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F o r R e l e a s e on D e l i v e r y
Wednesday, March 26, 1969
8:00 p.m. , E . S . T .




OBJECTIVES IN CONFLICT:
STABILIZATION POLICIES AND NATIONAL PRIORITIES

An Address by

Andrew F . Brimmer
Member
Board of Governors o f the
F e d e r a l Reserve System

P r e s e n t e d as the

Morton Wollman D i s t i n g u i s h e d
S p r i n g , 1969
at

Lecture

the

Bernard M. Baruch C o l l e g e
The C i t y U n i v e r s i t y o f New Y o r k

New Y o r k ,

New York

March 26,

1969

Ob* oTIVES IN CONFLICT:
STABILIZATION POLICIES AND NATIONAL PRIORITIES
By
Andrew F .

Brimmer*

W i t h the passage o f each week,

the fundamental c o n f l i c t

between

the campaign to b r i n g i n f l a t i o n to a h a l t and the p u r s u i t o f o t h e r n a t i o n a l
g o a l s i s becoming s h a r p e r .

Unfortunately,

the b a s i c

incompatibility

some o f our o b j e c t i v e s i s f r e q u e n t l y obscured by narrow t e c h n i c a l
over the conduct o f monetary and f i s c a l

policy,

Vietnam War, or by i d e o l o g i c a l d i f f e r e n c e s
the F e d e r a l Government i n the l i f e
n a t i o n a l economic p o l i c y i s
States,

about the a p p r o p r i a t e r o l e

o f the n a t i o n .

to check the c u r r e n t

i n f l a t i o n i n the
is

the b u s i n e s s

sector)

such demands.

A l t h o u g h the p r o s p e c t

on the o u t f l o w of U.S.
Still

avoid

While

(especially

that a r i s i n g

is

for

a r e t u r n to a serious

from

c a p i t a l De dropped

o t h e r evidence of c o n f l i c t i n g

to meet

deficit

some o b s e r v e r s are u r g i n g

that

immediately.

objectives

c o u l d be

but such a l i s t i n g would s i m p l y lead t o the same c o n c l u s i o n :

cited,

we f a c e an

* Member, Board o f Governors o f the F e d e r a l Reserve System.
S e v e r a l members o f the B o a r d ' s s t a f f helped i n the p r e p a r a t i o n o f
these remarks.
Mr. Helmut F. Wendel prepared the s t a t i s t i c s showi n g d i f f e r e n t p a t t e r n s o f war f i n a n c i n g .
M i s s Mary Ann Graves, my
a s s i s t a n t , h e l p e d w i t h the paper at s e v e r a l s t a g e s .




effort,

i s a l s o expanding more r a p i d l y than our a b i l i t y

i n our i n t e r n a t i o n a l b a l a n c e o f payments,
restraints

to

United

i s devoted to the Vietnam War

the p r i v a t e demand f o r goods and s e r v i c e s

of

W h i l e a primary aim o f

massive unemployment and the a g g r a v a t i o n of the urban c r i s i s .
share o f our r e s o u r c e s

arguments

by d i f f e r e n t v i e w s on the

another o b j e c t i v e - - o f almost e q u a l importance —

a significant

of

-2almost d e s p e r a t e need to sharpen our p r i o r i t i e s
instruments of p u b l i c p o l i c y
pressing

and to r e a r r a n g e our

to a c c o m p l i s h more e f f i c i e n t l y

our most

goals.
S i n c e each one o f us undoubtedly w i l l have h i s own c o n c e p t i o n

of

the proper o b j e c t i v e s

and conduct o f p u b l i c p o l i c y ,

me t o s p e l l out promptly the p e r s p e c t i v e
tasks of n a t i o n a l

stabilization

i t may be w e l l f o r

from w h i c h I v i e w the

current

policies:

For n e a r l y f o u r years now, s i n c e the a c c e l e r a t i o n
o f m i l i t a r y a c t i v i t y i n Vietnam i n mid-1965, we
have been f i g h t i n g a s i z a b l e war w i t h o u t r a i s i n g
s u f f i c i e n t t a x revenues to f i n a n c e i t .
In f a c t ,
the F e d e r a l budget d e f i c i t as a percentage o f the
i n c r e a s e i n Vietnam War - - r e l a t e d o u t l a y s has been
almost as l a r g e as i n the F i r s t and Second World
Wars - - and i n sharp c o n t r a s t to the budget s u r p l u s
a c h i e v e d d u r i n g the Korean c o n f l i c t .
Consequently, w h i l e the F e d e r a l Government's c l a i m s
on the n a t i o n ' s r e s o u r c e s have r i s e n s u b s t a n t i a l l y
s i n c e 1964, p r i v a t e c l a i m s have a l s o been a l l o w e d
to i n c r e a s e r o u g h l y i n l i n e w i t h the growth o f r e a l
output.
The r e s u l t s have been a d r a s t i c r i s e i n
excess demands p l a c e d on the economy, an i n t e n s i f i c a t i o n o f i n f l a t i o n , and growing e x p e c t a t i o n s o f
further i n f l a t i o n .
-

A l t h o u g h monetary and f i s c a l p o l i c i e s have attempted
to counter the emerging i n f l a t i o n a r y p r e s s u r e s , the
t i m i n g , scope and c o o r d i n a t i o n of the measures
adopted have been f a r from i d e a l .
Thus, t h e i r
impact on the pace o f i n f l a t i o n has been o n l y
modest and temporary, and they have done v i r t u a l l y
n o t h i n g to weaken i n f l a t i o n a r y e x p e c t a t i o n s .

