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F o r R e l e a s e on D e l i v e r y Thursday, A p r i l 17, 1969 11:00 a.m., E . S . T . MONETARY POLICY, CORPORATE FINANCING, AND THE QUEST FOR ECONOMIC STABILITY Remarks By Andrew F . Brimmer Member Board o f Governors o f the F e d e r a l Reserve System Before American Bankers Executive the Association Council The G r e e n b r i e r W h i t e Sulphur S p r i n g s , West April 17, 1969 Virginia MONETARY POLICY, CORPORATE FINANCING, AND THE QUEST FOR ECONOMIC STABILITY By Andrew F . Brimmer* As the c u r r e n t year has p r o g r e s s e d , evident that stronger inflationary d u r i n g 1969, we w i l l should l a s t beginning of economy, has become for for national stabilization a longer peroid of time - - policies In r e c o g n i t i o n of this f u r t h e r measures i n the campaign a g a i n s t a 1/2 per c e n t i n c r e a s e F e d e r a l R e s e r v e Banks, On A p r i l i n the d i s c o u n t and r e s e r v e r e q u i r e m e n t s rate 3, this which r e i n f o r c e l a s t December, w i l l inflation progress the the approval t o 6 per c e n t effective today. at at These during t o an end. the r e s t r i c t i v e be s u f f i c i e n t these additional c o u r s e o f monetary u n t o themselves On the c o n t r a r y , toward c h e c k i n g i n f l a t i o n that -- without if to we are t o make policy bring signif- imposing excessive s t r a i n s * Member, Board o f Governors o f the F e d e r a l R e s e r v e System. I am g r a t e f u l to s e v e r a l members o f the B o a r d ' s s t a f f f o r a s s i s t a n c e i n t h e p r e p a r a t i o n o f t h e s e remarks - - p a r t i c u l a r l y t o M i s s E l e a n o r J . S t o c k w e l l and M i s s Mary Ann G r a v e s . and year. monetary measures, the' c u r r e n t -- a g a i n s t demand d e p o s i t s However, we s h o u l d n o t h a s t e n to c o n c l u d e followed since clear: take o b v i o u s l y h e l p to dampen the r a t e o f economic e x p a n s i o n the r e s t o f icant for t h i s month t o a l l member banks were r a i s e d by 1/2 p e r c e n t a g e p o i n t , moves w i l l restraint changed o u t l o o k inflation. of are q u i t e t h a n was f o r e s e e n a t the F e d e r a l R e s e r v e Board d e c i d e d e a r l i e r was g i v e n f o r The i m p l i c a t i o n s need more o v e r a l l monetary and f i s c a l the y e a r . increasingly i n the A m e r i c a n economy a r e much t h a n was a n t i c i p a t e d even a few months ago. t h i s u n f o l d i n g evidence it pressures it -2on our f i n a n c i a l system - - it is p o l i c y must a l s o c a r r y a g r e a t e r clear t h a t the F e d e r a l Government's f i s c a l share o f the burden. Fortunately, in light o f the r e c e n t l y announced o u t l i n e s o f the budget f o r the next year, t h i s need i s r e c o g n i z e d i n the E x e c u t i v e Branch. p r o j e c t e d budget s u r p l u s m a t e r i a l i z e s , a powerful factor If the the fiscal sizable F e d e r a l f i s c a l p o l i c y would become s u p p o r t i n g the e f f o r t s to r e s t o r e p r i c e s t a b i l i t y . On the o t h e r hand, we s h o u l d keep i n mind t h a t the impact o f budgetary measures on the economy w i l l be f e l t o n l y a f t e r Congress has completed i t s and a p p r o p r i a t e d funds actually G i v e n the r e c e n t e x p e r i e n c e s spent. actions ( i n c l u d i n g o l d as w e l l as new a u t h o r i z a t i o n s ) i n t h i s regard, it seem w i s e t o r e s e r v e judgment on the u l t i m a t e c o n t r i b u t i o n t h a t p o l i c y w i l l make i n the quest f o r economic s t a b i l i t y would fiscal i n the months ahead. I n the meantime, the e x c e p t i o n a l s t r e n g t h w h i c h the p r i v a t e i s e x h i b i t i n g poses a s e r i o u s c h a l l e n g e to s t a b i l i z a t i o n p o l i c i e s . by a l a r g e i n c r e a s e i n p l a n t and equipment e x p e n d i t u r e s , business are the sector Spurred corporate s e c t o r has become a major source o f excess demand and a d d i t i o n a l p r e s s u r e on p r i c e s . To h e l p f i n a n c e the p r o j e c t e d e x p a n s i o n i n capacity, c o r p o r a t i o n s may t r y t o r a i s e a s i z a b l e volume o f funds d u r i n g coming months and thus aggravate a l r e a d y d i f f i c u l t outlook, c a p i t a l market c o n d i t i o n s . Given we s h o u l d be p r e p a r e d to a d j u s t our s t a b i l i z a t i o n p o l i c i e s more e f f e c t i v e l y w i t h the main sources o f i n f l a t i o n a r y pressures this to cope i n the year ahead. However, is i n a t t e m p t i n g to moderate the c a p i t a l goods boom - - c u r r e n t l y the m a i n s p r i n g o f which the renewed pace of expansion — we s h o u l d -3aa v o i d t a k i n g measures w h i c h m i g h t d i s r u p t i n the l o n g - r u n . In p a r t i c u l a r , i n my p e r s o n a l o p i n i o n , w i s e t o suspend the 7 per c e n t i n v e s t m e n t suggesting. On the o t h e r hand, the development o f if tax c r e d i t the economy i t w o u l d be as some o b s e r v e r s the e x c e s s i v e r a t e o f b u s i n e s s the b u d g e t a r y measures i n p r o s p e c t - - actions already taken - - plus careful t h o u g h t s h o u l d be g i v e n t o e x t e n d i n g t h e 10 per c e n t income applicable year at a r a t e to i n d i v i d u a l s . the c l o s i n g s e c t i o n o f V i g o r o f Economic I will these for corporations comment f u r t h e r expectations substantially a f a s t e r r a t e o f g r o w t h and l e s s progress gross n a t i o n a l product r i s e of adjustment (GNP) i n c u r r e n t the g e n e r a l p r i c e last -- of toward e x p e c t a t i o n prices for In late 1969 as a w h o l e This projection ( o r 6 . 8 per c e n t ) , steadily t h r o u g h the y e a r , t h e t h i r d q u a r t e r F e d e r a l pay r a i s e ) i n contrast year. the compared The r a t e l e v e l (as measured by the GNP i m p l i c i t i n c r e a s e was e x p e c t e d t o be a r o u n d 3 p e r c e n t 1969 - - in about the o u t l o o k f o r (or 9 . 