hare brought the balance of payments to the forefront of economic policy.
We must attain a balance in our international transactions vhich enables us
to meet our heavy obligations abroad without continued depletion of our gold
reserves. Siaiultaneously, we must continue to reduce barriers to international traide and increase the flow of resources from developed to developing countries.
Full recoirery without inflation; stronger defenses against future
recession; faster growth; balance-of-payments equilibrium and further trade
liberalisation — achieved with equity and "in a manner calculated to foster
and promote free competitive enterprise and the general welfare," as the
Employment Act wisely requires — these are the guideposts of Wf economic
policy for 1962.
Tbe Prospect for 1962
We look for a further strong economic advance in 1962.
Expansion in
the first half of the year, supported by inventory accumulation and rising
government expenditures, should be sustained after the middle of the year
by a quickening pace of business plant and equipment investment. Unemployment will fall, and profits and labor incomes will rise, as the economy
narrows the gap of unused capacity. The year 1962 should see a GNP of
$570 billion — a $50 billion gain over 1961.
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Policy and Progrcia in 1962
Economic recovery to date has been strong, and the outlook is favorable.
But to achieve the goals of full recovery, growth, and balance in international payments, the United States ficonflmy ru^eds (l) more demand now arid
more stable demand in the years ahead, (H) mon? investment, and (3) continued
price stability* In the rest of my statement, I atoll eacaeiine the broad
outlines of economic policy and program i'or 19&? in terms of these- thre<r
requirements. Specific recrmmendations to carry out this policy and program
are listed in the attached summary; "legislative proposals in the gconoiBic
Report of the President*"
1. The United States economy needs mure- dtaaond nov and more stable
demand in the years ahead * Today business needs mum orders, and worker*
more job opportunities. Both plant capacity and labor are available to
produce more goods and services if only tli
customers uilling ond_
able to buy themo In the next eighteen months, an expansion of about 10
percent in total demand will be needed if vc nre to close today's gap in
our economic performance and catch up with -I?
ccn'jmy's ever-tprowii^
capacity to produce«
For this expansion ve can and must, oi' courBc-, rely principally
on consumers and business firms. But it j., tb:- task of government flocal
and monetary policy to support and facilitate t.tiv ^jtpanslon of private
demand., Federal expenditures \rill in ere:•-.'.*
"ratoly, though at a slo\;e*r
pace than in the early phases of recovery. IThii. ±3 appropriate becuw
the very momentum of the upswing now gives private demand greater strength,
Since the stimulus of rising government earpei! :i i \ ui^ will be moderate and
declining^ government monetary and credit polit-j.-« can appropriately maintain
conditions favorable to private borrowing one spending.
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- TEbcpanslon of production beyond the current recovery requires more
than the expansion of demand» Bie econon^'c capacity to produce rauat "be
enlarged, by investment and other measures to Increase productivity* Yet
demand must grow too, roughly keeping tr nt^p with the growth of potential
output — neither outpacing it to cause inflation nor lagging "behind it to
cause recession and unemploymento This is the long-run tack of public
policy for economic stabilization- In our viev, it is in present eiretzastances consistent with this criterion to nln at. &. moderate surplus in
the Federal budget when the economy is operating at full potential,
It is not easy to steer the middle course of stability between too
rapid and too slov expansion of demand* Ir; our free economy fluctuations
in private spending are bound to oeeur.. Ib <:>iT8«t these swings, or even
to arrest and reverse them before they bee--»n*? cunulative, fiscal and. noncrtary
policy must be prompt and flexible. The P-rt»?^irtent has made threw pro;
cf the greatest importance to the future sVibility of the economy: (l) a
stand«l?y program of public capital improven»rits to conbat urvesiploymmit,
(2) a procedure for temporary partialffimt>.*;^ionof inRome ttucsi* to buttress
private purchasing power -when recession threatens, and (3) p^rmaiiant
strengthening of unemployment insurance
(See items 1-1, 1-2, and 1-3 of
the attached summary; "Legislative Propooal.3 in the Sconomic_ Jfe^ort of the
President*") Ihe gains from greater stability ->f the economy ar<$ not aitaply
the production and employment vhlch voulcl otl' -^wiso be lost in re'jessions,
great as these losses are* Instability r
.w?rs future growtJrt by
dulling incentives lor investing in new and more efficient capacity.
2. Hhe Ifaited States ecoaomv :>eedg RV^TX* invegtcient^ Private investment in plant and equipment in 1962 is a key element in the economic outlo'jk
— for full recovery, for economic growth, for improvement in the balance
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c.
.8 -
c
of payments. That is why major policies and proposals of the Administration
axe_designed to stimulate divestment: enactment of the proposed tax credit
for new investment in equipment with an effective date of January 1, 1962
{.Item IV-1 of the "Legislative Proposals"); revision of the Treasury's
guidelines for depreciation for tax purposes; and maintenance of monetary
and credit conditions favorable to the finojicing of investment»
(a) Full recovery.. To the saving of individuals from higher personal
incomes and of corporations from increased profits, the Federal Government
in fiscal 1963 will add a surplus of &-1/2 billion in its budget on national
income account. At full employment this surplus would be doubled. E&pansion
in 196e toward full employment in mid-1963 win require sufficient strength
in investment demand to use the saving which higher personal, business, and
government incomes will generate.
Of the $50 billion increase in GKP projected for calendar year 1962
over 196l, about half will be purchased by consumers and another fifth by
Federal, State, and local governments. The remaining 30 percent will be
available for increased Investment in inventories, housing, p.lant and equipment, and the like* An expansion of fixed investment outlays will be
particularly important in the second half of 19&2y when inventory building
and Federal expenditure are expected to be contributing less to growth
of demand than in the first half of the year.
Recovery itself will powerfully increase incentives for investment,
by whittling away at excess capacity arid by d<3snou3trating the profitability
of new capacity in a fuHy operating econceay* At the same time, positive
policy is essential to assure that the high potential saving of the economy
is used in productive investment, no wasted in incomplete recovery and
prolonged unemployment. If such policy is successfully adopted, the curror.t
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- 9-
r
recovery will pave the way for a higher trend rate of economic growth
over the years ahead.
(b) Economic growth. Once our idle manpower, machinery, and plant
are drawn fully into productive use, growth of production will depend upon
growth in our capacity to produce. We will need an expanding stock of plant
and equipment to give a rapidly growing labor force the tools to do their
Jobs* Indeed we will need more than that. Fbster growth in per capita
income requires faster growth in the prcxiuctivity of labor. This requires
not only more, but better, machinery and equipment to embody in industrial
practice the fruits of research and development • And it demands that we
provide the improved general education and specific training of our youth,
and of many adults, which will equip them for the jobs that technological
advance makes available, {items III-l, III-2, and V-3 of the "Legislative
Proposals")0 Without investment in h\*nan talent, investments in technological
progress and physical facilities cannot yield their full potential return
to the Ration*
(c) Improvement in the balance of payments. The United States must
pay its way in the world by earning in international competition a large
enough trade surplus to meet our overseas commitments and capital investments. We can earn the required trade surplus only if our products are
competitive in price and in quality.
