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FEDERAL RESERVE BANK
OF ST. L O U IS
MARCH 1977
:

The FOMC in 1976: Progress
Against Inflation .....................
Free Trade: A Major Factor
in U.S. Farm Income..................
LITiTLE R O C K
|

V-

Vol.
 59, No.


3

The FOMC in 1976: Prog ress Against Inflation
A L B E R T E . B U R G E R and D O U G L A S R . M U D D

T - H E prim ary objective of m onetary policy in 1976
was to redu ce inflationary pressures w hile sustaining
th e recovery w hich began in early 1975. T h e monetary
authorities expressed concern that, in an inflationary
environm ent such as prevailed in late-1975 and early1976, attem pts to quicken th e p ace of econom ic re­
covery through stim ulative policy actions could yield
undesirable results. As expressed by Chairm an Burns
in February,
R e c e n t exp erien ce . . . suggests th a t o n ce inflation
has b eco m e ingrain ed in th e thinking o f a n atio n ’s
businessm en and consum ers, high ly expansionist
m on etary and fiscal p olicies do not h av e th e ir in­
ten d ed e ffe ct . . . th e y m ay lead to larg er p re ca u ­
tion ary savings and sluggish con su m er b u y in g .1

Thus, w ith the pace of inflation a m ajor concern, the
m onetary authorities began the year w ith
. . the
firm intention of staying w ith a course of m oderation
in m onetary policy.”2
On balance, over 1976 the money stock ( M j ) grew
5.5 percent, a rate th at was “m oderate,” at least by
com parison w ith the growth rates of money experi­
enced since th e early 1970 s. T h e growth rate of
m oney did not sharply reaccelerate this second year
of econom ic recovery, as it had in some previous re­
covery periods. W hen the money stock accelerated
sharply, as in April and M ay, the F ed eral O pen M ar­
ket C om m ittee (F O M C ) adopted a m ore restrictive
policy and the growth of M j fell back. Associated
w ith this policy w ere falling interest rates and strong
growth of deposits at thrift institutions. T h ere was no
increase in the trend growth of money — the m ajor
influence on the trend growth of prices — and the
stage was set for a possible reduction in the trend
growth of M j in 1977.
In 1976, for the second consecutive year, the F O M C
publicly announced longer-run ranges for the m ajor
m onetary aggregates, M 1; M 2, and M ;i. T h e policy of
announcing longer-run ranges was begun in early 1975
at the request of Congress as expressed in House
NOTE: Unless otherwise stated citations throughout this
paper are from either the “Record of Policy Actions of the
Federal Open Market Committee” or “Statements to Congress,”
Federal Reserve Bulletin (February 1976-February 1977).
’ “Statements” (March 1976), p. 233.
2Arthur F. Burns, “Statements” (February 1976), p. 112.
Digitized for Page 2
FRASER


Concurrent Resolution 133 passed on M arch 24, 1975.
This resolution requested that th e B oard of Governors
consult w ith C om m ittees of th e Congress on a quar­
terly basis w ith respect to its objectives and plans for
the ranges of growth of the m onetary aggregates over
the next tw elve m onths.3
D uring 1976 Chairm an Burns m et w ith C ongres­
sional C om m ittees at about 90 day intervals to present
th e intended longer-run growth rates for the m onetary
aggregates that had b een decided upon at th e F O M C
m eeting about 15 days earlier. T h ese yearly ranges
w ere based on th e quarterly average for th e m ost
recent quarter to the quarterly average for one year
in the future. T h e F ed era l R eserve repeatedly em pha­
sized th at targets of this nature m ust b e su b ject to
review and adm inistered with flexibility.
T h e F O M C in 1976 also decided to release its
short-run operating targets for the m onetary aggre­
gates and the F ed eral funds rate w ith a shorter delay
than had previously been the case. T h e “R ecord of
Policy A ctions” for each F O M C m eeting contains the
short-run operating targets for the m onetary aggre­
gates and the F ed era l funds rate. From m id -1967 to
early 1975 th ere had been a delay of about 90 days in
releasing the “R ecord ” for each F O M C m eeting. In
early 1975 this interval was shortened to 45 days. At
the M ay 18, 1976 F O M C m eeting the Com m ittee
voted to release this record w ith a delay of only
about a month.
T h e extent to w hich the F ed era l R eserve was hold­
ing th e growth of the aggregates w ithin th e an­
nounced longer-run ranges was su b ject to very close
scrutiny by Congress and the public. W hereas in
previous years the behavior of M , was considered
significant by some, in 1976 alm ost every financial
report and the bulk of Congressional testim ony was
devoted to movem ents in M j relative to th e ranges
announced by th e F O M C .
T h is article reviews th e operation of th e F O M C
during this second year of announced longer-run
ranges of growth for m onetary aggregates. A Supple­
m ent at the end of th e article presents a detailed
m eeting-by-m eeting summary of F O M C decisions.
3See Nancy Jianakoplos, “The FOMC in 1975: Announcing
Monetary Targets,” this Review (March 1976), pp. 9-10.

FEDERAL RESERVE BANK OF ST. LOUIS

MARCH 1977

T a b le I

FO M C O perating Ranges
1975-1976
Sh o tt-R u n T olerance R a n g e s 1
renuu

D a le of
M e e tin g

Fed e ral Funds
Rate

iu

wniiii

R a n g e s Specified

M l & M2
R a n g e s A p p ly

R PD 2

Ml

A ctu a l G ro w th Rates

M2

Ml

M2
1 1 .0 %

Decem ber 16, 1 9 7 5

4 '/ , - 5 % %

4 -7 %

Dec.-Jan.

4 -7 %

7 -1 0 %

6 .8 %

Ja n u a ry 20, 1 9 7 6

4 % -5

2 -7

Jan.-Feb.

4 -9

7 -1 1 %

4.1

1 2 .6

F e b ru a ry 1 7 - 1 8 , 1 9 7 6

4 'A -5 %

( - % ) - (-4 % )

Fe b .-M a r.

5 -9

9 -1 3

5 .7

11.0

M a rc h 1 5 - 1 6 , 1 9 7 6

4 % -5 %

( -

M a r .-A p r.

4 -8

7 -1 1

10.1

1 1 .0

A p ril 2 0 , 1 9 7 6

4 % -5 %

A p r.-M a y

4 % -8 %

8 -1 2

1 0 .9

1 1 .5

2 ) - ( + 2)

M a y -J u n e

4 -7 %

5- 9

2.8

6 .6

Ju n e 2 2 , 1 9 7 6

5 % -5 %

Ju n e -J u ly

3 % -7 %

6 -1 0

3 .0

8.2

J u ly 1 9 - 2 0 , 1 9 7 6

4 y 4 - 5 3/4

J u ly -A u g .

4 -8

7 % -11 %

6.1

1 0 .6

A u g .-Se p t.

4 -8

7 % -1 1 %

3.1

9 .6

8 -1 2

7 .4

1 3 .0

M a y 18, 1 9 7 6

A u g u s t 17, 1 9 7 6

5 - 5 3/4

5 -5 %

Sep tem b er 2 1 , 1 9 7 6

4 3 / 4 -5 %

Sept.-O ct.

4 -8

O cto b e r 1 9 , 1 9 7 6

4 % - 5 '/ 4

O c t.-N o v .

5 -9

9 -1 3

6 .8

1 3 .0

N o v e m b e r 1 6, 1 9 7 6

4i/2 - 5 ’/4

N ov.-D e c.

3 -7

9 % -1 3 %

4.1

1 1 .4

D ecem ber 2 0 - 2 1 , 1 9 7 6

4> / 4-5

Dec.-Jan.

2 % -6 %

9 -1 3

6 .8

1 1 .0

lo n g e r -R u n T ole ra nce R a n g e s 3
Date
Announced

T arget
Period

N o v e m b e r 4, 1 9 7 5

111/75-111/76

F e b ru a ry 3, 1 9 7 6

IV / 7 5 - IV / 7 6

Ml

M2

5 -7 % %

M3

C re d it
P ro x y 4

7 % -1 0 % %

9 -1 2 %

6 -9 %

4 % -7 %

7 % -1 0 %

9-1 2

6 -9

M a y 3, 1 9 7 6

1 / 7 6 -1 / 7 7

4 % -7

7 % -1 0

9 -1 2

6 -9

J u ly 27 , 1 9 7 6

11/76-11/77

4 % -7

7% -

9 -1 1

5 -8

Novem ber 1 1 ,1 9 7 6

111/76-111/77

4 % -6 %

7 % -1 0

9 -1 1 %

5 -8

9%

1Short-i*un to leran ce ran g es w ere adopted a t each o f th e FO M C ’s regularly scheduled m eetin g s. T h e ra n g es fo r th e m on etary and reserve a g g reg a tes
w ere specified in term s o f tw o-m onth sim ple an n u al rates o f ch an g e fro m th e m onth p rio r to th e m eetin g a t w hich the ra n g es w ere established to
th e m onth follow ing th e m eetin g . T h e ran g es fo r th e F ed eral funds ra te w ere specified to cover th e period fro m th e m eetin g a t w hich th e ran ges
w ere adopted to th e follow ing reg u larly scheduled m eetin g . S h o rt-ru n ran g es w ere m ade av ailable in th e “ R ecord o f P olicy A ction s o f th e F ed eral
Open M ark et C om m ittee” ap p roxim ately 30 days a fte r each m eetin g .
2A t a special m eetin g held on M arch 29, 1976, th e C om m ittee reached th e u n d erstan d in g th a t several reserve ag g reg a te s (in clu d in g nonborrow ed
reserves, to tal reserves, and “m on etary base” — to tal reserves plus cu rre n cy ) should be considered in fo rm u la tin g th e ir in stru ctio n s to th e M anager
o f th e System Open M ark et A ccount. H ence, th e C om m ittee agreed to n o lon g er sp ecify exp ected grow th ra te s fo r reserves a v ailable to support
p riv a te nonbank deposits (R P D ’s ) .
3C h airm an o f th e F ed eral R eserv e B o ard A rth u r F . B u rn s announced intended grow th ra tes o f m on etary ag g reg a te s over th e indicated one y ear
periods in statem en ts p resented b efo re Congressional C om m ittees a t in terv a ls o f a p p roxim ately 90 days.
4D aily av erag e m em ber b an k deposits, adjusted to include funds fro m n ondeposit sources.

Aggregate Targets
T h e F O M C decided upon both longer-run and
short-run ranges for the m onetary aggregates. These
ranges for 1976 are presented in T a b le I, and the
longer-run ranges are shown graphically in C hart I.
T h e longer-run ranges cover a period of one year,
stretching from th e most recent qu arter to the cor­
responding qu arter one year in th e future. These
longer-run ranges w ere review ed by the F O M C at
th e end of each quarter, and w ere su b ject to modifi­
cation at any tim e based on new inform ation about
the likely course of the econom y. T herefore, as m em ­
bers of th e F O M C have repeatedly pointed out, the
F O M C does not consider itself ‘lo c k e d in ” to previ­
ously announced growth ranges for the w hole year



period. M onetary targets are expressed as ranges,
rather than single num bers.
Once basic decisions have been made about rates
of money growth, problems arise concerning the
manner of specifying the targets. There is the choice
between a single number and a range. A single
number virtually guarantees a miss but by virtue of
that fact also provides a reasonable excuse for miss­
ing. The uncompromising character of a single­
number target, however, is also more apt to provoke
controversy. A target range is easier to hit but, by the
same token, a miss may be more severely criticized.
At the same time, a range is likely to be less con­
troversial because it is less specific.4
4Henry C. W allich, “Innovations in Monetary Policy” (paper
presented at the Southern Econom ic Association meeting,
Atlanta, Georgia, November 18, 1 9 7 6 ), p. 7.
Page 3

FEDERAL RESERVE BANK OF ST. LOUIS

MARCH 1977

C ha rt I

T w e lv e -M o n th M ] Tolerance R a n g e s A n no un ce d D uring 1976

1975

1976

N o te : T h e l o n g e r - r u n r a n g e s a n d a c tu a l M i l e v e ls r e p r e s e n t t h e m o s t c u r r e n t s e a s o n a l l y a d ju s t e d m o n t h ly d a ta .

