The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
_H_E_A_R I_N G_S
(59)
.....
House Ways and Means Committee
(Wilbur Mills, Chairman) ........
(60) ...... Joint Economic Committee
(Wright Patman, Chairman)
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
.....
1962
Folder 2
Page 1
Executive Session,
closed to the public.
reviewing the state
of the economy and
question of tax
reduction.
2 p.m.
..............
8/9/62
Hearings on the state
of the economy.
11:40 a . m . and 2:30 p . m .
(Preceded on 8/15 by
President Malcolm Bryan,
and at 10 on 8/16 by
President Al Hayes) . . . 8/16/62
Continued in 1963 folder
For release on delivery
Statement of
William McChesney Martin, Jr.
Chairman,
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Board of Governors of the Federal Reserve System
before the
Joint Economic Committee
August 16, 1962.
Mr. Chairman:
It may be that just about everything that can be said about matters
of interest to the Members of this Committee has already been said by
other witnesses, but I should like nevertheless to be as helpful as possible in discussing economic and credit conditions today.
Much in the recent flow of statistical information has indicated a
definite loss of momentum in the pace of economic expansion.
particularly true of the June reports.
This was
In that month, there were declines
in durable goods orders, average hours of work at factories, retail sales
and housing starts, and only small gains in industrial production, employment and personal income.
Altogether, the impression of slowdown seemed
well confirmed.
There has been a popular tendency to view the various signs of slowdown as foreshadowing an imminent upper turning point in the economic
cycle.
Judged from the perspective of cyclical indicators, which in the
past have shown a tendency to run ahead of the over-all data, this view
has perhaps been reasonable.
I sometimes wonder though if we have not become overly sensitive
to cyclical indicators -- we read, watch, study, and talk about them so
much that we may have become like medical students who acquire each
disease as they read about its symptoms in their textbooks.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
We ought
to remember that, while leading indicators have correctly foretold some
recessions, they have also on occasions given portents of recession that
did not occur.
In June, our economic data were subject to certain special influences and, if allowance is made for these, the situation does not appear
so persuasively discouraging as appeared at first sight.
Thus, using
up the inventory accumulated in anticipation of a steel strike that did not
occur affected not only new orders for steel but also employment and
hours of work in the steel industry, and unemployment claims in steel
centers.
The steel industry is so large that declines in that one industry can
at times result in declines in over-all manufacturing orders, employment,
hours of work, and many other measures of economic activity.
Obser-
vers who simply count the pluses and minuses among the cyclical indicators run the risk of being overly influenced by the reflections of a decline
in one industry, not of cyclical origin, showing up several times in their
lists of unfavorable omens.
In addition to the steel situation, though of
less importance, a strike at some auto plants affected production and sales
in June.
The adverse effect of this on the June data should not be
interpreted as being of cyclical significance.
Nevertheless, the June showing as a whole was not strong.
And it
certainly made clear that the economy was moving ahead more slowly than
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
c
-
3
-
the optimistic goals widely discussed at the turn of the year.
From data now available for July, the economic situation appears improved.
The unemployment rate was down slightly, non-agricultural employment
rose somewhat further, and labor market data were definitely encouraging in
another respect: they showed a fairly large decline in the number of long-time
unemployed.
Among other information on July, retail sales rose briskly, with new
domestic auto sales and department store sales both making a strong showing.
Private construction activity, seasonally adjusted, held its advanced level. The
Board's index of industrial production, which was released early this week,
gained almost a full point, advancing to a new record high approximately onefifth above the 1957 level.
Preliminary indications from production schedules and weekly sales
reports suggest that the general improvement of the economy carried forward
in early August.
The information on consumers' purchase plans obtained in July by the
survey conducted for the Board each quarter by the Census Bureau gave two
important indications.
First, consumer buying plans had not been adversely
affected over-all by the recent stock market decline and the mixed economic
tendencies shown for June.
Second, as you may recall from earlier testimony
by a member of our staff, the data show some strengthening of consumer purchase
plans since early this year, especially for household durable goods.
Consumers are in a good financial position.
Their incomes rose further
in July to a new record high, and so did their savings.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The payments on
debt that consumers are obligated to make each month have risen less
rapidly than their incomes.
Furthermore, defaults on instalment credit
have declined sharply over the past 18 months to levels at or close to
the lows for recent years.
Business concerns' retained earnings and depreciation allowances
in recent months have also been large, in many instances considerably in
excess of current needs for replacement and expansion.
This form of
saving has been used in providing an additional flow of funds into credit
markets and into extensions of trade credit as well.
Meanwhile, business
demand for bank loans has been less vigorous than in this stage of previous
upswings.
Banks, t h e r e f o r e , have sought other outlets for their funds and
have increased other loans and investments, especially their holdings of
State and local securities and real estate loans.
Demand deposits have
changed little so far this year, while time and savings deposits grew very
rapidly in the first quarter and then continued to expand substantially
but at a lesser rate.
Over the first half of the year, short-term interest rates fluctuated
within a narrow range around a 2 - 3 / 4 per cent level.
Since late June,
the level has been a little higher, with the range on 3-month Treasury
bills running between 2. 80 and 3 per cent.
Yields on longer term U. S.
Government, State and local government, and corporate issues meanwhile
declined through midspring and subsequently moved moderately upward,
but they remain below the earlier highs for the year.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Throughout the
year, mortgage yields have moved downward.
The decline that has taken place in long-term interest rates has
reflected in large part the increased availability of funds in long-term
sectors of the market, as the rapid increase in time and savings deposits
at commercial banks was accompanied by continued large inflows of funds
to mutual savings banks and savings and loan associations.
Demand for
long-term funds in recent months has been generally moderate.
My comments would be incomplete if I neglected to mention the
persistent problem of restoring balance in our international accounts.
The problem of domestic expansion is interrelated with our international
problems and all of them must be thought about at the same time.
The United States has been making progress in reducing its over-all
deficit in international transactions.
The deficit came down from nearly
$4 billion in I960 to about $2-1/2 billion last year, and to an annual rate
of just under $1-1/2 billion in the first half of 1962.
no grounds for complacency.
Even so, we have
We must move further towards international
balance next year, and we must also achieve and maintain equilibrium
in the accounts in future years.
U. S. foreign trade has developed in an encouraging way this year.
Total exports have been rising, with exports to Western European countries
especially strong.
While imports also have risen, they have not spurted
ahead as they did in the preceding period of cyclical expansion and so have
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
remained lower in relation to the gross national product.
Both our export
and our import performances would indicate that we have been competing
effectively in international trade, and international price trends support
this interpretation.
The level of wholesale prices has been stable in this
country for some time, while prices in industrial countries abroad have
risen.
The merchandise trade surplus, at an annual rate of $5 billion in the
first half of 1962, is large but not large enough to match our large net payments for aid, for military expenditures, and for net private U. S. lending
and investment abroad.
And it would probably be unrealistic to expect the
whole of the remaining adjustment to come through yet further expansion
of the trade surplus.
That is why the Government has been working, both
from the procurement side and through negotiations with our allies abroad,
to reduce the balance-of-payments burden of our foreign aid and military
programs.
That is why we have had to pay close attention to the possible
effects that monetary and credit policies may have on international movements of capital.
Taken together, domestic economic and balance-of-payments developments have posed a problem for monetary policy, but in my judgment that
problem has not yet constituted as clear cut a dilemma as some observers
suggest.
While it has been necessary to formulate policy in the light both
of the credit needs of the domestic economy and the potential effects on
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
international capital movements, up to the present time it has not been a
matter of choosing between domestic and international goals.
With the rare exception of an internal liquidity crisis, such as that
experienced in the early 1930's, it is never helpful to sound recovery or
economic expansion to flood credit markets with redundant funds.
When
resources are not fully employed, credit should be readily available to
meet the legitimate needs of commerce, industry and agriculture -- as it
is now -- but no constructive purpose is served by expanding the credit
stream to the point where it overflows its banks.
So far, we have been
able to pursue policies which have not interfered with the ready availability
of credit in the domestic markets at rates generally about even with those
prevailing in early 1961, and in some critical areas substantially lower.
Fortunately, we have been free from inflation and the expectation of
imminent inflation.
This has made possible a more liberal policy with
respect to r e s e r v e availability,
a greater growth in bank credit, and less
upward movement of interest rates than in any other recovery and expansion in recent history.
In the last 12 months alone, we have added almost
a billion dollars to bank reserves, bank credit has expanded by $17 billion,
and high-grade long-term corporate bonds and State and municipal
securities are about 1/4 of 1 percentage point below their year-ago levels.
At the same time, we have generally maintained short-term rate
relationships with other major financial markets such as to avoid encouraging
outflows of short-term funds.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The fact that we have done and are continuing
-
8
-
to do this, as we strive to improve our basic balance-of-payments situation,
is bound to strengthen confidence in the dollar at home and abroad.
In my
judgment, this enhanced confidence is essential if we are to solve our
balance-of-payments problem and promote domestic prosperity.
This leads me to the matter of deficit financing.
It now seems most
likely that we shall experience some deficit in our budget for fiscal 1963.
That deficit would, of course, be increased if taxes are reduced during
the current fiscal year.
I have stated quite explicitly my belief that such deficits as we may
experience, whether they are due to a shortfall of receipts under the existing
tax structure, an increase in expenditures, or a reduction in tax rates,
should be met by borrowing from the real savings of businesses and
individuals, not through the creation of money through the banking system.
This does not mean that we will experience less easy conditions in
credit markets.
What happens will depend on many things -- most impor-
tantly on the rate of activity in the economy: credit conditions may be
tighter, or easier, or the same.
It is also helpful to recognize that in the American banking system
there is an important distinction between total bank credit expansion and
that portion of it which can be traced to the creation of money and credit.
The loans and investments of commercial banks in the United States can
grow in two ways:
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
one, through people placing more savings in banks in
- 9 -
the form of time and savings deposits; or two, through the creation of
demand deposits.
Hence, bank credit can expand substantially without any
significant money creation, as it has done in some periods.
Alternatively,
growth in bank assets can be -- as at times it has been -- associated almost
entirely with money creation.
Analysis of these processes would be simpler if we had an institutional
structure in this country in which the money creation function was entirely
separate from what is called the savings intermediary function -- the
collection of small savings and their investment for the benefit of depositors,
of shareholders and of policyholders -- but that is not the case.
To the
extent that individuals place their savings with banks and that banks, in turn,
invest these savings in Government securities, the deficit which led to the
issuance of the securities is being financed by real savings just as surely
as if the individuals had purchased savings bonds in the first instance.
Moreover, a certain amount of money creation to meet the legitimate
needs of a growing economy is a necessary and normal function of the banking
system, and it is expected reserves will be provided for expansion to meet
such needs.
Some part of the normal growth in banks' assets which
accompanies this money supply expansion must, as a simple matter of banking prudence, take the form of additions to the secondary reserves of
the banking system, which consist largely of Government securities.
Additions to banks' holdings of Government securities due to additional
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 10 -
flows of savings through this particular intermediary or to normal growth
in the money supply do not represent the financing of Government deficits
with bank-created or "printing press" money.
Such additions are not
inflationary and do not pose any threat to the soundness of the dollar.
What would be damaging to the strength of the dollar would be the
deliberate expansion of the credit base, above and beyond the needs of the
economy, in order to provide a ready market for the Government's borrowing.
This was done in the United States during vVorld War II, and in other
countries both at that time and during the economic chaos that followed.
is still being done in some unfortunate countries today.
It
The results have
invariably been bad, and have ranged from damaging, as they were here,
to nearly disastrous, as they have been in some other countries.
The
process of withdrawal and correction is always painful and difficult.
The only sure safeguard against the financing of deficits through bank
credit creation lies in careful control over the process by which bank credit
and money are created.
As I have said, the Federal Reserve is deter-
mined to provide, on the one hand, the reserves needed to support the
necessary and healthy expansion of bank credit and money required to meet
the needs of a growing economy, and on the other, not to again become
entangled in the vicious circle of financing Government deficits with bank
credit created solely for that purpose.
In closing, let me summarize as specifically as I can my view with
respect to the economic situation today.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 11 All in all, the performance of the economy has been disappointing in that it thus far has failed to reach the goals set for it by some and
predicted for it by others.
Yet the economy has withstood some rather
severe shocks -- last fall an auto strike, this year a major steel inventory adjustment and the sharpest stock market break since the 1930's -and still it has moved forward.
On the one side, it has not achieved the
levels of manpower or physical resource utilization we would all like to
see; on the other, the latest data do not, in our judgment, confirm that we
have reached or passed a turning point in the cycle at this time.
The most
likely possibility in the period immediately ahead seems to be for a continuation of mixed movements in the more sensitive indicators and some
further growth in the broad aggregate measures of economic activities.
Now a final word, about monetary policy and credit conditions.
The one factor over which the Federal Reserve has anything like complete
control is the volume of reserves available to the banking system.
In my
judgment we have supplied -- and are now supplying -- all the reserves
the banking system requires to meet the American economy's needs for
credit today and to foster its further economic progress.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
JOINT BCOttOMCC OOMMf f IW
T» MC. >(•) Ot» »UMJC LAW J*t. tTH
August 31, 1962
Hon. William McChesney Martin, Jr.
Chairman
Board of Governors
Federal Reserve System
Washingtci
D. C.
Dear Chairman Martin:
Ihis is in response to your letter of August 29 stat
that you will probably need at least .
to provide an answer
to the question I raised while you were testifying, concerning
proper and improper flow of funds.
Frankly, I am somewhat puzzled by this advice, because
when I raised this question I thought I made it clear that I vas not
asking that you undertake research to develop new information or
make new analyses; rather, I was asking that you supply the data
that were considered, and the analyses that were made and on which
Federal Open Market policy was based.
If you continue to fe«l, however, that the kind of
analysis for Vhich you would wish to take responsibility will
require several ?}r.nths, or even several weeks, it will be necessary
that we plan to piblish your analysis as a separate document. We
would not wish to delay printing of the Coianittee's hearing record
for any such length of time; in fact, we feel that because of the
interest in this record it should be published within the next
week or 10 days.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I am
Sincerely,
August 29,
The Honorable Wright Patman,
Chairman,
Joint lie oceanic Committee,
Congress of the United States,
Washington 25, B. C.
Bear Mr* Chair* an i
lou will recall that at the Joint Economic Committee's
recent hearing you asked that we supply statistical information
with regard to flows of funds for the past decade, together with
a commentary Indicating for each period ef time whether the flow
of funds was satisfactory or unsatisfactory, end our reason as
to why the flow was satisfactory or unsatisfactory! and, also,
what steps the Open Market Committee took in an effort to prevent or correct unsatisfactory conditions.
We are presently in the process of developing seal
adjustment factors for the quarterly flow of funds data, which
will make it Much easier to analyse and discuss this information
in terms of quarter-to-quarter changes. It wiH be highly advantageous from both the point of view of the authors end the readers
if the analysis can be expressed in terms of these new seasonally
adjusted figures, which should be developed within a few weeks,
rather than the cumbersome unadjusted figures which require repeat*
ed comparisons with changes in the same quarter of earlier years in
order to describe the current quarter-to-<fuarter movements.
Me would like to do a very thorough and careful job of
responding to your question, both because we feel it will be help*
ful to those outside the Federal Eeserve System who are interested
in studying financial developments over the past decade and the
role monetary policy has played In these developments, and because
such a careful review will undoubtedly add to our own insight into
the workings of financial markets*
We will proceed as expedltioucly as possible, but we will
probably need at least ninety days to provide you with the sort of
painstaking analysis I am sure you want and for which we would wish
to take responsibility.
Sincerely yours,
GEN/RLC:ac
cc: Miss Muehll
Muehlhaus
Mr. Noyes
Mr. Garden
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
V*. jfcC. K«rti»,
BOARD DF GDVERNDRS
DF THE
FEDERAL RESERVE SYSTEM
WASHINGTON
Scmerable Wrlgtot
Cbairiwua,
Joist leoaofcic Cowrittee,
Coagreas of the Waited State®,
25, D, €.
Bear Mr. Fatness
In reply to your letter of Attgust |f I as aemdlttf
you tables oa Systea transact! one la U. S, Soireriisieat securities by Maturity claaa, Syates exete&gee im SreAsury refund*
in^s, and Staler sales «mS purchases pf H. S. Governn»nt
s«c«ritie8. fbe data OB %st«s tran4*etifi£t», shovn in th*
enclosed Table 1^ cover oper»ti0B»".ts, .tli« first seven aoaths
of 19&; cerr«*f©adlsg fig«re»..C^. t^'Aoatfes
of 1^1 «ere
publiafeea in tbe Federal EeserVe.--&£»r<l f a Annual Report for
1961 (page 132). Tfct tables...c^t';|yst«ii exc)»a^fi a»4 dealer
traaaact tons corer the /«iir"i9^i'-'iftm4 tjje period to date la
It siiemlil $* p$lat*a out that the f Igurea on Sy*t«j»
traafiactiofis aaa those;; £a''tSealer purchases and sales are not
strictly eoaparable la two respects, first, System open oarket
operations, particularly la t&e shorter Maturity categories,
fretuestly lav^lre dlre-et t-raasactloas with forei^a official
a»3 imt©rimtion&l sccoimts as veil as transactteas vitli dealers.
the feansfr trmssactloss of course are not reflected 1m the data
reported by Sealers. Secoaily, the two sets of 3ata differ
aligfetly la respect to their tiaiag. Thus, Dealer transactions
are reported la terms of the 4ate when coasataoeat* to buy or
sell were stade* wbile System @|>eratioas are recorded la terns
®f tint date when securities p\ircbase4 or sold were actually
MUv*r*d*«v&lcl! say oftea Tom ®m toaslasss 4ay follovlag tie
eesnl^seat. for these reas^is,
iaferencee from the data eoacermtag the Syste»*s **sljareM of total oarJcet activity cannot
be precise.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-2-
Tables 3 and k show an unpublished breakdown of
dealer transactions between purchases and sales. Whea the
publication program on the Governaent securities sarket was
initiated Just over a year ago, it was with the understanding with the reporting dealers that data on purchases and
sales would be published on a combined basis only. In this
way it IMS felt that the public's interest in having adequate
and prompt information on voluaae of trading in the market
would be served. Accordingly, should the Joint Econqaic
Committee want to Hake use of the data in a way involving
their public release, it would be desirable for us to discuss
the natter with those who voluntarily supply this inforaation.
We aball, of courat, be glad to try to «a*war may
<p»8tioa* tiaat th« CoaBitt«« or its staff may b*v* concerning
t«ctenical or otlarr aspects of the data.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Siae*r*ly yours,
(Signed) Wm. McC. Martin, Jr.
W». McC. Martin, Jr.
Table 1
^FIDENTIAL (FR)
OPEN MARKET TRANSACTIONS OF THE FEDERAL RESERVE SYSTEM DURING 1962
(in millions of dollars)
Month
1962 - Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Year
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Gross
purchases
5io
$3$
•a, 112
" ' 5&2
1,136
ill
1,680
Outright transactions in U. S. Government securities "by maturity
Total
Treasury bills
Others within l_year
Exch. , mat,
Gross
RedempRedempGross
Gross
Gross
Gross
shifts, or
sales
tions
purchases
sales
tions
purchases sales
redemption
'527
616
380
" 333
622
702
:
1,20Q"
173
61
156
36
—
174
185
486
380
691
471
702
459
1,510
474
522
380
333
622
625
1,117
173
61
156
36
—
174
185
10
132
54
11
307
152
254
53
124
—
-—_
70
73
-1,307
-_
Table 1 (Cont»d.)
OPEN MARKET TRANSACTIONS OF THE FEDERAL RESERVE SYSTEM DURING 1962
(in millions of dollars)
1-3 years
Month
1962 - Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Year
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Gross
purchases
Gross
sales
,
5-10 years
Exchanges
Gross
Gross
or maturity
purchases sales
shift
Hf
23
357
50
127
136
136
—
-Hi, 30?
Exchanges
Gross
or maturity
purchases
shift
Over 10 years
Exchanges
Gross
or maturity
seles
shift
—
10
10
—
7
10
-793
+81
—
—
-28
—
~
-53
August 8, 1962
Table 2
Federal Reserve System Exchanges in
Treasury Refundings
(In millions of dollars)
Month
.Amount of maturing
securities held
7.^ol February
March?/
3,583
350
Exchanged
New or
reopened issue
3-1/1$ note of 8/15/62
3-5/8^ bond of 11/15/67
Redeemed
Amount
1
3,583
350
May
2,695
3% certif. of 5/15/62
3-1/1$ note of 5A5/63
1,700
700
August
U,835
3-1/1$ note of 11/15/62
3-3/1$ note of 8/15/61;
3,235
November
none
1,600
—
1962 February
U,8C6
3-1/2$ certif. of 2/15/63 3,306
h% note of 8/15/66
1,500
May
2,16U
3-lA£ certif. of 5A5/63 2,l6U
August
3,717
3-l/2fi certif. of 8/15/63 3,717
I/ Advance refunding.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
—
295
—
—
—
—
—
'August 8, 1962
Table 3
Total Dealer Purchases of U.S. Government Securities
(In millions of dollars)
Month
1961 Jan.
Feb.
Mar,
Apr .
May
June
July
Aug.
Sept.
Get.
Nov.
Deco
Total
1962 Jan.
Feb.
Mar.
Apr.
May
June
July
Total
15,570
11,356
16,008
llt,23l*
15,603
Within 1
year
10,381
7,582
11,10*5
11,031
13,U90
10,912
11,532
13,630
12,026
10,971
16,614.3
13,1*93
lib 037
16,678
ll*,l*72
15, too
15,683
179A8U
11,936
12,1*82
137, UOO
1 - 5 years
U,U06
3,068
3,h93
2,OU8
3,359
226
296
355
3^0
711*
821*
963
1*1*2
1*28
U23
526
297
391
i*65
695
1,581
15, ?lii
12,38U
1,796
13,51*2
13,172
13,251
557
Uio
6,U;0
1U,626
12,827
17,130
16,U72
15,537
Over 10 years
1,802
2,1*88
1,799
1,709
2,662
2,71*7
2,257
31,839
17,175
16,833
17,218
13,1*81
5 - 1 0 years
2,659
2,1*13
2,168
1,979
1,1*31
836
721
1,091
1,135
979
638
368
261
131*
22h
28U
191
356
U78
3,505
273
510
602
UU3
283
3U2
217
Note: Does not include securities received on direct allotment from the
Treasury or transactions under repurchase agreements, reverse
repurchase (resale) or similar contracts.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
August 8, 1962
CONFIDENTIAL
Table h
Total Dealer Sales of U.S. Goveriiment Securities
(In millions of dollars)
Month
1961 Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept .
Oct.
Nov.
Dec.
Total
1962 Jan.
Feb.
Mar.
Apr.
May
June
July
Total
18,3U9
13,211
18,50k
16,216
Within 1
year
12,982
9,235
13,721
12,961
13,118
13,615
15,181*
lli,9U3
12,721*
15,675
13,977
1 - 5 years
U,U67
3,28ii
3,565
2,076
17 , 810
16,38?
18,988
17,617
15,3U9
18, 8U5
18,318
17,369
iU,075
206,961 162,209
3,226
2,039
3,125
1,921
1,821
2,679
3,U27
2,300
33,930
17,876
1U,536
15,826
lU,6l6
15,878
15,325
17,337
1,687
2,657
2,351
1,797
2,617
2,027
20,589
18,625
19,620
18,059
20,127
18,819
19,786
1,1^5
5-10 years
Over 10 years
636
k26
838
821
1,059
26U
266
379
358
U07
253
133
225
396
213
U93
U81
5U6
529
U08
277
U21
U39
6,880
3,9U3
720
871
80li
1,186
1,371
1,111
691
306
561
638
U59
261
357
273
555
Note: Does not include redemptions of Treasury issues or transactions under
repurchase agreements, reverse repurchase (resale) or similar contracts
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
5,
t **•
******** t5, t-
vitft «U
of
voliM of tswdis* lay
Tour oo«pci«tioft
•a «*rXy tet* vlll
hM.riBf t acxt
r on tte M
Op*s Mixtet «M>Urt
tki» lafb»»ttdii at
tt^ vlU
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
JAHO
OF
OOVKMNOMM OT THE rCDCft
-'VC «Y«TCM
Augus
Margaret;
Miss Reagan called and left this messa
Mr. Hayes told Mr. Martin that Mr
agreed to try and get some part of Mr. Hayes 1
testimony in a closed session. After Mr. Mar
left Mr. Hayes' office, Mr. Dillon called back and had
been in touch with some of the members of the Patman
Committee and it was agreeable with them to have part
Mr. Hayes' testimony in a closed session.
The way they visualize it now, both Mr. Marand Mr. Hayes will be on in the open session Thursc
morning, and Mr. Hayes might be called back in the
afternoon for a closed session. Before this, Mr. Hayes
was to be on in the morning, and Mr. M
to be
on in the afternoon.
Miss Reagan went on to explain that Mr, Hayes
thinks some part of his testimony should be heard in
closed session and th«'
iat they are going to ;
and arrange, but it will change the tirnt
Martin will testify.
rr,
ALSO, Mr. Roosa had invited Messr
es, M a r t
and Coombs over to the Treasury to have lunch on
Thursday. However, because of the above turn of
events, it will probably be impossible for M;
s
to join the other gentlemen.
(
August 22, 1962
Board of Governors
Subject: Hearings before Joint
Economic Committee
From
Robert L, Car.dron
before
lowing
closed
mainly
This memorandum covers the final sessions of the hearings
the Joint Economic Committee on the state of the economy, foltestimony last week by Federal Reserve witnesses. The hearings
this morning, after three days of testimony this week devoted
to antitrust and monopoly questions.
Secretary of the Treasury Dillon appeared last Friday, and,
in response to questioning, made several points that may be of interest to you. First, he said a gold guarantee, as proposed by earlier
witnesses, would be "a very poor idea" because it is not needed in the
light of assurances already given by the President and would "question
his word", and because it would be unfair to American citizens, some of
whom would "try to ... shift their funds abroad , . . (to) get the
same sort of guarantee." Second, he made several comments about longterm interest rates. He said he thought the recent offering of U-l/U
per cent bonds would have been more successful if there had been more
than "one day's notice and then one day's sale" and that the Treasury
in future long-term issues "probably ought to give the public two or
three days to make up their minds." He resisted efforts to get him to
say the Federal Deserve should buy more long-term bonds, but agreed
"it would do no harm" and said if this were done, the purchases should
be in the five-to-ten-year area. He indicated that long-term interest
rates are now at "a reasonable level". He said it would not discourage
long-term borrowing by foreigners in the United States to raise the
long-term rate. On the other hand, he said the short-term rate is
"very significant" in short-term flows abroad and that the Treasury
has engaged Professor Cannon of Columbia University to make a study of
this question. He denied Senator Proxmire's contention that long-term
rates have risen faster than short-term rates in I960 and 1961, commenting that (l) the important long-term rates from the standpoint of stimulating the economy are the private corporate bond rate, municipal bond
rate, and the mortgage rate; (2) the rate on long-term U. S. bonds is
"relatively immaterial;" (3) the Federal Reserve cannot "effectively
influence long-term money rates" because only $2$ billion in U. S. bonds
is outstanding compared to hundreds of billions of other long-term obligations; and (U) the corporate bond rate is now only 1±/10 of one
per cent higher than the rate on U. S.lo^g-term bonds (as compared to
as much as one per cent in the past), and this stimulates the economy.
Yesterday morning Mr. Edwin G. Nourse (former Chairman,
Council of Economic Advisers 19U6-1914-9) was asked about the editorial
appearing in yesterday's Washington Post which criticized Chairman
Martin's statements regarding deficit financing through bank credit.
In response to Senator Bush's questions, Mr. Nourse indicated that
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
he "decidedly" approved Chairman Martin's stand on this question. Senator
Proxmire then said that Chairman Martin "has never taken" the "dogmatic
position . • . that you will never finance the Federal deficit to any
extent through the banking system"* Senator Proxmire said that Chairman
Martin "was very clear here the other day in saying that he would not
take" that position. Mr. Nourse agreed that the Federal Reserve is wise
not to take an extreme position either way on financing deficits and
said "they are right at the present time in following a somewhat tighter
money policy than certain factors in the economy think is desirable."
cc: Each Board Member
Mr. Young
Mr. Molony
Mr. Fauver
Mr. Knipe
Mr. Noyes
Mr. Kenyon
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
August Ik, 1962
To
Board of Governors
From Robert L, Cardon
Subject:
Hearings before Joint
Economic Committee
The official death certificate having been issued for the
1962 tax cut, a hard core of the Joint Economic Committee members settled down today to discuss monetary policy with three economists:
Lawrence S. Hitter, Professor of Economics, New York University,
Graduate School of Business; Beryl W. Sprinkel, Vice President, Harris
Trust and Savings Bank, Chicago; and J. M. Culbertson, Professor of
Economics and Commerce, University of Wisconsin.
Senator Javits opened the interrogation with a brief reference to the now departed tax cut, intended to establish that it may
have met with foul play. He then departed himself, leaving further
interrogation to Messrs. Patman, fteuss, Proxmire, and Pell.
Senator Proxmire expressed a deep sense of satisfaction in
hearing three witnesses so ably present views coinciding so closely
with his own. TO give you the flavor of the discussion, I cannot do
better than follow Senator Proxmire1 s suggestion that your attention
should be called to the following excerpts from hr. Culbertson1 s prepared statement:
"....There are means of correcting balance-of -payments
disequilibrium other than protracted deflation of the income or prices of any country. Students of such matters
took it for granted that the postwar international financial
system would explicitly avoid any such reliance upon deflation. However, the emotional gold-standard thinking that
wrought such havoc upon the world in the 1920 's and 1930f s
with its mystical attachment to high interest rates and deflation seems, despite the clear lessons of that period, to
have reasserted itself with alarming force. The grip of
this dogma and the habitual errors of Federal Heserve monetary policy are the principal impediments to the reachievement of full prosperity in the U. S. economy.