Rapid advance in productivity is the
ultimate key. Research and investment can keep our products in the vanguard
of the technological race, and keep our costs at levels which enable our
firms to compete while real wages in the United States steadily advance.
But our balance of payments position will be damaged if our productivity
lags, or if the competitive advantage which gains in productivity might
yield is dissipated in excessive increases of money costs.
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At present the balance between investment overseas and investment at
home is tipped too heavily in favor of foreign investment. One source of
this imbalance has been the contrast between excess capacity and correspondingly low profits at home and stistnin<?d rapid economic growth abroad. Pull
recovery in the United States will go far to correct this source of Imbalance.
The Administration's tax proposals and the new trade program are designed
to overcome other handicaps which investment at home has been suffering in
relation to investment in Europe. {Items IV-7 aiid V~2 of the "Legislative
Proposals.")
3» The United States economy needs continued price stability. The
price record of the current recovery is so for excellent. Demand and
production are increasing at a rate which is narrowing the gap of unused
potential, without giving rise to bottlenecks, specific shortages, and
upward pressures on prices and costs. The budget is appropriately paced
for an orderly expansion, with time for the economy's reserves of industrial
capacity and manpower to respond to the pattern of rising demands. If
private demands should, contrary to expectation, threaten to outrun the
capacity of the economy to meet them, monetary and fiscal policies can
and will hold the expansion within reasonable speed limits. The Administration's programs of area redevelopment., manpower training and development,
and youth employment opportunities will help to avert specific bottlenecks
and shortages, by trying to provide in advance plant capacity and skilled
labor to do the jobs which an expanding economy will require, (items XII-1
and UI-2 of the "Legislative Proposals „ ')
In a free economy, the course of the price level depends not only
on government policy but also on the decisions and negotiations of business
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Federal Reserve Bank of St. Louis
- 11 firms and labor unions« tCne President has repeatedly asked that these
decisions and negotiations give full weight to the national interest
in price stability* Success in stepping up productivity and maintaining
price stability can clear the path for solving our balance-of-payments
problem in the fraoevork of an ea^andiug *«onony and capitalizing on the
great opportunities and benefits of full recovery and economic growth .
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- •
TKB COTJCIL OF BOOIOHXC
January 25> 1962
Legislative Proposals in the Economic Report of the President
I. Strengthening Our Defenses Againat Recession
1. Provide stand-by authority for the President to make temporary
(six months) reductions of up to a maximal of 5 percentage points in all
individual ineoaas tax rates, subject to Congressional veto.
2. Provide stand-l^y authority for the President to initiate and
accelerate up to $2 billion of spending on capital improvements--Federal,
State, and local--such a\ithority to be ^triggered" by persistent and
substantial increases in the imffimployment rate*
3* Strengthen the messployment insurance system by providing for an
extended benefit period for experienced workers at all times and for all
worker® in timeig of high uaeisqployzaent. by providing incentives to States
to increase benefits, by extending coverage to three million additional
workers, aod other measures.
II* Strengthening the Financial Sygtem
1. Revise the tena® of the officers and members of the Board of
Governors of the Federal Reserve System, so that the four-year term of
the Chairman vill coincide with that of the President, so that the terms
of members begin and end in odd years instead of even years.
2» Baise salaries of members of the Board of Governors of the Federal
Reserve System*
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•2 3* Bepsal the Acts relating to silver of June 19, 193k* July 6,
1939, and July 31* 19^6, thus freeing the Treasury from asy obligation
to support the price of silver.
k. Repeal the 50 percent tax on transfers of interest in silver$ thus
fostering orderly price movesaent© by encouraging the establishment of a
futtiressaitet la silver.
5- Authorize the Federal Reserve Syst^a to issua Federal Reserve
Hot@@ in ^snomiimtioss of $1, thus making possible the gsmdual withdzuval
of sillier certificates in tlia <lencmi3&tiozi@ of $1 and $2 and the us® for
coinage pwp^sas of the silver tb^r^lsy released.
III. Str@agtl^niag our ^apoiiar
1. Provide federal aid for training and retraining of unes^ploysd
vorksrs. (Paaeage of proposed ^lanpo^tr Development and Training Act.}
2, Establish pilot programs© to expand eioploynient opportynitie® for
youtig people^ iaclMing training, ®Bs>l®^aent in public eewiee Job0^ and
eiaploymgot in a ne^ly established Yowfefe Conservation Corp®* (Passage of
proposed loveth S&DloQpiaat Opportunities Act).
3* Saerssse apps^priatioa for tb© U.S» ®s^>loym^it Service/ to enable
that agency to better fulfill its function of Batching available Jobs
and workers«
4.
the Welfare and Pension Plans Disclosure Act so as (a) to
provide a60quat© penalties for embegslemeat and (b) to vest ajithority ia a
rssposusibla Federal ageney t© enforce the statute by issuing binding zssgulatl&QSf prascribissg uniform reporting forms, and investigatins violation®.
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- 3-
I?. Strengthening Otar %ax System
1. Provide a tax credit equal to 3 percent of
investment in
eligible s&chinery sad equipmaat, thus et imitating investment in capacity
expansion and modernisation by redueiBg the net coet of acquiring new
equipment.
2.
dividend and interest imcoms subject to withholding.
3. Bepsal the $50 divi&snd exclusion sad the k percent dividend credit.
k-, Bevise tax treatment of business d&diactions £©r entertainment* gift©^
and oth^r e^peases, to stop abuses of n®spease-accou«t l£ring.n
5« Ellmijaat® the specSjal tsac prefe^sacs for capital gaiae from the sals
of depreciable property, real sad personal.
6. Biisa0wg isi^irraEtsd tax preference* to (a) eoopsratives, (b) micbual
fire and sasi^slty laeumaee cosrpaaies, aad (c) mutual saving? l^isk® and
saviags aM loan associations.
7« Kevise tex treatment of ffesraigpa iaeos®, to
im-yarrassted
incentives to the export of capital.
8. Ikteud the corpon^te iocoiQe tax aad certain eEcise taxes for another
3?©a3* Iss^oad Jim© 30# 19^2> a2£cep^ that certain taaces
to the
re^itad
of airways and vateniays stosld be revised BO that users of
these faciiiti©® carry a larger shs^re of the costs.
V. Ot^r jggi@le.tive Action Urped,ia the Ecenoiaic Bg^gft
1. ^act eaabliBg legislation for U* S. participation in that recent
asraa^aat sas©Bg tan imjor industrial countries to leBd specified aioounts of
their currencies to the SsteraatioBal ^Disstary Fund ifhea necessary to cope
with or forestall pressures ^nieh say liapair the inteniatiozml monetary
-•-. •"• • .
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2. Enact new trade legislation to facilitate negotiation of
reciprocal tariff reductions vith the European Comoon Market.
3-
Provide Federal aid to education, including assistance to States
for provision of more adequate public school facilities and higher teachers'
salaries and — at the higher education level — loans for construction of
facilities and for scholarships to able students who need help.
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TREASURY DEPARTMENT
Washington
FOR RELEASE ON DELIVERY
STATEMENT QP THE HONORABLE DOUGLAS DILLON
SECRETARY OP THE TREASURY
BEFORE THE
JOINT ECONOMIC COMMITTEE
TUESDAY, JANUARY 30, 1962, 10:00 A.M.,EST.