Page 4




1977

FEDERAL RESERVE BANK OF ST. LOUIS

T h e F O M C also chooses short-run ranges fo r the
m onetary aggregates th at are thought to b e consistent
w ith longer-run ranges. T h ese short-run ranges are
specified over m oving 2-m onth periods. F o r exam ple
at the January m eeting the F O M C specified short-run
operating targets for the 2-m onth period January F ebru ary. Th en at th e F ebru ary m eeting, new targets
w ere set for th e Febru ary - M arch period. Also, at
each m onthly m eeting th e F O M C sets desired ranges
for the F ed eral funds rate that cover the period until
th e next m eeting. T h e funds rate range is chosen to b e
broadly consistent w ith the short-run ranges for the
aggregates. On a m eeting-to-m eeting basis, control of
the funds rate becom es the prim ary operating o b jec­
tive of the Trad ing Desk.

Longer-R un R an g es — T h e F O M C began 1976
operating w ith longer-run ranges of 5 - 7% percent for
M j and 7% -1 0 % percent for M 2. T h ese ranges, w hich
had been announced in N ovem ber 1975, covered the
period from third quarter 1975 to third quarter 1976.
At its January m eeting the F O M C review ed its longerrun ranges and decided to redu ce th e low er range in
M t growth from 5 to 4Vz percent for the period from
fourth quarter 1975 to fourth quarter 1976. After
announcing the new longer-run range to Congress,
Chairm an Bum s further stated th at “. . . th e growth
rates of money and credit presently desired by the
F ed era l R eserve cannot b e m aintained indefinitely
w ithout running a serious risk of releasing new infla­
tionary pressures.”5
Throughout 1976 the F O M C ’s longer-run ranges for
M i growth w ere further reduced. In th e first quarter
of 1976 M j grew at only a 2.9 p ercen t annual rate,
considerably below the low er range of 4Vz percent.
However, real output growth had b een very strong in
the first quarter and staff projections indicated that
prices would rise m ore rapidly during the rem ainder
of th e year. At the April m eeting,
It was stressed during the discussion that the rate
of growth in M l needed to accommodate a good
economic recovery had been overestimated earlier:
Although M l growth in the past two quarters had
fallen short of the lower limit of the range that had
been specified by the Committee, it obviously had
been sufficient to accommodate a strong recovery.6

Therefore, the F O M C voted to reduce the upper
range on growth of M j from IVz to 7 percent.
It was noted that the recovery in economic activity
had been under way for 1 year and that the end of

MARCH 1977

the new period for the growth ranges would fall 2
years after the recession trough. Moreover, the re­
covery recently had gained strength. Accordingly,
it was observed that this might be an opportune
time for the Committee to take a small step toward
its longer-range objective of returning growth in the
monetary aggregates toward rates consistent with
general price stability.7

Although real output growth slowed substantially in
th e second quarter of 1976, th e F O M C decided at its
July m eeting to retain its longer-run ranges for money
growth. In reaching the decision to m aintain the
previous one-year range for M j, the C om m ittee noted
that even w ith th e second qu arter slowing in th e rate
of econom ic expansion, real output had increased at
about a 7 percen t annual rate over the first h alf of the
year. “A staff analysis of the econom ic outlook sug­
gested th at th e advance in business activity would
soon im prove from the relatively slow pace of recen t
m onths.”8 Staff projections suggested a “m oderately
rapid pace” for output growth over the next tw o quar­
ters, and favorable prospects for
. . continuation of a
good rate of expansion in real output into 1977.”9
Since th e outlook for econom ic activity was generally
view ed as favorable, there was some sentim ent among
m em bers of the F O M C to low er th e longer-run range
for M j. However, the C om m ittee concluded th at
. . . this did not appear to be an appropriate time to
reduce the [longer-run target] range [for M l
growth] in view of the recent hesitation in the
course of the economic expansion.10

D uring the third quarter th e F O M C continued to
b e satisfied w ith th e pace of econom ic activity and
expected a halt to the tem porary “pause” and some
pick up in the growth of real output later in 1976. At
the C om m ittee’s August m eeting,
Staff projections continued to suggest diat real GNP
would expand at a moderate pace in the current
quarter and that moderate growth in output would
continue well into 1977.
Staff projections for the second half of 1 9 7 6 dif­
fered little from those of 4 weeks earlier; they con­
tinued to suggest that the slackening in economic
growth in recent months would prove to be
temporary.
In general, Committee members felt that the pace
of expansion in over-all economic activity would
soon pick up again.11
7Ibid., pp. 516-17.
8“Record” (Septem ber 1 9 7 6 ), p. 776.
“Ibid., p. 774.

5“Statements” (February 1 9 7 6 ), pp. 124-25.

10Ibid., p. 781.

6“Record” (Ju n e 1 9 7 6 ), p. 517.

^ “Record” (O ctober 1 9 7 6 ), pp. 837, 839-40, and 844.




Page 5

Page 6

EXHIBIT I

FOMC ECONOM IC POLICY DIRECTIVES — 1976
D ate o f
FOMC
M e e t in g
Jan uary 20

Policy Consensus
.

. . to

fo ste r

e n c o u ra g e
re sistin g
to

a

fin a n cia l

co n tin u e d

co n d itio n s

econ om ic

O perating Instructions
that

recovery,

will
w hile

in fla tio n a ry p re ssu re s a n d contributing
s u s ta in a b le

pattern

of

in te rn ation a l

tran saction s.

. . . w h ile
an d
to

ta k in g

account

in te rn a tio n a l finan cial
m aintain

p re v a ilin g

co nd itio ns ove r the

of d eve lop m en ts

Dissents
in

dom estic

None

m arkets, the C om m ittee seeks

bank

p e rio d

reserve

and

im m e d ia tely

m on ey

ahead,

m arket

p ro vid e d

that m on e ta ry a g g re g a te s a p p e a r to be g r o w in g at a b o u t
the rates currently expected.

F e b ru a ry 1 7 -1 8

N o Change

No C hange

N one
A b se n t a n d not v o tin g : M r. G a rd n e r.

M a rch 1 5 -1 6

N o Change

. . . w h ile
financial

ta k in g

m arkets

ch a n ge

m arkets,

reserve

and

account of d eve lop m en ts

and
the

m on ey

the sen sitive
C om m ittee
m arket

in

dom estic

state o f fo re ig n

seeks

co n d itio n s

to

None

ex­

a ch ie ve

bank

consiste nt

with

m oderate gro w th in m on eta ry a g g re g a te s ove r the p erio d
ahead .

A p ril 2 0

N o Change

. . . w h ile ta k in g account o f d eve lop m en ts in dom estic a n d

None

in te rn a tion a l

A b se n t a n d not v o tin g : M r. H o lla n d .

achieve

bank

fina n cia l

m arkets,

reserve a n d

the

Com m ittee

seeks

to

m o n e y m arket co n d itio n s c o n ­

sistent with m oderate grow th in m on etary a g g re g a te s over
the p erio d a h e a d .

M a y 18

N o Change

No C hange

M r.

C o ld w e ll

d isse nted

b e c a u se

he d id

not w a n t to

p ro v id e for the p o ssib ility of a rise o f a s much a s
p erce nta ge p o in t in the Fed eral fu n d s rate . . . .

%

In his

o p in io n , a further rise of that a m ou n t could h a ve an
e x a g g e ra t e d

effect

on

expe cta tion s

in

the

financial

m arkets, p ro v o k in g excessive in crea ses in interest rates.

J u n e 22

.

. .

to

fo ste r

fin a n cia l

co n d itio n s

that

will

N o Change

N one

e n c o u ra g e co n tin u e d econ om ic e x p a n sio n , w h ile

A b se n t a n d

re sistin g

voted a s altern ate fo r M r. Kim brel.)

to

a

in fla tio n a ry p re ssu re s a n d contributing
su s ta in a b le

tran saction s.




pattern

of

in te rn ation a l

not v o tin g : M r. Kim brel.

(M r. B a u g h m a n

J u ly 1 9 - 2 0

No

Change

N o Change

M r. V o lk e r d isse n te d from

this action

p re sen t

w o u ld

circum stances

he

not

b eca use in the
w ish

to

or lo w e r the Fed e ral fu n d s rate b y a s much a s
a

p e rce n ta ge p oin t —

raise
%

of

a c h a n g e that m ight be inter­

preted a s a stro n g s ig n a l o f a c h a n g e in p olicy a n d
that co uld
in

re sp o n se

h a ve

rep e rcu ssio n s

m erely

to

in fina n cia l m arkets —

short-term

fluctuations

in

the

m o n e ta ry a g g re g a te s that m ight well p rove transient.

A u gu st 17

N o Change

. . . w h ile t a k in g
and
to

in te rn a tio n a l
m a in ta in

co n d itio n s

account of d ev e lo p m e n ts

in

dom estic

fina n cia l m arkets, the C om m ittee seeks

p re v a ilin g

o v e r the

bank

p e rio d

reserve

and

im m e d ia tely

m on e y

ahead,

m arket

N one
A b s e n t a n d not v o tin g : M r. Balles.

(M r. G u ffe y voted

a s altern a te fo r M r. B alles.)

p ro v id e d

that m on e ta ry a g g re g a te s a p p e a r to be g r o w in g at a b o u t
the rates cu rrently expected.

S e p te m b e r 21

N o Change

. . . w h ile ta k in g
and

account of

in te rn a tio n a l fina n cia l

d eve lop m en ts

in

dom estic

m arkets, the Com m ittee seeks

None
A b se n t a n d not v o tin g : M r. Partee

to a ch ie ve b a n k reserve a n d m o n e y m arket co n d itio n s c o n ­
sistent with m od erate grow th in m on eta ry a g g re g a te s over
the p e rio d a h e a d .

O c to b e r 1 9

N o Change

N o Change

None

Novem ber 16

N o Change

N o Change

None
A b s e n t a n d not v o tin g : M r. Balles.
a s a n altern ate fo r M r. B alles.)

Decem ber 2 0 > 2 1 N o C h a n g e

. . . w h ile
and
to

ta k in g

account o f

in te rn a tio n a l fina n cia l
m a inta in

co n d itio n s

p re v a ilin g

bank

ove r the p e rio d

d eve lop m en ts

in

dom estic

m arkets, the Com m ittee seeks
reserve

and

im m e d ia tely

m on e y

ahead,

m arket

p ro v id e d

that m on eta ry a g g r e g a t e s a p p e a r to be g r o w in g at a b o u t
the rates cu rrently expected.

