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FEDERAL RESERVE B A N K
O F ST. L O U IS
MARCH 1970
V o l. 5 2 , No.
m
3
Extent of the Slowdown
by NORMAN N. BOWSHER
S p e n d i n g growth has slowed in recent months;
production has stagnated or declined. Total dollar
spending on goods and services rose at about a 4 per
cent annual rate from the third to fourth quarter of
1969, compared with an average 8 per cent rate from
1965 to the fall of 1969. Spending probably rose yet
more slowly in early 1970. Real production of goods
and services declined slightly from the third to fourth
quarter last year, and the decline probably acceler
ated in early 1970. From mid-1968 to the fall of 1969,
real output had risen at a 2.8 per cent rate, and 5
per cent in the previous year.
Other measures of economic performance have also
shown weakness in recent months. Industrial produc
tion has declined at a 5 per cent annual rate since
last July, after rising about 5 per cent in the previous
year. Payroll employment was about unchanged from
last October to February. Unemployment, which aver
aged an unusually low 3.5 per cent of the civilian
labor force last summer, rose to 4.2 per cent in Feb
ruary. Unemployment among married men rose from
1.5 per cent to 2 per cent.
Despite the marked slowing in the growth of spend
ing and the cutbacks in production, prices have con
tinued to rise at about the same pace as in early
1969. Although the rate of increase of the general
price index (GNP price deflator) ostensibly slowed
somewhat to a 4.7 per cent annual rate in the fourth
quarter, it rose at a 5 per cent rate during the last
half of 1969, the same rate as during the first half of
the year.
An evaluation of current trends in economic de
velopments cannot be completed for many months.
Meanwhile, some insight may be gained by compar
ing recent developments in the chief economic meas
ures and public policies with their behavior around
peaks in economic activity in previous postwar cycles.
The last three peaks in economic activity selected
by the National Bureau of Economic Research are
May 1960, July 1957, and July 1953. Comparison of
the current situation with these periods may be help
ful in providing perspective on the magnitude of the
current downturn and in developing judgments about
its possible future course.
Selecting a recent “peak” month or quarter for
comparison is arbitrary at this time. Housing starts
Page 2
reached a high about a year ago. Other measures,
including industrial production, reached their peaks
last summer, while others, such as construction,
reached highs in the fall. A number of dollar-amount
time series, including personal income, have contin
ued to rise, but at a reduced pace. In this study
August 1969 is used as a tentative peak. It is the
middle month of the quarter when total real output
of goods and services was greatest. Any other month
from last July to November might have been selected.
Comparisons with Previous Cycles
Spending growth in recent quarters has been con
siderably faster than around the previous three cy
clical peaks. In the year ending with the third quar
ter 1969, total spending on goods and services rose 8
per cent (Table I). This was greater than for the
corresponding period preceding any of the other
peaks. The average for the last year of the three
previous economic upswings was 5 per cent.
From the third to the fourth quarter last year,
total spending rose at a 4 per cent annual rate. In
Table I
CHANGES IN PRODUCTION A N D SPENDING
(A n n u a l Rates o f Change)
Peak Q uarter o f
Economic A ctivity
Total S pending1
Total Production2
Year Before Peak
111/1969
7 .6
2.5
Recessions:
11/1960
111/1957
111/1953
3 .7
6.1
5.9
2.0
2.4
5.0
5.2
3.1
8.5
7.7
4 .9
6.4
A verage o f 1960, 1957,
and 1953 peaks
Slowdowns:3
IV /1 9 6 6
111/1962
Q ua rter A fte r Peak
111/1969
4.0
-
0.4
Recessions:
11/1960
111/1957
111/1953
- 0.4
— 4.2
- 5.3
-
1.9
6.0
4.7
3.3
-
4.2
1.8
5.5
-
1.0
3.7
Average o f 1960, 1957,
and 1953 peaks
Slowdowns:®
IV /1 9 6 6
111/1962
’ Gross N ational P rod u ct in current dollars
2Gross N ational P rodu ct in constant dollars
S lo w d o w n s selected by Federal Reserve Bank o f St. Louis.
FEDERAL RESERVE BANK OF ST. LOUIS
MARCH, 1970
Total Spending on Goods and Services
Real Output
Gross N ational Product (Current Dollars)
Peaks = 100
105
Peaks = 100
105
S e asonally A d justed
A v e ro g e o f 1959-61,1956-58,
ond 1952-54
100
Gross N a tio n a l Product (Constant Dollars)
100
Peaks = 100
Peaks = 100
S e asonally A d iusted
1051------------------------------------— ------------------------------- ,105
_____
100
✓ '^ '^ 1 9 6 8 - 7 0
95
95
3RD Q re/53
3RDOTR.'57
2NDQTR.60
3RD OTR '69
1-------------------------- L------------ 1-------------------------- ...
^
90
-
-----4
-
3
-
2
-
1
0
1
2
1
3
90
-2
QUARTERS TO AN D FROM PEAK
Latest d a ta p lo tte d : 4th q u a rte r
Source:U.S. D e partm ent o f Commerce
-1
0
1
2
QUARTERS TO A N D FROM PEAK
Latest d a ta p lo tte d : 4th q u a rte r
Source: U.S. D e partm ent o f Commerce
the first quarter of each of the three previous business
recessions total spending declined at an average 3
per cent rate. Preliminary data indicate that total
spending probably continued to rise moderately from
the fourth quarter last year to the first quarter this
year. In the second quarters of the three previous
recessions, total spending declined at an average rate
of 4 per cent.
The more rapid growth of spending in 1969 and
early 1970 than around previous cyclical peaks re
flects the higher rate of inflation in the current period.
In real terms, the recent and earlier periods are
more nearly similar. Real production before the as
sumed peak last August grew somewhat slower than
before other peaks, but it has demonstrated more
strength after the turn than during the early months
of the three previous business recessions. In the
year ending with the third quarter of 1969, total
output of real goods and services rose 2.5 per cent,
compared with an average 3.1 per cent in the cor
responding years before the 1960, 1957, and 1953
peaks (Table I). From the third to fourth quarter in
1969, production declined at a 0.4 per cent annual
rate, while in each of the first quarters after the
three previous cyclical turns, output declined much
more sharply, averaging a 4.2 per cent annual rate.
Industrial production, which includes only about
one-third of total production but which is measured
monthly, has followed a pattern similar to total real
output. In the eight months ending last August, in
dustrial production rose at a 5 per cent annual rate
(Table II), about the same as the average for the
eight months before the 1953, 1957, and 1960 busi
ness cycle peaks.