Mister Chairman and Committee Members:
The past twelve months have been an active, and I think
fruitful, period In terras of our economic policy.
In*many ways,
remarkable progress has been evident. Nevertheless, urgent
problems remain.
I am grateful for this opportunity to review with
you today both our recent experience and our plans for meeting the
needs of the future.
Progress and Problems
Last year began-in recession, but closed with output and
income at new record highs. The personal hardship and economic
waste of unemployment were reduced. Nearly a million workers
were added to non-farm payrolls.
Industry, while working longer
hours at higher pay, is also earning greater profits. And, while
providing a higher standard of living for our citizens, we have
strengthened our military defenses and contributed further to
the economic progress of other, less fortunate nations.
This progress was achieved within a context of general price
stability.
On that solid base, exports reached a record volume,
contributing to a significant reduction in our basic balance of
payments deficit. At the same time, defenses against potentially
disturbing short-term capital movements are being greatly reinforced
As a result, confidence in the dollar has been strengthened.
D-376
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.
However, the economy is still operating well below its full
potential. Our growth rate over recent years has hardly been
satisfactory. Unemployment is still at an unacceptably high level.
The deficit in our international accounts, while smaller, remains
troublesome. And, the very progress of the past year, not only in
this country but in other parts of the free world, has brought with
it new problems to which we must find solutions.
Financial Policies in 1961
There is no single, easy explanation for our progress during
1961.
A large part of the answer lies in the natural vitality
of our type of market economy operating under conditions of overall price stability — the fundamental prerequisite for all our
attempts to achieve faster growth at home while simultaneously
working toward a sustainable balance in our international accounts.
That price stability, in turn, can be traced primarily to sharp
gains in industrial efficiency and worker productivity as output
expanded from its recession level — gains that enabled industry
to pay higher wages and to increase profits without raising prices.
Government policy supplied another large part of the answer.
Flrat, there was the psychological, but nonetheless real,
reaction that flowed from President Kennedy's earliest
statements and programs.
At home, the President's clear intent to
deal with the recession promptly and effectively helped restore
confidence in the economic outlook, encouraging expanded investment
and spending.
Similarly, the President's expressed determination
to maintain the strength of the dollar internationally without
resort to protection, controls, and restraints met with a prompt
response. The speculative capital outflow subsided and the gold
drain was sharply reduced.
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'
-3-
This positive approach entailed, under the particular
circumstances then prevailing, acceptance of a sizable budgetary
deficit — which was further enlarged by the higher levels of
defense spending called for by the Berlin crisis. At a time when
human and industrial resources were readily available to expand
output, the rising trend of Government outlays and the consequent
deficit were important factors in speeding the recovery without
creating pressures on the price structure.
The stimulating effects of the budget were reinforced by
monetary and credit policies. Throughout the past year, the credit
markets have had ample funds to meet the combined demands,of
businesses, individuals, and the various levels of government —
thus facilitating a revival in capital outlays, higher levels of
home building, and steady progress toward meeting the accumulated
needs of local governments. In sharp contrast to other recovery
periods since World War II, lending rates have held almost steady,
particularly in the long-term area. Both corporations and state and
local governments can still raise funds at virtually the same cost
as a year ago. Mortgage rates, after declining in the early part
of 196l, have been substantially unchanged since last spring.
This stability was particularly striking in a year when the total
funds raised in the capital markets by corporations, homebuye'rs, and state and local governments, reached a new all-time
peak.
All this was accomplished without permitting rates for
short-term money market instruments to drop to the extremely low
levels characteristic of earlier periods of easy money and
recession. That was a significant achievement, for short-term
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-u-
%
rates, while leas important in influencing investment activity at
home, can play a critical role in directing the flow of liquid
capital between the financial centers of the world. Here, Treasury
debt management policy, as well as greater flexibility in the
day-to-day conduct of open market operations, was an important
factor*
Working in close cooperation with the Federal Reserve, the
Treasury, in financing the deficit, increased the outstanding
total of securities maturing within a year by more than $10 billion.
At the same time, there was no shortening of the average maturity
of the marketable public debt, largely as a result of the
continued use of the "advance refunding" technique.
This type of
financing involves the exchange of outstanding Issues for longer
maturities, with a minimum impact on market conditions and flows
of funds into productive investment.
This combination of a budgetary deficit with flexible monetary
and debt management policies, carefully attuned to the realities
of the balance of payments as well as domestic needs, was
appropriate both in terms of magnitude and timing. The extremes
of the 1958 recession — when the deficit reached nearly
$12-1/2 billion and interest rates dropped sharply, only to surge
abruptly higher as recovery started — were successfully avoided.
Financial policies were stimulating without being inflationary;
the threat of disturbing short-term capital outflows was
ameliorated.
fashion.
Moreover, business expansion has proceeded in orderly
Today, signs of the sort of excesses that breed
instability and require sudden changes in policy are notable for
their absence.
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Federal Reserve Bank of St. Louis
- 5> Our Basic Goals
This does not mean, of course, that all the policies
appropriate to the past twelve months are suitable for meeting the
challenges of 1962.
With recovery largely completed, the domestic
focus must now be on maintaining forward momentum while guarding
i
against inflationary pressures as our resources are more fully
utilized. Confidence in the dollar has been maintained.
To
sustain that confidence, further progress toward a long-run
equilibrium in our basic International accounts is a necessity.
Our fundamental objectives — domestic growth and a payments
balance — must be pursued together, within the framework of free
t
markets. All Administration policy is pointed toward that end.
We reject policies that presume irreconcilable conflict between our
objectives;, policies
that attach sole priority to growth, or
sacrifice growth to external equilibrium.
These purported solutions
are both unacceptable and unworkable in a world in which our
capacity to grow is being challenged and our allies in freedom need
the strength and stability assured by a solid dollar.
Success in reaching our twin objectives will require hard
decisions, not only by those who shape the financial policies of
Government, but also by those who set price and wage policies for
management and labor.
A Balanced Budget
The President's Budget Message is a financial reflection of our
national needs and priorities.
Expenditures will rise moderately in
fiscal 1963, almost entirely because of defense needs and despite
painstaking elimination of non-essential spending, both military and
civilian. These expenditures can and should be supported by a growing economy.
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In the light of past experience and current trends, the
- 6projections of a further rise in the Gross National Product to
$570 billion in 1962 that underlie the revenue estimates are entirely
reasonable.
Without raising tax rates an advance of this sort will
generate revenues slightly larger than expenditures. Under the
economic conditions we foresee, the achievement of such a balance is
highly important in avoiding inflationary pressures as the economy
moves closer to its full potential.
One result of this budget will be to reduce the possibility of
severe strains on the- monetary system as the economy expands —
strains that could bring sharp and sudden increases in interest
rates and unsettling market reactions that impede the flow of
savings into productive investment.
In 1956 and 1957* and
particularly in 1959* strains of this sort appeared to be
developing at a time when too much of the burden of maintaining
balanced growth and curbing excesses was thrust upon the monetary
authorities.
