Full text of Review (Federal Reserve Bank of St. Louis) : December 1975

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

FEDERAL RESERVE BANK
OF ST. LOUIS
DECEMBER 1975

Vol. 57, No. 12




Crowding Out and Its Critics*
KEITH M. CARLSON and ROGER W. SPENCER

D o e s Government spending displace a near-equal
amount of private spending? This notion, popularly
known as the “crowding-out” effect of Government
expenditures, has recently gained wide-spread at­
tention at two levels. First, at the policy level, public
officials have expressed concern that massive current
and projected Federal deficits will have a deleterious
effect on private capital expenditures for some time
to come. Second, at the academic level, “crowding
out” is at least one of the issues which helps to dis­
tinguish between followers of the two major macroeconomic schools of thought — Keynesians and
monetarists.

can be described in the context of the standard
IS-LM analytic framework. In this framework, which
is the cornerstone of most macroeconomics courses
taught throughout the western world, the IS curve
represents the locus of points (pairs of interest rates
and real income) in which the real sector of the
economy is in equilibrium, and the LM curve repre­
sents a similar locus of points for which the demand
for money equals the supply. The IS-LM apparatus
has distinct limitations, but because of its widespread
use as a pedagogical device, it serves a useful func­
tion in highlighting the issues in the crowding-out
controversy.2

This article focuses on “crowding out” from more
of an academic than a practical policy point of view.
Policy implications can be drawn from this discus­
sion, but, for the most part, the abstract economic
models used in academic circles are not easily adapt­
able to observable phenomena. Yet the origins of the
recent crowding- out controversy at the academic
level are traceable to certain empirical results based
on U.S. experience.

The subject of crowding out is approached by first
investigating a number of separate “cases” which pro­
vide various explanations of how crowding out might
occur. Next, the role of stability considerations in the
controversy is assessed. Finally, several econometric
models are examined to determine what empirical
implications they have for the crowding-out issue.

New research has been conducted in this area and
some old arguments have been revived.1 Many of
the developments in the crowding-out controversy

To set the stage for the discussion, two matters
of a preliminary nature are taken up in this section.
First, crowding out is defined for the purposes at
hand. Much of the recent discussion of crowding out
has been confusing simply because the term has not
been carefully defined. Second, since the controversy

“The authors acknowledge the helpful comments of James
Barth, William Dewald, Dean Dutton, Thomas Havrilesky,
Robert Rasche, Paul Smith, Frank Steindl, and William Yohe,
none of whom should be held responsible for remaining
errors.
1For a survey that includes a discussion of the views of the
classical economists on crowding out, see Roger W. Spencer
and William P. Yohe, “The ‘Crowding Out’ of Private Ex­
penditures by Fiscal Policy Actions,” this Review (October
1970), pp. 12-24.

Page 2


SOME PRELIMINARIES

2For discussion of the limitations of the IS-LM framework,
see Karl Brunner and Allan H. Meltzer, “Monetarism: The
Principal Issues, Areas of Agreement and the Work Remain­
ing,” Monetarism, ed. Jerome L. Stein, (Amsterdam: North
Holland Publishing Co., forthcoming), and “Mr. Hicks and
the ‘Monetarists,’ ” Econom ica (February 1973), pp. 44-59.

F E D E R A L R E S E R V E BANK O F ST. L OUI S

has moved through several stages in recent years and
has oftentimes involved complex and subtle argu­
ments, an overview is provided as a guide to the
reader.

W hat Is Crowding Out?
Crowding out generally refers to the economic ef­
fects of expansionary fiscal actions. If an increase in
Government demand, financed by either taxes or
debt issuance to the public, fails to stimulate total
economic activity, the private sector is said to have
been “crowded out” by the Government action. The
presumption of a constant money supply insures that
the policy action accompanying the increase in Gov­
ernment demand is fiscal and not monetary.
The analysis may be conducted in either real or
nominal terms. The crowding-out hypothesis main­
tains that if prices are held constant, as in typical
IS-LM fashion, an increase in real Government de­
mand financed by real taxes or debt has no lasting
effect on real income. Alternatively, crowding out
implies that an increase in Government spending,
given flexible prices and a constant money supply,
has no lasting effect on nominal income. In other
words, the steady state Government spending multi­
plier, under the above conditions, is approximately
zero.3
By approximately zero, we mean that increased
Government demand may crowd out exactly the
same amount of private demand, slightly less, or
slightly more. There is complete crowding out if $1
of Government demand displaces $1 of private de­
mand, partial crowding out if $1 of Government
demand displaces less than $1 of private demand,
and over crowding out if $1 of Government demand
displaces more than $1 of private demand. The in­
creased Government demand may increase aggregate
demand temporarily, permanently, or not at all, as
will be explained below.

Overview
The origins of the recent controversy are traceable
primarily to the empirical results published by Ander­
sen and Jordan in 1968 and supporting studies by
Keran in 1969 and 1970.4 These results indicated
3These definitional issues are explored in more detail in the
appendix.
4Leonall C. Andersen and Jerry L. Jordan, “Monetary and
Fiscal Actions: A Test of Their Relative Importance in
Economic Stabilization,” this Review (November 1968), pp.
11-24; Michael W. Keran, “Monetary and Fiscal Influences



DECEMBER 1 9 7 5

that nominal crowding out occurs; that is, a change
in Federal spending financed by either borrowing or
taxes has only a negligible effect on GNP over a
period of about a year. These studies did not suggest
that expansionary fiscal actions have no effect, but
showed instead that the initial effect, which is posi­
tive, is followed in later quarters by an approximately
off-setting negative effect.
The response to these empirical results took place
at two levels — statistical and theoretical. At the
statistical level, the validity of the results was ques­
tioned. Were proper statistical procedures followed
in their derivation?5 On the theoretical level the ques­
tion was whether or not the results were consistent
with what seemed to be the accumulated evidence
on certain theoretical propositions.6
Although all the returns regarding the validity of
the Andersen-Jordan empirical procedures are not
yet in, this article focuses on the theoretical argu­
ments that have since evolved. The first theoretical
argument offered in response to the crowding out
concept was an alleged inconsistency between such
results and the prevailing estimates of the interest
elasticity of the demand for money.7 The critics
charged, on the basis of the IS-LM framework, that
in order for crowding out to occur, the proponents
of these results must be assuming that the demand
for money is nearly perfectly interest-inelastic. This
allegation meant acceptance of the proposition that
the LM curve is essentially vertical. According to the
critics, most empirical estimates do not support a zero
interest elasticity of money demand.
In answer to this charge of inconsistency, Milton
Friedman and others argued that the slope of the
LM curve was largely irrelevant to the crowding out
on Economic Activity - The Historical Evidence” this R e­
view (November 1969), pp. 5-24, and “Monetary and Fiscal
Influences on Economic Activity; The Foreign Experience”
this Review (February 1970), pp. 16-28.
5^re J? ' Jera ld Corrigan, The Measurement and Importance
of Fiscal Policy Changes,” Federal Reserve Bank of New
York Monthly Review (June 1970), pp. 133-45; Richard G.
Davis, “How Much Does Money Matter? A Look at Some
Recent Evidence,” Federal Reserve Bank of New York
Monthly Review (June 1969), pp. 119-31; and Edward M.
Gramlich, “The Usefulness of Monetary and Fiscal Policy
as Discretionary Stabilization Tools,” Journal o f Money,
Credit and Banking (May 1971), pp. 506-32.
6James Tobin, “Friedman’s Theoretical Framework,” Journal
o f Political E conom y (September/October 1972), pp. 852-63;
Warren L. Smith, “A Neo-Keynesian View of Monetary Pol­
icy,” Federal Reserve Bank of Boston, Controlling Monetary
Aggregates (June 1969), pp. 105-26; and Ronald L. Teigen,
“A Critical Look at Monetarist Economics,” this Review
(January 1972), pp. 10-25.
‘Tobin, “Friedman’s Theoretical Framework.”
Page 3

F E D E R A L R E S E R V E B A N K O F ST. L O U I S

discussion.8 In particular, Friedman pointed out the
necessity of distinguishing between initial and subse­
quent effects of fiscal actions. According to Friedman,
an “expansionary” fiscal action might first be reflected
in a rise in output, but the financing of the deficit
would set in motion contractionary forces which
could eventually offset the initial stimulative effect.9
In response to the Friedman explanation, the crit­
ics developed still another argument, again pointing
out an alleged inconsistency. This time the critics
attempted to demonstrate that the Friedman argu­
ment, which stemmed from explicit consideration of
the Government’s financing requirements, is not con­
sistent with generally accepted assumptions concern­
ing stability of the economic system (as represented
by the IS-LM apparatus).10 In particular, a debtfinanced increase in Government spending in a world
where crowding out occurs does not set in motion a
set of forces that will drive the IS-LM model to a
new equilibrium once it is disturbed from an initial
equilibrium.
All of these arguments are reviewed in some detail
in this article. Several alternative explanations are
offered as to how crowding out might occur regard­
less of the slope of the LM curve. A number of
shortcomings of the recently advanced arguments
based on stability analysis are discussed. Finally,
returning to the empirical level, the results of some
well-known econometric models are examined to see
what light they shed on the crowding-out controversy.