0 per c e n t ) d u r i n g 1968. was p r o j e c t e d t o d e c l i n e for possibility t o $920 b i l l i o n . about $60 b i l l i o n w i t h an i n c r e a s e o f $71 b i l l i o n deflator) on t h i s than t h a t i n checking i n f l a t i o n . i n t h e range o f $918 b i l l i o n implied a year-to-year increase of higher surtax Expansion economy d u r i n g 1969 have s h i f t e d was p r o j e c t e d believe remarks. I n t h e l a s t month o r s o , January, I are invest- ment i n f i x e d equipment i s n o t dampened by the monetary and f i s c a l t h r o u g h the n e x t f i s c a l un- to roughly 4 per cent and of price (after the annual r a t e of i n the c l o s i n g months of i n the c o r r e s p o n d i n g months of -4aBy the end o f March, i t was e v i d e n t t h a t the growth of economy was not moderating as e x p e c t e d . about spending p l a n s In fact, d u r i n g the c u r r e n t y e a r . outlook i s the sharp i n c r e a s e o f o v e r a l l economic (about A l t h o u g h no d e t a i l e d r e v i s i o n s components u n t i l 14 per c e n t ) sector for performance opti- i n plant and 1969. can be made i n the projections the new F e d e r a l budget e s t i m a t e s f i s c a l y e a r 1970 a r e a v a i l a b l e and have been d i g e s t e d , clear i t was The key development u n d e r l y i n g the more equipment o u t l a y s planned by the b u s i n e s s of GNP and i t s information i n the p r i v a t e s e c t o r became a v a i l a b l e , n e c e s s a r y t o r e v i s e upward the p r o j e c t i o n s mistic as more the it is for already t h a t the r a t e of growth of the economy d u r i n g c a l e n d a r 1969 w i l l be h i g h e r t h a n was a n t i c i p a t e d i n January. the a d d i t i o n a l measures o f monetary r e s t r a i n t the p r o j e c t i o n o f even a s l i g h t l y warranted. In January, larger As o f t o d a y , adopted two weeks ago, i n c r e a s e i n GNP may w e l l be the q u a r t e r - t o - q u a r t e r increases i n GNP were expected t o be i n the range of $11 b i l l i o n t o $13 b i l l i o n , s e a s o n a l l y a d j u s t e d annual growth rates of 5 t o 6 per c e n t . appears t h a t the q u a r t e r l y r i s e s these c o n d i t i o n s , suggesting Now i t i n GNP may be even h i g h e r . the t r e n d o f p r i c e s despite Under d u r i n g 1969 would s t i l l be down- ward, but the e x t e n t of the d e c l i n e would be l e s s than expected as year began. By the f o u r t h q u a r t e r , the GNP d e f l a t o r may s t i l l r i s i n g a t an a n n u a l r a t e of 3 - 1 / 2 per cent — a g a i n s t just be under the -5a3 per cent p r o j e c t e d i n J a n u a r y , and 1969 as a whole may r e g i s t e r a p r i c e g a i n as l a r g e as t h a t recorded i n 1968. Impact of Monetary Restraint I t was a g a i n s t t h i s background of a q u i c k e n i n g pace o f a c t i v i t y that the F e d e r a l Reserve Board adopted a d d i t i o n a l measures monetary r e s t r a i n t and c r e d i t economic earlier t h i s month. Prior t o these moves, monetary c o n d i t i o n s had changed s u b s t a n t i a l l y i n response t o the i n p o l i c y w h i c h o c c u r r e d l a s t December. of During the f i r s t shift quarter of this y e a r , nonborrowed r e s e r v e s o f member banks d e c l i n e d a t an a n n u a l r a t e 0.5 p e r c e n t , compared w i t h an annual r a t e of i n c r e a s e o f 3 p e r cent the f i n a l t h r e e months of 1968, Reserve Banks rose f u r t h e r , Because member bank borrowing a t t o t a l r e s e r v e s expanded a t an annual o f 0.9 per cent d u r i n g the f i r s t quarter — i n sharp c o n t r a s t 8 . 8 per cent annual r a t e o f growth i n the f o u r t h of in Federal rate t o an quarter. T h i s p r e s s u r e on bank r e s e r v e s was accompanied by v e r y growth i n p r i v a t e demand d e p o s i t s and a s i z a b l e d e c l i n e i n time little deposits a t commercial banks. R i s i n g money market r a t e s focused c o n s i d e r a b l e p r e s s u r e on l a r g e banks, as the maximum i n t e r e s t ficates of deposit r a t e s payable on l a r g e denomination (CD's) became i n c r e a s i n g l y n o n c o m p e t i t i v e as y i e l d s market i n s t r u m e n t s r o s e f u r t h e r . From mid-December — when heavy CD a t t r i t i o n began - - t o l a t e March, weekly r e p o r t i n g banks l o s t certi- nearly on -6ai n CDfs. $5.5 b i l l i o n i n New Y o r k C i t y . About 55 per c e n t o f t h i s d e c l i n e o c c u r r e d a t banks P a r t l y i n response to t h i s CD a t t r i t i o n , banks w i t h f o r e i g n branches borrowed h e a v i l y i n the E u r o - d o l l a r market. o f March, head o f f i c e under $10 b i l l i o n , December liabilities By the end t o f o r e i g n branches had r i s e n to an i n c r e a s e o f n e a r l y $3.0 b i l l i o n over the just average level. I n f l o w s o f consumer-type time and s a v i n g s d e p o s i t s at weekly r e p o r t i n g banks d e c l i n e d i n J a n u a r y - - f o l l o w i n g the year-end c r e d i t i n g period. However, these i n f l o w s expanded m o d e r a t e l y i n F e b r u a r y and p i c k e d - u p markedly i n March. accounted f o r inflows of Flows o f r e g u l a r savings t h i s p a t t e r n -- d e c l i n i n g sharply i n January, unchanged i n F e b r u a r y , and expanding s u b s t a n t i a l l y time c e r t i f i c a t e s pace over the f i r s t interest deposits remaining i n March - - since and open accounts remained at a f a i r l y q u a r t e r o f 1969. For a l l commercial banks, steady total time and s a v i n g s d e p o s i t s d e c l i n e d a t a 6.7 per cent annual r a t e d u r i n g the first q u a r t e r o f 1969. institutions (See T a b l e 1 . ) slowed o n l y s l i g h t l y interest rate funds