"Would monetary restriction plus tax reduction produce
prosperity?— Since our present situation seems to impose
upon us a conflict between policy objectives, it is now commonly suggested that we, in effect, mount our charger and
ride off in both directions, that we maintain our restrictive monetary policy— or go further and set about to raise
interest rates — in deference to our balance of payments
disequilibrium while reducing taxes in the hope that this
will improve employment. The chances that such a program
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
"would bring us to full employment seem to me extremely
small, and the chances that it would lead us to an intol*
erable plight seem rather substantial. I think that the
implications of any effort through Federal Reserve policy
to raise U.S. interest rates are not widely appreciated.11
Mr. Sprinkelfs prepared statement was less colorful, but, in
response to questioning, he agreed with Mr. Culbertson that the money
supply has not grown fast enough. Both men criticized the Federal Reserve for becoming too preoccupied with short-run credit conditions and
not paying enough attention to long-run growth in the money supply.- Both
firmly rejected the notion that time and savings deposits should be includ
ed in the money supply.
Mr. Hitter said he was not willing to criticize the Federal Reserve "quite as much as my colleagues would or as I think you (meaning
Mr. Reuas) might." He wasn't so sure recent monetary policy has been
restrictive, and was tolerant of efforts to shore up short-term rates,
although skeptical of their efficacy. He was alarmed, however, at recent,
indications the Federal Reserve and the Treasury may have decided to
raise long-term rates as well; such a decision could only flow from a
readiness to accept a recession in order to protect our gold stock.
All three witnesses agreed on the need for greater flexibility
in exchange rates, greater ingenuity in seeking solutions other than high
interest rates in dealing with our balance of payments problems, and better coordination of fiscal and monetary policies. They felt it would be
not only foolish, but impossible, to stimulate the domestic economy with
expansionary fiscal policy while protecting our gold with restrictive
monetary policy.
Senator Proxmire asked why we should not include time and savings deposits in measuring the money supply, and was given four reasons
by Mr. Culbertson: First, they bear interest and money doesn'tj second,
the Federal Reserve can create demand deposits, but not time and savings
deposits5 third, growth in time and savings deposits does not stimulate
the economy (citing experience in I960 and 1962); finally, if time and
savings deposits were counted, yeu should also include other liquid
assets.
Senator Proxmire then turned to "Operation Nudge11, asking the
witnesses to comment on Chairman Martin's position that the Federal Reserve could not buy long-term bonds more heavily without destroying the
market for them. iir. Culbertson responded by elaborating on his prepar*
ed statement, to the effect that "Operation Nudge" makes no sense, because the Treasury has sold more long-term bonds than the Federal Reserve
has bought. Mr. Ritter, uncharitably intimating that this answer was not
responsive, changed the question to read "Would this be pegging the market
and would that be interfering with free market forces?" He then answered
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-3by denying that this would constitute pegging the market and affirming
that the function of the Federal Reserve is to interfere -with free market
forces.
Senator Pell then entered the discussion, somewhat diffidently;.
explaining he was trying to grapple with the fundamentals of this complex subject. He asked how important interest rates are in producing
recessions or booms, Mr. Pdtter replied that "Now you're starting to
divide the panel." He said no one is too sure of the answer, because
the Federal Reserve has neglected fundamental research into the effesls
of monetary policy, but he felt interest rates have less effect than
Messrs, Culbertson and Sprinkel think. Mr. Culbertson followed with the
comment that interest rates are not so important as money supply; that
failure to expand the money supply can produce a recession that will
bring very low interest rate.-, iir. Sprinkel added that there is considerable evidence of the importance of growth in the money supply in
producing economic growth.
cc: Each Board Member
Mr. Young
Mr. Molony
Mr. Fauver
Mr. Knipe
Mr. Noyes
Mr. Kenyon
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
c
•
August 13, 1962
To
Board of Govepwtfrs
X "\
From Robert L, Cardon /\\K
Subject:
Hearings before Joint
Economic Committee
The Joint^oncmicjSommittee heard this morning from three
European witnesses suggestions as to how the United States should deal
with the "dilemma" posed by the necessity for higher economic growth on
the one hand and correction of our balance of payments deficit on the
other hand. The witnesses (Ettore Lolli, Central Director, Banca
Nazionale dol Lavoro; Jurg Niebans^ Professor of Economics, University
of Zurich| and Alan Day, Professor of Economics, London Schcol of
Economics) agreed on one thing: the advisability of the United States
furnishing foreign holders of dollars with some form of guarantee against
devaluation^ They proposed furnishing gold certificates to foreign dollar
holders, including private holders as well as central banks, in exchange
for dollars. The Treasury would guarantee to redeem these certificates in
dollars at a rate sufficient to cover any devaluation which might occur
after the certificate was acquired. Mr, Patman remarked that the guarantee suggestion appealed to him very much and that he intended to ask
Treasury and Federal Reserve witnesses for their views on the suggestion
when they appear later before the Committee.
In response to questioning by Senator Sparkman and Senator
Proxmire as to why fears of devaluation persist in Europe, the witnesses
stated that many Europeans fear the Treasury may be forced to suspend gold
sales in some future crisis even though today the President and the
Secretary of the Treasury are stating in good faith that there will be no
devaluation. They felt that the issuance of gold certificates would fill
the need for actions by the United States rather than mere statements of
intention to maintain the gold value of the dollar. In explaining why the
United States may have to suspend gold sales, ixir. Lolli said that a gentle
men' s agreement exists among central banks to refrain from exchanging dollars for gold and that "you can't rely on gentlemen's agreements."
Mr. Niehans1 statement to the Committee referred to the recent
exchange swap between the Federal Reserve Bank of New York and the Swiss
National Bank as a good example of "exchange rate guarantees between
Central Banks . e.° creating a new type of dollar, that is, dollars free
from exchange risk." Mr. Reuss commented that he was "fascinated" by
this swap arrangement and that it is "very new and radical" because it is
the first instance of a guarantee against devaluation furnished by the
United States. He said it was "ironic" that the Committee must get a
Swiss witness to tell them what the Federal Reserve is doing in this field
The witnesses—between them—managed to make it clear (at least to some of
the reporters, if not to Mr. Reuss) that there is nothing radically new
about guarantees in connection with these swaps.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-2-
Mr, Curtis questioned the witnesses1 assertion that the
United States faces a dilemma. He agreed that the balance of payments
deficit is a serious problem but stated that the other horn of the
dilemma does not exist; that is, he believes that economic indicators
do not properly reflect the growth that has occurred in our economy.
He feels most of our capacity that is idle is capacity that is obsolete
in the sense that if it were more fully utilized we would be producing
goods for which there is no demand. He feels that efforts to expand
production at existing plants would block needed steps to retrain workers
and modernize equipment.
Mr. Lolli's statement asserted that there is no need to fear
"a budget deficit within certain limits and provided that it is financed
from savings with little resort to bank credit." In response to questioning by Senator Proxmire, Mr. Lolli conceded that the United States
economy today differs from that of Italy in many respects, including the
greater danger of inflation in Italy,and that, therefore, there is less
need to finance deficits from savings in the United States than in Italy.
The witnesses all seemed to agree that balance of payments
considerations call for at least no reduction in United States' interest
rates, although there was difference among them as to whether any increase
would be desirable.
Mr. Niehans advanced the thesis that monetary policy should be
concentrated solely on dealing with our balance of payments problems and
that fiscal policies should be used to provide any needed stimulus to
the domestic economy. This view was not received with enthusiasm by any
of those members of the Committee presente Senator Froxmire, in particular, seemed more interested in other methods of dealing with our balance
of payments problem. These other methods included repeal of the gold
cover requirement (which was recommended by Mr. Day in his formal statement ); reduction of Government spending abroad; more flexible exchange
rates (which Mr. Day's formal statement advanced as the "most desirable
policy"); and limiting foreign access to our capital markets (Mr. Niehans1
formal statement suggested that it might be advisable to control the placement of long-term bond issues in the United States by foreign borrowers),
Mr. Niehans said that approval of the Swiss National Bank must be obtained
before floating such issues in Switzerland, and suggested that approval
by the Federal Reserve be required in this country.
The following members of the Committee were in attendance at the
hearing this morning: Messrs. Patman, Reuss, Sparkman, Griffiths, Proxmire,
Curtis, and Bush.
cc: Each Board Member
Mr. Young
Mr. Fauver
Mr. Molony
Mr. Knipe
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Mr. Noyes
Mr, Kenyan
August 10, 1962
To
Board of Governors
From Robert L. Garden
/
X
\
//\WA \
Subject: Hearings before Joint
Economic Committee
Yesterday morning trre^J-oifit Economic Committee heard three
economists blame Government fiscal policy for choking off economic
growth, Mr. Eckstein (Professor of Economics, Harvard University) and
Mr. Pechman (Director of Economic Studies, The Brookings Institution),
impatient with the delay in cutting taxes, tried to exorcise the evil
spirit of the balanced budget, Mr. McCracken (Professor of Economics,
University of Michigan) called for reductions in taxes and Government
spending.
Yesterday afternoon Leon Keyserling told the•Committee we
need an immediate tax cut, plus easier money. He characterized current
monetary policy as a declaration of war against the American people.
His solution for our balance of payments deficit is a higher growth
rate. Raymond Saulnier, on the other hand, saw no need for a tax cut.
As to monetary policy, he contented himself with a warning against tightening money to aid the balance of payments. Tightening credit, he felt,
would not solve the problem and might jeopardize recovery; other measures,
such as reducing military costs abroad, should suffice.
This morning featured a varied witness panel. Mr. Livingston
(Financial Editor, Philadelphia Bulletin; nationally syndicated columnist)
said the tax structure should be overhauled next year to restore incentive,
not to produce a deficit (although he will accept a temporary deficit, if
necessary). Mr. Ruttenberg (Director, Department of Research, AFL-CIO)
concentrated on the need for a temporary ^5> billion tax cut now. Mr.
Hagedorn (Director, Research Department, National Association of Manufacturers) recommended tax cuts—within the framework of a balanced budget—
to stimulate plant modernization and improve profits. Mr. Langum (Consulting Economist,, and President of Business Economics, Inc., Chicago) presented an analysis of corporate profits, without making policy recommendations.
Mr. Patman's view that the Administration and Congress should
exercise greater control over monetary policy is not new, of course, but
he is using two recent developments to dramatize it. First, Chairman
Martin's statement of July 1?> to the House Banking and Currency Committee,
to the effect that budget deficits should be financed primarily out of
savings rather than out of bank-created credit was described by Mr. .Patman
this morning as an announcement that the System would give a tax cut
"a Russian veto". Second, Mr. Vjeston (Professor of Economics, University of
California, Los Angeles), on the first day of these hearings, urged a tax
cut as needed to counteract restrictive monetary policy. When Senator
Proxmire questioned this, Mr. Weston explained that he meant Congress traditionally had not exercised control over monetary policy, so, as a practical matter, Congress should take the only other alternative available to
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-2-
it and follow a stimulative fiscal policy. When Senator Proxmire reminded
Mr. Weston that the Constitution gives Congress power over monetary policy,
Mr. Weston asked why they don't exercise it. Mr. Patman described this
interchange this morning as follows: "Mr. Weston told us he wasn't going
to talk to us about monetary affairs because we didn't have anything to
do with it.11 Mr. Patman commented that Federal Reserve officials think
they're not responsible to Congress or the people, that each member of the
Federal Open Market Committee—the most powerful group on earth—thinks he
"is responsible only to his own conscience and God." This is not fair to
the President, says Mr. Patman.
Mr. Curtis is continuing his effort to show that a deficit will
not stimulate the economy if it is financed by savings. This drew the
response today from Mr. Ruttenberg that he would be right if it were
financed by the sale of E-bonds, but that this is unlikely. A more likely
possibility, Mr. Ruttenberg says, is that the deficit would be financed
by commercial banks. At that point, he says, the Federal Reserve should
supply reserves to replace those used by the banks to buy Government obligations. He says this does not amount to pegging interest rates—just
keeping free reserves at an appropriate level. Mr. Curtis, nevertheless,
expressed disappointment that witnesses are not discussing in their prepared statements the problems in debt management and the balance of payments that a budget deficit would cause.
Senator Douglas, yesterday, argued that monetary policy is too
restrictive, on the following basis. Free reserves, which averaged
#$00 million or so in 1961, have averaged <^37£ million during 1962. But
a level of $375? million really means free reserves are "practically nonexistent" because (l) they are concentrated mostly in country banks, which
account for a small portion of bank loans, and (2) vault cash is counted
now as reserves.
"""-*
cc: Each Board Member
Mr. loung
Mr. Molony
Mr. Fauver
Mr. Knipe
Mr. Noyes
Mr. Ke.:».yon
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
August 9, 1962
To
Board of Governors
From
Robert L0 Cardon
Subject:
Hearings before Joint
Economic Committee
The Joint Economic Committee1s current hearings on the "State
of the Economy and Policies for Full Employment"
opened with three separate statements of purpose„ Chairman Patmarils was brief and broad,
indicating a judicious readiness to receive and consider any suggestions
for improving our economy0 Senator Bush sounded a note of greater urgency.
He felt the Committee should probe deeper than such "ripple-on-the-strsam"
questions as a tax cut, down into the darker mysteries of "how to get the
country moving again." Senator Proxmire, on the other hand, had a ready
answer for our troubles: the "high-interest, slow-down" policy of the
Federal Reserve, and challenged any witness to justify it.
The first two days of the hearings have been well attended by
Members and the press. Ten of the sixteen Members have been present at
one time or another, with Messrs, Patman, Douglas, Reuss, Proxmire, Bush,
Curtis, and Javits, taking the most active part.
While much of the testimony end questioning has centered so far
around an immediate tax cut, two other themes seem likely to attract increasing attention as the prospects of a tax cut this year fade. Patman,
Douglas, Heuss, and Proxmire are trying to demonstrate that the balanceof-payments deficit is no excuse for tight money, which is choking off
growth. Bush and Curtis, on the other hand, evidently want to show that
the Administration's deficit spending programs lie at the root of the
trouble.
At its opening session, Tuesday, August 7, the Committee heard
four economists. Three of them favored a tax cut for various reasons.
Mr* Suits (Professor of Economics, University of Michigan) felt our
economy lags because of "tight tax brakes" properly applied during World
War II and Korea but harmful now. Mr. Weston (Professor of Economics,
University of California at Los Angeles) felt a tax cut is needed to
counteract restrictive monetary policy resulting from balance-of-payments
problems. Mr. Wishart (Research Director, Amalgamated Meatcutters and
Butchers of North America) said taxes should be cut for the lower income
groups to stimulate consumer demand. Only Mr. Ellis (Economist, du Pont
de Nemous & Co.) expressed reasonable satisfaction with the state of the
economy.
At its second session, yesterday morning, Mr. Greenwald (Director of Research, McGraw-Hill Publishing Co.) said business investment in
plant and equipment should continue to expand; with other sectors neutral
or favorable, he saw no need for a tax cut. Mr. Katona (Professor of
Economics, University of Michigan), on the other hand, recommended a tax
cut to create a freer-spending psychology among consumers. Our own
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-2-
Miss Dingle presented the data just collected for the Quarterly Survey
of Consumer Buying Intentions for July, leaving broader policy judgments
to others,
Yesterday afternoon^ Chairman Heller of the Council of Economic
Advisers summed up the prospects for the economy as follows: "A continued
period of modest upward movements or leveling off is one reasonable possibility. We experienced this in 1956-57, with gains in output just large
enough to prevent a significant rise in unemployment. But we cannot rule
out the alternative possibility that the recent slowdown in the expansion
represents advance warning of an economic decline,," In any case, he called
for action on proposals already submitted to the Congress by the President,
to strengthen the performance of an economy !Tstill operating considerably
short of its potential." These include standby tax cut authority, expansion
of public works, and liberalizing unemployment insurance. He straddled the
question of a tax cut this year, but said "the basic case for easing the
net tax drain on the economy, as well as the broad principles which should
guide tax reduction, are reasonably clear in the light of our unsatisfactory
economic experience of the past five years." His remarks on monetary policy
are quoted more fully at the end of this memorandum^ but two points stand
out. First, he said a "careful balance must be struck between bank and nonbank financing" of deficits so as not to "Thwart or nullify the expansionary
effect of budget measures in an economy with excessive unemployment and
excess capacity." Second, he said monetary policy is more restrictive than
desirable for the domestic economy, but this is necessary because of the
balance-of-payments deficit.
In the questioning so far, only one Member of the Committee (Senator Javits) has expressed disappointment over the Administration's failure
to recommend a tax cut this year. Senators Douglas, Proxmire, and Pell
have expressed flat opposition to cutting taxes now, and Senator Bush and
ivir, Curtis give strong indications of opposition without expressly committing themselves. Other points of special interest to Committee Members
are listed below:
1. Patman: Should the Federal Reserve keep the power to frustrate ("sabotage") expansionary policies of the Administration?
2. Douglas: Since the economy is faltering, shouldn't the
Federal Reserve apply the traditional remedy of monetary ease, leaving a
tax cut in reserve for a rainier day?
3» Douglas: What evidence is there of interest rate differentials leading to capital outflows? (He sees covered rate differentials
as favoring us or neutral).
U. Curtis; Eow could a tax cut stimulate the economy if there
is a budget deficit? Government borrowing will nullify the tax cut unless
the deficit is financed with bank credit created for the purpose, and he
trusts the Federal Reserve will not create the reserves to finance it that
way.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-3£. Curtis: Why was there no increase in the labor force
from June 1961 to June 1962? Doesn't this indicate unemployment is worse
than the figures show?
6. Proxmire: Do higher interest rates have any significant
impact on our balance of payments or loss of gold reserves? (He cites various statements coming from Federal Reserve sources as showing they do not.)
7* Proxmire: Does the Treasury's recent decision to offer a
long-term bond issue indicate that the Administration has decided to join
the Federal Reserve in pushing up interest rates (and long-term rates at
that)?
Excerpts from Heller's testimony on monetary policy:
u
lc At a time when the Federal budget was becoming progressively less expansionary in its net impact on the economy during the 196162 recovery, monetary policy remained easy, partly through conscious effort
of the monetary authorities, partly because expansionary forces have not
been as strong as expected, and partly because 1961-62 may mark the end of
a rising trend — related to inflationary expectations — in interest rates.
"2. Balance of payments and gold outflow considerations currently
demand a more restrictive monetary policy than would be desirable from the
standpoint of the domestic economy. To this extent, fiscal policy must be
more expansionary than would otherwise be necessary in order to promote
domestic economic expansion and narrow the excessive gap between our
economic performance and our economic potential. Indeed, closing this gap
can play an important role in building long-run confidence in the dollar,
As the steps currently being taken to eliminate the balance of payments
deficit and strengthen our international monetary position achieve their
objective, the curbs on our freedom to use monetary policy to meet the
needs of the domestic economy will be progressively reduced.
"3. Any move toward sizable tax reduction must, of course, be
accompanied by a willingness to move toward higher interest rates if this
should prove to be necessary (a) to discourage any adverse capital flows
that might develop, or (b)"to offset any inflationary'^pressures that might
ensue "^ if- the rebound toward full employment should profcfe to be unexpectedly
rapid.
"U. If budget deficits are incurred, the method of financing
them must be carefully adapted to the prevailing economic circumstances.
A careful balance must be struck between bank and non-bank financing, a
balance which will not thwart or nullify the expansionary effect of budget
measures in an economy with excessive unemployment and excess capacity, but
will prudently shift Federal debts into non-bank hands as the economy comes
close to or reaches full employment.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-h"Summing up, let me say that relative monetary ease has facilitated economic expansion in the recovery of 1961-62) that even greater
ease would have been possible in the absence of international payments
pressures; that those pressures throw an additional burden on fiscal
measures as part of a co-ordinated economic policy for full employment and
faster growth; and that care must be exercised not to overcompensate for
such international monetary pressures by premature or excessive tightening
of credit and interest rates."
cc: Each Board Member
Mr, Young
Mr. Molony
Mr. Fauver
Mr. Knipe
Mr. Noyes
Mr. Kenyon
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
This article is protected by copyright and has been removed.
Author:
Livingston, J.A.
Article Title:
Business Outlook... (Syndicated Column) Did Martin's 'Nyet' Kill
1962 Tax Cut?
Journal Title:
The Washington Post
Date:
August 17, 1962
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
This article is protected by copyright and has been removed.
Author:
Nossiter, Bernard D.
Article Title:
Tight Credit Line Upheld by Martin
Journal Title:
The Washington Post
Date:
August 17, 1962
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
This article is protected by copyright and has been removed.
Article Title:
Light on a Mystery
Journal Title:
The New York Times
Date:
August 16, 1962
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
This article is protected by copyright and has been removed.
Author:
Slevin, Joseph R.
Article Title:
Tax-Cut Foe: 'Money Plentiful'
Journal Title:
New York Herald Tribune
Date:
August 16, 1962
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
This article is protected by copyright and has been removed.
Article Title:
Economic; Washington – Add Economic; Fed -- Patman
Journal Title:
Associated Press News Wire
Date:
August 6, 1962
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
This article is protected by copyright and has been removed.
Article Title:
Tax - Interest
Journal Title:
Associated Press Ticker
Date:
August 7, 1962
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
This article is protected by copyright and has been removed.
Article Title:
Javits Urges Tax Cut
Journal Title:
Dow Jones Ticker
Date:
August 7, 1962
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
This article is protected by copyright and has been removed.
Article Title:
Patman Slates Hearings on Money Policy
Journal Title:
Washington Star
Date:
August 1, 1962
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(
STARK - 5171
FOR IMMEDIATE RELEASE
Thursday, August 16, 1962
CONGRESS OF THE UNITED STATES
JOINT ECONOMIC COMMITTEE
Joint Economic Committee Announces Additional Witnesses
for Hearings on
State of the Economy and Policies for Full Employment
Rep. Wright Patman (D., Texas), Chairman, Joint Economic Committee
today announced the Committee's hearing agenda for Friday, August IT, 19&2,
and Monday and Tuesday of the following week, August 20 and 21.
In addition to testimony from Secretary of the Treasury C. Douglas
Dillon on Friday morning, as previously announced, the Committee will hear
on Friday afternoon Hon. Ewan Clague, Commissioner of the Bureau of Labor
Statistics, Department of Labor, on the subject of changes in the size
and composition of the labor force.
Beginning next week the Committee will hear witnesses on the relationships between inadequate competition and monopoly in the market place
and the nation's failure to maintain maximum employment, production, and
purchasing power. Mr. Patman said "the Committee's hearings would fall
short if we considered only improvements in monetary, tax, and other fiscal
policies as a means of achieving full employment and a better rate of
economic growth. Government actions in these fields can not substitute
for competition, because, in a free enterprise system vigorous competition
must be the main force working for full employment of our resources and for
prompt adjustments in resource uses following changes in technology and
consumer demands."
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(MORE)
2.
Hon. Lee Loevinger, Assistant Attorney General in charge of
antitrust, Department of Justice, will be the first witness on competition
problems and will discuss the Department's first report of identical bids
to be made under Executive Order No. 10936. This order was issued on
April 2k, 1961, following adoption of a resolution by the Joint Economic
Committee suggesting that President Kennedy issue such an order, and the
first report to be released has been in preparation for more than a year.
The agenda is as follows:
Friday afternoon, August If, 2:00 o'clock, in the District of Columbia
Committee Hearing Room, Room~6226, New~Senate Office Building (Changes in the Size and Composition of the Labor Force")
EWAN CLAGUE, Commissioner of the Bureau of Labor Statistics,
Department of Labor
Monday morning, August 20, 10:00 o'clock, in the Atomic Energy Committee
Hearing Room, Room AE-1, The Capitol — (Competition Policies for
Maximum Employment, Production and Purchasing Power)
LEE LOEVINGER, Assistant Attorney General in Charge of Antitrust
Division, Department of Justice
Tuesday morning, August 21, 10:00 o'clock, in the Atomic Energy Committee
Hearing Room, Room AE-1, The Capitol — (Competition Policies for
Maximum Employment, Production and Purchasing Power)
EDWIN G. NOURSE, former Chairman, Council of Economic Advisers
1946-19^9
ALFRED E, KAHN, Professor of Economics, Cornell University
WALTER ADAMS, Professor of Economics, Michigan State University
EIOHARD J. BARBER, Professor of Law, Southern Methodist University
Tuesday afternoon, August 21, 2:00 o'clock, in Room AE-1, The Capitol -
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(Possible continuation of morning witnesses)
( END )
STARK - 5171
FOR IMMEDIATE RELEASE
Friday, August 10, 1962
CONGRESS OF THE UNITED STATES
JOINT ECONOMIC COMMITTEE
Agenda for 2nd Week's Hearings
Rep. Wright Patman (D., Texas), Chairman, announced today the
witnesses scheduled for appearance during the second week of the
Committee's hearings on the state of the economy and on policies for
achieving maximum employment, production, and purchasing power, as follows:
Monday morning, August 13, 10:00 o'clock, in the Atomic Energy Committee
Hearing Room, Room AE-1, The Capitol — (Fiscal and Monetary
Policies with Particular Reference to the European Experience)
ETTORE LOLLI, Central Director, Banca Nazionale del Lavoro
JTJRG NIEHANS, Professor of Economics, University of Zurich
ALAN DAY, Professor of Economics, London School of Economics
Monday afternoon, August 13, 2;00 o'clock, Room AE-1, The Capitol
Possible continuation of morning witnesses.
Tuesday morning, August lU, 10;00 o'clock, in the Caucus Room, Old Senate
Office Building, Room 318 — (Monetary policies)
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
LAWRENCE S. RITTER, Professor of Economics, New York University,
Graduate School of Business
EBRXL W. SPRINKEL, Vice President, Harris Trust and Savings Bank,
Chicago, Illinois
J, M. CULBERTSON, Professor of Economics and Commerce,
University of Wisconsin
(MORE)
2.
Tuesday afternoon, August lk, 2;00 o'clock, in the Caucus Room, Old Senate
Office Building, Room 318 — (Balance of Payments and International
Funds Flow)
FREDERICK H, KLOPSTOCK, Manager, Research Department, Federal Reserve
Bank of New York
SAMUEL PIZER, Assistant Chief, Balance of Payments Division,
Department of Commerce
DOS HUMPHREY, Professor of Economics, Fletcher School of Lav and
Diplomacy, Tufts University
PHILIP BELL, Professor of Economics, Haverford College
Wednesday morning, August 15, 10;00 o'clock, in the Atomic Energy Committee
Hearing Room, Room AE-1, The Capitol — (Monetary Policies and Methods)
MARRINER S. ECCLES, former Chairman, Board of Governors, Federal Reserve
System, and Chairman of the Board, First Security Corporation,
Salt Lake City
MALCOLM BRYAN, President, Federal Reserve Bank, Atlanta
Wednesday afternoon, August 15, 2;00 ofclock, Room AB-1, The Capitol
Possible continuation of morning witnesses
Thursday morning, August 16, 10:00 o*clock, in the Atomic Energy Committee
Hearing Room, Room AE-1, the Capitol — (Monetary Policies and Methods)
ALFRED HAYES, President, Federal Reserve Bank, New York
WILLIAM McCHESNEY MARTIN, Jr., Chairman, Board of Governors, Federal
Reserve System
Thursday afternoon, August 16, 2:00 o'clock, Room AE-1, The Capitol
Possible continuation of morning witnesses
Friday morning, August 17, 10;00 o'clock, in the District of Columbia Committee
Hearing Room, Room 6226, New Senate Office Building
C. DOUGLAS DILLON, Secretary of the Treasury
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(END)
STARK - 5171
FOR IMMEDIATE RELEASE
Tuesday, August 7, 1962
CONGRESS OP THE UNITED STATES
JOINT ECONOMIC COMMITTEE
Economic Committee Announces Witnesses
Si
>
for Hearings on
atfl of the Economy and Policies for Full Employment
J
V_X
First Week
>resentative Wright Patman (D., Texas), Chairman, announced
today the witnesses who are scheduled to appear at the first six sessions
of the hearings on the State of the Economy and Policies for Full Employment:
Tuesday morning, August 7, 10:00 o'clock — State of the Economy
IRA ELLIS, Economist, duPont deNemours & Co.
DANIEL B. SUITS, Professor of Economics, University of Michigan
J. FREDERICK WESTON, Professor of Economics, University of
California, Los Angeles
JAMES WISHART, Research Director, Amalgamated Meat Cutters and
Butcher Workmen of North America
Wednesday morning, August 8, 10;00 o'clock — State of the Economy
DOUGLAS GREENWALD, Director of Research, McGraw-Hill Publishing Co.
MONA E. DINGLE, Economist, Board of Governors, Federal Reserve System
GEORGE KATOM, Professor of Economics, University of Michigan
Wednesday afternoon, August 8, 2;00 o'clock -- State of the Economy
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
COUNCIL OF ECONOMIC ADVISERS:
WALTER W. HELLER, Chairman
KEKM1T GORDON, Member
GARDNER ACKLEY, Member
- 2-
Thursday morning, August 9, 10:00 o'clock -- Fiscal Policy
OTTO ECKSTEIN, Professor of Economics, Harvard University
PAUL W. KcCRACKEN, Professor of Economics, University of Michigan
JOSEPH A. PECHMAN, Director of Economic Studies,
The Brookings Institution
Thursday afternoon, August 9, 2:00 o'clock -- Fiscal Policy
LEON H. KEYSERLING, Economic Consultant, Washington, D.C.
RAYMOND J. SAULNIER, Professor of Economics, School of Business,
Columbia University
Friday morning, August 10, 10:00 o'clock — Fiscal Policy
GEORGE G. HAGEDORN, Director, Research Department
National Association of Manufacturers
JOHN K. LANGUM, Consulting Economist, and President of
Business Economics, Inc., Chicago
JOSEPH A. LIVINGSTON, Financial Editor, Philadelphia Bulletin;
Nationally syndicated columnist.