CROWDING OUT AND THE SLOPE
OF THE LM CURVE
Until recently, it was suggested by a number of
analysts that contemporary monetarists view the
sMilton Friedman, “Comments on the Critics,” Journal of
Political Econom y (September/October 1972), pp. 906-50;
and Karl Brunner and Allan H. Meltzer, “Money, Debt, and
Economic Activity,” Journal o f Political E conom y (Septem­
ber/October 1972), pp. 951-77.
9For further discussion of the role of the Government financ­
ing constraint, see Spencer and Yohe, “The ‘Crowding Out’
of Private Expenditures;” Carl F. Christ, “A Short-Run Aggregate-Demand Model of the Interdependence and Effects
of Monetary and Fiscal Policies with Keynesian and Classical
Interest Elasticities,” T he American Econom ic Review (May
1967), pp. 434-43, and “A Simple Macroeconomic Model
with a Government Budget Restraint,” Journal o f Politi­
cal Econom y (lanuary/February 1968), pp. 53-67; and W il­
liam L. Silber, “Fiscal Policy in IS-LM Analysis; A Correc­
tion,” Journal o f M oney, C redit and Banking (November
1970), pp. 461-72.
I0Alan S. Blinder and Robert M. Solow, “Does Fiscal Policy
Matter?” Journal o f Public Econom ics (November 1973),
pp. 319-37; and lames Tobin and Willem Buiter, “Long

Page 4


DECEMBER 1 9 7 5

vertical LM curve as a requirement for the existence
of crowding out. James Tobin, for example, observed
that a vertical LM curve leads to the “characteristic
monetarist” proposition that “a shift of the IS locus,
whether due to fiscal policy or to exogenous change
in consumption and investment behavior, cannot alter
y” n William Branson, in his popular macroeconomics
textbook, noted that
T h e m onetarist position is th at the interest elastici­
ties of the demand for and supply of money are
zero, so that the L M curve is vertical. In this case
fiscal policy changes the composition, but not the
level of national output, while monetary policy, shift­
ing a vertical L M curve, can change the level of
output.12

Similar statements can be found in other texts.
This classical case of crowding out is examined in
some detail because of its presumed importance in
the crowding-out discussion. Following discussion of
this classical case, several alternative explanations
are offered as to how crowding out can occur in the
IS-LM framework, even if the interest elasticity of
money demand is not zero.

The Classical C ase: A Vertical LM Curve
In order for Government spending to stimulate
economic activity, it must either foster increases in
the money stock (however defined) or increases in
the rate at which the existing money stock turns over.
Because the former possibility does not involve net
debt purchases by the private sector or increases in
taxes, there is no reason to think that private spend­
ing would be crowded out. However, if the money
stock does not increase, Government spending must
be financed by debt issuance or increased tax rev­
enue, either of which could result in a reduction in
private spending. If private spending is not curbed
by such actions, total spending rises, which implies
a rise in velocity — the rate at which the money stock
turns over.
Run Effects of Fiscal and Monetary Policy on Aggregate
Demand,” Cowles Foundation Discussion Paper No. 384
(December 13, 1974).
1'Tobin, “Friedman’s Theoretical Framework,” p. 853.
12William H. Branson, M acroeconom ic Theory and Policy
(New York: Harper & Row, Publishers, 1972), p. 281. It is
of interest to note that Tobin labels the case in which only
monetary policy can affect income as characteristically mon­
etarist and the situation in which both monetary and fiscal
policies can alter income as characteristically neo-Keynesian.
Branson symmetrically views the vertical LM case as
“extreme” monetarist, and the vertical IS case as “extreme”
neo-Keynesian (or “fiscalist” ).

F E D E R A L R E S E R V E BANK O F ST. L OUI S

It is an axiom of classical economics that velocity
is virtually constant and cannot be increased by
Government actions. In particular, the rise in interest
rates, which is associated with the issuance of Gov­
ernment debt, does not induce the private sector to
attempt to hold less money balances because the
demand for money is not sensitive to interest rate
changes. This idea can be illustrated graphically
with the Hicksian IS-LM apparatus in Figure 1.

DECEMBER 1 9 7 5

F ig u re 1

Classical Case

The LM curve is vertical (drawn for a given price
level, P0) in the classical case, reflecting a zero inter­
est elasticity of the demand for (and supply of)
money. Thus, an increase in Government spending
which shifts the IS curve to the right can only in­
crease the interest rate, but does not stimulate veloc­
ity. Consequently, aggregate demand, as shown in
the bottom half of Figure 1, does not shift.13 One or
more components of private spending are crowded
out by an amount equal to the amount of the Govern­
ment spending increase. As a result, with aggregate
demand failing to shift in response to the increase
in Government spending, crowding out occurs in both
real and nominal terms.

Alternative Cases: Crowding O ut W ithout a
Vertical LM Curve
Five cases are presented which represent eco­
nomic situations conducive to Government displace­
ment of private spending without the requirement of
a vertical LM curve. The architects of these frame­
works range from such disparate figures as the Chi­
cago economists, Frank Knight and Milton Friedman,
to John Maynard Keynes.
T h e Keynes C ase: Expectations Effects — John
Maynard Keynes in 1936 provided the thrust for the
proposition that Government spending does not crowd
out private spending in his landmark book, The G en­
eral Theory o f Em ploym ent, Interest and M oney.14
It is ironic that certain passages in that book provide
strong support for the opposite contention.
Keynes, throughout his General Theory, was much
concerned with expectations and confidence. He did
not overlook the possibility, even in those times of
relatively small budget deficits, that Government
13Although shown as a straight line, the true spirit of the
classical case would be better preserved if aggregate de­
mand were drawn as a rectangular hyperbola.
14John Maynard Keynes, The General Theory o f Em ploy­
ment, Interest and Money (New York: Harcourt, Brace and
Company, 1936), pp. 119-20.



spending could adversely affect the confidence of the
private sector in its economic future.
W ith the confused psychology which often prevails,
the Government programme may, through its effect
on ‘confidence’, increase liquidity-preference or di­
minish the marginal efficiency of capital, which,
again, may retard other investment unless measures
are taken to offset it.15

An induced increase in liquidity preference, subse­
quent to an increase in Government spending from
Gn to G,, is depicted in the IS-LM framework (see
Figure 2) by a leftward shift of the LM curve, and a
diminished marginal efficiency of investment schedule
is reflected by the subsequent backward shift of the
15Ibid., p. 120. For an algebraic analysis that takes into ac­
count some of the relevant aspects of this Keynes case, see
Richard J. Cebula, “Deficit Spending, Expectations, and
Fiscal Policy Effectiveness,” Public Finance (3-4/1973), pp.
362-70.

Page 5

F E D E R A L R E S E R V E BAN K O F ST. LO UIS

DECEMBER 1 9 7 5

A continued experience with deficits which do not

produce sustained recovery, as in this country, or a
recent inflation and collapse, as in continental Eu­
ropean countries, is likely to make a deficit a matter
for concern and anxiety. And, if there is disbelief in
the benefits of a deficit, then the new money spent
by the government may well be more than offset by
additional withdrawals of private money which
would otherwise be spent. Likewise, if consumer in­
comes do increase immediately as a result of the def­
icit, business may anticipate that the increase is tem­
porary and refrain from long-term commitments.16
T he Knight C ase: A H orizontal I S Curve — This
case is constructed on the basis of the writings of
Frank Knight.17 The analysis does not do justice to
the complex theories of Knight, but is offered as being
roughly consistent with the spirit of his theory of
capital and interest.18 Though Knight certainly did
not conduct his analysis within an IS-LM framework,
an attempt is made to translate his ideas into such
terms.
According to Knight, we should expect no dimin­
ishing returns from investment. One reason for a
nearly perfectly interest-elastic investment function
is that the quantity of capital is so large relative to
the additions to it that these additions should not be
expected to have much of an effect on the yield of
capital.18 Another reason, according to Knight, is

IS curve to the position denoted as IS (G i). If these
shifts in the IS and LM curves result in no change
in aggregate demand at the given price level P0, both
nominal and real crowding out will occur. However,
the actual shift in aggregate demand could be posi­
tive, negative, or negligible, depending on the rela­
tive shifts of the IS and LM curves.
A number of analysts have recently invoked the
Keynes case to explain the sluggishness of capital
expenditures in recent years. They, however, are not
the first since Keynes to attribute lackluster invest­
ment plans to stepped-up Government spending. De­
scribing a situation with some similarities to the
present, Daniel Throop Smith observed (in 1939)
that:

Page 6


16Daniel Throop Smith, “Is Deficit Spending Practical?” Har­
vard Business Review (Autumn 1939), p. 38.
17No attempt is made to cite all of Knight’s articles on in­
terest and capital, but a summary is contained in Frank H.
Knight, “Capital and Interest,” in Readings in the Theory
o f In com e Distribution, The American Economic Association
(Philadelphia: The Blakiston Company, 1949), pp. 384417. The Knight case was suggested to the authors by Wil­
liam Dewald of Ohio State University, but he is absolved
of any responsibility for the particular analysis here.
18The difficulty of interpreting Knight’s writing is illustrated
by Friedrich A. Lutz, T he Theory o f Interest (Chicago:
Aldine Publishing Co., 1968), p. 104, where he intro­
duces his chapter on Knight as follows:
It is not easy to give an exposition of Knight’s theory
of capital and interest. Over a number of years Knight
devoted many papers to the subject; and, as anyone
who ever attempted to work his way through Knight’s
theory knows, these writings have passages which are
very difficult to understand and also, either apparently
or really, contradictory.
19For a discussion of the relationship between stocks and
flows in the market for capital goods, see James G. Witte,
Jr., “The Microfoundations of the Social Investment Func­
tion,” T he Journal o f Political E conom y (October 1963),
pp. 441-56.
To add to the confusion relating to the interpretation of
Knight’s writings, it should be noted that Knight did not
accept the three-part division of resources into land, labor
and capital. His interpretation, rather, was that anyone who
has control over productive capacity will employ any or all
sources in such a way as to maximize the return for their
use. For an analysis that preserves this broad interpretation
of capital, see Milton Friedman, Price Theory: A Provisional
Text (Chicago: Aldine Publishing Company, 1962), pp.
244-63.