out o f funds t o nonbank i n the e a r l y months o f the y e a r , i n p a r t because a s u b s t a n t i a l number o f already s h i f t e d t h e i r Inflows of interest-sensitive these i n s t i t u t i o n s reflecting depositors i n response to the p r e s s u r e on bank r e s e r v e p o s i t i o n s , w i t h h i g h and r i s i n g market r a t e s o f interest, had earlier (which i n c l u d e s combined p r i v a t e demand d e p o s i t s i n c r e a s e d a t o n l y a 1.1 per c e n t annual r a t e over the f i r s t probably increases. Again, money s t o c k savings quarter. The c u r r e n c y i n the hands o f the p u b l i c as w e l l as -6aT a b l e 1. Changes i n Commercial Bank C r e d i t , Money Supply and Time D e p o s i t s ( S e a s o n a l l y a d j u s t e d annual r a t e s , per cent) Category 1968 Year T o t a l l o a n s and investments U.S. Government securities 1969 Fourth Quarter First Quarter March 11.0 10.4 1.5 3.4 -14.4 -29.8 -14.5 8.5 - 2.5 Other securities 14.8 20.9 5.7 Total loans 11.9 13.9 7.9 9.7 12.2 14.4 4.9 6.5 7.6 2.3 2.5 11.3 15.7 Business loans Money s u p p l y Time and s a v i n g s d e p o s i t s at a l l commercial banks - 6.7 - - 2.8 0.6 -7ap r i v a t e demand d e p o s i t s ) quarter, a t banks a l s o r o s e i n t h i s p e r i o d . i n time and s a v i n g s d e p o s i t s more than o f f s e t deposits, in their security portfolios s t r o n g l o a n demands. $4.6 b i l l i o n ties, the r i s e I n the f i r s t banks made i n demand t h r e e months o f 1969, banks mainly (which f e l t the b r u n t o f r e d u c i n g h o l d i n g s o f these s e c u r i t i e s , and F e d e r a l Agency liquidated Treasury the CD a t t r i t i o n ) particularly actually issues. a l t h o u g h demand f o r r e a l e s t a t e c r e d i t advanced pace o f securi- short-term municipals The c o n t i n u e d s t r e n g t h i n l o a n demand r e f l e c t e d m a i n l y by b u s i n e s s e s , continued they c u t back s h a r p l y on the a c q u i s i t i o n o f o t h e r w i t h l a r g e banks of significant i n o r d e r to accommodate i n h o l d i n g s o f U.S. Government s e c u r i t i e s , Moreover, the quarter. I n v i e w o f these d e p o s i t o u t f l o w s , adjustments U.S. Nevertheless, and t o t a l member bank d e p o s i t s d e c l i n e d at an annual r a t e about 5 per c e n t d u r i n g the f i r s t bills. first or about o n e - t h i r d the r a t e o f growth over 1968 as a whole. Government d e p o s i t s decline r o s e a t a 2.3 per c e n t annual r a t e i n the l a t e 1968. over 14 per c e n t i n the f i r s t borrowing also maintained B u s i n e s s l o a n s expanded a t an annual r a t e quarter, compared w i t h an annual r a t e o f 12 per c e n t i n the f o u r t h q u a r t e r o f l a s t y e a r . The i n c r e a s e s S e c u r i t y loans d e c l i n e d sharply f u r t h e r to reduce t h e i r fall about to w o r k i n g c a p i t a l needs a s s o c i a t e d w i t h expanded p l a n t and equipment expenditures. early of i n business l o a n s i n the J a n u a r y - M a r c h months p r o b a b l y r e f l e c t e d i n p a r t b o r r o w i n g finance the of positions 1968. as d e a l e r s continued from the h i g h l e v e l s reached i n the summer and -8aThe impact o f monetary r e s t r a i n t , s t r o n g demands f o r c r e d i t , rates. D u r i n g the f i r s t For example, can a l s o be seen i n the b e h a v i o r o f interest q u a r t e r , most i n t e r e s t r a t e s r o s e to new h i g h s . or about 60 b a s i s p o i n t s above the December h i g h . w i t h l o a n demands a t banks s t i l l further, March. continuing the F e d e r a l funds r a t e r o s e to about 6.85 per c e n t near end o f March, rates i n the f a c e o f Moreover, s t r o n g , banks r a i s e d t h e i r prime lending to 7 per cent i n e a r l y January and to 7.50 per c e n t i n mid- In addition, banks w i t h f o r e i g n branches r e l i e d h e a v i l y on the E u r o - d o l l a r market f o r funds, pushing r a t e s on 3-month m a t u r i t i e s , example, to over 8.50 per cent by the end o f March, p o i n t s above the December h i g h . the f i r s t the or about 120 b a s i s However, T r e a s u r y b i l l rates f e l l t h r e e months o f 1969 - - i n s p i t e o f l a r g e s a l e s o f b i l l s banks and d e a l e r s - - i n response t o heavy demands f o r these probably i n large part r e f l e c t i n g s h i f t s of for during by both instruments, funds from CD's t o bills, a l t h o u g h u n c e r t a i n t y as to i n t e r e s t r a t e and s t o c k market developments may a l s o have generated some demand f o r b i l l s . bills, f o r example, fell Market r a t e s on 3-month T r e a s u r y to around 6 per c e n t near the end o f March, or about 20 b a s i s p o i n t s below t h e i r December peaks. P r e s s u r e on bank r e s e r v e p o s i t i o n s term c a p i t a l markets. a l s o s p i l l e d over i n t o long- Y i e l d s on l o n g - t e r m Government bonds r o s e by about 20 b a s i s p o i n t s t o a l e v e l o f around 6.25 per cent d u r i n g t h i s p e r i o d . the end o f March, y i e l d s on m u n i c i p a l bonds, Aaa c o r p o r a t e new i s s u e s 5 year c a l l p r o t e c t i o n ) , (with and FHA mortgages a l l had r i s e n about 45 b a s i s p o i n t s above t h e i r December h i g h s , per cent and 8.11 per c e n t , By r e a c h i n g l e v e l s o f 5.30 per c e n t , respectively. 7.31 -9aI n t e n s i f i c a t i o n o f Monetary Restraint As I mentioned above, d e s p i t e the s u b s t a n t i a l r e s t r a i n t on money and c r e d i t brought about s i n c e the end o f 1968, the F e d e r a l Reserve Board c o n c l u d e d on A p r i l additional steps. 