STANLEY H. RUTTENBERG, Director, Department of Research,
AFL-CIO
Hearings will be open to the public, in the Atomic Energy Committee
Hearing Room— AE-1, The Capitol
Witnesses for succeeding sessions "will be announced at a later date.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(END)
Johnson - 5171
FOR A.M. RELEASE
SUNDAY, August 5, 1962
CONGRESS OF THE UNITED STATES
JOINT ECONOMIC COMMITTEE
Joint Economic Committee Announces Witnesses
for Hearings on
State of the Economy and Policies for Full Employment
Representative Wright Patman (D., Texas), Chairman, announced
today the witnesses who are scheduled to appear at the first three sessions of the hearings on the State of the Economy and Policies for Full
Employment:
Tuesday morning, August 7j 10:00 o'clock — State of the Economy
IRA ELLIS, Economist, du Pont de Nemours & Co.
DANIEL B. SUITS, Professor of Economics, University of Michigan
J. FREDERICK WESTON, Professor of Economics, University of
California at Los Angeles.
JAMES WISHHART, Research Director, Amalgamated Meatcutters and
Butchers of North America.
Wednesday morning, August 8, 10:00 o'clock — State of the Economy
DOUGLAS GREENWALD, Director of Research, McGraw-Hill Publishing Co,
GEORGE KATONA, Professor of Economics, University of Michigan.
Wednesday afternoon, August 8, 2:00 o'clock — State of the Economy
COUNCIL OF ECONOMIC ADVISERS:
WALTER W. HELLER, Chairman
KERMIT GORDON, Member
GARDNER ACKLEY, Member
Hearings will be open to the public, in the Atomic Energy Hearing Room,
AE-1 in The Capitol.
Witnesses for succeeding sessions will be announced at a later date.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Stark - 5171
FOR A.M. RELEASE
WEDNESDAY, August 1, 1962
CONGRESS OF THE UNITED STATES
JOINT ECONOMIC COMMITTEE
Joint Economic Committee Announces Hearings
on Fiscal and Monetary Policies
Rep. Wright Batman (D., Tex.), Chairman, announced today
that the Joint Economic Committee will begin hearings next week on
policies for achieving full employment.
The minority members of the Committee have requested
hearings•on the state of the economy, Mr. Batman said, and several
of the majority members have also requested hearings on what should
fce done to improve matters, if anything. Our purpose will be to
cover both subjects and to consider, in a related way, what the
trends in the economy are and what changes in fiscal or monetary
policies, or both, are needed to stimulate employment and economic
growth.
Mr. Batman said that Committee members feel that some of the
basic questions needing answers are: Have monetary and tax policies
prevented full employment? To what extent do artificial restrictions
on the growth of private credit reduce prices and wages or merely
reduce employment of labor and machines?
How much is the deficit
in our balance-of-payments affected by the flow of bank funds to
and from foreign countries?
What are the practical alternatives to
the policy of raising domestic interest rates to levels of those
in Western Europe? Are tax cuts needed to bring about full
employment?
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(MORE)
2.
Would the effects of a tax cut be wiped out by changes in
monetary policies? What would be the effects of a tax cut
accompanied by a cut in Federal spending, as compared to a tax
cut without a cut in Federal spending? What kind of tax cuts, if
any, would so stimulate the economy that a deficit would be
avoided? What kind of tax cut is most likely to have a
wholesome effect on the economy in the long run, when the
Federal budget is balanced or in surplus?
To achieve full
employment and a more rapid expansion of productive capacity,
should the first step be to increase the Nation's rate of savings
or to raise family living levels?
The Committee will look into the trends in personal and
corporate liquidity and in the flow of funds to families,
businesses, savings, consumption; and to what extent there has
been a profit squeeze.
Mr. Patman said that the Committee will try to obtain
facts and expert analyses, not just air the policy stands of
organized banking, industry, and labor groups.
Witnesses will be announced later this week; hearings
will be open to the public.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(EHD)
August 27, 1962
Dear Wilfred:
.
Thank you for sending me the Commercial
and Financial Chronicle and I axn glad you appreciate
the quotation you used.
With all good wishes,
As always,
Wm. McC. Martin, Jr,
Mr. A. Wilfred May,
Executive Editor,
The Commercial and Financial Chronicle,
25 Park Place,
Hew York 7, New York.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
MEMORANDUM
A. WIL
.ED MAY
Executive Editor
Liear Bill: —
Besides this cover page, ...lease nots
ay citation of your tesimony on r. 4 ( "
of "toe week")
The COMMERCIAL and FINANCIAL
25 PARK PLACE
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
CHRONICLE
•
NEW YORK 7.N.Y.
REctor 2-9570
4
(804)
Tne Commerci
OBSERVATIONS.
BY A. WILFRED MAY
SWISS BANKER'S VIEWS
ON THE DOLLAR
(In Pessimistic Dissent)
Arresting indeed is Switzerland's
up-dated overflowing gold and
monetary situation. With her gold
holdings amounting to 10.6 billion
Swiss francs and the note circulation reaching 7.4 billion francs,
the cover of the note circulation
aggregates 142%. The bank note
circulation and all short-term liabilities of the central bank are
covered by 114% in gold and foreign exchange.
But for the international monetary situation, Switzerland could
at any time return to issue gold
coins. Meanwhile, the Swiss franc
is based on gold only; the Central
Bank is at any time prepared to
sell gold to foreign central banks;
and trade in gold coins is free to
everybody.
The Dollar's Contribution
Authoritative word from Switzerland attests to the fact that this
situation stems directly from dollar distrust, with over $275 million
having flowed into Switzerland
since early June — this needed
capital inflow having been sufficient to over-balance this supposedly "rich" country's adverse
current account and appreciable
capital exports.
This most recent capital inflow
has more than doubled the volume reached during the international ''confidence crisis" in
October 1960, when the London
gold price rose to $40.
Accordingly, a leading Swiss
central banker in a letter to Mr.
David Rockefeller commenting on
the Chase Manhattan Bank president's exchange of views with
President Kennedy published in
Life magazine, reports that "the
distrust against the dollar in
European circles has taken proportions never known before."
Detailing this conclusion on the
situation leading to the two dollar-franc Swap arrangements with
the New York Federal Reserve
Bank, the Swiss authority goes on:
"From all over the world orders
to convert dollar balances into
Swiss francs have reached our
banks. Domestic and foreign bank
http://fraser.stlouisfed.org
customers sold TT Q c.~~*,~:+:
^
Federal Reserve Bank of St. Louis
(Aug. 16), we pointed out the
virtue of illiquid property, as
art, in a declining market, in providing its owner emotional relief
through ignorance about "what's
going on" price-wise..
By way of "P. S." we suggest
to the interested, by way of comp r o m i s e between the hyperliquidity of the Stock Exchange
a n d the quite complete nonliquidity of the art market, the
over-the-counter securities market. Values in that area tend to
be enhanced by the liquidity-enchanted public's prejudice against
issues that are not Exchange
listed—that is, of inflating the
premium paid for listing's advantages.
S u c h listed - versus - unlisted
price disparity is evidenced even
in the case of the over-thecounter market's high-grade Blue
Chippy issues in the portfolios of
institutions and investment companies. The "value discount" in
the fund category is importantly
caused by the managers' "window
dressing" urge to confine their
portfolio displaying to the "more
respectable" E x c h a n g e-listed
issues.
COMPARATIVE EARNINGS
YIELDS
A group of 55 leading over-thecounter industrial stocks extensively appearing in the portfolios
of the institutions,* are currently
available at an average priceearnings ratio of 14.3 versus 18 on
the Dow Jones Industrial Average, and 16.7 on Standard & Poor's
Average of 425 Industrials—and
also versus the 15-times earnings
"sound value" yardstick expounded by Messrs. Kennedy and Dillon.
This Counter group includes
such representative issues as
Time, Inc. (at 13.5 times earnings),
Warner & Swasey (8.5), Sprague
Electric (13) Grinnell (8), etc.
Thus there is revealed another
demonstration of the substantial
premium charged for stock market liquidity!
A "P. S." ON THE
LIQUIDITY FETISH
are intended only to facilitate
observation of the current
market, and the sales are repeated later in their correct
chronological order.
"The Exchange's p r e s e n t
ticker prints at a rate of 500
characters, or the equivalent
of 100 words, a minute—the
speed of the fastest commercial telegraphic printers today.
But realizing that this speed
is not sufficient to keep up
with anticipated 6 to 10 million share days in the future,
the Exchange has worked with
equipment manufacturers for
a number of years to develop
a faster ticker. Based on
technological advances, a new
900-character tape printer is
scheduled for o p e r a t i o n in
1964."
Thus we see the constant
speeding-up of the Exchange's reporting mechanisms and accelerated trading activity following
each other in a Vicious Circle.
rele
doll
mai
cou
inc
abo
cen
pro
doll
dec
OF THE WEETO
"I sometimes wonder though* gros
if we have not become overly
proi
sensitive to cyclical indicators
val
—we read, watch, study, and
the
talk about thsm so much that
ser
U'g may have become like
p r(
medical students who acquire
h a;
each disease as they read
dou
about its symptoms in their
1950
textbooks. We ought to rerate
member that, while leading
dow
indicators have correctly foreN
told some recessions, they
fact
have also on occasions given
rate
pcrtents of recession that did
grov
net occur." — From Statement
ecoi
by Chairman William McC. Iwou
Martin, Jr., of the Federal
hilli
Reserve Board, before the » lion.
Joint Economic Committee^^'ther
Aug. 16.
coul
This realistic depiction of the an4
hypochondriac attention paid to
the Indicators (in the economic °bso
rather than the political category)
r
is particularly worthy in the light trv
of the economy's current stubborn C°U1
refusal, once again, to follow that ln
supposedly greatest indicator of
*
them all, the stock market; or °[ur
even to conform to the President's ^
pictureseque post-Crash description of the economy as "running
Bu
out of gas."
$23 t
perfc
Cherokee Sees.
SRCIAL and FINANCIAL
ftONICLE
Reg.U.S.Pat. Off.
New York 7, N. Y., Thursday, August 23, 1962
Duntry
n pros that
Cxecuing of
camine of
i this
dn to
early
/orite
i reqist of
much
there
nary
and
lown
and
i be
! SO-
;n a
/hat
itely
nust
and
are
cern
iem9. In
; our
•t is,
•ge 25)
Price 50 Cents a
Federal Reserve's Credit Policy
The Past, Present and Future;
By William McChesney Martin, Jr.,* Chairman of the
Board of Governors of the Federal Reserve System
Central banking chief, stressing adequacy of banking system's supply of reserves for today's credit needs, rejects
easier credit policy for stimulating the economy. Asserting
that credit has perhaps actually been too easy in the past,
Mr. Martin urges financing of deficit through real savings
in lieu of short-term bank credit. Finds business conditions
improved in July over June, with betterment continuing in
early August; and expects mixed movement for awhile. Suggesting our over-sensitiveness to cyclical indicators, Mr.
Martin forecasts further growth in the broad aggregate
measures of economic activities.
Much in the recent flow of statistical information
has indicated a definite loss of momentum in the
pace of economic expansion. This was particularly
true of the June reports. In that month, there were
declines in durable goods orders, average hours of work at
factories, retail sales and housing starts, and only small gains
in industrial production, employment and personal incor ,e.
Altogether, the impression of
slowdowns seemed well confirmed.
There has been a popular
tendency to view the various
signs of slowdown as foreshadowing an imminent upper
turning point in the economic
cycle. Judged from the perspective of cyclical indicators,
which in the past have shown a W. McC. Martin, Jr.
tendency to run ahead of the
over-all data, this view has perhaps been reasonable.
I sometimes wonder though if we have not become overly sensitive to cyclical indicators—we
TVT TcurnTCTW ATTOXT — Tin
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
read, watch, study, and talk about them so much
that we may have become like medical students
who acquire each disease as they read about its
symptoms in their text-books. We ought to remember that, while leading indicators have correctly
foretold some recessions, they have also on occasions given portents of recession that did not occur.
In June, our economic data were subject to certain special influences and, if allowance is made
for these, the situation does not appear so persuasively discouraging as appeared at first sight.
Thus, using up the inventory accumulated in anticipation of a steel strike that did not occur affected not only new orders for steel but also employment and hours of work in the steel industry,
and unemployment claims in steel centers.
The steel industry is so large that declines in
that one industry can at times result in declines
in over-all manufacturing orders, employment,
hours of work, and many other measures of economic activity. Observers who simply count the
pluses and minuses among the cyclical indicators
run the risk of being overly influenced by the
reflections of a decline in one industry, not of
cyclical origin, showing up several times in their
lists of unfavorable omens. In addition to the
steel situation, though of less importance, a strike
at some auto plants affected production and sales
in June. The adverse effect of this on the June
data should not be interpreted as being of cyclical
significance.
Nevertheless, the June showing as a whole was
not strong. And it certainly made clear that the
economy was moving ahead more slowly than the
optimistic goals widely discussed at the turn of
the year.
From data now available for July, the economic
situation appears improved. The unemployment
rate was down slightly, non-agricultural employment rose somewhat further, and labor market
data were definitely encouraging in another res p e c t : t h e y showed a
(Continued on page 28)
rlpalprs and investor* in r»nrnnrat«>
1
Miss Muehlhaus
Professor J. M. Culbertson
School of Commerce
The University of Wisconsin
Madison 6, Wisconsin.
Dear Professor Cuiberteon:
;
Thank you. for sending me a copy of your statement to
the Joint Economic Committee last week. As you suggest,
your view is somewhat at variance with mine, as is evident
from my statement to the same Committee, a copy of which
is enclosed.
I agree with you on a number of points, however, and
I certainly feel, as I am sure you do, that better understanding
of the magnitudes involved in measuring monetary growth and
continuous reappraisal of what constitutes adequate monetary
growth is vital. Everything that you can do as a research
economist and as an articulate member of the academic coxa-*
m unity to further our understanding of this perplexing problem
is all to the good.
I know that you understand better than some of your
colleagues that the Board and its staff have no desire to insulate
themselves from the point of view expressed in your paper. In
fact, quite the opposite is true. I hope that we will he able to
arrange some opportunities for an exchange of views around the
table with you and others interested in the formulation of monetary
policy in the months ahead.
Sincerely yours,
:NED) WM. McC.
McC, Martin, Jr.
Enclosure (8/16)
GENink
cc: Miss Muehlhaus
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Miss Muehlhaus
August Z4, 1962
Dr. Lawrence S. Ritter
Graduate School of Business
New York University
100 Trinity Place
Hew York 6, New York.
Bear Professor Ritter:
It was thoughtful of you to send me a copy of
the text of your statement to the Joint Economic
Committee during its recent hearings.
In the light of your expressed concerns, I
am sending in return a copy of my own statement
in which I tried, at some length, to spell out my
views on some of these matters. You may be especially interested in the latter half of the statement, which
treats with the topics of the relationship of domestic
and international considerations and of deficit financing,
With kindest regards,
Sincerely yours,
Wm. McC. Martin, Jr.
Enclosure (8/16 statement)
CLF:nk
cc: Miss Muehlhaus
t(**i
« M?lS
REMARKS OF THE HONORABLE DOUGLAS DILLON
SECRETARY OF THE TREASURY
BEFORE THE JOINT ECONOMIC COMMITTEE
FRIDAY, AUGUST 17, 1962, 10:00 A. M. , EOT
The performance of the economy has already been reviewed by
previous witnesses. As you know, there have been substantial gains
in domestic employment and production over the past 18 months, plus
clear progress toward restoring balance in our international
accounts.
You are also aware that the margin between our productive
potential and the current rate of business activity is still far
too wide to permit complacency. Unemployment at 5.3 percent,
although much improved, is still at an unacceptably high level.
And, if we are to maintain a secure foundation for the dollar and
for vigorously expanding trade among nations, the deficit in our
balance of payments must be eliminated.
Thus, the major task of economic policy is to facilitate a
step-up in the pace of domestic expansion at the same time that we
reinforce our program for achieving equilibrium in our international
payments.
!
There is no basic conflict between these twin goals of rapid
growth at home and balance in our foreign payments.
The key to
both is the fuller and more effective use of our unmatched human
and physical resources.
We must produce more and better goods and
services with greater efficiency, and we must have markets —
domestic and foreign — adequate to absorb our output.
This requires that our productive plant and machinery be
modernized and expanded.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The skills and initiative of our workers
- 2must be better channeled into constructive effort.
Domestic demand
must also grow to provide markets for increased productive
capacity.
And foreign markets must not be closed to us —
either
by insurmountable tariff barriers, or by increases in our own price
level.
The financial policy of the Federal Government will be one of
the vital factors in shaping our progress toward these ends over
the years ahead.
Within our over-all financial policy, tax policy
can play a particularly important role.
Federal income taxes today absorb fully 15 percent of our
total national income.
they are levied —
The sheer size of these taxes and the way
the tax rate schedules, their application to
different sources of income, the maze of special provisions
all exert a pervasive influence on economic activity.
—
It is the
joint responsibility of Congress and the Executive, while raising
needed government revenues, to use the taxing power constructively
to facilitate progress towards our goals of full employment, rapid
growth, and stable prices.
It has become apparent in recent years
that some elements of our tax structure are impediments in our
path to those goals —
impediments that in many cases can, and
should, be removed.
Four distinct problems have urgently called for reform:
1.
Our tax structure has placed a heavy burden on the
productive investment so vital to the growth process.
2.
The current rate structure siphons off so large a
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
_ 3 fraction of the increased income generated by
business recovery that forward momentum is dissipated before full employment and full utilization
of industrial capacity can be reached.
3.
Overly high rates of individual income tax interfere
with the economic process.
Energies and resources
are diverted from the business at hand and
concentrated on minimizing tax burdens through the
use of a patch work of special deductions and
exclusions, built up over the years to lighten the
burden of our onerous rate structure.
4.
Our tax system today lacks provision for flexible
and timely adjustments to meet swiftly developing
changes in the over-all level of economic activity.
One of the major objectives of this Administration has been a
tax environment more conducive to business investment in new
equipment.
As a first step toward this objective, the Treasury
has overhauled depreciation guidelines within the framework of
existing law.
generation —
This reform —
the first thoroughgoing review iti a
recognizes fully the impact of swiftly changing
technology on the economic life of equipment, and permits
individual businesses to establish schedules in keeping with
objective measures of their own replacement practices.
Depreciation
deductions permitted for manufacturing machinery and equipment will
be increased by an estimated 17 percent from existing practice;
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
_ 4 the current tax load will be lightened by an estimated $1.5 billion
the first year; and administrative procedures will be greatly
simplified.
Although the result, in terms of stimulating new
investment, cannot be gauged precisely, the reaction of the business
community to this long-needed reform has been extremely favorable.
These realistic depreciation schedules must be supplemented
and reinforced by other measures, however, if we are to provide
incentives for investment within our tax structure comparable to
those available in the other leading industrialized countries.
These further incentives —
generate —
and the increased investment they will
are necessary both to spur growth at home and to main-
tain and improve our competitive position in world markets.
The proposed 7 percent investment tax credit, incorporated in
the Revenue Act of 1962 already passed by the House of Representatives and approved by the Finance Committee of the Senate, represents
the minimum we must do to keep up with our competition from abroad.
All of our foreign competitors provide special tax inducements
of one sort or another over and above realistic depreciation in
order to promote the modernization and expansion of business
investment.
We must do as much if we are to compete on equal terms.
This is clearly indicated by a table I am submitting for
the record.
You will note that, even with the 7 percent credit,
as reported by the Senate Finance Committee, our treatment of new
investment will be less generous than many of our foreign
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 5competitors.
Its early enactment is essential to narrow the gap and
is also of great importance in sustaining and accelerating the
current economic expansion.
The President has announced that a comprehensive program of
tax reform —
including a general reduction of both individual and
corporate rates, effective January 1, 1963 —
for action early next year.
will go to the Congress
In developing this reform program
within the Administration, we are particularly conscious of the
need to achieve a tax structure that will both increase consumer
demand and provide new incentives —
business —
both to individuals and to
while also providing for an appropriate surplus of
revenues over expenditures when the economy is operating at
acceptable levels of employment and plant utilization.
The economy over the past five years has been marked by two
recessions, as well as a persistently excessive level of unemployment.
That record provides ample evidence of the drag on growth
inherent in our current tax structure.
Today, many of the special expansionary forces that marked
the private economy during the first decade of the postwar period are
no longer with us.
The tax system that was appropriate during the
inflationary postwar epoch is now too onerous.
Too much potential
purchasing power is diverted from the spending stream1 a"s a business
recovery develops, dampening economic activity long before full
employement is approached.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The end result is that recovery bogs
- 6down at some level of output well below potential —
and instead of
the theoretical large surplus that would be generated at full
employment, we find ourselves with .farther deficits.
Part of the solution to this problem can be found in reducing
the total tax load on the economy.
Another part can be found by
developing a tax structure that will increase private initiative
and productive investment.
their level —
The structure of taxes —
as well as
affects incentive^ to work, to invest, to cut costs,
a
and to produce efficiently.
Thus tax reform is just as important as tax reduction.
Such a
program necessarily involves a loss of revenue in its first year of
application, but this initial loss of revenue should be soon recouped
as our economy moves ahead.
It should be looked upon as a necessary
down payment on economic growth, more jobs, and higher standards
of living and greater opportunity for all Americans.
More rapid
growth will hold and attract funds here that might otherwise be
invested abroad, and rising investment will make our producers more
competitive in world markets.
Both of these effects will serve
to improve our balance of payments.
Fear of deficits is deeply rooted in our thinking —
and that
fear has its basis in the fact that deficits have sometimes led to
excess demand and inflation.
But in today's economic environment —
far from being a source of dangerous inflationary pressures — our
deficit reflects our idle plant capacity and our overly large
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 7unemployment rolls.
A temporarily larger deficit under these
circumstances is a reasonable price to pay for a program of basic
tax reform and tax reduction designed to spur output and promote
full utilization of our human and physical resources, a program
that promises over the years to generate increased government
revenues as a result of increased output.
Finally, even with the enactment of such a program, we will
also need a measure of tax flexibility, in order to strengthen
our arsenal of tools to combat cyclical down turns.
Legislation
providing this flexibility, patterned on a recommendation of the
Commission on Money and Credit, has been submitted to the Congress
by the President.
Its enactment would strengthen our ability to
handle future down turns.
Monetary and Debt Management Policy, which affects the cost
and availability of credit, is another area in which the Federal
Government can exert a powerful influence on economic developments.
The main responsibility for monetary policy lies, of course, with
i
the Federal Reserve. But the Treasury — largely through its
management of the public debt —
can also significantly influence
the cost and availability of funds.
Difficult and new problems have arisen in this area over the
past 18 months.
On the one hand, the Federal Reserve and the
Treasury together —
and I want to emphasize the continuous
cooperation and close working relationships that have developed
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 8between these agencies —
have had a common interest in assuring
the availability of an ample supply of funds to finance domestic
investment.
But we are also alert to the potential danger of
investors shifting their funds abroad in search of higher returns •
thereby increasing our balance of payments deficit.
Fortunately, rates for top-grade short-term securities — the
part of the rate structure which is the most important in international capital flows —
also have the least significance from
the standpoint of domestic business conditions.
Therefore, within
the limitations imposed by a free and fluid domestic market for
credit, we have sought to encourage an active flow of funds into
productive long-term investment, while maintaining a competitive
equilibrium with foreign markets in the short-term area.
For this
reason a large portion of the funds injected into the market by
the Federal Reserve since February, 1961, have taken the form of
purchases of approximately $3.4 billion of securities maturing
in more than one year, rather than short-term bills, as had been
their usual practice in the past.
At the same time, the Treasury
increased the volume of its own debt outstanding in the under
one-year maturity area by nearly $14 billion.
With the short-term rate structure supported in this manner,
the Federal Reserve has been able to supply the banks liberally
with reserves throughout the recovery period, and thereby to
maintain an atmosphere of credit ease and ample availability.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
_ 9 At the same time, the Treasury, through flexible use of advance
refundings and other sales of intermediate and longer term
securities during propitious market periods, has been able to
•i •
improve its over-all debt structure without impeding the flow of
funds into productive long-term investment.
The results have been gratifying.
Rates for Treasury bills,
which never fell below 2-1/8 percent during the recession months
of 1961, have risen to the 2-7/8 to 3 percent area.
This has
been necessary in order to keep pur rates roughly competitive with
the rate structure in foreign markets —
after allowing for the
fluctuating cost of forward exchange cover.
At the same time, the interest rates of key importance to
domestic growth and investment -r for mortgages, bank loans,
corporate bonds, and state and local government securities — have
generally remained close to, or even dropped below, their recession
lows.
Mortgage rates, in particular, have declined, slowly but
almost steadily, for more than a year, and market rates for
government-insured mortgage loans now average more than 1/4 percen t
below the levels prevailing at the trough of the recession a year
and a half ago.
Local government borrowing costs in recent
months have been at the lowest levels since mid-1958.
Moreover,
funds are freely available at these rate levels in all sectors
of the market.
Far from drawing back on new commitments, banks
and other lenders have continuedi to offer liberal credit terms and
to actively seek out potential borrowers.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 10 -
The contrast with other recent periods of expansion is striking
Rates in all sectors of the market are well below the postwar peaks
reached in 1959; 18 months after the recovery began, banks are
still liberally supplied with funds for new loans; and there is no
lack of credit availability.
As we move ahead in financing our current deficit, we will
naturally be concerned to maintain a balanced structure of Federal
debt.
That means we must be able to continue to tap a cross
section of the funds becoming available in the market —
from
individuals and long-term investment institutions as well as from
banks.
But, it is not part of our policy to press ahead with
long-term financing to the extent of jeopardizing the flow of
funds necessary to support an expansion of business investment.
Any changes, during the coming year, in the level of long-term
interest rates will reflect a natural response to changing levels
of business activity, and not any rigid preconceptions regarding
the appropriate method of financing our current deficit.
it represent a blunt effort —
futile —
Nor will
which I believe would be quite
to crowd out of the long-term market some marginal
amount of foreign borrowing —
borrowing that in any event is
attracted more by our unrivaled market facilities than by relatively
small differences in the total cost of the credit to the borrower.
The Balance of Payments;
Over the longer-run, as I have said,
our ability to maintain equilibrium in our international balance of
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 11 payments will reflect our success in achieving more rapid increases
in productivity, a favorable climate for new investment, faster
growth, and stable prices in our domestic economy —
precisely
the objectives we are seeking in our tax reform program and in
credit policies.
But, for the present, after more than a decade
of deficits, we cannot afford to wait idly by until these longer-run
solutions take hold.
Instead, we must intensify our efforts
through other means to restore balance as promptly as possible.
Our balance of payments accounts are beginning to show some
of the fruits of the measures we have taken.
The over-all deficit,
which averaged $3.7 billion between 1958 and 1960, was reduced to
$2.5 billion in 1961 and, during the first half of this year fell
further, to an annual rate of $1.5 billion.
Part of this recent
improvement resulted from the temporary Canadian difficulties, but
more basic factors have also contributed.
For instance, the net drain from our mutual defense program
is being significantly narrowed —
reflecting additional military
procurement in the United States by our allies, as well as our
own economies in overseas spending.
Current outlays for economic
aid also reflect our efforts to furnish this assistance in the
form of American goods and services.
Perhaps most significant
for the longer-run, our exports have climbed to a new record level
—
thanks in large part to the virtual stability of the prices of
our manufactured goods since 1958.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Although imports have also
- 12 risen —
an expected response to higher levels of business activity -•
our trade surplus has improved over the second half of 1961.
Efforts to lessen the balance of payments impact of our overseas
expenditures and to stimulate our exports
are being stepped up.
One evidence of our determination to reduce Government spending
overseas to the minimum necessary is the recent development under
the aegis of the Bureau of the Budget of a government-wide control
system for international transactions.
This requires the quarterly
submission by all agencies, whose transactions affect the balance
of payments, of a detailed report of past results, as well as of
detailed estimates running one year into the future.
This system
provides, for the first time a regular and orderly procedure for the
special review and control of these outlays.
Each item is being
subjected to close scrutiny, and unless adequately justified in
terms of over-all priorities, is promptly eliminated.
The
institution of this close control over the spending which affects
our balance of payments should lead to substantial savings in the
future.
j
Secretary McNamara has established as a target the reduction
of net military spending abroad to $1.6 billion for fiscal 1963,
and to $1.0 billion by fiscal 1966.
$2.6 billion or more.
This compares with a previous
With the full cooperation of our allies,
these targets can be reached without in any way impairing our defense
position.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 13Our export program should soon receive additional impetus as
the result of a number of measures —
including the recent appointment
of an over-all Export Coordinator in the Department of Commerce.
This official is charged with the responsibility of reviewing and
expediting our total export drive, working with both industry and
Government to assure the best use of our recently improved facilities
and assistance programs for exporters.
Meanwhile, our defenses against the potential shocks and strains
that can come from sudden and large-scale shifts of liquid funds —
whether arising from speculative or other pressures —
have been
greatly strengthened.
The agreement reached last December by the industrialized
countries to supplement the regular resources of the International
Monetary Fund with additional credit facilities of $6 billion has
now been ratified by 7 countries and will become effective as soon
as the United States itself completes the necessary legislative
action.
Apart from that agreement, the Treasury and the Federal
Reserve, acting in close cooperation with each other and with
responsible foreign officials, have made steady progress in
arranging facilities for acquiring convertible foreign currencies.
These currencies, in turn, may be flexibly employed to absorb
dollars passing into foreign hands as a result of our payments
deficit.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
While still in a "pilot" stage, enough has already been
- 14 learned from this experience to suggest that these facilities can
potentially provide an entirely new dimension to our defenses
against disturbances in the international monetary system.
