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For Release on Delivery
"{Approximately 7 p.m.,
Central Standard Time,
December 10, 1954-)
THE ECONOMIC LANDSCAPE
Address of C. Canby Balderston, Member,
Board of Governors of the Federal Reserve System,
before the
New Orleans Clearinghouse Association,
New Orleans, Louisiana,
on Friday, December 10, 1954.
The Economic Landscape
Our economic life may be likened to an enormous river that flows
without ceasing.
Sometimes its progress is straight and placid, sometimes
crooked and tumultuous.
Those supported by this economic flow— and who is
not— keep peering into the future to discover what lies ahead, both iri the
long distance and in the short.
The effort to observe what mountains, rapids, rocks and pleasant
fruitful valleys are to be encountered is as old as Adam1s departure from
the Garden.
It is born not alone of curiosity but of the imperative need
to make those plans and take those actions needed for success and survival.
But the forecasting even of the immediate future makes one aware of the
perils of prophecy.
than with short.
They are of course greater with long-i‘
un predictions
And so, a venture to do both would seem to place one's
self in double jeopardy.
Regardless of the risk of being proven a poor prophet, I will
ask what a long view reveals.
Among the trends that seem to me worthy of
notice are four:
The first is the recent high rate of population increase— about
1.7 per cent a year as compared with less than 1 per cent in the 1930's.
The most fundamental question stemming from it is whether we can provide
our growing population with a constantly rising standard of living.
I will
leave the answer to this question to the future— noting only that our
history has been characterised by a persistent upward trend, albeit with
short-term irregularities.
One aspect of population growth is the number of households
formed each year, which affects the construction of schools, roads, homes,
and household furnishings.
Even though household formation is expected to
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decline during the next few years from earlier high levels, population
growth will, in the long run, bring about an increase in household forma
tion.
For many decades the number of households has tended to grow more
rapidly than the population, causing the average size of household to
decline.
Or, perhaps the cause-effect relationship is just the reverse.
The more rapid growth in households reflects a greater tendency for parents
to maintain separate households long after their offspring have set up
homes of their own.
As a result, the average size had dropped from 4-93
persons in 1890, to 3.35 by 1950, and to 3.28 by 1953.
The rate of house
hold formation, which is itself influenced by the state of business, makes
an impact upon the volume of sales of many industries.
During the 1930's,
the number of households added each year averaged only about half a million;
in the immediate postwar years, 1947 to 1950, nearly a million and a half.
Since then, the rate has fallen to approximately one million a year, and
during the rest of this decade seems likely to run about 800 thousand.
Even this reduced rate of increase will probably give us more than 52
million households by I960 as compared with 43.8 million in 1950 and 46.8
million in 1953.
For this estimate I am relying upon Current Population
Reports of the Bureau of the Census.
As to the impact of population growth upon the labor force, I
will assume freedom from another world war but continuance of a high level
of defense activity.
According to the Bureau of the Census, it is estimated
that enough jobs vili be required each year during the last half of the cur
rent decade to absorb about 900,000 persons, as compared with 700,000 in the
first half.
During the 1960's, the problem of job creation will become
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more than one-third greater for, during that period, the postwar biibies
will be seeking jobs at the annual rate of nearly 1.2 million.
A second trend is the centrifugal movement of population in
metropolitan areas.
For some decades there has been a trend from mid
city to suburban areas.
Made possible by improved transportation, this
trend has enhanced suburban real estate values, depressed some city prop
erty values, and led to a tremendous demand for autos and for roads to run
them on, for schools, water works, disposal plants, and other utilities.
For some utilities the requirement for plant and equipment and the requi
site capital is magnified by the fact that the cost of such expansion
seems to increase, not in direct ratio to the distance at which people
settle from city centers, but at a much higher ratio.
A third factor is the gain in productive capacity during and
since World War II. This gain cannot be measured accurately but its mag
nitude is reflected in the investment in new plant and equipment.
In the
four years of 194-7-50 American business spent over $20 billion a year on
new plant and equipment and, in the four succeeding years, nearly $27
billion annually.
The latter is almost five times the figure for 1939.
In
short, in the years following the end of World War II, American business
has invested over $200 billion to replace, improve and expand its productive
facilities.
Even after allowance for substantial price increases since
1939 and for replacement of worn-out facilities, the net expansion in the
physical volume of fixed capital has been tremendous.
For example, steel
capacity has been increased by over 50 per cent; electric power capacity,
by about 150 per cent. While we are unable to measure accurately the re
sultant growth in total industrial capacity, the growth exists and is sig
nificant.
I mention this factor both because of the importance of these
resources in the event of war and because of the obvious social gains
from our ability to create a larger pile of goods and services for consumers to enjoy. But this social gain is not without cost.
As Emerson
pointed out in his essay on Compensation, "Every sweet hath its sour;
every evil its good.......For every benefit which you receive, a tax
is levied . . . . Every thing has two sides, a good and an evil." For
the manufacturer in a particular industry, growth in plant capacity may
mean greater profit potential for himself but increased competition within
his industry accompanied by downward pressure upon prices.