F E D E R A L R E S E R V E BAN K O F ST. L OUI S

DECEMBER 1 9 7 5

that investment carries with it an investment in
knowledge, including research and development. As
a result, a declining marginal product of capital is
approximately offset by technological advances so
that an aggregate investment curve is drawn as nearly
horizontal with respect to the yield on capital.
When translated into an IS-LM frame of reference,
the Knight case introduces an interesting element to
the crowding-out controversy. A perfectly flat IS
curve (see Figure 3) means that fiscal actions are
incapable of shifting the IS curve. An increase in
Government spending, for example, absorbs saving
and reduces the amount available for private invest­
ment (any increase in Government spending shows
up as a one-for-one displacement of private invest­
ment). Combining the flat IS curve with the LM
curve provides a case where monetary policy domin­
ates the determination of output. Fiscal actions
have no effect on either output or the interest rate.20
It is of interest to note that monetary policy has no
effect on the interest rate either, an implication
which runs counter to some statements by Knight.21
But because fiscal actions do not shift aggregate de­
mand for this so-called Knight case, the implication
is that both nominal and real crowding out occur.22
T h e Ultrarational C ase: D irect Substitution Effects
— Recently, Professors Paul David and John Scadding developed some arguments for crowding out that
are derived from an assumption of ultrarationality on
the part of households.23 The notion of ultraration­
ality is based on the assumption that households re­
gard the corporate and Government sectors as exten­
sions of themselves — as instruments of their private
interests. This fundamental behavorial assumption is
offered as an explanation for Denison’s Law — the
-°It is surprising that this case has not received more atten­
tion in the literature, because it is every bit as monetarist
as the vertical LM case. For an example of one writer who
does mention this case, see Martin Bronfenbrenner, Incom e
Distribution Theory (Chicago: Aldine-Atherton, 1971), pp
339-40. However, Bronfenbrenner dismisses it as a long-run
case with little short-run significance.
- 1See Knight, “Capital and Interest,” p. 406.
--Though the Knight case has not been empirically tested, it
has implications which are consistent with the results of a
number of empirical studies. The Andersen-Jordan results
relating changes in GNP to monetary and fiscal actions are
consistent with such a case. The inability to find a stable
relationship between interest rates and various measures of
fiscal action is also consistent. And finally, the stability of
real interest rates over time —at least to the extent real
rates have been measured — provides indirect evidence in
support of the Knight model.
-■
‘Paul A. David and John L. Scadding, “Private Savings:
Ultrarationality, Aggregation, and ‘Denison’s Law,’ ” Journal
o f Political Econom y (March/April 1974), pp. 225-49.



observed stability of the ratio of gross private saving
to GNP in the United States.24
The David-Scadding article is of relevance to the
crowding-out controversy because of its fiscal policy
implications. The assumption of ultrarationality im­
plies displacement effects of Government spending
which the authors call “ex ante crowding out.” They
argue that stability of the gross private saving ratio
- 4Edward F. Denison, “A Note on Private Saving,” The R e­
view o f Econom ics and Statistics (August 1958), pp. 261-67.
David and Scadding suggest that if Government and cor­
porate activity simply substitute for, rather than augment,
household activity, there should be virtually no change in
such broad aggregates as the ratio of gross private saving
to GNP.
Page 7

F E D E R A L R E S E R V E BAN K O F ST. LOUIS

DECEMBER 1 9 7 5

in the face of substantial variation in the Government
deficit suggests that private debt and public debt
are close substitutes. An extra dollar of Government
deficit displaces a dollar of private investment ex­
penditure because deficit financing is viewed as pub­
lic investment and substitutes for private investment
in that households tend to classify both in terms of
future consumption benefits. This case is shown in
Figure 4, where an increase in Government spending
financed by borrowing induces an offsetting change
in private investment so that the IS curve does not
shift on balance.
Similarly, tax-financed expenditures have a dis­
placement effect on private consumption since they
are viewed in terms of their present consumption
benefits and substitute perfectly for private con­
sumption. With an increase in Government spending
for consumption financed by increased taxes, the in­
crease in taxes reduces private consumption with no
effect on private saving. As a result, there is a shift
in the composition of output from the private sector
to the Government, but there is no shift in aggregate
demand.
Consequently, with tax-financed Government ex­
penditures displacing private consumption and Gov­
ernment bond issues (deficit financing) displacing
private debt issues dollar for dollar, there is no way
that fiscal actions can affect total demand for goods
and services. In the parlance of the IS-LM framework,
fiscal actions (defined as either tax- or debt-financed
Government expenditures) have no net effect on the
IS curve or on aggregate demand, which implies both
nominal and real crowding out. Also, for this case,
fiscal actions have no influence on interest rates.
Whether the David-Scadding ultrarational case is
to be taken as a serious explanation of crowding out
is an open question. Yet it is important to note the
implications of this model, because it represents a
departure from the severe restrictions implicit in the
IS-LM model. In particular, the IS-LM model allows
for no substitution between private spending and
public spending; David-Scadding have shown that
moving away from these restrictive assumptions
acts in the direction of reducing the fiscal policy
multipliers. Furthermore, by way of Denison’s Law,
they conclude that the evidence leans more toward
the extreme of ultrarationality than the extreme of
the IS-LM model.
T he E xtended IS-LM C ase: Price Flexibility — All
cases discussed thus far have not presented any con­
flicts with respect to the nominal versus real crowding

Page 8


not shift. There is, however, another way in which
crowding out might occur, reflecting a response of
the price level to a step-up in Government spending.
This case argues that crowding out is possible even
without the assumption that aggregate demand does
not shift. The implication for nominal versus real
crowding out is ambiguous for this case, however.
Robert Rasche constructed a sophisticated version
of the IS-LM apparatus which was based primarily
on the textbook presentation of Robert Crouch.-5
25Robert H. Rasche, “A Comparative Static Analysis of Some
Monetarist Propositions,” this Review (December 1973), pp.
15-23; and Robert L. Crouch, M acroeconomics (New York:
Harcourt Rrace Jovanovich, Inc., 1972).

F E D E R A L R E S E R V E BANK O F ST. L OUI S

The model included wealth in the consumption and
money demand functions, a Government budget con­
straint, and a labor sector, as well as an endogenous
price level. According to Rasche’s analysis, an in­
crease in real Government purchases, financed either
by taxes or debt issuance, increases aggregate de­
mand, and, consequently, the commodity price level.
Although there may also be a rise in consumption
owing to a presumed positive effect of debt issuance
on wealth, there is an offsetting increase in the
demand for money associated with such wealth gains
(see Figure 5). The rise in the price level reduces
private consumption as well as the real supply of
money. Together with a decline in the amount of
private investment owing to an increase in interest
rates, these factors tend to crowd out an amount of
real private expenditures equivalent to the increase
in Government purchases. Crowding out occurs in this
model in real terms, but with a higher price level,
crowding out is not likely to occur in nominal terms.

DECEMBER 1 9 7 5

Fi gur e 5

Extended IS-LM Case

These results lead Rasche to conclude that nominal
crowding out requires “extreme” assumptions about
the interest elasticity and the wealth elasticity of the
demand for real cash balances. It should be pointed
out, however, that Rasche, in his manipulation of the
model, did not allow for a Keynes expectation effect,
an ultrarational direct substitution effect, or a Knight
effect, all of which may leave the aggregate demand
curve unmoved in response to an initial increase in
Government spending.
T he Friedm an C ase: Initial vs. Subsequent Effects
— Milton Friedman’s role in the crowding-out con­
troversy was established in a series of articles pub­
lished in the Journal o f Political Econom y over the
period 1970 to 1972.28 Friedman did not rely solely
on the IS-LM model as a framework for his analysis,
but most of his ideas can be summarized in such a
context. Friedman denied emphatically that the mone­
tarist propositions rested on the shape of the LM
locus. Instead, Friedman stressed the continuing ef­
fects of deficit finance, and a fundamental distinction
between stocks and flows.
Friedman dealt with a large number of complex
issues in his reply to the critics, and it is difficult to
determine to what extent he supported the notion of
fiscal crowding out. His chief point seems to have
-''Friedman, “Comments on the Critics”; “A Theoretical
Framework for Monetary Analysis,” Journal o f Political
Economy (March/April 1970), pp. 193-238; and “A Mone­
tary Theory of Nominal Income,” Journal o f Political
Econom y (March/April 1971), pp. 323-37.



been that the power of monetary actions far surpasses
that of fiscal actions, which is similar to but not quite
the same as declaring a belief in crowding out. Never­
theless, he concluded that the expansionary effect of
an increase in Government spending by borrowing
is likely to be minor.
To illustrate the Friedman case, consider Figure 6.
The IS curve is drawn quite flat, reflecting Friedman’s
statement that “ ‘saving’ and ‘investment’ have to be
interpreted much more broadly than neo-Keynesians
tend to interpret it, . . .”27 Though Friedman does
not emphasize it, this interpretation puts him close to
the Knight case, because the implication of more
27Friedman, “Comments on the Critics,” pp. 915.
Page 9