Taken together, the financial program and policies I have
outlined here today will make a major contribution to our economic
goals.
But I should also emphasize that these policies cannot
however wisely considered and implemented —
—
do the job alone.
They
are no substitute for responsible wage bargaining and pricing
practices, for measures to maintain active competition among
producers, for better educational and research facilities, or for
all the other ingredients of dynamic growth with stable prices.
But, it is equally true that without well considered tax reform,
monetary, and debt management policies flexibly attuned to the
facts of our internal and external position, and intense efforts
to restore balance of payments equilibrium, the prospects for
substantial progress toward a better life for all our citizens in
the years ahead would be seriously impaired.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
oOo
Comparison of depreciation deductions, initial and investment allowances I/ for industrial
equipment in leading industrial countries with similar deductions and allowances in the United States
Representative
tax
lives
Belgium
Canada
Years
8
10
Depreciation deductions, initial and investment
allowances (percentage of cost of asset)
•
First year
•
:
First 2 years
:
First 5 years
22.5
30.0
^5-0
44.0
92.5
71.4
France
10
25.0
43.8
76.3
West Germany
Italy
Japan
Netherlands
Sweden
United Kingdom
Average, 9 foreign countries
United States:
Practice prior to 7/11/62
With new depreciation guidelines
'
With new depreciation guidelines and investment
credit 2/
10
10
16
10
5
27
20.0
25.0
43.4
26.2
30.0
39.0
29.0
36.0
50.0
51.0
49.6
51.0
46.3
46-3
67.2
100.0
68.2
85.6
100.0
64.0
80.6
15
12
13.3
16.7
24.9
30.6
51.1
59.8
12
29.5
42.5
69.6
Office of the Secretary of the Treasury
Office of Tax Analysis
August 13, 1962
I/ The deductions and allowances for each of the foreign countries have been computed on the assumption that
the investment qualifies fully for any special allowances or deductions permitted. The deductions in the
United States have "been determined under the double-declining balance depreciation method,,without regard
to the limited first-year allowances for small business.
2/ For purposes of this table, the 7 percent investment credit has been considered as equivalent to a
Ik percent investment allowance. For corporation subject only to the 30 percent normal tax, for instance,
it is equivalent to an investment allowance of 23 percent. Allowance has been made in these calculations
for the adjustment to basis in the amount of the credit as provided in the bill as reported by the •
Senate Finance Committee.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
STATEMENT OF ALFRED HAYES, PRESIDENT
FEDERAL RESERVE BANK OF NEW YORK
BEFORE THE JOINT ECONOMIC COiMTTEE OF THE CONGRESS
AUGUST 16, 1962
Mr. Chairman and members of the Committee:
The United States has achieved, thus far in 1962, a substantial
expansion in domestic economic activity as well as a further improvement
in its international payments position. During the first half of 1962,
production, employment, and incomes all achieved record levels.
Available
data for July clearly indicate that the expansion is continuing.
Never-
theless, it must be admitted that progress in speeding up the country1s
rate of economic growth has been less rapid than many of us considered
possible at the beginning of the year, and in our international accounts
we cannot be satisfied until the balance of payments gap has been
eliminated.
Economic performance must be appraised not only against the past,
but also against what might be achieved if we made reasonably full use of
human and material resources. Measured by this latter yardstick, our
recent performance cannot be rated wholly satisfactory.
Although the
percentage of people out of work has dropped substantially during the
current upswing, I do not question that we must aim for a more ambitious
target.
In short, unemployment has been and remains too high.
Business outlays on new plant and equipment must expand sharply
if the economy is to move into higher ground. Business investment has in
fact rebounded smartly from its recession lows, but in this vital area,
too, the rate of improvement has been short of the need. An important
stimulus has now been given to business investment by a revision in the
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-2depreciation schedule, and another would be provided by the enactment of
the investment credit proposal now before Congress.
These changes, and
the promise of reduced corporate tax rates next year, are desirable not
only as likely to produce expansion in the economy but also as a means to
achieve greater productivity and lower costs in an increasingly competitive
world market.
We are concerned that the forward thrust of the economy has been
losing some of its force, even if one excludes from consideration the
temporarily depressing effects of the unraveling of the steel situation.
On the other hand, the generally stable level of prices, coupled with
unused industrial capacity at home and ready availability of goods from
abroad, has militated against the accumulation of large inventories as a
hedge against shortages and higher prices. The fact that we have avoided
excessive inventory accumulation during the current expansion is encouraging, since it diminishes the danger that such accumulation might set off a
recessionary movement or contribute to such a movement if the business tide
should turn for other reasons.
Throughout the current business expansion, and despite some
criticism at home and abroad, the Federal Reserve has maintained conditions
of monetary ease. As a matter of fact, an examination of business annals
is unlikely to produce another example of a strong recovery proceeding so
far in an atmosphere of ready availability of credit. Large amounts of
bank reserves have been made available, more than offsetting the losses
resulting from the gold outflow. Banks remain comfortably liquid and
anxious to lend. Bank holdings of mortgage loans and municipal obligations
spurted by a total of &6 billion over the first seven months of the year,
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(
—3—
more than during any other similar span of time. Instalment lending has
also increased substantially. At the same time, loan demand and security
flotations by business borrowers have been disappointing, despite the fact
that interest rates for such credit are little changed from those prevailing at the trough of the recession.
One important reason for the
lackluster performance of bank lending is the moderate business demand for
inventories.
A look at the volume of reserves supplied by the System,
together with the maintenance of a relatively high level of free reserves
since the beginning of the recession should be persuasive evidence that
the Federal Reserve authorities have been consistently replenishing
reserves which the banks have put to work. It is true that the money
suppljr—narrowly defined as checking accounts and currency—has increased
comparatively slowly of late, but this development has to be viewed
together with an unprecedented spurt in commercial bank time and savings
deposits. Such deposits, which for most holders provide almost as much
financial maneuverability as checking accounts, have spurted by .#10 billion,
or 12 per cent, so far this year. The public1s holdings of short-term
United States Government securities, which can be readily turned into cash,
have also expanded substantially.
So long as the shortfall of economic activity from wrhat I regard
as a reasonable goal persists, it seems to me that monetary policy should
properly remain concerned with maintaining the maximum degree of credit
ease consistent with its other objectives.
At the same time, we must keep in mind that attainment of our
economic goals depends on many factors, of which credit and monetary
conditions, over which the central bank exerts direct influence, represent
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-4only one—though an important—element. The job of instilling new vigor
into the business expansion must, I believe, be done largely by means
other than monetary policy.
I should like to turn now more specifically to developments in
our international position.
The balance of payments, as you know, has shown some needed
improvement in the first half of 1962. However, a part of the improvement,
although by no means all of it, has occurred because of a temporary flow
of funds, now reversed, from Canada to the United States as pressures
developed on that country's currency.
It is therefore clear that unremitting
efforts to make further progress in reducing the over-all deficit remain
the order of the day. The Administration, as you are aware, is pursuing
a multi-pronged attack on the problem, including an export promotion
program, reduction of military spending abroad, negotiations for both
additional foreign defense purchases in this country and a wider sharing
of aid to underdeveloped countries, and further "tying" of U. S. aid to
those nations. Right now, as well as over the longer term, emphasis must
be kept upon increasing the competitiveness and productivity of the U. S.
economy. For this reason, the recent record of lower unit wage costs has
been most welcome, especially at a time when wage pressures continue strong
in Western Europe and elsewhere.
Bringing our international payments into balance and keeping
them under close control is a necessary condition for protecting the
dollar's position as the world's leading currency and as the keystone of
a stable international currency and payments system. The rebuilding of
foreign monetary reserves and the redistribution of international gold
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-5reserves have resulted in a decline in our gold stock and in a rapid rise
of foreign short-term claims on the U. S, These short-term claims are
like money in the bank to those that own themj and, just as any of us
would, they look to the banker, the United States, to provide assurance
that the bank is being managed wisely. If we expect people to keep their
money in U. S. dollars we must give them both confidence in the soundness
of our currency and some inducement to stay with us, rather than moving
to another currency or to gold* It is for this reason that the System has
cooperated in efforts to avoid unnecessarily low short-term interest rates
and thus to reduce disruptive short-term capital outflows and their actual
or potential effects on our gold stock. In this connection, I should like
to emphasize my strong conviction that if we achieve a balance in international payments and avoid actions that damage confidence, our gold stock
is ample for our requirements both as a major trading nation and as bankers
for the world.
I was surprised, by the way, that several witnesses have proposed
to this Committee that the United States extend a "gold guarantee" to
foreign holders of dollars. I wish to emphasize my strong conviction that
such a guarantee would be an exceedingly harmful measure, besides being
ineffective.
In my judgment, this type of "protection" -would be illusory
and, in any case, is not warranted in view of the Government's determination
to maintain the gold price and to take the basic measures needed to assure
attainment of this objective. Indeed, a guarantee would merely becloud
this larger issue.
The potential of monetary policy in protecting a currency against
sudden speculative pressures is well recognized; hence Federal Reserve policy
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
C
C
-6-
must reirain flexible and prepared to deal with any contingency.
Vie should
try to avoid conditions of excessive credit ease that make reserves so
ample that our banks and other lenders are induced to seek more remunerative outlets abroad because credit availability greatly exceeds domestic
loan demands.
Rate differentials are an important, but not the only, reason
for international capital movements. For instance, the sheer size,
efficiency and ease of access of our capital and short-term credit markets
constitute a strong attraction to foreign borrowers.
And, as you know, a
variety of rate differentials are involved, both hedged and unhedged,
while their respective significance in pulling in or repelling money may
change over time. The Federal Reserve System has to be continuously alert
to the pressures on the dollar which may arise from rate and credit
developments, or from any other cause. In essence, the challenge to
monetary policy in recent years has been to provide an adequate availability
of credit to support a sustainable growth of our economy while guarding
against a spilling over of excess liquidity into channels that would weaken
the international position of the dollar or renew inflationary pressures
domestically.
Meanwhile, the external defenses of the dollar have been
strengthened so that monetary policy will not be overburdened while more
basic balance of payments adjustments are still taking place. Such a
strengthening would have been required, it might be added, even without
a U, S. payments problem.
Convertibility has greatly increased the volume
and volatility of internationally movable funds; this is a natural consequence of the considerable degree of our success in approaching the kind of
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-7world we have been seeking to achieve since World War II.
Nevertheless,
it does mean that proper resources must be at hand to meet sudden shifts
of funds and pressures that may be expected to be temporary. There is
encouraging evidence that this problem can be handled through such
avenues as the activity of the Treasury and the Federal Reserve in the
exchange markets, the increasingly close central bank cooperation of the
past 18 months, and the IMF expansion agreement (still requiring final
Congressional action, of course), which will vastly enlarge our access to
currencies that we may need. Official U. S. exchange operations undertaken
so far have basically been designed to protect the U. S. dollar against
disturbingly large pressures at a time when we are making steady progress
toward bringing our balance of payments into equilibrium.
Treasury operations in convertible currencies began in the
spring of 1961 when the Federal Reserve Bank of New York, acting for the
Treasury, undertook operations in the market for German marks designed to
deal with the abnormal conditions that had developed following the
revaluations of the German and Dutch currencies in March 1961.
This
operation was followed by other Treasury transactions in Swiss francs,
Italian lire and Dutch guilders, which are continuing up to the present.
The Federal Reserve System, with the full concurrence of the Treasury,
concluded that the central bank of this country should play a more active
and direct role in defending the international value of the dollar. The
Federal Open Market Committee therefore authorized the Federal Reserve Bank
of New York on February 13, 1962, to undertake transactions in foreign
currencies for System Open Market Account in accordance with the Committee's
instructions. Since that time the System has acquired a substantial amount
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-8of convertible foreign currencies, primarily through a series of reciprocal
currency agreements with foreign central banks, and has begun to use these
resources in defense of the dollar.
The possibility of acquiring substantial amounts of foreign currencies through such currency swaps with foreign central banks rests upon
a mutuality of interest. That interest is to make the present international
financial system, under which world trade and investments are expanding
rapidly, work reliably and efficiently. Therefore countries relying upon
the dollar as an important part of their international reserve assets are
glad to participate in arrangements that reduce the possibility of
temporary and capricious pressures on the dollar. Furthermore, since
currency swaps and standby agreements are tantamount to a mutual credit
facility, foreign countries as well as ourselves obtain access to additional resources in case of need. Over the years ahead, these arrangements
can also make a useful contribution to world liquidity needs.
In carrying out exchange transactions for both the Treasury and
the System, we have made a point of establishing the closest and most
harmonious possible relations with foreign central banks—an indispensable
requirement when working in the exchange markets for their currencies. We
have found that, with this cooperation, our use of foreign currency
resources has in fact been effective; we have helped to strengthen the dollar
in the exchange markets, reduced cumulative or snowballing speculative flows,
and eased the immediate impact upon the U. S. gold stock of foreign central
bank accumulations of dollars.
You will realize that official U, S. exchange operations rest
upon the assumption that the pressures they have to meet are of a temporary
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(
r
-9-
and transitional nature. In a number of important instances, this has
already turned out to be the case so that the commitments undertaken
could be liquidated without a gold loss.
be taken for granted.
Such success, however, cannot
In particular, an indefinite continuation of large
U, S. payments deficits would assure that the pressure upon the dollar
becomes permanent rather than temporary.
Hence, these exchange operations
in no way detract from the urgency of our task in correcting the payments
deficit.
Furthermore, while the initial development of close international
cooperation has clearly been stimulated by the very strains it is designed
to combat, foreign countries are counting upon us, as we are counting upon
them, to take the national actions necessary to make certain that such
strains upon any one currency will in fact pass.
Thus far we have met to a remarkable degree the challenge of
harmonizing the domestic and international aspects of our financial policies,
I believe we have the needed flexibility to continue to meet this challenge
under the changing conditions that may confront us.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(
For Release on Delivery
STATEMENT OF MALCOLM BRYAN, PRESIDENT
OF THE FEDERAL RESERVE BANK OF ATLANTA,
BEFORE THE JOINT ECONOMIC COMMITTEE
AUGUST 15, 1962
Gentlemen:
It is flattering to have been asked to appear before you
today.
After an examination of conscience, however, I find my
sense of self-esteem greatly reduced by the necessity of confessing
that I have no new figures and no new and revealing
of old figures.
arrangement
I think I should also confess--and this is done out
of no sense of false modesty--that I do not know the answers to the
problems that beset us.
At the moment, without trying to support the point with
figures, it seems to me that we are churning around at a high level
of economic activity, perhaps even edging upward a little, all without
going anywhere in a hurry.
Whether this slowdown in our rate of
expansion will be followed by a break-out on the upside, with continued recovery, or on the downside, I do not know; but I am sure
that when the facts are in, it will appear to everyone,
including
myself, that I ought to have known.
Let me state a few convictions for whatever they may be
worth:
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
r
- 2-
1.
If we break out of this pause on the downside, there is
no presently visible, objective,
rational reason why the period of ad-
justment should be long and deep.
It will only be long and deep if we
take counsel of our fears and frighten each other into panic.
If we do
this, then we are stupid.
2.
It is inevitable, in the normal misjudgments of human
beings, especially when correct judgments are made the more difficult
by a long inflationary cycle such as this country has had, that there
will appear a thousand and one misapplications of capital and manpower
that find a less-than-expected market for their products and services.
It is possible, to be sure, that we shall be unpleasantly surprised by
the magnitude and extent of the adjustments that may be necessary.
I myself believe that they are of a size and magnitude small enough
that our dynamic economic system can accommodate itself to them.
What chiefly scares me is that we shall attempt to overmanage the economy, wherein I think our last case may well be worse
than our first.
What is continuously needed is not a single adjustment
but a myriad of adjustments.
These can only be made by a flexible
economy whose decisions related to manpower and capital are under
the day-to-day guidance of f r e e consumer and f r e e investor choices.
I realize that an economy guided by a free market is often an uncomfortable thing to have around; a free market often seems to behave miserably.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Unfortunately, in my judgment, there is no substitute for it.
(
r .
- 3 -
So I bespeak my conviction that we should at this time be
guided by two general philosophies:
a.
Speaking simply as an American citizen, I think
we should see to it that the pains of readjustment do
not fall with overwhelming and degrading force on the
unemployed, which is the tragic and classic locale of
most of those pains.
I believe we are bound in con-
science not to let that happen.
b.
Again, speaking simply as an American citizen,
I believe we should do the things we know that Government can do and do well.
We should see that competition
is maintained in all sectors of the economy; .we should
see that the consumer is protected against the sharp
practice of an occasional scoundrel; we should see that
he is protected in those areas where his quality judgments
do not suffice.
Even, if I dare say it, I think we should
strive studiously to avoid rigidities introduced into the
economy by Government itself.
After that, I believe we
shall be well advised to give the free market economy
a chance to adjust itself before we intervene with massive
medications.
I shall make a slight further allusion to
this point in a minute or so.
Now, as for monetary policy.
As I see it, monetary policy
in most of the postwar period can be interpreted around a few simple
ideas.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
First of all,
we have been striving to bring inflation to an
end, but to bring it to an end so gently and so gradually that American
businesses, individuals, governments, and the managers of savings
institutions could continually examine their commitments in the light
of a gradually evolving situation, not in the light of a sudden and dramatic
alteration in their environment, which would necessitate sudden, large,
and dramatic adjustments.
Put in a different frame of reference, we have been feeling
our way slowly toward a viable structure of interest rates that will
attract from the American people as savers the large bulk of the funds
that other Americans, American governments, and our offshore friends
want to borrow.
Note, however, a point so many times made:
The
Federal Reserve System has had no intellectual or emotional preoccupation with either high interest rates or low interest rates, as such.
We
have merely wanted an interest rate--the price for money--that largely
equates the supply of savings that Americans are willing to furnish at
that price with the demand for American savings at that price.
At the same time, we have allowed for a growth of bank reserves intended to accommodate a growth in the money supply, which
has been intended in turn to accommodate the increasing population
and the increasing transactions of our country.
That growth of reserves
over the long postwar period exhibits a straight-line trend of 3 percent
per annum.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 5 I do not believe that this has been a tight money policy.
Indeed, if it is to be criticized, I think the criticism over the long
period is that it may have been too easy, delaying adjustments that,
considering the constant change in a consumer-guided economy,
are forever necessary and are the easier the more promptly they
are made; if we are to be criticized, I suspect the criticism is properly
•
taken on the point that we have allowed too much of the economy's
expansion to be financed out of bank created credit.
Second, speaking not to the long term but to our reaction
toward cyclical situations, we have had an extraordinarily simple
.
pattern. Whenever we could detect a downward trend in economic
activities, we have acted promptly to increase the supply of bank reserves and thus to permit banks to seek loans and investments and,
in turn, to increase the money supply.
By the same token, when we
have detected the economy operating in conditions of boom, we have
allowed borrowing demands to press against bank reserves and interest
rates to call up a greater supply of real savings.
The pattern has been as simple as that.
Our counter-cyclical
actions, whether by luck or sophistication I do not know, seem to me
to have had an excellent result.
We have avoided in postwar America
a long or severe depression of the sort that has characterized
other
postwar periods, and the economy has responded when we have tried
to stimulate it by monetary means.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 6 Now, let me go back to a point made a short while ago.
In endeavoring to stimulate the economy we have increased bank reserves, after adjusting for changes in reserve requirements, from
the low point in April,
I960, of $18.2 billion, to $20. 0 billion
(daily average basis) in July, 1962.
cent increase.
This has amounted to a 10 per-
Note that the figure for total reserves, both on a
seasonally adjusted and unadjusted basis, stands comfortably above the
long-run 3 percent growth rate in bank reserves.
had an easy money policy.
In short, we have
The commercial banks of this country have
responded to this easy money policy by expanding their loans and investments $31. 2 billion, seasonally adjusted, or 16. 8 percent, between
April, I960, and July, 1962.
Still, we must all agree that the economy, while it has
responded to monetary ease, has not recently been responding altogether
to the heart's desire.
Although the figures, I believe, give
an ex-
aggerated impression, we have an uncomfortable overcapacity in many
lines.
True, the figures for July were somewhat heartening, but un-
employment remains higher than it should be.
This leads me to an uneasy suspicion that something is
happening in the economic system that we do not quite understand.
Since I must frankly say that I do not believe it to be a lack of money
availability, I believe a search for what is happening to our economy
must take other directions; we need an agonizing reappraisal of some
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 7 -
of the other elements of our total national policy.
Meanwhile, with
so many doctors disagreeing, I think we would be smart to postpone
any exploratory operations or massive medications.
It seems to me that the economy is like a man slightly afflicted with hypochondria who goes to his physician for a regular
check-up and mentions that he has not been feeling as peppy of recent
weeks as he had been.
I think the physician in such a case would be
wise and prudent to keep the patient under observation for a time
before he begins dosing him either with tranquilizers or stimulants.
Neither may be needed.
is,
With the art of economic diagnosis what it
I feel that we should all be wise to pause a while and to find out,
as best we can, what is actually happening in the economy before we
begin dosing it.
Such a suggestion may have the defect of being a little
behindhand in the beginning of treatment, if treatment is needed; it has
the enormous advantage of assuring that the patient is not treated with
a medicine that aggravates,
rather than remedies, his condition.
That leads to a further question.
Do I believe that additional
injections of easy money would help the economy at this time?
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I do not.
FEDERAL RESERVE BANK
OF ATLANTA
O F F I C E OF
PRESIDENT
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
August 7, 1962
Here are a couple of copies of the
first rough, rough draft of what I plan to say.
As you can see, and probably suspected all
the time, I long ago had my license to practice
economics canceled. I am sorry to be so backward.
Do not hesitate to make suggestions.
I have hurried this through so that
I could have the remainder of my time getting
abreast of some past statistics and trying to
puzzle out answers to questions that are likely
to be popped.
As ever,
Malcolm
Mr. Wm. McC. Martin, Jr.
Chairman
Board of Governors of the
Federal Reserve System
Washington 25, D. C.
Enclosures
STATEMENT OF MALCOLM BRYAN, PRESIDENT
OF THE FEDERAL RESERVE BANK OF ATLANTA
FORE THE JOINT COMMITTEE ON THE ECONOMIC
REPORT, AUGUST 15, 1962
Gentlem
It is flattering to be asked to appear before you today.
After
an examination of conscience, however, I find my sense of self-esteem
greatly reduced by the necessity of confessing that I have no new figures
and that I do not know the answers to the problems that beset us.
I am
afraid that when I am done the members of this Committee will reflect
that they should have called on someone a great deal smarter.
At any
rate, like the average man, I am eqiipped with a considerable set of what
I call convictions and others call prejudices.
We Americans seem to have developed the habit of taking the
economy's blood pressure, pulse rate, and temperature every hour on
thehour.
Professional economists, businessmen, and bankers are heavily
engaged in the activity; the press, daily and weekly, tells us what has
happened, what is happening, and what is about to happen.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I myself am
I
sometimes tempted to the notion that if all the energy and wit involved
could be channeled in some other direction, the result, although perhaps not
immediately perceptible in our Gross National Product, would nonetheless
have a long-run favorable effect on the growth rate of our economy.
At the moment, without trying to support the point with figures,
it seems to me that we are churning around at a high level of economic
activity without going anywhere in particular.
I do not know whether we
shall, after this pause, break out on the upside with a continued recovery
or on the downside; but I am sure that when the facts are in it will appear
to everyone, including myself, that I ought to have known.
Let me state a few convictions that may be dismissed as mere
whimsey:
1.
If we break out of this pause on the downside, there is no
presently visible, objective, rational reason why the period of adjustment
should be long or deep.
It will only be long and deep if we take counsel
of our fears and frighten each other into panic.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
If we do this, then we are
.3
stupid; I do not believe we are that stupid.
2.
It is inevitable, after the long inflationary cycle this country
has had, that there will appear a thousand and one misapplications of capital
and manpower that find a less-than-expected
and services.
market for their products
It is quite possible, to be sure, that we shall be unpleasantly
surprised by the magnitude and extent of the adjustments that may be
necessary.
I myself believe that they are of a size and magnitude small
/
enough that our dynamic and infinitely flexible economic system can accom-
modate itself to them if we will but let it.
What chiefly scares me is that we shall stifle the economy by
•
attempting to overmanage it, wherein I think, judging upon the record,
our last case may well be worse than our first.
What will be needed, if
this pause in the economy breaks out on the downside, is not a single
adjustment but a myriad of adjustments.
These can only be made by a
flexible economy whose decisions related to manpower and capital are
under the day-to-day guidance of free consumer and free investor choices.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-•4 -
I doubt if the process will be greatly aided if on the basis of a theory,
which can easily be mistaken, and on the basis of statistics that at best
represent a microscopic sampling of the economic universe, we attempt
to beguile, entice, prod, and pummel the economy in one or another di-
rection.
I realize that a free market is often an uncomfortable thing to
have around and often seems to behave miserably.
Unfortunately, there is
no substitute for it.
So I bespeak my conviction that we should at this time be guided
by two general philosophies:
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
a.
Speaking simply as an American citizen, I think
we should see to it that the pains of readjustment do not fall
with overwhelming and degrading force on the unemployed,
which is the classic locale of those pains.
I believe we are
bound in conscience not to let that happen.
b.
Again, speaking simply as an American citizen, I
believe we should do the things we know that government can
i
. do and do well.
We should see that competition is maintained
in all sectors of the economy; we should see that the consumer
is protected against the sharp practice of an occasional
scoundrel; we should see that he is protected in those areas
where his quality judgments do not suffice.
After that, I be-
lieve we shall be well advised to give the free market economy
a chance to adjust itself before we intervene to prod it and
direct it.
I shall make a slight further allusion to this point
in a minute or so.
Now, as for monetary policy.
As I see it, monetary policy in
most of the postwar period can be interpreted around a few simple ideas.
First of all,
we have been striving to bring the inflation to an
end, but to bring it to an end so gently and so gradually that American
businesses, individuals,
governments, and the managers of savings insti-
tutions could continually examine their commitments in the light of a gradually
evolving situation, not in the light of a sudden and dramatic alteration in
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
.,
--6-
'
C
their environment, which would necessitate sudden, large, and dramatic
*
adjustments.
Put in a different frame of reference, we have been feeling
our way slowly toward a viable structure of interest rates that will attract
from the American people as savers the large bulk of the funds that other
Americans, American governments, and our offshore friends want to borrow.
At the same time, we have allowed for a growth of bank reserves
intended to accommodate a growth in the money supply, which has been in
•
turn intended to accommodate the increasing population and the increasing
transactions of our country.
That growth of reserves over the long postwar
period exhibits a straight-line trend of 3 pe rcent per annum.
I do not believe that this has been a tight money policy.
Indeed,
if it is to be criticized at all, I think the criticism over the long period is
.
.
that it may have been too easy, delaying, and therefore aggravating, adjust-
ments that, considering the constant change in a consumer-guided economy,
are forever necessary and are the easier the more promptly they are made;
if we are to be criticized, I suspect the criticism is properly taken on the
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
point that we have allowed too much of the economy's expansion to be
financed out :of bank credit and required too little of it to be financed
out of real savings.
Second, speaking not to the long term but to our reaction toward
cyclical situations, we have had an extraordinarily simple pattern.
Whenever
we could detect a downward trend in economic activities we have acted
promptly to increase the supply of bank reserves and .thus to permit banks
to seek loans and investments and, in turn, to increase the money supply.
By the same token, when we have detected the economy operating in con-
ditions of boom, we have allowed borrowing demands to press against bank
reserves and interest rates to call up a greater supply of real savings.
The pattern has been as simple as that.
We have sometimes
been criticized on the matter of timing, when our economic seismographs
have failed to give us a sufficient warning of a distant tremor.
defend the record.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Still, I
- 8 -
Our counter-cyclical actions, whether by luck or sophistication
I do not know, seem, to me to be excellent.
We have avoided in postwar
America a long or severe depression of the sort that has characterized
other postwar periods, and the economy has responded beautifully when
we have tried to stimulate it by monetary means.
Now, let me go back to a point made a short while ago.
In
endeavoring to stimulate the economy we have increased bank reserves from
the low point,
, in 1958 to
This has been a total of
percent.
, on our latest monthly figures.
Note that the figure for total reserves,
V ,
both on a seasonally adjusted and unadjusted basis, stands comfortably above
the long run 3 percent growth rate in bank reserves.
We have, in short,
had an easy money policy.
Still, we must all agree that the economy, while it has responded,
has not responded altogether to the heart's desire.
believe are exaggerated,
lines.
Although the figures I
we have an uncomfortable overcapacity in many
Though the figures for July were somewhat heartening, unemployment
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
.
...
-9-
remains higher than any of us would like to see.
This leads me to an uneasy suspicion that something is happening
in the economic system that we do not quite understand.
Since I must
frankly say that I do not believe it to be a lack of money availability, I
believe a search for wla t is happening to our economy must lie in other
directions; we ne.§d an agonizing reappraisal of some of the other elements
';'.
..a''
of our total national policy.
In the meantime, I have suggested that we should not be in haste
to begin kicking, prodding, spurring, and pummeling the economy. It would
be the part of prudence, I believe, to find out what is wrong with it before
we begin prescribing dosages.
on shore and off shore.
demand.
For my own part, I hear a lot of advice,
Some say that what we lack is an adequate consumption
Some say that what we lack is an adequate investment demand.
Others say that we need a shorter work week.
Still others say that we are
undergoing an unprecedented industrial revolution, that the economy cannot
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
. 10 -
of itself re-deploy its f o r c e s , and that the government should step in to
direct capital and labor to the places where the government thinks they
should go.
And so on.
Every economic astrologer active in the field is equipped with a
set of figures and a set of theories to support his conclusions; and they
agree on one thing only:
something should be done!
