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! T « r> < \ October u, 19*7. (Delivered Oct. 7. 1957) • > u . y a THE JOB OF THE FEDERAL RESERVE SYSTEM C/ * • r. , The Federal Reserve System*s most important job i s to help to protect national prosperity from damage by inflation. In doing i t s part of the job, the Federal Reserve System relies on the determination and resourcefulness of the American people to cope as successfully with inflationary problems as they did with post war readjustment problems when national production was greatly increased and living standards raised within the 3ame short space of time that i t was also possible to be of major assistance to our friends abroad. Teamwork accomplished those re- markable economic feats and teamwork at a l l levels of public and private l i f e and activity i s essential to overcoming the threat of inflation. The general object of teamwork must be to keep the total of public and private expenditures in proper balance. This i s because the concern f e l t about inflation has focused on the d r i f t toward higher Prices and, therefore, to the extent that total expenditure is the source of the pressures which force prices up, holding them within reasonable bounds helps to abate pressure on the price structure and to preserve the purchasing power of the dollar. In line with this reasoning, public bodies have been urged to adopt f i s c a l policies holding their expenditures within the most conservative limits that are practical. Con- servatism in the area of private expenditure i s equally desirable and i t is there that the worfc of the Federal Reserve System can be most useful through the anti-inflationary influence of i t s power to regulate the supply of credit. -2 The economic importance of the Federal Reserve System's job of regulating the volume of credit l i e s in the fact that the use of credit leads to expenditures that become a part of the total stream of expenditures. As Federal Reserve System policy of recent tinos has been to restrain the expansion of credit, the e f f e c t has been to limit additions to the stream of total expenditures and thereby to moderate upward price pressures that would otherwise originate from credit sources. Business activity during the period that the Federal Reserve W sought to restrain the expansion of credit has been at a high level, as has also been true of the demand for credit, which accounts for the rise in interest rates. I t is true that i f the Federal Reserve System had not acted to restrain the expansion of credit, and a larger supply of credit had been available, interest rates presumably would not have risen as strongly as has been the case but the stream of expenditures would have been swollen proportion ately and inflationary influences aggravated that much more. Moreover, although interest i s seldom a decisive business cost, i t i s a cost faotor to be reckoned with in business planning. A» that i s so, higher interest rates tend to exert a restraining influence °n economic activity at times when booming conditions deserve the touch °f a cautionary hand. By the same token, a higher cost of interest proba- bly has some e f f e c t on the thinking of individuals planning to purchase homes or consumer durable goods through the use of credit by encouraging their greater use of savings and lesser use of credit for carrying out their projects. Under present conditions, the use of savings to finance business expansion i s preferable to bank created credit because such a use of -3savings penults the advancement of capital expansion programs with a minimum of inflationary impact. I t therefore follows that where higher in- terest rates tend to stimulate savings and to draw them into economically sound projects, a good purpose has been served. All bold higher interest rates are a natural phenomenon of the present state of business and in their effects help to serve the ends of a national economic policy seeking to preserve a sound prosperity. What may ho hoped f o r from the public and p r i v a t e teamwork necessary to insure the continuance of generally prosperous conditions i s that the economic factors and credit resources wliich during recent years have found varying active employment in one sector of the economy after another w i l l continue bo c i r culate and as t h e i r need at one point has lapsed will move on to find s t i l l °ther useful employment. This i s the process that is known as a rolling readjustment which as i t may now bo occurring might witness a shift in economic activity away from the area of capital investment back, for example, into the area of home construction. The transfer of economic factors and credit resources that would accomplish tliis s h i f t might be expected to stimulate and increase demand for the output of the enlarged plant capacity that has been put in place as a sorvico to the American consumer. A new balance between national production and consumption should come from this kind of development and without burdening the American people with an additional load of debt a3 would be the case i f an attempt should be made to a r t i f i c i a l l y stimulate consumption through a greater U3e of credit. 0 The high level f employment and of individual incomes give promise that consumers have "the means to absorb the output of our magnificent plant. Their willingness -hto do so depends on their confidence that a l l vestiges of inflation can be eliminated and the purchasing po^er of the dollar maintained. Team- work to protect prosperity i s essential to j u s t i f y that confidence. A. L. Mills, Jr. Summary of remarks at the Joint Directors1 Meeting, Oklahoma City Branch, federal Reserve Bank of Kansas City
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