Under these c i r c u m s t a n c e s ,

I am p e r s o n a l l y convinced t h a t

most important assignment f o r n a t i o n a l economic p o l i c y i s
the t a s k o f b r i n g i n g i n f l a t i o n




to a h a l t .

the

to get on w i t h

I think this objective

should

-3atake p r i o r i t y over some o f our o t h e r important g o a l s - -

such as m i n i m i z i n g

the r a t e o f unemployment or optimum f u n d i n g o f programs to a i d the
In reaching t h i s

conclusion,

cope w i t h the c r i s e s
our human r e s o u r c e s .

I am not u n m i n d f u l o f the p r e s s i n g need to

i n our urban areas and to f o s t e r
Rather,

cities.

the improvement

I b e l i e v e t h a t even these c r i t i c a l

of

objectives

cannot be reached w i t h o u t the attainment and maintenance of a h i g h and
s t a b l e r a t e o f growth i n r e a l output i n the l o n g - r u n .
condition for
to the c u r r e n t

the emergence o f such a p a t t e r n o f growth i s

a pre-

an e a r l y end

inflation.

However,

I also r e a l i z e

t h a t , because i n f l a t i o n has been a l l o w e d

t o become so f i r m l y embedded i n the s t r u c t u r e o f

the economy, p e r s e r v e r a n c e

w i l l be r e q u i r e d f o r perhaps a year or more to h a l t
w i t h o u t b r i n g i n g about a d r a s t i c d e c l i n e
rise

In turn,

i n unemployment, n e i t h e r of which i s

m a j o r i t y of the American p u b l i c .
whatsoever to b e l i e v e

inflation

completely

i n output and a dramatic
a c c e p t a b l e to the v a s t

On the o t h e r hand,

t h e r e i s no r e a s o n

t h a t even a modest l e s s e n i n g o f i n f l a t i o n a r y

sures can be a c h i e v e d w i t h o u t a s i g n i f i c a n t

s l o w i n g i n the r a t e

economic expansion and some i n c r e a s e i n unemployment.

pres-

of

The c r i t i c a l

ques-

t i o n i s where to s t r i k e a b a l a n c e between these competing o b j e c t i v e s .
my v i e w ,

the p r i n c i p a l w e i g h t should be p l a c e d on the s i d e o f

inflation,

and we should be prepared to accept the u n f a v o r a b l e

on output and employment as p a r t of the c o s t o f a t t a i n i n g t h i s
A t the same time, however,

effects
goal.

I b e l i e v e we should be e q u a l l y

concerned about where the r e a l burden o f f i g h t i n g i n f l a t i o n




checking

actually

In

-4afalls.
nor

It

primarily

without
is

should not

orchestration

of

and d r a s t i c

Federal
areas

disruptions

declines

econoir^ - -

m

while

restraint

other

the

such a s s i s t a n c e
productive

stabilization
to happen.

and t h e

of

t h e economy.

policy

For

if

functioning
of

instruments,

example,

credit

continue with

spending.

On t h e o t h e r

through

shift

a drastic

an e x c e s s i v e

are

that

primary r e l i a n c e

high

to

interest

specific

little,
hand,

if

curtailment
share

of

t o make headway t o w a r d

sectors

any - -

primary
of

considerations

way t o

press

f~e

States

a.5 t o r e - c a s t

on o a r

national

pursue

the

l e a d me t o

campaign a g a i n s t
our n a t i o n a l

resources.

following

changes

nondefense
to

urban

s u b s t a n t i a l l y on

l e a d i n g m e a n i n g f u l and

also

priorities

To be

seek

specific,

during

a sizable
the next

expand o u t l a y s

development
reduce

current

conclusion
inflation

that
in

the

and t o r e - o r d e r
I believe

the

t h a t we

other

fiscal

for

To a c h i e v e
types

including militarv

c.

surplus

in

year,

the

b u t we

u r b a n and human
these

Federal

outlays

ends,

Federal

we

should

expenditures

wherever

should

resource
--

possible.

best

United

the

course.

We s h o u l d
budget

the

the

of

dependence

the burden

and t h e d i s a d v a n t a g e d who must r e l y

they

Yet,

o f money and c a p i t a l m a r k e t s ,

sectors

would

poor

the

disadvantaged

lives.
These




sectors

availability

achieved

expenditures

and t o

m

the

credit-financed

on f i s c a l

poor

p o l i c y w o u l d u n d o u b t e d l y mean e x c e p t i o n a l l y

serious

their

on t h e

v u l n e r a b l e

e x a c t l y w h a t we s h o u l d e x p e c t

rates,

in

exclusively

on p a r t i c u l a r l y

careful

cr monetary

the

fall

claims

should

-5aD e s p i t e these economies - - and to guarantee a
s i z a b l e budget s u r p l u s - - i t i s c l e a r t h a t the
10 per cent income s u r t a x s h o u l d be extended.
I n f a c t , i n v i e w o f the sharp r i s e i n b u s i n e s s
f i x e d investment p r o j e c t e d f o r t h i s y e a r , i t
seems unwise to c o n s i d e r r e d u c i n g the r a t e .
To r e i n f o r c e these f i s c a l moves, monetary p o l i c y
should maintain a posture of s u b s t a n t i a l r e s t r a i n t .
Moreover, such a p o l i c y s h o u l d be s u f f i c i e n t l y
r e s t r i c t i v e - - and h e l d l o n g enough - - t o ensure
t h a t the r a t e o f expansion o f bank c r e d i t w i l l be
k e p t q u i t e modest u n t i l r e a l progress has been made
i n checking i n f l a t i o n .
I n my o p i n i o n ,
above i s

far preferable

some o p e n l y ,

the s t r a t e g y o f s t a b i l i z a t i o n p o l i c i e s

sketched

to s e v e r a l a l t e r n a t i v e s w h i c h are b e i n g urged - -

o t h e r s more q u i e t l y .