Page
7




None

(M r . G u ffe y voted

FEDERAL RESERVE BANK OF ST. LOUIS

T his view was again expressed by th e F O M C in
Septem ber:
Staff projections suggested that growth in real GNP
would pick up somewhat in the fourth quarter and
would remain at a good rate well into 1977.
Staff projections for the period through the second
quarter of 1977 suggested that growth in real out­
put of goods and services would be at a somewhat
higher rate than in the second and third quarters of
1976.
During the Committee’s discussion of the eco­
nomic situation at this meeting no member expressed
substantial disagreement with the staff projection of
stronger growth in real GNP over the quarters
immediately ahead.12

At the O ctober 19 F O M C m eeting the prelim inary
estim ates of growth in real G N P showed a further
slowing to about a 4 percent rate in the third quarter
of 1976 from the 4.5 rate recorded in the second
quarter. T h e F O M C , although somewhat concerned
about th e slower than anticipated growth of real
GN P, expected some im provem ent in real output
growth in the future and retained their serious con­
cern about inflation.
Staff
in real
quarter
quarter

projections continued to suggest that growth
GNP would pick up somewhat in the fourth
and would be sustained at about the fourthrate well into 1977.

No member suggested that a decline in economic
activity was likely, but some of the members ex­
pressed concern that the rate of growth in coming
quarters would not achieve a sufficient reduction in
unemployment. Serious concern was also expressed
by various members about the persistence of a high
rate of inflation.13

At th e O ctober m eeting the longer-run ranges were
discussed, but since it would b e 23 days before C hair­
m an B um s testified before Congress, the F O M C de­
cided to postpone its decision on the appropriate
ranges from third quarter 1976 to third quarter 1977
until early November. On N ovem ber 8 the C om m it­
tee held a telephone conference m eeting w here it was
decided to low er the upper range on M j from 7 to
6 V percent. T h e C om m ittee decided th at such a
2
ran ge
. . would provide am ple scope for faster
m onetary growth, w hile still seeking a gradual return
to general p rice stability.”14 C onsequently, the
F O M C was operating at the end of 1976 w ith an
upper target boundary for M 1 growth that was one
full p ercentage point low er than at the end of 1975.

MARCH

T h e F O M C also m ade some downward adjust­
m ents in its target ranges for the broader m onetary
aggregate M 2. T h ese adjustm ents w ere less m arked
than those in th e M 1 ranges. T h e low er ban d of the
Mo range was le ft unchanged at 7 ¥2 p ercen t through­
out 1976. T h e upper band was reduced at the April
m eeting by V2 percen tage point, and then was further
reduced b y V p ercen tage point at th e July m eeting.
2
H ow ever, in N ovem ber w hen th e upper band o f the
M | targ et range was low ered, th e upper band on the
M 2 range was raised V p ercentage point. T his up­
2
w ard adjustm ent in the Mo target range was m ade
because:
Expansion in the types of time and savings deposits
included in the broader aggregates had been larger
than expected mainly because short-term market
interest rates had proved to be lower than antici­
pated while rates offered by bank and nonbank thrift
institutions had remained generally at regulatory
ceilings. Under such circumstances, it was observed,
it would be appropriate to accommodate higher rates
of growth in M 2 and M 3 than contemplated in July,
if they should develop.15

Short-Run R an ges — At each of its m onthly m eet­
ings th e F O M C decided upon short-run ranges for
M i, M 2, and the F ed era l funds rate th at w ere thought
to b e consistent w ith the longer-run goals of policy.
B ecause of the sharp m onth-to-m onth variation in the
growth rates of th e m onetary aggregates, th e F O M C
has ( 1 ) stated its short-run objectives in term s of
average growth rates over tw o-m onth periods and ( 2 )
specified m uch w ider short-run ranges for the growth
rates of the aggregates than longer-run ranges. Th e
tw o-m onth periods cover the m onth in w hich the
m eeting is held and the follow ing m onth. T h e shortrun ranges, as shown in T a b le I, w ere usually about
4 p ercentage points in width.
T h e short-run im plem entation of policy rem ained,
as it had been in the past, keyed to control of the
F ed era l funds rate.
The Federal Reserve policy strategy is based in
large part on the monetary aggregates, but its shortrun tactical instrument is the Federal funds rate.
Under the funds rate approach, the Federal Reserve
estimates the level of short-term interest rates, in­
cluding the funds rate, at which the public, given
projections of income, will want to hold the amount
of money the Federal Reserve intends to supply.
Then reserves are supplied in an amount that will
maintain that level of the funds rate, and that will
cause the banks to generate the targeted amount
of money.16

12“Record” (Novem ber 1 9 7 6 ), pp. 916, 919, and 922.
13“Record” (D ecem ber 1 9 7 6 ), pp. 1019 and 1025.

15Ibid., pp. 1031-32.

14Ibid., p. 1031.

u;Wallich, “Innovations in Monetary Policy,” p. 12.

Page 8



1977

Organization of the Committee in 1976
The Federal Open Market Committee (F O M C )
consists of the seven members of the Federal Reserve
Board of Governors and five of the twelve Federal
Reserve Presidents. T he Chairman of the Board of
Governors is also, by tradition, Chairman of the Com­
mittee. The President of the New York Federal Re­
serve Bank is a permanent member of the Committee
and, also by tradition, its Vice Chairman. All other
Federal Reserve Bank Presidents attend the meetings
and present their views, but only the four Presidents
who are members of the Committee may cast votes.
These four memberships rotate among the Bank Presi­
dents and are held for one-year terms beginning
March 1.
Members of the Board of Governors in 1976 in­
cluded Chairman Arthur F . Bums, Vice Chairman
Stephen S. Gardner, Philip E . Coldwell, Philip C.
Jackson, Jr., David M. Lilly, J. Charles Partee, and
Henry C. Wallich. Mr. Gardner succeeded George W .
Mitchell, whose term expired January 31, as Vice
Chairman of the Committee effective February 13.
Mr. Lilly assumed his duties June 1, replacing Robert
C. Holland who resigned effective May 15. In addi­
tion to Paul A. Volcker, President of the Federal Re­
serve Bank of New York, the following Presidents
served on the Committee during January and Febru­
ary 1976: Ernest T. Baughman (D allas), David P.
Eastbum (Philadelphia), Bruce K. M acLaury (M in­
neapolis), and Robert P. Mayo (C h icago). In March
the Committee was reorganized and the four rotating
positions were filled by: John J. Balles (San F ran ­
cisco), Robert P. Black (R ichm ond), Monroe Kimbrel
(A tlan ta), and Willis J. Winn (C leveland).
The Committee met regularly once each month
during 1976 to discuss, among other things, economic
trends and to decide upon the future course of open
market operations.1 However, as in previous years,
occasional telephone or telegram consultations were
held between scheduled meetings.2 During each regu­
larly scheduled meeting, a directive was issued to the
Federal Reserve Bank of New York stating the general
economic goals of the Committee and providing gen­
eral guidelines as to how the Manager of the System
Open Market Account at the New York Federal Re­
serve Bank should conduct open market operations to
achieve these goals. E ach directive contained a short
review of economic developments and the general
economic goals sought by the Committee. The last
paragraph gave operating instructions to the Account
Manager. These instructions were stated in terms of
bank reserve and money market conditions which
were considered consistent with the achievement of
iT h e Committee held a special meeting on M arch 29, 1976
for the purpose of reappraising the methods employed in
formulating and implementing the directives issued to the
Manager of the System Open Market Account.
2On November 8, 1976 the Committee held a telephone
meeting for the purpose of establishing monetary aggre­
gate growth ranges over the year ending third quarter
1977.




desired growth rates of monetary aggregates. Special
factors, such as Treasury financing operations, were
also taken into account.
Decisions regarding the exact timing and amount of
daily buying and selling of securities in fulfilling the
Committee’s directive are the responsibility of the Sys­
tem Open Market Account Manager at the Trading
Desk of the New York Bank. E ach morning, the
Account Manager and his staff decide on a plan for
open market operations to be undertaken that day. In
developing this plan, money and credit market condi­
tions and aggregate targets desired by the Committee
are considered, as well as other factors which may be
of concern at the time. E ach morning, the Account
Manager, in a conference call, informs one voting
President and staff members of the Board of Gover­
nors about present market conditions and open market
operations which he proposes to execute that day.
Other members of the Committee are informed of the
daily program by wire summary.
A summary of the Committee’s actions is presented
to the public in the “Record of Policy Actions of the
Federal Open Market Committee." Following the
Committee’s decision at the May 18, 1 9 7 6 meeting,
the “Record” was released approximately 30 days
after each meeting, beginning with the “Record” of
the April 20, 1 9 7 6 meeting. Soon after it is released,
the “Record” appears in the Federal Reserve Bulletin
and, in addition, “Records” for the entire year are
published in the Annual Report of the Board of Gover­
nors. The “Record” for each meeting during 1976
generally included:
1) a staff summary of recent economic develop­
ments, such as prices, employment, industrial
production, and components of the national in­
come accounts; projections concerning real out­
put growth for two or three quarters ahead; and
prospective financial developments;
2 ) a discussion of recent international financial de­
velopments and the U. S. foreign trade balance;
3 ) a discussion of credit market conditions and
recent interest rate movements;
4 ) a discussion of open market operations, the
growth of monetary aggregates, and bank re­
serve and money market conditions since the
previous meeting;
5 ) a discussion of current policy considerations, in­
cluding money market conditions and the move­
ments of monetary aggregates;
6 ) conclusions of the FO M C ;
7 ) a policy directive issued by the Committee to
the Federal Reserve Bank of New York;
8 ) a list of the members’ voting positions and any
dissenting comments;
9 ) a description of any actions and consultations
that may have occurred between the regularly
scheduled meetings.

Page 9

FEDERAL RESERVE BANK OF ST. LOUIS

Periodically during 1976 prim ary im portance was
assigned to control of th e F ed eral funds rate as an
operating target. F o r exam ple, m oney m arket condi­
tions received prim ary em phasis at th e January, Au­
gust, and D ecem ber m eetings:

MARCH 1977

F O M C R a n g e for F ed e ra l Fu nd s Rate

In view of the current uncertainties regarding the
behavior of the monetary aggregates, many members
advocated that the Committee continue to give
greater weight than usual to money market condi­
tions in conducting open market operations in the
period until the next meeting and that it specify
2-month ranges of tolerance for growth in the mone­
tary aggregates that were wider than usual.17
Most members favored directing operations
toward maintaining about the current Federal funds
rate. Accordingly, they preferred to give more
weight than usual to money market conditions in
formulating the operating instructions contained in
the last paragraph of the domestic policy directive,
and they advocated specifying a relatively narrow
range for the Federal funds rate centered on the
prevailing rate of 5Vi per cent.18
Most members favored giving greater weight than
usual to money market conditions in conducting
open market operations in the period until the next
meeting, in part because projections of growth in
monetary aggregates around the year-end were
highly uncertain.19
As shown in C hart I I and T a b le I, the F ed eral R e ­
serve in 1976 consistently held the F ed eral funds rate
w ithin its short-run target ranges, usually at about
th e m id-point of the target ranges. E ven though the
tw o-m onth growth targets for the aggregates were
specified w ith w ide ranges, th e actual growth rates of
the aggregates w ere frequently above or below the
specified ranges, as shown in C hart I I I . How ever, as
noted at th e January m eeting, “It was . . . understood
[by th e F O M C ] that, as a result of short-run factors,
growth rates from m onth to m onth m ight well
fa ll outside the ranges contem plated for annual
periods.”20 At each m eeting th e F O M C review ed the
short-run behavior of the aggregates relative to their
expected behavior. W hen the aggregates w ere grow­
ing above their expected ranges, th e F O M C in 1976
generally raised its short-run specification for the
F ed eral funds rate. F o r example, th e growth of M j
accelerated rapidly in April and May. At the April
m eeting the F O M C voted to raise th e low er band on
th e funds rate by 25 basis points.
'" “Record” (March 1976), p. 243.
18“Record” (October 1976), p. 845.

ronaei ora indicoled for the firs* full week during which they were in effect.

