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1914 BUSINESS REVIEW is produced in the Department of Research. Jack C. Rothwell was primarily responsible for the article, “Aiming at a Moving Target," and Kathryn Kalmbach for “The Current Business Expansion: Where from Here?" The authors will be glad to receive comments on their articles. Requests for additional copies should be addressed to Bank and Public Relations, Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania 19101. AIMING AT A MOVING TARGET Environment and the Goals of Federal Reserve Policy The German philosopher Arthur Schopenhaur SOCIAL GOALS IN THE U.S.A. had some interesting thoughts on the goals This environment of intellectual and material of human society. He thought we would all be progress was the backdrop against which the better off if we ceased to reproduce and let the early social goals of the United States were race die out. The reason for this dire prescrip formulated. The ideas of the Declaration of Inde tion: life is a struggle; defeat and anguish are pendence are rooted here— that all men are inevitable; so why bother. created equal and have inalienable rights such Fortunately, Schopenhaur’s views failed to as life, liberty, and the pursuit of happiness. The capture the enthusiasm of his contemporaries. Constitution drew upon this broad movemenUin But his views do illustrate an important point stating such objectives of union as that of pro in any discussion of social objectives: such ob moting the general welfare. jectives are the peculiar products of their times. The subsequent evolution of economic objec Take Schopenhaur’s case, for example. The tives in the United States has amounted, in large Napoleonic Wars had just ended. Europe was perished, measure, to a searching refinement of the “ gen eral welfare” goal. Given the background herit wretched poverty stalked the land. Moreover, age that progress was possible (and given the ravaged, millions of persons had the hopes of the French Revolution— liberty, stated objective that Government should pro equality, and fraternity— were little more than mote that progress) this nation constantly has mocking echoes. Things seemed so bad that the been involved in a revision of the idea of famed German poet, Goethe, was moved to an progress. What was good enough became not nounce, “ I thank God I am not so young in so enough. thoroughly a finished world.” In this article we take a look at shifting ideas But of course times changed. In fact, the of the goal of progress with emphasis upon the pessimism of the early nineteenth century was, character of the times which generated these in retrospect, no more than a ripple on the broad shifts. Our focus is upon money and the Federal tidal wave of hope unleashed by the Renaissance Reserve System, how the System reacted to and and the Age of Enlightment. Among other things, was stimulated by the changing times and how this hope sprang from development of the scien it altered its goals better to coincide with the tific method and the rapid accumulation of tech evolving idea of progress. nical know-how. It suggested that man, by exer fulfilling his unique human potential and satisfy THE SHIFTING IDEA OF PROGRESS AND THE EVOLUTION OF FEDERAL RESERVE GOALS ing his wants. In the Employment Act of 1946, Congress di cising his reason, could march ever upward in 3 business review rected the Federal Government to coordinate all us go back in history and trace the factors its activities toward the end of “ promoting maxi motivating change. mum employment, production, and purchasing power” and to do so “ in a manner calculated to BIRTH OF THE FEDERAL RESERVE SYSTEM foster and promote free competitive enterprise.” The immediate stimuli which motivated Congress In essence, Congress carefully defined two to establish the Federal Reserve System were the broad sets of economic goals, (a) what might be severe money panics of the nineteenth and early called “ performance goals” (maximum employ twentieth centuries.1 The influence of the panics ment, etc.) and (b) what could be termed “ en vironment goals” (free competitive enterprise). is clearly evident in the Federal Reserve Act, which defines the performance objectives of the These two broad classifications of goals, in new System in such terms as furnishing an elas fact, have characterized the objectives of the tic currency and affording a means to rediscount Federal Reserve System since its very early days. commercial paper. Both explicitly and implicitly, the System has sought to maintain economic stability within the Economic performance framework of a free enterprise system. This is In effect, the System was to provide funds to a thread member banks which needed additional resources of continuity that binds past to to meet the currency demands of their depositors present. Yet as conditions changed through time— as or to pay balances due other banks. The funds we experienced wars, inflations, and recessions could be obtained by a banker through a sim — subtle changes occurred both within and be ple process: going through the notes owed him, tween these two broad sets of goals. selecting one or more deemed eligible, present The performance objective changed in the di ing them to a Federal Reserve Bank for discount. rection of greater dynamism; from avoiding If banks had enough eligible notes, they would money panics to mitigating the boom-recession always be able to get funds from the System and phase of the business cycle; from meeting the thus could avoid any panic on the part of cus needs of commerce and industry to actively tomers who might fear that currency would not stimulating commerce and industry, and pro be forthcoming on demand. But the framers of the Federal Reserve Act moting real growth. The environment objective also shifted. had more in mind than preventing panics. The Though the Fed still sought a free-enterprise System was also to accommodate the “ legitimate” environment in pursuing its performance goals, credit needs of a growing economy through its it found that its own functioning could not be discount function— through provision of funds guided solely by the forces of free enterprise. It and by setting the rate of discount— and prevent could not be so integral a part of the free enter “ ill-advised” credit expansion. prise system that its actions were limited by this To meet credit needs, the Act authorized the system. It could not, for example, be stimulated Reserve Banks to “ discount notes, drafts and to action solely by such free-market phenomena bills of exchange [for member banks] issued or as “ gold flows” and “ productive credit.” i For a discussion of the character and mechanics of panics, see Business Review, Federal Reserve Bank of Phila delphia, “Who Changed the Rules of the Game,” October 1963, p. 4. So much for the direction of movement. Let 4 business review drawn for agricultural, industrial or commercial 2. International Trade. But nineteenth century, purposes, or the proceeds of which have been laissez-faire ideas encompassed more than domes used, for such purposes. . . Banks could then tic production and trade. The System envisaged use the proceeds of the discounts to make loans