Monetary policy is an essential and powerful tool
for facilitating appropriate adjustments in the economy. But
unless it is supported by appropriate budgetary policy, the results
can be capricious and unpredictable, contributing too little to
either stability or growth.
The Debt Ceiling
The President's recent request to raise the temporary debt
limit to $308 billion is the result of an unavoidable
concentration of revenues in the final half of fiscal 19^3 — a
concentration that stems largely from the normal recurring
seasonal pattern of tax receipts. Borrowing of about $9 billion
will be necessary between the end of this fiscal year and the
principal tax payment dates in fiscal 19&3 — even though the
budget for the fiscal year as a whole is balanced. Moreover,
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Federal Reserve Bank of St. Louis
- 7while we anticipate that the total debt on June 30 of this year
will be somewhat lower than the current figure of over
$297-1/2 billion, prompt enactment of an increased ceiling is
needed to restore some margin for flexibility and unforeseen
4
contingencies — a margin that has been virtually exhausted by the
higher defense expenditures required to meet the Berlin crisis,
which developed after the enactment of the current limit of
$293 billion.
Measures to Encourage Investment
A balanced budget in times of relative prosperity means that
the Federal government on an overall basis does not draw on the
t
national flow of savings available for investment. Thus a balanced
budget in these circumstances promotes the flow of private
investment.
Why is an increase in such investment so important to us today?
At the heart of the matter is the fact that it makes possible
greater productive efficiency.
Gains in efficiency are necessary
for growth at home, for price stability, and for aggressive
penetration of foreign markets.
Thus, increased investment is the
key to achieving our major objectives —growth and external
balance — simultaneously in the years ahead. And, this is where
the American economy has fallen furthest behind in recent years.
Since the mid '50's investment in capital equipment in the
United States has averaged less than 6 percent of the Gross National
Product as compared to about 7 percent during the earlier postwar
years.
By contrast, German investment has been averaging about
12 percent of G.N.P. during recent years, French
i between 8 and
9 percent, and the Common Market countries as a group about
10 percent. It is not a coincidence that these countries have been
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- 8growing by roughly 5 percent per year, while generally maintaining
a strong external payments position.
Nor is it mere happenstance
that some other countries, where productive investment has been a
relatively small proportion of G.N.P.,have had to cope with
relatively slow growth and recurrent payments difficulties.
Certainly growth alone, or larger investment by itself, is
no guarantee of external balance. But foreign experience
strongly suggests that our twin objectives can be not only
compatible, but mutually reinforcing.
In our economy, Investment in plant and equipment is properly
the province of private businesses, individually responding to
the profit motive and competitive pressures by increasing*
production efficiencies and seeking out new markets. The
Government nevertheless has an essential role to play in maintaining
an economic climate that will encourage and facilitate the investment process.
I have mentioned the role of budcetary policy in this regard.
But a balanced budget alone cannot meet cur urgent need to
increase our rate of Investment in productive capital equipment.
It is also vitally important that our tax system should recognize
the need to accelerate the modernization of our physical plant
and equipment.
This is why the Administration has attached first priority,
among tax reform measures, to the investment credit and the
related revision in depreciation schedules. The first steps
toward depreciation reform have already been taken with the new
depreciation allowance guidelines for most of the textile industry.
Revisions in guidelines for other industries will be announced
this spring.
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Federal Reserve Bank of St. Louis
- 9Based on exhaustive statistical and engineering studies,
these administrative actions, consistent with the present law,
recognize past experience and practices as well as the impact of
technological advances and other factors on the economic life of
plant and equipment. They will provide a much more realistic basis
for taxation, and will stimulate business modernization and
expansion. They can not alone, however, assure the necessary flow
of funds into new productive facilities, nor will they place
American firms on an equal footing with their competitors abroad,
where special incentive allowances are commonplace.
To achieve
this, revision of depreciation guidelines must be accompanied by
the proposed Investment credit. These coordinated reforms go
together and should not be separated.
In enacting the investment credit,we must also recognize the
need to avoid a loss of revenue that could jeopardize the prospects
fa?a vigorous recovery with stable prices.
It is for this
reason that the President is urging the simultaneous enactment of
tax reforms that will balance the cost of the Investment credit
and at the same time eliminate certain defects' and Inequities in
our tax structure.
Meanwhile the Treasury is continuing its intensive review of
the broad issues of tax reform, including the structure of the
personal income tax. Fundamental changes of this sort inevitably
require careful preparation, and close analysis of a welter of
detail. In the end, Congressional hearings will provide the
best assurance of a full and fair appraisal of the implications of
any basic change in the tax laws.
The President plans to submit to
the Congress later in this session a broad program of tax reform
so that this process of public scrutiny can get underway promptly,
looking to enactment of the reform in 1963.
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Federal Reserve Bank of St. Louis
Any comment now on
- 10 -
the nature of these proposals would be premature, but a thoroughgoing reform of this type will almost certainly entail some
adjustments in the basic individual tax rates.
Toward Payments Equilibrium
Tax reform to stimulate modernization of our industrial
equipment provides a foundation for other efforts to improve our
balance of payments position, including measures aimed directly at
increasing exports to the large and rapidly growing markets of
Europe and other developed countries.
The Administration is
pursuing with vigor its program to make more American businesses
aware of the opportunities in foreign markets, to familiarize those
markets with American products, and to enlarge and spee*d the flow
of information between American producers and their potential
markets. A new and comprehensive program of export credit Insurance,
undertaken by the Export-Import Bank in cooperation with private
insurance companies and banks,is now ready and will provide
simplified procedures and comprehensive risk guarantees fully
equivalent to those long available to most of our competitors
abroad.
In today's world, export markets are highly competitive.
The rapid growth and consolidation of the European Common Market,
creating a free internal market but protacted from outsiders by a
wall of uniform tariffs, poses a serious problem — but it also
presents a great opportunity. The problem is that we must assure
ourselves of access to the richest of our foreign markets — a
market to which we export almost $3-1/2 billion per year, a far"
larger amount than we import from the same area. The opportunity
lies in the mutual negotiation of lower tariffs on a reciprocal
basis for broad groups of products,at one and the same time
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- 11 expanding our export potential and forging a strong Atlantic
trading partnership.
To seize this opportunity, President Kennedy
has sent to Congress a new Trade Expansion Act.
Increased exports are, over the long run, the most effective
means of eliminating our basic balance of payments deficit in
a manner consistent with our other objectives and responsibilities.
But because of our current position, other efforts to reduce the
drains directly related to our overseas commitments must be
continued and reinforced.
One of the most important is the negotiation of arrangements
with certain of our allies to offset the dollar outflow arising
from maintaining our military forces overseas.
In addition, a
large portion of our economic assistance is being tied to
purchases In this country.
And, the proposed legislation to
equalize the impact of the corporate (income tax on business
I
operations at home and in developed countries abroad would eliminate
a special stimulus to investment in industrialized nations.
The Balance of Payments in 19^1
Although some of these measures have been in effect for only
a limited period of time and others are yet to be undertaken,
our balance of payments showed substantial improvement for 1961 as
a whole. While firm data are still not available, current
indications are that the basic deficit — the net of all our
recorded transactions except volatile short-term capital flows —
declined to roughly $6(30 million, as compared to almost $2 billion
during I960. A part of this improvement — almost $700 million —
can be credited to advance repayments by foreigners of long-term
Government loans.