In view of their assessment that the pace of eco­
nomic expansion would be relatively strong, most
members favored directing operations in the period
immediately ahead toward restraining growth of
the monetary aggregates within ranges not very
much higher than the longer-run ranges agreed upon
at this meeting and indicated that they would toler­
ate some modest firming in money market condi­
tions. It was observed that some firming in money
market conditions in this period would reduce the
likelihood of excessive monetary growth in subse­
quent months.21
T h en a t th e M ay 18 m eeting,
The members agreed that growth in monetary
aggregates recently had been at unacceptably high
rates, especially in view of the longer-run ranges for
growth that had been adopted at the preceding
meeting.
. . . to sustain confidence it was important for the
System to demonstrate its intention to resist unduly
rapid growth in the monetary aggregates; and that
pursuit of that objective would run little or no risk of
aborting the recovery in economic activity.
In general, Committee members favored directing
operations in the period immediately ahead toward
moderating growth of the monetary aggregates, and
they indicated that in pursuit of that end they would
accept some modest further finning in money market
conditions.22
C onsequently, the F O M C adopted a F e d era l funds
range of 5-5% percent, com pared to the 4% - 5V* per­
cent range adopted in April.
Mr. Coldw ell dissented from th e C om m ittee’s d eci­
sion a t th e M ay m eeting to raise th e F ed era l funds
rate range by % percent. An increase in th e funds rate
of as m uch as % percen t over th e next inter-m eeting

19“Record” (February 1977), p. 137.

21“Record” (June 1976), p. 518.

20“Record” (March 1976), p. 243.

22“Record” (July 1976), pp. 586-87.

Page 10



FEDERAL RESERVE BANK OF ST. LOUIS

F O M C R a n g e s of T ole rance for M o n e t a r y A g g r e g a t e s
1976

MARCH 1977

gates, th e D esk was initially directed to aim for a 4%
percen t funds rate. T h is was later raised to 5 percent
as th ere appeared evidence of renew ed strength in
the aggregates.
At th e N ovem ber F O M C m eeting it appeared th at
real output was currently expanding at an even slower
rate than the 4 percent prelim inary estim ate for the
third quarter. M em bers of the F O M C w ere generally
agreed th at the pause in real output growth was still
in force. T h e C om m ittee was concerned th at nearterm real output growth would not b e adequate to
m ake any progress tow ard reducing the unem ploy­
m ent rate. C onsequently, the F O M C decided to ease
money m arket conditions at the N ovem ber m eeting.
In the discussion of current policy at this meeting,
members of the Committee in general favored some
easing in money market conditions in the period
immediately ahead, so long as growth in the mone­
tary aggregates did not appear to be unduly rapid.25

period, in M r. C oldw ell’s opinion,
. . could have an
exaggerated effect on expectations in the financial
m arkets, provoking excessive increases in interest
rates.”23
As th e summer progressed it becam e evident th at
money growth was low relative to th e short-run tar­
gets. T h e D esk operated in early July to reduce the
F ed eral funds rate to its low er band of 5 Vi percent
established at the Ju n e F O M C m eeting. At the July
F O M C m eeting the low er band on th e funds rate was
low ered V percentage point to 4% percent.
2
Mr. V olker dissented from the C om m ittee’s action
at this m eeting. In his view, allow ing a change in the
F ed eral funds rate of as m uch as % percentage point
in response to short-run variations in m onetary aggre­
gates “. . . m ight b e interpreted as a strong signal of a
change in policy and that could have repercussions in
financial m arkets. . . .”24
T h e gradual reduction in the F ed eral funds rate
continued throughout the rest of 1976. By the end of
the year th e range on the F ed eral funds rate had been
reduced to 4V4 to 5 percent. At th e August F O M C
m eeting the D esk was directed to aim for a funds
rate of 5V* percent, and this d irective was continued
at th e Septem ber m eeting. At the O ctober m eeting,
in view of the slow growth of the m onetary aggre­

. . .System operations were conducted pursuant to
the Committee’s decision that the Manager should
aim to reduce the Federal funds rate to about 4%
per cent within the first week after the meeting and
to 4% per cent within the following week — pro­
vided that growth in the monetary aggregates did
not appear to be strong relative to the specified
ranges.26

In N ovem ber and early D ecem ber the projections
for the growth of M ) and Mo over the NovemberD ecem ber period w ere revised downward. By early
D ecem b er it appeared that M i growth m ight fall
below its low er short-run target band. T h e Desk b e­
cam e “somewhat m ore accom m odative in the provi­
sion of reserves” and by the tim e of the D ecem ber
20 F O M C m eeting the Fed eral funds rate was at
about 4% percent.

Summary and Conclusions
T h e F O M C began 1976 with the firm intention of
avoiding a reacceleration of inflation w hile continuing
to encourage econom ic recovery. In pursuit of this pol­
icy, throughout the year the F O M C moved to gradu­
ally reduce its longer-run ranges for the growth rate
of th e money stock ( M , ). Although these ranges were
reduced, th e actual growth rate of the money stock
was only reduced slightly, com pared to its rate during
the first three quarters of the current econom ic recov­
ery. M ,, w hich had grown at a 5.6 percent rate from
the first quarter of 1975 to the fourth quarter of 1975,

ss Ibid., p. 589.

- 5“Record” (January 1977), p. 23.

- 4“Record” (Septem ber 1 9 7 6 ), p. 786.

-•’“Record” (February 1 9 7 7 ), p. 133.




Page 11

FEDERAL RESERVE BANK OF ST. LOUIS

MARCH 1977

continued to grow at the same rate over the first two
quarters of 1976. Over the last half of 1976, the growth
o f m oney was reduced slightly to 5.4 percent. Al­
though th e actual growth rate of money was hardly

reduced over 1976, relative to its past trend of about
6 p ercen t it grew at a som ew hat slower rate. B y thus
avoiding a reacceleration in m oney growth th e F O M C
m ade a first step tow ard reducing inflation.

SUPPLEMENT
FOMC Decisions in 1976
T his supplem ent consists of selected excerpts from
the “R ecord of Policy Actions” for each of th e F O M C
m eetings in 1976. T h e excerpts are selected to high­
light key factors influencing F O M C decisions. They
include analyses of current and projected econom ic
developments, discussions of current policy actions,
and long- and short-run operating instructions issued
by th e F O M C to th e Trad ing Desk. T h e full text of
each “R ecord of Policy Actions” appears in issues of
th e F ed eral R eserve Bulletin.

M eeting H eld on January 20, 1976
Staff projections suggested that growth in output
would moderate somewhat further in the first half
of 1976 and that the rate of increase in prices would
change little.
System open market operations in the inter-meet­
ing period had been guided by the Committee’s
decision to maintain the bank reserve and money
market conditions prevailing at the time of the D e­
cember meeting, provided that monetary aggre­
gates appeared to be growing at about the rates
then expected. Data that became available week by
week after the December meeting suggested that in
the December-January period M l and M2 would
grow at rates below the lower limits of the ranges of
tolerance that had been specified by the Committee.
Accordingly, near the end of December, the System
began to direct operations toward some easing in
bank reserve and money market conditions. By
January 12 the Federal funds rate had declined from
the neighborhood of 5V* per cent — the level pre­
vailing at the time of the December meeting — to
an area of 4% to 4% per cent.
Subsequently, a majority of Committee members
concurred in Chairman Bums’ recommendation of
January 12 that the Manager be instructed to hold
the weekly-average Federal funds rate at the ap­
proximate level of 4% per cent until the time of this
meeting.
. . .part of the fourth-quarter shortfall in growth of
M l appeared to be attributable to a decline in the
Page 12




demand for checking deposits, especially because of
the shift in business deposits from demand accounts
to savings accounts. Businesses were expected to
continue to substitute savings accounts for demand
deposits over the year ahead, although at a slower
pace than in recent weeks. For that reason, and also
because of other indications that demand deposits
were being used more efficiendy, the Committee
decided to reduce the lower limit of the longer-run
range specified for M l from 5 per cent to 4% per
cent.
The ranges specified for M2 and M3 . . . were
unchanged from those adopted in October.
In the discussion of current policy at this meeting,
the Committee took note of a staff analysis suggest­
ing that for the period immediately ahead uncer­
tainty about the behavior of the demand for money
was greater than usual.
In view of the current uncertainties regarding the
behavior of the monetary aggregates, many members
advocated that the Committee continue to give
greater weight than usual to money market condi­
tions in conducting open market operations in the
period until the next meeting and that it specify
2-month ranges of tolerance for growth in the mone­
tary aggregates that were wider than usual. Some
members preferred to give greater emphasis to
variations in the behavior of the monetary aggre­
gates relative to expectations, and the suggestion
was also made that more weight be given to the
behavior of M2 relative to that of M l than had been
the case in the past.

M eeting H eld on February 17-18, 1976
Staff projections for the second quarter of this year
suggested that growth in output would remain mod­
erate and that the rate of increase in prices would
change litde.
Staff projections for the first half of 1976 sug­
gested that growth in real output would be some­
what stronger than had been suggested 4 weeks
earlier.
System open market operations in the inter-meeting period had been guided by the Committee’s

FEDERAL RESERVE BANK OF ST. LOUIS

decision to maintain the bank reserve and money
market conditions prevailing at the time of the Janu­
ary meeting, provided that monetary aggregates
appeared to be growing at about the rates then
expected. Data that became available week by
week suggested that in the January-February period
M l would grow at a rate near the lower limit of the
range of tolerance that had been specified by the
Committee but that M2 would grow at a rate near
the upper limit of its range of tolerance. Therefore,
operations were directed toward maintaining the
Federal funds rate close to 4% per cent, the level
prevailing at the time of the January meeting.
In the discussion of current policy at this meeting,
the Committee took note of a staff analysis suggest­
ing that in the period immediately ahead transac­
tions demands for money — at current levels of
short-term interest rates -— might be expected to
pick up in association with expansion in economic
activity.
During the discussion it was noted that the eco­
nomic situation and outlook had improved in recent
weeks, and almost all Committee members indicated
that they favored essentially no change in policy.

M eeting H eld on March 15-16, 1976
Staff projections for the second quarter of 1976
were similar to those of 4 weeks earlier.
System open market operations in the inter-meeting period had been guided by the Committee’s
decision that open market operations should be
directed toward maintaining the bank reserve and
money market conditions prevailing at the time of
the February meeting — characterized by a Federal
funds rate of about 4% per cent — provided that
monetary aggregates appeared to be growing at
about the rates then expected.
Data that became available near the end of Feb­
ruary suggested that both M l and M2 were grow­
ing faster than had been expected, and open market
operations permitted a slight firming in bank reserve
and money market conditions. However, data that
became available toward the end of the first week
in March suggested that the monetary aggregates
were growing at rates closer to those that had been
originally expected, and money market conditions
eased.
In the discussion of current policy at this meeting,
the Committee took note of a staff analysis suggest­
ing that in the period immediately ahead transac­
tions demands for money — at current levels of
short-term interest rates — might be expected to
increase in association with expansion in nominal
GNP; in view of recent experience, however, the
analysis also suggested that the increase might be
less than would be expected on the basis of histori­
cal relationships.
During the discussion it was noted that the recov­
ery in economic activity had remained orderly, that
liquidity had improved, and that the outlook for



MARCH

1977

activity was satisfactory —■ although inflation re­
mained a problem. Against that background, Com­
mittee members indicated that they favored essen­
tially no change in policy.