3 t h a t the campaign a g a i n s t i n f l a t i o n c a l l e d These were taken - - i n v o l v i n g an i n c r e a s e i n the for discount r a t e a t F e d e r a l Reserve Banks from 5 - 1 / 2 t o 6 per cent and an i n c r e a s e of 1/2 percentage p o i n t i n r e s e r v e requirements a g a i n s t demand d e p o s i t s . At the new l e v e l , the d i s c o u n t r a t e i s the h i g h e s t i n 40 years - - i n 1920-21 the r a t e was as h i g h as 7 per cent. The i n c r e a s e i n r e s e r v e requirements became e f f e c t i v e A p r i l period A p r i l 17 and i s 3-9 i n c l u s i v e . o f member banks as f o l l o w s although applicable a g a i n s t demand d e p o s i t s to average d e p o s i t s in the The i n c r e a s e was d i s t r i b u t e d among c l a s s e s (millions of dollars): A l l Member banks New Y o r k r e s e r v e c i t y banks Other r e s e r v e c i t y banks C o u n t r y banks The new r e s e r v e requirements $660 124 262 274 at r e s e r v e c i t y banks are 17 per c e n t on n e t demand d e p o s i t s under $5 m i l l i o n and 17-1/2 per cent on d e p o s i t s over $5 m i l l i o n . For a l l o t h e r member banks, the new requirements are 12-1/2 per c e n t on d e p o s i t s under $5 m i l l i o n and 13 per cent on those over $5 m i l lion. No changes were made i n r e s e r v e requirements As member banks a d j u s t deposits, their ability a g a i n s t time to these h i g h e r requirements to expand c r e d i t w i l l be l e s s e n e d W h i l e i t may be n e c e s s a r y t o use open market o p e r a t i o n s adjustment o f deposits. a g a i n s t demand considerably. t o c u s h i o n the the banks to the h i g h e r r e s e r v e r e q u i r e m e n t s , one s h o u l d not -10aconclude t h a t the i n c r e a s e o f $660 m i l l i o n i n r e q u i r e d r e s e r v e s w i l l f u l l y o f f s e t by F e d e r a l Reserve purchases of Government securities. Requirements were r a i s e d f o r the purpose o f a b s o r b i n g r e s e r v e s , p e r s o n a l l y - - would expect to see the e f f e c t borrowed r e s e r v e s o f member banks. reserve requirements, member banks; $5 m i l l i o n . it and I I t might be observed t h a t , in to all under i t had taken such a s t e p when r e s e r v e These exemptions were aimed at l e s s e n i n g the c o m p e t i t i v e d i s a d v a n t a g e size. raising d i d not exempt s m a l l banks w i t h n e t demand d e p o s i t s requirements were changed on e i t h e r demand or time d e p o s i t s . similar -- c l e a r l y r e g i s t e r e d i n non- the Board a p p l i e d the h i g h e r requirements During recent years, requirements be earlier reserve impose on s m a l l member banks compared w i t h nonmember banks I n the p r e s e n t c i r c u m s t a n c e s , where the aim i s growth o f bank c r e d i t i n the e f f o r t to check i n f l a t i o n , of to reduce the an exemption o f v V \ any member banks from the h i g h e r r e s e r v e requirements seemed inappropriate./ The need to i n s u r e t h a t monetary r e s t r a i n t reaches a l l banks and not s i m p l y the l a r g e money market banks - - i s i l l u s t r a t e d i n the d a t a i n T a b l e 2, showing changes i n l o a n s and investments by c l a s s o f bank l a s t December, compared w i t h changes i n c o r r e s p o n d i n g p e r i o d s over the three years. March, 1969, $2.4 b i l l i o n . I t w i l l be noted t h a t , between mid-December, I n r o u g h l y the same p e r i o d a year e a r l i e r , e x p e r i e n c e o f New Y o r k r e s e r v e c i t y banks: 1968, since last and mid- t o t a l l o a n s and investments of a l l member banks d e c l i n e d by investments had r i s e n by about the same amount. mid-March, -- their their loans Even more s t r i k i n g i s i n the t h r e e months ending t o t a l loans and investments d e c l i n e d by $3.4 billion, and the in -10aTABLE 2 LOANS AND INVESTMENTS BY CLASS OF BANK ( A l l d a t a a r e f o r Wednesday d a t e s , w i t h o u t s e a s o n a l a d j u s t m e n t , Levels 12/11/68 3/12/69 Change 3 mos. in billions of dollars) Changes i n c o r r e s p o n d i n g periods ending 3/27/68 3/30/66 3/29/67 Loans and Investments A l l member NY Reserve C i t y Other Reserve C i t y Country U.S. Gov't. 321.1 57.3 130.7 133.1 48.7 6.7 17.0 25.1 +2.3 -0.9 +1.1 +2.1 +6.9 +1.2 +3.6 +2.1 +0.7 -0.4 -0.6 +1.7 42.7 4.6 14.4 23.8 -6.0 -2.1 -2.6 -1.3 -1.2 -0.7 -0.3 -0.2. +2.5 +0.8 +1.5 +0.2 -2.9 -0.7 -1.6 -0.6 Securities A l l member NY Reserve C i t y Other Reserve C i t y Country Total -2.4 -3.4 -0.4 +1.4 Securities A l l member NY Reserve C i t y Other Reserve C i t y Country Other 318.7 53.9 130.3 134.5 56.2 8.0 22.5 25.6 56.4 7.5 22 .0 26.9 +0.2 -0.5 -0,5 +1.3 +2.1 +0.4 +0.5 +1.2 +3.2 +0.4 +1.9 +0.9 +0.5 -0.6 +0.3 +0.8 216.2 42.7 91.2 82.4 219.6 41.9 93.8 83.9 +3.4 -0.8 +2.6 +1.5 +1.5 -0.6 +1.0 +1.1 +1.2 +3.0 +0.9 +0.7 +1.4 Loans* A l l member NY Reserve C i t y Other Reserve Country Business (12/11/68) Loans A l l weekly r e p o r t e r s NY w e e k l y r e p o t e r s Other w e e k l y r e p o r t e r s * - Includes loans t o banks. 71.7 23.7 48.0 (4/2/69 ) 75.2 24.5 50.7 (4/3/68) +3.5 +0,8 +2.7 +2.9 +1.2 +1.7 - - +0.1 +1,1 (4/5/67) +1.5 +0.7 +0.8 (3/30/66) +3.5 +1.5 +2 .0 -11a g a i n s t a decrease o f o n l y $900 m i l l i o n i n the comparable p e r i o d o f 1968. I n o t h e r words, w h i l e r e s e r v e c i t y banks i n New Y o r k h e l d l e s s than one- f i f t h o f the t o t a l l o a n s and investments h e l d by a l l member banks i n midDecember, 1968, the drop i n the d o l l a r amount o f t h e i r h o l d i n g s during the f o l l o w i n g t h r e e months was almost 1 - 1 / 2 times as l a r g e as t h a t member banks taken as a group. In contrast, e x p e r i e n c e d o n l y a modest d e c r e a s e i n t h e i r o t h e r r e s e r v e c i t y banks l o a n s and investments, c o u n t r y banks r e g i s t e r e d an a c t u a l e x p a n s i o n . by o t h e r d a t a i n the t a b l e : A similar story i s the h e a v i e s t burden o f monetary through mid-March - - i n both a b s o l u t e and r e l a t i v e on the l a r g e s t for and told restraint terms - - had fallen banks. Other evidence (not shown i n T a b l e 2) suggests t h a