The decline of industrial production at a 6 per cent
annual rate from August to January was much more
modest than in the comparable 1957 and 1953 pe
riods, and about the same as in the 1960 period.
Production fell at an average 14 per cent rate in the
corresponding five months of the three previous
recessions.
Employment trends have been much stronger in
1969 and early 1970 than around the upper turning
points of the three earlier business cycles (Table II).
From December 1968 to August 1969 payroll employ
ment rose at a 3.6 per cent annual rate. In the com
parable eight months preceding each of the three
previous business cycle peaks, the growth rate of
payroll employment averaged 2 per cent. Since last
August payroll employment has risen slightly, at a
0.5 per cent rate, whereas in the first five months of
each of the three previous recessions, it had declined,
at an average annual rate of 2.8 per cent.
Industrial Production
Peaks = 100
105
A v e ra g e o f 1959-61,1956-58,
and 1952-54
100
95
100
\
/
95
\
y
JUL r 53
in i', '5 7
90
85
Peaks = 100
105
S e asonally A d ju s te d
\
S
90
M AY'60
AU G .69
------------ L i -------- L
-12
- 9 - 6
^ -------- L .J
-3
1 i
0
i
1 i
i
3
1 ,
6
i
1 i
i
12
85
M O N THS TO A N D FROM PEAK
Latest d a ta p lo tte d : J a n u a ry p re lim in a ry
Page 3
FEDERAL RESERVE BANK OF ST. LOUIS
MARCH, 1970
Payroll Employment
Personal Income
M O N TH S TO A N D FROM PEAK
Latest d a ta p lo tte d : J a n u a ry p re lim in a ry
M O N THS TO A N D FROM PEAK
Latest d a ta p lo tte d : January p re lim in a ry
Source: U.S. D e p a rtm e n t o f Lab or
Source: U.S. D e p a rtm e n to f Commerce
Table II
CHANGES IN SELECTED ECONOMIC INDICATORS
(A nn ual Rates o f Change)
Peak Month
O f Economic A ctivity
Industrial
Production
Payroll
Employment
Construction
Expenditures
Personal
Income
Eight Months Before Peak
August 1969
Recessions:
M ay 1960
July 1957
J uly 1953
Average of 1960, 1957,
and 1953 peaks
Slowdowns:
O ctober 1966
July 1962
—
August 1969
Recessions:
M ay 1960
July 1957
July 1953
Average o f 1960, 1967,
and 1953 peaks
5.0
3.6
8.8
6.5
8.6
1.0
6.2
3.1
0 .7
2.1
7.0
5.5
5.2
— 2.1
1.1
4.2
5.3
2.0
5.9
1.1
7.0
5.4
4.5
2.9
8.2
5.2
— 6.8
5.8
Five Months A fte r Peak
0.5
5.0
6.0
1.9
— 0.1
— 1.4
— 2.2
2.2
0.6
2.8
0.1
0.2
2.8
1.1
6.6
5.1
— 6.2
— 16.1
— 19.5
— 1.7
— 3.1'
— 3.5
— 13.9
-
Slowdowns:
October 1966
July 1962
— 4.2
.8
— 3.4
—
.3
.8
Other indicators of economic activity,
both nominal and real, generally confirm
the evidence emerging from the above
measures that the economy has been
stronger in the past than at periods
around the three previous cyclical
peaks. Personal income rose more rap
idly immediately before and after
August 1969 than in the like periods
around May 1960, July 1957 and July
1953. Construction expenditures, which
were adversely affected in the past year
by financial disintermediation, neverthe
less compare favorably with expendi
tures over the entire period before and
after the earlier cyclical peaks (Table
I I ) . About 96 per cent of those in the
labor force were employed in early 1970,
while at the same stage in the three
previous recessions the employment rate
averaged about 94 per cent.
Em ploym ent Rate
Pei Cent ol Civilian labor Force
Per Cent
Rale of Harried Men
Total Employment Rate
1952
1953
1954
'E a r lie r d a ta no* a v a ila b le ,
la te s t d a ta p lo tte d : F eb ru ary
Page 4
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
Source-. U.S. D ep artm en t o f Labo r
FEDERAL RESERVE BANK OF ST. LOUIS
MARCH, 1970
Inflation is also much stronger now than around
the earlier cyclical highs. Overall prices rose 5.1 per
cent during 1969. In the comparable years ending one
quarter after the three previous business highs, over
all prices rose an average 1.6 per cent.
Fiscal and Monetary Conditions
A brief review of recent Government economic
stabilization actions, compared with those around the
beginnings of the last three business recessions, may
also be useful in evaluating recent business develop
ments. Fiscal conditions, as measured by the highemployment budget, were nominally stimulative prior
to the July 1953 peak and restrictive before the July
1957, May 1960, and August 1969 high points. Mone
tary actions, as measured by changes in the money
supply, were restrictive prior to each of the four peaks.
1953— Around the July 1953 turning point in busi
ness activity, fiscal actions were stimulative while
monetary developments were moderately restrictive.
The budget was in large deficit as a result of the
Korean conflict, but in the peak quarter it was some
what less stimulative than in the previous quarter.
Immediately after the peak, fiscal actions became less
expansionary, with cutbacks in spending after the
Korean War more than offsetting lower tax rates.
The money stock increased at a 1.6 per cent an
nual rate in the seven months before the July 1953
peak. This was much slower than the 4 per cent rate
from 1949 to 1952. After the peak in business activity,
money changed little on balance for a relatively long
period of nine months before it began rising rapidly.
The recession of 1953-54 was the longest of the three
considered, and illustrates that a downturn can occur
despite a stimulative Federal budget.
1957— Around the July 1957 peak both fiscal and
monetary developments were restraining forces. The
high-employment surplus was slightly restrictive, mov
ing up $2 billion in the two quarters before the peak
and remaining at about this level for two quarters
afterward. Thereafter, the budget became somewhat
less restrictive.
M oney Stock
Peaks = 100
104
Peaks = 100
104
S e asonally A djusted
103
103
102
102
A v e ra g e o f 1959-61,1956-58
101
/
________ *
\
/
100
100
99
99
98
98
/^ 6 8 -7 0
97
High-Em ploym ent Budget
Surplus(+)
Deficit(-)
+25
Surplus(+)
Deficit(-)
+25
S e asonally A d ju s te d
3RD QTR. 53
3RDQTR.57
+20
3RDQ TR.69
+15
1959-61
+10
------------ ---------------
+5
-----------------/
196 8-7 0
------ — — — .
1956-58
0
+5
0
-5
■
-5
1 9 5 2 -5 4
" ----------
-
10
-15
-
3
-
2
-
-10
...