M eeting H eld on April 20, 1976
Staff projections for the remaining quarters of this
year suggested that growth in output would be
moderate and that the rise in prices would be above
the relatively low first-quarter pace.
System open market operations since the March
15-16 meeting had been guided by the Committee’s
decision to seek bank reserve and money market
conditions consistent with moderate growth in mone­
tary aggregates over the period ahead. Data that
became available week by week during the inter­
meeting period suggested that in the March-April
period M l and M2 would grow at rates near the
midpoints of the ranges that had been specified by
the Committee. Accordingly, System operations
were directed toward maintaining conditions of re­
serve availability consistent with a Federal funds
rate of about 4% per cent — the rate prevailing at
the time of the March meeting and the midpoint of
the operating range that the Committee had speci­
fied for the inter-meeting period.
During the discussion, the view was expressed
that an appreciable tightening in money market con­
ditions in the period immediately ahead would be
premature. . . .
. . . financial markets were particularly sensitive at
this time, and any appreciable tightening in money
market conditions could have a substantial effect on
short-term interest rates and could adversely affect
flows of time and savings deposits at both banks and
nonbank thrift institutions.

M eeting H eld on May 18, 1976
Staff projections suggested that growth in real out­
put was continuing at a vigorous, although slightly
less rapid, pace in the current quarter and that it
was likely to be more moderate in the second half
of the year. The projections also suggested that the
rise in prices would be above the relatively low
first-quarter rate.
Immediately after the April meeting the System
became less accommodative in the provision of re­
serves. Operations were directed toward achieving
conditions of reserve availability consistent with a
Federal funds rate of 4% per cent — the midpoint
of the 4x to 5V* per cent operating range that the
k
Committee had specified for the inter-meeting
period and V percentage point above the rate
s
prevailing at the time of the April meeting.
Data that had become available soon after that
meeting and in each subsequent week suggested
that in the April-May period growth in M l and M2
would be strong relative to the ranges that had been
specified by the Committee. Accordingly, the System
Page 13

FEDERAL RESERVE BANK OF ST. LOUIS

gradually became still less accommodative in the
provision of reserves. By the end of the inter-meeting period the Federal funds rate was around 5Y
4
per cent, the upper limit of the specified range. . . .
In the discussion of current policy at this meeting,
the Committee took note of a staff analysis suggest­
ing that over the May-June period the rate of
growth in M l was likely to subside from the rapid
pace in April. . . .
During the Committee’s discussion, it was ob­
served that the recovery in economic activity had
proceeded in a satisfactory way, although the rate of
unemployment remained high and re-intensification
of inflationary pressures was a serious threat.
Altogether, the outlook for economic activity was
strong; to some members of the Committee, it
appeared stronger than suggested by the staff
projections.
The members agreed that growth in monetary
aggregates recently had been at unacceptably high
rates. . . .
It was observed that the moderate monetary policy
that the System had been pursuing had contributed
to a return of confidence; that to sustain confidence
it was important for the System to demonstrate its
intention to resist unduly rapid growth in the mone­
tary aggregates; and that pursuit of that objective
would run little or no risk of aborting the recovery in
economic activity.

MARCH 1977

During the Committee’s policy discussion, it was
observed that the apparent moderation in the rate
of growth in real GNP in the second quarter was, by
and large, a healthy development, in the sense that
continuation of the rapid first-quarter rate of expan­
sion would soon have generated undesirable boom
conditions. On the whole, the members were of the
view that the economic expansion was proceeding
satisfactorily and that the outlook was favorable. At
the same time, some concern was expressed about
the possibility that inflationary pressures would
strengthen as the expansion proceeded.
The Committee agreed that it would be desirable
to maintain relative stability in money market con­
ditions at this juncture, in light of the current slow­
ing of the economic expansion and the moderation
of growth in the monetary aggregates since April.
A substantial majority favored a relatively narrow
range of 5V* to 5% per cent, on the grounds that a
significant easing of money market conditions would
be undesirable at this time in view of the likelihood
that it might have to be reversed shordy, and that a
significant finning would be inappropriate in view
of the element of uncertainty in the economic
oudook.
As at other recent meetings, they decided that
approximately equal weight should be given to M l
and M2 in assessing the behavior of the aggregates.

M eeting H eld on July 19-20, 1976
M eeting H eld on June 22, 1976
Staff projections suggested that during the second
half of the year real GNP would expand at a good
pace and that prices would continue to rise some­
what faster than they had in the first quarter.
A staff analysis of the economic situation indi­
cated that the economic expansion had slowed
somewhat more in the second quarter than had been
anticipated a month earlier. . . .
Immediately following the May meeting, the System
had become a little less accommodative in the provi­
sion of reserves, as it aimed at reserve conditions
consistent with a Federal funds rate averaging
around 5% per cent.
Data becoming available in the latter part of May
suggested that the May-June rates of growth in both
M l and M2 would be near the upper ends of the
Committee’s ranges of tolerance. Accordingly, the
System sought reserve conditions consistent with a
Federal funds rate of about 5% per cent.
. . .the Committee took note of a staff analysis sug­
gesting that. . . growth in M l would be influenced
by increasing demands for money associated with
expansion in nominal GNP, but that the rise in June
was likely to be somewhat smaller than in July be­
cause of continuing adjustments of cash balances
built up during the April bulge in money growth.
Page 14



Staff projections continued to suggest that during
the second half of the year real GNP would expand
at a moderately rapid pace and that prices would
rise somewhat faster than they had during the first
half. Moreover, prospects appeared favorable for
continuation of a good rate of expansion in real
output into 1977.
. . .in early July, data becoming available suggested
that in the June-July period growth in M l would be
below the lower end of the specified range while
growth in M2 would be close to the lower limit of its
range. In those circumstances, the System became
a litde more accommodative in the provision of re­
serves, and by midmonth the Federal funds rate had
declined to around 5Vi per cent, the lower limit of
the specified range.
During the Committee discussion at this meeting,
some members stressed the signs of hesitation in the
economic expansion in the second quarter. . . .
Several members expressed a belief that the pace
of economic expansion would pick up again from
the reduced rate in the second quarter, and a num­
ber anticipated that in the quarters immediately
ahead growth in real GNP would be faster than that
suggested by the staff projections.
In the discussion of current policy at this meeting,
the Committee took note of a staff analysis suggest­
ing that in the July-August period various factors

FEDERAL RESERVE BANK OF ST. LOUIS

that appeared to have depressed M l balances in
June would no longer be operating and, therefore,
that M l would expand appreciably.
As to policy for the period immediately ahead,
members differed little in their preferences for
ranges of growth in the monetary aggregates over
the July-August period and for the midpoint of the
inter-meeting range of tolerance for the Federal
funds rate.
Differences of view were more marked with re­
spect to the appropriate width of the range for the
Federal funds rate. At its previous meeting, the
Committee had agreed upon a relatively narrow
range. . . .
Most members, however, favored specifying a
somewhat wider range for the Federal funds rate
. . . .Some of these members also stressed the existing
uncertainty about the forces influencing the behavior
of the monetary aggregates. . . .
. . .in their view this uncertainty was a reason for
specifying a wider range for the Federal funds rate
and for continuing to base operating decisions in
the period immediately ahead primarily on the be­
havior of the aggregates.
It was agreed that until the next meeting the
weekly-average Federal funds rate might be ex­
pected to vary in an orderly way within a range of
4% to 5% per cent.

M eeting H eld on August 17, 1976
Staff projections continued to suggest that real GNP
would expand at a moderate pace in the current
quarter and that moderate growth in output would
continue well into 1977. The projections also sug­
gested that average prices in the current quarter and
in subsequent quarters would rise somewhat faster
than they had during the second quarter.
Staff projections for the second half of 1976 dif­
fered little from those of 4 weeks earlier; they con­
tinued to suggest that the slackening in economic
growth in recent months would prove to be
temporary.
As the inter-meeting period progressed, incoming
data suggested that in the July-August period growth
in M l and M2 would be close to the midpoints of
the ranges specified by the Committee. In these
circumstances, System open market operations were
directed toward maintaining conditions of reserve
availability consistent with a Federal funds rate of
about 5 V per cent — the rate prevailing at the
*
time of the July meeting and the midpoint of the
operating range that the Committee had specified
for the inter-meeting period.
In the discussion of current policy at this meeting,
it was brought out that the accelerated expansion in
M l since early this year, taken in conjunction with
the reduced rate of growth in nominal GNP and
with relatively little change in interest rates, could
indicate that the downward shift in the demand for



MARCH 1977

money that was so evident in the latter part of 1975
was proceeding much more slowly.
During the Committee’s discussion at this meeting
no member expressed substantial disagreement with
the staff projection of moderate growth in real GNP,
although several members did stress the elements of
weakness that had developed in the past few
months. It was felt that uncertainty about the precise
course of economic developments had increased. . . .
In general, Committee members felt that the pace
of expansion in over-all economic activity would
soon pick up again.
As to policy for the period immediately ahead,
Committee members in general advocated continua­
tion of the current stance. Most members favored
directing operations toward maintaining about the
current Federal funds rate. Accordingly, they pre­
ferred to give more weight than usual to money
market conditions in formulating the operating in­
structions contained in the last paragraph of the do­
mestic policy directive, and they advocated specifying
a relatively narrow range for the Federal funds
rate. . . .
It was agreed that System operations until the
next meeting would be directed toward maintaining
the weekly-average Federal funds rate at about its
current level of 5'A per cent. The members also
agreed that, if growth in the aggregates should ap­
pear to be deviating significantly from the rates
expected, the weekly-average Federal funds rate
might be expected to vary in an orderly fashion
within a range of 5 to 5 ¥2 per cent.

M eeting H eld on Septem ber 21, 1976
Staff projections suggested that growth in real GNP
would pick up somewhat in the fourth quarter and
would remain at a good rate well into 1977. The
projections also suggested that average prices would
continue to rise at about the recent pace.
The rate of increase in M l thus far in 1976 was
consistent with the view that the downward shift in
the demand for currency and demand deposits that
was so evident in 1975 may have slowed. As a result,
the velocity of M l increased on the average over
the second and third quarters of 1976 at a much
slower rate than over the preceding three
quarters. . . .
During the inter-meeting period the Federal
funds rate deviated litde from the 5*4 per cent mid­
point of the operating range that had been specified
by the Committee.
As to policy for the period immediately ahead,
Committee members in general advocated continua­
tion of the current stance. Interest rates, especially
on long-term debt, had been adjusting downward, it
was observed, in good measure because of improving
confidence that the rate of inflation was being re­
duced, and also because of stability in the Federal
funds rate.
Page 15

FEDERAL RESERVE BANK OF ST. LOUIS

There was near unanimity in the preferences ex­
pressed for ranges of growth in the monetary aggre­
gates over the September-October period.
It was suggested that the relatively rapid growth in
M2 ought to be accommodated.
With respect to the Federal funds rate, the mem­
bers agreed that it would be appropriate to maintain
the prevailing level of 5Vt per cent so long as the
monetary aggregates were growing at about the
rates expected. They differed, however, in their
preferences for the width of the range for the funds
rate.
It was observed, that if the Committee specified
a wider range for the Federal funds rate than it had
at the August meeting, it would be appropriate to
place greater emphasis than at that meeting on the
behavior of the aggregates in formulating the operat­
ing instructions contained in the last paragraph of
the domestic policy directive issued to the Federal
Reserve Bank of New York.