For one, I do not know
what should be done; and I am enough of a cynic, although courteous and
pleasant in my cynicism,
to believe that no one else knows either--albeit,
in the light of subsequent events, someone will prove to have guessed right.
It seems to me that the economy is like a man who goes to his
physician for a regular check-up and mentions that he has not been feeling
as peppy of recent weeks as he had been.
I think the physician in such a
case would be wise and prudent to keep the patient under observation for
a time before he begins dosing him either with tranquilizers or benzedrine.
He may need neither.
With the art of economic diagnosis being what it is,
I feel that we should all be wise to pause a while and to find out, as best
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
,
- 11 we may, what is actually happening in the economy before we begin dosing
it either with sedatives or stimulants.
Such a suggestion has the defect
of being a little behindhand in the beginning of treatment; it has the
enormous advantage of not treating the patient with a medicine that
aggravates,
rather than remedies, his condition.
That leads to a further question.
Do I believe that additional
injections of easy money would help the economy at this time?
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I do not.
THE
ECONOMIC
BASLE,
ADVISER
The Honorable Wright Patman, Chairman
Joint Economic Committee
Congress of the United States
Washing tonf D .fifJ
Dear Mr. Patman,
I wish to thank you and the members of the Joint
Economic Committee for inviting me to participate in the
hearings on the state of the U,S. economy which the
Committee will hold on Monday, August 13th* It is with
deep regret that I have to decline the kind invitation,
however, as I cannot free myself to go to the United
States at this time* You may be sure that the subject
is of great interest to me and that I would ordinarily be
very happy to contribute in any way possible to the work
of your Committee*
I may add that the recent Annual Report of the
Bank for International Settlements dealt to some extent
with the economic and financial situation of the United
States, and I am taking the liberty of sending you a copy
of It under separate cover. I myself am in full agreement
with the Report and do not feel that developments since its
release would warrant any significant changes in the views
presented.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Yours sincerely,
Milton Gilbert
August 17, 1962.
Dear Steve:
Thank you for giving me a copy of your
testimony before the Joint Economic Committee on
August 9 and calling my attention to the comments
on monetary policy. I think your statement is first
class, as usual* and makes a real contribution at
this mixed up time.
X am enclosing a copy of my comments
at the same hearings yesterday which you might
like to have.
Please give my best to Este!le,and Cynthia
and I miss you both. Cynthia and our children are
over in Greece at the moment but the vagaries of the
present Congress have kept me here.
With ail good wishes,
Cordially yours,
Wm. McC. Martin, Jr.
Dr. R. J. Saulnier,
410 Lehman Hall,
Barnard College,
Columbia University,
New Tork 27, Hew York.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
TESTIMONY OF DR RAYMOND J SAULNIER, PROFESSOR OF ECONOMICS,
BARNARD COLLEGE, COLUMBIA UNIVERSITY, NEW YORK CITY, BEFORE
THE JOINT ECONOMIC COMMITTEE, WASHINGTON DC. AUGUST 9 1962,
I want, first, to commend the Committee on its decision to hold open hearings
at this time on economic policy and to thank you for inviting me to participate
in them.
Certainly, the hearings are timely. Although the economy is far from being
in distress, things have not gone very well and certainly not as well as was
expected. The 1961-62 recovery and expansion was not up to par, much less
than having been an improvement over earlier recoveries.
And there are those
who think that after only seventeen months of recovery and expansion a downturn
is imminent.
It also adds to the timeliness of these hearings that they come
at a point when the federal budget is being shaped up for the fiscal year 1964
and I would assume that work on the legislative program for 1963 will soon be
under way in the Executive Branch.
In short, the time couldn't be more
appropriate for an open discussion of economic policy.
I think it would be
agreed, also, that such a discussion is needed.
As I understand it, you have already received testimony setting forth the
salient facts on the economic situation.
I will try not to duplicate any of
this, but before I comment on policy matters I must give you my own conclusions
regarding the present position of the economy and the near-term outlook, for
these are critical to my policy recommendations.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 2 3
It is widely acknowledged that for some time now the indicators to which we
look for clues as to the economic outlook have been far from encouraging.
Warnings of a slowdown in the rate of economic advance began to be visible
early this year. Month by month these warnings were confirmed;
but the
evidence for the month of May went beyond this to suggest a strong possibility
of a downturn occurring before the end of the year.
If anything, June darkened
the outlook a bit.
July was another matter.
Not very much data are available yet, but what there
is suggests that the economy steadied itself and improved a bit.
Indeed, for
a month that is often hard to interpret, I would say that the evidence of
improvement in July is pretty clear.
Certainly, if we look at the month's
developments from the point of view of their policy implications there is no
doubt but that they destroyed any case there may have been for an emergency
tax cut. And perhaps I can best express my estimate of the near-term outlook
by saying that I doubt that developments in the next few months will warrant
emergency tax cutting.
But it would be a mistake to think that the danger of a downturn has been
altogether averted. I don't think one can say at this time that it has been
any more than deferred. The economy has shown resistance and strength in the
last few weeks but the record for the recovery as a whole obviously suggests
a lack of the kind of liveliness one would like to see. The way I read the
record, it is saying that there is no need for emergency anti-recessionary tax
cutting, but that there is an urgent need to strengthen the underlying forces
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(
- 3-
that make for growth in our economy and to remove obstacles to growth.
And I
would say that the record is telling us, also, that we don't have an unlimited
amount of time to shape and adopt the needed measures.
The performance of the economy in the last few years, and in particular the
disappointing record of the present recovery, provide important guidance as
to the kinds of measures that are needed, Four points in this record are
especially noteworthy.
First, it should be clear from recent experience that we can't produce the
economic growth we want merely by an increase in federal spending. The fact
is that in the fiscal year just completed net budget expenditures of the federal
government rose by more than $6 billion.
This followed an increase of $5
billion in the fiscal year 1961, of which nearly 80 per cent was incurred in
the last six months of that period. And I would judge that more increases are
in prospect.
The budget presented to the Congress in January 1962 projected
a rate of expenditures for Fiscal 1963 which would be about $6 billion higher
than the Fiscal 1962 rate. Thus, we have had a $10 billion increase in federal
expenditure rates in the last year and a half; and if things turn out as
projected in January, we shall have had a $16 billion increase in the two and
a half years ending June 30 1963.
There has been a sharp increase, also, in
spending by state and local governments.
The economy has lagged, but no one
can say it has lagged because it got no boost from governmental spending.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 4-
Second, not only have we had a sharp rise in federal spending but it has been
deficit spending, which is widely regarded as being a very strong tonic for
the economy.
But if a deficit in the federal budget with expenditures rising
will stimulate the economy, then we should be enjoying a good deal more
stimulation than we are feeling right now.
There was a deficit in the con-
ventional budget of nearly $4 billion in the fiscal year 1961 and a deficit
of $6.3 billion was registered in the fiscal year just completed. And still
the economy lags.
There are all kinds of reasons why our country, with its heavy responsibilities
in the Free World, should keep its financial housekeeping in strict order,
but if we were to put all of these powerful arguments aside and simply look
at the record as pragmatists I don't see how we can escape the conclusion that
the federal budgetary deficits just don't work the magic they are reputed to
perform.
Third, it is not easy, either, to see a ground for complaint that consumer
buying power has not increased rapidly enough.
Between the first quarter of
1961, which was the trough quarter of the 1960-61 recession, and the second
quarter of this year, disposable personal income rose more than did personal
consumption expenditures.
Reflecting this fact, the annual rate of personal
savings went up by about $3 billion and the savings ratio rose from 6.7 to 7
per cent.
Fourth, the record shows very clearly that the one major element in our economy
that has been really lagging is the volume of expenditures by private business
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 5 -
concerns on plant and equipment. While other major categories of national
product have been increasing well enough, and some, such as governmental
spending, have been rising sharply, producers' expenditures on durable goods
have hardly increased at all. They rose in the recovery period, but not nearly
enough;
and, looking at their behavior over a longer period, they were barely
larger in the second quarter of 1962 than they were in the second quarter of
1960.
Furthermore, if the amounts spent were expressed in constant rather
than in current prices I expect it would be found that the physical amount of
goods involved was actually less in mid-1962 than it was two years ago.
When one goes over the whole record it is pretty clear that the lag in our
economy is in private investment activity and that our major need is to create
an environment that will favor a more rapid increase in this category of
expenditures.
What we need is a program of action that will bring this about.
In a moment I will outline a plan of policy which, in my judgment, would fit
the present situation, but before I do that let me say that a plan of economic
policy, like any broad strategical plan, must respect the constraints that are
inherent in the situation in which it is intended to operate. There is no
point in talking about what it would be helpful to do if only the situation
were not what it is. In the present case, it is futile, and worse than that,
to talk about policy without regard to the fact that we have a substantial and
continuing deficit in our balance of payments. When I appeared before this
Committee last January I said that I thought this was our "number one" problem.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(
- 6-
I think that is still a correct appraisal of the situation. We should shape
our policy plans in the understanding that we do have a precarious international financial position;
and to the fullest extent possible our plans
should be designed to help improve that position.
Further, it is not very helpful to talk about policy plans, fiscal or otherwise,
as if there were no deficit in the federal budget.
I have heard suggestions
recently for tax reductions that sound as if those who make them have forgotten
that the federal government is not collecting enough money to pay its expenses
even in an advanced stage of business expansion. The advocates of this kind
of tax cutting have either overlooked the existing deficit, which hardly seems
possible, or they have been persuaded that tax cuts which create deficits will
give such a strong stimulus to growth that they will pay for themselves with
very little delay. As I have shown, there is nothing in our recent experience
to suggest that deficits, as such, will do this.
In any case, the policy program I am going to propose does respect the facts
of our international financial position and our federal finances.
Let me outline the major elements of a program.
First, it would be helpful, if this Committee, and the Administration, would
reaffirm the budgetary policy which has been previously stated, namely, that
our object in budgetary planning is to achieve a balance over the cycle, with
surpluses in periods of cyclical expansion offsetting deficits during cyclical
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 7 -
recessions.
Any doubts on this should be put to rest.
Second, it is essential, in my judgment, to initiate at the earliest possible
opportunity a program of tax reforms designed to stimulate a higher rate of
business capital expenditures.
The steps recently taken by the Treasury to
liberalize depreciation allowances were a good start. The investment credit
would be helpful, too, though my preference would be for a still more liberal
depreciation allowance.
Beyond these steps, we ought to get the corporate income tax rate down. The
42 per cent limit proposed in the Baker-Herlong bill would be very helpful,
of course, but we might set 47 percent as an interim goal. Also, we should
eliminate the near-confiscatory rates imposed on the upper brackets of individual income. Again, I would like to see these reduced over a period as
contemplated in the Baker-Herlong bill, but 50 per cent would be a reasonable
interim goal.
Quite apart from other effects, these tax changes would be tremendously helpful
to our four million small and medium-sized business concerns.
The task we
face of providing jobs in this decade for a rapidly increasing number of young
people is going especially to require a vigorous body of small and mediumsized companies.
Many will find employment in large nationwide organizations,
but we should leave no stone unturned to help the small and medium-sized
companies in which large numbers of young people will find their most interesting and rewarding employment opportunities.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(
- 8-
Third, although I want to see us do every bit of constructive, growth-promoting
tax reducing that we can do, I believe we should limit what we do to what can
be counterbalanced, in its immediate revenue-reducing effects, by expenditure
reductions and possibly by some sales of Treasury-held financial assets. If
rate reductions of the type I have proposed promote growth to the extent that
I think they will, they will eventually pay for themselves, but in the interim
we should plan to pay for them in some quite tangible way.
I suggest that we go about the task of financing constructive, growth-promoting
tax cuts as follows:
(1)
As guidance for the fiscal 1964 budget-making process the President should
set a ceiling on federal spending.
This ceiling should not be higher
than the projected spending level of Fiscal 1963 and if possible should
be lower.
(2)
With that ceiling as a preliminary guide, an effort should be launched
at once to reduce spending on low-priority programs.
The economies
achieved from this budget review need not go exclusively to financing
tax reductions.
On the contrary, they might be divided about 50-50
between this purpose and increasing expenditures on truly high-priority
programs.
By high-priority programs I mean those that give a clear
promise of enhancing our capability for achieving a vigorous rate of
economic growth.
(3)
Although I would depend mainly on the reduction of low-priority spending
to offset the immediate revenue cost of tax reforms it should be possible
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 9-
to offset some part of this budgetary impact from the proceeds of the
sale of portions of the huge amount of financial assets which the federal
government has accumulated over the years under its various direct loan
programs,
It was estimated in the January 1962 budget message (Special
Analysis E) that outstanding direct loans of major federal credit programs
at the close of the fiscal year 1962 would come to nearly $27 billion.
Obviously, one should not press a program of this kind too hard lest it
raise borrowing costs in the long-term capital markets.
But it should
be possible to distribute significant amounts of these assets on terms
that would be fully protective of the public interest and without any
material effect on long-term borrowing costs.
Something between $2-1/2 and $3 billion would be a reasonable beginning
goal for tax reductions of the sort I have proposed; and I believe that
this immediate impact on revenues could be offset by some combination
of the means I have indicated.
If more can be done.
so much the better.
It is ray considered judgment that a statement to the effect that this
is the direction of policy to be followed in tax and expenditure matters
would have a very stimulative effect on our economy.
But I would
emphasize that it is very important to get the program under way soon.
Accordingly, the tax aspects should be presented, in my judgment, in a
form that will minimize the time required for consideration prior to
enactment.
(4)
From this point of view, the simpler the bill the better.
This brings me to the question of monetary policy, which is especially
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 10 -
important at this time because of our international payments position
and because of the lag in our economy.
No one wants a money policy that will retard the correction of our
balance of payments position, much less a policy which would actively
worsen that position.
On the contrary, money policy should contribute
to the needed correction.
But if monetary policy is asked to carry too
much of the burden of correcting, or even of protecting, an international payments position which, like ours, is traceable in good part
to governmental programs it could very well be so restrictive as to
offset all the stimulating effect which we could hope to produce through
fiscal measures.
The risk of our getting into such a policy dilemma is
reduced, of course, to the extent that we succeed in efforts such as
those being pressed by the administration in connection with procurement
under our military and economic aid programs.
Vigorous application of
these efforts to conserve dollars is an absolute requirement of policy
at this time.
This requirement is underlined by the fact that free reserves seem, to
have been trending down recently, that the money supply currently seems
to be shrinking, and money rates and bond yields have recently taken
a rather sharp turn upward.
Considering all elements in the situation,
as the Reserve authorities are in a position to do, these developments
may be both necessary and beneficial. All the same, I would hope that
considering the position of the economy at this time and the extent of
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-li-
the more direct measures being taken to help correct our balance of
payments, it will not be necessary to tighten credit conditions over
their present position.
Actually, some easing would be helpful to the
economy, especially in the long-term section of the market.
At an earlier point in this statement I suggested the sale of some part
of the financial assets currently held by the Treasury as a technique
for meeting part of the cost of a growth-promoting tax reduction program,
I realize that this could have a tendency to raise long-term borrowing
costs, though I should think the program could be managed so as to limit
this effect to a very small amount and hopefully to avoid it altogether.
But if long-term borrowing costs have to be lifted, and in the last few
weeks they have been lifted in the corporate bond market, I should think
it would be better to do this as part of a program to finance growthpromoting tax reductions than as part of a normal Federal Reserve open
market operation.
(5)
Finally, let me say a few words on the relation of costs and prices to
economic growth. Mr. Boiling of this Committee will perhaps remember
a letter I wrote him a few years back responding to certain questions
he put to me and in which I stressed the importance of cost increases,
and particularly of labor-cost increases, as a force behind rising
prices.
This was not a widely-held view at the time, but it has gained
a good many followers since.
Indeed, not so long ago it was not even
fashionable to believe in the necessity of a reasonably steady price
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 12 -
level as a basis on which to achisve sustainable and meaningful economic
growth.
But views on these matters have undergone very considerable
change.
Nowadays, there is broad agreement that a reasonably stable
price level is the only basis on which a workable economic strategy can
be built. I subscribe fully to this view, though I must confess that
the conversion to it has been more rapid and more widespread than anything
I had expected to witness.
But this is good and I am happy to see it;
all that concerns me is that we do not overlook the fact that once price
level stability has been made the basis of an economic strategy, one
automatically accepts certain other requirements, too.
The most important
of these is that, in the most general case, production costs must not
increase by amounts that cannot be fully offset, in their effect on unit
cost of production, by improvements in productivity. If this requirement
is not respected, the result is a suppression of profit margins and
eventually a suppression of the rate of economic growth.
There is wide agreement, I believe, that for some years we have, as a
nation, been failing to respect this requirement.
Competitive conditions,
and to some extent governmental pressures, have pretty much fixed a
ceiling on prices; currently, many industrial prices are being reduced.
But we have been less successful in limiting increases in costs. One
way to put this is to say that price inflation, at least for the time
being, has been checked but that cost inflation continues.
I believe
that it is this inconsistency, which reflects itself in narrower and
that
narrower profit margins,/is the major factor behind the lag in our
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 13 -
economic growth. And I want to state quite clearly that although I
believe we can improve our economic performance through appropriate
j&*&43Lt& &M4&
/^monetary policies, we must follow appropriate wage-price-profit policies
or we will undo all the good these other measures can accomplish. This
is obviously what the President and his Council of Economic Advisers had
in mind in setting forth certain wage and price guidelines in the January
1962 Economic Report.
There is a good deal that can be said pro and con on the idea of setting
guidelines in this fashion, but without going into these arguments I
must express a reservation about the wage guideline as currently defined.
The principle that labor cost increases should be equated to productivity
improvements does not, in my judgment, suit our present situation. What
we need now is a chance to achieve an improvement in profit margins and
some reductions in prices. If we keep our economy competitive enough,
which is a requirement underlying any strategy for an enterprise economy,
we can be sure that profit improvement will not go far beyond what is
reasonable before it is translated into lower prices.
But in order to
achieve profit margin increases and price reductions, production cost
increases must be kept well within productivity improvements, not equated
to them. The guideline, in my judgment, should be revised to this effect,
It would be helpful also to have a better understanding as to how these
guidelines are to be enforced. Certainly, it is clear that there is very
little to be gained from enforcement procedures of the sort that were
employed in the steel incident. I have four suggestions to make in this
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 14 -
connection.
First, on the application of wage-price guidelines, I suggest that the
Executive Branch limit its role to (i) annual descriptive and analytical
reviews, presented in the Council's year-end Economic Report, of the
major developments affecting wagess prices and profits; and (ii) a
critical evaluation by the President, in his year-end Economic Message,
of wage-price-profit developments during the year. If it should be the
President's judgment that developments have not been consistent with
the national interest he could state the respects in which he believes
mistakes have been made and the lines along which adjustments should be
made. There is ample opportunity in the medium of these two messages
for the facts to be set forth and analyzed for their meaning and
significance and for guidance, which I believe should be couched in
general terms, to be given for the year ahead. Short of emergency
conditions, and in these connections I would interpret "emergency" quite
restrictivelys I believe our economy will work better if the Executive
Branch avoids direct intervention in specific wage-price decisions.
In
the meantime, efforts should be pressed, as I believe they are by the
President's special commission on labor-management relations, to explore
ways of improving the balance of bargaining power in labor markets.
Second, I suggest that conferences such as the one sponsored this spring
by the Secretary of Labor on national economic issues be held regularly
every year. Conferences of this kind are an excellent way to encourage
discourse and to improve understanding among labor, management and
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 15 -
government on economic policy questions.
Third, it would also be helpful to provide for the expression of views
from the public on wage-price-profit developments. To this end, the
Joint Economic Committee or possibly the Council of Economic Advisers
might plan to have open hearings every January or February devoted
specifically to this range of questions and in particular to the guidelines, if these continue to be set out by the Council and the President.
So far as possible, the effort should be to give an opportunity to be
heard to all those who have potentially useful contributions to make to
the discussion.
This could be a kind of "annual economic town meeting."
I come from New England and I know that it is sometimes not as easy to
get such meetings stopped as it is to get them started, but I think this
can be managed and, in any case, the open discussion of stated public
policy is always a healthy thing in a democracy.
Open discussion is
certain to help us find our way to an understanding of the kind of wageprice policy, shaped through free collective bargaining and competitive
markets, under which we can achieve the kind of economic performance
we all desire.
Fourth, I suggest that this Committee make a special point, possibly
through the scheduling of special hearings, of examining into the ways
in which government itself may be putting direct upward pressure on costs
and prices.
I have in mind, particularly, the governments' procurement
and contracting activities and the programs under which it makes minimum
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 16 -
wage determinations as authorized by the WalshrHealy and Davis-Bacon
statutes. We should be quite sure that these programs are administered
in ways that are consistent with the kind of wage-price policies which,
under the guidelines procedure, we hope to have followed by all labor
groups and business units.
I would judge from my experience as an
^^.sjjt'fisbc-tAj-esif
gar*Chairman of fch«
0^ President^£.Council of Economic Advisers that there
are responsible businessmen who would say that the programs tend to
inflate costs.
The problem needs close study.
I have limited myself in this statement to fiscal, monetary and wage-price
policies. There are, of course, other parts of a strategy of economic policy
that also deserve attention. But the three I have commented on are the crucial
ones. If I have overlooked points in which members of this Committee have a
particular interest, I shall be happy to respond to questions on them.
Thank you very much.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Raymond J Saulnier
New York City
August 8 1962
Airmail
August 20, 1962,
Dear Paul;
1 am pleased to have the copy of
your statement before the Joint Economic
Committee and you can he sure 1 shall
read it with real interest. As 1 appeared
before the same group you might like to
glance at a copy of my statement, a copy
of which is enclosed.
It has been a busy but interesting
summer.
With all good wishes.
Cordially
Wm. McC. Martin, Jr.
Professor Paul W. McCracfcen,
Graduate School of Business Administration,
The University of Michigan,
Ann Arbor, Michigan.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
TESTIMONY OF SfctfL W, McCSACKEN, PHOFESSOK OF BUSINESS C0WDJTIOHS, SCHOOL OF
BUSINESS ADMINISTRATION* UNIVERSITY OF MICHIGAN, BEFORE THE JOINT ECONOMIC
COMMITTEE OF THE CONGRESS., AUGUST 9, 1962, 10s00 A.M
I.
Mr, Chairman*
I greatly appreciate the opportunity to appear before
this Committee to consider the implications of current business conditions for
economic policy, Clearly the first question to pe^e is thins
Does the
evidence indicate that the economic situation needs to be strengthened in
a lundamentel way? The situation is not* of ccwarse,, without its hopeful
aspects
Evea if this cyclical expansion were to be a bit on the short side,
business cycle history suggests that eccttoaic conditions should 'x^ntlntie to
iaprove for several Months yet - By the end of this year the present expansion
would still be <*f only 22 sooths duration*
Only on* upswing since World War I
(November, 1927, to August, 1929) was shorter than this, Moreover, we know that
the course of any upswing is irregular,, with flat Booths and air pockets occasionally developing^
The fact is that in recent sooths the economy has been
boBbarded with an unusual rim of bad luck -— such as the steel price donnybrook, the stock aarket break, and recurring nervousness about the international
position of the dollar, Good ecosoBic policy 'clearly requires that we not be
nervous Nellies — rashly proposing aajor changes each tiae a cluster of bmd
news or bad luck comes along»
Three considerations suggest that the economy does need strengthening
in a fundamental way. First„ there is the fact that the economy h*s for some
years been operating somewhat below par
This has been widely recognized and
discussed. In his study for this Committee (published in 1960) Mr Knowles
estimated for each year frca 1909 to date the output that would have represented
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 2-
reasonably full utilization of the nationps productive resources. In nine
of the fifteen years from 1947 to 1961 output was below par (including all
years since 1957). By contrast in the 17 years from 1909 to 1929 (excluding
the years 1917-1920) the record was notably better.
"Full employment" years
in those two decades outnumbered those when output was sub-par by about two
to one.
Interpretations of this experience will differ, but one conclusion
is clear.
and steam.
The economy for several years has had an evident lack of bounce
Our current problem Iti more than Just one of those normal momentary
air pockets in a cyclical expansion.
Second, the current cyclical expansion (beginning after February
1961) has turned out to be the weakest since the first World War. During the
sixteen months from February, 1961, bo June, 1962, nonagricultural employment
gained 3.6 per cent. The average employment gain in the first 16 months of
the eight other cyclical expansions since World War I was 11.3 per cent,, and
even following the hardly discernible recession of 1927 employment increased
7.6 per cent. The improvement in industrial production this time has been
less than in any of tfee other cyclical expansions since the first World War.
The same is true for gross national product.
The gain in retail sales has been
slightly greater than that following July, 1921, and November, 1927, but it
falls considerably short of those after t.'*e other six recessions. The facts
can usefully be summarized something lik«> this. The data in Table I show the
gains in eight measures of business activity during the first 16 months of
each cyclical expansion since World War I. If data were fully available it
would be possible to make 64 comparisons of the current cyclical expansion
with others — for each of eight measures of business activity comparing the
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Percentage Increase in Eight Measures of Business Activity During
the First Sixteen Months of Cyclical Expansions Since World W»r I
After Recession Ending;
July
1921
July
1924
Number of employees in nonagricultural
establishments
+21 06
+11 . 4 + 7,6
Unemployment rate, total (inverted)
•.
Mar ^
1933
June
1938
Oct0
1949
Aug u
1954
Apr,
1958
1961
+18,2
+ 9.4
+11 ,0
+ 6,1
+ 408
+ 306
+123 . 7 +4300
08,7
+260 6
NA
NA
NA
+3500
429 2
+50.0
1-27,5
+18,4
+34,5
+47,7
+3007
+17,2
+18,9
+15,4
Gross national product in current dollars (Q)~
NA
+16,2
+1108
+230 5
+1200
+23,7
+13 o 0
+1004
+10,2
Gross national product in 1954 dollars (Q)?/
NA
NA
NA
NA
NA
+13.2
+ 9,8
+ 98
+ 7,7
+13.0
+22 .5
+13.7
+29.7
+16,2
+16,0
+1600
Index of industrial production
i
n
i
Nov.
1927
Indicator
Bank debits outside NYC, 343 centers
+11 . 3
Personal income
+21.0
+12,6
+10.2
+26 . 5 +10,8
+31 ,1
+11 o 5
+ 8,5
+ 900
Sales of retail stores
+ 405
+69
+ 5,4
+2000
+180 9
+22 ,1
+11 c 3
+1006
+ 6.5
Source: "Business Cycle Developments," July, 1962, p0 57,
NA - Not available,
a/ Five quarters,
b/ Four quarters*
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
+19,3
- 4-
post-1961 gala with that during the eight other cyclical expansions,,
Since
for earlier periods some data are not available, only 55 iisch comparisons can
be made,
In 48 of these 55 the ccsap&risan is unfavorable to the performance
since early last year, in 6 ttwsre is a favorable cinparison^ and in one
case it is a tie*
That the current cyclical expansion has been a particularly weak
and sluggish one is Quite evident fron these facts,
l*. is the nation's
poorest performance in fcsar decades» and probably one of the poorest in our
historya
It is, of courset true that expansions after very mild recessions
(such as the one in 196&-31) tend to be on the mild side, but tiie current
expansion is weak even relative to tbat following the 19£7 recession,,
third,, we are begls&ing to j?aad©]r if the present expansion will
turn out to be not only the wesl&st but also one of ths ahorv.est in the
post-war periodo
We must beware of attaching excessive importance to very
current data, On the other tood, certain facts are undeniably disturbing,
The gain in business activity dsriag June (the last month at the moment
for which data are f-jlly available) was about one-third tfc» average monthly
gain since the present exp&i&sio& g^t tgnderway,, There is al^o some evidence
in the data in "able II of a slowing dosm in the expansion tiroughout the
second quarter „
Moreover, it 'is cleir that business sentiment has been
adversely affected by events is recent months, The stock market break has
had a subsfemtial effect on tUc thinking of both business people and consumers «
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 5Table II
Monthly Changes in Selected
Measures of Business Activity
(Seasonally adjusted)
1962
Nonagricultural
Employment
Industrial
Production
Personal
[nooiM
Retail
Sales
U>
(2)
(3)
(4)
(5)
Jan.
-58
-13
S-l-,7
$4- 9
Feb,
+339
+1,3
+3,2
+129
March
+128
+009
+2,, 6
+302
April
4359
41.1
+2.4
+338
May
+ 11
+0B7
+104
-117
June
+ 43
+0*3
+007
-431
2/G1-6/62 av0
*121
+100
+203
+ 80
Source: Col0 2 - BL8 estimates of nonagricultural workers on payrolls
(in thousands); Col0 3 - Percentage points for the FR8 Index of
Industrial Production^ Col* 4 - Department of Commerce (in
billions); Colc 5 - Department of Commerce (in millions)0
Many businessmen were alarmed by the inferences they drew from the Adainiatration's
handling of the steel price dispute, even though they did not support the
actions of the steel industry, It would be reasonable to expect that an
already anemic expansion would at least not be helped by the adverse cumulative
effect of these more or less fortuitous developments,,
Finally, leading indicators generally have not been looking strong
for some time., New orders for durable goods have been declining since January',
and the June fall was fairly sharpa
in May and again in June.
The length of the work week moved downward
In fact, the most recent data available for the
30 leading indicators in "Business Cycle Developments'* show 18 of them
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
declining and 12 rising,,
interpret.
Leading indicators are, of course, difficult to
They can be affected by capricious developments, and in any case
the length of the leads is quite variable,,
It would be difficult, however,
to give their present pattern a very optimistic interpretation,,
If this review of the current economic situation is realistic, we
clearly face more than the problem of an off one or two months in the inevitably
somewhat irregular path of a cyclical expansion,,
It is more accurate to say
that we confront an uncertain short-run business outlook following upon a
particularly weak cyclical expansion ~- all of this superimposed upon an
economic performance that has been sub-par.for some years„
II.