For

example:

I n c r e a s i n g l y , i t i s b e i n g suggested t h a t the F e d e r a l
Reserve System encourage the a d o p t i o n o f a v o l u n t a r y
program under w h i c h banks and o t h e r l e n d e r s can agree
on c r e d i t r a t i o n i n g among d i f f e r e n t types o f b o r r o w e r s .
Suggestions are a l s o b e i n g heard t h a t d i r e c t
over wages and p r i c e s should be adopted.

controls

F i n a l l y , more and more, arguments are b e i n g advanced
which h o l d t h a t we r e a l l y cannot a f f o r d to pursue
v i g o r o u s a n t i - i n f l a t i o n a r y p o l i c i e s because such
e f f o r t s — i f s u c c e s s f u l - - would generate s e r i o u s
d i s o r d e r s i n our c i t i e s .
Thus, the o n l y a l t e r n a t i v e
i s to accept the i n f l a t i o n .
I n my p e r s o n a l v i e w ,
out h e s i t a t i o n .




these a l t e r n a t i v e s

should be r e j e c t e d w i t h -

I n the c l o s i n g s e c t i o n s o f these remarks,

I e x p l a i n why.

-6aWar F i n a n c e and

Inflation

As mentioned above,
can be i d e n t i f i e d e a s i l y :

it

the c h i e f

cause o f

has a r i s e n p r i m a r i l y

f i n a n c i n g a s s o c i a t e d w i t h the Vietnam War.
since m i l i t a r y
But f o r

activity

three of

the c u r r e n t
from the

inflation
deficit

Almost f o u r years have passed

i n Vietnam was a c c e l e r a t e d i n the summer o f

those y e a r s ,

t h e r e was no i n c r e a s e i n tax

rates.

T h i s was i n s t r i k i n g c o n t r a s t to the s i t u a t i o n i n the
three preceding periods of m i l i t a r y
e n t e r e d World War I ,

conflict.

1965.

When the U n i t e d

last
States

income taxes were i n c r e a s e d s h a r p l y i n 1917.

Tax

r a t e s were a l s o r a i s e d promptly i n 1941 and 1942 i n c o n n e c t i o n w i t h W o r l d
War I I .

A t an e a r l y stage o f

i n 1950 and 1951.
a period of

Again,

the Korean c o n f l i c t ,

however,

tax r a t e s were

increased

i n the case o f the Vietnam War,

i t took

t h r e e years - - from mid-1965 to mid-1968 - - to i n c r e a s e

r a t e s .—^During t h i s p e r i o d o f i n a c t i o n ,
from $1.6 b i l l i o n

to $25.2

the F e d e r a l budget d e f i c i t

tax
grew

billion.

Compared w i t h the i n c r e a s e i n w a r - r e l a t e d F e d e r a l o u t l a y s ,
deficit

i n the t h r e e years ending l a s t June was c l o s e to the

proportions

r e g i s t e r e d d u r i n g the two w o r l d wars - - and i n d r a m a t i c c o n t r a s t to
s u r p l u s achieved d u r i n g the Korean e p i s o d e .

For i n s t a n c e ,

f i s c a l years 1917-19, major n a t i o n a l s e c u r i t y o u t l a y s
m i l i t a r y but w a r - r e l a t e d i n t e r n a t i o n a l e x p e n d i t u r e s )

i n the

the F e d e r a l budget d e f i c i t

the

three

( i n c l u d i n g noni n c r e a s e d by $29.5

b i l l i o n above the pre-war spending l e v e l o f $300 m i l l i o n per y e a r .
the same p e r i o d ,

the

In

t o t a l e d $23.3 b i l l i o n - I n the f i v e

or

79 per cent o f the r i s e

i n war-related expenditures.

fiscal

years 1941-45, m i l i t a r y

spending and r e l a t e d i n t e r n a t i o n a l o u t l a y s r o s e by

1/ Except f o r i n c r e a s e s i n S o c i a l S e c u r i t y tax r a t e s w h i c h m a i n l y
served t o f i n a n c e i n c r e a s e d b e n e f i t s .



-7a$255.6 b i l l i o n over the pre-war annual r a t e o f $1.5 b i l l i o n .
same y e a r s ,

the accumulated budget d e f i c i t

a r a t i o o f 74 per c e n t .
f i s c a l years 1951-53),

amounted to $190.2 b i l l i o n

But d u r i n g the Korean War (spanning the
a budget s u r p l u s o f $2.3 b i l l i o n was

w h i l e m i l i t a r y o u t l a y s r o s e by a t o t a l o f $77.8 b i l l i o n
annual r a t e o f $13 b i l l i o n .