t the same p a t t e r n extended through March as a w h o l e . For example, a t l a r g e banks, c r e d i t r o s e l e s s than u s u a l i n March and d e c l i n e d much more than u s u a l over the January-March p e r i o d . increases at s m a l l banks, the i n e a r n i n g a s s e t s were more than u s u a l i n March and were about in line with first-quarter i n March, On the o t h e r hand, as w e l l as f o r changes f o r o t h e r r e c e n t y e a r s . the e n t i r e f i r s t Loan expansion q u a r t e r , was much l e s s than u s u a l at l a r g e banks - - but somewhat more than u s u a l a t s m a l l banks. the case o f investments, issues for bank h o l d i n g s o f m u n i c i p a l and F e d e r a l Agency i n c r e a s e d m o d e r a t e l y i n March - - b r i n g i n g the annual r a t e o f the f i r s t In q u a r t e r to about 6 per c e n t , i n the f o u r t h q u a r t e r o f 1968. However, growth compared w i t h over 20 per cent the slowdown o c c u r r e d at large banks who reduced t h e i r h o l d i n g s c o n t r a - s e a s o n a l l y over the January-March -12period. Declines were sharp, i n h o l d i n g s of both short- and r e d u c t i o n s certificates also occurred i n holdings of and F e d e r a l Agency i s s u e s . continued to acquire s e c u r i t i e s periods of other recent Thus, and l o n g - t e r m m u n i c i p a l s In contrast, participation s m a l l banks a t a pace w e l l above t h a t i n the comparable years. i n my o p i n i o n , the need to r e d i s t r i b u t e some o f the burden o f monetary r e s t r a i n t w i t h i n the b a n k i n g system was c l e a r l y e v i d e n t . the same time, t h e r e was no need t o r e l i e v e the o v e r a l l p r e s s u r e o f on any segment o f the system by p r o v i d i n g g r e a t e r funds t h r o u g h the a b i l i t y deposits. Rather, leeway t o compete t o o f f e r h i g h e r r a t e s on v a r i o u s as s t r e s s e d above, The Boom i n B u s i n e s s for time The s t e p s taken in end. Investment As I mentioned above, ment d u r i n g 1969 i s restraint the fundamental need a t the end o f March was f o r more - - n o t l e s s - - o v e r a l l r e s t r a i n t . e a r l y A p r i l were d i r e c t e d to t h a t types o f At the p r o j e c t e d r i s e i n business fixed invest- the p r i n c i p a l r e a s o n why the c u r r e n t i n f l a t i o n w i l l be prolonged. The l a t e s t survey o f a n t i c i p a t e d b u s i n e s s c a p i t a l spending (conducted p e r i o d i c a l l y by the Commerce Department's O f f i c e o f Economics and the S e c u r i t i e s and Exchange Commission) 14 per c e n t i n p l a n t and equipment o u t l a y s i n 1969. Business suggests a r i s e The survey was con- d u c t e d i n l a t e J a n u a r y and e a r l y F e b r u a r y and announced i n the m i d d l e March. If would r i s e these p l a n s were f u l f i l l e d , t h i s year by $9 b i l l i o n business of spending f o r new to a t o t a l o f $73 b i l l i o n . of facilities Such a r a p i d -13e x p a n s i o n would be i n sharp c o n t r a s t t o the 4 per c e n t advance i n 1968 and the r i s e o f 2 per cent i n 1967. Apparently, the recorded projected i n c r e a s e r e s t s on a number o f m o t i v a t i o n s - - i n c l u d i n g an e x p e c t a t i o n l a r g e s a l e s g a i n s i n 1969, the improved e a r n i n g s p o s i t i o n i n 1968, t o expand c a p a c i t y to meet l o n g - r u n demand, and the d e s i r e t o capital f o r l a b o r wherever t h a t the p r o j e c t e d r i s e i s b r o a d l y based, w i t h m a n u f a c t u r i n g i n d u s t r i e s o f 16 per c e n t , 12 per c e n t . substitute in capital expecting a gain and the nonmanufacturing s e c t o r e x p e c t i n g an i n c r e a s e of A l t h o u g h some o f the a n t i c i p a t e d advance i n p l a n t and e q u i p - ment o u t l a y s may n o t be r e a l i z e d higher prices rather represents efforts possible. The OBE-SEC survey i n d i c a t e s outlays of (and some o f the p r o j e c t e d i n c r e a s e than r e a l investment), the p l a n n e d i n c r e a s e reflects still a s u b s t a n t i a l r i s e i n p r i v a t e c l a i m s on r e s o u r c e s a t a time o f serious i n f l a t i o n . Furthermore, the s i z a b l e e x p a n s i o n i s p r o j e c t e d despite the f a c t t h a t the c a p a c i t y u t i l i z a t i o n r a t e i n m a n u f a c t u r i n g averaged 84 per cent d u r i n g the second h a l f o f 1968 - - w e l l below the p r e f e r r e d o f 90-92 per cent. W h i l e one might expect some s h o r t - f a l l between p r o j e c t e d a c t u a l o u t l a y s on f i x e d equipment, t h e r e i s a l s o a good chance t h a t may be r e a l i z e d s u b s t a n t i a l l y - - u n l e s s p u b l i c p o l i c y T h i s was c e r t a i n l y November, 1965, and plans i s brought to bear. the case d u r i n g the 1966 f i x e d i n v e s t m e n t boom. In the OBE-SEC survey i n d i c a t e d t h a t p l a n t and equipment l a y s d u r i n g the second q u a r t e r o f the f o l l o w i n g year were p r o j e c t e d show an i n c r e a s e o f 14 per cent over the annual average f o r rate 1965. out- to By the -14time o f the March, increase of 1966, survey, such o u t l a y s were p r o j e c t e d to show an 16 per c e n t d u r i n g the f u l l year over the 1965 l e v e l . actual increase i n 1966 was 16.7 per c e n t . strong business anticipations, ment e x p e n d i t u r e s Thus, d u r i n g a p e r i o d The of the p r o j e c t e d i n c r e a s e s i n p l a n t and e q u i p - i n d i c a t e d i n the OBE-SEC survey may u n d e r s t a t e actual outlays. It community i s is t o o e a r l y to t e l l c a r r y i n g out i t s y e a r g o t underway, j u s t how s u c c e s s f u l l y the b u s i n e s s investment p l a n s i n 1969. However, i t was expected t h a t the i n c r e a s e i n f i x e d would be p a r t i c u l a r l y sharp d u r i n g the f i r s t quarter