What is our problem?
There are, broadly speaking, two possibilities*
People are either disinclined to spend their purchasing power, or there is a
shortage of purchasing power,
to spendo
In one respect there may be a lessened inclination
Consumer attitudes have never regained the levels of buoyancy that
were reached in 1955, and there has been some deterioration since events of
April and May*
And the evidence is clear from work at the University of
Michigan*s Survey Research Center that changes in consumer attitudes do influence
the level of spending.
There 10 also some concern ebout the possibility that
wants have simply been saturatedc
This argument has taken many forms —
ranging
from that of the affluent society to the fear that consumers are so fully in
debt that the further expansion of credit necessary to sustain vigorous prosperity, cannot take placee
There are persuasive reasons, however, for believing that the problem
is not primarily saturation of wants0
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Research evidence is fairly clear on
•> poiot
,*s»)U tact is that aa l*n**i*
>•».**„ AffveU
aaplration rta* alao. The achleveaeat of one aca..
«$ 0eta the
the laat ciecade the Uaiver*ity of Klchi ««*''* Siarvwr &e«M**rc& Center haa
jrrofoed fNM»pl« ftbotlt their iMNids «ad wb«tln«r lb*y voald Ilk* to wUi9 jlp0c:
«*prai<$ * tur«» itt th<e cottlng year,
lib their 1962 MMttOgrapfe th« C»atwr *u»
•
TcKtcy, »» ttey did ten y«mr» ago, the great jaajority <»f
»» |Ngof»le express wiatie* a»d desires for cooauaer fmHJiA
all iikcone groyp»«
Tho«*fe *AO do aot ex^rena nuch
vi«he« are »oat cxvaaonly old ... or poor
Th* proportion
having no viahes and desires haa not increased ia the l»et tea
Belaa; veil atocked with gooda, or having a«de large expee
diturea recently* does not aake for "ueedleaaneae0"
The Jciada of thittga desired have changed sttfbatantially
I^Attf 4 V^atttt
^/**»
Mlft^avMaMv*
t^^^tie&aatdtt
Bu^ai^a^
aad variofM hobbgr expend!turea have iBcreaeed in fr^qtreftcy
i a»jj. uj, 1
At
the name tie*, deairea for autonobiies have not di*iniched in
•econd cara). Becatiae people have a great away wants aad deairea,
they feel they wiat econowlae aad ahop car<§;
(There vaa«
therefore, a chaage in the kind of autoaobile deaired >*
•George Katona, Char lea A, Lininger^ Jiuoes H, Uorgftn, aad b*-« iaaeller,
**1961 Survey of Coaaoaer Finance*" (Uhiveraity of Michigan„ Survey
Research Cettter 1962) p 0 98u
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- & -
O»e ftvl'ie&ce suggests to aw that the problem 1* a shortage oi p**rpower.
Since the low quarter of 1961 private? iii£o**« «i ter \«**ii
* personal Istcosie plus corporate profits after taxes) haw increased
$32
a t>ut private ckMMiisO for output h*s increiiiMi^
bUMo«i.
thus
p/rivft'v* dtymitnd i»»-ii Ancr«*ai€»<l $1,21 for «#cto; dollar
- *«»» ,
Tni.t i* !•&» tomn tJj« $1.32 1» th
-
:>-i aftur 19S4, but it in still true that i.a &h« 5 qu»r
>wing th« lo% polat l«*t y«««r private dmaaud for good* and &«rvic*»
iar* rapidly than ittcoiQ«s after taxes.
To »tMM» a shortage of purchasing power is «y&ony»ou& with the
to accelerate the rise la wage rates.
This approach would; •»*' r.owse, be sell-
defeat ing becaut»e it would also r«i*a costs ol protftsfctio«j *ml,-( tA^r^/oro^ prices,
AP*J xf the price line were held 0 th« resulting d«t«rioratiott in rrtviii* =»&.,
give us a aore «eute ca#* of the economic anenla we were trying to cure. On
tbi« our experience of the last sewrel years i» quit«e> c?.**r.,
Th-r f « v i *Ji*t,
Table III
Indexes of Corporate Xncoae and
Output IQ Manufactiirittg
^ 100)
Oat:
^plo Costs
(3)
1 ,3
96
:
-
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
112
5.5
100,0
107,9
112,9
108,9
119 0
123.5
124,0
ts
(4)
100.0
.
91.6
73.2
101,$
96,0
94
(6)
100,0
5 , Cl
l.fr* -. 0
112. a
-. •
109, I
110. 1
110.1
2 - Federal Reserve Index; Cols, (3) and (4) - Sasic d&tft
!>epartKent of Cosnerce; Col (5) - Column 3 oilvidanl by coXuna 3
Col, <6) Colisan 4 divided by colwna 2}
83.3
4 per unit of output rose More rapidly than prices after the Mtd--1950'a,
wttfc the cotiseouent sharp decline in profits per unit of output, unquestiona
played a Major role in the sluggish performance of toe econoMy in that perio
it is9 1 think9 increasingly clear that the econoMlc policies of
goveraMent have been natol ng m substantial contribution to the econmeif4»
shortage of ptfcrchaeiac power la recent years. At tine* the Monetary author i
clearly have stepped too hard on the brake pedal —•*-.£•>» in *$5? and
in 1959. It i# equally clear „ however, that Monetary polic? haw dw&t
economic expaaaion for roughly two and one-half yeara, The reaerve
ol the banka haa been easy, CoaMmrr.iat basks are eager to expand
in cottt^iiit vo tike *" loaned- up" b^nkiiDif ae&tiMent lift tin* tigfct -r--*)i»erv« *.;
" . " n-'X'j > i 'i^iiji r >!• 5a*« i&cr&a««d ^-1/2 per cent l$>. is** last
^2^^^ C^Lt^^
10, iatereat rates <cotstr«ry to tis* «xpectatiCNb of Many experienced
Market ^w^r^rera «*rly thia year) have reMained relatively Xow., ftond yi«ida
are only aiightiy »'tK9im tho»* at tiro l^w point of t^^ roc^^i^ion early last
year., Vhatever quarrels w« way KiitNm with the Federal iteaorve about deta^
the evidence ooe* not support the view that Monetary policy &*# had atacb to do
with th* current •i«NKgl«hnes» of the H*cono»r
The princ;
operationa.
*g b.fc* e«so« f*"«» th# t*3t si -de of governnes&t .fiscal
**r# w* fe*rw poisitw^ %»A. ts* gratification to the stabilizing
effect of our tax •true&tfre ** * Major defense ia a recession. The isrg«*
ive nature b*-*;* «eant that aroch of the decline in incoMes has been at
nse of 1&* tmx collector .
abilise--
•
tncoMt»« *f t«r taxe# tended to «tay put - -
*r* *13. i«*lil«r with this story . for som» enrit^uui
«& Jiave not seeMed to p»^/-r^iw» fully tii« ij»iplic.*t..i»5«i& o*f «t.feA« for
expansion, e^^d t^«»uKli we usually raclted the right
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 10 -
The fact 10* however, that a tax structure which stabilizes incones
after taxes during m recession also "stabilizes" then in an expansion —
i,e, s
it retards their expansion, Hist total cash receipts of government (federal,
Table IV
towwnMMit Boceipta aad GUP At
Postwar Cyclical Peaks
(Dollar amort* in billions)
1- 1
v • .:
1957
1960
1962 — 2nd «|tr
Sources
National
Eneem
Governnent f)«celpts
yj iwni
% XI
$223.5
305,6
366,9
415 5
457.0s
$ 59 a 2
94,9
116.3
141,0
158,0*
26,6%
31.1
31.8
33,9
34, 6e
Basic data fron the Oepartnent of fnmanure
e - estimated
state, and local) have absorbed a large and growing; proportion of the national
Income is well enough known„ though the quantitative nagnitudes are not always
appreciated. The ratio of government cash r@e«ipt* (o& a national incone
basis) to national incone has ilsen fron 26,6 per cent in 1948 to 33,9 par
cent in I960, and it is probably about 34-1/2 per cent now,
Let us new- look nor« closely at the last year and one-half to see
how this^nVks out cyclically. Fron the low first quarter of 1961 to tiie second
quarter of 1963 private incones before taxes (personal income plus corporate
profits and the inventory valuation adjustnent) increased $45,0 billion
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
,
•r.«
A* Per Cent Ch*«g*v Private Income
$4-'
2(1'
4.1.4%
$16 5
33, .3%
$r34
B**lc <*&t* tram Department of Commerce
Government receipts, however,, Absorbed 44 per cent of this increase
Jiow
the sluggishness ®* the present recovery8 and the one in 1958-609 begias
to loot ie»s mysterious*
Hie tax atrmefeiore, by abaorbine 4O-45 per cent
of the rise in private incoaes, left « gala i» incoaes after taxes so
wMi.<
itpecial eleaent^i of streagtn present) we could
,
economy !&*<:-%. to reasonably full esyloysjsfr
• • • «M«tr«l position of time budget (wiaere reweotaes -misiU w«r
*§«$tt*]L} t* .** fttll eatploymettt, we should theoreticaily f.
persistent unenployneot — though a tax structure absorbing
a large proportion of increnenta to national incone vould still have
inportant adverse l^iplicatloixs for econonic growth„
If
however» this
neutral budgetary position is at a level of business activity consider**
ably below vh*t would constitute reasonably full enploynent,, »« feav* mlso
ei short ra» probi@»«
The fiscal drag would make full employment dUir*
cult to attaia, vhich would cause a short-fall in revenue, which would
oake the budget look bad. which might make us disinclined to take needed
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 12 : this is not an unfair characterization of
the present situation.
In their January iteport the Council of Kconemie
Advisers estimated that at reasonably fall employmeat the present tax structure
would produce a aur|iliia (on a national income accounts basis) of perhaps $£
billion this year, with this full employment surplus approaching $10 billion
by the first half of calendar 1963,
In short 9 the budget now mwres from a
neutral to a restrictive position substantially before the economy reaches
reasonably full enploynent, and wiU* govemnent receipts siphoning off over
40 per cent of additions to incoae, it has been very difficult to get the
needed thrust of increased private deaand*
III.
If this diagnosis is correct what does it suggest for fiscal policy?
It neans, I think three things. First, the tax structure should be lowered
so that the budget does not begin to exert a brake on the econony quite so
far below reasonably full enploynent. Second, the tax structure now absorbs
too large a proportion of increases in the national incowec
Third, we aust
slow down the tendency for the Federal government** receipts to absorb a
growing proportion of the national income secularly.
Host of my time has been consumed la an endeavor to establish the eas®
that the fiscal operations of government are an important source of our present
eeononie proble«» and that vigorous fiscal action nust play a najor role in any
progran to deal with the problea,
This leaves little tine to spell out specifics
Even mo, it nay be useful to indicate briefly the nature of a fiscal program
that night contribute to a stronger econonya
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 13 -
First? budgetary procedures should fee nodi fled so Uiat we give
explicit attention to this question: Sow rapidly should Federal expenditures
grow IB the years ahead?
the excellent work OB expenditures at both «nd« o*
Pennsylvania Avenue do an effective and, I think , underappreciated Job of
sifting; out waste sad unessentiality in ttee technical sease.
, . . , - . . , • - • •. ...
• irhi IM
It is less well
these Lndlvidually pel] coBSidere<
HrograM i I
«f» t« »@re thaa otafht to be spent in the aggregate. The ratio of Federal
budget cash outlays to GUP i& fiscal 1962 was 2,.. I percentage points above that
Table VI
Ratio of Federal Cash
Budget Outlays to CMP
•
-.- .
Total
of fiscal 1956,
.^ -
FY 1956
F£ JJ60
10,0%^
_Ii!L
jj.aST"
"
17,8
100 1
^ 10^4
l*o»'
Jta short, if the rate of Increase of Federal outlays had
been linited to the rate of ig&crease of GMP, Federal cash outlays last year
wo«iid have been $12 billion less, Ibis inevitably has reduced the scope for
otherwise desirable incentive-pronoting tax reductions*
It IP sawt ttaAreasonable
to expect Iron the Administration an explicit declAration of its longer-range
policy with respect to total outlayss and the Congress should re^exanine its
own pre«?»d«»n*» fco mm if m®r® explicit attention can be given to tue total on
5^*cv ^
the expenditure side of each^budget
Second, the economic situation would benefit fron tax actions now
that would reduce the level of the structure and nove it in the direction of
a better system, Fortunately9 there is considerable agreement about what
would constitute such a package -- a reduction of 3 to 5 points in the
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 14 -
corporate income tax; a cut -off of the perseaal incoiao tax at around a 65
eeat top rate, with sreGUGtioas of perhaps 2 peree&tage points back dowa through
the normal tax; aad a rati®»ali2;atia& of <msr ns&tley array of excise taxes
(which eowlct be doae with oso loss ef revenue). The total package should be
such that the result ing tas structure would prodtsee ezteasgh ^©veaues eotaforto cover CKpeadi tares at reasonably- fall esploymento
OB this basis
i^ $7 biiliaa should presafely tee th& outside limit of assy tax
reductions at thia time0
The aetissm sh€«ild sot fe© "q^iekie" or temporary ia
charactss"0 We shcmld capitalise csm tk© substantial curremt consensus
what ought to- fee dosa t© mova toward a better basic patters of F©ds-s?ai
Third, I would myself sasppoyi the px^gosal that the President be giv©a
limited pow@r t© alter certain taas rates.
This eottld Sse hedged with ad©^^ate
safeguards — limited as to asso-wit* asd perkaps reiuirisg that th© President
tr&assit t© tine Congress a fall report setting forth reascnis for his actions*
Without this each reeessisMi produces liMKsos'abl® presstiras to "do
oa the ©speaditus^ sids <9biebr bistory saggests,. will be
t@ a/higher lew&l*
serrati^m.
"mis proposal would, ia short, be a st^p toward fiscal eoa-
Is the long rm it v?€>uld nake f«r a less rapid increase
ditures and more elbow rocta oa the tas side for fsartfeer' seeded
question;
Wo^jld tas r©«3«ictiaa aad reform ROW be apt
to worses farther t&@ alrea^r eo&ei?bat sa^vo^is posit ia® of the dollar isteamatiosaall^?
This is possible.
If the resulting ©s^a^si<5^ s@ts ia motion aa aceeleratsd
ia our cost-priee Isvel, sad if w© issist tlaat the soa©taa?y s«tfeoriti©s adhere
t© ottrsaUstlcally low iat-erest rat«sst
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
if I3©ed0d
issprsves^at is profits
- 15 -
seemingly interpreted as evidence of entreprcneural malevolence, Xtiie
dollar could qulc&ly &e i& real trouble„
And, it must be stated flatly, such
trouble would then fee thoroughly desei'ved,
II, however, we manage our affairs carefully, tfaer^ is good reason
to think that th© international position of the dollar would at^t be worsened
by tax reform and reduction nov/, and it might well fee stresgtiaened. The
resulting Mglier level of national income v/cmld, of course, test! to increase
imports aad tliat would enlarge the deficit ia our isitersatioaa! b& lasted of
paymeatSo
There are, however,, forces that v?o«ld r;ork the other way, Tlie eor©
active desaarad for fuada would produce higher interest rates in tfce U.S. capital
markets0
The invigorated pace of ocouesic activity would enlarge the ©ppor-
timities for more profitable- lavestrsesit o?C capital in the domestic @C€iii<^g?^
^'^ez^&^s&J ^Ze
_^ez<^& ^^^^^s&^e^s^ ^t^^c^-^ ^-r^^c^L^
And the icuao^aticmal activity tliat aeceispaaies a more lively pace of •comaic
espansioa s2i©uld in time laave soae favorable effect on O.S. exports,
^?tf(jZ_S
^T>^*-^^'£l^Z^^(~^L~J
Siace in
X-t>C^5^*_-;
tfee U.S.. ecology isp^rts are relatively siaall aadycapitul trniiDaotioar^fin^eur
balaHce of payiseiats ar-@ relatively large, there is at least aa ev&ii ebaaee that
policies proposed here would kelp to narrow the fealeaeo 01' payseats deficit,,
There d€i©s remtaia tlje potentiailj adverse effect sti comfideacs is the
dollar, iaternatioaally aud doaestieally, of tax action BOW.
If, however,
the tasgiblo, eoKeretej objectivo force-s can r.0asossfoly tje e^pe^ted to fee at
least aeutral sad probably favorable^ and if we give evideisca of capacity to
manage sensibly stzc& tfeisgs as siouetssry aad \7age~eost~pjfiee ^elicies, w©
caa pralsably deal with the psychological aspects of the problem,,
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 16 -
CoaclqstoB
Tins bacalured state of the economy at present, coming; OB the he*ls of a
particularly weak cyclical expansion superimposed OB a protracted period of
less than reasonably full employment„ strongly suggests that the ecoaosiy needs
strengthening in a fundamental way; and it also suggests that v/ithin reasonable
limits this can be done without courting the risk of a disorderly ecoaouic
expansion«
The basic problem is a shortage of income and purchasing power,
bat this deficiency must bo remedied is ways that do not increase costs per
unit of output and that do sot produce monetary conditions which wowld further
weaken the dollare
This calls for tax adjustments that lower and otherwise
improve the atructixreo
Hie oag&itude of the redaction should still leave us
with a tax structure whose revenues would cover expenditures when productive
resources are being utilized reasonably fully,
Such actioa need aot weaken the dollar interaatioaally^, a&d there
is aa even chance that they might strengthen ita
In fact,, we are fortusate
that what is seeded to step up the pace of Job creation a&d economic expansion
-->-z-»C-*-z--<-
at hone could also add streagth to the dollar iateraatioaally —/f& store
ittAovative, isore prosperous, and ssore profitable ecoctoaor.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statement of
Wm. McC. Martin, Jr., Chairman,
Board of Governors of the Federal Reserve System
before
The Ways and Means Committee
of the
House of Representatives
August 9, 1%2
Mr.
Chairman:
I have come here not to advocate or to oppose a cut in taxes -- for
tax decisions lie outside my province -- but to be as helpful as possible to
this Committee in discussing economic conditions and the relation of credit
conditions thereto.
To many people, the recent performance of the United States
economy has been less than satisfactory.
The flow of statistical informa-
tion about activity has been widely publicized as showing a definite loss of
momentum in the pace of expansion.
June reports.
This indication was clearly given by
In that month, there were declines in durable goods o r d e r s ,
average hours of work at factories,
retail sales and housing starts, and
only small gains in industrial production, employment and personal income.
Altogether, the impression of slowdown seemed well confirmed.
There has been a popular tendency to view the various signs of
slowdown as foreshadowing an imminent upper turning point in the economic
cycle.
Judged from the perspective of cyclical indicators, which in the past
have shown a tendency to run ahead of the over-all data, this view has
perhaps been reasonable.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I sometimes wonder though if we have not become overly sensitive
to cyclical indicators -- we read, watch, study, and talk about them so much
that we may have become like medical students who acquire each disease as
they read about its symptoms in their textbooks.
We ought to remember
that, while leading indicators have correctly foretold some recessions, they
have also on occasions given portents of recession that did not occur.
In June, our economic data were subject to certain special influence
and, if allowance is made for these, the situation does not appear so persuasively bearish as appears at first sight.
Thus, using up the inventory
accumulated in anticipation of a steel strike that did not occur affected not
only new orders for steel but also employment and hours of work in the steel
industry, and unemployment claims in steel centers.
The steel industry is so large that declines in series relating to
it can at times result in declines in over-all manufacturing orders, employment
and hours of work.
Observers who simply count the pluses and minuses
among the cyclical indicators run the risk of being overly influenced by the
reflections of a decline in one industry, not of cyclical origin, showing up
several times in their lists of unfavorable omens.
In addition to the steel
situation, though of less importance, a strike at some auto plants affected
production and sales in June.
The adverse effect of this on the June data
should not be interpreted as being of cyclical significance.
Nevertheless, the June showing as a whole was not strong.
And
it certainly made clear that the economy was moving ahead more slowly than
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
the optimistic goals widely discussed at the turn of the year.
From the scattered and incomplete data now available for July,
the economic situation appears to be mildly better.
The unemployment rate
was down slightly, and the data were definitely encouraging in another respect:
they showed a fairly large decline among the long-time unemployed.
Among other information on July, new domestic auto sales rose
strongly: department store sales returned to the high levels of May; and
private construction activity, seasonally adjusted, was up again, with
industrial and commercial building quite strong.
Exports recorded for June
rose sharply.
While reports on industrial production are not yet sufficiently
complete to compute the Board's index, the information now at hand does
suggest a good chance that the index will equal, or be slightly above, its
record June level.
Similarly, while data on consumers' purchase plans are not as
conclusive as one might hope, they do suggest that over-all buying plans have
not been adversely affected by recent events.
For example, our quarterly
survey, conducted with the Census Bureau in July, does not show any
significant setbac.x in consumer spending plans since the previous survey in
April.
On the contrary, the data point to some strengthening of consumer
purchase plans since early this year.
Consumers are in a good financial position.
a record high, and so are their savings.
Their incomes are at
The payments on debt that con-
sumers are obligated to make each month have risen less rapidly than
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
consumer incomes.
Furthermore, instalment credit delinquency and re-
possession rates have declined sharply over the past 18 months to levels
at or close to the lows for recent years.
Business concerns' retained earnings also have been large, in
many instances considerably in excess of current needs for expansion. This
form of saving has been used in providing an additional flow of funds into
credit markets and into extensions of trade credit as well.
Meanwhile,
business demand for bank loans has been less vigorous than in this stage
of previous upswings.
Banks, therefore, have sought other outlets for
their funds and have increased other loans and investments, especially their
holdings of State and local securities and real estate loans.
Demand deposits
have changed little so far this year, while time and savings deposits grew very
rapidly in the first quarter and then continued to expand but at a lesser rate.
Over the first half of the year, short-term interest rates fluctuated
within a narrow range around a 2 - 3 / 4 per cent level.
Since late June, the
level has been a little higher, with the range on 3-month Treasury bills
running between 2.80 and 3 per cent.
Yields on longer term U.S. Government,
State and local government, and corporate issues meanwhile declined through
midspring and subsequently moved moderately upward, but they remain below
earlier highs for the year.
Throughout the year,
mortgage yields have
moved downward.
The decline that has taken place in long-term interest rates has
reflected in large part the increased availability of funds in long-term sectors
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
5
-
of the market, as the rapid increase in time and savings deposits at commercial
banks was accompanied by continued large inflows of funds to mutual savings
banks and savings and loan associations.
Demand for long-term funds,
meanwhile, was generally moderate.
My comments would be incomplete if I neglected to mention the
persistent problem of restoring balance in our international accounts.
The
problem of domestic expansion is interrelated with our international problems
and all of them must be thought about at the same time.
The United States has been making progress in reducing its over-all
deficit in international transactions.
The deficit came down from nearly
$4 billion in 1960 to about $2-1/2 billion last year, and to an annual rate of
about $1-1/2 billion in the first half of 1962.
for complacency.
Even so, we have no grounds
We have to move further towards international balance
next year, and look forward to maintaining equilibrium in the accounts in
future years.
U. S. foreign trade has developed in an encouraging way this year.
Total exports have been rising, with exports to Western European countries
especially strong.
While imports also have risen, they have not spurted
ahead as they did in the preceding period of cyclical expansion and so have
remained lower in relation to the gross national product.
Both our export
and our import, performances would indicate that we have been competing
effectively in international trade, and international price trends support this
interpretation.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The level of wholesale prices has been stable in this country
for some time, while prices in industrial countries abroad have risen.
The merchandise trade surplus, at an annual rate of $5 billion in
the first half of 1962, is large but not large enough to match our large net
payments for aid, for military expenditures, and for net private U. S.
lending and investment abroad.
And it would probably be unrealistic to
expect the whole of the remaining adjustment to come through yet further
expansion of the trade surplus.
That is why the Government has been work-
ing, both from the procurement side and through negotiations with our allies
abroad, to reduce the balance-of-payments burden of our foreign aid and
military programs.
That is why we have had to pay close attention to the
possible effects that monetary and credit policies may have on international
movements of capital.
Taken together, domestic economic and balance-of-payments
developments have posed a problem for monetary policy, but in rny judgment
that problem has not constituted as clear cut a dilemma as some observers
suggest.
While it has been necessary to formulate policy in the light both
of the credit needs of the domestic economy and potential effects on international capital movements, it has not been, as is sometimes said, a
matter of choosing between domestic and international goals.
V/ith the rare exception of a liquidity crisis, it is never helpful to
sound recovery or economic expansion to flood credit markets with redundant
funds. When resources are not fully employed, credit should be readily
available to meet the legitimate needs of commerce, industry and agriculture-
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
as it is now--but no constructive purpose is served by expanding the credit
stream to the point where it overflows its banks.
So far, we have been able
to pursue policies which have not interfered with the ready availability of
credit in the domestic market at rates generally about even with those prevailing in early 1961, and in some critical areas substantially lower.
At
the same time we have generally maintained such short term rate relationships
with other major financial markets as to avoid encouraging capital outflows.
The fact that we have done and are continuing to do this, as we strive to
improve our basic balance-of-payments situation, is bound to strengthen
confidence in the dollar at home and abroad.
In my judgment, this enhanced
confidence is essential if we are tx> solve our balance-of-payments problem
and promote domestic prosperity.
This leads me to the matter of deficit financing.
It now seems most
likely that we shall experience some deficit in our budget for fiscal 1963.
That deficit would, of course, be increased if the Executive and the Congress
determine that it is necessary or desirable to reduce taxes in the current
fiscal year.
I have stated quite explicitly my belief that such deficits as we may
experience, whether they are due to a shortfall of receipts under the existing
tax structure, an increase in expenditures, or a reduction in tax rates, should
be met by borrowing from the real savings of businesses and individuals, not
through the creation of money through the banking system.
This does not mean that we will experience less easy conditions in
credit markets.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
What happens will depend on many things -- most importantly
- 8 -
on the rate of activity in the economy:
credit conditions may be tighter, or
easier, or the same.
It is also essential to realize that in the American banking system
there is an important distinction to be drawn between bank credit expansion
and bank credit creation .
The loans and investments of commercial banks
in the United States can grow for either of two reasons:
one, because
people are placing more savings with them in the form of time and savings
deposits; or tvo, because of the creation of demand deposits based on
additional bank reserves.
Hence, bank credit can expand substantially as
it did in the first half of 1962, without any significant money creation.
Alternatively, there are times when the growth in bank assets has been due
almost entirely to money creation.
Analysis of these processes would be simpler if we had an
institutional structure in this country in which the money creation function
was entirely separate from what is called the savings intermediary function-the collection of small savings and their investment for the benefit of
depositors, shareholders and policyholders--but that is not the case.
To the
extent that individuals place their savings with banks, and banks, in turn,
invest a part o.f these savings in Government securities, the deficit which
led to the issuance of the securities is being financed by real savings just as
surely as if tbe individuals had purchased savings bonds in the first instance.
A second consideration is that a certain amount of money creation
to meet the legitimate needs of a growing economy is a necessary and normal
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 9 -
function of the banking system, and it is expected reserves will be provided
for expansion to meet such needs.
assets
Some part of the normal growth in banks'
which accompanies this money supply expansion must, as a simple
matter of banking prudence, take the form of additions to the secondary
reserves of the banking system, which consist largely of Government securities.
Additions to banks' holdings of Government securities due to either of these
causes do not represent the financing of Government deficits with bank created
or printing press money, are not inflationary, and do not pose any threat to
the soundness of the dollar.
What would be damaging to the strength of the dollar would be the
deliberate expansion of the credit base, above and beyond the needs of the
economy, in order to provide a ready market for the Government's borrowing.
This was done in the United States during World War H, and in other countries
both at that time and during the economic chaos that followed.
being done in some unfortunate countries today.
It is still
The results have invariably
been bad, and have ranged from damaging, as they were here, to nearly disastrous, as they have been in some other countries.
The process of withdrawal
and correction is always painful and difficult.
Typically, this sort of "printing press" financing takes the form of
direct sales of short-term Government securities to the banks with a parallel
expansion of bank demand deposits supported by reserves provided freely
through the central bank.
However, it can take subtler forms.
The financing
of the Government debt on a balanced maturity basis, with a substantial part in
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 1C -
longer term bonds, is desirable for a number of reasons.
But sound debt
management decisions by the Treasury do not necessarily assure that deficits
will not be financed by bank credit creation.
Shifts in holdings among market
participants can mean that the Government is, in effect, borrowing newly
created money, even though the particular securities it sells go into the hands
of savings institutions.
This is what happens when long-term rates are
"pegged" below the level market forces would establish,
In the final analysis, the only sure safeguard against the financing of
deficits through bank credit creation lies in the control exercised by the central
bank over the process by which bank credit and money are created by the banking system.
As I have said, the Federal Reserve is determined to provide,
on the one hand, the reserves needed to support the necessary and healthy
expansion of bank credit and money required to meet the needs of a growing
economy, and on the other, not to again become entangled in the vicious circle
of financing Government deficits with bank credit created solely for that
purpose.
In closing, let me summarize as specifically as I can our view with
respect to the economic situation today.
All in all, the performance of the economy has been disappointing
in that it failed to reach the goals set for it by some and predicted for it by
others.
The economy has withstood, and gone forward, after some rather
severe shocks -- last fall an auto strike, this year a major steel inventory
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 11 adjustment and the sharpest stock market break since the Great Depression -but it has not achieved the levels of manpower or physical resource
utilization we would all like to see.
On the other hand, the latest data do
not, in our judgment, confirm that we have reached or passed a turning point
in the cycle at this time.
The most likely possibility in the weeks and months
just ahead seems to be for a continuation of mixed movements in the more
sensitive indicators and some further growth in the broad aggregate measures
of economic activities.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-
C -
-
EIGHTY-SEVENTH CONGRESS
WILBUR D. MILLS, ARK., CHAIRMAN
CECIL ft. KING, CALIF.
