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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. 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, of life inflation. as I have s t r e s s e d throughout these remarks, I view w h i c h h o l d s t h a t such an e f f o r t terms o f i t s be made t o impose t o cope w i t h the c u r r e n t 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 . Therefore, to 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
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