Nevertheless, the Improvement in the remainder
of the basic account was substantial.
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Federal Reserve Bank of St. Louis
Preliminary figures point
- 12 -
to an overall deficit — including short-terra capital outflows —
approximating $2.5 billion, down from $3.9 billion in 19&0 and from
an average of $3.7 billion over the three years 1958-1960.
Much remains to be done before equilibrium is restored.
Some year-end figures now becoming available and tentati\e data
for the fourth quarter emphasize the need for caution.
The
over-all deficit appears to have risen to well over $1 billion in
the final quarter, considerably above the average for the first
three quarters of the year.
The Increase in the deficit from the third to fourth quarters
appears to have been entirely a matter of short-term capital
outflows — one of the most elusive items to pin down statistically,
Estimates now at hand suggest that these flows, for the ye^r as a
whole,were almost as large as in I960.
There were, however, clear and significant differences in
the character of these outflows.
In I960, reflecting some
uncertainty over the stability of the dollar, the outflow had been
in considerable part of a speculative character, and the flows were
quickly translated into a drain of gold. This disruptive
speculation qeased early in 1961. There-was, however, a continuing
outflow of short-term funds over the first three quarters of 1961,
related largely to an increase in the financing of foreign trade
by American banks.
In the fourth quarter, a further outflow from this source was
coupled with large shifts of liquid funds to foreign markets —
partly in response to interest rate differentials, and partly
related to certain quirks in the impact of domestic and foreign tax
i
treatment of earnings of American companies with operations in
Canada resulting from changes made in Canadian tax laws during the
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year.
Some shifts recorded as an outflow were apparently promptly
reinvested in the New York market by agencies of foreign banks.
This again seems to be the case particularly with Canadian banks
and their agencies. We cannot as yet pinpoint the relative weight
of all these factors. There are serious questions whether our
conventional classifications of short-term capital flows accurately
reflect their true significance for the balance of payments.
This
difficult subject is presently a matter of intensive study.
Certainly, the fact that the exchange markets have been calm for
months belies any implication that these recent outflows are a
symptom of concern about the dollar.
So does the fact that a much
i
smaller proportion of the dollars flowing abroad was converted into
gold, during 1961.
In addition early and necessarily fragmentary
data for January indicate that these unusual outflows have ceased.
Strengthening the International Monetary System
Whatever their cause, the large flows of short-term capital
since the institution, of currency convertibility by major foreign
countries provide evidence of the need to bulwark the dollar and
the whole international payments mechanism against their potentially
disturbing impact. In a world of convertible currencies and free
markets, sizable flows of liquid funds between markets can be
expected as a natural response to myriad changes in both our own and
foreign economies. The danger is that,under certain circumstances/
they may set off self-propelling speculative movements.
During the past year, we have used three approaches In dealing
with this problem:
For many months, the Treasury, operating within the framework of
the newly created Organization of Economic Cooperation and
Development, has been conducting fruitful consultations with other
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financial powers on a periodic basis. These discussions have
laid the foundation of common understanding and cooperation that
is a prerequisite for effective international action to prevent,
limit, or offset currency movements that could undermine a stable
monetary system. They have been supplemented by Federal Reserve
participation in the regular meetings of European central bankers
at Basle, and by bilateral consultations with our principal
financial partners.
The Treasury also has undertaken the purchase and sale of
foreign currencies for the first time in a generation.
These
operations helped at certain critical periods to reduce incentives
to shift funds abroad on a speculative basis or to take advantage
of temporary differentials in the exchange markets.
The Federal
Reserve has also recently decided to undertake operations in
foreign currencies, a development which we in Treasury regard as
highly promising.
Chairman Martin will be elaborating further on
this approach during his testimony this afternoon.
I look forward
to our continued cooperation with the Federal Reserve in the
international field, Just as in the domestic area.
i
Finally, and most significant for the strengthening of the
international monetary system, is the.agreement reached among ten
of the major Industrialized countries to buttress the resources
and capabilities of the International Monetary Fund by lending it
specified amounts of their own currencies when necessary to cope
with temporary stresses.
This $6 billion of standby facilities,
including almost $2-1/2 billion of European Common Market
currencies, will both reduce the likelihood of a "run" on any
member currency and provide the means to withstand the impact of
a speculative attack should one develop. The new arrangements
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will powerfully reinforce the effectiveness of the Fund, and
could be of great assistance to the United States.
Enabling
legislation will be submitted to the Congress shortly.
Economic Security and Stabilization
The President has proposed a series of measures to promote
greater economic security for all our people, to permit more of our
citizens to share fairly in the growth of the economy, and to reduce
the hardships and waste of recurrent recessions.
Aid to depressed
areas and worker retraining can help speed growth and eliminate
pockets of hardship. Broadened unemployment insurance can both
reduce personal misfortune and strengthen the "automatic stabilizers"
..
t
that have helped prevent our postwar recessions from turning into
full scale depressions.
And, a reserve shelf of public works will
strengthen our defenses against a possible future recession.
The President has also set before you a carefully devised plan
for introducing an element of flexibility Intoi our tax structure.
The measure would facilitate a timely, but temporary, reduction in
personal income tax rates, at his initiative, in the event of a
serious business downturn.
Its significance lies in the fact that
a reduction In personal tax rates could speedily give a powerful
boost to consumer spending power at critical Junctures, when delay
might permit cumulative downward forces to take hold.
Adequate
safeguards are provided, including strict limits on the amount and
duration of any such tax reduction.
This carefully circumscribed
delegation of authority to the President, always subject to
Congressional veto, would be a significant addition to our arsenal
of anti-recessionary weapons.
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- 16 The Continuing Challenge
The continuing economic challenge before us is clear: we
must fashion the most effective arrangements possible to assure
that our free economy will reach its unrivalled potential and
enable us to fulfill our responsibilities for leadership in the
free world.
In meeting that challenge, we are acting in those
areas where Government can appropriately and helpfully initiate
new programs and policies. Equally important, we have tried to
be conscious of those things Government cannot do, or that the
private sector of our economy can do better.
The essential and unique characteristic of the American
economy is the strength it derives from individual freedom for
all of us — as workers, employers, owners, and consumers.
In shaping our program for the years ahead, we are working toward
the sort of environment that will strengthen and preserve that
precious heritage.
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Federal Reserve Bank of St. Louis
oOo
EXECUTIVE OFFICE OF THE PRESIDENT
BUREAU OF THE BUDGET
Washington 25, D. C.
FOR RELEASE ON DELIVERY
Expected at 10:00 a.m.