investment (perhaps as much as 13 p e r c e n t a t an annual r a t e ) , w i t h the pace d e c l i n i n g s t e a d i l y after For ( t o perhaps 4 per c e n t at an annual r a t e i n the f i n a l the y e a r as a whole, the end o f March, considerably -- there- quarter). the i n c r e a s e was p r o j e c t e d a t 10 per c e n t . By the p r o j e c t i o n o f the annual i n c r e a s e had been r a i s e d t o at l e a s t 12 per c e n t . The s h a r p e s t advance ( a t an a n n u a l r a t e o f around 18 per c e n t ) was s t i l l quarter, as the w i t h a downtrend t h e r e a f t e r . expected t o o c c u r i n the However, by the f o u r t h q u a r t e r , pace o f e x p a n s i o n was p r o j e c t e d a t almost 8 per c e n t - - n e a r l y double rate projected in year. the the January. Some i n d i r e c t evidence suggests the pace o f b u s i n e s s investment, first in fact, was q u i t e r a p i d d u r i n g the f i r s t fixed quarter of this The o u t p u t o f b u s i n e s s equipment d u r i n g the January-March months r o s e a t a s e a s o n a l l y a d j u s t e d annual r a t e o f 8 per c e n t . Since prices p r o b a b l y r o s e a t an annual r a t e o f 3 - t o - 4 per c e n t d u r i n g the same p e r i o d , -15the expansion i n c u r r e n t d o l l a r s was c l o s e t o 12 per cent at an annual rate. Looked at i n a somewhat l o n g e r p e r s p e c t i v e , o u t p u t o f b u s i n e s s equipment i n the f i r s t t h a t the investment boom i s q u a r t e r o f 1968, per c e n t ; certainly the e x p a n s i o n i n the q u a r t e r o f t h i s year strong. For example, suggests i n the first the s e a s o n a l l y a d j u s t e d annual r a t e o f i n c r e a s e was 4 i n the second q u a r t e r , a 1 per c e n t d e c l i n e o c c u r r e d , and t h i s was f o l l o w e d by a g a i n o f 2 per c e n t i n the t h i r d q u a r t e r - - b o t h at annual r a t e s . I n the f i n a l q u a r t e r , r a t e o f 12 per c e n t , quarter of 1969. l e v e l of and t h i s was f o l l o w e d by 8 per c e n t d u r i n g the Also, orders f o r producers1 the f i n a l i n the January-March months o f t h r e e months o f l a s t y e a r ; these i n d i c a t o r s 1968. suggest t h a t investment i n business On the o t h e r hand, p l a n s r e p o r t e d i n the OBE-SEC survey were made b e f o r e monetary became as r e s t r i c t i v e as i t is currently. r u n lower - - and as c o r p o r a t i o n s authorities are f u l l y advanced such o r d e r s were 16 per cent quarter of f i x e d equipment i s expanding a t a r a p i d pace. the policy Thus, a c t u a l spending should c o n c l u d e t h a t the monetary and fiscal committed to f i g h t i n g i n f l a t i o n - - and i n f a c t making s u b s t a n t i a l p r o g r e s s - - b u s i n e s s first t h i s y e a r , new d u r a b l e equipment remained at the s h a r p l y above the l e v e l r e c o r d e d i n the f i r s t Again, t h e r e was a sharp r i s e a t an annual investment o u t l a y s are undoubtedly w i l l be reduced somewhat. C o r p o r a t e Demand f o r Funds T h i s r a p i d pace o f b u s i n e s s increase investment may generate a s i z a b l e i n the volume o f c o r p o r a t e b o r r o w i n g i n the s e c u r i t i e s markets. -16T h i s c o n c l u s i o n emerges w i t h c o n s i d e r a b l e c l a r i t y quarterly s o u r c e s and uses o f tions 1967 and 1968 and the f i r s t for from an a n a l y s i s funds d a t a r e l a t i n g t o n o n f i n a n c i a l f o u r t h q u a r t e r o f 1968 are s t i l l half o f 1969. Figures for of corpora- the p r e l i m i n a r y and those f o r 1969 must nec- e s s a r i l y be rough e s t i m a t e s . I n g e n e r a l terms, corporations the "gap11 between i n t e r n a l and t o t a l o u t l a y s for funds o f f i x e d a s s e t s and i n v e n t o r i e s nonfinancial is projected t o be even somewhat w i d e r d u r i n g the f i r s t two q u a r t e r s o f 1969 than the r e c o r d gap o f the f o u r t h q u a r t e r o f 1968. I n the f i n a l l a s t year, p r e l i m i n a r y estimates t h r e e months o f suggested t h a t f i x e d investment exceeded i n t e r n a l l y g e n e r a t e d funds by j u s t over $21 b i l l i o n a t an annual r a t e ; each o f the f i r s t $2 b i l l i o n w i d e r . anticipated offsets two q u a r t e r s o f t h i s y e a r , Internal sharply higher funds seem l i k e l y corporate sector l i q u i d asset accumulation After and the i n g i n excess o f c u r r e n t needs. accumulation. seems to have e n t e r e d 1969 in s e v e r a l y e a r s o f moderate i s e s t i m a t e d to have s p u r t e d v e r y s h a r p l y i n 1968, r e f l e c t i n g h i g h p r o f i t s added t o i n t e r n a l t o change l i t t l e , l e v e l o f p l a n t and equipment o u t l a y s more than a very favorable f i n a n c i a l p o s i t i o n . growth, the gap may be as much as the p r o j e c t e d lower r a t e o f i n v e n t o r y The n o n f i n a n c i a l in and cash f l o w s and some borrow- A wide excess o f t a x a c c r u a l s over payments fund a v a i l a b i l i t y i n the f i r s t quarter of and h e l p e d t o h o l d e x t e r n a l f i n a n c i n g needs down. this year, Through b o r r o w i n g from banks and heavy r e l i a n c e on the commercial paper market, many c o r p o r a t i o n s r e f r a i n e d from h i g h c o s t c a p i t a l market b o r r o w i n g . But, w h i l e the average -17pace o f p u b l i c bond o f f e r i n g s f a c t o r s about i t so f a r i n 1969 has n o t been h i g h , are s i g n i f i c a n t . two P r a c t i c a l l y none o f the r e c e n t i n g s have been made by l a r g e i n d u s t r i a l or f i n a n c i a l most have been by p u b l i c u t i l i t i e s firms. offer- Instead, o r by s m a l l e r c o r p o r a t i o n s using convertibles. The f i n a n c i a l p o s i t i o n of c o r p o r a t i o n s now s u g g e s t , that l a r g e f i r m s once a g a i n may have