I n the case o f

s i t u a t i o n has been r a d i c a l l y d i f f e r e n t .
activity,

D u r i n g the

three

achieved,

above the pre-war

the Vietnam War, however,

B e f o r e the q u i c k e n i n g o f

I n the

t h r e e f i s c a l y e a r s 1966-68, w a r - r e l a t e d e x p e n d i t u r e s r o s e by a t o t a l

i n g l a s t June,

the F e d e r a l budget d e f i c i t

per cent o f the c l i m b i n w a r - r e l a t e d
W i t h the passage o f

next June,

t o t a l e d $37.8 b i l l i o n ,

for

the e a r l i e r

amount may n o t m a t e r i a l i z e ) .

failure

a sharp

the f i s c a l year

a s u r p l u s o f $2.4 b i l l i o n was expected ( a l t h o u g h the

time, however,

or 64.5

expenditures.

Reflecting this,

e v i d e n c e suggests t h a t the f u l l

of

D u r i n g the same t h r e e years end-

the 10 per c e n t s u r t a x i n mid-1968,

improvement was s e t i n t r a i n .

the

military

d e f e n s e spending was at an annual r a t e o f $49.6 b i l l i o n .

$58.6 b i l l i o n above the p r e v i o u s l e v e l .

--

ending

evolving

I n the mean-

to cope adequately w i t h the t a s k o f

war f i n a n c i n g produced the adverse e f f e c t s many o b s e r v e r s had f o r e s e e n .
Most economists would agree t h a t d u r i n g a war,

the f i r s t

step

o f Government f i n a n c i a l p o l i c y should be an i n c r e a s e i n income tax
The prime aim i s not simply to r a i s e revenue to f i n a n c e
it

is

the war.

rates.
Rather

t o reduce p u r c h a s i n g power i n the hands o f the p r i v a t e s e c t o r

which i n t u r n l e s s e n s
the war e f f o r t .




the l a t t e r f s

The f a i l u r e

--

c l a i m s on r e a l r e s o u r c e s needed f o r

to r a i s e income t a x r a t e s

i n a timely

fashion

-8aafter

the q u i c k e n i n g o f the Vietnam War l e f t

sectors

the b u s i n e s s and household

i n a p o s i t i o n to b i d s t r o n g l y f o r goods and s e r v i c e s

when the F e d e r a l Government was a l s o t r y i n g to i n c r e a s e i t s
o v e r , because d e f i c i t
and consumers,

at a time
share.

f i n a n c i n g expanded the p u r c h a s i n g power o f

they were a b l e to b i d even more a g g r e s s i v e l y

More-

businesses

f o r goods and

services.
Thus,

i n the second q u a r t e r o f 1965, the p r i v a t e s e c t o r accounted

f o r 81.5 per c e n t o f r e a l gross n a t i o n a l p r o d u c t
dollars),

and the F e d e r a l Government accounted f o r 9.4 per c e n t .

f o u r t h q u a r t e r o f 1968, the p r i v a t e
to 79 per c e n t ,
cent.

sector's

slightly

and the F e d e r a l Government's share had r i s e n to 11 per

D u r i n g the same p e r i o d ,

r e a l GNP r o s e by 18 per c e n t ,

but the

i n c r e a s e d by 14 per

So, a f t e r more than t h r e e years o f an expanding war,

s e c t o r was s t i l l

I n the

share had d e c l i n e d

amount o f output absorbed by the p r i v a t e s e c t o r
cent.

(GNP, measured i n 1958

the

private

c l a i m i n g almost as l a r g e a p r o p o r t i o n of r e a l output as

at the time the m i l i t a r y e f f o r t was a c c e l e r a t e d .
F e d e r a l Government d i d succeed i n expanding i t s

On the o t h e r hand,

the

share o f r e a l o u t p u t .

It

absorbed about 20 per cent o f the growth i n r e a l GNP d u r i n g these 3 - 1 / 2
years,

or over t w i c e i t s

review.

share at the b e g i n n i n g o f the p e r i o d under

A s m a l l p a r t o f the F e d e r a l Government's e n l a r g e d share o f

output was p r o v i d e d by a modest shaving o f p r i v a t e s e c t o r c l a i m s ,

real

and the

r e s t was p r o v i d e d by a d e c l i n e i n the share g o i n g to S t a t e and l o c a l
governments.
I n terms o f c u r r e n t p r i c e s ,
3 - 1 / 2 years ending i n December,




1968.

GNP r o s e by 31 per cent d u r i n g the
However,

s i n c e r e a l output r o s e by

-9ao n l y 18 per c e n t ,
higher p r i c e s .
end o f 1968,

over t w o - f i f t h s

o f the r i s e

i n money GNP r e p r e s e n t e d

T a k i n g the p e r i o d as a whole, between mid-1965 and the

the GNP i m p l i c i t

the p r i c e indexes)

price deflator

(the most b r o a d l y based o f

advanced at an annual r a t e o f 3-1/2 per c e n t ; i n the

p r e v i o u s 3 - 1 / 2 years the annual r a t e o f i n c r e a s e was l e s s than 2 per
I n the case o f consumer p r i c e s ,

the i n c r e a s e from mid-1965 to the end o f

1968 was a l s o at an annual r a t e o f 3-1/2 per c e n t ,

a g a i n s t o n l y 1-1/2 per

c e n t a t an annual r a t e i n the p r e c e d i n g 3-1/2 y e a r s .
advances were a c c e l e r a t i n g throughout the p e r i o d ,
became more b r o a d l y based.
expectations of s t i l l

These t r e n d s ,

further

Moreover,

and the

i n turn,

price

increases

generated growing

inflation.