Friday, January 26, 1962
STATEMENT OF DAVID E. BELL
DIRECTOR OF THE BUREAU OF THE BUDGET
BEFORE THE JOINT ECONOMIC COMMITTEE
ON THE BUDGET FOR FISCAL YEAR 1963
Mr. Chairman and Members of the Committee:
It is a pleasure to appear before you today to discuss with you the
budget recently transmitted by the President for fiscal 1963*
Economic basis for the budget
The balanced budget transmitted for 1963 accords with our expectations
with respect to the state of the economy. Specifically, we expect that
the expansion which has already lifted the rate of gross national product
by over $40 billion since the first quarter of calendar 196l will continue
through the current year and beyond, carrying the gross national product
during calendar 1962 to a record of $570 billion. Personal incomes are
expected to reach $M*-8 billion in calendar 1962, up $30 billion from a
year earlier, and corporate profits $56 J billion, an increase of $1OJbillion.
The increase in the gross national product from the first to the fourth
quarter of 1961 averaged well over 2^r percent per quarter.
Our assump-
tions for 1962 will be realized even if the expansion slows down to an
average quarter-to-quarter increase of 2 percent. Steady expansion at a
rate of 2 percent per quarter should bring the rate of unemployment down
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from its present rate of over 6 percent to about 1; percent by the end
of fiscal 1963.
The current budget outlook
Under the President's recommendations, budget expenditures for fiscal
1963 will increase by $3.1* billion over the level estimated for the
present fiscal year, to $92.5 billion.
TABLE 1.
(Fiscal years.
BUDGET SUMMARY
In billions of dollars)
Descriptlon
actual
estimate
estimate
Budget expenditures:
National defense ....................... 1;7.5
51.2
52.7
International affairs and finance......
2.5
2.9
3.0
Space research and technology. . . .......
.7_
1.3
2.U
Subtotal ................... ......." 50.7
55. li
58.1
Interest .................... *
..........
Domestic civil functions:
Agriculture and agricultural
resources.......i...
Natural resources..
Commerce and transportation
Housing and community development....
Health, labor, and welfare.
Education.*
Veterans benefits and services.......
General government
Subtotal, domestic civil
functions
Civilian pay reform.
Allowance for contingencies
Deduct interfund transactions
Total
Budget receipts, total
Budget surplus (+) or deficit (-)
Public debt, end of year.
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9.0
9.0
9.U
5.2
2.0
2.6
.3
iu2
.9
5.U
1.7
6.3
2.1
2.9
.5
U.7
1.1
5.6
1.9
5.8
2.3
2.5
.8
5.1
1.5
5.3
2.0
22.1^
.7
25.3
.1
.7
25. h
.2
.2
.7
81.5
77.7
89.1
82.1
92.5
93.0_
-3.9
289.0
-7.0
295.it
+.5
29U.9
c
3
More than three-quarters of the increase in budget expenditures, or
approximately $2.7 billion, is accounted for by national security and
space activities. Most of the remainder will be required for interest
charges on, the public debt.
In total, budget expenditures for civilian
programs for fiscal 1963 are virtually unchanged from fiscal 1962.
The
President is recommending increases in a number of areas, such as education and health, that will be valuable in terms of productivity of our
human resources and long-run growth of the economy. This is made
possible, with almost no increase in total civilian expenditures, by
holding down or cutting back on some less urgent outlays.
Budget receipts in fiscal 1963 are estimated to total $93 billion, an
increase of $10.9 billion over the recession-affected level of the
present fiscal year. These receipts estimates assume extension of
corporation income taxes and most excise taxes at present rates as well
as the economic expansion described above.
The administrative budget for 19&3 "thus shows a modest surplus of about
$500 million. As a result, the public debt on June 30, 1963, is
expected to be $29^.9 billion compared with $295.^ billion at the end
of the current year, furthering the decline of the outstanding debt
relative to the gross national product, which has been going on since
the end of World War II. The public debt, far from being an increasing
burden on our economy, has declined steadily from the equivalent of
about 130 percent of the GNP at the end of the fiscal year 19^6 to a
little over half the GKP at present.
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(Xrtside the administrative budget, trust fund expenditures are estimated
to increase "by about $1 billion in fiscal 1963 (Table 2 attached). The
largest increase is for benefit payments under old-age and survivors
insurance, up about $1 billion. Proposed legislation for medical care
for the aged through the social security system is not estimated to take
effect in time to affect 1963 expenditures. Regular unemployment
insurance benefits from the trust fund will decline with economic
recovery, and budget expenditures for temporary extended unemployment
compensation are terminating.
Outlays under proposed legislation for
permanent improvements in unemployment compensation, however, are estimated to begin in 1963.
Trust fund receipts for fiscal 1963 are estimated at $27.5 billion, or
approximately $3 billion more than in fiscal 1962. About two-thirds
of this increase will be accounted for by the higher collections anticipated from higher payrolls and increased tax rates for Federal old-age
and survivors insurance.
Federal accounts on the basis of the consolidated cash statement—
combining the administrative budget and trust fund programs along with
certain other Federal transactions, and eliminating intragovernmental
transactions—show an estimated increase in expenditures of $3»7 billion
and a $1^ billion increase in receipts, with an excess of receipts from
the public of $1.8 billion over payments to the public in 1963. This
compares to an excess of payments over receipts of $8.5 billion in
fiscal 1962 (Table 3 attached).
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Fiscal policy considerations
Federal receipts and expenditures on a national income account basis
are summarized in Table k (attached).
Viewing the expenditure side first, several points might be made in
assessing the impact of the 1963 budget on the economy. First, the
projected increase in total spending of just under $6 billion in fiscal
1963 follows on the increase of $9 billion expected for the current
fiscal year. Only a part of the latter increase has so far taken place.
The $15 billion increase for the two fiscal years combined, for which
expanded defense and space programs are in large part responsible,
.
represents half-again as rapid a rate of growth in Government spending
as we have had on the average over the six years preceding.
.:,
'
|
Second,
-
Federal purchases of goods and services are scheduled to rise more
rapidly than total spending, reflecting the proposed reductions in
postal and farm subsidies on the one hand and the increase in goods
bought for defense and space activities on the other.
-
- -
-
• " •
'
-
' ••;
The increase in purchases of goods and services as a percent of total
Federal spending reverses a steady downtrend that has characterized the
Federal budget ever since the end of the Korean conflict (Table 5
i
attached). While this change in the composition of Federal expenditures
is the net result of individual program decisions rather than any
•
deliberate effort to increase the fraction of the budget going into the
purchases of goods and services as such, it does have significance for
the economy. Other things being equal, purchases of goods and services
probably have a more direct impact on aggregate demand and a larger
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total economic impact per dollar of Federal outlay than other categories
of spending.
However, a greater economic impact per dollar does not necessarily mean
that the purchase of goods is the most appropriate kind of expenditure
for an anti-recession program. For such periods, as was the case in
1961, certain categories of transfer payments, such as extended unemployment benefits, may be easier to start quickly, may make their economic
impacts more promptly, and relieve hardship more directly and equitably.
•
Turning to the other side of the ledger, Federal receipts in the national
'
income accounts, since they are recorded on an accrual basis, respond
'
more promptly than receipts in the administrative budget or consolidated
cash statement to changing levels of income in the private sector.
Thus,
the rise in corporate profits tax accruals since the first quarter of
1961 has already wiped out most of the Federal deficit on a national
income basis that was occurring at the trough of the recession.