a free international market place in which the to their customers. Thus the process of discount businessmen of each nation would (a) specialize ing was the way both to prevent panics and pro in producing those goods they could make at vide funds for legitimate business growth. lowest comparative cost and then (b) trade with The Annual Report for 1914 summed up the each other across international boundaries, rela Board’s idea of its objectives when it mentioned tively unencumbered by tariffs and the like. It the: was thought that such a system would provide promise of being able to protect business against the most goods at the lowest prices. The system the harmful stimulus and consequences of ill- also envisaged the free movement of capital advised expansions of credit on the one hand, funds— an important invisible raw material of or against the menace of unnatural restrictions the production process. and unnecessary contractions on the other, with 3. The Role of Money. Yet the system might exorbitant rates of interest and artificial strin need new money and credit if it were to grow gencies.2 healthily. Rich resources were available for ex These, then, might be termed the early “ per ploitation. New undertakings could be estab formance” objectives of the System. But how lished and new production set going if money were the “ environmental” objectives expressed? and credit were available. Sufficient funds, how Economic environment ever, might not be forthcoming out of savings. What was needed was new money and credit to There was no explicit mention in the Federal create a new circuit of production and then to Reserve Act of a free market environment. Yet circulate an ever-expanding volume of trade. much was implied and much more was taken This was to be provided through banks. for granted. To understand the environment 4. Self-Regulating Nature of the Laissez-faire which the Federal Reserve hoped to foster, it is System. But what was to make the system run necessary to understand the economic thinking smoothly? Businessmen might produce too much inherited by the System. of the wrong kind of goods and not be able to 1. Free Enterprise. Nineteenth century, laissez- sell them (thus creating unemployment of work ers as goods stacked u p). Moreover, too much faire liberalism was the legacy of the Federal or too little new money might be created thus Reserve System. Free enterprise was the byword — businessmen should be allowed to compete in causing inflation on the one hand (too much the production and sale of goods with a bare money pursuing goods) or inhibiting expansion minimum of interference by Government. It was on the other (not enough money to take advan thought that this system would assure maximum tage of productive opportunities). Finally, since output at lowest cost and hence provide the the system included international trade, might greatest possible satisfaction of economic wants. we spend too much abroad and thus lose gold? The answer to these questions— or so it was 2 Federal Reserve Board, Annual Report, 1914, p. 17. thought— was that the system was self-regulating, 5 business review that the system itself generated forces that would vesting too much) and hence losing gold? Again, maintain the system generated self-stabilizing forces, or its own equilibrium and its own so it seemed. stability. of markets, for example, was A nation would buy too much abroad, it was widely accepted: supply creates its own demand thought, because prices were lower abroad. It — the process of production places income in would invest too much because interest rates the hands of the producers which is used to pur were higher. “ Say’s law” chase the fruits of production. Thus the system Increased purchases and investments abroad tended toward operation at full capacity and full employment. Flexible wages, prices, and profits would mean a flow of domestic currency (and bank deposits) to foreign lands and quite pos were supposed to assure the timely movement of sibly, an outflow of gold. This was where the capital and labor from industries where demand self-corrective force became manifest. was falling to those experiencing rising demand. Since gold was the basis of a nation’s money And what of money? As it did in the produc and banking system in the classical model, (cur tion and distribution spheres, the laissez-faire rency and bank deposits were supposed to be system was supposed to generate its own equili backed by gold and interchangeable for gold) brating forces. If commercial bankers and cen the outflow of gold was supposed to inhibit fur tral bankers would only recognize these forces, ther creation of money and credit. Commercial then it was thought that the equilibrium of the bankers, seeing their gold reserves shrink, would system would not be endangered by financial be more reluctant to make new loans and excesses. There would tend to be just the right create new demands against their diminishing amount of new money and credit to assure high- gold reserves. Central bankers, aware of the level production at stable prices. outflow of gold, would raise their discount rates On the home front, the mechanism was the thus discouraging banks from rediscounting “ real bills doctrine.” The Federal Reserve should their paper and obtaining the wherewithal to create new money (via the discount mechanism) create new money and credit. only on the collateral of productive loans made The result? Less money and credit would be by banks to finance current production and dis available. With less money and credit pursuing tribution— goods in process. Thus it was argued domestic goods, prices would tend to fall. With that each new creation of money and credit less money available to borrowers, interest rates would match the needs of the production process. would tend to rise. Domestic prices and interest If production grew, so would money and credit. rates The free-enterprise system generated the demand foreign counterparts and domestic citizens would would become competitive with their for productive loans and this demand was the cease spending too much abroad.3 The laissez- very force that would maintain financial equilib faire system generated forces from within that rium. All the central banker need do was recog maintained international as well as national nize it and adjust his discount administration equilibrium. We could have the benefits of free and rates accordingly. enterprise and free trade together with the bene Finally, how about the problem of interna tional trade, of buying too much abroad (or in 6 3 The reverse of this process was supposed to take place in the countries gaining gold. business review fits of money creation to set in motion new cir things didn’t work out. For times were changing. cuits of production and trade. In short, we could Events were to test both the laissez-faire system have a growing supply of low-cost goods to of goals and the prevalent idea of progress on satisfy our wants with a minimum of disturbing which those goals were based. The test was busi business fluctuations. ness depression— 1920-1921 and the dark years One might look at the laissez-faire system as of the thirties. a “ package deal.” Theoretically, the