A g a i n s t t h i s evidence o f r i s i n g i n f l a t i o n a r y p r e s s u r e s ,
record of s t a b i l i z a t i o n p o l i c i e s
the summer o f 1965,

has n o t been v e r y good.

Beginning w i t h

and by e a r l y 1966 the need f o r a f i s c a l p o l i c y

c o n s i d e r a b l e r e s t r a i n t was obvious to most o b s e r v e r s .
were taken t o a c c e l e r a t e income t a x c o l l e c t i o n s

Although

and a few e x c i s e

(which were s c h e d u l e d to e x p i r e ) were kept on the books, h i g h e r
tax r a t e s were n o t adopted u n t i l
fiscal restraint,

second h a l f o f 1966 and the f i r s t
(particularly

T h i s was e s p e c i a l l y
h a l f o f 1968.

the 1966 e p i s o d e )

M a i n l y because o f the r i g i d i t i e s

steps
taxes
income

to c a r r y the main

t r u e d u r i n g the

The l e s s o n s o f

that

are by no means c o m f o r t i n g .

s u r r o u n d i n g home f i n a n c i n g

1/ S o c i a l S e c u r i t y p a y r o l l taxes were i n c r e a s e d to
enlarged b e n e f i t s .




of

the summer o f 1968.JL/ln the absence o f

monetary p o l i c y was l e f t

burden o f c o u n t e r i n g i n f l a t i o n .

experience

the

the need f o r a l e s s expansive f i s c a l p o l i c y became

increasingly evident;

appropriate

cent.

offset

institutions,

-10athe l a t t e r were a b l e to compete f o r

funds i n o n l y a l i m i t e d way a g a i n s t

the e x p a n s i o n i n s a l e s o f market s e c u r i t i e s
i n Government i s s u e s .

Consequently,

h e a v i l y on the a v a i l a b i l i t y
of

(and i t s

o f funds at s a v i n g s i n s t i t u t i o n s ,
of c r e d i t

bore much

i n 1966.

a l t h o u g h the a d o p t i o n o f the s u r t a x l a s t

p r o b a b l e c o n t i n u a t i o n f o r at l e a s t another year) g r e a t l y

the Government's f i s c a l

situation,

the o u t l o o k f o r

expenditures

June
improved

the p r i v a t e economy

suggests u n c o m f o r t a b l e p a r a l l e l s w i t h developments d u r i n g 1966.
the d i s t r u b i n g element i s

rise

the h o u s i n g s e c t o r , w h i c h depends

the impact o f the reduced a v a i l a b i l i t y
Unfortunately,

-- including a sizable

Again,

a p r o s p e c t i v e boom i n p l a n t and equipment

coming a t a time o f e s s e n t i a l l y

full

employment.

M o d e r a t i n g the Investment Boom
I n my o p i n i o n ,

the p r o j e c t e d r i s e i n b u s i n e s s

d u r i n g the c u r r e n t year i s

i n b a s i c c o n f l i c t w i t h the p r i o r i t y

t o a c h i e v i n g an e a r l y end to i n f l a t i o n .
c h a l l e n g e to n a t i o n a l s t a b i l i z a t i o n
The l a t e s t

fixed

Thus,

it

investment
assigned

poses a s e r i o u s

policies.

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 Business
Economics and the S e c u r i t i e s

and Exchange Commission) suggests a r i s e

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.

The survey was con-

ducted i n l a t e January and e a r l y February and announced i n the m i d d l e
t h i s month.

If

these p l a n s were f u l f i l l e d ,

f a c i l i t i e s would r i s e

of

b u s i n e s s spending f o r new

t h i s year by $9 b i l l i o n t o a t o t a l o f $73 b i l l i o n .

An i n c r e a s e o f 14 per cent i n the c u r r e n t year would be i n sharp




of

contrast

-11ato the 4 per cent advance r e c o r d e d i n 1968 and the r i s e o f 2 per cent
1967.

Apparently,

in

the p r o j e c t e d 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 o f l a r g e s a l e s g a i n s i n 1969,
p o s i t i o n i n 1968, e f f o r t s

the improved e a r n i n g s

to expand c a p a c i t y to meet l o n g - r u n demand,

the d e s i r e to s u b s t i t u t e c a p i t a l f o r l a b o r wherever
The OBE-SEC survey i n d i c a t e s

and

possible.

t h a t the p r o j e c t e d r i s e i n

capital

o u t l a y s 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 e x p e c t i n g a g a i n
o f 16 per c e n t ,
12 per c e n t .

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

r e f l e c t s higher prices rather
still

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 not be r e a l i z e d

represents

time o f s e r i o u s
d e s p i t e the f a c t

(and some o f the p r o j e c t e d

than r e a l i n v e s t m e n t ) ,

increase

the planned

increase

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
inflation.

Furthermore,

the s i z a b l e expansion i s

projected

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 c e n t 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 r a t e 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 and
a c t u a l o u t l a y s on f i x e d equipment,
may be r e a l i z e d s u b s t a n t i a l l y
T h i s was c e r t a i n l y
November,

there i s

a l s o a good chance t h a t

-- unless public p o l i c y

i s brought to b e a r .

the case d u r i n g the 1966 f i x e d investment boom.

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
1966,

survey,

1965.