•
In national income terms, we estimate a Federal deficit of only $0.5
billion in 1962, compared to deficits of $7.0 and $8.5 billion in the
administrative budget and consolidated cash statement, respectively. For
fiscal 1963, the estimated national income surplus of $li.U billion compares with much smaller surpluses of $0.5 billion and $1.8 billion on the
administrative budget and consolidated cash bases.
I have been asked from time to time whether the switch from Federal
deficit to surplus with economic recovery will not "pinch-off" the
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1
recovery short of full employment, as is generally agreed among
economists of a variety of persuasions to have happened on the road
to recovery from the 1958 recession. We do not believe this will
happen this time, and there are two points I would like to make in
this connection. First, the turn-around in fiscal policy will not
"be as sharp as in the last recovery. The "pinch-off" in 1959 and I960
was not wholly a matter of automatic built-in stabilizers.
It also
involved a cutback in defense and other Federal spending, and increased
tax rates for gasoline and for social security payroll taxes. Administrative budget outlays fell by almost $U billion in fiscal 1960.
By
contrast, fiscal 1963 budget expenditures will be $3«^ billion higher
than in fiscal 1962.
The consolidated cash statement swung from a
deficit of $13.1 billion in fiscal 1959 to a surplus of $0.8 billion
in fiscal I960—a net change of just under $1^ billion. This time, the
total swing from deficit in 1962 to surplus in 1963 is estimated at
$10.3 billion on a consolidated cash basis.
'
Second, there is no reason to expect the sharp change towards a tight
money policy that took place in the last expansion. With the good
record on price stability so far in this recovery, and with the absence
of any indication of an early resumption of inflationary pressures, the
monetary authorities, within the constraints imposed by balance of
payments considerations, should be in a better position to continue
their policy of monetary ease than they have been in previous postwar
recoveries.
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With both fiscal and monetary actions expected to be less restrictive
on the economy in the coming year than they were during the previous
economic recovery, the 1963 budget can be characterized as expansionary without being inflationary. An increase in Federal spending
is in prospect, but the annual budget figures do imply a slowdown in
the rate of increase sometime in calendar 1962.
In addition, the
payroll tax rates under the old-age and survivors insurance program
will be increased under present law by an annual rate of approximately
$2 billion on January 1, 1963, and this will have a restraining effect
on private demand.
Although the administration is rather confident about the economic
outlook and the economic assumptions underlying the budget, we cannot
be dogmatic about such matters. The possibility of a more vigorous
or a less vigorous expansion cannot be ruled out. Perhaps the most
important factor in our confidence about the performance of the economy
in the long run is the fact that the present administration remains
alert to developing economic trends, and stands reacfcy to change its
policies when the evidence shows this is appropriate.
As you know, the President has requested three major steps to increase
the built-in stability of our economy—strengthening of the unemployment
insurance system, standby authority to initiate a temporary expansion
of public works, and standby authority to cut personal tax rates for recession periods. We do not expect a recession in the period covered by this
budget that would call for the use of these weapons. But as the
President stated, "the time to repair the roof is when the sun is
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shining."
I hope this Committee will give its wholehearted support in
setting up this new policy machinery.
The new budget document
We have received and are studying with interest the very recent staff
report of this Committee on the Federal budget as an economic document.
It is an excellent report on the data economists need to analyze issues
of public finance, and should prove helpful to us in making future
improvements in the budget document. Some of its recommendations follow
similar ideas of our own that are already incorporated in the new
document for 1963•
This administration is certainly sympathetic to the general philosophy
underlying your staff report, that the budget process must be useful
for purposes of economic analysis, as well as for budgeting in the
traditional and most important sense of assessing the proper level of
Federal expenditures to meet defense, international, and other national
needs, and of calculating revenue requirements and availability. There
is increasing recognition of what economists have long held—that the
Federal budget can and should be used for economic stabilization, and
to promote economic growth, equilibrium in our balance of international
payments, and efficient allocation of resources.
The budget document
should be a vehicle for promoting intelligent public discussion of these
and other economic questions.
In the new budget document for fiscal 19&3, we have taken a number of
steps along these lines. For one thing, the budget contains a more
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comprehensive and explicit discussion of the economic assumptions
underlying the revenue estimates. Second, we have included in the
budget document a translation of Federal fiscal activities into the
national income terms more familiar to economists—an alternative
presentation of the budget totals more indicative of the direct impact
of Federal activity on current incomes and output in the national
economy. The very recent statement of the Committee for Economic
Development, "Fiscal and Monetary Policy for High Employment," has,
in fact, recommended the national income basis as the most useful
single way to express budget totals for the purpose of evaluating
fiscal policy. Third, we have incorporated in the document new tables,
including summaries of obligations incurred, of Federal civilian employment, and the investment character of Federal budget expenditures.
Fourth, we have put back into the document itself certain special
analyses that are particularly useful for analyzing the economic
character of the budget, such as those on public works, Federal credit
programs, research and development programs, and Federal aid to State
and local governments, Finally, the new format (and I might add, the
lower price) of the budget should promote wider public use and understanding .
In considering further improvements in the budget document, we will of
course continue to welcome suggestions. However, I believe we must
agree that much more than a modification of the budget is involved in
improving the flow of data on the economic aspects of Federal activities. Reports and documents prepared by various Federal agencies,
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including those directly involved in carrying out important Federal
programs, must also share this responsibility. Moreover, a large
part of the economic analysis of individual Federal programs must
continue to be a part of the budget review process within the
executive branch and in testimony of responsible agency officials
before the Committees of the Congress.
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TABLE 2.
(Fiscal years.
TRUST FOND SUMMIT
In billions of dollars)
Description
Trust fund receipts;
Federal old-age and survivors insurance
trust fund
Federal disability insurance trust fund
Unemployment trust fund
Railroad retirement account
Federal employees' retirement funds.....
Highway trust fund
Veterans life insurance funds
Other trust funds
.
Subtotal
Deduct interfund transactions.
Total, trust fund receipts
Trust fund expenditures:
Federal old-age and survivors insurance
trust fund
Federal disability insurance trust fund..
Unemployment trust fund
Railroad retirement account..
Federal employees' retirement funds...........
Highway trust fund.
Veterans life insurance funds
Federal National Mortgage Association
trust fund, net..
Deposit funds and all other trust funds.......
Subtotal
Deduct interfund transactions
Total, trust fund expenditures
Net accumulation..
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1961
actual
1962
estimate
1965
estimate
11.9
1.1
3.8
1.1
2.0
2.9
.7
.8
12.3
1,1
3.6
1.1
2.1
3.1
.7
1.0
lU.2
1.2
1±.2
1.2
2.1
3.1*
.7
1.0
2k. 3
.5
25.0
.5
28.0
.5
23.8
21+.5
27.5
11.8
.8
U.7
1.1
.9
2.7
.8
13.3
1.1
3.8
1.1
1.0
3.2
.7
Hi.3
1.2
3.9
1.1
1.1
3.1;
.7
-.1
1.0
.9
£
.5
1.0
23.8
.5
26.0
15
27.1
.5
23.2
25.6
26.6
.6
-1.0
.9
January 26, 1962
TABLE 3. RECEIPTS FROM AMD PAYMENTS TO THE PUBLIC
(Fiscal years. In billions of dollars)
Description
Receipts from the public;
Budget receipts
Trust fund receipts
Less:
Intragovernmental transactions
Receipts from the exercise of
monetary authority.