buyer got all the free-market and output advantages with out need to make agonizing discretionary deci THE MURKY ERA OF THE TWENTIES AND THE THIRTIES sions on how to maintain the stability of the The tests didn’t come for a while. The Fed was system. All he had to do was recognize the busy with organizational problems during its stabilizing forces and play by the rules of the early days. Then World War I came along and game, just act appropriately with regard to gold all objectives became secondary to a successful flows and “ real bills.” financing of the war effort. For several months Thus the Fed, at its inception, was committed following the war, the Fed felt compelled to de to an environment goal of free markets. But the vote its efforts and resources to aiding the Treas environment goal was a package in which the ury with the large war debt Fed also accepted the inherent forces which making credit readily available and keeping in would stabilize the system. In short, the Fed terest rates low ). Then, in 1919, conditions took on a responsibility to propagate the whole seemed ripe once more to bring the objective of economic stability to the fore. system, to gain the benefits and maintain the (which meant viability of the classical model by playing its rules. And the environment goal seemed in perfect harmony with the performance goal. Perform ance was directed at stability— at avoiding panics and preventing “ ill-advised expansions or unnatural restrictions of credit.” The environ ment objective seemed to promise just that— to provide both the natural forces and the auto matic guides to action which would maintain stability. The Fed’s commitment to the laissez-faire sys tem was implicit in the Federal Reserve Act which prescribed the nature of bills which could be discounted and required that Federal Reserve notes be backed by gold. The commitment was also evident in System statements and publica tions. A neat package it would seem. But the fact is, The twenties In the year or more preceding 1920, fundamental economic developments as viewed by the Fed were deteriorating to the extent that economic goals seemed in imminent danger. Credit was being used for “ speculative” purposes, which seemed to threaten economic stability and un dermine both performance and environment goals. Moreover, gold was flowing out. The sit uation was described as: characterized by an unprecedented orgy of ex travagance, a mania for speculation, over extended business in nearly all lines and in every section of the country, and general de moralization of the agencies of production and distribution.4 4 Federal Reserve Board, Annual Report, 1920, p. 1. 7 business review Given these conditions, the Fed raised dis ber bank when it rediscounts with a Federal count rates both at the close of 1919 and again Reserve Bank may disclose the purpose for in May, 1920. The Reserve authorities felt that which the loan evidenced by that paper was credit should do its part in bringing about re made, but it does not disclose what use is to adjustment, that borrowing should be made be made of the proceeds of the rediscount. A sufficiently expensive to exert pressure and dis farmer’s note may be offered for rediscount by courage unproductive and unnecessary uses of a member bank when in fact the need for redis credit. But the movement should be gradual and counting has arisen because of extensions of credit by the member bank for speculative use.5 orderly; sudden credit or price deflation might Moreover, the Board pointed out: lead to disaster. Was the Fed successful? Unfortunately, no. By what means may it be known whether the There followed in 1920-21 the sharpest price volume of credit provided by the Federal Re break in history and a severe business recession. serve Banks is in any given set of circumstances This untoward train of events set the stage adequate, excessive, or deficient? The problem for a fundamental reexamination of Federal in good administration under the Federal Re Reserve policy. Many members of Congress, serve System is not only that of limiting the field Federal Reserve officials, and others felt that of uses of Federal Reserve credit to productive the and necessary. purposes, but also of limiting the volume of Others, however, felt that Fed goals had not credit within the field of its appropriate uses recession was inevitable been attained and asked why. This interrogative attitude was expressed suc cinctly in the Federal Reserve Board’s Annual to such amount as may be economically justified — that is, justified by a commensurate increase in the nation s productivity.6 Report for 1923. In this document the classical The question of the international gold stand laissez-faire model— the proud construction of ard also came up for review. The Board con the nineteenth century— came in for quite a cluded that it was desirable to return to the humbling review. First to feel the swordpoint of standard but: analysis was the “ real bills doctrine.” The Re Under the present conditions, with gold em serve Board pointed out that the theory was bargoes in force in most foreign countries and erroneous, that concentrating on the quality of the United States practically the only free gold credit would not automatically assure that (a) market of the world, the movement of gold to credit would be used for nonspeculative pur this country does not reflect the relative posi poses or that (b) the over-all quantity of credit tion of the money markets nor does the move would be just sufficient to meet the needs of ment give rise to corrective influences, working trade. through exchanges, money rates, and price levels, There are no automatic devices or detectors for which tend to reverse the flow. The significance determining, when credit is granted by a Fed which movements in the reserve ratios formerly eral Reserve Bank in response to a rediscount possessed rested upon the fact that they were demand, whether the occasion of the rediscount the visible indicators of the operation of the was an extension of credit by the member bank for non-productive use. Paper offered by a mem 8 Federal Reserve Board, Annual Report, 1923, p. 35. e Ibid., p. 33. 