Meeting H eld on October 19, 1976
Staff projections continued to suggest that growth
in real GNP would pick up somewhat in the fourth
quarter and would be sustained at about the fourthquarter rate well into 1977. However, the projected
rates of growth were slightly below those of a month
earlier. . . .
Data that became available at the end of Septem­
ber indicated a substantial weakening in the growth
of demand deposits. It appeared that in the Sep­
tember-October period growth in M l would be
below the lower end of the specified range while
growth in M2 would be close to the midpoint of its
range. In those circumstances the System began to
be a little more accommodative in the provision of
reserves, and the Federal funds rate eased to about
5 per cent.
During the Committee’s discussion of the eco­
nomic situation, several members expressed the view
that the economic outlook was less favorable now
than it had been a month or two ago, and that the
risk of a shortfall from expected growth rates in real
GNP had increased.
In the course of the discussion, it was pointed out
that uncertainty about the fiscal policy that would
be pursued in the months ahead — and about pro­
jections of economic activity for coming quarters —
was greater than usual.
With respect to annual rates of growth in the
aggregates over the October-November period, most
members favored a range of 5 to 9 per cent for M l,
given the rebound in growth already in train for
October. For M2, most members favored a range of
9 to 13 per cent. While it was noted that these
ranges were high in relation to the Committee’s
12-month ranges for growth in these aggregates, it
was argued that the Committee should consider
that M l had not grown at all in September and that
Page 16




MARCH 1977

recent and prospective rates of growth in M 2 — and
in M3 as well — reflected the temporary stimulus
provided by recent declines in yields on market
securities to levels below the rates being offered on
deposits.
With respect to money market conditions in the
period until the next meeting, most members
favored a slight easing.
It was agreed that until the next meeting the
weekly-average Federal funds rate might be ex­
pected to vary in an orderly way within a range of
4% to 5Vi per cent. It was also agreed that the
Manager should aim to reduce the Federal funds
rate to about 4% per cent within the next week, and
to decide on subsequent objectives on the basis of
incoming data on the monetary aggregates.

M eeting H eld on November 16, 1976
The information reviewed at this meeting suggested
that real output of goods and services . . . might be
expanding at a somewhat slower pace in the current
quarter. The rise in average prices . . . appeared to
be somewhat faster than in the third quarter. . . .
Staff projections suggested . . . that growth in real
GNP would pick up somewhat in the first quarter of
1977 and that it would be sustained at about the
first-quarter rate well into the new year.
On October 21, 2 days after the October meeting,
incoming data suggested that over the OctoberNovember period rates of growth in both M l and
M2 would be at about the upper limits of the ranges
specified by the Committee. Therefore, it appeared
likely that any reduction in the Federal funds rate
in that week — pursuant to the Committee’s con­
sensus at the October meeting — would have to be
quickly reversed. In those circumstances the Com­
mittee concurred in Chairman Bums’ recommenda­
tion of October 21 that the Manager be instructed to
continue to aim during that week for a Federal
funds rate at about the prevailing level of 5 per cent.
Data becoming available during the following
week continued to suggest unexpected strength in
growth of the monetary aggregates. In response to
an inquiry from the Manager concerning the appro­
priate interpretation of the Committee’s instructions,
Chairman Bums . . . . advised that in his judgment
any significant increase in the Federal funds rate at
that time from the prevailing level of 5 per cent
would be inconsistent with the Committee’s intent.
No member of the Committee expressed the view
that a rise in the Federal funds rate would be
appropriate.
In their discussion of the economic situation,
members of the Committee were in agreement that
the sluggishness or “pause” in the growth of real
output was continuing. As at the mid-October meet­
ing, no member suggested that a recession was
likely.
In the discussion of current policy at this meeting,
members of the Committee in general favored some

FEDERAL RESERVE BANK OF ST. LOUIS

MARCH

1977

easing in money market conditions in the period im­
mediately ahead, so long as growth in the monetary
aggregates did not appear to be unduly rapid.

recent sluggishness appeared to have been only a
“pause” in the growth of real output rather than the
forerunner of a new recession.

It was agreed that until the next meeting the
weekly-average Federal funds rate might be ex­
pected to vary in an orderly way within a range of
4 V to 514 per cent. It was also agreed that the
2
Manager should aim to reduce the Federal funds
rate to about 4% per cent within the next week and
to about 4% per cent within the following week —
provided that growth in the monetary aggregates
did not appear to be strong relative to the specified
ranges — and to decide on subsequent objectives
on the basis of incoming data for the monetary
aggregates.

Moreover, it was suggested that confidence had
improved. . . .

M eeting H eld on D ecem ber 20-21, 1976
The information reviewed at this meeting suggested
that growth in real output of goods and services in
the fourth quarter had remained close to the pace in
the third quarter. . . .
Projections of economic activity for the rest of 1977,
it was noted, depended on the assumptions made
with respect to the economic policies that would be
pursued by the new administration taking office on
January 20.
After the first week of December, incoming data
suggested that in the November-December period
growth in M l would be below its specified range
while growth in M2 would be at about the midpoint
of its range. Therefore, System operations became
somewhat more accommodative in the provision of
reserves, and at the time of this meeting the Federal
funds rate was about 4% per cent ■ near the lower
—
limit of the specified range. . . .
In their discussion of economic developments and
prospects at this meeting, Committee members gen­
erally agreed that the latest business statistics in­
dicated a strengthening in the situation and that the




Although Committee members in general viewed
the business situation and outlook as having im­
proved, some noted that the strengthening thus far
had not been great and that it was not certain that
the pause had ended.
Inflation also continued to be a source of concern
Some concern was expressed that fiscal stimulus
might foster new inflationary expectations or that, as
at times in the past, its effects might come so late in
the expansion as to cause growth of real output to
accelerate at a time when it should be moving
gradually toward the longer-term rate of growth in
potential output. The view was also expressed, how­
ever, that a degree of fiscal stimulus was desirable.
Most members favored giving greater weight than
usual to money market conditions in conducting
open market operations in the period until the next
meeting, in part because projections of growth in
monetary aggregates around the year-end were
highly uncertain. A majority favored directing opera­
tions toward maintaining the Federal funds rate at
about its prevailing level of 4% per cent for the time
being, unless growth in the monetary aggregates
appeared to be deviating significantiy from the rates
currently expected.
The members agreed that, if growth in the aggre­
gates should appear to be strong or weak relative
to the specified ranges, the weekly-average Federal
funds rate might be expected to vary in an orderly
fashion within a range of 4lA to 5 per cent. As at
other recent meetings, the Committee decided that
approximately equal weight should be given to M l
and M2 in assessing the behavior of the aggregates.

Page 17

Free Trade: A Major Factor in U.S. Farm Income
C L IF T O N B . L U T T R E L L

I . j X P O R T S of U.S. farm com m odities totaled $23
billion in 1976 and are expected to exceed that
amount this year. Exports in the past year accounted
fo r alm ost 25 percent of the dollar value of all farm
comm odity sales, and the 100 m illion acres of land
utilized in producing this volum e of exports repre­
sented 30 percent of the total acreage harvested. Thus,
exports play a significant role in determ ining the n a­
tion’s farm incom e.
Since 1970 farm exports have increased both in
dollar value and as a share of total farm commodity
sales. T h e 1975-76 m arketing year was the seventh
successive year of record agricultural exports in
nom inal terms. T h e $23 billion of farm products ex­
ported last year was alm ost four tim es the dollar value
of farm exports in 1969 and m ore than double the
value of 1972. T h e nom inal value o f farm exports rose
at a 21 percen t annual rate during the seven-year
period since 1969, w hile in real terms (a t constant
p rices) they rose at a 12 percen t rate. T h e value of
such exports rose from 14 p ercent of farm commodity
sales in 1970 to 24 percen t in 1976. Furtherm ore, in
1976 a sm aller proportion of the exports was sold on
concessional terms (aided by G overnm ent subsidies).
C oncessional sales abroad declined from two percent
of total farm commodity sales in 1972 to one percent
in 1976.

RESTRICTIVE WORLD TRADE
PRACTICES
T h e downturn in farm exports in the 1920s can b e
largely traced to substantia] increases in artificial re ­
strictions on w orld trade in general. T h e relatively
free trade era beginning in the m id-1800s — trade
w ithout high tariffs, quotas, and other governm ent
restrictions — was generally on the w ane follow ing
W orld W ar I. In the 1920s th ere was an observable
worldw ide trend tow ard increased international trade
restrictions. B ritain, a traditionally free trade n a­
tion, levied the K ey industries D uty in 1921 w hich
im posed a 33.33 p ercen t a d v alorem tariff rate on
many item s. In addition, w artim e duties w ere reim ­
posed on a num ber of “luxuries” in 1925, a fter their
lapse in 1924. T h e U nited States enacted th e FordneyM cC um ber T ariff in 1924 raising im port duties on
numerous item s. Still h igher duties w ere levied by the
United States in 1930 w ith the passing of the H aw leySm oot Act. This A ct authorized tariff rate increases
on m ore than 800 item s during the early stages of the
great depression. O th er nations im m ediately re ta li­
ated by increasing th eir im port duties.1 W ith in two
years general tariff increases w ere en acted in nine
nations w hich com prised the m ajor w orld m arket for
U.S. farm products, including C anada, C uba, M exico,
F ran ce, Italy , Spain, India, A rgentina, and Brazil.

F arm exports as a p ercen t of farm com m odity sales
have m oved in a U-shaped pattern since W orld W ar I
(see accom panying ch art). In the early 1920s such
exports exceeded 20 p ercent of gross farm receipts.
B y the late 1920s farm exports had declined to 17
percent of sales; they averaged 11 p ercent of sales
during the 1930s, 10 p ercen t in the 1940s, and 12
percent in the 1950s. In the 1960s exports rose to 15
p ercen t of sales and continued upward in the 1970s,
averaging 24 p ercen t of sales in th e three calendar
years 1974-76 inclusive — alm ost the same as in the

As a consequence of these trade restrictions and a
worldw ide depression, w hich began in 1929, w orld
trade both in nom inal terms and relative to G N P
declined sharply. From 1929 to 1932, the dollar value
of world trade dropped 61 percent, and the value of
U.S. foreign trade fell 69 p ercen t.2 T o ta l U .S. exports

early 1920s.

-Statistical Y ea rb o o k o f th e L e a g u e o f N ations, 1934-35.


Page 18


1For a more comprehensive discussion of the-im pact of the
Hawley-Smoot Act, sse Allan H. Meltzer, “Monetary and
Other Explanations of the Start of the Great Depression,”
Jou rn al o f M onetary E con om ics (Novem ber 1 9 7 6 ), pp.
459-461.

FEDERAL RESERVE BANK OF ST. LOUIS

MARCH

1977

Farm Exports A s Percent o f Farm C o m m o d i t y S a le s

1920

1924

1928

1932

1936

1940

1944

1 94 8

1952

1 95 6

1960

1964

1968

1972

19 7 6

So urce: U.S. D e p a rtm e n t of A g ric u lt u re

d eclined from 4.9 percent to 2.7 percen t of G N P dur­
ing the period. F arm com m odity exports declined
from $1.8 billion to $0.75 billion during the three
fiscal years ending in 1932. Farm exports as a share of
total farm production, how ever, rem ained relatively
stable during the early depression years despite the
h igher tariff rates. In 1930, the first full year of the
depression, farm exports am ounted to 13 percent of
farm commodity sales, and at the trough o f the d e­
pression in 1933 such exports, w hile declining sharply
in nom inal value, still totaled about 13 p ercen t of
sales.

