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For release on deliveryWednesday, June 6, 1973

Some Problems of Central Banking

Address by
Arthur F. Burns
Chairman, Board of Governors of the Federal Reserve System

before the
1973 International Monetary Conference

Paris, France

June 6, 1973

The advent of the 1970's has not diminished the range
or difficulty of the problems that central bankers face.

In the

international area, relationships among economies have been
undergoing rapid change, and our governments are now activelyseeking to develop new international rules to guide their future
conduct in the spheres of money and trade.

As central bankers,

we have inevitably become involved in efforts to achieve urgently
needed reforms of the international monetary system.

We have

also had to wrestle anew with problems of recession, economic
overheating, and the stubborn persistence of inflation.
Today, I want to focus my remarks on the problem of
achieving greater stability in the performance of our domestic

There is no more crucial need for the stability and

welfare of our economies than to find more effective methods for
dealing with inflation and its causes.

Restoration of international

financial order also depends heavily on our handling of this problem.
The policies that are needed to halt inflation, without at the same
time plunging our nations into economic stagnation or recession,
extend beyond the normal province of central banking.


management of monetary matters nevertheless remains an


indis pens able ingredient in reaching the objective of noninflationary growth that we all seek.
Since the end of World War II, our economies have
developed a disconcerting bias toward inflation.

A variety of

influences - - social, political, and-institutional - - have been
at work here.

But there can be no doubt that the speed and

vigor with which governments tend to deal with recession,
their considerable success in this endeavor, and their reluctance
to act with similar decisiveness to curb economic booms, have
contributed materially to the world-wide upward trend of the
price level and the persistence of inflationary expectations.
Monetary and fiscal policies for managing aggregate
demand now bear, and must continue to bear, the main responsibility for regulating the over-all performance of our national

At times, the level or pace of total economic activity

will continue to call for restraining policies, and at other times
there will be need for stimulus.

But I must caution that experi-

ence suggests that we will need to embark on policies of active
stimulation with greater care, unless we subdue the natural
inclination to stay too long with such policies.

The ability and

the will to make timely shifts in the thrust of fiscal and monetary

policies are of the utmost importance if these policy instruments
are to play a more constructive contracyclical role.
We need also to recognize that skillful, timely, and
flexible use of/demand management policies piay not suffice to
achieve satisfactory economic performance.

To be sure, total

spending in the economy can be slowed through monetary and
fiscal measures.

But under the institutional conditions that

now prevail in many of our countries, shifts in these policies
have a much stronger and more prompt effect on real output
and employment than on the pace of inflation.

The persistence

of rapid advances of wages and prices in the United States and
other countries, even during recent periods of recession, has
led me to conclude that governmental power to restrain directly
the advance of prices and money incomes constitutes a necessary
addition to our arsenal of economic stabilization weapons, to be
used occasionally ~ ••- but nevertheless vigorously — when needed.
There is another difficulty in relying exclusively on. broad
monetary and fiscal policies for combatting cyclical fluctuations.
Over-all restraint, it is true, will in time slow any exuberant

It may not, however, curb sufficiently or in timely

fashion the sectors of demand that are leading to economic imbalance, and thereby set the stage for later economic trouble*


Over-all restraints that are sufficient to curb expansion in
aggregate economic activity may do so by inducing sizable
declines promptly in some areas, such as housing, and yet
have slight effect for some time in other areas, such as
business investment.

This is particularly likely to be the

case when reliance is placed mainly on monetary policy, and
hence on sharp changes in credit conditions, for purposes of
economic stabilization.
Throughout business cycle history, the major force
making for economic instability has been the rather large
fluctuation characteristic of business investment.

At times,

of course, the spending and taxing policies of government have
been a source of economic trouble, especially in connection with
wars and their financing*

On occasion, also, large changes in

the spending propensities of consumers have played their part
in carrying aggregate activity to unsustainably high, or unacceptably low, levels.

But it is in the pronounced changes of

the investment plans of business firms, with respect both to
their fixed capital and inventories, that much of the cyclical
instability of advanced industrial economies has originated.

Business investment is, of course, vital to the growth
in productivity, and the improvement in material welfare, to
which all nations aspire.

Over the long run, incentives to in-

vest therefore need to be enhanced.

But it would be far better

if a high average level of investment could be achieved without
the sizable fluctuations that have characterized the past.


general economy would benefit from a reduction of this source
of instability.