THOMAS J. O'BRIEN, ILL.
HALE BOGGS, LA.
EUGENE J. KEOGH, N.Y.
NOAH M. MASON,
BURR P. HARRISON, VA.
FRANK M. KARSTEN, MO.
A. S. HERLONG, JR., FLA.
VICTOR A. KNOX, MICH.
JAMES B. UTT, CALIF.
JACKSON E. BETTS, OHIO
WILLIAM J. GREEN, JR., PA.
STEVEN B. DEROUNIAN, N.Y.
JOHN C. WATTS, KY.
AL ULLMAN, OREG.
JAMES A. BURKE, MASS.
HERMAN T. SCHNEEBELI, PA.
CLARK W. THOMPSON, TEX.
MARTHA W. GRIFFITHS, MICH.
ILL.
JOHN W. BYRNES, WIS.
HOWARD H. BAKER, TENN.
THOMAS B. CURTIS, MO.
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
WASHINGTON, D.C.
JOHN M. MARTIN, JR.,
WILLIAM H. QUEALY,
ASSISTANT CHIEF COUNSEL
GERARD M. BRANNON,
MINORITY
LEO H. IRWIN, CHIEF COUNS
RAYMOND F. CONKLING,
ALFRED R. MCCAULEY,
July 27, 1962
PROFESSIONAL STAFF
The Honorable William McChesney Martin, Jr.
Chairman of the Board of Governors
Federal Reserve System
Washington 25, B. C*
Dear Mr* Chairman:
As you have been informally advisedt the Committee
on Ways and Means has initiated a series of executive sessions
to receive the views and observations of a number of invited
experts on the state of the economy.
The purpose of this letter is to extend to you an
invitation to appear before the Committee some time during the
week of August 6 so that the Committee may have the benefit of
your views, in closed session, on this subject. Hie precise
date and time of your appearance can be worked out by your
staffs and the Chief Counsel of the Committee.
For your information, I am enclosing a list of the
experts who have been invited by the Committee to appear during
the course of these closed sessions. This list has not been
released by the Committee to the public. Also for your information, I am enclosing a copy of my letter to these participants
in which 1 have set forth a series of questions. These questions may be useful to you. This letter likewise has not been
released to the public by the Committee.
Sincerely yours,
WDN:jmk
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
V
THERE FOLLOWS A COPY OF THE IDENTICAL LETTERS SENT TO EACH
PARTICIPANT IN THE CURRENT DISCUSSIONS:
Dear
:
The Committee on Ways and Means has decided to hold a series
of discussions in executive (closed) sessions to examine the
current economic outlook. These discussions will be limited to
invited witnesses. The Committee will sincerely appreciate it
if you can participate in these discussions.
We are attempting to obtain the views of persons representing
a cross section of the American economy on both our short-range
and long-range economic outlook. These discussions will be of an
informational type and will not look toward any specific legislative action. However, we are seeking any recommendations as to
possible ways of improving our economic outlook. If it should be
decided by the Committee at some later date that any problems
which may be facing the economy call for legislation within the
jurisdiction of the Committee, public hearings will be held at
that time on specific proposals.
As you will recall, in the last recession it was decided to
accelerate Government spending. In recent weeks, there has been
considerable discussion of the possibility of enacting substantial
tax cuts as a means of bolstering the economy. This, of course,
is a subject within the jurisdiction of our Committee. There are
also many who feel that any tax cuts should be based on decreases
in Government spending0 For the purpose of the current discussions
it is requested that your statement be limited to the immediate
and long-range economic outlook, with any suggestions you may have
as to means of bolstering the overall economy. To be most useful
to the Committee, it is suggested that you confine your remarks
to this subject. This means that it will not be necessary nor
helpful to the Committee at this time to restate the position of
an organization as to any tax, etc., recommendations which are
primarily of interest just to certain segments of the economy.
Among other things, it is suggested you cover the following topics
in your statement:
(1) If there is no change in the Government's fiscal policy,
what will be the developments with respect to employment, income
and profits in the economy over the next four calendar quarters
and with respect to the longer range?
(2) If a change is required in Government fiscal policy for
the next four quarters and the long range, what changes do you
suggest? Do you feel that any legislative or administrative
action by way of an acceleration in Government spending, tax cut,
etc., should be taken at this time? If so, please give us your
reasons for reaching your conclusions*
(3) Does the outlook call for general tax reduction at this
time? If so, what should be the size of the tax reduction and
when should it go into effect?
(4) How would a tax reduction at the present time affect the
prospects for employment, income, prices, and profits?
(5) How would a tax reduction and the change in economic
activity affect the revenue outlook over the present fiscal year
and over the next several years?
(6) Should tax reduction at the present time be designated
as a temporary reduction or should the reduced rates be made part
of the permanent law?
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
^
« 2(7) What should be the proportion o£ reduction going in the
general area of individual income taxes, corporate income taxes,
or excises?
(8) What would be the impact of a major tax reduction at the
present time on interest rates and the balance of payments?
(9) Would it be better to avoid a loss of revenue through
tax reduction until such loss could be coupled with overall tax
reform, including reform of the rate structure?
If you desire, it would be helpful to the Committee and the
staff to furnish us with 35 copies of your statement. Your statement will not be released to the public when presented. However,
a stenographic record will be kept and the Committee will decide
later whether or not to make this record public. You will have
the opportunity to make any comments you may want to off the
record so that they will not be made public.
Under the rules and procedures of the House, if you desire,
you will be reimbursed for your expanses in connection with your
appearance at the rate of 12 cents a mile and $16 per diem. The
Committee staff in Room 1102 will take the details as to your
reimbursement and secure your signature on a voucher.
It is requested that you summarize your position in a statement of reasonable length. We will accept for the record a full
statement of your views and any explanatory material which you
consider relevant.
We will sincerely appreciate your participation in these
discussions. It will represent an important service to the
Committee.
If you can appear, please advise us so your schedule can be
worked out.
The meetings will be held in our Main Hearing Room, first
floor, New House Office Building.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Sincerely yours,
(signed)
Wilbur D. Mills
Chairman
TENTATIVE LIST OF EXPERTS INVITED TO APPEAR BEFORE
COMMITTEE ON WAYS AND MEANS IN EXECUTIVE DISCUSSIONS
ON STATUS OF THE ECONOMY, BEGINNING THURSDAY,
JULY 26, 1962 - IN ALPHABETICAL ORDER*
Henry C. Alexander, Chairman of the Board, Morgan Guaranty Trust
Company, New York, N. Y.
Hon. Robert Anderson, Carl M. Rhoades Loeb and Co., New York, N.Y.
Elliot Bell, Editor and Publisher, Business Week, New York, N.Y,
Edward M. Bernstein, Consulting Economist on International Finance,
Washington, D. C.
Hon. Roy Blough, Columbia University, New York, N.Y.
Hon. Arthur Burns, National Bureau of Economic Research, New York,
N. Y.
William Butler, Economist, Chase Manhattan Bank, New York, N.Y.
Gerhard Co1m, Chief Economist, National Planning Association,
Washington, D. C.
Hon. Joseph Dodge, The Detroit Bank, Detroit, Michigan
Frederick Goodrich, Exec. Vice President, United States Trust Co.,
New York, N.Y.
Crawford H. Greenewalt, President, duPont Company, Wilmington, Del.
John Gurley, Stanford University, Palo Alto, California
George C. Hagedorn, Director, Research Dept., National Association
of Manufacturers, New York, N. Y.
W. E. Hamilton, Director of Research, American Farm Bureau,
Chicago, Illinois
Walter Hoadley, Economist, Armstrong Cork Co., Lancaster, Penna.
Reuben L. Johnson, Assoc. Director, Farmers Union, Washington, D«C.
Dexter Keezer, Economist, McGraw-Hill Publishing Co., New York, N.Y.
John Lintner, School of Business Administration, Harvard University,
Cambridge, Mass.
George Meany, President, AFL-CIO, Washington, D. C.
Geoffrey Moore, National Bureau of Economic Research, New.York, N.Y,
Richard Musgrave, Princeton University, Princeton, N.J.
Robert R. Nathan, Consulting Economist, Washington, D. C.
James J, O'Leary, Vice Pres. and Director of Research, Life
Insurance Association of America, New York, N, Y.
Joseph A. Pechman, Director of Economic Studies, Brookings Institution, Washington, D, C.
H. Ladd Plumley, President, United States Chamber of Commerce,
Washington, D. C*
Stanley H, Ruttenberg, Research Director, AFL-CIO, Washington, D.C.
Hon. Raymond Saulnier, Columbia University, New York, N. Y,
Charles L. Schultze, University of Maryland, College Park, Md.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 2Murray Shields, Investment Analyst, MacKay Shields Financial
Corporation, New York, N. Y.
Arthur A. Smith, Vice President and Economist, First National
Bank, Dallas, Texas
Philip Sporn, President, American Electric Power, Inc., New York,
N. Y.
Walter Stark, Vice President, Loomis Sayles & Co., Boston, Mass.
George Terborgh, Research Director, Machinery & Allied Products
Institute, Washington, D. C.
Charls E. Walker, Exec. Vice President, American Bankers Assoc.,
New York, N. Y.
Frazer Wilde, Chairman of the Board, Connecticut General Life
Insurance Co., Hartford, Conn.
Theodore 0. Yntema, Vice President, Ford Motor Company,
Dearborn, Michigan
* **
GOVERNMENT REPRESENTATIVES
Hon.
Hon.
Hon.
Hon.
From
C. Douglas Dillon, Secretary of the Treasury
Arthur J. Goldberg, Secretary of Labor
Luther H. Hodges, Secretary of Commerce
David E. Bell, Director, Bureau of the Budget
the Council of Economic Advisers:
Hon. Walter W. Heller, Chairman
From the Board of Governors of the Federal Reserve System:
Hon. William McChesney Martin, Jr. , Chairman
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
* * **
• Charlsft*teUlu
I.
A.
My sgadssjtialo
ft. idoatify ay
C. Off*the roaord qeestioa as to grata* il relest <3t*ir**a'» letter stftted
Gsaartttoe voald decide whet testimony to releeso; * as»spspsr stated
vitoaooos oosld control what, if say, to b« released*-vhst ere grooBd
rales JU this respect?
a* the ejaoatiOBS that the CesBHLttee is eoasideria§ havs coo*
•M for * MMl»or of vook*, I to4 roeoxtly out iato writiag my
oaojoet *** 4oliv«ro4 tlMB *« * o»o*efc. Tkl« aoooch
tt«d for tk« rooori ojMl thin •ormi^ «ott!4 liko miaply to
eortolA oorto of it «a4 to oaoojMriso cort«ia of itui c<m-
II.
i» ctroag tiMt r
orj in topping out proanturoiy, «nd
;, or plaat oad ssjsipsitat outlays that have ia the post often
sharp adiaato)aats oad corroctioas. swt this doesn't SMMU
X view tho sitoatioa with eojapi**eaey; suite the eoatrary, thora ia oa
elaaeat .ia tho evrroat sitaatioa, aet heretofore present la
that is a coaoe for ftrare eoacem.
C. * 1*11 retarm to this point ia a awjaestt; hot first, rather than dwell oa
Lc indicators oad what they are telliag as, it tssajs to aw
ra tapsrtsat to ask oarselves wj^r this roaowary, as did the reeovocy of 195ft*oO, ssasja to bo toppiaft out ooaoidorably short of s level
of satisfactory atiilaatioa of reooarces. I voald aaphaaisa four
iblo
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
A fellare, oaring tko postwar period aa a vbole, to keep
apotitiye, witb toe raoalt ta*t foreiga pro*
too vide a
e oad 01
ia rodoral revoaaea vhich: althaagh
pdloal, tea do ia a reeovory to top
fall recovery ia
A tax •trvetvre vbica, bacaaoe of oxtroaoly bigb iadividaai
rates, toads to stifle tao inceative sad ia*
tbat eoaatitoto tao driviag fores ia a free atarket
A deterioration in ooafidoace oa tho part of deanstic businoss*
aws oad iavoators at a tiaw vhea foroiaja eoafidoacs ia tho
dollar is aaytttint bat robust — this is the factor aot heretofore prevent in the pootwar period, sad oas whioh I think s«•trrv** *p*«isl «*^Hssis -* tnd««d, in aieny ways it is the key
*H<*t
"*«il
-1*
IU.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
to •«<
3,
fit
fi*Mi if 43
•UNM to lift tofUit cool*
tar ftfe*
it la,
A TAX CVT
*T
EM
tO Tffff •ATTtti
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ttMM «c* fftttiag to*, (lapitait t« this *•«••» 1* that «
tWOXWy <Wtf WM&4 fc^ tMt ttC CiM <[mi t! 1.OM.)
2.
HM X0BMbJttdrit •* t4X «** «*tt]4 *« «•• tk»t §•«• iMmffici«Bt
vttifM t* CM pr««»ing «M4 for *tiMKiatift§ IncMiti^M a«4 lavMt«Mt» «ntf tk*r«l*F* gmitk, toy v^dl«ftin§ tt* kigb r«t««
«« SatflviAMlA «M9 1» ^urtla«l«rt «n ^M!MHM c*rp*Y«jfcla«*.
UMI CWMMNWd^K* ^C k^MiJHMft 4ff4 JjW^St^T MM^^kUMC A4HHMC
fc^ ttduLW9V ClHNMHJII wOM^vdMHIflM* VMlHB9^*4MI 4Ub9CM • BO^M UMI
tkift teet Mi »*•» t* to v*ll-9tVMCt«T^ fr«n tkia 9t4a^olmt.
S. tte VE3BMLJB550&. i^iiH to Mqr «§t tfcat ^»yld paali Uii* 7««r' t
4hMtts4t •!/••• !>• <NT ctopi tto VMMM^ p^AMtiMi 4ttfilclt •£
What taaaa laaawfca aall aawa to, it aaaa» to ••, la that any *»l*rg«aaat la tlM F«4«r«l 4«£Uit totalrlag team a tax cut tkla auaawr abmiU
a* viavail, aat aa tha fanaaa at taa eat, ant aa tea aglca,
la av JariajBaat* aaty avaaaaaJia Cac a s&aaX&aawt ^aF cvt la taJ.a Caa*
avaaalaaal aaaalaa aaaa&4i aa flatly vajactatf nalan taa aa£acaajnla
vU4IBlft>££MftQ 4B0ft lfth!LiP4Bflt C4H^ f^JkiflNPSJfcT^a
^^BfllHL WMH ^P^fcJf^T
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
flttftfl^ax*
This speech is protected by copyright and has been removed.
Author(s):
Walker, Dr. Charls E.
Title:
A Tax Cut This Summer?--Some Neglected Considerations:
Remarks before the Southwestern Graduate School of Banking,
Southern Methodist University, Dallas, Texas
Date:
July 16, 1962
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Dear Fred:
Thank you for sending me your statement before the Ways and Means Committee and
the memorandum, 'Prospects for Dollar Devaluation,"
both of which X read carefully.
A» you may know, I am scheduled
t© go before the Committee on this Thursday.
With all good wishes,
Cordially yours,
*icC. Martin, Jr.
Mr. Frederick K, Goodrich,
Executive Vice President,
United States Trust Company of Hew York,
45 Wall Street,
Hew York S, Hew York.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
c
c
United States ©rust (tfompantj
of Neuj l|ork
45 WALL STREET- NEW YORK 5, N Y
FREDERICK
N. GOODRICH
H AN OV ER 2-4 6OO
July30,
1962
E X E C U T I V E VICE PRESIDENT
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Dear Bill:
It was good to talk to you on Friday and to
hear your comments on current trends.
As you requested, I am enclosing a copy of
my statement to the Ways and Means Committee. I am
also sending along a copy of a recent memorandum we
prepared on dollar devaluation.
With my appreciation and best regards,
Cordially,
Mr. William McC. Martin, Chairman
Board of Governors
Federal Reserve System
Washington, D. C 0
C
(
NOT FOR RELEASE
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Statement before the
Committee on Ways and Means
of the
House of Representatives
87th Congress, Second Session
on
July 27, 1962
by
Frederick N. Goodrich, Executive Vice President
United States T r u s t Company of New Y o r k
on
'The Economic Outlook: Comments and Suggestions'
Introduction
My name is Frederick N. Goodrich.
I am an Executive
Vice President and the Chief Investment Officer of the United States Trust
Company of New York.
My Company is an independent banking institution
which for over a century has managed the private wealth of individuals,
families and institutions.
Our interest in investments is of a long term nature.
As one
whose responsibilities focus on the Trust Company's investment policies and
on our economic studies, my interests in our economy include both the long
term problems affecting our growth and healthy balance and also the more
immediate problems which can upset our long t e r m development.
Like your-
selves, we at the Trust Company have a deep interest in a growing economy,
a strong dollar, and a stable domestic and international society.
Economic Outlook
In the absence of strongly favorable Government action, we
anticipate at least a moderate recession in production, employment and p r o f i t s ,
beginning within the next few weeks or months and lasting for the next 12 months
or longer.
The major immediate factors which will bring about the decline
are the damage to consumer and business purchasing power from the drop in
equity prices, the weakening of confidence in the ability of business to operate
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 2 -
as profitably as had been hoped, and the cumulative impact of consumer,
business, stock market, and psychological trends on each other.
While
the "built-in stabilizers" of Government expenditures, unemployment
payments, and lower tax collections resulting from lower corporate and
individual incomes will help restrain the decline, they will not be able, at
the present high tax rates, to cope with the developing situation of inadequate
effective demand.
To be specific, we expect a reduction in retail sales, business
inventories, and residential construction, and a faltering and later decline
in business capital expenditures.
A decline in business would bring a weakening
of confidence in the dollar and in all probability an accelerated outflow of gold,
trends which would be aggravated by a continuing reliance on "easy" monetary
policies as an economic stimulus.
These events should be forestalled b e f o r e
they cause undesirable chain reactions in the economy and in the security and
foreign exchange markets.
Whether or not the anticipated recession proves to be serious,
we have been for some years in a period of inadequate economic growth and
of considerably less than full use of our physical and human r e s o u r c e s .
Effective economic demand has been inadequate despite sharply expanded
Government spending.
Unless there is a change in the Government's fiscal
policies involving substantial tax reduction and a new restraint in spending,
combined with other policies encouraging to business confidence, we expect
economic activity to continue well below par for some y e a r s to come.
The
results of inadequate economic production will be living standards below what
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
c
c
.
- 3 they should be, excessive unemployment, and greater difficulty in carrying
out our international role.
Basic economic problems of immediate concern
Our concern here is with basic problems which need n e a r - t e r m
action.
We will not discuss such longer term problems as population changes,
foreign competition, international economic burdens and the absence of a
satisfactory international monetary system.
We support f r e e r trade, encouragement to investment abroad, and
improvement in international monetary arrangements.
However, the maintenance
of our immediate equilibrium and p r o g r e s s is essential both to the national
welfare and strength and to the working out of desirable solutions for the longer
term problems.
The following basic problems should guide n e a r - t e r m Governmental
action:
1.
Wage costs continuing to rise beyond productivity.
-- Wage
guide-lines which are too high and which are not being sufficiently acceptea by
labor are a discouraging contrast to price levels under both competitive and
Government p r e s s u r e s .
This problem is aggravated by labor practices
restricting productivity which boost wage costs and inhibit economic growth.
2.
The taxation system.
-- Excessive personal and corporation
income tax rates r e s t r i c t purchasing power and curtail incentives.
3.
The continuing adverse balance of international payments.
-- Our adverse balances and gold outflow are not only a threat to the international position of the dollar but are also a depressant to confidence and to
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 4 -
domestic economic trends.
4.
The declines in stock prices from high levels.
-- The
prolonged advances in equity prices have supported purchasing power and
provided a base for borrowing.
While a correction was inevitable, confidence
in economic growth with reasonable profits and tax treatment would justify
present or higher average stock prices.
Substantial further declines would
seriously undermine confidence and purchasing power.
5.
The huge increases in total private debts from about
$140 billion in 1945 to $630 billion currently.
much of the postwar expansion.
-- These debts have financed
This long period of rapid private debt
expansion has weakened the financial strength of an increasing number of
borrowers.
It is essential that the diminished reservoir of eager credit-
worthy borrowers be replenished by tax reduction and by confidence. Otherwise
we face deflation and an excessive dependence on Federal borrowing.
Policies recommended for best solutions
1.
Restraint on wage increases is needed because of the
near-monopolistic powers which Government has permitted labor to achieve.
The long range solution is amendment to the Federal labor laws to correct
these excessive powers.
Lacking such action, we must for the near term be
satisfied with "moral" restraint in an atmosphere of f r e e collective bargaining.
However, it is essential that the Government recognize the difference between
restraining the d e g r e e of wage i n c r e a s e s won by a monopolistic position and
attempting to control prices which are arrived at competitively.
support Government policies to a s s u r e full competition.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
We fully
Assuming that
- 5competitive conditions prevail, we consider it essential to confidence and
the functioning of our economy that the Government not i n t e r f e r e with pricing.
Government policies regarding labor and business should
encourage productivity in every practical way.
The Government should
emphasize to all concerned that purchasing power derives primarily from
production and only secondarily from financial arrangements.
Labor practices
aimed at spreading the work inhibit production, t h e r e f o r e reduce purchasing
power, and become an important root cause of unemployment.
2.
Reduction in excessive personal income tax rates is urgently
needed to increase purchasing power and to spur incentives.
tax rates also need to be reduced to improve profitability,
capital investment.
Corporate income
confidence and
While some income tax escape provisions may need to be
tightened, the basic economic need is for substantial net tax reduction.
In our opinion, the amount of tax reduction needed promptly is
in the neighborhood of $10 billion annually.
We recommend that the reduction
be designated as permanent rather than temporary.
three-fourths
We believe that some
of the reduction should be in individual income taxes and the
remainder in corporate income taxes.
As a general guide-line, we would suggest
an approximate 15% a c r o s s - t h e - b o a r d cut in individual income tax rates, an
additional reduction in the r e p r e s s i v e high bracket rates which produce but
little revenue, and an approximate 10% cut in c o r p o r a t e income tax r a t e s .
We believe that the reduction should become effective either immediately or
retroactively to July 1, 1962.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 6 We urge that tax reduction not be delayed for tax r e f o r m .
When in the future the Congress may a g r e e on the tightening of certain
tax provisions to promote equitable treatment and produce additional
revenue, income tax rates should then be f u r t h e r reduced and business
depreciation charges should be further liberalized.
Reduction in taxes should be accompanied by solid indications
of restraint in Government spending.
We do not expect a reduction in Federal
expenditures nor do we make this a condition of our recommendation for tax
reduction.
However, indications that unnecessary expenditures will be
avoided and that any f u r t h e r increases in spending will be limited to essentials
are much needed to provide confidence in our economy and our c u r r e n c y .
At present levels of Federal taxation and expenditures, tax
reduction would be far more stimulating to the economy than larger Governmental expenditures.
Not only would the major portion of the tax reduction
be expended, but the stimulus to confidence, to investment, and to the base
for needed private borrowing would be highly favorable.
The end results of this stimulus would be g r e a t e r production,
employment, national income and business p r o f i t s .
The overall price t r e n d s ,
including the cost-of-living index, should not be much a f f e c t e d since g r e a t e r
production should be readily available to meet the g r e a t e r demand.
In this
connection, it should be observed that increasing price and cost levels in
recent years have not been caused in any significant d e g r e e by Government
fiscal policies but have been f o r c e d by the near-monopolistic powers of labor
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(
C
- 7 -
unions.
Tax reduction should not be avoided because of the misapprehension
that a temporarily larger Federal deficit would be inflationary under present
circumstances of inadequate demand and of under-utilization of our productive
plant and manpower.
The resulting Federal deficit would be in part promptly r e c o v e r e d
by the expansion of activity and incomes.
Under conditions where savings,
including the potentially larger savings from larger production and incomes,
are not being fully absorbed by private and local borrowing, some new Federal
borrowing is needed.
It should be well understood that this approach to
temporary deficit financing should be embraced in conjunction with other
policies essential to a sound dollar and to confidence: primarily, stronger
monetary policies, restraint in Government spending, and general policies
encouraging to f r e e competitive enterprise.
As economic activity approached
reasonable capacity, given the proposed level of taxation and restraint in
Government spending, we estimate that the Federal budget would show a
surplus.
3.
Stronger monetary policies are urgently needed.
This view
was widely expressed by leading international economists during and following
the recent Rome monetary meetings.
The doctrine that "easy" money
stimulates economic activity and employment under almost all economic
conditions has been c a r r i e d much too f a r .
W e s t e r n European c o u n t r i e s have
in recent y e a r s used strong monetary policies as an essential ingredient of a
favorable balance of payments, confidence and a vigorously growing economy.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(
C
- 8 -
The maintenance of substantial f r e e reserves in the banking
system is unsound under conditions of a continuing adverse payments balance
and gold outflow.
Not only do excessively easy monetary policies aggravate
the outflow of funds, but they also thereby damage confidence in the dollar
and in the American economy far more than they act as a potential domestic
stimulus.
Given tax reduction and other encouragements to the economy,
stronger monetary policies would serve as the balance to stimulate the
proper channeling of savings and would, together with more confidence in
our economic trend, become major f o r c e s toward promoting domestic and
international confidence.
It has become a great American fallacy to think of low interest
rates as good and high interest rates as bad.
being somewhat more savers than b o r r o w e r s ,
low rates than from high rates.
The mass of the American people,
certainly benefit no more from
The fallacy is accompanied by a great over-
emphasis on interest rates as a cause of domestic economic trends.
actuality, interest rates are much more a result than a cause.
In
They normally
are and should be the result of the relationship between the supply of savings
and the demand for investment funds.
This relationship is closely allied to
the supply and demand f a c t o r s in the economy.
we tend to have lower interest rates.
have higher interest rates.
When supply exceeds demand,
When demand exceeds supply, we tend to
A permanently depressed economy would be the
best possible prescription for lower i n t e r e s t r a t e s .
The obvious good thing
about higher interest rates is that they are a natural result of strong demand
and good times.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
(
C
- 9 -
International position of the dollar
The overall e f f e c t s of lower income taxes, moderation in
spending, an economy strongly moving ahead and higher i n t e r e s t r a t e s ,
would be strongly favorable to the international position of the dollar.
truly balanced budget is a highly desirable goal.
of payments will be far
vigorous economy.
A
However, the balance
more influenced by whether or not we have a
This is true, despite the higher imports associated
with a vigorous economy, because of the spur to confidence and the
encouragement to long-term corporate and individual investments in this
country.
Furthermore, such conditions of high activity and confidence
would lead to the stronger monetary policies and higher i n t e r e s t rates
which attract foreign and domestic funds.
Private and public debts
There is a broad need in responsible private and governmental
q u a r t e r s for a better understanding of the position of debt in our economy.
There is a similar need for better understanding of the vital relationship
between savings and investments.
For example, if new corporate and
individual savings are not matched by new investment, much of which takes
the f o r m of debt, some of the purchasing power resulting f r o m production
will not be used, and a decline in both production and purchasing power will
result.
Total p r i v a t e , municipal and Federal debts amount to about
$1,000 billion, an amount somewhat less than twice the c u r r e n t g r o s s
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
f
C
- 10 -
national product and well in line with average past relationships between
total debts and the gross national product.
In 1961 total debts rose by over
$50 billion, the major part of the increase of course being in private debts.
Since 1945 increases in private debts have been more than ten times the
increase in Federal debt.
If in the years ahead the gross national product is to rise at an
average of 4 to 5% a year, it will be necessary for total debts to rise by no
less than $40 to $50 billion a year.
Without such increases we would go into
a strongly deflationary period, a deflation which would be greatly aggravated
by the probable continued increase in wage costs.
Moreover, continuing
declines in equity values would result in substantial liquidation of debts.
The interacting deflations of values and of debts would create adverse trends
of considerable consequence.
In a prosperous economy the net increases in individual and
corporate debts, together with small increases in municipal debts, would
fully carry the load. Our tax rates should of course be set at levels which
would provide a Federal budget surplus under conditions of full employment
and reasonable maximum use of our economic capacity.
Without such a prosperous economy we will certainly be facing
a Federal deficit.
If the recession is permitted to develop its potential, the
deficit in the 1963-64 fiscal year could easily approach $20 billion. Imaginative
tax reduction would forestall this kind of weak fiscal experience accompanied
by weak business, employment and foreign exchange conditions.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 11 Conclusion
A substantial tax reduction is urgently needed to forestall
declining and interacting trends in business and personal incomes, in
private debts and psychology, and in the security and f o r e i g n exchange
••
markets.
A renewed business upswing within the next year, made possible
by prompt tax reduction and recovery of confidence, would provide the
background for stronger monetary policies and higher i n t e r e s t rates.
Stronger monetary conditions should be permitted to develop promptly to
aid the balance of payments and our international flow of funds and thereby
in turn to help domestic confidence.
These policies, together with restraint in Government spending
and other steps favorable to a f r e e competitive system, would greatly
support economic conditions, confidence, and their interaction.
With the economy again moving ahead, the Government could
concentrate on encouraging both business and labor to develop maximum
productivity as the only basic source of purchasing power and of national
economic strength.
/eMc
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ED STATES TRUST COMPANY
OF NEW YORK
July 19, 1962
Prospects for Dollar Devaluation
Expectations of devaluation
Dollar devaluation has been a recurring topic of financial
discussion for the past 15 years. During the last 4 or 5 years, those who
expect devaluation have been impressed by our continuing though relatively
moderate adverse balance of payments and loss of gold. The recent stock
market break has brought renewed interest and speculation on this question.
Present discussion of dollar devaluation generally r e f e r s to
devaluation in terms of gold, i. e. , an increase in the established gold
price of $35 an ounce. The principal argument advanced for expecting that
a higher price will be either forced by events or voluntarily adopted is the
presumed insufficient quantity of gold for international liquidity. Those who
expect devaluation in terms of gold may or may not expect devaluation in
terms of other major currencies. However, it is generally assumed that
the other currencies would be devalued along with the dollar.