In
out-

to
By the

such o u t l a y s were p r o j e c t e d t o show an

i n c r e a s e o f 16 per cent d u r i n g the f u l l year over the 1965 l e v e l .




plans

1965, the OBE-SEC survey i n d i c a t e d t h a t p l a n t and equipment

time o f the March,

-

The

-12aa c t u a l i n c r e a s e i n 1966 was 16.7 per c e n t .
business a n t i c i p a t i o n s ,
ditures

indicated

Thus, d u r i n g a p e r i o d 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 equipment

i n the OBE-SEC survey may u n d e r s t a t e a c t u a l

On the o t h e r hand,

as i t

is currently.

i n g s h o u l d run lower - - and as c o r p o r a t i o n s

conclude t h a t

are f u l l y

— business

t o dampen b u s i n e s s c a p i t a l o u t l a y s

the monetary and

investment o u t l a y s

tax c r e d i t

line

seems p r e f e r a b l e

o f the g e n e r a l i n s t r u m e n t s
I n making t h i s
the p r o j e c t e d i n c r e a s e s

s h o u l d be suspended as a move

results

t o r e l y on the steady and v i g o r o u s
of monetary and f i s c a l

observation,

Cer-

little

to

o f such a move.
application

policy.

l e t me say t h a t I r e a l i z e

t h a t some o f

i n p l a n t and equipment are based on l o n g - r u n

and many p r o j e c t s w i l l n o t be ready t o produce u n t i l
I

undoubtedly

i n 1966-1967 p r o v i d e s

encourage one t o be h o p e f u l about the b e n e f i c i a l

Nevertheless,

fact

- - as some o b s e r v e r s are s u g g e s t i n g .

t a i n l y 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

tions,

spend-

i n my p e r s o n a l o p i n i o n , we ought not to h a s t e n t o con-

c l u d e t h a t the 7 per cent investment

it

Thus, a c t u a l

considerably.

Consequently,

Rather,

outlays.

committed t o f i g h t i n g i n f l a t i o n - - and i n

are making s u b s t a n t i a l p r o g r e s s
w i l l be reduced

expen-

the l a t e s t p l a n s a p p a r e n t l y were made b e f o r e

monetary p o l i c y became as r e s t r i c t i v e

f i s c a l authorities

strong

considera-

1970 and 1971.

t h i n k the impact o f f i s c a l and monetary r e s t r a i n t

—

sued long enough - - w i l l have a dampening e f f e c t on t h i s p a r t o f the

if

pur-

spending

stream.
The Role o f Monetary

Policy

D e s p i t e the p o s s i b l e d e l a y s

i n the impact of monetary p o l i c y

e r a t i n g p l a n t and equipment e x p e n d i t u r e s ,

I must emphasize t h a t we have

achieved a s u b s t a n t i a l degree of monetary r e s t r a i n t



s i n c e the end of

i n modalready

1968.

-13aFor example, d u r i n g the f i r s t
bank c r e d i t

t h r e e months o f t h i s y e a r ,

(as measured by the c r e d i t proxy) may d e c l i n e by almost 5 per

cent at an annual r a t e :

d u r i n g the l a s t q u a r t e r o f 1968, such

expanded at a 12 per c e n t annual r a t e .

Even a f t e r

i n bank c r e d i t d u r i n g the f i r s t
I n the f i r s t

credit

adjusting for

E u r o - d o l l a r b o r r o w i n g s abroad by head o f f i c e s o f U. S. banks,

annual r a t e .

total

increased

the

decline

q u a r t e r may be c l o s e to 2 per cent at an

t h r e e months o f t h i s y e a r ,

the annual growth

r a t e o f the money s t o c k may be reduced to 2 per c e n t compared w i t h 7-1/2
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 .

Time and savings

deposits

at commercial banks are p r o j e c t e d to d e c l i n e at an annual r a t e c l o s e
7 per cent d u r i n g the January-March months,
o f e x p a n s i o n o f 16 per cent i n the f i n a l
p r i n c i p a l explanation of t h i s

i n contrast

to an annual r a t e

t h r e e months o f 1968.

sharp turnaround i s

to

The

the s u b s t a n t i a l

attri-

t i o n i n CD's at l a r g e banks - - w h i c h have shrunk by $3-1/2 to $4 b i l l i o n
s i n c e the b e g i n n i n g o f the y e a r .
Under these p r e s s u r e s ,

banks are f i n d i n g i t

n e c e s s a r y to t i g h t e n l e n d i n g terms.

The banks 1

increasingly

prime l e n d i n g

interest

r a t e has been r a i s e d from 6-1/4 to 7-1/2 per cent s i n c e e a r l y December;
and c o u n t i n g the e f f e c t s o f compensating b a l a n c e s ,

the minimum c o s t

b o r r o w i n g even f o r the b e s t customers now exceeds 9 per c e n t .
more banks are t u r n i n g down new l o a n r e q u e s t s ,

increasingly

to s m a l l e r r e g i o n a l i n s t i t u t i o n s .

ordinarily

shifted

Loan d e p o s i t r a t i o s

many i n s t a n c e s are as h i g h as they were d u r i n g the p e r i o d o f




More and

and demands w h i c h

would have been met at the l a r g e money market banks are b e i n g

of

in

severest

-14acredit restraint
story.
their

i n 1966.