t o tap the c a p i t a l m a r k e t s . likely that corporate eroded. accruals It l i q u i d a s s e t h o l d i n g s have been, or soon w i l l R e f l e c t i n g t h e l a r g e A p r i l and June i n s t a l m e n t s , i n contract first however, t o the f i r s t t a x payments — T h i s sharp t u r n around from t h e q u a r t e r r e p r e s e n t s a s u b s t a n t i a l use o f c o r p o r a t e f u n d s . In addi- t i o n , w h i l e p r o f i t s a r e a l s o expected t o remain r e l a t i v e l y h i g h , i n g c a p i t a l o u t l a y s are p r o j e c t e d t o widen the gap between generated funds and e x p e n d i t u r e s . t o a g r e a t e r volume o f e x t e r n a l increas- internally A l l o f these developments s h o u l d lead financing. Some market p a r t i c i p a n t s now t h i n k a few s i z a b l e industrial f i n a n c e companies are w a i t i n g f o r an opportune time t o f l o a t bonds. no one i n the market a p p a r e n t l y sees a n e a r - t e r m p o t e n t i a l surge i n volume of i s s u e s coming t o market, i n c o n t r a s t be, q u a r t e r — are expected s h a r p l y t o exceed t a x i n the second q u a r t e r of 1969. t h i s year, is t o market rumor some p i c k up i n l a r g e o f f e r i n g s would n o t now be a and While the earlier surprise. -18As s t r e s s e d above, the market swing i n income t a x payments between the f i r s t and second q u a r t e r o f 1969 (even a f t e r seasonal implies factors) t h a t the f u r t h e r w h i c h p r o b a b l y o c c u r r e d i n the f i r s t f o l l o w e d by much l a r g e r r e d u c t i o n s This further corporations implies -- allowing for accumulation of l i q u i d assets t h r e e months would most l i k e l y be i n these b a l a n c e s i n the second q u a r t e r . a c o n s i d e r a b l e e x p a n s i o n i n the demand f o r from banks as w e l l as from the s a l e o f market funds by securities. M o d e r a t i n g the C o r p o r a t e Investment Boom I n my o p i n i o n , validated -- p e r m i t t i n g such e n l a r g e d demands f o r funds to be and thus a l l o w the p l a n t and equipment boom to proceed at p r o j e c t e d pace - - would be i n c o n s i s t e n t w i t h our n a t i o n a l o b j e c t i v e bringing i n f l a t i o n to an end. measures adopted e a r l i e r As I observed above, t h i s month s h o u l d make an a d d i t i o n a l toward the achievement o f t h i s goal. measures w h i c h seem i n p r o s p e c t f o r materialize, s h o u l d a l s o be However, be even g r e a t e r if Given t h i s as an u n n e c e s s a r y s t i m u l a n t (and i n d i r e c t l y of policy contribution budgetary as they actually helpful. the c a p i t a l goods boom t u r n s out still possibility, t h o s e o b s e r v e r s who are c r i t i c i z i n g credit the t i g h t e r the coming f i s c a l y e a r , a n t i c i p a t e d even today, e f f o r t s m i g h t be r e q u i r e d . that Moreover, the s t r e n g t h o f than i s the monetary the other one must stabilization recognize the 7 per cent investment to the a c q u i s i t i o n of c a p i t a l t o the c u r r e n t i n f l a t i o n ) to tax goods and who are a l r e a d y c a l l i n g for -19its suspension again, Nevertheless, little have a v e r y s t r o n g argument on t h e i r the o f f - o n e x p e r i e n c e a l o n g t h i s line i n 1966-1967 side. provides to encourage one to be h o p e f u l about the b e n e f i c i a l r e s u l t s o f a move. credit in fact, I t w i l l be r e c a l l e d t h a t the i n i t i a l f o r 15 months, p l a n to suspend the tax and to i n c l u d e a f a i r l y wide range o f c a p i t a l w i t h i n the scope o f the s u s p e n s i o n , goods t u r n e d out i n p r a c t i c e to i n v o l v e an a c t u a l s u s p e n s i o n o f o n l y r o u g h l y f i v e months - - and the types o f ments to which i t such a p p l i e d was narrowed c o n s i d e r a b l y . appears t h a t by the time the s u s p e n s i o n was f i n a l l y the wave o f c a p i t a l e x p a n s i o n had passed. invest- In retrospect, approved, it the c r e s t As the emerging evidence t h a t the e x c e s s i v e r a t e o f growth o f o u t p u t - - e s p e c i a l l y o f of suggested investment goods - - and i n f l a t i o n a r y p r e s s u r e s were moderating i n e a r l y 1967, a move to r e s t o r e the 7 per c e n t t a x c r e d i t was launched q u i c k l y , approved i t fairly Yet, promptly. despite t h i s experience, t h e r e appears t o be a growing movement i n support o f r e p e a t i n g the e p i s o d e . seems to be a s t r o n g one. taxes f o r billion, I n 1965, 1965, amounted to $2.0 the investment tax c r e d i t the amount o f unused c r e d i t the c u r r e n t y e a r , Although i t is d i f f i c u l t the 7 per cent investment case corporate available income amounted to $1.7 or 5.4 per c e n t o f the $31.7 b i l l i o n o f c o r p o r a t e income t o t a l e d $1.2 b i l l i o n . the investment c r e d i t their or 5 . 8 per c e n t o f the $34.8 b i l l i o n o f c o r p o r a t e that year. A t the end o f for Quantitatively, I n 1966 (the l a t e s t year f o r w h i c h income t a x d a t a are a v a i l a b l e ) , b i l l i o n dollars, and Congress to taxes. corporations to o b t a i n a f i r m e s t i m a t e , t a x c r e d i t may be providing -20c o r p o r a t i o n s w i t h as much as $2.8 b i l l i o n . from c o r p o r a t e incentive t o add t o p l a n t and equipment I still I n the l o n g - r u n , t o modernize t h e i r is t h i n k i t would be unwise to suspend the we w i l l p r o b a b l y need to encourage businesses p r o d u c t i v e c a p a c i t y to h e l p m a i n t a i n f u l l o f our manpower r e s o u r c e s . p r o v i d e such an example), But i n the s h o r t - r u n would seem p r e f e r a b l e utilization (and the n e x t year may i t may a l s o be n e c e s s a r y to o f f - s e t t i o n t o o u t p u t w h i c h the t a x p r o v i d e s . cent