Business enterprises would also benefit from a

more regular pace of investment, since they would thus avoid
a concentration of expenditures at times when financing costs
are high, when the capabilities of suppliers are strained, and
when delivery and installation dates become more uncertain.
In view of our continuing problems in achieving economic
stability, we must persist in the search for new and more refined tools of stabilization policy.

Ideally, these measures should

be of the kind that can be introduced or removed quickly and
that will affect private spending decisions rather promptly.
Many countries have recognized this need, and we at the Federal
Reserve have sought to profit from their experience and studies,
as well as from our own research.


Last year, for example, the Federal Reserve Board
completed a study of ways in which the housing industry could
be provided a degree of insulation from the fluctuations brought
on by sharp changes in credit conditions.

One of our major

conclusions was that more stability in residential construction
would require less instability in business investment.


this end, we proposed that consideration be given to the use of
a variable investment tax credit.

When contracts or orders for

new plant and equipment are advancing too rapidly, the tax credit
could be reduced, and when such investment is lagging, the tax
credit could be raised; thus providing a direct cost incentive
for moderating cyclical movements in this area,
I continue to believe that the concept of a variable tax
incentive to business investment has merit.

Because of our

need in the United States to encourage greater productivity,
however, I would now recommend that the tax credit remain
in effect continuously and that it at no time drop to zero.


could vary, perhaps, between 3 or 4 per cent and 15 per cent,
depending on economic conditions*

It would be important also

to retain a decisive role for the Congress in determining the
specific rate of tax credit.

This could be done by empowering

the President to initiate changes in the investment tax credit,
but making it subject to veto or approval - - and perhaps also some
modification - - b y the Congress within a 45 or 60 day period.
In recent months, the Federal Reserve has faced the
problem of dealing with a rapidly escalating demand for bank
credit, even though the monetary aggregates, by and large,
have grown at a moderate pace.

The upsurge in bank credit

has been associated mainly with the demand for business loans,
and it has been largely accommodated by the banks through the
issuance of certificates of deposit in the money market.
Accordingly, the Board in mid-May announced a new restrictive
action aimed specifically at this development.

Since May 16,

any further increase in bank issues of large certificates of
deposit or similar money market instruments, over a base of
$10 million or the amount then outstanding, whichever is larger,
is to be subject to an additional reserve requirement, presently
set at 3 percentage points.

At the same time, any additional

funds obtained abroad by U. S. banks for domestic purposes
became subject to reserve requirements on a comparable basis,
and the remaining interest rate ceilings on large certificates of
deposit were suspended.


The new marginal reserve requirement will raise the
cost incurred by banks in obtaining additional funds through
the money market for the financing of loan expansion.


doing so will have the use of only 92 per cent of the proceeds,
rather than the 95 per cent that they had before.

The purpose

of the marginal reserve requirement is to restrain bank lending
to business on a market-oriented basis, so that rationing of
funds by the banks to their large business customers may be
accomplished through higher costs, rather than by the imposition
of arbitrary and inflexible interest rate controls.

We expect

that the result will be to moderate the willingness of banks to
accommodate their customers through this source of financing.
If it fails to do so sufficiently, we are prepared to consider
additional actions that will limit further the availability of the
funds that banks have at their disposal.
I have urged bankers in the United States to discipline
the pace at which they are extending credit, in the interest both
of our economy's present need and of sound banking practice.
I repeat that appeal today.

In doing so, I recognize that earnest

efforts by commercial banks to moderate their rate of credit
accommodation will not, by itself, be a sufficient remedy.
is no less important that d$e& b*£a£iaess leaders recognize the


need to limit their investment plans for the time being, and thus
restrict their requirements for external finance, whether from
the banks or the money and securities markets.
the growth of bank credit will be of little avail

Moderation in
if the result

is merely to augment open-market financing of an unsustainable
increase in business spending.
In times like these, it is also necessary that public
expenditure in the United States be restrained to the maximum
extent feasible.

It is necessary that our government seek stren-

uously to achieve balance, or actual surplus, in its income
relative to its expenditure.

And as far as the Federal Reserve

is concerned, it is more necessary than ever that we keep
monetary expansion down to a moderate pace, while we at the
same time avoid the kind of constriction in credit markets that
could lead to recession and the certainty of large stimulative
measures later on. We must avoid serious overheating of the
American economy now, and we must try to curb our inflation
through methods that will not add to future economic instability.
With reasonable cooperation by all leading groups in our society,
I am confident that we can achieve these goalso

This is of

critical importance to the United States and also to the world
at large.

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