5 business review nicely adjusted mechanism of international fi serious and protracted period of unemployment nance. With this mechanism now inoperative, in the nation’s history. In 1933, for example, the ratios have lost much of their value as one out of four persons in the labor force could administrative guides.7 not find a job. This compares to about one out To sum up the reevaluation prompted by the inflation-deflation cycle of the early twenties, of eighteen today, and even now we think of unemployment as a serious problem. the idea of progress could still be interpreted The early thirties were also years of financial broadly within the old context: an environment crisis, when banks failed by the score and goal of free enterprise, a performance goal of stock prices plunged. And the depression was economic stability. Yet important shifts within not confined to this country. All of the indus and between the goals had occurred. trial nations of the world suffered, and each at With regard to performance, panics no longer tempted to protect itself, even through pushing appeared to be a problem; concentration now this suffering onto the other with beggar-my- was even more strongly on cyclical fluctuation neighbor policies of tariffs, exchange controls, in business. and the like. As for environment, the nineteenth century Given these conditions, the idea of progress laissez-faire model viewed as an integral whole shifted from maintaining stability to regaining had received some hard knocks. Fed officials had, it— putting people back to work, reflating prices, in effect, adjudged it incompatible with the per reestablishing confidence in banks and the fi formance goal. Though a return to the gold nancial system. Arthur Hersey of the Board’s standard was hoped for, the “ real bills doctrine” staff summarized the change in the following was logically debunked as a technique to insure manner: the economy against speculation and assure the After 1929 the dislocation of normal economic proper over-all quantity of money and credit. processes and the depressed level o f business This is not to say that “ real bills” ideas were activity and national income made it necessary completely dead. Such sharp breaks with the to reinterpret the twofold objective of maintain past are rare indeed. But, metaphorically speak ing prosperity and of maintaining sound credit ing, the doctrine stood with hat in hands and conditions. It was no longer a question merely head bent in humility. The Fed was moving o f smoothing out fluctuations in a generally away from the automatic formulae of laissez- stable economy. During the years 1930-1933 faire toward discretionary money management. the immediate need was to restore the stability Yet equally significant changes were still to and adaptability o f the banking system . . . come, both in the idea of progress and in the “ Soundness” of “ credit conditions” . . . now goals of policy to implement changing ideas. involved the ultimate issue of public confidence Next in line as a social catalyst: the Great De in the banks and the basic ability of the banks pression of the 1930’s. to function effectively. The banking crisis of The thirties was not to be cured simply by providing the banks with facilities for borrowing . . . From those years, unlike the money panic of 1907, The decade o f the thirties marked the most 7 ibid., p. 30. (Continued on Page 12) 9 THE CURRENT BUSINESS EXPANSION: The current expansion in business, which has been going on for over three years, has now become the longest since World War II (not counting the one from 1949-53 which was stretched out by the Korean action). The ques tion now is what the tax cut will do to the course of the expansion. No one knows for sure, but part of the answer may lie in the nature of the growth we have had so far. These charts compare the growth in this period with those of other expansion periods in the postwar years, starting with the bottom of the recession as 100. INDUSTRIAL PRODUCTION INDEX (Trough == 100) UNEMPLOYMENT RATE FROM HERE? NEW CONSTRUCTION OUTLAYS Construction outlays also have shown less vigor; until the most recent month, the rate of advance had about come to a halt. INDEX (Trough = 100) PER CENT GOVERNMENT PURCHASES OF GOODS AND SERVICES INDEX (Trough = 100) It is Government purchases of goods and services which have given the really impressive support to the economy over the past three years, increasing relatively more than in any of the other periods except during the Korea episode. If two words can characterize the period, they are “slow” and “ inadequate.” This has been a relatively slow and gradual expansion. The course of industrial production during the current expansion has been quite similar to that after the 1954 recession, but generally at a lower level. In recent months, output has been relatively steady. And the pace has been too slow to take up unused resources. The unemployment rate, despite a high level of output, has been running considerably above the percentages of the comparative recoveries and hasn't shown any direction for many months. Much the same is true of the rate of idle manufacturing capacity. One big reason the expansion has been relatively slow and inadequate is that this has not been a capital boom. Plant and equipment expenditures are scheduled to pick up steam after a lack-lustre first quarter, but their rate of increase is expected still to lag considerably behind the pace of the other recovery periods. PLANT AND EQUIPMENT EXPENDITURES INDEX (Trough = 100) WHOLESALE PRICES And because of all this the Federal Reserve has pur sued an easy money policy which has promoted a much more rapid growth in bank credit than during earlier periods. INDEX (Trough = 100) BUSINESS INVENTORIES INDEX (Trough = 100) TOTAL BANK CREDIT (Loans and Investments) INDEX (Trough = 100) Businessmen also have been prudent about spending for in ventories, increasing stocks more modestly than in earlier expansions. RETAIL SALES Perhaps not quite so conservative as businessmen, consumers nevertheless have not been indulging in a spending spree. Although setting new record highs for three successive months, retail sales still have not risen so much as after the 1949 and 1954 recessions. Construction outlays also have shown less vigor; until the most recent month, the rate of advance had about come to a halt. INDEX (Trough — 100) MONTHS AFTER TROUGH Perhaps characterizing the moderate nature of the per iod better than any other has been the stability of prices. Although consumer prices have risen at about the same pace as in earlier expansions (except during Korea), wholesale prices have re mained strikingly steady. In short, this expansion has lasted longer than the others perhaps because it has been slower. This very moder ateness gives rise to hopes that the upturn can continue. We shall have to wait, of course, to see how the tax-cut experiment turns out; but the nature of the expansion so far suggests that the tax cut will help to sustain and stimulate a somewhat lagging economy rather than put the bloom on a boom. business review (Continued from Page 9) “ rules of the game” — to react automatically with 1934 to the present time [1940] the Federal greater credit ease or restraint in response to Reserve System gold inflows and outflows. There was a complete has continued to orient its monetary policy toward the goal of a lasting There was also a developing reluctance to recovery.8 But what, meanwhile, was happening to the environment breakdown of the classical gold standard. objective? In a sentence, the allow international developments to affect do mestic policies adversely. After 1931, gold in laissez-faire model was disintegrating under the flows were the rule in the United States. The pressure of the day. Such a model seemed more large volume of excess reserves which resulted and more inconsistent with the dire need to acted as a sort of cushion. Loss of gold no bolster the domestic economy. longer limited freedom to pursue domestic ob Free trade? Legislators decided that import jectives. ing goods meant exporting jobs. The answer— The general unwillingness to let international tariffs: the Smoot-Hawley Tariff of 1930, for events overshadow domestic