Total receipts from the public
Payments to the public:
Budget expenditures.
Trust fund expenditures
Government- sp onsor ed enterpr is e
expenditures (net)
Less:
Intragovernmental transactions
Accrued interest and other noncash
adjustments (net)
Total payments to the public
Excess of receipts (+) or payments (-)
1961
actual
1962
estimate
196J
estimate
77.7
23.8
82.1
2k.5
93.0
27.5
U.2
l;.0
.1
.^1
97.2
102.6
116.6
81.5
23.2
89.1
25.6
92.5
26.6
-.2
.5
.3
li.2
luO
3.9
.8
.1
.8
99.5
111.1
111;.8
-2.3
-8.5
+1.8
3.9
*
-x- Less than $50 million.
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January 26, 1962
TABLE I;.
FEDERAL RECEIPTS AND EXPENDITURES IN THE
NATIONAL INCOME ACCOUNTS
(In billions of dollars)
Fiscal
year
Expenditures
Purchases
of goods
and services Other
Total
Receipts
Surplus ( +)
or deficit (-)
1953 . .
56.8
19.6
76.2
69.9
-6.3
1954.
53.9
20.6
71*. 5
65.9
-8.6
1955-
1*5.0
23*0
68.1
67.0
-1.1
1956.,
1*5.2
2k.3
69.5
76.3
+6.8
1957..
U8.3
28.3
76.5
80.9
+k.k
1958. «
50.5
32.2
82.8
77.8
-k.9
1959. .
53.8
36.5
90.2
85. k
-li.8
1960
52.9
39.0
91.9
91*. 1
+2.2
1961.
5U.6
U2.3
97.0
9k.*
-2.2
60.2
U5.9
106.1
105.6
-.5
6k.2
1*7.7
111.9
116.3
+k.k
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January 26, 1962
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TABLE 5. RELATION OF PURCHASES OF GOODS AND SERVICES
TO TOTAL FEDERAL EXPENDITURES
(National income accounts basis)
Purchases of
goods and services
as % of total
Fiscal
year
1953
195ii
7U.5*
-
1955
1956
72.3
66.1
,
65.0
1957
63.1
1958
61.0
1959
59.6
I960
57.6
1961.....
56.3
1962 estimate,
56.7
1963 estimate,
57.U
January 26, 1962
B O A R D DF G O V E R N O R S
DF THE
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
To
Mr.
Martin
Date
December is,
Subject! ^JSt^tement for Joint Economic
From Chas. Molony
Although your 1962 appearance before the Joint Economic Committee
is nearly 1 1/2 months away, preliminary preparations for your statement
and testimony ought to begin now, with an alert to key staffers on the
material you'll want to have in hand -- by the end of the first week in January ,
if possible .
Bearing in mind that your statement must serve as (1) the really
timely review and annual report of the Board, (2) the position setter not
only for Federal Reserve operations over the last yealf but those in prospect,
and (3) the base for your subsequent testimony in response to questions, it
seems to me the following materials will be essential:
1. From Mr. Noyes <*•'- A review of overall developments in 1961,
stressing the financial over the economic. Preferably this would be an
analysis of the flow-of-funds over the period, such as you used to background
your statement covering 1959.
This review should be the opening part of
your statement, and be the backdrop for your subsequent remarks.
2.
From Mr. Thomas^-- A review and analysis of open market
operations in 1961. This should be the core part of the entire statement.
As there were no discount or r e s e r v e requirement actions in 1961, here you
will have the best -- and most timely -- opportunity in years to give a really
good, undistracted account of the Federal Reserve's use of its most important
instrument.
Because the subject is so big and so crucial at this time,
perhaps the best thing to do is to tell Mr. Thomas the importance you attach
to developing everything of significance (certainly including the scale of
Federal Reserve operations outside of short-terms, and perhaps Treasury
operations as well, if the combined figures add light to the s t o r y ) , and then
give him full scope to develop it./
r
3.
From Mr. Young -- The international financial story, not only
for balance of payments and international flows but also for the international
"cooperation" arrangements - - a situation that's sure to draw some questions,
and therefore one that had better be told at least in essential outline so as to
facilitate the handling of questions.
Since you may be setting a position here
with future bearings, perhaps here, too, the best thing is to give Mr. Young
the dimensions of the job and whatever scope he needs for developing the
significant.
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4. From Mr. Wernick (or through Mr. Noyes) -- Significant
employment-unemployment developments and prospects, with attention
to anything (cyclical-structural unemployment included) that the Joint
Economic Committee shows an interest in during the hearings it opened
on this subject today (December 18). At an absolute minimim,you'll
need to show an awareness of and an interest in what's happening in the
employment-unemployment field.
5. In addition, the change in Regulation Q will need some coverage in the statement to give some necessary perspective before the questions
start on this subject.
We're already in shape to cover what the Board had
in mind in making the changes in Regulation Q, but could Research, Bank
Examinations or the Reserve Banks furnish material on what the member
banks have been doing in follow-up to the permissive action?
You're
sure to be asked about that, and we'll look bad if we don't show we've
been interested enough to follow-through on what the banks did in
consequence.
There may be other matters needed in the statement, but I'd think
the above would cover the really essential, pertinent matter -- and I'd
think it best not to clutter up with anything not essential, even though it
may be a topic for questioning - - a s , for example, tax questions (depreciation
allowances, taxation of overseas firms, of savings and loan associations, etc. ).
Also, I'd think it well to leave out reference to the report and
recommendations of the Commission on Money and Credit, even though
questions on this subject undoubtedly will be asked of you. If you do want to
say anything in the statement about Federal Reserve structural matters, I'd
think you'd want to weave it in with the open market operations, where it
might stand as indirect comment unconnected with the Commission's report.
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The Honorable Wright Patman,
Chairman,
Joint Economic Committee,
Congress of the United States,
Washington E§, D.C.
Dear Mr. Chairman:
Thank yon for your letter of December 14,
and the afternoon of Tuesday, January 30, is
agreeable to na« for the hearings before your
Committee on the President's Economic Report.
May 1 take this opportunity to wish you
a Very Merry Christmas and a Happy New Year.
Sincerely yours.
WOT. McC. Martin, Jr.
cc: Mr. Shay
Miss Muehlhaus
WMM:mnm
»*»OIT PATOMW, roc..
flftl y MMO. L>.
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Congrettf of tijc Wniteo States!
IK. JAVtT*. K T
JOINT BOOMOMIC COMMM r f"
» PVMSUANT TO MR. *<iO «r WVLJC CAW IM. n
December 14, 1961
Mr, William McChesney Martin, Jr.
Chairman of the Federal Reserve System
Washington, D. C.
Dear Mr. Martin:
We expect to receive the President's Econcxnic
Report next year on or about January 20 and the Committee would like very much if you would be one of the
earlier witnesses.
Accordingly, we would like to schedule your
appearance for the afternoon of Tuesday, January 30«
Please let me know whether or not this meets
with your convenience.
Sincerely,
Patman
Chairman
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