1
0
1
..
.
2
3
4
QUARTERS TO AN D FROM PEAK
Latest d a ta p lo tte d : 4th q u a rte r 1969, firs t th re e q u a rte rs 1970
estim ated by F ed era l Reserve Bank o f St. Louts
Sources: U.S. D e p a rtm e n t o f C om m erce, C ouncil o f Economic
A d vise rs, and F e d e ra l Reserve Bank o f St. Louis
96
J
it * *
— ..........i. - j - ... ...1 ...i. .1 i. .
-12
- 9 - 6
-3
95
Y53
XJLY’5 7
MAY'60
AUG.69
1...1. 1
0
97
96
3
.....1— 1— L...1....1 1.. 1.
6
95
M ONTHS TO A N D FROM PEAK
+20
+ 15
+10
101
-15
L a te st d a t a p lo t te d : F e b r u a r y p r e lim in a r y
Seven months before the 1957 turning point, the
money supply reached a plateau and remained at
this level until two months after economic activity
began contracting. From the second to the sixth
month of recession, money contracted at a 3 per cent
rate. After the sixth month of recession, however,
money rose at a rapid 5 per cent rate in the follow
ing five months. By most measures the 1957-58 reces
sion was the most severe of the three examined, but
its subsequent recovery was also the most pronounced.
1960— Before the cyclical peak of May 1960, both
fiscal and monetary conditions were very restrictive.
In the year ending with the peak quarter, the highemployment surplus rose from $8 billion to about $15
billion, a high level by historical standards. Money
contracted at a 3 per cent annual rate during the
(Continued on Page 14)
Page 5
Money Supply and Time Deposits, 1914-69
I n SEPTEMBER 1964 an article in this Review
discussed the relation between money supply, time
deposits, money plus time deposits, and periods of
national economic contraction and expansion. In par
ticular, the historical data were reviewed in light of
the hypothesis that an increase in growth of the money
supply or some other specific monetary magnitude,
relative to growth of the demand for it, would result
Money Stock
in a rise in total spending. Conversely, a reduction
in the growth of this key variable, without a cor
responding decline in the growth of demand for it,
would cause a decline in spending.
This note, with accompanying charts and tables,
re-evaluates the earlier conclusions in light of the
additional experience since September 1964. The top
tier of the chart on pages 8 and 9 shows weighted
month-to-month changes in the stock of money, de
fined as private demand deposits plus currency held
by the public, expressed in compounded annual rates
of growth or contraction from August 1914 through
December 1969. The middle and bottom tiers show
Demand and Production
Ratio Scale
ions o f Dollar:
P ercentages a re annua) rates o f change fo r pe rio ds in d ic a te d .
Latestdato p lotted: February p re lim ina ry
Page 6
1962
1963
Ratio Scale
Trillions o f Dollars
Q u a rte rly Totals a t Annual Rates
Seasonally A d juste d
1964
1965
1966
1967
Q G N P in current do llars.
|2G N P in 1958 do llars.
Percentages o re a nnual rates o f cha ng e fo r p e rio ds in d ica te d .
Latest d a ta p lo tte d : 4th q u o rte r
1968
1969
1970
Source: U.S. D epartm ent o f Commerce
FEDERAL RESERVE BANK OF ST. LOUIS
MARCH, 1970
Table II
Table 1
MONEY SUPPLY1
PERIODS O F CO N TRA CTIO N
COMPOUNDED AN NUAL RATES OF CHANGE
(S easonally A djusted)
National Bureau of Economic Research
Peak
Jan. 1913
—
Trough
No. o f Months
Dec. 1914
23
Aug. 1918
—
March 1919
Jan. 1920
—
July 1921
18
7
M ay 1923
—
July 1924
14
Oct. 1926
—
Nov. 1927
13
Aug. 1929
—
March 1933
43
M ay 1937
—
June 1938
13
Feb. 1945
—
Oct. 1945
8
Nov. 1948
—
Oct. 1949
11
July 1953
—
Aug. 1954
13
July 1957
—
A p ril
M ay 1960
—
Feb. 1961
1958
9
9
PERIODS OF MARKED SLO W DOW N
Federal Reserve Bank of St. Louis
July 1962
—
Dec. 1962
Oct. 1966
—
A p ril 1967
*
Aug. 1969
__
5
6
*
* Specificationi o f the end o f the latest slowdown was not clear at
the tim e o f this publication.
similar data for time deposits and money plus time
deposits, respectively. The shaded vertical columns
on the chart, 1914-1961, denote periods of economic
contraction as determined by the National Bureau of
Economic Research, and the shaded vertical columns,
1962-1969, denote periods of economic slowdown as
selected by this bank. The initial and terminal dates
for all but the current slowdown are presented in
Table I. The horizontal bars on the chart represent
the trend rates of change for periods of no marked
and sustained change in the rates of change of the
variable. Although selection of periods is judgmental,
it is believed that most analysts would arrive at sub
stantially similar results. The average annual rate of
change for each selected period is presented in Table
II for money, in Table III for time deposits, and in
Table IV for money plus time deposits.
Experience since 1964 has been similar to that in
the 1914-64 period. That is, marked and sustained
changes in the rates of growth in either money or
money plus time deposits have usually been followed
after a brief lag by changes in the same direction
in the growth of total spending. With respect to the
hypothesis tested, this would seem to indicate that
increases and decreases in the supply of these magni
tudes, rather than being in response to changes in the
Periods o f No M arked and Sus
tained Change in Rates o f Change
(represented by bars on chart)
Annual Rates o f Change
June 1914
—
Dec. 1969 .................................
June 1914
Dec. 1917
Feb. 1919
March 1920
Jan. 1922
—
Dec. 1917 ...............................
Feb. 1919 .................................
March 1920 ............................
Jan. 1922 ...............................
Jan. 1923 .................................
14.2
8.2
17.4
— 8.2
1 1.0
A p ril
Sept.
Dec.
A p ril
Sept.
1924 ...............................
1925 ...............................
1926 .................................
1928 ...............................
1929 ...............................
0.5
10.3
— 2.5
3.3
0.4
March 1931 ............................
July 1932 .................................
Aug. 1933 ...............................
June 1936 ...............................
March 1937 ............................
— 4.2
- 14.3
— 4.8
16.7
6.5
Dec. 1937 .................................
June 1939 ...............................
June 1942 ...............................
Dec. 1943 .................................
June 1946 ...............................
—
Jan.
A p ril
Sept.
Dec.