policies was well example, greatly increased the price of a wide illustrated in the Board of Governor’s 1936 range of imported goods. Other countries as Annual Report: well instituted tariffs, and most also established On September 25 the Governments of the United embargoes, quotas, and exchange controls. States, France, and the United Kingdom issued Real bills? The theory which had stood with similarly worded statements in which each Gov hat in hands in the twenties was ushered out ernment declared ‘ its purpose to continue the the door in the thirties. The Glass-Steagall Act policy which it has pursued in recent years, one of 1932 empowered the Reserve Banks to make constant object of which is to maintain the advances to member banks that did not have greatest possible equilibrium in the system of adequate eligible and acceptable paper. Later, international exchange and to avoid to the ut the Banking Act of 1935 said that “ any Federal most extent the creation of any disturbance of Reserve Bank . . . may make advances to any that system’ . . . Each Government stated that it member bank on its time or demand notes . . . must, of course, in its policy towards interna which are secured to the satisfaction of each tional monetary relations take into full account Federal Reserve Bank.” the requirements of internal prosperity .9 ( Em Gold flows? The problems of the twenties were posed with new intensity in the thirties. With tariffs and controls over imports and phasis supplied) In summary, the desperate need to secure performance goals— to rise from the abyss of with exchange controls over capital flows in depression— resulted in a rapid revision of the many nations there was no reason to expect a environment quick and sure response abroad to domestic laissez-faire model was judged inappropriate for goal. The nineteenth century changes in prices and interest rates, hence there the conditions of the thirties. Free multilateral was no reason to adhere to the gold standard trade became a distant dream from the past. Gold-flow rules and “ real bills” were scrapped. s Arthur Hersey, Historical Review of Objectives of Fed eral Reserve Policy, Federal Reserve Bulletin (Washington: Board of Governors of the Federal Reserve System), April 1940, p. 10. 12 9 Board of Governors of the Federal Reserve System, An nual Report, 1936, p. 6. business review And to top things off: the Fed had even been ing to the Aeronautical Chamber of Commerce given a direct control over credit markets! The is likely to skid by 85 or 90 per cent, and with Securities and Exchange Act of 1934 empow it will go the demand for astronomical tonnages ered the Federal Reserve Board to prescribe of aluminum and magnesium. The machine tool minimum margin requirements for purchasing industry has turned out enough equipment dur or carrying securities or selling them short. ing the war, in the estimation of some manu A man could still go out and start a grocery facturers, to supply the needs of the next twenty store and compete with the fellow down the years. And so on. How many jobs can such street— we still wanted free markets at home. industries safely prom ise?10 But for the time being the old environment was done for. Debate over postwar performance goals End of the depression Congress as it deliberated the course of postwar The grim years of the Great Depression finally economic policy. Add to this memories of the Such haunting possibilities greatly concerned died away. The muffled voices of men in bread recent depression and there seemed no cause lines, the fears of unemployment, want, poverty for optimism. Statements such as the following — all were stilled. Now a new force was seeth were included in materials prepared to aid Con ing in Europe. The clank of metal on metal and gress in its deliberations on economic policy. the sound of jackboots in the streets signaled In the early 1930’s about one-third of our work the emerging threat, then the awful climax and ers were unwanted, and all the rest shared in culmination of World War II. the fear of being unwanted. These injuries to Yet at war’s end the specter of the Great De pression returned, its influence not yet spent. The human dignity will not again be tolerated by a free and self-reliant people.11* shape of our postwar goals was to bear the in And other basic dimensions of this same delible imprint of the experience of the thirties. theme were considered. Throughout the hear THE EMPLOYMENT ACT OF 1946 Act one is struck by the resounding concern An article appearing in the February, 1945 over the possibility of social conflict— conflict ings which preceded passage of the Employment issue of Harper s expressed well the concern of of ideology which might spring forth in either the nation over postwar economic prospects: peaceful or violent form if the nation should once During less than two years of war we tripled more be racked with depression. Concerning the our ocean tonnage, and we will go into the peace former, Senator Wagner was quick to comment: with a merchant marine at least equal to that of Recent events in other democracies convince me all other nations combined. Obviously we will that this fundamental economic truth [the de not need to build very many more ships for sirability of full employment] is permeating the some time to come. The huge chemical factories minds of more and more people. Interpretations can hardly expect stump-blowing and highway blasting to require explosives on anything like the scale demanded by the siege of Aachen or the bombing of Tokyo. Plane demand, accord 10 Stanley Lebergott, "Shall We Guarantee Full Employ ment?” Harper’s Magazine (Vol. 190, No. 1137, February 1945), p. 194. 11 U.S. Senate, Committee on Banking and Currency, Assuring Full Employment in a Free Competitive Economy, 79th Congress, 1st session, staff report, September 1945, pp. 5-6. 13 business review of the [meaning of the] recent British elections ployment legislation were tempered throughout are as thick as a field of daffodils. . . . They by a desire to avoid “ overstepping the bounds [the British people] were not satisfied that the of propriety” in setting and implementing na government in power was sufficiently resolute in tional economic objectives for a free enterprise its determination to achieve postwar full employ economy. ment, and so they have elected another govern ment which is pledged to that purpose.12 But the fear of social conflict lay rooted in It goes without saying, of course, that Con gressional judgments differed as to the geog raphy of these bounds. An outstanding feature soil deeper than that of the ballot box. For in of the initial legislation was the high degree of the despair of depression many saw the seeds emphasis placed on Government spending to of man’s basest emotions, both as an individual combat depressions. and as a social animal. In the words of the Full In both Houses the tussle over the bill resulted Employment Subcommittee: in a progressive de-emphasis of this specific When there are too few jobs to go around, bitter stabilization device in favor of a more com conflict develops between groups and individuals. prehensive technique of analysis of all sources Under these