F E D E R A L R E S E R V E BAN K O F ST. LOUIS

DECEMBER 1 9 7 5

inclusive investment tends to flatten the IS curve and
dampen the power of fiscal actions.28 In addition,
Friedman indicates that the wealth effects of in­
creased bond holdings on spending will be minimal,
because increases in debt would tend to be offset by
an increase in expected tax liabilities.
Perhaps an even more important reason to doubt
the long-run expansive capacity of increased Govern­
ment spending is its effect on the future production
of goods and services. Friedman notes that debtsupported Government spending leads to a “reduction
in the physical volume of assets created because of
lowered private productive investment.”29 In other
words, potential output in the future will be low­
ered relative to what it would otherwise be with the
transfer of resources from private investment (which
generates the future capital stock) to Government
spending (which absorbs the capital stock).
Apart from these objections to the idea of stimula­
tive Government actions, an initial shift of the IS curve
(see Figure 6) may still be consistent with crowding
out over the longer term. For a given LM curve, the
relatively flat IS curve, which Friedman apparently
envisions, yields a shift of aggregate demand which
is very small. In addition, Friedman notes that “the
evidences of Government debt are largely in place of
evidences of private debt — people hold Treasury bills
instead of bills issued by, for example, U.S. Steel.”30
If this statement is given the ultrarational interpreta­
tion discussed earlier, private expenditure is cut back,
thereby offsetting the initial increase in Government
spending. Whether such an effect is a partial or com­
plete offset is not made clear, but if it exists, the IS
and aggregate demand curves move back toward
their original positions.
These are the initial effects of a debt-financed in­
crease in Government spending, but Friedman goes
on to emphasize that subsequent effects will con­
tinue as long as a deficit exists. In later periods, the
IS curve will continue shifting back to the left be­
cause private expenditures continue to be cut back
28T. Norman Van Cott and Gary Santoni, “Friedman versus
Tobin: A Comment,” Journal o f Political Economy (July/
August 1974), pp. 883-85. In this article the authors show
that the effect of broadening the interpretation of saving
and investment is to make the IS schedule flatter. They
demonstrate this by adding the interest rate as an argument
in the consumption function, and then showing that the
extent to which the IS curve is shifted is unaffected by
fiscal actions; only the slope is changed.
29Friedman, “Comments on the Critics,” p. 917.
3°Ibid.

Page 10


as Government debt is substituted for private debt.
Eventually, the stock of private wealth will be re­
duced relative to what it otherwise would be because
of reduced investment, thereby reinforcing the left­
ward movement of the IS curve.31
Because Friedman is not clear with regard to the
role of commodity prices in his analysis, it is difficult
to assess his view of real versus nominal crowding out.
It is perhaps best simply to conclude that the im­
pact of an increase in debt-financed Government
spending is veiy small, and that there is little differ­
ence between the effects of debt- versus tax-financed
expenditure. A relatively flat IS curve yields these
31For a recent paper that works out a numerical example of
the first round and subsequent effects of a fiscal action in
an IS-LM framework, see Laurence H. Meyer, “The Bal­
ance Sheet Identity, The Government Financing Constraint,
and the Crowding-Out Effect,” Journal o f Monetary E co­
nomics (January 1975), pp. 65-78.

F E D E R A L R E S E R V E BAN K O F ST. L O U IS

results, and any ultrarational effects would reinforce
them.

CROWDING OUT AND STABILITY
CONSIDERATIONS
The Friedman emphasis on the longer-run effects
of monetary and fiscal actions prompted two major
papers (one by Alan Blinder and Robert Solow and
the other by James Tobin and Willem Buiter) that
attempted to demonstrate that the crowding-out ef­
fect of fiscal actions is not consistent with the assump­
tion of stability of the economic system, as repre­
sented by the IS-LM model.32 Both of these papers
are discussed in this section along with a third — by
Karl Brunner and Allan Meltzer — which actually
antedates the other two.33 All three models essentially
employ comparative static tools to examine a dynamic
phenomenon.

The Long-Run Balanced Budget Models
Blinder and Solow — Recently, Blinder and Solow
developed a rigorous theoretical attack on the crowding-out thesis.34 They envisioned three possible levels
of crowding out:
1) The Government undertakes activities which
would otherwise be provided, on a one-for-one basis,
by the private sector. They point out that this sort of
crowding out (to the extent it exists) would occur
regardless of how the Government spending was
financed;
2) Debt issues floated by the Government to fi­
nance its spending drive up interest rates and crowd
out private borrowing;
3) Increases in wealth, derived from the issuance
of Government bonds, increase money demand, that
is, shift the LM curve leftward sufficiently to negate
the rightward shifts of the IS curve.
Blinder-Solow constructed an extended version of
the IS-LM framework which incorporated consump­
:1-Blinder and Solow, “Does Fiscal Policy Matter?” and Tobin
and Buiter, “Long Run Effects.”
:!3Brunner and Meltzer, “Money, Debt, and Economic
Activity.”
34For papers criticizing the Blinder-Solow analysis, see Albert
Ando, “Some Aspects of Stabilization Policies, The Mone­
tarist Controversy, and the MPS Model,” International E co­
nomic Review (October 1974), pp. 541-71; Paul E. Smith,
“The Government Budget Constraint, Crowding Out, and
Stability of Equilibrium,” unpublished (May 1975); and
James R. Barth, James T. Bennett, and Richard H. Sines,
“Fiscal Policy and Macroeconomic Activity,” ( Paper pre­
sented at the Meetings of the Southern Economic Associa­
tion, New Orleans, Louisiana, November 14, 1975).



DECEMBER 1 9 7 5

tion and money demand as functions of wealth, and
a Government budget constraint providing for Gov­
ernment debt interest payments. They adhered to the
usual IS-LM customs of treating the price level as
fixed and of ignoring the existence of a banking
system.
Blinder-Solow then attempted to discern the likeli­
hood of crowding-out phenomena occurring by in­
vestigating the stability properties of the model. They
derived the following theoretical conclusions:
1) if Government spending financed by bond issu­
ance is contractionary, as (according to Blinder-Solow)
monetarists claim, the IS-LM model is unstable;
2) if Government spending financed by bond issu­
ance is expansive, as neo-Keynesians claim, but less
expansive than Government spending financed by
money creation, the model is unstable;
3) if Government spending financed by bond issu­
ance is m ore expansive than Government spending
financed by money creation, the model is stable.
The unusual result that theoretical stability condi­
tions imply that bond-financed Government spending
is more stimulative than money-financed Government
spending comes about because of the inclusion of
interest payments on outstanding debt in the Gov­
ernment budget constraint. For the model to be stable,
the budget must be in balance in the long run to
ensure unchanging stocks of money and debt. In or­
der for the budget gap to close after the initial shock
of fiscal stimulus, income must rise by a larger amount
in the bond-financed case than in the money-financed
case. This result follows because higher tax receipts
must be induced to offset the increased interest pay­
ments on the Government debt.
Tobin and Buiter — Recently Tobin and Buiter also
formulated an IS-LM model for the purpose of ex­
amining the crowding-out thesis. Although some of
the equations differ from those employed by BlinderSolow, the basic assumptions, such as a constant price
level, and the methodology, which is marked by the
stability requirement of a balanced budget process,
are virtually the same.35 Like Blinder-Solow, TobinBuiter utilized more than one variation of the basic
IS-LM model, and like Blinder-Solow, they arrived at
the conclusion that the stability considerations inher­
ent in the balanced budget requirement generate a
35Although the bulk of their analysis assumes a constant price
level, as does an earlier model on which their paper was
based, Tobin-Buiter present one version of the model which
employs a variable price level.

Page 11

FEDERAL- R E S E R V E BAN K O F ST. LO UIS

positive Government spending multiplier. TobinBuiter emphasized that the analysis is conducted for
periods in which the economy is less than fully em­
ployed. Furthermore, that crowding out occurs at
full employment is, for them, not a foregone con­
clusion, in view of a positive fiscal multiplier in their
full-employment model.
Brunner and M eltzer — Another model has recently
been developed which is adaptable to analysis of the
crowding-out question. Brunner and Meltzer con­
structed a model of the economy which differs sig­
nificantly in orientation from the standard IS-LM
model. The Brunner-Meltzer model contains markets
for real assets, financial assets, and current output, and
permits wealth owners to choose among money, bonds,
real capital and current expenditures. In contrast
with the Blinder-Solow and basic Tobin-Buiter mod­
els, the Brunner-Meltzer model permits the price
level to be determined endogenously and includes a
banking sector. The analysis also features, as do the
other models, stability considerations and a Govern­
ment sector which issues interest-bearing debt.
Apparently, these common elements of the models
are the elements which lead to the unusual results
already noted in the Blinder-Solow model, and which
also emerge in the Brunner-Meltzer model. In par­
ticular, Brunner-Meltzer find that Government spend­
ing financed by debt issuance is more stimulative than
Government spending accompanied by expansionary
monetary actions. Such a result is again dictated by
the requirement of a balanced budget for long-run
equilibrium. Once disturbed by, say, an increase in
Government spending, the budget is required to re­
turn to balance, and the presence of interest pay­
ments in the budget constraint means that a larger
increase in income is required for bond-financing
than for money financing.
Brunner-Meltzer recognized this obvious discrep­
ancy between their model results and the historical
evidence, particularly as interpreted by monetarists.
They note, that their model results imply “that infla­
tion or deflation can occur without any change in B
[the monetary base, which is the prime determinant
of the money supply].”36 Brunner and Meltzer take
a markedly different view of the causes of inflation
outside their model construct and in the context of
observable phenomena: “Our analysis of inflation, pre­
sented at the Universities-National Bureau Confer­
ence on Secular Inflation, analyzes the issue in more
36Brunner and Meltzer, “Money, Debt, and Economic Activ­
ity,” p. 973 (bracketed words supplied).