F ree International Trade Espoused . . .
W ith a new Adm inistration in 1933, the political
clim ate changed, and this nation began to espouse the
cause of free international trade. T h e H ull Reciprocal
T rad e Agreem ents A ct was passed in 1934, the first of
a series o f legislative attem pts to expand international
trade. O ther tariff reduction acts and international
agreem ents further contributed to free trade practices.
E specially significant w ere the G eneral A greem ent on
Tariffs and T rad e in 1947 and the T rad e Expansion
A ct of 1962 w hich authorized the President to negoti­
ate numerous tariff reductions.
W h ile attem pts w ere being m ade to expand in ter­
national trade through tariff reductions, Congress en ­



acted special legislation in a num ber ot instances
w hich was designed to expand farm exports through
the use of export subsidies. T h e expansion of farm
exports through the use of G overnm ent subsidies was
a m ajor factor in the post W orld W ar I I assistance to
Europe and Japan under the United Nations R elief
and R ehabilitation Administration, the M arshall Plan,
and other relief and recovery programs. A fixed por­
tion of the foreign econom ic aid funds in 1954 was
earm arked to buy surplus farm com m odities from the
U nited States. P u b lic Law 480, passed in 1954, was
specifically designed to provide a foreign outlet for
“surplus” farm products. W h ile these programs were
not restrictive within them selves, they tended to pro­
duce retaliatory restrictive actions by other nations.

. . . Blit Restrictive Farm Programs Enacted
D espite the stated free trade objectives in the for­
eign trade legislation and international agreem ents of
the 1930s and the follow ing decades, the m ajor farm
programs enacted during this period tended to re ­
strict farm product exports. In 1943 Professor
Theodore W . Schultz, in a study o f dom estic farm
programs, pointed out that m ost o f the agricultural
agencies established during the 1930s w ere designed
to do one thing — provide “parity” (h ig h er than freePage 19

FEDERAL RESERVE BANK OF ST. LOUIS

m arket) prices fo r farm products.3 T h e m ethods used
to attain this objective w ere supply and production
controls, price supports, com m odity storage, and sur­
plus disposal programs.

Production Controls and Price Supports
In 1933, w hen the New D e a l cam e into being
direct legislative action was taken to increase farm
product prices to levels above those dictated by the
free m arket. T h e Agricultural Adjustm ent Adminis­
tration was established to curtail production of most
m ajor crops. A specific num ber of acres was allocated
to the key crops on each farm . P rice supports w ere set
through Com m odity C redit C orporation (C C C ) non­
recourse loans to farm ers on stored commodities. T h e
loan and storage programs, financed at taxpayer ex­
pense, w ere designed to guarantee a specific price,
usually above the free m arket level, to farm pro­
ducers by restricting the flow of com m odities to both
dom estic and export markets. T h e surplus disposal
programs — P ublic Law 480, school lunches, food
stamps, and other food disposal schem es — w ere all
designed to increase total dem and for farm products
and thereby enhance prices. T h e P ublic L aw 480
program, w hich subsidized exports of farm com m odi­
ties to the less developed nations, may have increased
farm exports somewhat. How ever, such programs
w ere disruptive of norm al trade flows, and gener­
ally have been regarded as “dumping” when used by
other nations to export products to the U nited States.

MARCH

1977

of total U .S. exports during the eight years prior to the
programs (1 9 2 6 -3 3 ). F arm exports declined to an
average of 29 percen t of total exports from 1934 to
1940 and to 23 p ercen t of total exports from the end
of W orld W ar I I until 1971, despite the governm ent
subsidies on a sizable portion of th e farm com m odities
exported.4
T h e artificially high farm product prices resulting
from the production controls and p rice supports
caused the rest of the w orld to increase the produc­
tion of farm products from the am ounts th at would
have otherw ise been produced. T h e h igher farm pro­
duct prices increased the returns to resources in
agriculture and caused increased resources to move
into the industry in the rest of the world. C on se­
quently, farm production outside the U nited States
was enhanced and U.S. farm exports reduced. In ad­
dition, increased resources m oved into th e production
of farm com m odity substitutes bo th here and abroad
leading to a further reduction in world dem and for
U .S. farm products.

Cotton

Production controls and price supports have been
a m ajor d eterrent to the expansion of international
trade in farm products over m ost of the period since
the early 1930s. T hey reduced dom estic farm out­
put and led to increased prices for farm products
to all users, both dom estic and foreign. T h e average
price of U.S. farm products rose at the rate of 15 per­
cen t per year from 1932, the last year prior to the
programs, to 1935. In comparison, the average price
of industrial com m odities rose at a 3.4 percent rate
during this period.

O ne prim e exam ple o f the consequences o f the
U.S. farm production controls and subsidies was the
sharp decline in the usage of dom estic cotton. In
1930, prior to the acreage controls and p rice supports,
this nation supplied m ore than 5 0 p ercen t o f the
w orld’s cotton production. At the beginning of W orld
W ar II, after seven years of the program s, cotton
production in the U nited States had declined to 40
percent of the world total, and the nation’s share con ­
tinued down to less than 20 percen t o f th e world
total in 1970. In 1930 the U nited States exported 7.1
m illion bales of cotton, or m ore than 50 percen t of
total world cotton exports. By 1940 U .S. cotton exports
had declined to 1.2 million bales or about 15 p ercen t
of the world total. T h e volum e o f dom estic cotton ex­
ports rose follow ing W orld W ar II, bu t in 1970 U.S.
exports totaled only 3.7 m illion bales, or 22 percen t of
the world total.

Follow ing the production controls and price sup­
ports, U .S. farm com m odity exports declined both
relative to farm commodity sales and as a share of
total U .S. exports. Farm exports, w hich accounted for
14 percen t of farm com m odity sales in 1932, dropped
to 11 percent of such sales in 1934 follow ing the re­
strictions, and continued downward to 8.5 percent in
1936 (see ch art). Farm exports averaged 38 percent

T h e cotton programs had a m ajor im pact on world
land resource use as indicated by shifts in the acreage
used for cotton production. D uring the 1930s cotton
harvested in the U nited States declined 43 percent,
from 42 m illion to 24 m illion acres. In contrast, cotton
harvested in foreign countries rose 24 percent, from
43 million to 53 m illion acres during the period. In the
40 years from 1930 to 1970, during m ost o f w hich pro­

^Theodore W . Schultz, R ed irectin g F arm P olicy (N ew York:
The Macmillan Company, 1 9 4 3 ), p. 6.

4U,S. Department of Agriculture, A gricultural Statistics, 1972,
p. 698.

Digitized Page 20
for FRASER


FEDERAL RESERVE BANK OF ST. LOUIS

duction controls and p rice supports w ere in effect,
acres of cotton harvested in the U nited States fell 74
percent, w hereas the acreage harvested in the rest of
the w orld rose 57 percent. Although part of the re ­
duction in cotton acreage in the U nited States
reflected rising dom estic yields and technological
developm ents in the synthetic fiber industry, a large
part of the shift can be attributed to the restrictive
cotton programs.
W h ile the im pact of the cotton restrictions on the
use o f synthetic fiber substitutes is difficult to assess,
the h igher prices for cotton resulting from the re ­
strictions w ere no doubt a factor contributing to the
sharp increase in synthetic fiber usage. At the b eg in ­
ning of the controls in 1933, synthetic fiber substitutes
w ere virtually unknown. Follow ing W orld W ar II
such fibers began to com pete aggressively w ith cotton,
and by 1975 the poundage of such fibers used by
dom estic mills was m ore than double th at of cotton.

Wheat
C otton is only one exam ple of export m arkets being
underm ined by dom estic farm production restrictions
and p rice supports. T h e w heat acreage controls and
p rice supports had a sim ilar im pact. T h e G overnm ent
began to hold w heat off the m arket in m id-1929
through loans to farm ers by the F ed eral F arm Board.
In 1933 dom estic acreage controls and the In tern a ­
tional W h eat A greem ent furth er contributed to rising
w h eat prices and a reduction in w heat exports. W h ile
the downward adjustm ent in dom estic w heat acreage
was not as m uch as was planned during the early
years of the controls, because o f the drought in 1933
and 1934, the controls did reduce production, and
w heat prices rose.5 T h e prices received by farm ers
rose from an average of $0.48 per bushel during the
three years 1930-32 to $0.82 during the six years
1934-39. Exports declined from an average of 103
m illion bushels per year during 1930-32 to an average
o f 56 m illion bushels per year during 1934-39.
T h e adjustm ents in resource use in some of the
m ajor w heat im porting nations as a result of the
higher prices took a p red ictable route. T h e largest
w heat im porter, the U nited Kingdom, increased its
w heat acreage by plow ing up some grassland and
planting it to w heat. Italy expanded her acreage by
clearing and draining the Pontine M arshes. F ra n ce
5In 1934 Sherman Johnson estimated that the wheat programs
had resulted in prices 10 to 15 cents per bushel higher than
they otherwise would have been. See W h ea t U nder th e Agri­
cultural A djustm ent A ct (T h e Brookings Institution, 1934),
p . 90.




MARCH

1977

m ade m ore extensive use o f h er North A frican pos­
sessions for w heat growing, thereby reducing both
dom estic w heat production and im ports from the
U nited States.
In the U nited Kingdom w heat prices in 1933 had
declined to 67 percen t of the 1930 level; they d e­
clined further in 1934 but rose sharply in the next
three years and during the two years 1937-38 they
averaged 51 percen t above the 1933 level. T h e cereal
portion of the food price index likew ise rose sharply,
increasing by 42 p ercen t from 1933 to the average for
1937-38. In contrast to the sharp increase in cereal
prices, the m eat-fish and other food sectors of the
consum er p rice index rose only 12 and 13 percent,
respectively. In response to these changing p rice re ­
lationships B ritish farm ers found it profitable to plow
up grazing land on w hich m eat was being produced
and seed it to w heat. T h e acreage seeded to w heat
rose from 1.34 m illion in 1932 to 1.92 m illion in 1938,
an increase of 43 percent. W h ea t production in the
nation rose 67 p ercen t during the period, and imports
of w heat declined. T o ta l w heat and flour imports by
the United Kingdom declined 12 p ercen t from the
1931-33 average to the 1937-38 average.6
Exports of most other m ajor crops, including feed
grains, tobacco, rice and peanuts have likew ise been
affected by the farm programs, bu t not to the same
extent as w heat and cotton.
T h e unfavorable im pact of the farm price supports
and controls on exports was pointed out by Professor
D ale H athaw ay in 1963:
Suddenly in the m id-1950’s the impact of our
domestic programs upon foreign trade in farm prod­
ucts came home to roost with a vengeance. Exports of
farm products fell precipitously, aggravating the do­
mestic stocks problem and threatening us with a
permanent loss of foreign markets as foreign supplies
expanded to fill the gap.7

Controls Relaxed and Exports Rose
In recen t years G overnm ent controls on agriculture
have been relaxed, and greater reliance has been
placed on free m arket forces in the use of farm pro­
duction resources and the pricing of farm com m odi­
ties. Sin ce the enactm ent of the Agricultural A ct of
1970, m ost of the dom estic farm restrictions have been
1 B. R. Mitchell, A bstract o f British H istorical Statistics (C am ­
1
bridge: Cambridge University Press, 1 9 6 2 ), p. 99.
"D ale E. Hathaway, “Evaluation of Agricultural Programs in
Terms of Econom ic Growth, Foreign Trade, and Political
Feasibility: A General Appraisal,” Increasing U nderstanding
o f P u blic P rogram s a n d P olicy (Chicago: Farm Foundation,
1969), p. 73.
Page 21

FEDERAL RESERVE BANK OF ST. LOUIS

redesigned to perm it com petitive pricing o f m ost
crops including w heat, feed grains, the m ajor oilseeds,
and cotton. A creage controls fo r m ost crops w ere
largely rem oved in 1974 w ith the elim ination o f the
set-aside provisions for cotton, w heat, and feed grains.
T his action freed about 60 m illion additional acres for
crop production. C C C loans on basic crops have been
continued, b u t the rates have generally b een set b e ­
low w orld-price levels and subsidies on the production
o f m any farm com m odities have b een elim inated.
T h e decline in the im pact of the G overnm ent pricesupport programs on the p rice o f farm com m odities is
indicated by the reduced volume of C C C loans and
holdings. In 1965 the value of farm com m odities
owned by the C C C totaled $4.1 billion and the co r­
poration had an additional $2.6 billion of loans out­
standing on farm com m odities through p rice support
operations. B y 1974 the value o f com m odities owned
by the C C C had declined to $188 million, and C C C
loans outstanding w ere down to $681 million. T h e
freeing of agriculture from excessive production re ­
strictions and the return to the price m echanism as
the m ajor instrum ent in m anaging th e farm econom y
has no doubt been a m ajor facto r in the sharp increase
in farm exports in recen t years.