conditions, human virtues lose sig of instability in the economy and attack along nificance. The ethics of society recede to the a broad front with remedial actions of many ethics of the jungle, where dog eats dog. Racial sorts. and personal hates emerge. Group is set against The environmental metamorphosis may also group and class against class. The forces of in be seen in Senator Taft’s questioning of that tolerance and fear come forth in racial and section of the original bill which stated that: religious conflict.13 “ All Americans able to work and willing to This, then, was the atmosphere in which Con gress debated the provisions of the Employment Act of 1946. One basic question seemed to be work have the right to useful, remunerative, regular, and full-time employment. . . .” “ What was the nature of this right?” inquired at issue: could men endure and could this na Senator Taft, “ Is that a legal right, intended to tion stand another depression like that of the create a legal right that a man can sue on if 1930’s? It appeared that we must perform better he doesn’t get it, or what is the nature of that? — raise our sights or we risked grave conse . . . is that a right like the Bill of Rights, that quences. a man can enforce in court?” 14 Yet as we have seen, where performance is debated, environment is not far behind. It was this type of questioning and analysis which assured that the Act as finally passed would reflect the environment goal of free en The environment goal: Maintenance of free economic institutions terprise, even if that goal should be consider ably modified from the days of laissez-faire. Despite fear of unemployment and social con This, then, is the heritage of the Employment flict, the hearings and reports on postwar em- Act of 1946, an attempt to provide economic 12 U.S. Senate, Subcommittee of the Committee on Bank ing and Currency, Full Employment Act of 1945, 79th Con gress, 1st session, hearings, July-September 1945, p. 2. is U.S. Senate, Committee on Banking and Currency, Assuring Full Employment in a Free Competitive Economy, op. cit., pp. 4-5. stabilization within the confines of free economic 14 14 u.S. Senate, Subcommittee of the Committee on Bank ing and Currency, Full Employment Act of 1945, op. cit., p. 20. business review institutions. Senate hearings on the Act began competitive enterprise on the other. on July 30, 1945. After months of exhaustive Yet if the Act stressed the traditional ob study in both House and Senate, after testimony jectives it also recognized the gradual shaping and counter testimony, examination and cross- and molding of these objectives. examination a joint conference committee fi The Act called for free competitive enterprise nally agreed upon the specifics of the bill.15 It but not for the laissez-faire environment of was passed by unanimous voice vote in the earlier years. Controversy concerned mainly the Senate and by a 322-84 majority in the House. technique and degree that Government should The President signed the bill on February 20, intervene to maintain economic stability. 1946 and the Employment Act of 1946 became Public Law 304.16 It read in part: But perhaps most important, the Act expressed an important change in the idea of progress and The Congress hereby declares that it is the con in the responsibility for progress. The Act was tinuing policy and responsibility of the Federal legal recognition of the gradual evolution of Government to use all practicable means con the performance goal— from an emphasis on sistent with its needs and obligations and other panics and accommodation of the needs of busi essential considerations of national policy, with ness; through a rather grudging acceptance of the assistance and cooperation of industry, agri responsibility for mitigating fluctuations in the culture, labor, and State and local governments, business cycle; to active stimulation of business; to coordinate and utilize all its plans, functions, and finally to active stimulation of economic ac and resources for the purpose of creating and tivity aimed at achieving carefully enumerated maintaining, in a manner calculated to foster and promote free competitive enterprise and the performance goals. The movement was from pas sive accommodation to active stimulation. And general welfare, conditions under which there the responsibility for progress? No longer was will be afforded useful employment opportunities, the Federal Reserve alone in the center of the including self-employment, for those able, will ring. The experiments and experience of the ing, and seeking to work, and to promote maxi thirties were now signed into law. The Federal mum employment-, production, and purchasing Government “ with the assistance and coopera power.17 tion of industry, agriculture, and labor and This was the substance of the Employment local governments” was to “ coordinate and uti Act. Once more was expressed the subtle bal lize all its plans, functions, and resources” to ance of performance and environment goals— achieve the desired economic ends. And the dedication to employment, production and course the Federal Reserve, as a creature of purchasing power on the one hand and to free Congress, was bound by the Act. is U.S. Senate, Subcommittee of the Committee on Bank ing and Currency, Full Employment Act of 1945, 79th Con gress, 1st session, hearings, July-September 1945; U.S. House Committee on Expenditures in the Executive Depart ments, Full Employment Act of 1945, 79th Congress, 1st ses sion, hearings, September-November 1945. 10 For an interesting resume of the history of and con troversy over United States economic stabilization policy leading finally to the passage of the Employment Act of 1946, see Edwin G. Nourse, Economics in the Public Service, (New York: Harcourt, Brace and Company, 1953), pp. 49-75 and 355-367. it Employment Act of 1945, Public Law 304, 79th Con gress, 2nd session, February 1946, section 2. of Even with the passage of the Employment Act, however, the evolutionary process did not end. Time does not stand still. The framers of the Employment Act could not anticipate all the new problems that would arise. They could not foresee the whole complex of forces which would shape the postwar period. Hence, they could not 15 business review legislate with infinite precision to provide for and all this within an environment of free en all eventualities. terprise. The future was indeed to bring surprises. As During the early postwar years up until the a result, the idea of progress was to become even “ Accord” of 1951, the Fed was restrained in its more ambitious, and we were to call for an even efforts to fight inflation by its policy of support more careful definition and delineation of our ing the prices of Government securities in order economic goals. to assist the Treasury in managing the huge Economic problems came in three waves as debt contracted during World War II. Never the nation traversed the decades of the 40’s, 50’s, and 60’s. These waves were named infla theless, the Fed realized the dangers of inflation tion, growth, and balance of payments. stable prices. and stressed the importance of maintaining But inflation was by no means to be our sole THE