Page 12


DECEMBER 1 9 7 5

detail and explains why most inflations or deflations
have resulted from changes in money.”37
One must bear in mind that the results of the
Brunner-Meltzer model are predicated on: (1) the
absence of money illusion (in the usual sense), but
the existence of a possible wealth illusion by way of
incomplete discounting of future tax liabilities; (2 )
the requirement of a balanced budget; (3 ) a fixed
capital stock (Blinder-Solow, in contrast, present a
variation of their model in which the capital stock is
permitted to grow); (4 ) no labor sector ( to facilitate
changes in output in lieu of the absence of a changing
capital stock); and (5 ) the presumption that asset
prices respond more strongly to an increase in Govern­
ment debt than to an increase in the monetary base.38

Shortcomings of the Balanced-Budget Models
The recent attack on the crowding-out thesis by
way of stability analysis introduces a new element
into the controversy. There are several reasons to
to question the implications of these models of the
economy which indicate that crowding out is not con­
sistent with model stability.
Treatm ent o f Price L ev el C hanges — The BlinderSolow model and the basic Tobin-Buiter model, which
are somewhat sophisticated versions of the standard
IS-LM apparatus, permit no role for price level
changes.3” Considering world-wide economic devel­
opments over the past decade, one must question the
relevance of so-called “structural” models which omit
the existence of inflationary pressures and inflationary
expectations. Moreover, an important channel through
which crowding out might occur is closed off when
price level changes are forbidden to emerge.
Blinder-Solow recognized this deficiency of their
model to some extent, as indicated by their acknowl­
edgement that the fiscal policy multiplier would be
lowered in several ways by the inclusion of an endogenously-determined price level: (1 ) higher prices
lower the real value of the money stock and shift the
37Ibid.
:!8The last-mentioned item is particularly critical for the
Brunner-Meltzer results. Whereas asset prices can be ex­
pected to respond in a positive manner to increases in the
monetary base, there is ambiguity in the response of asset
prices to the issuance of Government debt. A positive
wealth effect ( given incomplete discounting of future tax
liabilities) must outweigh a negative substitution effect
(caused by Government debt competing in asset markets
with private debt) for the Brunner-Meltzer results to hold.
39The Brunner-Meltzer model permits price level flexibility,
but excludes a labor sector, which presumably plays an
important part in realistic attempts to capture the economic
structure.

DECEMBER 1 9 7 5

F E D E R A L R E S E R V E BANK O F ST. L OUI S

LM curve to the left; (2) higher prices reduce real
wealth, and thus consumption, shifting the IS curve
to the left; (3 ) progressive taxes combined with in­
flation increase the real yield of the tax system, which
also tends to shift the IS curve leftward; (4 ) a rising
price level depresses exports and induces imports in
an open economy, which again pushes the IS curve
to the left.40
Blinder-Solow maintained that although the fiscal
multiplier will be less than before with the inclusion
of price level changes, the sign of the multiplier will
remain positive. Because it is their view that the
crowding-out hypothesis requires the fiscal multiplier
to be negative, the authors considered only the sign
of the coefficient to be at issue. This, however, is a
gross exaggeration. To our knowledge, there have been
no claims that the crowding-out hypothesis requires
that a dollar of Government spending, unsupported
by monetary expansion, must reduce private spend­
ing by m ore than a dollar, which is the implication
of a negative fiscal policy multiplier.41 Crowding out
of the private sector occurs not only when $1 of Gov­
ernment spending reduces private spending by $1
(a multiplier of zero), but when $1 of Government
spending reduces private spending by 50 cents (a
multiplier of 0.50). Crowding out, then, is a matter
of degree rather than of absolute magnitudes. A
negative multiplier is not a necessary condition for
crowding out. And the omission of changing price
levels in various IS-LM models contributes to the
likelihood that crowding out tendencies will not
emerge.
B alanced Budget Equilibrium — The three models
under consideration show that in order for the budget
to be balanced, and for the model to be in long-run
equilibrium, the fiscal policy multiplier must be posi­
tive. A full equilibrium requires that the levels of
stocks and flows be unchanging. But the question re­
mains, how does such a formal analysis contribute to
an explanation of the empirical results that imply
crowding out occurs?
Tobin-Buiter made two significant points in this
connection. First, they questioned the ability of eco­
nomic analysis — presumably, as incorporated in ab­
stract models — to track changing economic variables
to some logical end. “The trouble with such discus­
40Blinder-Solow added this final price effect in “Analytical
Foundations of Fiscal Policy,” in Alan S. Blinder, Robert
M. Solow, et al., The Econom ics o f Public Finance (W ash­
ington, D.C.: The Brookings Institution, 1974), p. 47.
41It should be pointed out that various econometric models
indeed have uncovered negative fiscal multipliers (see p.14
of this article).



sions, including this one, is that a long run constructed
to track the ultimate consequences of anything is a
never-never land. For that abstraction we apologize
in advance.”42 If one is really interested in tracking
changes in economic variables over time, the better
approach would be to construct dynamic models
rather than comparative static models.
Second, Tobin-Buiter questioned the stability re­
quirements (including a balanced budget) associated
with the IS-LM investigations into the crowding-out
controversy. Their concluding remarks were:
Finally, we observe again that it is disturbing that
the qualitative properties of models — the signs of
important system-wide multipliers, the stability of
equilibria — can turn on relatively small changes of
specification or on small differences in values of
coefficients. W e do not feel entitled to use the
‘correspondence principle’ assumption of stability to
derive restrictions on structural equations and pa­
rameters. T h ere is n o d iv in e g u a ra n tee th a t th e
ec o n o m ic system is sta b le.*3

The economic system may be stable in the sense
that the U.S. economy has not exploded, but it is a
long jump from that sort of stability to one which
requires stock-flow equilibrium including a balanced
budget. Indeed, the budget of the U.S. Government
has been in deficit in eleven of the past fifteen years.
The stock-flow equilibrium models discussed here,
then, are basically empty of empirical content. Al­
though there may have been periods in which some
of the relevant flows were approximately in balance,
one would be hard pressed to uncover data points
corresponding to periods of unchanging stocks. With­
out the necessary data and a translation of the ab­
stract models in a form which is testable, it is impos­
sible to confirm or refute the hypotheses associated
with these stock-flow equilibrium models.
Fiscal vs. M onetary Stimulus — The underlying as­
sumptions and stability requirements of the models
in question combine to produce a most curious result:
Government spending financed by debt issuance is
more expansionary than Government spending ac­
companied by money creation. The expansionary ef­
fect is summarized in terms of real output in the
Blinder-Solow model and prices in the Brunner-Meltzer model.
These theoretical implications run contrary to vir­
tually every investigation conducted into the impacts
of fiscal and monetary policy actions on economic
42Tobin and Buiter, “Long Run Effects,” p. 1.
43Ibid., p. 42 (italics supplied).
Page 13

F E D E R A L R E S E R V E BAN K O F ST. LO UI S

activity. None of the architects of these models at­
tempted to reconcile the model implications with the
mass of empirical studies contradicting them.
Brunner and Meltzer acknowledged this discrep­
ancy. However, they offered no explanation for the
fact that even though their model implies that bondfinanced Government spending is more inflationary
than money-financed spending, their own empirical
studies indicate just the opposite.44 One is led to
conclude that manipulation of these theoretical mod­
els constitutes an interesting academic exercise, but
contributes little of practical significance to the crowd­
ing out controversy. With empirical considerations
coming to the fore, the discussion now turns to the
econometric literature to determine what evidence
that approach has brought to bear on the issue of
crowding out.

ECONOMETRIC MODELS AND
CROWDING OUT
In a recent study of a number of econometric
models, Gary Fromm and Lawrence Klein published
simulation results showing the implied Government
expenditure and tax mulitpliers for these models.45
The results showed long-run Government spending
multipliers ranging from about 1 to 5 when measured
in terms of impact on current dollar GNP.40 How­
ever, the majority of the large models surveyed re­
vealed that crowding out did occur in real terms over
time. Some indicated $1 of Government spending for
goods and services crowded out even more than $1 of
private spending.
For example, the Wharton Mark III Model yielded
a multiplier of minus 3 after forty quarters, and the
Bureau of Economic Analysis (U.S. Department of
Commerce) Model gave a real Government spending
l4Karl Brunner, Michele Fratianni, Jerry L. Jordan, Allan H.
Meltzer, and Manfred J. Neumann, “Fiscal and Monetary
Policies in Moderate Inflation: Case Studies of Three Coun­
tries,” Journal o f Money, C redit and Banking (February
1973), pp. 313-53.
45Gary Fromm and Lawrence R. Klein, “A Comparison of
Eleven Econometric Models of the United States,” T he
American Econom ic R eview (May 1973), pp. 385-93. These
models, unlike the IS-LM abstractions discussed earlier,
were not forced to a full stock-flow equilibrium.
" ’Blinder-Solow cited these results as attesting to the absence
of crowding out in large income-expenditure models. Ac­
knowledging the nonexistence of Government budget con­
straints in the models, they added that despite this de­
ficiency, “All we can do now is render a verdict on the
basis of the evidence already in.” They ignored the real
crowding-out results implied by the econometric models,
which is surprising, in that their own model emphasized the
crowding-out issue in real terms. See Blinder and Solow,
“Analytical Foundations,” p. 78.