On the one
hand, American business has enhanced its ability to create goods and
services, which provides material benefits for all and a useful and po
tent brake upon inflation; on the other hand, it has stepped up competi
tion. Excess capacity puts pressure on prices and in turn on costs.
Competition, of course, has been an integral part of the process by
which new products have been introduced and distributed and by which
gains in productivity have been disseminated throughout our economy.
A fourth factor is technological development.
Since World
War I, the number of men engaged in industrial research has increased
fifty-fold, and as Dr. Mees of the Eastman Kodak Co. has pointed out,
technical advance has been accelerating at a rate that has itself been
accelerating.
mankind.
Yet this has been a period very short in the history of
In the dramatic language of Dr. Robert E. Wilson, Chairman of
Standard of Indiana:
"Let us compress the supposed 500,000 years of man's develop
ment into 50 years.
On this time scale it took man 49 years to get over
being a nomad— even longer to get his first pair of pants. - - A few
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months ago a few men learned to write; two weeks ago the first printing
press was built.
Only within the lest 3 or U days have we really under
stood how to use electricity.
"And within the very last day have come such amazing things as
radio, television, diesel locomotives, rayon, nylon, sulfa drugs,—
electric computers - - - 100-octane gasoline, color and sound in motion
pictures. - - On our condensed time scale, jet planes, a dosen new anti
biotics and hormones, and the release of atomic energy all came into the
picture" in the last hour or two.
Dr. Wilson's portrayal of man's technical advance has the great
virtue of simplicity.
Too often worthwhile ideas become lost in academic
language.
The point that Dr. Wilson is driving home is that technology is
the most significant characteristic of our time.
It is true, of course,
that it has increased to awesome proportions man's ability to destroy
himself, but it has also enhanced his ability to achieve a satisfying
material existence.
Even though critics may feel that people have be
come overly interested in gadgets, it is my belief that the physical
facilities for living a good life that are made possible by technology
increase the chances of millions to enjoy the comforts once reserved to
kings.
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The Immediate Outlook
When one seeks to forecast the state of business in the near
future, he must assess the relative influence of many forces that do not
move in the same direction at the same time.
To quote a great authority
on business cycles, the late Wesley C. Mitchell, "A real chart of one
business cycle vould be a hopelessly complex tangle of hundreds of
curves." Businessmen find the problem so perplexing that they tend to
center their attention on a few factors that seem to them to have proven
helpful in prognosis.
In order that businessmen and scholars may apply
the exception principle to this problem, the National Bureau of Economic
Research has analyzed the several hundred indices which it has studied
over ohe last quarter century.
The Burea.u has found some that tend to move in advance of gen
eral business, some that move concurrently with it, and some that tend
to lag.. I will mention only those that have tended to move in advance;
i.e., to lead.
These are new orders for durable goods; business failures,
as reflected in liabilities; average hours worked per week in manufactur
ing; residential building; nonresidential building; commodity prices; new
incorporations; and industrial stock prices.
The majority of these indices are still pointing upward.
Their
favorable prognostications are being confirmed by the indices that coin
cide with general business, such as nonagricultural employment, freight
carloadings, and industrial production.
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These indicators appear to be suggesting the likelihood of a
continued rise in activity.
However, like other measures designed to en
able us to read the future, they must be used with caution.
To provide
perspective for them, a bx*ief look at the immediate past may be useful.
This recession seems to have been of about the same intensity
as that of 1948-49«
It began about the middle of 1953 and by the spring
of 1954 showed signs that it might be coming to an end.
Throughout this
period, inventories, which were so high a year ago as to give businessmen
real concern, have been reduced at an annual rate of 4 to 5 billion dollars.
This has been a healthy correction, but at the same time a business
depressant.
Government spending, particularly for defense, has also been
reduced considerably.
It is, therefore, reassuring that, in the face of
substantial reduction of inventories and of governmental buying, the
decline in business activity did not become cumulative and business is
apparently showing signs of some recovery.
A powerful force aiding re
covery has been the sharp increase since spring in residential construc
tion activity.
Consumer outlays for nondurable goods and services have
also risen, as has spending by State and local governments.
The challenge that now faces our economy is to use prudent
management in private and governmental affairs.
The gifts that technology
heaps upon us have expanded our scale of living beyond the wildest dreams
of one of Ben Franklin's time. Our ability to produce has been tested
more than once by the God of War. What he called forth in such abundance
because he appealed to the loyalties of men is required likewise by the
Goddess of Peace.
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But prudent management would emphasize a sense of balance and
proportion.
The stable healthy growth in productive facilities and in
production that is needed for the best interests of consumers and of bread
winners can be injured either by lack of faith or by excessive speculative
enthusiasm.
To maintain such a balance with nicety requires delicate
handling of credit control mechanisms.
It calls likewise for the under
standing interpretation of the economic facts of life by all informed
citizens and especially by the banking fraternity.
If we may revert to the analogy with which we began, that our
economic life is like a great river flowing at varying rates of speed
through dangerous rapids as veil as fertile prosperous valleys, it seems
superfluous to suggest that safe navigation calls not only for peering
ahead, but for the intelligent charting of a course coupled with the
courage to follow it regardless of temptation.
@FedFRASER