POSTWAR PERIOD postwar problem. The world still was changing, Inflation and this change was to be reflected in our eco First off, fears of massive unemployment and nomic goals. civil discord soon gave way to a grave concern The next stimulus to change, however, was over inflation. While yearly averages of unem to come more from the political than the eco ployment never exceeded 3.9 per cent in the nomic sphere. For soon the cordial relationships early postwar years, consumer prices jumped established with the Soviet Union during World over 25 per cent between 1945 and 1949. In War II gave way to developing world tension. his mid-year Economic Report for 1948, Presi The mental image of a kindly and benevolent dent Truman stated: Uncle Joe was replaced by the stark realism of Repeatedly I have called attention to the de the Iron Curtain. This changing world scene veloping inflationary conditions which endanger was responsible in large measure for a new both our domestic strength and our place in emphasis on the goal of . . . world affairs . . . The policy proclaimed in the Employment Act requires us to devise and adopt Growth positive measures to stop this inflation and se Shortly after World War II, Soviet ambitions cure relative stabilization.18 became more and more obvious. By external Truman interpreted the “ maximum purchas power and internal subversion the Soviets over ing power” clause of the Employment Act as a ran Poland, Hungary, Rumania, Bulgaria, East mandate to stop inflation. Others interpreted the Germany, and many of the other satellites. Five clause only as a requirement to maintain high years after World War II the Soviet bloc had effective demand. But whatever the interpreta expanded to include more than half of the land tion, stable prices soon became a prime goal of area and population of Europe. And other na national economic policy. We were becoming tions were threatened: Turkey, Greece, even more ambitious in our performance goals. We powers such as France and Italy. wanted maximum employment and stable prices, This nation realized that something had to be done. First, Soviet pressures were countered is The Mid-year Economic Report of the President, July 30, 1948, pp. 1-2. 16 with aid to Greece and Turkey. Then came the business review Marshall Plan, followed by a building up of military strength around the world. Finally, the fighting in Korea began. incorporated into our bag of economic objectives. Of course competition with the Soviet Union was not the sole reason for the emerging im All this took a huge commitment of men, ma portance of the growth goal. Generally speaking, terials, and industrial resources— so much so we must have a growing economy if we are to that an important fact was driven home. If we provide jobs for new entrants into the labor were to maintain our position of strength in market. As time went on, this second reason for the cold war, yet still maintain the world’s high the growth goal became perhaps even more im est living standard, we must produce more, portant than national defense. improve our productivity. In a word, we had In the sixties, for example, it is expected that to grow at the fastest possible sustainable rate. the net addition to the labor force will be about President Eisenhower put it this way in his 13 million. This is more than 50 per cent Economic Report for 1954: greater than the addition in the fifties. A high and sustained rate of economic growth But just as the problem of inflation was joined is necessary to the welfare, if not to the survival by the problem of growth, so growth was soon of America and any of the free world. The to have company. The next important problem to United States is now engaged, and must be for affect significantly our economic goals was a se some time to come, in an effort to build security vere and prolonged balance-of-payments deficit. forces adequate to deter and to strike back at aggression. These security-building efforts, and Balance of payments the parallel efforts to raise the defense potentials and the living standards of friendly peoples in The deficit in our balance of payments first became a major concern in 1958. In that year other countries, are as much dependent on our we found ourselves paying far more to for industrial production as is the conduct of war eigners for imports, investments, military and itself. Success in them will depend in large part economic aid than we received for our exports on the amount by which our national output is of goods and services and for other transactions. increased.19 The difference came to a sizable $3.8 billion, Thus we were not satisfied with mitigating of which $2.3 billion was settled in gold. swings in the business cycle, nor even with Like the problem of growth, the payments maintaining full employment. Indeed, full em deficit was related as much (and perhaps more) ployment could be gained by using plows in to political than to economic developments. Our stead of tractors. We wanted full employment efforts to raise the defense potentials and living with growth, with rising per capita real income, standards of friendly peoples had paid off. Not with ever greater output per man-hour at full only did we develop an elaborate and costly employment levels. network of military installations around the Some felt this idea was implicit in the Em world, but we “ aided friendly peoples” to the ployment Act; others did not. But as before, extent that they became our competitors as well implicit or not, the specific goal of growth was as our customers. We found in the latter 50’s that our international export surplus was simply 19 Economic Report of the President, January 28, 1954, p. 3. not large enough to support our military and 17 business review economic aid expenditures abroad, plus our in ernmental policy to counter the business cycle. creasing private investments in foreign lands. Yet it may be that environment goals will The result was an alarming outflow of gold, an become relatively more important. This possi economic problem bility stems from the rather unique times in par excellence. Regaining equilibrium in our balance of payments, not a problem since the early 30’s, became an impor tant objective of economic policy. which we live. The decades during which this nation con centrated on improving economic performance In the December, 1963 edition of The Fed were characterized by a relative isolation from eral Reserve System: Purposes and Functions, the performance goals of the Federal Reserve external System were stated as follows: to say that problems did not crop up from time The function of the Federal Reserve System is to time— just that we were relatively isolated. to foster a flow of credit and money that will First came World War I and its aftermath dur pressures— from balance-of-payments problems, gold flows, and the like. That is not facilitate orderly economic growth, a stable dol ing which the gold standard was abandoned by lar, and long-run balance in our international the major industrial nations of the world. Then payments.20 came the Great Depression and the large gold its flow into the United States which served as a place as a major stated goal of Federal Reserve