Page 14


DECEMBER 1 9 7 5

multiplier over the same time period of minus 23.
These results go well beyond monetarists’ contentions
that complete crowding out gives a multiplier of ap­
proximately zero, though these results are less than
clear on the issue of nominal crowding out.
The Fromm-Klein survey of the empirical results
suggested that crowding out typically occurred be­
cause of a rising price level, capacity constraints, and
rising nominal interest rates. These results are con­
sistent with those implied by the extended IS-LM
case described above, and do not necessarily cor­
roborate crowding out of the nonshifting aggregate
demand variety, that is, those cases which imply
that crowding out occurs because fiscal actions are off­
set by other components of aggregate demand.
However, Fromm-Klein recognized that the model
simulations produced evidence not in accord with the
usual standard Keynesian presumption of positive
Government spending multipliers:
Conventional textbook expositions generally depict
real expenditure multipliers approaching positive
asymptotes. In fact, most of the models here show
such multipliers reaching a peak in two or three years
and then declining thereafter in fluctuating paths.
At the end of five to ten years, some of the models
show that continued sustained fiscal stimulus has
ever-increasing p e r v e r s e im pacts.47

Klein suggested elsewhere that perhaps these new
estimates of the fiscal multiplier are not as damaging
to the Keynesian position as they initially appear.48
After all, it takes a considerable length of time in
some of the models for the Government spending
multiplier to approach zero or turn negative, and
policymakers historically have shown little concern
for the long run. We would only add that this argu­
ment reflects the progression of the debate on crowd­
ing out from “Does it exist?” to “What is the time
period?”
As far as small models are concerned, the monetarist
model of the Federal Beserve Bank of St. Louis set
off much of the current controversy. Fiscal crowding
out emerges in the reduced form equations published
in the St. Louis R eview only after a period of time,
even though it is a much shorter period of time than
that of the large income-expenditure models, and it
occurs in nominal terms rather than in just real terms.
Government spending, as measured by high-employment expenditures, exercises a relatively strong in­
47Fromm and Klein, “A Comparison,” p. 393 (italics supplied).
48See Lawrence R. Klein, “Commentary on ‘The State of the
Monetarist Debate,’ ” this R eview (September 1973), pp.
9-12.

F E D E R A L R E S E R V E BAN K O F ST. L OUI S

fluence on GNP (assuming a constant change in the
money supply) in the current quarter and the next
quarter, but is approximately offset within a year’s
time.
These results, which are confirmed by regression
analysis employing data through mid-1975, should not
be interpreted to suggest that “Government spending
doesn’t matter”; it matters very much over a certain
period. Moreover, if Government spending were to
accelerate or decelerate rapidly rather than be held
to a steady rate of change, the impact on GNP would
be considerable.
The chief reason that these reduced form results
are of interest is that they do not follow from a
structural model that constrains the channels of trans­
mission from fiscal actions to economic activity. Gov­
ernment expenditures cover a wide range of activities,
some of which substitute for private consumption and
investment, and others which serve as substitutes or
complements to private factors of production.49 With
such diverse effects, any model which restricts the
transmission of fiscal actions to income and/or interest
rate channels, runs the risk of missing the full effects
of Government interaction with the private sector.50
The St. Louis results certainly do not do justice to the
measurement of the effects of the complexities of the
Government spending process, but they serve the
function of questioning the results from models which
restrict the operation of fiscal actions via fixed
channels.

SUMMARY AND CONCLUSIONS
This article has surveyed the recent literature on
the subject of the crowding-out effect of fiscal actions.
Crowding out was defined as a steady state Govern­
ment spending multiplier of near zero, a definition
which was extended to differentiate the terms “nom­
inal” and “real” crowding out.
49We, like most other analysts, have had little to say about
the effect of fiscal actions on aggregate supply. For an
attempt to enrich standard macroeconomic analysis with
such considerations, see Kenneth J. Arrow and Mordecai
Kurz, Public Investment, the Rate o f Return, and Optimal
Fiscal Policy (Baltimore: The Johns Hopkins Press, 1970);
and Lowell E. Galloway and Paul E. Smith, “The Govern­
ment Budget Constraint and Aggregate Supply,” (Paper
presented at the Meetings of the Southern Economic Asso­
ciation, New Orleans, Louisiana, November 14, 1975).
50See R. L. Basmann, “Remarks Concerning the Application
of Exact Finite Sample Distribution Functions for GCL
Estimators in Econometric Statistical Inference,” Journal
o f the American Statistical Association (December 1963),
p. 944, where he says:
. . . the entire burden of statistical inference in econo­
metric simultaneous equations models falls on the un


DECEMBER 1 9 7 5

This survey indicates that the controversy has taken
place on two fronts — theoretical and empirical. First,
the theoretical literature has developed primarily with
reference to the IS-LM model or modifications thereof.
Several cases were examined which serve as candi­
dates providing theoretical support for the crowdingout hypothesis. In addition, the role of stability con­
ditions in the crowding-out controversy was examined.
In general, the conclusion was that stability considera­
tions are of limited relevance with respect to the ac­
ceptance or rejection of the crowding-out hypothesis.
The empirical literature, on the other hand, has
taken the form of simulations of Government actions
and has yielded results that show signs of being con­
sistent with the crowding-out hypothesis. This crowd­
ing out tends to be very slow in developing, however,
and occurs in real rather than nominal terms. The St.
Louis results still stand out relative to the large
econometric models in that crowding out occurs more
quickly and also in nominal terms.
As a result of this survey, it is clear that the
crowding-out controversy continues to exist. Appar­
ently these issues will not approach resolution until
additional structural models are developed and tested.
The Keynesians have developed many models, but
these models have not been tested as interdependent
units.51 Monetarists, on the other hand, have not of­
fered structural models to go along with their reduced
form results.52 Such a turn toward hypothesis testing
could lead toward a resolution of the issues in the
crowding-out controversy. Although the controversy
has been explored in this article primarily on a theo­
retical level, the implications of these issues for practi­
cal matters of stabilization policy are of great
significance.
constrained estimates and test statistics associated with
the reduced-fonn, at least, if empirical confirmation
of the underlying economic postulates is the goal aimed
at. Whenever the unconstrained reduced-form statistics
are judged to be in good agreement with the propo­
sitions (theorems) deduced from the underlying eco­
nomic postulates, then do the structural estimates
emerge as sound and convenient summaries of that
part of the sample statistical information which is
relevant to the numerical values of structural pa­
rameters, but generally not otherwise.
51See Keith M. Carlson, “Monetary and Fiscal Actions in
Macroeconomic Models,” this Review (January 1974), pp.
8-18. A suggested testing of models as interdependent
units requires that the model be specified in structural form,
but the testing of the model should focus on the reduced
form. For further discussion of this approach, see James L.
Murphy, Introductory Econom etrics (Homewood, Illinois:
Richard D. Irwin, Inc., 1973).
52For recent efforts in this direction, however, see Leonall
C. Andersen, “A Monetary Model of Nominal Income
Determination,” this Review (June 1975), pp. 9-19.
Page 15

F E D E R A L R E S E R V E BAN K O F ST. L OUI S

DECEMBER 1 9 7 5

APPENDIX

For purposes of definition consider the accompanying
Figure, panel (A ), which is a representation of the
m arket for total output of goods and services. The
intersection of aggregate supply (ASo) and demand
(ADo) determine the equilibrium level of output, Xo,
and the price, Po, at w hich it will b e sold. L abel this
intersection as point A and interpret it as an initial
equilibrium. Now, introduce an expansionary fiscal
action like increased Government demand for goods
and services financed by sales of Government debt
to the public.
Assume that the net effect of increased Government
demand and the issuance of debt is an increased de­
mand for goods and services, as indicated by the shift
of the demand curve to A D i. Further, suppose that
the expanded Government sector adversely affects
efficiency and productive capacity, resulting in a shift
of the supply curve to ASi. If the new equilibrium
occurs anywhere on the vertical line through point A,
say at point B, we say that re a l crowding out has
occurred. T h at is, increased real Government spending
has been completely offset by a decline in real private
spending.
Consider now Panel ( B ) in the Figure. T h e curved
line drawn through point A is a rectangular hyperbola
indicating that P times X , which is defined as the
nominal value of total output (th at is, G N P ), is con­
stant and equal to Po Xo. In other words, there is an
infinite number of combinations of P and X , besides Po
and Xo, which would give the same dollar value of
total output as at point A. Suppose that in response
to an expansionary fiscal action, aggregate demand
and aggregate supply shift in various directions (d e­
pending on the assumptions m ade) and the new
equilibrium settles on the curved line, say at point B
or C. Under these conditions, n om in al crowding out
is said to occur. T hat is, an increase in Government
spending has been offset by a decline in the dollar
amount of spending by the private sector.