There is some occasional discussion of dollar devaluation
in terms of other strong currencies on the grounds that our production costs
are too high and that the dollar has inadequate relative purchasing power.
However, this possibility appears increasingly unlikely as European prices
rise more rapidly than ours and the West German and Dutch have come to
regret even their modest 5% revaluations of early 1961.
Nature of the problem
B e f o r e discussing the major factors in the position of the
dollar as we see them, we should emphasize that the future international
position of any currency is by no means altogether predictable. While we
believe that the prospects for dollar devaluation continue to be remote, we
would point out that an all important factor is confidence. In order to maintain confidence and the full international value of the dollar, restrictions on
its use and f r e e exchange must be avoided. With f r e e movements permitted,
it is always possible that loss of confidence in internal political or economic
conditions could cause sufficient movements of both foreign funds and
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
UNITED STATES TRUST COMPANY
-2-
OF NEW YORK
domestically owned balances to put unbearable strain on the dollar and
bring about either outright devaluation or its equivalent through embargoes
and restrictions.
While such a loss of confidence in the dollar must remain
possible, it is our opinion that the strength of the dollar in terms of
productivity, comparative price trends, large foreign investments, military
power and potential use of untapped reserves is great -- great enough so
that devaluation seems most unlikely in the foreseeable future.
In discussing the prospects for devaluation, we will divide
our comments into two main sections: 1 8 ) discussion of the position of gold,
international liquidity, and the functioning of the dollar as a r e s e r v e currency;
and 2. ) an outline of the reserve strengths of the dollar position.
1. Position of gold, international liquidity and the functioning of the dollar
as a r e s e r v e currency
a. ) Position of gold
In considering the likelihood of a higher price for gold -- many
gold minded commentators speak of prices from $50 to $75 an ounce --, we
should understand not only the trends affecting the dollar and the U. S.
economy, but we should also understand the weaknesses in the position of gold.
Gold retains some of its former monetary position by functioning
as part of the monetary reserves behind the principal currencies and by
serving as a convenient measuring stick for these currencies. It retains
these functions because of its historic use as money and because adequate
substitute arrangements have not been formed. However, gold is no longer
the world's money in any basic sense: 1. ) its non-monetary use is less than
20% of newly mined production, a fact which totally unfits it for continuing in
the long run as the world's money; and 2. ) the money used by the citizens of
nearly every country of the world is not directly convertible into gold.
The price of $35 an ounce established in 1934 was an arbitrary
price. It is clear that it was an arbitrarily high price in relation to intrinsic
value since the great subsequent losses in the purchasing power of the dollar
have not brought about a higher price. If gold had had a real value of $35 an
ounce in the 1930's, it is obvious that the subsequent U. S. inflation would have
by now forced a much higher price.
The gold situation cannot be properly interpreted without an
understanding of the following essential points: 1. ) Only a small fraction of
the new annual production of gold, to say nothing of the far vaster accumulated
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
UNITED STATHS TRUST COMPANY
-3-
OF NEW YORK
supplies, are wanted for useful purposes other than hoarding or as
"reserves". 2. ) The purpose in acquiring gold is t h e r e f o r e mainly for
resale when the price has gone up. 3. ) The market for any commodity
is on weak foundations when the greatest part of its buying and holding
is for resale at hoped for higher prices.
It is for these reasons that the U. S. Government has so
far had no real difficulty in maintaining a stable price for gold despite a
major war and substantial postwar inflation. Gold, of course, does have
inherent useful value, although certainly well below $35 an ounce. Given
sufficient further loss of dollar purchasing power, there could come a
point where gold would become truly preferable to dollars and a gold price
rise would occur. At the present juncture, however, it is our judgment
that the dollar and the U. S. Government have considerable room for action
before there will be any occasion to increase the already excessive price
of gold.
b. ) International liquidity
A principal argument advanced for increasing the price of
gold is that this would aid international liquidity. Free world central bank
and government holdings of gold now aggregating some $41 billion would be
substantially increased in terms of dollars by the stroke of a pen. In our
opinion, this view completely misunderstands both the position of gold and
the factors which bring liquidity. Liquidity cannot be enhanced for any
appreciable length of time by arbitrarily marking up the nominal value of
a little used metal.
Liquidity, either international or domestic, depends on the
confidence that economic groups have in the claims they hold against each
other. For example, a community has liquidity if its banks have sufficient
confidence in the community to make an adequate volume of loans and if at
the same time the members of the community have sufficient confidence in
the banks to hold and employ as money the deposits resulting from the loans
made by the banks.
Similarly, international liquidity consists principally of the
claims which various countries and their citizens hold on each other and
their confidence in the purchasing power and convertibility of these claims
into desired goods and services or into other desired currencies. Various
international arrangements, such as the International Monetary Fund and
supplementary monetary agreements, are of course necessary for the
functioning of the international system. But fundamentally the system and
its liquidity is a network of claims and of confidence in those claims. Gold,
for example, is today mainly a way of holding claims on other countries and
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
UNITED STATES TRUST COMPANY
-4-
OF NEW YORK
principally on the United States which underwrites the fixed dollar-gold
relationship. Without the continued cooperation of the United States
these claims in the form of gold could not be exercised at $35 an ounce.
For the United States to arbitrarily increase the size of these claims by
increasing the gold price would weaken its position, promote long term
inflation and contribute nothing permanent to international liquidity.
c. ) Dollar as r e s e r v e currency
The role of the dollar as the key r e s e r v e currency is a
central factor in today's international arrangements. Foreign dollar
reserves are now more basic than sterling as both the supplement and
support to gold reserves. It is certainly true that the expansion of the
world's dollar holdings -- the other side of our adverse balance of payments
-- .should in the future be kept quite moderate. However, some further
increase, perhaps in the neighborhood of 2 to 4% annually, or between
$400 million and $750 million a year, will probably prove desirable as
the United States continues to expand its foreign investments. That
amount of increased deposits on the world's principal banker should be
desirable. If the purchasing power of the dollar continues more stable
than that of the other leading currencies, a moderate expansion of balances
could almost certainly take place without weakening confidence in the dollar
and could make a useful contribution to international liquidity.
2. Reserve strengths of the dollar position
a. ) The United States has at present a favorable merchandise
trade balance of $4 to $5 billion annually. In addition, we have a net
favorable balance of earnings on investment assets of approximately
$2 1/2 billion. It is true that these amounts have not been sufficient to
offset net long term investments, foreign aid and military expenditures
abroad. However, exclusive of movements of short term funds, the adverse
balance has been reduced to a rate in the neighborhood of $1 billion annually.
Not only has there been a trend toward a smaller basic adverse balance during
the past three years, but some part of the remaining smaller adverse balance
should prove desirable in the interests of international liquidity. As for the
fluctuating but recurring outflow of short term funds, the actual course of
events is difficult to predict. Nevertheless, unless confidence in the
American economy and in the future purchasing power of the dollar were
to deteriorate far more than we think the facts will justify, we feel that
there is no problem of short term movements that higher interest rates
will not cure.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
UNITED STATKS TRUST COMPANY
-5-
OF NEW YORK
b. ) The continued expansion of American private long
term investments abroad has been a factor in the adverse payments
balance. However, the fact that Americans are expanding their corporate
and individual long term holdings abroad by some $2 billion a year in
excess of the increase of foreign holdings here is a great source of future
strength to the dollar. Private American long term investments abroad
have a total value of at least $50 billion in comparison with private foreign
long term investments here of about $20 billion. Even if all outstanding
short term claims, private and governmental, are added to these private
investments (while excluding both the gold and long term claims held by
the United States Government), total American holdings abroad exceed
foreign holdings h e r e by at least $15 billion.
It is poor analysis to think of short term foreign dollar
claims as being held exclusively against our gold. These claims are
against a "bank" whose gold holdings of $16 billion (plus its IMF quota of
$4 billion) are minor assets compared either to its foreign investments
or to its great wealth and productive power.
c. ) Our net military expenditures abroad of some $2 1/2 billion
annually obviously constitute an important factor in the adverse payments
balance. However, not only is our favorable balance of trade able to pay
much of these and other expenditures, but we should not lose sight of
military strength as a source of strength to the dollar. Our military
leadership of the West adds substantially to our bargaining power with any
governments which might attempt to f o r c e us to raise the price of gold against
our wishes. In actuality, the trend among the European governments is toward
cooperation on currency matters. P r e s s u r e for this cooperation will continue
strong both because of our economic and investment strength and because of
the necessity of political and military cooperation.
d. ) It is important to note that price levels are rising more
slowly in the United States than in other leading countries. Overall price
trends including services are rising here by not much over 1% annually,
whereas increases of 2 1/2 to 5% annually are taking place in Europe. While
the labor situation here leaves much to be desired, our annual increases in
wage costs are closer to productivity gains then in most other Western
countries. It is true that our price and wage cost levels are higher than in
these other countries. However, this has been so for a long time and is
partly due to our more fully developed economy. We have over the years
had favorable trade and payments balances even with an unfavorable gap in
purchasing power. Today, as the other countries catch up in their development, they are also gradually catching up in their price levels. Our improved
trade balances of the last three years in some part reflect this narrowing process,
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
UNITED STATES TRUST COMPANY
OF NEW YORK
e. ) An important aspect of the r e s e r v e strength of the
dollar is the fact that interest rate levels have so far had only minor use
in defense of the dollar,, This has been true in part because of the political
tendency toward easy monetary policies in this country and in part because
the need for use of interest rates in defense of the dollar has not yet been
at all acute. The mild tendency during the past year and one half toward
slightly higher short term rates, while continuing quite easy monetary
policies, has been little more than a token of what can be accomplished
through higher interest rates.
We now believe that higher interest rates will be used in
defense of the dollar when necessary. Sufficiently higher short term rates
would stop or reverse the recurring outward flow of short term funds.
Somewhat higher long term rates are also expected, when market and
exchange conditions require them, to discourage excessive foreign borrowing
and to help attract investment funds.
It will be important, of course, to accompany stronger
monetary policies with well conceived action, including tax reduction, to
spur the domestic economy. A strong economic trend encourages both
higher interest rates and international confidence. Policies intended to
stimulate the economy will almost certainly be adopted by the Administration
within the next few months or year. The Government action to be expected
may well be too little and too late to do more than mitigate the course of the
recession. Nevertheless, we believe that the underlying strength of our
economy and production system, together with stronger monetary policies,
will provide adequate strength against dollar devaluation.
Conclusion
While many factors argue against devaluation, we recognize
the importance of the sensitive matter of confidence. We also recognize
the prospects for a business recession which, without fully effective Administration action, could be the most severe of the postwar period. If a r e c e s s i o n
does become prolonged, it would make the position of the dollar more difficult
both through the damage to confidence and through the encouragement of
continued easy monetary policies.
Despite these uncertainties and difficulties in the period ahead,
it remains our strong opinion that devaluation continues to be unlikely. The
reasons we discussed above may be briefly summarized:
1. An increase in the price of gold seems unlikely in part because
of the comparatively small proportion of the metal's supplies acquired for
actual use.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
UNITED STATHS TRUST COMPANY
-7-
OF NEW YORK
2. Devaluation of the dollar in terms of other major currencies is
becoming increasingly unlikely as price and cost trends abroad increase
more rapidly than here.
3. The large and growing total of American investments abroad is
a strong support for the dollar. The increase in dollar claims held by
foreigners does not look so dangerous when related to American investments
or to our great economic and productive strength. The fact that the dollar
has become the key reserve currency should be a condition which we can
manage successfully over a period of years.
4. Our favorable merchandise trade balance, plus a substantial
balance of net income on investments, are important factors of strength.
While these balances do not fully equal our new investments and governmental
expenditures abroad, they do place us in a sufficiently strong position to defend
the dollar.
5. Our position of military leadership of the Western countries
gives our Government additional bargaining power in financial as well as
political matters.
6. Monetary policies and the level of interest rates have so far been
used only to a minor degree in defense of the dollar and our gold holdings.
We expect monetary policies to strengthen in response to p r e s s u r e s against
the dollar. We expect that use of this reserve weapon will be adequate to
counteract the p r e s s u r e s that we foresee.
7. While the U. S. economy is now facing a number of difficult
problems, we believe that the longer term prospects are for substantial
growth. We expect that over the next ten years our technological and
population growth will be such that the real economic growth will exceed
that of the past ten years. In the light of that prospect and the diminishing
increases in the price level, we anticipate a strengthening of the dollar's
position over the years ahead.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
F. N. Goodrich
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
August 8t 1962.
Bear Mr. Stark:
Thank yea for your mice letter of August 6
and 1, too, enjoyed our visit when yom were in
Wash lag ton in late June.
I
I appreciate very much your letting me
have a copy of your statement last week before the
Ways and Means Committee and shall read it with
real interest.
As you requested, I am enclosing copies
of three recent statements before Congressional
committees although, as you will note, they are
brief and specific to the bills under consideration.
I am expecting to testify next week before the
Joint Economic Committee, in connection with
its hearings on fiscal and monetary policies,
and wilt be glad to send you a copy of any prepared
statement 1 use at that time.
I will look forward to having another
visit with you one of these days.
.
With all good wishes*
Cordially yours,
rss
air. W. E. Stark,
Vice President,
Loomis-Sayles & Company incorporated,
140 Federal Street.
Boston*
LOOMIS-SAYLES 8 COMPANY
INCORPORATED
14O FEDERAL STREET
BOSTON 10
WALTER R. STARK
VICE
PRESIDENT
August 6, 1962
Mr. William McC. Martin, Jr., Chairman
Board of Governors
Federal Reserve System
Washin gton, D. C•
Dear Mr. Chairman:
Sometime ago when I was in Washington I had a most
pleasant and. stimulating visit with you—on time
which I Knew full well that you could not readily
spare. I am chagrined to find that I have not already acknowledged the visit.
You may be interested to see the enclosed statement
of my point of view on the business situation and
outlook and on tax reduction which I presented to the
Committee last week.
I should be glad to have copies of such of your recent statements on the Hill as may be conveniently
available.
Sincerely yours,
A
Enclosure
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ttftrf 'I
W. R. Stark
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
CONFIDENTIAL
Statement of
Wo Ro Stark
Vice President and Economic Advisor
LoomiSj, Sayles and Company, Inc.
Boston^ Massachusetts
before the
Ways and Means Committee
August 2, 1962
LOOMIS. S A Y L E S 8r COMPANY. INCORPORATED
500M-1Z-61
THE BUSINESS OUTLOOK AND ITS BEARING ON FISCAL POLICY
Summary
The broader statistical measures show business activity at record levels--with less
appearance of important internal maladjustments and weaknesses than ordinarily precedes a downturn in the business cycle„
However, there has been a slackening of improvement in production, employment, and
consumer income, and some easing off in consumer buying; the preponderant number of
the principal statistical series that customarily move in advance of the cycle have
begun to sag or decline; and confidence has been severely unsettled by a number of
developments«
These are by no means decisive evidence of an imminent downturn into recession.. At
this time, conclusions about the outlook are essentially a matter of judgmento
The Outlook
My conclusions are as followsi
Only inconsequential, if any, further increase in general business activity is to
be expected during the balance of the year=
In all probability the calendar year 19^3 will be a recession year--for the most
part, if not entirely.
The key question is, of course, whether the recession will be moderate or severe,
short or prolonged»
I strongly believe that anything approaching complete convic-
tion on the answer to this question is, at present, quite impossible„
Much will depend on the economic climate--on whether or not there is to be improvement or further deterioration in confidence and in the relations between government
and businesSo
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
LOOMIS, SAYLES ft COMPANY. INCORPORATED
5DDM-12-61
The Business Outlook and Its Bearing on Fiscal Policy
o,ooooo2
To an extraordinary degree the outcome will depend on the timeliness, the appropriateness, and the effectiveness vith which the government deals vith the difficult and crucially important problems confronting the country at this critical
juncture0
There is a real risk that the next recession may be significantly more severe than
heretofore in the postvar period„
Provided that risk is recognized, however, I
would consider it premature to set one's working benchmarks on that assumption0
Instead, I believe it prudent to use working guides that allow for recession within
the range of the relatively moderate declines of the postwar period--but as the
best that might be expectedo
To be more specific, I use the following assumptions in making my own working estimates of the Federal Government's receipts<, I assume that—The Federal Reserve Production Index at best will close this calendar year
at or about the 118 level (seasonally adjusted, 1957=100); it will reach a
low in the neighborhood of 106-108 by, say, the third quarter of 1963; and
it will average for that year 109-111 as against an average of about 117
for this year0
Personal income will at best average $442 billion this year, and
$446-$448 billion in 19630
Corporate profits before taxes at best will average $50 billion for the
current calendar year and $45 billion for next year0
The Main Reasons for Expecting Recession
I shall not here elaborate on the reasons underlying these conclusions — which as I
said must in the last analysis be largely a matter of judgment . Among the central
contributing factors are;
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
LOOMIS. S A Y L E S & COMPANY. INCORPORATED
The Business Outlook and Its Bearing on Fiscal Policy
1. The recent performance of the various statistical series that have
figured importantly over the years in the business cycle studies of
the National Bureau of Economic Research and that are now helpfully
made available currently by the Department of Commerce„
These sta-
tistics have begun to signal that the next change in economic activity will be down, though without dependable indications as to the
timing of the turn,,
2»
The severe decline in stock prices since the first of the year*
Clearly this dramatic experience has taken something substantial out
of the business outlook--directly, as a result of losses in excess
of $100 billion, and Indirectly through the effect on the confidence
of investors ,> business managements, and to some extent consumers „
It is not yet possible to measure the impact of the market decline-or to know whether or not the market has fully adjusted to changed
investor expectations in regard to the outlook for inflation, corporate profits, and future rates of economic growth,
3<>
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The continuing squeeze on corporate prof its«, The economy is still
in the process of adjusting to the absence, for the time being at
least j, of active inflationary trends and expectations and to the
back pressure against higher prices as a result of intensely competitive conditions here and abroad--this in the face of continuing
pressures toward higher labor costs.
The unsatisfactory trend and level of corporate profits in recent
years highlight the heavy burden of taxes levied against corporate
profits. Throughout the postwar period, corporate profits after
taxes have declined steadily in relation to the Gross National
LOOMIS. S A V L E S ft C O M P A N Y . INCORPORATED
500M-12-61
The Business Outlook and Its Bearing on Fiscal Policj
. „ . « „ 0 .4
Product--to an average of 4.5$ in "both I960 and 1961 (scarcely better
than that in the first quarter of this year) from an average of
better than 7$ in four years 1947-1950 and ranging from 6% to 1% or
better for the most part throughout the twenties and in the years
immediately preceding World War II.
4«
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Finally and, in a way, most important of all--deterioration in the
economic climate. This unfortunate condition is a result of the market
decline, of the recurring uncertainty about the balance of payments and
doubt about the dollar, and most particularly of the irritations, misunderstanding and often animosity that mar relations between business
and government, and that create friction and mistrust in place of
cooperative effort.
In my opinion^ it is difficult to overstate the importance of confidence and of the economic climate generally on the course and on the
vigor of economic activity. In the life history of business cycles
this single and intangible factor has been largely responsible for
the difference between big and little business cycles.
There is no need to belabor the point; but ours is in fact essentially
a free enterprise economy. We too often forget that enterprise is
something that performs not in the aggregate, but in terms of individuals --their imagination, courage and competence in taking business
risks successfullyo
In the present situation nothing would contribute more definitely to
improvement in the economic climate than the development of definitely
better understanding and cooperation between management, labor and
governmento
This is not a problem for the government alone, but the
L O O M I S , S A Y L E S f t COMPANY. INCORPORATED
SOOM-12-61
The Business Outlook and Its Bearing on Fiscal Policy
government8s role Is bound to be crucially important0
Oo00,0.5
Whatever the
government may undertake in its effort to encourage renewal of economic growth and sustained improvement in the rate of growth vill be
fully effective only if effective in regard to this highly important,
albeit intangible, area*,
Clearly, there are many other considerations to "be taken into account in judging
the economic outlook«
Among numerous reassuring circumstances is the absence dur-
ing the expansionary phase of the current business cycle of any great overswing of
speculative excesses (apart from the stock market where there has been substantial
if not necessarily full correction)—the apparent absence of really serious internal maladjustments and weaknesses in the economy,, And there appears to have been
no background of large-scale misuse of credit,
Major Problems
The country stands at a very critical juncture in its history not merely or mainly
because of the indications of impending recession in businessc
sions before0
We have had reces-
The present situation is particularly crucial, however, because of
the importance and difficulty of several major problems which must be successfully
handled--problems in respect of which the government cannot afford to be wrong by
any very material margin„
To begin with, in view of this country5s international role and the scope of its
domestic and international responsibilities, there is a clear need for a better
rate of economic growth than we have had in recent years0
This need highlights one
of the major drags against such growth to which I have already alluded, namely the
drag of overhigh taxes and of a badly distributed tax burden„
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
LOOMIS. SAYLES & COMPANY. INCORPORATED
5QOM-12-61
The Business Outlook and Its Bearing on Fiscal Policy
6
Normally there would "be a self-evident case for tax reduction as an important element in a constructive government program on behalf of improvement in the domestic
economyo
But the situation is tremendously complicated by two centrally important
conditions: one, the government's already unsatisfactory fiscal position--with the
budget running a substantial deficit despite almost the highest tax structure in
the country's history and with business at record levels; the other, the persistence of a seriously adverse balance in our international payments--due in large
measure to the burden of the government's foreign aid loans and grants and its
expenditures abroad»
Monetary and credit policy too would normally be regarded as available as part of
a program to improve the domestic outlook. But here again the situation is complicated by the international payments position and the likelihood that the requirements of the international situation may, at times, have to take precedence over
the needs of the domestic economy. To the extent that the latter proves to be the
case, then clearly a heavier domestic burden falls on the pursuance of an appropriate fiscal policy. And yet this country's fiscal policies must now, for the
first time in modern history, be determined with due regard for the understanding
and the acceptance of those policies abroad.
In this setting it seems obvious that final decision in the matter of tax reduction
under present conditions must be made on the basis of calculated risk--risk closely
calculated by those best able to judge all the elements in an unusually complex
situation,,
Budget Estimates
Over the years since leaving the Treasury I have continued to follow fiscal developments with close interest and have, from time to time, endeavored to make my own
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
L O O M I S . S A Y L E S & COMPANY.
INCORPORATED
5QQM-1Z-61
The Business Outlook and Its Bearing on Fiscal Policy
tentative revenue estimates <,
It is possible that the Committee may have some in-
terest in such highly provisional estimates as I have been able to make in the time
available.
For some months my preliminary estimates for fiscal 1963 have suggested a lower
level of receipts than were estimated in the January Budget Message—and a deficit
on an administrative budget basis somewhere in the neighborhood of $4 or $5 billion«
The following range of tentative estimates for fiscal 1963 is figured on the basis
of current tax rates (without allowance for changes in depreciation and without
allowance for the tax bill now pending before the Senate).
Budget Summary
(billions of dollars)
1962
Fiscal Years
1963 est
Budget Basis
Receipts
81.4
88.7
86,8
Ways & Means Com,
Own tentative est.
Expenditures
87 .7 (-1-3.5)
92.5
91 . 2
Official esto 1/62
Officially est'd. increase
from 1962 level ,
Deficit
-6.3
-4.4
-2.5 (combining the most favorable)
As noted in the table,, the higher of the two receipts estimates is the one used by
the Joint Committee Staff in the early spring.
The lower figure would reflect my
working benchmarks for income, prof its , et cetera—and so reflect the effect of at
least moderate recession in 1963•
The higher of the expenditure figures is merely the official estimate from the
January Budget Message.
The lower figure merely assumes the same increase between
1962 and 1963 that was officially estimated in January, but the increase has been
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
L O O M I S , S A Y L E S & C O M P A N Y . INCORPORATED
The Business Outlook and Its Bearing on Fiscal Policy
0 0 . 0 0 oo8
applied in this case to the actual expenditures for fiscal 1962 which, as it turned
out, were about $lA billion below the January estimates.
In gaging the cost and effect of tax reduction on the budget, some allowance must
at least be considered, if not actually made, for whatever constructive effect the
action may have on the tax bases„
How much allowance--and on what time schedule--
will be most difficult to judge even when the tax changes become known»
Clearly, adoption of any substantial tax reduction would mean more deficit financing for a while and, at a time like the present, would involve very real risks„
Obviously the degree of risk will depend not only on the character of the tax
changes themselves but on the character of the over-all fiscal policy and the
manner in which it is administered; and much will depend also on the response of
business and the consumer in this country--not to mention international reactions,
which will be highly important„
Tax Reduction
For any who believe that the economy has lost its basic vigor and dynamism and is
unable to respond in ways that will mean solid improvement in our economic performance, any tax reduction at present would appear to place the country in a hazardous
positiono
However, for those who believe that the economy is basically strong and in terms of
its present position is likely to respond favorably to tax reductions enacted as
part of a broad program of constructive government measures, the risk would be
calculated quite differently,,
Frankly I come rather reluctantly to the point of favoring tax reduction at the
present time--faced as we are with the enigma of a huge and growing burden of
government expenditures which, year after year, continually match or exceed the
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
LOOMIS, SAYLES & COMPANY.
INCORPORATED
SOOM-12-61
The Business Outlook and Its Bearing on Fiscal Policy
•9
yield of a tax structure that is both too high and badly distributed., However,
I believe that an early and simple first step tovard incentive-encouraging reduction of taxes on individual and corporate income would sufficiently improve the
outlook for the private sectors of the economy to warrant the risk involved--subject to these important conditions;
1. The changes should be simple and capable of prompt enactment without
controversy and delay»
2o
To be effective they should be permanent and consistent with a later
overhaul of the whole structure»
3. They should be associated with a firm commitment to restrain and
where possible to reduce expenditures.
k. There should also be an undertaking to finance the resulting deficits
in so far as possible from savings.
5«
Finally, it should be recognized that tax reduction alone will not
be enough--but instead should be part of a broad effort to improve
relations between business and government and to energize the private
economy.
The matter of expenditures deserves real emphasis. There should be at least a determined commitment to exert effective administrative restraint against avoidable
increase in expenditures and a commitment to eliminate expenditures where possible
on the basis of restudy of priorities., The recent accomplishments of Secretary
McNamara illustrate the possibilities in this direction and should be emulated
throughout government agencies.
Beyond this^ there is a real need for more critical reviews than heretofore of the
possibilities of reducing or at least deferring some part of the government's
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
L O O M I S , S A Y L E S a C O M P A N Y . INCORPORATED
The Business Outlook and Its Bearing on Fiscal Policy
,10
foreign expenditures and the need also for the United States to take a much firmer
position among its allies with regard to sharing the cost of military and foreign
aid expenditures «
The formulation of specific tax proposals should be left to those in a position to
base their suggestions on closer and more intensive work on this extremely exacting
subject than I am in a position to do»
So , I am loath to go much beyond such
general principles as those stated above.
Corporation income tax- -Believing that taxation of corporate income at rates as
high as 52$ exerts a cumulative drag against investment and against vigorous business enterprise in developing new ventures and new employment opportunities, I
would place a high priority on a reduction to Vf$ effective on 19^ 3 incomes0
I would estimate that such a change would cost about $2 billion in a full year
(figured on pretax corporate income of $50 billion and making approximate allowance
for changed depreciation standards),
Individual income tax- -There has been a variety of suggested changes in this areac
Whether or not a downward revision of the various bracket rates, scaled to effect
a highly desirable reduction of the very high rates, would be feasible without a
great amount of delay and controversy is an open question,
A simpler alternative would be to provide a flat cut beginning January 1, of, say,
5$ or 10$ in the tax as calculated under the present law. This procedure could be
adopted to be effective until such time as the broad overhaul of the individual
income tax provisions of the present law is completed „ A 5$ to 1,0% cut made effective on calendar year 1963 incomes would cost about $2.5 billion to $5°0 billion,,
(I am not certain whether it would be administratively feasible to phase in a
partial reduction before the end of this year*)
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
LOOMIS, S A Y L E S & COMPANY. INCORPORATED
5ODM-1Z-61
The Business Outlook and Its Bearing on Fiscal Policy
,11
Such reductions, taken in connection with the recent liberalization of depreciation
allowances (and without reference to the bill now pending before the Senate), could
involve a full-year cost as high as $5 to $9 billion.
I believe that tax action taken within that range and subject to the conditions
indicated above would tend to cushion such recessive tendencies in business activity as appear to be in prospect--and in time move business strongly ahead to new
high levels„
How much allowance should be made for this result in projecting the
fiscal picture ahead into the next year and thereafter is an open question0
No one can know for sure what the impact of a further extension of deficit financing on a substantial scale for another year or more might be. The answer will turn
mainly on the over-all character of the government's fiscal and related policies-particularly on its ability to elicit the active cooperation of business and labor,
and to activate the forward drive of which our economy is capable»
It is these
considerations as much as the arithmetic of budget estimates that will determine
how effective tax reduction at this time will be*
Two concluding observations: Even the government, powerful as it is, has no magic
with which to control at will the course of business activity<>
There is no single,
simple action by which it can command the kind of sustained improvement in our economic performance that the country needs. While prompt and constructive tax action
appears to hold considerable promise of good results, such action would of necessity involve very real risks under existing conditions--and the final decision is
one that must be based on close calculation of the risks by those best able to
judge all the elements in an unusually complex situation0
Ours is a basically strong economy and there is no reason why the country's difficult problems should get out of hando
Responsible critics, both at home and abroad^
will judge the government8s policies according to whether they are considered to be
realistically and responsibly formulated and effectively administeredo
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
L O O M I S . SAYLES & COMPANY. INCORPORATED
500M-12-61
@FedFRASER