A p ril
1923
1924
1925
1926
1928
—
—
—
—
_
—
—
—
—
—
Sept. 1929
March 1931 —
July 1932
—
—
Aug. 1933
June 1936
—
March 1937 __
—
Dec. 1937
—
June 1939
—
June 1942
—
Dec. 1943
June
Jan.
Nov.
A p ril
A p ril
1946
1948
1949
1953
1954
—
—
—
—
—
Jan.
Nov.
A p ril
A p ril
M ay
1948 .................................
1949 ...............................
1953 ...............................
1954 ...............................
1955 .................................
M ay
Dec.
Jan.
June
June
1955
1956
1958
1959
1960
—
—
—
—
Dec.
Jan.
June
June
Jan.
1956 .................................
1958 .................................
1959 ...............................
1960 ...............................
1962 ..................................
Jan.
Sept.
A p ril
Jan.
Jan.
1962
1962
1966
1967
1969
—
—
—
—
.—
Sept.
A p ril
Jan.
Jan.
June
1962 ...............................
1966 ...............................
1967 ..................................
1969 ..................................
1969 ...............................
June 1969
—
Dec. 1969 .................................
—
5.3%
-
—
-
8.4
7.9
17.9
30.8
12.3
3.9
1.2
4.3
0.2
4.3
1.1
0.9
4.1
2.3
2.4
0.3
4.5
0.3
7.3
4.0
0 .7
1S ources: Basic data fo r June 1914 - December 1946:
Milton Friedm an and A nna Jacobson Schwartz, A Monetary H istory o f the U nited States, 1867-1960, 1(P rin ceton :
P rinceton U niversity Press, 1963), Table A -l, C ol. 7.
Basic data fo r January 1947 - December 1969 : Board o f
Governors o f the Federal Reserve System.
demand for them, have contributed to significant cor
responding economic expansions and contractions.1
The growth rates of both money and money plus
time deposits have generally declined prior to peaks
in business activity and have risen before troughs. As
shown in the two-page chart, the average rates of
growth of money and money plus time deposits de
clined prior to the 1967 hesitation in economic activ1Similar conclusions have been reached using more sophisti
cated statistical methods. See Leonall Andersen and Jerry
Jordan, “Monetary and Fiscal Actions: A Test of Their
Relative Importance in Economic Stabilization”, this Review,
November 1968, pp. 11-24; and Michael Keran, “Monetary
and Fiscal Influences on Economic Activity — The Historical
Evidence,” this Review, November 1969, pp. 5-24 and
“Monetary and Fiscal . . . — The Foreign Experience,” this
Review, February 1970, pp. 16-28.
Page 7
Money Supply and T ! Deposits, 1914-1969
C om pounded A
R ates o f C h a n g e
M o n e y S u p p ly ; Tim e D eposits
” 1------------'---------- I------------------------- 1----------- r
.
'
i
'
I
■M U
- i-
1914
1916
- l.
191S
Os
1920
-U
1922
-J-
1924
—
_ j ------------- l _
1926
192S
1930
1932
1934
1936
T h re e -m o n th m o v in g a v e r a g e s o f c o m p o u n d e d a n n u a l ra te s o f c h a n g e , w e ig h te d 1-2-1, c o m p u te d fro m s e a s o n a lly a d ju s te d d a ta .
Bars in d ic a te a v e ra g e rates fo r p e rio d s o f no m a rk e d a n d s ustain ed c han ge in the rates o f c han ge.
1938
1940
1
1 <<<<<*;------- T
1
I
■>.-
'
I
.".I-----------
1I n
M I
-50
»
1944
—
W~^
■a-
- j-
1946
194S
1950
1952
1954
1956
-J -
1958
-L-
1960
1962
1964
1966
1968
1970
Sources: 1914-46, M ilto n F rie d m a n a n d A n n a S c h w a rtz , " A M o n e ta ry H is to ry o f the U n ite d S ta te s, 1867-1960” , (P rin ce to n : P rin ce to n U n iv e rs ity P ress, 1963);
1947-69, B o a rd o f G o v e rn o rs o f th e F e d e ra l R eserve System .
S h a d e d v e r tic a l a re a s , 1914 th ro u g h 1961, in d ic a te p e r io d s o f bus in e s s recessio ns; s h a d e d v e r tic a l a re a s , 1962 th ro u g h 1969,
in d ic a te re c e n t p e rio d s o f e c o n o m ic s lo w d o w n .
L a te st a v e ra g e p lo tte d : D e c e m b e r 1969 (w hich in c o rp o ra te s N o v e m b e r, D e c e m b e r a n d J a n u a ry d a ta ). The la te s t s h a d e d a re a
a ls o te rm in a te s in D e c e m b e r, a lth o u g h th e s lo w d o w n m a y n o t h a v e e n d e d a t th a t d a te .
Page 8
Page 9
FEDERAL RESERVE BANK OF ST. LOUIS
MARCH, 1970
Table IV
Table III
TIME DEPOSITS1
COMPOUNDED ANNUAL RATES OF CHANGE
(Seasonally A djusted)
Periods o f No M arked and Sus
tained Change in Rates o f Change
{represented by bars on chart)
A nnual Rates of Change
June 1914
—
Dec. 1969 .............._ ........................ ..... ..........7.0%
June
Aug.
Jan.
Oct.
M ay
1914
1915
1917
1918
1920
—
—
—
—
—
Aug.
Jan.
Oct.
M ay
Jan.
1915 ____________ ____________ _____ 7.8
1 9 1 7 ............ .......... .............. .......... ..........25.3
1918 ..... .......................... .........................6.4
1920 ................................................ ..........24.3
1922 ................................................
1.3
Jan.
June
Jan.
Dec.
M ay
1922
1923
1926
1926
1928
—
—
—
—
—
June
Jan.
Dec.
M ay
Oct.
1923 ..... ........................ _........................15.5
1 9 2 6 ............... 1..................... .......... ..........8.8
1926 _________________ _________ _____ 3.1
1928 ................................_______ _____ 9.9
1930 __________________________ _____ -0-
Oct.
M ay
M ay
Sept.
Nov.
1930
1933
1935
19 37
1938
—
—
—
—
—
M ay
M ay
Sept.
Nov.
Oct.
1933 _____ ___________________
— 21 .7
1935 ....................................... ..... ..........9 .7
1937 ......................... ................ ..............6.9
1938 ............................... .............. — 1.1
1941 ..................................... .......... ..........3.0
Oct.
A p ril
Feb.
Sept.
Nov.
1941
1942
1944
1945
1946
—
—
—
—
—
A p ril
Feb.
Sept.
Nov.
Feb.
1942 .............................................