Page 16


This distinction betw een nominal and real crowd­
ing out is important because clearly one does not im­
ply the other. This is shown in Panel (C ) which
combines the definitions of real and nominal crowd­
ing out from Panel (A ) and ( B ) . T h e solid lines are not
demand and supply curves, b u t are the loci of points
defining real and nominal crowding out.
Note that the lines are now drawn as the midpoint
of a shaded band. This is done to reflect the crowdingout hypothesis; th at is, an increase in Government
demand, not supported by monetary expansion, re­
sults in a steady state income multiplier of a p p ro x i­
m ately zero. T h e middle of these bands represents
those points at which $1 of Government spending
crowds out exactly $1 of private spending. T h e shad­
ing to the right of either line describes th at area in
which partial crowding out (a multiplier betw een 0
and - ) - l ) occurs; the shading to the left of either line
describes that area in w hich over crowding out (a
multiplier betw een 0 and —1) occurs. O f course, it is
possible that a dollar of Government spending might
crowd out more than two dollars of private spending,
resulting in a multiplier of less than —1 and an equilib­
rium point to the left of either of the bands.
Various combinations of real and nominal crowd­
ing out are possible, given an expansionary fiscal ac­
tion. For example, at point A, there is partial nominal
and partial real crowding out. At point B, there is
partial nominal, but over real crowding out and so on
for other combinations around the intersection of the
two bands. A t some point outside this area, such as
point E , there is partial real crowding out, b u t a com ­
plete absence of any sort of nominal crowding out. It
is clear that a com plete analysis of the fiscal process
requires an assessment of both the demand and sup­
ply factors involved in order to describe accurately
the extent to which nominal and real crowding out
m ight occur.

F E D E R A L R E S E R V E B A N K O F ST . L O U I S

DECEMBER 1 9 7 5

Definitions of Crowding Out
(A)

(B)

Real Crowding Out

Nominal Crowding Out




(C)
Sum mary

Page 17

The Origin and Impact of Inflation
Remarks by DARRYL R. FRANCIS, President, Federal Reserve Rank of St. Louis
Refore the Joint Seminar of The Canadian Council of Financial
Analysts and The Toronto Council of Financial Analysts
Toronto, Canada, November 18, 1975

J t IS A pleasure to be here in Toronto and to share
with you my views on inflation. This is a subject
whose popularity has fluctuated with cyclical fluctua­
tions in business activity; it is debated during up­
swings only to recede into oblivion during down­
swings. Yet, in my opinion, it is a subject which should
be analyzed at all times since it is during downswings
that the seeds of inflation are sown.
You have suggested that I speak on the monetarist
view of inflation. While the framework within which
I analyze the causes and consequences of inflation is
of the monetarist variety, I think I should mention
that what I consider most important does not neces­
sarily represent the views of all monetarists. In order
to put things into perspective, I should like to outline
this framework of analysis.

THE FRAMEWORK
An increase in the total money stock, when it is not
accompanied by a similar increase in output, has a
predictable effect on behavior. Individuals will at­
tempt to divest themselves of what they consider to
be their excess money balances by bidding for other,
nonmoney assets. As the prices of these assets rise,
output is stimulated. But such increases in output
are limited by the growth of resources. Expansion of
the money stock produces only a transitory increase
in production, while it leads to a permanent rise in
the rate of increase of prices. Evidence confirming
these results is not difficult to find; rates of growth of
money and rates of increase in the price level closely
parallel each other when viewed as long-term trends.
A great deal of evidence has been amassed showing
that an increase above the trend growth of money
which persists for at least two quarters will lead to a

Page 18


rise in the rate of output growth which is quite short­
lived. However, as the rate of production returns to its
trend level, the rate of inflation increases. We have
observed a symmetrical situation for declines in the
rate of money growth. Such declines create transitory
recessions that are replaced by lower inflation rates in
six to eight quarters.
Despite many arguments to the contrary, it is clear
that central banks can control the money supply
within a very narrow range over a time period of a
quarter or more. But if we accept the above relation­
ship between money supply and the price level, why
has the money stock been allowed to grow in such a
way as to produce persistent and accelerating infla­
tion punctuated by occasional recessions? Have cen­
tral banks produced this growth pattern through some
nefarious design? Have they merely been incompe­
tent? I, for one, believe that neither is the case and
that we must look to our political and social aspira­
tions for the root causes of the economic dilemma
upon whose horns we sit so very uncomfortably.
In doing this, I shall confine my observations to the
American experience, simply because I am most fa­
miliar with the trials of the U.S. economy. I am quite
sure, however, that parallels can be drawn for
Canada and many other Western industrialized na­
tions which face the same problems of inflation and
unemployment.

EXPANDING GOVERNMENT SECTOR:
HAS ANYTHING BEEN ACCOMPLISHED?
For many years, Government spending and the size
of the Government sector have expanded at an in­
creasing rate. Since 1950 total annual Government ex-

DECEMBER 1 9 7 5

F E D E R A L R E S E R V E BAN K O F ST. L OUI S

penditures have risen by about $454 billion, with $328
billion of that having been recorded in the past ten
years. This growth was spurred by an underlying
philosophy which contends that greater direct Govern­
ment activity is the best way, if not the only way, to
achieve certain economic and social goals. So let us
consider the claims of those who espouse this philos­
ophy and examine their validity. Has this spending
accomplished what it set out to do? Was it indeed the
“best” way? And finally, has it had other consequences,
too important to be termed merely “side effects,”
which have imposed high costs on us all?

Economic Stability
One of the oldest arguments in favor of increased
Governmental incursion into economic life holds that
fiscal policy is the proper, indeed the necessary, tool
to stimulate the economy and combat unemployment.
In addition to the automatic stabilizing effects of tax
and transfer payment policy, it has been alleged that
the Government should introduce significant spending
efforts when the activity of the private sector is inade­
quate for full employment, however defined. And it
is argued that this spending should engender deficits,
since financing through higher taxes would reduce
private purchasing power and frustrate the attempt
to expand total demand.
Historically, Government deficit spending has had
no stimulative effects except insofar as it was accom­
panied by monetary expansion. Thus the stimulation
desired could have been accomplished directly
through monetary expansion without the Government
encroachment into the private sector that is inherent
in expansive fiscal policy. More important, we know
that the fiscal stimulus is only transitory — that the
output effects of excessive money growth are quickly
dissipated and that the only lasting result is ever ag­
gravated inflation. Consider our actual performance.
Have we reduced fluctuations in output and employ­
ment through the wide use of fiscal deficits and sur­
pluses? Obviously the answer is no. Since the inception
of these policies in the early 1930s, the frequency and
magnitude of economic fluctuations have not differed
significantly from those prior to that period.

Fuller Utilization of Labor Resources
A second popular argument, and on the surface a
very persuasive one, states that it is the proper func­
tion of Government to employ those resources, par­
ticularly labor, which the private sector is unwilling to
employ. Presumably, the whole society benefits from



such programs at no cost, since additional production
is being provided by those who were previously con­
tributing nothing. This is a seductive argument which
merits careful examination. Surely we must agree that
private enterprise will always take advantage of the
opportunity to employ resources which it expects to
use profitably. When some resources are not so em­
ployed, it means only that their services are not worth
the price attached to them.
For the cause of this situation, we must again look
to the influence of Government. Hedged in as we have
become by laws requiring the payment of minimum
wages and “equal pay for equal work,” we have seen
more and more of the labor force become unemploy­
able. And when the Government puts them to work,
one basic result is the same. To the extent that these
people are being paid more than the market decrees,
there is a real transfer of wealth to them from the
rest of society. Real output may be greater, but much
of the increase in their welfare comes not from their
new productivity but from the rest of us.
To gauge the accomplishments of these policies,
whatever their redistributive effects, we need only to
look at what has occurred. In the face of many jobcreation programs, we find that output growth has
risen at approximately a constant trend rate since
1946, irrespective of the rate of Government spending.
And in the same period, unemployment fluctuated
around an average of 4.9 percent until its recent
increase.

Satisfaction of Social Needs
An argument of more recent vintage maintains that
the goods and services provided by the private sector
in response to society’s demands do not respond to the
so-called “true needs” of society. It follows from this
that the Government should divert resources to the
satisfaction of these needs. More and more programs
have been enacted in areas ranging from health care
to cultural pursuits. Whether they have increased our
welfare is highly questionable. We have obtained
these services only by sacrificing other things we
would have chosen for ourselves. But in their efforts
to make it appear that there is indeed such a thing as
a free lunch, our elected officials have increased Gov­
ernment expenditures without attempting a corres­
ponding rise in taxes. As a result, monetary growth
and inflation have provided the means of transferring
control of resources from private hands into the hands
of bureaucrats who, it would seem, know our needs
better than we ourselves do.
Page 19

F E D E R A L R E S E R V E BAN K O F ST. L OUI S

More Equal Distribution of Income
Finally, implicit in all the arguments of the advo­
cates of interference is the assumption that an ex­
panded Government role in economic activity will,
and should, redistribute income in the direction of
some notion of greater equality. Whether this redis­
tribution is indeed desirable is an argument which has
probably existed since the first two humans met. I will
not attempt to make any enlightening contributions to
that debate. It is fair to ask, however, what has been
achieved. In spite of the expanding role of Govern­
ment activity since World War II, the distribution of
income has changed very little. The income group
representing the lowest twenty percent received 5
percent of total income in 1947 and 5.5 percent in
1971, while the share of the highest 20 percent fell
from 43 percent in 1947 to 41.6 percent in 1971. This
can hardly be considered a significant accomplish­
ment, expecially in view of the costs incurred.

NEGLECTED CONSIDERATIONS
These proposals to improve our socio-economic wel­
fare have, through design or through ignorance,
overlooked the problem of financing the additional
expenditures. The basic issue in the financing of Gov­
ernment programs is that resources have to be trans­
ferred from one sector of the economy to another. This
can be accomplished in only three ways. One is to tax
current private consumption and investment — that
is, to increase taxes. The second is to tax future private
consumption by incurring a deficit and selling Govern­
ment securities to the private sector. This method
moves resources immediately by reducing the pur­
chasing power of security buyers only, but ultimately
spreads the burden to all taxpayers when the securi­
ties must be redeemed. And the third is to finance the
deficit by indirectly selling securities to the central
bank which buys them with newly created money.