sort of buffer behind which domestic policies policy. could be pursued with little regard for gold The balance of payments had found outflows. IN CONCLUSION Then World War II was upon us and for Here, for the moment at least, the evolutionary several years thereafter, United States industrial process rests. We have reached the present. capacity stood virtually alone. There seemed The story of change in our performance goals has been characterized by a continual and ever scant need to temper domestic policies for ex ternal reasons. more ambitious shift in the idea of progress: Then, in 1958, we realized that we had from passive accommodation to active stimula emerged from external economic isolation. This tion, from preventing panics to encouraging a emergence high rate of economic growth in an atmosphere levels. First of all, the war-devastated countries had of price stability and payments equilibrium. was proceeding on at least two The story of change in our environment goals, rebuilt their productive capacity so that they on the other hand, is characterized by a gradual could produce goods both for domestic con shift away from laissez-faire. On successive oc sumption and for export. They became our com casions the old environment was found to con petitors in world markets. flict with new demands for economic perform Second, Government policy was directed at ance. We found, for example, that it was difficult an international society of nations— welded to to maintain a reasonably stable economy with gether out discretionary central bank action and gov strengthened by expanding markets, free trade 20 Board of Governors of the Federal Reserve System, The Federal Reserve System: Purposes and Functions, Fifth Ed., p. 1. 18 by mutual self-interest in defense— and free movements of capital funds— a grand “ Atlantic Alliance.” business review All this and more served to raise the curtain behind which domestic policies could be pursued pursuing policies at home appropriate to domes tic conditions. with scant attention to external pressures. In Though a tall order, much has already been effect, this nation was enlarging its environ done— the Federal Reserve swap arrangements ment goal. Here was culminating a longer-run are an example. Recommendations for further movement toward free world trade which would cooperative arrangements range all the way to take its place beside “ free competitive enter the creation of a world central bank. prise.” And when policies directed at such a Undoubtedly experiments in international eco goal begin to bear fruit, then problems of bal nomic and financial cooperation will continue ance of payments and gold flows once more come to the fore. as times change, as the future brings unantici pated problems to an unsuspecting world. Just Many nations through time have met external how fast these experiments will mature into new difficulties with policies which tended to depress institutions is difficult to tell. Yet as the future domestic income and employment. Tight money, unfolds, world policymakers would do well to for example, might raise domestic interest rates keep in mind the words of the philosopher. and thus discourage capital outflows. But it also From Aristotle comes this advice: might discourage productive investment at home, Let us not disregard the experience of ages; in thereby inhibiting industrial expansion and gen eration of new jobs. the multitude of years, these things [new ideas], Today, with the lessons of the thirties behind if they were good, would not have remained unknown.21 Hegel has this word. He tells us that great us, we are much less inclined to sacrifice do mestic goals to maintain a given international men are, in essence, midwives of the future— environment and to achieve equilibrium in the that they anticipate the Zeitgeist, the spirit of balance of payments. Yet we recognize that the the age, and pull forth its offspring. balance-of-payments problem must be solved and Such individuals . . . had an insight into the we realize the benefits of an international At requirements of the time— what is ripe for de lantic Alliance. How, then, are we to proceed velopment. This was the very Truth for their when national policies appropriate to one goal age, for their world; the species next in order, or set of goals may conflict with those appro so to speak, and which was already formed in priate to another? the womb of time.22 Today we are reaching for a new synthesis Somewhere between the experience of Aris — a means through which we may achieve both totle and the Zeitgeist of Hegel lie the realities domestic and international goals without sacri which must be dealt with in this nineteenth year ficing one to the other. This synthesis is inter of the nuclear era. national cooperation— cooperation which will give us time to work out balance-of-payments problems in an environment of free trade while 21 Aristotle, Politics, Book II, Chapter 5, (New York: The Modern Library, 1943) p. 90. 22 G. W. F. Hegel, The Philosophy of History, (New York: Dover Publications, Inc., 1956) p. 30. 19 F OR THE R E C O R D . . . Third Federal Reserve District United States Per cent change Per cent change Department Store Factory* Employ ment Payrolls Sales** Check Payments Per cent change Feb. 1964 from Per cent change Feb. 1964 from Per cent change Feb. 1964 from Per cent change Feb. 1964 from SU M M ARY mo. ago year ago 2 mos. 1964 from year ago mo. ago year ago 2 mos. 1964 from year ago + Feb. 1964 frc m 2 + 7 + 6 6 + 2 + 2 Feb. 1964 frc m LOCAL CHANGES mo. ago M A N U FA C T U RIN G Electric power consumed........ Man-hours, total*.................. Employment, total................... W a ge income*....................... - 2 + 5 + 1 + 4 + + + 7 1 1 3 + - 7 4 0 1 year ago mo. ago year ago + mo. ago +i +10 C O N S T R U C T IO N **.................. + 18 - 4 + 10 + 15 Harrisburg....... +2 +3 + CO AL P R O D U C T IO N ................ + +12 +12 - 2 + + Lancaster......... + 1 -1 + 5 Philadelphia. . . . 0 -1 + 3 Reading.......... 0 +2 + 3 + 9 0 + 1 +3 + 8 + ^ + 10 9 TRADE*** Department store sales............. 1+ 3 B A N K IN G (All member banks) 0 Deposits............................... Loans................................... - 1 Investments............................ + 2 U.S. Govt, securities.............. + 3 Other................................. + 1 Check payments..................... — 16+ + 7 3 6 + 10 •Production workers only. ••Value of contracts. •••Adjusted for seasonal variation. 2 0 + 6 9 + 3 + 13 + 17 - 6 + 18 + 1 + -1 3 + 6 +10 - 8 + 17 + 10 - 4 + 14 2 5 7 4 - 3 +20 + 8t + 5 + 8 + 2 - 6 +20 + + 6 + 11 + 1 + +n 0 - 8 - 8 6 Scranton.......... Trenton........... -1 +4 - 1 + 10 - + 11 -3 5 + 9 + 18 + 7 + 18 + 9 W ilkes-Barre. . . +4 +2 + 16 +10 +12 + 8 -1 0 + 11 Wilmington...... + + + 0 + 1 0 - 1 + 1 -1 8 -1 +5 - + 12 + 9 +20 -3 4 + 14 + 11 - + - + 15 PRICES Consumer............................. 7 + 11 + year ago -1 7 +i +24 9 mo. ago - Lehigh Valley. . . +53 + year ago ot + n + 2t 0 0 + 0 1 + f20 Cities ^Philadelphia 0 2 Y ork............... +3 +3 4 + 11 1 2 7 4 *N o t restricted to corporate limits of cities but covers areas of one or more counties. ••Adjusted for seasonal variation.
@FedFRASER