— 7.4
1944 ...... .... ................. ....... .......... .......... 14.1
1945 _________________________ _____ 28.1
1946 ___ __________ _____ ___ _______ 12.7
1948 ________________ __________ _____ 5 .0
Feb.
M ay
Sept.
Aug.
Nov.
1948
1951
1953
1954
1956
—
—
—
—
—
M ay
Sept.
Aug.
Nov.
Aug.
1951 ___________ ___ ___________ _____ 0.9
1953 .............. ....... .............. ...................7.4
1954 ............................................ .......... 10.8
1956 __ ______________________ _____ 3.6
1958 ......... ....................... ........... .......... 13.4
Aug.
June
M ay
Nov.
Dec.
1958
1960
1966
1966
1968
—
—
—
—
—
June
M ay
Nov.
Dec.
Dec.
1960 ............................................ .......... 2.8
1966 ..... ........................ ........................ 14.8
1966 __ ______________________ _____ 4.2
1968 ______ ______________ __________ 13.7
1969 ....... ................. .......................
— 5.3
'S o u rce s: Basic data fo r June 1914 - December 1946:
Friedm an and Schwartz, A M onetary H istory o f the
U nited States, 1867-1960, (P rin ce to n : Princeton U niver
sity Press, 1963), Table A - l, Col. 3.
Basic data fo r January 1947 - December 1969:
Board o f Governors o f the Federal Reserve System.
ity. This slowdown in economic activity, although
marked, was not severe enough to be classed as a
recession by the National Bureau of Economic Re
search. The average rate of change for both money
and money plus time deposits rose prior to the rapid
increase in total spending, which began in the sum
mer of 1967.
MONEY SUPPLY PLUS TIME DEPOSITS1
COMPOUNDED ANNUAL RATES OF CHANGE
(Seasonally A djusted)
Periods o f No Marked and Sus
tained Change in Rates o f Change
(represented by bars on chart)
Annual Rates of Change
June 1914
—
Dec. 1969 ............. ........... .... ................ .........5.9%
June
M ay
Feb.
A p ril
Jan.
1914
1917
1919
1920
1922
—
—
—
—
—
M ay
Feb.
A pril
Jan.
Jan.
1917 .................................. ..........
1919 ....... ......................... ..............
1920 .............................................
1922 .......................................... .....
1923 ..............................................
Jan.
A p ril
Oct.
Dec.
A p ril
1923
1924
1925
1926
1928
—
—
—
—
—
A p ril
Oct.
Dec.
A p ril
A p ril
1924 .................. ..................................... 4.1
1925 ________ __________________ _____ 9.7
1926 __________________________ _____ 0.1
1928 ..................... ....................... ..........6.1
1930 ________ _________________
— 1.0
A p ril
July
June
A p ril
July
1930
1931
1932
1933
1936
—
—
—
—
—
July
June
A pril
July
Feb.
1931 ............ ...................................
— 5.9
1932 ..................................... ......— 20.0
1933 ______ _____ ____ ___ __ __
— 16.2
1936 ................................................
12.5
1937 ................................................ ......... 6.7
Feb.
M ay
June
Dec.
Nov.
19 37
1938
1942
1943
1945
—
—
—
—
—
M ay
June
Dec.
Nov.
July
1938 .............................................
— 2.4
1942 ________ ______________ __
11.7
1943 ................. ........................ .....
27.2
1945 _________________________
16.7
19 4 7 ......................... ................ ..... ..........5.8
July
Dec.
Dec.
A p ril
Feb.
1947
1949
1952
1954
1955
—
—
—
—
—
Dec.
Dec.
A p ril
Feb.
Jan.
1949 __________ _______ ________ _____ 0.4
1952 ..... .... ............ .............. ...... ............. 4.5
1954 ........................................................2.7
1955 ......... .................... ............................5.5
1958 ................................................ ..........1.9
Jan.
M ay
June
A p ril
Sept.
1958
1959
1960
1962
1962
—
—
—
—
—
M ay
June
A p ril
Sept.
A p ril
A p ril 1966
Nov. 1966
Dec. 1968
—
—
—
Nov. 1966 ________ _________________ _____ 2.3
Dec. 1968 _________ ________________
10.1
Dec. 1969 ......... ......................................
— 1.5
1959
1960
1962
1962
1966
14.5
10.5
18.0
— 5.0
12.4
________ _____ ___ _______ _____ 6.4
.......................... ..................
— 0.8
................ ............................ ..........6.9
............................................. ......... 4.6
_________________ _______ _____ 8.7
'S ou rces: Basic data fo r June 1914 - Decem ber 1946:
Friedm an and Schwartz, A M onetary H istory o f the
U nited States, 1867-1960, (P rin ce to n : Princeton U niver
sity Press, 1963), Table A - l, Col. 8.
Basic data fo r January 1947 - Decem ber 1969:
Board o f Governors o f the Federal Reserve System.
Movements in both money and money plus time
deposits since 1914 have been broadly consistent with
the hypothesis. However, when two variables are both
consistent with a hypothesis, it is appropriate to ask
which shows the most consistency in accord with that
hypothesis. In this instance, the money stock, exclu
sive of time deposits, appears to be the better key
variable. For example, beginning in November 1956,
eight months before a business cycle peak, time de
posits rose rapidly. In fact, in many instances since
1914, time deposits did not decline before a peak
in business activity nor rise before a trough. Therefore,
the consistent behavior of money plus time deposits
results primarily from the overpowering strength of
the money variation, rather than the contribution of
time deposits. It follows that money plus time de
posits is a less sensitive variable than the money
supply alone. Moreover, the change in the rate of
growth of time deposits has been seriously affected
in recent years by the relation between Regulation
Q ceilings on interest rates banks are permitted to
pay on time deposits and market interest rates.2 As
a result, the relation between time deposit growth
rates and changes in total spending has been even
weaker since 1964 than in earlier years.
2Charlotte Ruebling, “The Administration of Regulation Q,”
this Review, February 1970, pages 29-40.
This article is available as Reprint No. 54.
Page 10
More Flexibility in Exchange Rates —
And in Methods
by DR. WOLFGANG SCHMITZ, President of the Austrian National Bank
and Governor of the International Monetary Fund for Austria
The following article provides an interesting and practical suggestion for improving the flexibility in
international exchange rates. The article reflects Dr. Schmitz’s personal opinion, and should not he interpreted
as necessarily representing the official views of the Austrian National Bank.
Re-establishing the Bretton Woods Flexibility
Today there is widespread and growing under
standing that it has become necessary to ease our
exchange rate system, which has become too rigid,
and to make the original Bretton Woods idea of suf
ficient flexibility effective again. The (short-term)
transitional period of fluctuating exchange rates for
the Deutsche mark has shown that in particular
situations, a greater flexibility in the adjustment of
exchange rates could be highly advantageous for the
international monetary system.