Other Factors Contributed to Rising
Farm Exports
A rising volum e of w orld trade in recen t years has
contributed to the sharp increase in U.S. farm exports.
Since 1970 exports of the eight m ajor com m ercial n a­
tions listed in T ab le I have increased faster than their
Gross National Product (G N P ), and in m ost cases
export growth has more than doubled the rate of
G N P growth. In contrast, from 1960 to 1964 exports
rose at about the sam e rate as GNP.
In addition to the relaxation of farm programs
w hich has contributed to rising w orld trade in recen t
years, other factors affecting the rising volume o f farm
exports include: a relatively p eacefu l international
situation, the move to more flexible exchange rates,
som e further tariff reductions, the O P E C oil cartel,
and rising real incomes. F o r centuries the threat of
w ar and the alleged demands for national defense
have b een used as argum ents fo r g reater self suffi­
ciency. T h e m ilitary strength of a nation is believed
by many people to be enhanced by self-sufficiency in
econom ic production, particularly food. C onsequently,
during periods of m ajor threats to world p eace and
im m ediately after m ajor international disturbances
the proponents o f self sufficiency are likely to influPage 22




MARCH 1977

T a b le 1

G R O S S N A T IO N A L PRODUCT A N D EXPORT
G R O W T H IN LARGE C O M M ER C IA L N A T IO N S
(C o m p o u n d e d A n n u a l Rates o f C h a n g e )
1 9 6 0 -6 4
Canada GNP
Exports

7 .0 %
5 .9

France G N P
Exports

1 9 7 0 -7 4
1 3 .2 %
2 4 .4

10.1
1 3 .4

13.1
2 9 .2

8 .7
9.5

9 .7
2 4 .7

Ita ly G N P
Exports

1 1 .9
10.5

1 3 .9
28.1

Japan G N P
Exports

1 6 .0
1 5 .0

1 7 .0
3 6 .5

1 0 .3
1 1 .7

1 2 .9
2 6 .5

6.5
3.8

1 2 .5
2 6 .9

5 .9
5 .4

9 .2
2 5 .9

G e rm a n y G N P
Exports

N e th e rla n d s
Exports

GNP

U nited K in g d o m
Exports

GNP

U nited Sta te s G N P
Exports

S o u rc e : U n ited N ation s, Monthly Bulletin of Statistics (A u gu st
1 9 7 6 ), pp. 186-189, (M ay 1 9 6 8 ), pp. 176-179, and In te r
n a tio n a l M on etary Fund, D irection o f Trade 1966-70, p. 2,
and D irection o f Trade 1960-64, p . 2.

ence national trading policy, especially in those n a­
tions w hich im port a large p ercen t o f th eir food
supply. T h ese proponents of self sufficiency hold that
it is safer in an uncertain world to provide th e basic
necessities at hom e even at higher costs.8
T h e move to m ore flexible exchange rates in 1971
probably contributed to the rise in total international
trade by the U nited States and, th ereby, to an in ­
crease in farm exports. D uring th e late 1960s the
dollar was overvalued in international trade — th at is,
at the fixed exchange rate A m erican produced goods
w ere less attractive in the international m arket than
foreign produced goods. C onsequently, foreign pur­
chases of goods and services from the U nited States
declined relative to foreign sales to the U nited States.
H ow ever, w ith the establishm ent of the floating ex­
change rates w hich em erged from the so-called crisis
of 1971, the dollar was no longer overvalued relative
to other currencies and, as a result, U .S. exports of
goods and services rose.
W h ile it is argued by some that flexible exchange
rates increase th e risks o f international trade, others
point out th at the m arket pricing of currencies leads
to a reduction in trade restrictions. G overnm ents
often attem pt to m aintain th eir currency values by
lim iting im ports and thereby lim iting th e am ount of
dom estic currency flowing into international exchange
markets. Such restrictions reduce the volum e o f trade
8Charles P. Kindelberger, F o reig n T ra d e a n d th e N ational
E con om y (N ew Haven: Yale University Press, 1 9 6 2 ), p. 142.

FEDERAL RESERVE BANK OF ST. LOUIS

MARCH 1977

and the consum ption and investm ent opportunities of
the people. N evertheless, the tendency to restrict
trade for purposes of m aintaining artificial exchange
rates is w ell entrenched in the political arena.9 W ith
the demise of fixed rates this reason fo r erectin g trade
barriers no longer exists.

tend to m ake resource adjustm ents m ore nearly in
accord w ith production efficiencies and w orld m ar­
kets. W orld resources m ove to those uses w hich w ill
provide maxim um returns. C onsequently, each nation
produces those products in w hich it has th e greatest
relative advantage.

N egotiations b y the G eneral A greem ent on Tariffs
and T rad e (G A T T ) m em bers tow ard fu rth er tariff
reductions have continued in recen t years. In 1973 the
m em bers adopted a new M ultifiber T extile A gree­
m ent w hich is expected to liberalize and expand
w orld textile trade. T h e T rad e A ct of 1974 further
expanded the President’s negotiating authority to re ­
duce tariffs. Also the nation’s econom y is probably
still adjusting to reduced tariff barriers negotiated
follow ing th e K ennedy round o f tariff reductions in
the 1960s. On the other hand, an increasing amount
of the trade negotiations in recen t years appears to
have b een negative. T h e agreem ents contain num er­
ous safeguards and relief provisions for real or im ag­
ined dam age to specific industries or labor, and safe­
guards to national security. Such actions, taken to
reverse earlier free trade practices, tend to offset a c­
tions intended to further liberalize trade.

T h e U nited States has a relative advantage in the
production o f agricultural com m odities. This nation
has an abundance of fertile soil, generally favorable
w eather, and relatively high technological develop­
m ent in agriculture. C onsequently, by specializing in
agricultural production and trading farm products for
the products of other nations, such as petroleum ,
m etals, tropical fruits, coffee, and other im ports, we
have m ore goods available for consum ption than
would b e available w ithout the specialization of pro­
duction and trading. O ur increase in farm exports is
thus m ore than m atched b y a gain in our ability to
purchase goods and services produced b y other n a­
tions. Conversely, the gain in exports to the United
States by other nations increases th eir ability to pur­
chase our farm products and provides them w ith more
goods for consumption. C onsequently, any restrictions
w hich dampen our im ports or in terfere w ith in ter­
national trade in any w ay reduce the d egree of
m utually profitable international specialization and
th ereby restrict the export m arket for dom estic farm
products.

W h ile th e higher oil prices follow ing the actions of
th e O P E C cartel cu t tw o ways in the export picture,
they probably contributed to increased U .S. farm ex­
ports on balance. U.S. oil purchases from abroad have
increased several fold since the cartel was formed,
and a larger quantity of farm com m odities are re ­
quired to purchase a given quantity o f oil. O n the
negative side, how ever, a num ber of the m ajor im ­
porters of U.S. farm com m odities, such as Jap an and
G erm any, now use a larger portion of their foreign
exchange to purchase oil from the O P E C nations.
A pparently these nations w ill have less foreign ex­
change to purchase farm products from the U nited
States.

F ree Trade — A Boon to American
Agriculture
T h e sharp increase in U .S. exports w ithin the free
m arket setting of recen t years reflects a furth er co n ­
centration of resources in those sectors of the nation’s
econom y having the greatest relative advantage.
W orld trade rises as a result o f further specialization
in resource use. E ach trading nation specializes in the
production of those com m odities in w hich it has a
relative advantage over the rest of the world. Nations
9See Gerald M. Meier, P roblem s o f T ra d e P olicy ( Oxford Uni­
versity Press, 1 9 7 3 ), p. 16.




E xtern al world trade and U.S. farm exports can b e
expected to in crease furth er as the m ajor econom ies
of the world accep t freer trade policies. F o r trade to
continue to expand, how ever, free trade policies are
necessary for both exports and imports. Restrictions on
imports of foreign goods and services, farm price
supports and production controls, and quotas on ex­
ports are not conducive to w orld trade growth. N a­
tions w hich follow such arbitrary trade restricting
practices and production controls cause im porting
nations to lose confidence in them as a source of
supply. Im porters w ill thus becom e more self suffi­
cien t or look elsew here for a m ore reliab le supply for
the sam e reason that th e U nited States hopes to gain
greater self sufficiency in petroleum production and
usage. If the U nited States can avoid such restrictions,
our farm exports should continue to expand. Farm ers
will experience gains from the expansion. Im ports of
nonfarm products should increase and som ew hat
slow er growth w ill occur in the dom estic production
of those types of products that are im ported. H ow ­
ever, greater expansion w ill occur in the farm sector
and in the farm supply industries such as fertilizer
and farm m achinery. H ence, the rise in specialization
Page 23

and foreign trade will not cause any net loss of jobs
or reduce the overall returns to labor and other re ­
sources. In contrast, all trading nations should gain
from the greater output and consumption resulting
from further world specialization of resource use and
production.

CONCLUSION
Since 1970 U.S. farm exports have risen sharply,
both in dollar value and relative to total farm com ­
modity sales. Farm exports now account for almost
25 percent of the value of all farm com m odity sales,
about the same percent as in the early 1920s — a
period of relatively free trade.
D uring the four decades from 1933 to 1972, farm
exports averaged less than 12 percent of farm com ­
modity sales. D uring most of this period, farm product
prices w ere m aintained above free m arket levels
through Governm ent production control and price
support programs. T hese programs lim ited the expan­
sion of farm exports by raising the costs of such com ­
modities to foreign purchasers. At the higher prices,
foreign producers had greater incentive to increase
production of these and substitute products. In addi­



tion, the support prices contributed to the rep lace­
m ent of cotton by synthetic fibers in both dom estic
and foreign markets.
W ith the elim ination of m ost p rice supports and
production controls on farm products in the early
1970s, farm exports relative to total sales again
clim bed to about their 1920-30 levels. W h ile a portion
of the recen t farm export gains can b e attributed to
reduced tariffs and other factors, such as the m ove to
more flexible exchange rates and a relatively peacefu l
international scene, part of the gain is attribu table to
the relaxed dom estic p rice support and production
control programs.
If the restrictive farm programs are not reim posed,
and free trade practices are m aintained, a high p e r­
centage of the nation’s farm production w ill probably
continue to be exported. This nation has a relative
advantage in the production of most farm products
and under a free trade regim e farm exports w ill rise.
A rising volume of farm exports under free m arket
conditions is beneficial to A m erican farm ers and at
the sam e time increases the goods and services avail­
able to all people in the trading nations.