Other measures o f bank l i q u i d i t y

tell

W i t h the passage o f each week, banks are i n c r e a s i n g l y

reducing

p a r t i c i p a t i o n i n the market f o r S t a t e and l o c a l government

and n e t s a l e s o f F e d e r a l Government i s s u e s remain l a r g e .
F e d e r a l Reserve Banks has r i s e n s h a r p l y ,
offices

o f U. S. banks to t h e i r

$9.8 b i l l i o n ,
Again,

restraint

securities,

Borrowing from

and the l i a b i l i t i e s

o f head

f o r e i g n branches have c l i m b e d to over

compared w i t h an average o f $7 b i l l i o n l a s t

these i n d i c a t o r s

the same

December.

suggest t h a t a s u b s t a n t i a l degree o f monetary

has been accomplished.
On the o t h e r hand, we must accept the f a c t t h a t the e f f e c t s

monetary p o l i c y on spending f o r goods and s e r v i c e s
registered after

a significant

time l a g .

and on p r i c e s

T h i s i s p a r t l y because

g i c a l l y p l a c e d s e c t o r s may have b u i l t up a l i q u i d i t y
be worked o f f
This

commercial banks.

are
strate-

c u s h i o n t h a t must

- - w h i l e o t h e r s may occupy f a v o r e d p o s i t i o n s w i t h

is especially

of

lenders.

t r u e o f the r e l a t i o n s h i p between many c o r p o r a t i o n s and
To a c o n s i d e r a b l e e x t e n t ,

t h i s accounts f o r the

fact

t h a t b u s i n e s s l o a n s i n January and F e b r u a r y t h i s year r o s e at an annual
r a t e o f 19 per c e n t ,

compared w i t h 13 per cent d u r i n g l a s t November and

December and w i t h 11 per cent i n the second h a l f o f 1968.

While

r a t e o f growth eased somewhat i n the month o f February ( d a t a f o r
are s t i l l
than i s

fragmentary),

March

the pace o f expansion c o n t i n u e s t o be much g r e a t e r

c o m p a t i b l e w i t h the e f f o r t

stance f o r monetary p o l i c y i s
sufficient

the

t o check i n f l a t i o n .

clear:

Thus,

the proper

r e s t r a i n t must be m a i n t a i n e d

degree to induce banks t o decrease even f u r t h e r

in

the pace at

which they are t a k i n g on new commitments and the r a t e at w h i c h they are




-15aexpanding l o a n s and i n v e s t m e n t s .

This posture of r e s t r a i n t

s h o u l d be

h e l d f o r a l o n g enough p e r i o d of time t o c o n v i n c e everyone t h a t
i n g and spending d e c i s i o n s must be r e v i s e d downward t o l e v e l s
w i t h the maintenance of n o n i n f l a t i o n a r y growth i n the
Unpromising

(some o p e n l y ,

long-run.

others q u i e t l y )

as a l t e r n a t i v e s

courses are b e i n g urged

t o a p o l i c y of monetary and

r e s t r a i n t as a means of c o p i n g w i t h i n f l a t i o n .

gestions

consistent

Alternatives

As I mentioned above, s e v e r a l d i f f e r e n t

fiscal

borrow-

These i n c l u d e

sug-

t h a t the F e d e r a l Reserve sponsor a scheme of v o l u n t a r y c r e d i t a l l o -

c a t i o n to domestic borrowers and t h a t Congress adopt d i r e c t c o n t r o l s over wages
and p r i c e s .

S t i l l another s u g g e s t i o n i s t h a t no s e r i o u s e f f o r t be made to check

i n f l a t i o n because such an attempt may r e s u l t
i n c r e a s e d t e n s i o n s i n urban a r e a s .

i n h i g h e r unemployment and

I n my o p i n i o n ,

these are not m e a n i n g f u l

alternatives.
I

can a p p r e c i a t e

the r e l u c t a n c e of banks t o say " n o " to customers

w i t h whom they have had a l o n g - s t a n d i n g r e l a t i o n s h i p .
stand t h e i r

fear that i f

I can a l s o under-

they t u r n down a customer he may e a s i l y be accom-

modated by a c o m p e t i t o r - - who may a l s o get the b a l a n c e s p r e v i o u s l y
w i t h the f i r s t

bank.

It

held

i s these k i n d s of concerns which have l e d some

bankers t o suggest t h a t i t might be a good i d e a f o r the F e d e r a l Reserve
System t o encourage the a d o p t i o n of a v o l u n t a r y c o n t r o l program under w h i c h
banks and o t h e r l e n d e r s can agree on c r e d i t r a t i o n i n g among d i f f e r e n t
of

borrowers.




types

-16aOf c o u r s e , I cannot speak f o r o t h e r s i n the F e d e r a l Reserve
System, but I would f i n d i t

difficult

t o support such a p r o p o s a l .

the b a s i s o f my own e x p e r i e n c e w i t h another v o l u n t a r y c r e d i t
program ( t o l i m i t
cial

restraint

f o r e i g n l e n d i n g by American banks and nonbank

institutions),

finan-

I am convinced t h a t the i n e q u i t i e s w h i c h such a

scheme must n e c e s s a r i l y

i n v o l v e would be extremely s e r i o u s .

and borrowers w i t h f a v o r e d p o s i t i o n s
would be a b l e t o e x p l o i t

Lenders

at the b e g i n n i n g of the program

t h e i r advantage and s t r e n g t h e n t h e i r own com-

petitive positions.