In searching for ways and means to achieve more
flexibility which, however, still would be a limited or
controlled flexibility of exchange rates, there are two
problems which now are to be investigated separately:
1) Which technique for more flexibility is best
suited for specific situations; and
2) What should be changed or amended in the
Articles of Agreement of the IMF so that
those methods may be employed legally?
This article
question.
deals
primarily with
the
second
Why More Flexibility of Exchange Rates?
There are quite different motives for calling for
more flexibility in the exchange rates:
It should be made easier for governments to ad
just exchange rates as it has been envisaged by the
Bretton Woods System, but in fact practiced only
hesitatingly. The postponement of the devaluation of
the French franc from November 1968 (Bonn Con
ference of the Group of Ten) to August 1969, and
the delay in the revaluation of the Deutsche mark
until September 1969, brought France a heavy loss in
its international reserves and thus severe exchange
restrictions to the business community, and brought
Germany an undesired and inflationary influx of
foreign exchange.
As long as there is not sufficient international co
ordination of economic and monetary policies, the
rigidity of exchange rates will continue to cause in
flationary or deflationary currents to flow from one
country to another. More leeway in the adjustment
of exchange rates could better enable countries to
protect themselves against this. More flexible ex
change rates would facilitate a more effective use by
central banks of their monetary policy instruments to
regulate the money supply of their countries in the
face of balance-of-payments influences.
In 1951 the IMF was already concerned with the
issue of more flexibility: “The maintenance of a given
exchange rate sometimes is made very difficult either
by a set of internal policies or by the external eco
nomic forces with which countries must deal. In the
main, these difficulties arise from the fact that chang
ing economic forces operate with unequal effects on
various countries.”1
Under a dollar standard, large industrial countries
or groups of industrial nations could have the inten
tion not to link, unconditionally and automatically,
their monetary policies to that of the U.S. authorities.
More flexibility in exchange rates would enable those
countries to keep their price levels stable even if the
United States is not successful in fighting inflation.
The present system of abrupt and not easily rever
sible alterations of exchange rates favors speculation
because there are no serious financial risks to being
wrong. An increased flexibility in the formation of
exchange rates will increase the risks and there1Annual Report, International Monetary Fund, Washington,
D. C., 1951, p. 37.
Page 11
FEDERAL RESERVE BANK OF ST. LOUIS
fore should produce more success in combatting
speculation.
In view of the priority accorded to aims of na
tional economic policy (e.g. monetary stability, full
employment, economic growth), the equilibrium of
the balance of payments is often neglected. More
flexible exchange rates could facilitate, without jeop
ardizing the national policy goals mentioned, the bal
ancing of international payments.
How to Get More Flexibility?
Since there are different motives underlying the
call for more flexibility, several proposals to introduce
more flexibility into the exchange rate mechanism
have been made.
The members of the IMF are advised to make
more frequent use of the present provisions of the
Articles of Agreement by adjusting their exchange
rates more often but by smaller steps.
One step further is the proposal to allow exchange
rates to drift slowly and steadily by weekly, monthly
or quarterly alterations up to a maximum annual rate
of 2 to 3 per cent, either automatically or guided
deliberately (crawling peg —sliding parity). Such
limited exchange rate flexibility is believed to be
small enough to discourage speculation in foreign ex
change markets, while assuming enough stability for
international trade and payments, and providing suf
ficient scope for long-run exchange rate adjustments.
Another way to make the system more flexible
would be to widen the limits within which exchange
rates are allowed to fluctuate around their par values.
It is suggested to increase the present margin of 1 per
cent on either side of parity to about 2 to 3 per cent
(smaller band) or about 4 to 5 per cent (broader
band).
A combination of the “sliding parity” ( “crawling
peg”) proposal with a widening of the margins is
known as a “movable band.”
Another solution of exchange rate flexibility has
been chosen by Canada and Germany outside the
Articles of Agreement of the IMF: freely or ma
nipulated floating exchange rates limited to a single
country and/or to a certain period of time.
With regard to the inter-relationship of economic
integration and exchange rate stability, the proposal
has been made to establish currency areas, each com
prising a group of countries. Between such areas,
exchange rates would be freely, or within limits,
Page 12
MARCH. 1970
variable; within each group of countries parities
would be fixed without any adjustment procedure,
because of the close economic integration and
cooperation.
More Flexibility in the Methods
In the discussion on the optimum technique to be
followed in order to achieve better flexibility, these
instruments have been considered so far. Neverthe
less, it seems difficult to recommend the use of one
particular technique for all situations, as the motives
calling for smoother adaptation are manifold, and it
might be difficult to find any one device appropriate
in all cases. The crawling peg proposal, especially
the asymmetric upward type providing for only an
upward movement, for instance, may be appropriate
for offsetting differences in the rate at which different
countries’ cost levels are rising; there are, however,
doubts whether it really would discourage specula
tion. The “widening of the margins” proposal, within
which exchange rates are permitted to fluctuate
around their par values, would not solve the problems
created by long-run disparities of inflation rates in
different countries; it would deal effectively with
short-run disturbances and, by making possible losses
as well as gains, would be able to curb speculation
in foreign exchange. Wider bands may be suitable
to avoid the risk of irreversibility of changes in
parity, and thus would make it easier to adjust an
exchange rate in a way that, after the intervention
point had been reached, the rate might later on be
declared as the new parity. “Floating rates” (freely
or manipulated) anticipating exchange rate adjust
ments are a device to avoid a period of speculation
as was the case in the recent Deutsche mark crisis
last September. Moreover, there will be cases where
the more frequent use of the present provisions may
be suitable under certain circumstances. In many
cases, the present adjustable peg will still remain the
best way to adjust a parity also in the future.
We should, therefore, be more flexible also in
choosing the method of achieving more exchange
rate flexibility. It should be proved whether it would
not be wise to leave the choice of the appropriate
instrument to the discretion of the Fund (IM F), in
close consultation with the countries concerned.
Proposed Amendment to the Articles
of Agreement
According to the currently valid provisions of Ar
ticle IV, the suspension of a par value established
FEDERAL RESERVE BANK OF ST. LOUIS
in concurrence with the Fund is not permitted, un
less a new par value is agreed upon forthwith. If,
however, under exceptional circumstances, a country
cannot maintain the agreed parity, or the establish
ment of a new parity or the adherence to the mar
gins prescribed involves considerable risks, that
country may so inform the Fund and state that it
will temporarily not be in a position to fulfill the
obligations of Article IV, Sections 3 and 4. If the
Fund concludes that the arguments presented are
convincing, it may make its view known, but it can
not approve of the action of the member country.