tax the strong. Nevertheless, credit. can be deducted taxes - - and n o t s i m p l y from investment o u t l a y s - - the tax c r e d i t p r o v i d e s obviously very Since t h i s If the stimula- t h i s need does m a t e r i a l i z e , to pursue a c o u r s e o t h e r it than suspending the 7 per credit. One such a l t e r n a t i v e would be to i n c r e a s e the 10 per cent surtax applicable t o 15 per c e n t , to c o r p o r a t i o n s . i t might l i f t $2 b i l l i o n a t an annual r a t e . If this t a x were extended, F e d e r a l revenue from c o r p o r a t e income and r a i s e d taxes by some D u r i n g the f o u r t h q u a r t e r o f 1968, corporate p r o f i t s b e f o r e taxes were a t an annual r a t e o f $95,8 b i l l i o n . Federal revenue from c o r p o r a t e p r o f i t s the 10 per cent surtax) ( i n c l u d i n g the e f f e c t s of d u r i n g the same q u a r t e r was a t an annual r a t e o f $39.9 And w i t h c o r p o r a t e p r o f i t s i n c r e a s e i n the c o r p o r a t e taxes billion. e x p e c t e d t o remain h i g h f o r 1969 as a whole, s u r t a x by 5 percentage p o i n t s w o u l d probably an -21i n c r e a s e F e d e r a l revenue from c o r p o r a t e taxes by j u s t over $2 b i l l i o n an annual at rate. If i t were n e c e s s a r y to take f u r t h e r f i s c a l measures t o moderate the investment boom, the above approach would y i e l d a q u a n t i t a t i v e result o f r o u g h l y the same magnitude as t h a t w h i c h might be d e r i v e d from the suspension of the investment tax c r e d i t the tax c r e d i t r o u t e - - for a f u l l year. But - - unlike i t would not i n v o l v e a l o n g d e l a y i n the trans- m i s s i o n o f the impact to c o r p o r a t e spending f o r c a p i t a l goods. the h i g h e r s u r t a x would mean a d i r e c t corporate p r o f i t s , it of business prospects. reappraisal Since there i s already a growing divergence are expanding c a p a c i t y and the r a t e o f i n the household s e c t o r ) , expected p r o f i t r a t e , might be s u f f i c i e n t officials after-tax c o u l d be expected t o b r i n g about a prompt the r a t e at w h i c h b u s i n e s s e s o f demand ( e s p e c i a l l y and known r e d u c t i o n i n Because a modest d e c l i n e t o i n d u c e numerous to r e v i s e downward t h e i r own p l a n s f o r e x p a n s i o n . in between growth the corporate Such downward r e v i s i o n s would c l e a r l y be more c o n s i s t e n t w i t h t h e n a t i o n a l o b j e c t i v e of b r i n g i n g i n f l a t i o n to a h a l t . C o n c l u d i n g Remarks I n the meantime, will c o n t i n u e t o make i t s quest f o r I am p e r s o n a l l y c o n f i d e n t own ( h o p e f u l l y u n e q u i v o c a l ) the r e s t o r a t i o n o f economic s t a b i l i t y . t h a t monetary policy contribution in T h i s must the necessarily -22mean t h a t a s u b s t a n t i a l degree of c r e d i t r e s t r a i n t w i l l well into bankers the f u t u r e . and t h e i r Consequently, have to be m a i n t a i n e d I p e r s o n a l l y would n o t encourage customers to l o o k f o r w a r d to an e a r l y r e l a x a t i o n o f Reserve r e s t r a i n t on the r a t e o f growth o f bank r e s e r v e s . the c o n t i n u a t i o n of excessive i n f l a t i o n a r y pressures On the Federal contrary, i n the economy r e q u i r e s t h a t b a n k e r s keep a c l o s e check on the r a t e at w h i c h they are e x t e n d i n g or a c q u i r i n g s e c u r i t i e s . their realizes it is highly desirable that every one i n the banking community for sometime i n t o the f u t u r e . t o be u n c e r t a i n t y authorities a c o n t i n u a t i o n o f monetary On the o t h e r hand, t o pursue t h i s necessary -- there s t i l l I am p e r s o n a l l y as i s n e c e s s a r y - - and f o r as l o n g as (such as s e l l i n g U . S . Government and o t h e r exceed t h e i r ability capital losses) crunch 1 1 . their inflation. in their existing long-term l o a n commitments greatly to meet them through the growth o f d e p o s i t s . c e r t a i n t h a t many bankers would d e f i n e "credit if is to bankers t h a t they n o t have t o make some o f the more p a i n f u l adjustments at s i z a b l e speak prepared t o b r i n g about a m e a n i n g f u l r e d u c t i o n i n the pace o f I am p e r s o n a l l y unprepared to g i v e any assurances securities appears W h i l e I o b v i o u s l y cannot i n the F e d e r a l Reserve System, p o l i c y as f a r structures restraint about the degree o f c r e d i t r e s t r a i n t w h i c h the monetary are prepared to b r i n g about. f o r my c o l l e a g u e s asset I think v i r t u a l l y by now t h a t the o u t l o o k i s for quite will end, new commitments to l e n d i n the f u t u r e be kept i n check as w e l l . Frankly, Thus, To achieve t h i s loans I am such a s i t u a t i o n as a s o - c a l l e d For the monetary a u t h o r i t i e s to g i v e an assurance that -23any bank can l i q u i d a t e losses and to c o n t i n u e a r a p i d r a t e o f to a v i r t u a l say, l a r g e amounts o f s e c u r i t i e s w i t h o n l y modest capital l o a n e x p a n s i o n would be tantamount abandonment o f the p o l i c y o f monetary r e s t r a i n t . Needless I am n o t s u g g e s t i n g t h a t I f a v o r a l l o w i n g d i s o r d e r l y c o n d i t i o n s d e v e l o p i n the Government s e c u r i t i e s market. t i o n s would have t o be used to f o r e s t a l l But t h e r e i s requirements to s e l l if purchases reserve and the guarantee o f an o p p o r t u n i t y f o r such s e c u r i t i e s w i t h l i t t l e the emergence o f such a s i t u a t i o n . (which can be o f f s e t by an i n c r e a s e i n necessary) to O b v i o u s l y open market opera- a g r e a t d e a l o f d i f f e r e n c e between such j u d i c i o u s o f Government s e c u r i t i e s to r i s k of c a p i t a l losses. banks
@FedFRASER