Inflationary Financing
When deficits are financed by the sale of Govern­
ment securities, the attendant additions to the demand
for credit must exert upward pressure on interest
rates. Aside from directly discouraging private con­
sumption and investment spending, higher interest
rates, like taxes, are politically undesirable. Hence,
these first two methods have typically not been
favored. If the central bank must submit to political
pressure to contain increases in interest rates, the
solution is clear. The monetary authority is compelled
to buy at least a portion of the Government issues

Page 20


DECEMBER 1 9 7 5

from the private sector. This action undoubtedly
mitigates the initial pressure on interest rates, but at
the same time it stimulates money growth and the
ensuing inflation leads eventually to higher interest
rates.
The process I have outlined here is not hypothet­
ical; we have seen it in operation over the greater part
of the past thirty years. Since 1950, the Federal Gov­
ernment’s debt has grown by $176 billion. In that
same period, the Federal Reserve System’s holdings of
debt have grown by $68 billion and the money stock
has increased by $176 billion. Meanwhile, proponents
of deficit spending as a stimulus have proudly pointed
to their successes as they saw output and employment
increase — however briefly — with each new deficit,
and considered the attendant inflation a small price to
pay for the short-run achievements.
To sum up: there is no convincing evidence that
increased Government spending, with its accompany­
ing deficits, has accomplished its stated social goals.
There is no evidence whatsoever that it is the most
efficient way to pursue these goals or even that any
benefits have exceeded the costs involved. On the
other hand, there is overwhelming evidence that it
has led to our persistent inflation. I can therefore say
unequivocally that not only are the causes of inflation
identifiable, but they can be eliminated. That they
should be eliminated becomes clear once we consider
the consequences of inflation.

Economic Instability
One of these results is that it can inspire monetary
policies which reinforce inflationary pressures. I have
already discussed the fact that increased Government
borrowing exerts an upward pressure on interest rates.
When the central bank is then called upon to mone­
tize a part of the debt in order to counteract that
pressure, inflation ensues. Each time this process has
been pursued, interest rates have not stayed down
for long. As people become aware of inflation and
the expanded money supply, they expect prices to
rise further. Interest rates rise as inflationary premi­
ums are incorporated into them. The central bank
again attempts to resist the rise by increasing the
money supply and the whole cycle is renewed.
A closely related policy-induced effect is the reces­
sions brought about by recurrent efforts to reduce
inflation rapidly and drastically. When the concern
for inflation becomes greater than that for interest
rates, there are periodic attempts to reduce the rate of
price rise by sharp reductions in the rate of money

F E D E R A L R E S E R V E BAN K O F ST. LO UI S

growth. These reductions have been responsible for
most of our recessions and increases in unemployment.

Arbitrary W ealth Transfers
The less visible consequences of inflation are per­
haps even more ominous. An inflation which is not
fully anticipated brings about a redistribution of
wealth from creditors to debtors. When people see
this occurring, they will bend their efforts toward pro­
tecting themselves from these effects.
Another subtle aspect of inflation is the loss which
inflation imposes on all holders of money. Inflation
leads all economic units, both individual consumers
and firms, to try to maintain smaller money balances
and, as they become a more costly productive re­
source, to make greater attempts to economize on their
use. But these attempts require the use of substitute
resources, not the least of which are the time and
effort involved in devising alternatives to money trans­
actions. I think you can easily visualize where this
leads; we are all aware of the inefficiences of bilateral
barter transactions. Money is a useful good which
permits increased specialization in production and
any decrease in that specialization necessarily leads
to a reduction in output. The recorded instances of
very rapid rates of inflation in Europe and South
America convincingly illustrate this fact.

Increased Uncertainty
A major consequence of the inflation that we have
experienced is the increased uncertainty which has
had an impact on every aspect of our economic life.
There are really two factors at work here. First, when
a society has come to expect a fluctuating inflation
rate which cannot be accurately predicted, long-term
financial contracts become increasingly risky to both
lenders and borrowers; hence, they become increas­
ingly rare. I am sure you are all aware that since the
early 1930s the average time to maturity of debt obli­
gations has decreased substantially. Greater uncer­
tainty — that is, greater risk — as to the financing of
long-term investment leads to reluctance to undertake
such investment. As a result, productive capacity is
lowered and future consumption possibilities are
decreased.
Another source of increased uncertainty, and one
whose effects become immediately apparent, is that
we have been led to expect the Government periodi­
cally to attempt to combat inflation in ways and at
times that we cannot predict. Many of these tech­
niques, such as wage and price controls and the re­



DECEMBER 1 9 7 5

actions to them, can, and already have, produced
serious distortions in the economic process.
An excellent example is the phenomenon observed
in the American automobile industry in the past year.
Faced with poor sales, manufacturers reacted not
with straightforward price cuts, but with elaborate
rebate programs which were more costly for both them
and their customers. The only reason which I can see
for this extraordinary maneuver is that they feared the
imminent reimposition of price controls and wished
to insure themselves the greatest possible flexibility in
the face of this threat.
It is the long-term, often slowly working, and hardly
visible effects of inflation, which, in my opinion, repre­
sent the greatest danger. They lower the standard of
living; they undermine the fiber of our political, eco­
nomic and social system; and because they are not
readily apparent, inflation frequently is considered to
be of secondary importance to more visible, but transi­
tory, economic problems.
Our current situation affords us a perfect example
of the problems I have outlined. Although it seems
that we have reached the bottom of the recession and
that recovery is surely underway, unemployment rates
remain relatively high and some industries still suffer
low rates of growth in demand. As recovery progresses
and inventory liquidation ceases it is reasonable to
expect that private borrowing will increase; this is
bound to exert an upward pressure on interest rates.
Now, how will the Government react to this combi­
nation of circumstances? Will it again consciously dis­
regard the dangers of inflation, addressing itself to the
short-run unemployment problem with traditionally
ill-conceived and ineffective spending programs? Such
a course of action will engender massive Government
demands on the credit market, adding to the upward
push on interest rates. To combat this, money growth
must accelerate, bringing with it greater inflation in a
year or so and still higher interest rates.
What then? Will aggravated inflation be permitted
or will we subject the economy to another recession?
Or shall we, alternatively, break from our traditional
response, allow the economy to continue the progress
it has begun, and not create new problems by attempts
to accelerate that progress or to depress the interest
rate. These are the alternatives which face policy­
makers.

SUMMARY AND CONCLUSIONS
In conclusion, let me restate my fundamental propo­
sitions. First, it is quite evident that inflation is the
Page 21

F E D E R A L R E S E R V E B A N K O F ST . L O U I S

result of excessive monetary growth and that demandinduced recessions are caused by sharp downward
deviations from this growth path. Second, monetary
growth in excess of resource growth has been the most
dependable result of Government deficits and the de­
sire to mask the resource transfers that these deficits
are assumed to entail. Third, deficits have typically
arisen from attempts to change socio-economic condi­
tions — attempts which have, just as typically, been
futile.
Solutions are readily available, but they require a
time horizon which extends beyond the next election
and beyond the short-term outlook and narrow analyt­
ical base of many economists. The basic requirement
is the realization that all social and economic programs
entail a cost which must be paid in one form or
another. If this realization becomes prevalent and if
the costs become clear, there will be no need for
central bank financing of huge Government deficits.
Neither will there be a necessity for maintaining in­
terest rates at some predetermined level. In short,
there will be no need to fool the electorate. This


Page 22


DECEMBER 1 9 7 5

would free the monetary authorities to control the
growth of the money stock, keeping it at a rate con­
sistent with the rate of growth of output and eliminat­
ing the major cause of both inflation and demandinduced recession.
Meanwhile, in the current circumstances, it is per­
fectly feasible to permit interest rates to seek their
market-determined level and to start a very gradual
deceleration in the trend rate of money growth. It may
take a year or two or three, but inflation can be re­
duced without the emergence of recession. But again,
a necessary condition is the discipline imposed by
public knowledge that any service provided by the
Government must be paid for by the public itself and
must be paid immediately.
Perhaps such knowledge will reduce demands for
Governmental services, or at least eliminate the politi­
cal pressures to pretend that these services can be
provided free of charge. And in my opinion, these pre­
tentions are the major impulses which set in motion
the causes of inflation.

EIGHTH




FEDERAL

RESERVE

DISTRICT

HEAD OFFICE, BRANCH, AND OTHER CITIES OF OVER 10,000 POPULATION

Legend
o

H e a d O f f ic e

®

B ra n c h O ffic e s

m

o f the FRB, St. Lo uis
o f the FRB, S t. Louis

S ta n d a rd M e tro p o lita n S t a t is t ic a l A re a s

■

P la c e s

■

P la c e s o f 4 0 - 5 0 ,0 0 0

o ver 5 0 ,0 0 0

District States

P la c e s o f 3 0 -4 0 ,0 0 0
•

P la c e s o f 2 0 -3 0 ,0 0 0

o

P la c e s o f 1 0-2 0,00 0

r - T - i l l l . llnd
Jj^Mo.Sjv^
T e n n *_^

P o p u la tio n is b a s e d
on the 1970 c e n su s.

y iss
M
— S ta te Bo u n d a rie s

— D is tric t

0

32

F e d e r a l R e s e rv e B a n k o f S t. L o u is

B o u n d a ry

64

96

D E C EM B ER 1975