Also, it is not clear whether the Fund, based on the
policy it has evolved over time, may in the course
of consultations with member countries recommend
changes in the par values of their currencies. The
power of the Fund to effect parity changes by action
under the exchange rate provisions of the Articles is
strictly limited to responding to proposals made by
members. If there is no proposal on the part of the
member, the Fund has no power under these provi
sions to induce action with respect to a member’s
parity. It is generally considered that the Fund is not
regarded as being authorized to recommend to a
member to employ certain techniques of more flexi
bility, even in cases when such a procedure would
protect the international monetary community (e.g.
the Deutsche mark case in the fall of 1969).
In order to terminate this legally unsatisfactory
situation which, incidentally, restricts the influence
the Fund may exert on such special situations. Article
IV could perhaps be amended by the insertion of a
new paragraph. It would empower the Fund to ap
prove or suggest, in close consultation with the coun
try concerned, the temporary introduction of an
exchange rate formation deviating from the present
wording of Article IV, if such a step for the country
concerned appears justified in the light of prevailing
( specific) circumstances.
The admission or suggestion of one or another sys
tem of limited flexibility could be based on the fol
lowing criteria:
1) Circumstances must be of a character that
more flexibility is deemed appropriate to
avoid disturbances in international money
markets;
2) The decision is to be made by the IMF in
close contact with the member concerned.
MARCH, 1970
Strengthening the Authority of the IM F
Payments restrictions were introduced by member
states, though they are regarded by Article I of the
Articles of Agreement as measures destructive to na
tional or international prosperity. Important decisions,
as for instance allowing exchange rates to fluctuate,
were not permitted by the Fund for lack of legal
possibilities, but had to be tolerated. These circum
stances, in some quarters, led to the opinion that in
the long run the authority of the Fund may be weak
ened. If we aim just at maintaining the regime of
rigid rates as it stands now, we run the risk of putting
at stake both of the most important achievements of
our present international monetary system: the con
vertibility of important currencies, and the authority
of an international monetary institution. We should
keep in mind that the merit of Bretton Woods is not
only the achievement of having established a system
of fixed par values, but above all, the fact that it
was successful in setting up an international organiza
tion to take care of the interests of the world’s mone
tary community.
It would strengthen the authority of the IMF
if the decision on which method to choose for
achieving more flexibility would be left not just to
the country concerned, as practiced at present, but
also to the Fund. This would put the Fund into
the position to base its decision, if desirable, on cer
tain conditions regarding the economic policy of the
country concerned. The Fund even would be able to
encourage exchange rate adjustments. Thus exchange
rate policy may, together with a set of other suitable
instruments, play its proper role in the adjustment
process.
Other Advantages of the Proposed Solution
It is unlikely that there will ever be general agree
ment on an optimal method of flexibility applicable
to all cases. The amendment of the Articles of Agree
ment as proposed here could, however, within a rela
tively short period of time, be presented to and ex
amined by the Board of Governors of the IMF and
recommended to the member countries for adoption.
The IMF could then be in a position to take into
account the special features of a given situation and
choose the method best qualified to deal with it in
close consultation with the country concerned.
It is not very likely that more flexibility leads to
frequent fluctuations of the exchange rate. Even those
Page 13
FEDERAL RESERVE BANK OF ST. LOUIS
MARCH. 1970
countries that have embarked on a policy of fluctuat
ing rates have in practice generally stabilized their
rates within narrow limits over long periods of time.
Under the provisions suggested in this paper, the IMF
furthermore would be able to control that policy.
countries not in need of increased flexibility at present.
And for those countries which, for whatever reasons,
shun adjustment of their par value by the current
method of the adjustable peg, there would be a
variety of other methods.
As the fate of the exchange rate system of Bretton
Woods demonstrates, it is difficult to foresee the at
titudes of governments, central banks, the business
community and the public towards new international
regulations. If necessary, a change in the policy of
the IMF is relatively easy to affect. The various
methods for improvement of flexibility could make it
possible to gain new experience. The system of lim
ited flexibility can be based on lessons learned from
experience gained in the pure par value system as
well as from new experiments.
A greater flexibility within determined or deter
minable limits is not only compatible with the gen
eral principle of fixed exchange rates — the mainte
nance of the present system even makes solutions
for special cases necessary. Limiting flexibility as to
space and time should allay the doubts of those who,
rightly or wrongly, fear the introduction of new fac
tors of uncertainty into the international monetary
system. On the other hand, such a solution will also
permit the further evolution of those new methods
which prove to be useful.
Such an amendment would provide for the small
est change of the present system. There would not
be any direct changes concerning the majority of
The proposed amendment finally is compatible
with a general widening of the bands, if the IMF
study comes to the conclusion that it would be useful.
Extent of the Slowdown -----(Continued from Page 5)
ten months ending May 1960. Fiscal actions remained
restrictive for more than a year after the recession
began. Money, however, began rising within two
months after the recession commenced. The 1960-61
recession was probably the mildest of the three pe
riods of adjustment considered here; total spending
evidently responded to the moderate monetary ex
pansion in spite of a large high-employment surplus.
1969— Fiscal actions changed from a stimulative
to a restrictive stance more than a year before August
1969, reflecting the 10 per cent surtax imposed in
mid-1968 and some cuts in the rate of Government
spending growth. The high-employment budget
moved from a large deficit in early 1968 ($14 billion
annual rate) to a surplus ($8 billion annual rate) in
the third quarter of 1969. However, it may be noted
that the surplus after mid-1969 was far less in rela
tion to total spending than in the 1961-63 period,
when the nation recovered from recession.
According to the plan outlined in the President’s
current budget, fiscal actions are to remain moder
Page 14
ately restrictive through 1970. The high-employment
budget in the first half of the year is estimated to
remain near the $9 billion rate of surplus level
reached in the last half of 1969 and then rise to about
a $13 billion rate in the last half of 1970. Social se
curity outlays are scheduled to increase in the second
quarter, and the tax surcharge is scheduled to expire
in July, but these expansionary actions are to be more
than offset by curtailment in the growth of Govern
ment spending.
The influence of the Government on total spending
may turn out to be moderately expansionary in 1970.