Those not so f a v o r e d would have t h e i r

worsened.

l e n d e r s who had t o make unpopular

Moreover,

On

positions

turndowns

l o a n r e q u e s t s n a t u r a l l y would f i n d the program a convenient

of

crutch.

S i n c e such a scheme would p r o b a b l y have t o i n c l u d e some means o f

getting

" e x c e p t i o n s , f f the a d m i n i s t r a t i v e burden (which n e c e s s a r i l y would be
c o n s i d e r a b l e ) would become even g r e a t e r .

Thus,

v o l u n t a r y program f o r the a l l o c a t i o n of c r e d i t
would pose a s e r i o u s

t o domestic

policy,

t o reach the b a s i c source of the

Such c o n t r o l s

a l l - o u t war e f f o r t ,

in this

over wages and

c o u n t r y have been a s s o c i a t e d w i t h an

and they have been accompanied by other

measures

(such as h i g h e r taxes and m a t e r i a l s a l l o c a t i o n ) w h i c h r e - i n f o r c e d
Even so,
and I I ,




infla-

pressures.
T h i s i s even more t r u e of mandatory c o n t r o l s

prices.

borrowers

i n t e r f e r e n c e w i t h the conduct o f monetary

and i t would p r o b a b l y do l i t t l e
tionary

the l a u n c h i n g of a

the e x t e n t of t h e i r
the main e f f e c t

success i s not a t a l l

o f the c o n t r o l s

clear.

them.

I n W o i l d Wars

seems t o have been t o

suppress

I

-17aexcess demand d u r i n g the war years - - which was s u b s e q u e n t l y

registered

i n s u b s t a n t i a l post-war i n f l a t i o n s .

the

t i o n of d i r e c t
expectations
effort,

imposi-

c o n t r o l s a l o n g w i t h h i g h e r taxes seems t o have eased

of

price

D u r i n g the Korean War,

further

inflation;

so a f t e r

i n c r e a s e s were r e l a t i v e l y

However, i n my judgment,

the f i r s t

year o f the war

moderate.

the key p o i n t about such c o n t r o l s

is

t h a t they cannot be expected t o work except as p a r t of a comprehensive
system o f w a r - t i m e r e g u l a t i o n s .

Since such a system does not appear

be c a l l e d f o r ,

I think i t

best t h a t no s e r i o u s e f f o r t

wage and p r i c e

controls.

to

I n s t e a d , a v i g o r o u s p o l i c y of monetary and

fiscal restraint

seems s u f f i c i e n t

Finally,

t o cope w i t h the c u r r e n t

view w h i c h h o l d s t h a t such an e f f o r t

of

life

inflation.

as I have s t r e s s e d throughout these remarks, I

the t a s k t o c h e c k i n g i n f l a t i o n i s u r g e n t .

terms o f i t s

be made t o impose

Therefore,

think

I cannot share

i s t o o c o s t l y when measured

impact on unemployment and the need t o improve the

the

in
conditions

i n urban a r e a s .
I am f u l l y aware of the f a c t t h a t the r a p i d expansion of

economy i n r e c e n t y e a r s has been e s p e c i a l l y h e l p f u l
i n the l a b o r f o r c e .

For example,

t o m a r g i n a l groups

the unemployment r a t e f o r

nonwhites

averaged 8 . 1 per cent i n 1965, compared w i t h 4 . 5 per cent f o r a l l
workers.

By 1968, the nonwhite r a t e had d e c l i n e d t o an average of

per c e n t , a g a i n s t 3 . 6 per cent f o r
last year,

the t o t a l c i v i l i a n

civilian
6.7

labor f o r c e .

I n the

the improvement i n the employment s i t u a t i o n has been p a r t i c u -

l a r l y s t r i k i n g f o r those l i v i n g i n urban p o v e r t y a r e a s .




the

Between the

fourth

-18aq u a r t e r s of 1967 and 1968, the unemployment r a t e s i n p o v e r t y
of

the n a t i o n ' s

neighborhoods

100 l a r g e s t m e t r o p o l i t a n areas d e c l i n e d from 6.9 per

t o 5.2 per c e n t .

T h i s r a t e o f improvement was f a s t e r

cent

than t h a t i n o t h e r

neighborhoods of the 100 areas — or i n the n a t i o n as a w h o l e .
Thus, I am o b v i o u s l y r e l u c t a n t
w h i c h would l i m i t

or erase t h i s p r o g r e s s .

t h a t such r e l u c t a n c e
inflation.

t o see c i r c u m s t a n c e s
Nevertheless,

develop

I do not

should l e a d t o a slowdown i n the campaign a g a i n s t

After a l l ,

whatever improvement i n employment and income the

poor and disadvantaged can a c h i e v e w i l l be of even g r e a t e r b e n e f i t
i s not eroded by r i s i n g
Instead,
further

agree

as I

if

it

prices.
s t r e s s e d above, I t h i n k one must l o o k t o the

expansion o f t r a i n i n g ,

h e a l t h , h o u s i n g and o t h e r p u b l i c

programs

as means of e n s u r i n g t h a t the poor and d i s a d v a n t a g e d do not c a r r y

the

main burden of c h e c k i n g i n f l a t i o n .

national

stabilization policies

is

clear:

I n the meantime,
it

the t a s k f o r

i s t o push the f i g h t a g a i n s t

inflation.

As one who shares i n the development and e x e c u t i o n of these p o l i c i e s ,
have no doubts about my own r e s p o n s i b i l i t i e s .




I