Attainment of fiscal restraint is dependent on the
willingness of Congress to limit spending to the
amount proposed in the high-employment budget
plan. Also, even if the plan is followed and the econ
omy weakens, tax receipts may be less than antici
pated in the plan, causing the unified and national
income accounts budgets to indicate a more expan
sionary effect on the economy. According to one view,
this automatic stabilization feature of Government
FEDERAL RESERVE BANK OF ST. LOUIS
MARCH, 1970
Real M oney
In C onstant D ollars
Peaks - 100
104
Peaks - 100
104
103
103
A v e ra g e o f 1959-61,1956-58,
102
101
101
1968-7
99
' ^
100
\
i
100
\
yVi
102
99
^ -------'
JUL Y'53
JULY'57
MAY'60
AUG. 69
98
97
98
97
96 --------------------------------------L --------- i— i------------ ,—
.12
-9
-6
-3
0
3
6
96
12
M O N THS TO A N D FROM PEAK
L atest d a ta p lo tte d : F eb ru a ry estim ated
business cycles, the average contraction of money in
real terms was also at a 2.3 per cent rate, and in the
six months after the turn the contraction was at a 2.4
per cent rate.
Conclusions
tax receipts tends to have a desirable stabilizing ef
fect on total spending, and accordingly would not be
reason for alteration of the high-employment budget
plan.
Defense spending is expected to decline from 9
per cent of total spending in 1967 and 1968 to 7.5
per cent in 1970, while the nondefense portion of
total spending is planned to rise from 11.5 per cent
in 1967 to 13 per cent in 1970.
Monetary actions were only moderately restrictive
before August 1969. In the seven months ending with
August, money rose at a 2.8 per cent annual rate.
This was faster than immediately before any of the
three recessions reviewed, but was considerably less
than the rapid 7 per cent rate of increase during the
preceding two years. From last August to February
money rose at less than a 1 per cent rate, which is
faster than in the first six months after the 1957 peak
and about the same as after the 1953 and 1960 highs.
Adjusted for declines in the purchasing power of
money, monetary actions have been similar to those
around other recent cyclical peaks. Money in real
terms declined at a 2.3 per cent annual rate in the
seven months before August 1969 and at a 3.5 per
cent rate in the first six months after August. In the
corresponding seven months before the three previous
Is the economy in a recession or in a pause?
The answer to this question cannot be conclusively
settled at this time (early March). Complete inter
pretation of recent and current events depends on
developments in the near future. However, evidence
is growing that real output is continuing to decline
in early 1970, and that the late-1969 to early-1970
period may ultimately be termed a recession.
A review of widely used economic measures
through the months of January and February shows
some similarities between the current situation and
the three previous recessions, but most yardsticks in
dicate that the slowdown has been milder than in
the early months of the three most recent recessions.
On the other hand, the current hesitation already
appears to be slightly greater than the 1962 and 1967
pauses in economic activity, neither of which was
severe enough to be termed a recession.
Whether the current downturn remains milder than
the earlier recessions, matches them, or becomes more
severe depends on many factors. The course of de
velopments in the economy over the rest of the year
will be influenced by recent and forthcoming Gov
ernment stabilization actions. Recent fiscal actions
have been moderately restrictive, and are expected
to change only slightly in the near future. But in the
past, fiscal actions alone have not been consistently
related either to recession or expansion. For example,
Page 15
FEDERAL RESERVE BANK OF ST. LOUIS
MARCH, 1970
the mini-recession of early-1967 occurred when fiscal
actions were the most stimulative in over two decades,
and total spending continued to rise rapidly in late
1968 and early 1969 despite a sharp shift toward fiscal
restraint.
and how soon the inflation will now be eliminated
depends on many factors, such as avoidance of
strongly expansionary fiscal or monetary actions, cor
rection of imbalances from past actions, and the
atrophy of expectations of further price advances.
Monetary actions have also been moderately re
strictive, but less so than during the corresponding
periods around any of the three previous cyclical
peaks. From December 1968 to February this year
money rose at a 2.1 per cent annual rate. By com
parison, money declined at a 0.3 per cent average
rate in the corresponding 14-month periods around
the three previous peaks. Assuming money has begun
rising at a moderate rate, past experience suggests that
the current “recession” will be the least severe of any
in the past two decades.
This review of previous recessions indicates that
long-term interest rates tend to recede slowly. Yields
on highest-grade seasoned corporate bonds averaged
about 7.8 per cent in the three months ending with
February. Price expectations have been a major fac
tor affecting the level of interest rates.2 When bor
rowers expect prices to rise, they are willing to pay
higher interest rates, because equipment and mate
rials will cost more later. Any stimulative effect of
higher rates on saving is offset by anticipated future
reductions in the purchasing power of funds. In pre
vious recessions long-term rates drifted lower only
slowly as inflationary expectations receded. In the
1957-1958 period, for example, interest rates on high
est-grade corporate bonds decreased from a peak
average of 4.1 per cent in the third quarter of 1957 to
a trough of 3.6 per cent three quarters later. These
interest rates fell from a high of 4.6 per cent in the
last quarter of 1959 to a trough of 4.3 per cent in the
first quarter of 1961. Short-term rates in each reces
sion declined more sharply than long-term rates.
Along with the interruption in production growth,
the country continues to suffer from continued infla
tion. The inflation was caused by excessive spending,
stimulated by expansionary fiscal and monetary de
velopments from 1964 through 1968.1 Despite a slow
ing in the growth of spending in late 1969 and early
1970, the rate of overall price increase has continued
at about the 5 per cent rate attained in early 1969.
Some prices were held back during the period of
excessive spending by regulations (for example, pub
lic utility rates), by contracts (prices of some mate
rials and labor services), and by public opinion or a
money illusion. As these prices move up, they place
cost-push pressures on some other prices, causing
inflation to continue after the excessive spending is
eliminated.
Experience indicates that inflation can be elimi
nated only slowly, and that success in reducing it
will take great patience and the avoidance of exces
sive policy actions. During the recessions of 1958 and
1960, price increases continued despite a pronounced
reduction in demand for goods and services. Whether
1See Norman N. Bowsher, “1969-Battle Against Inflation” in
the December 1969 issue of this Review, pp. 2-12.
In summary, the economic pause since last August
has been milder than during the three previous reces
sions. Experience from previous periods when the
growth rate of money has slowed indicates that the
contraction may go on for a quarter or more, and
that continued monetary restraint would intensify
the magnitude and duration of the downturn. On the
other hand, if progress is to be made in moderating
the rapid increases in prices, excessively rapid in
creases in money, such as occurred in 1967 and 1968,
must be avoided.
2See William P. Yohe and Denis S. Kamosky, “Interest Rates
and Price Level Changes, 1952-69” in the December 1969
issue of this Review, pp. 18-38.
@FedFRASER