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Sat for Publication. - Remarks of C . Canby Balderston, Vice Chairman, Board of Governors of the Federal'Reserve System, before the Central Banking Seminar, Federal Reserve Bank of Eoston, on Thursday, March 24, 1955» THE nTTArnTQF_GREDIT IS NOT STRAINED,—OR IS IT? Our economic life may be likened to an enormous river that flows withb a s i n g . Sometimes its progress is straight and placid, sometimes crooked tumultuous. T h o s e supported by this economic f l o w — a n d who is n o t — k e e p pee ring into the future to discover what lies ahead, both m the long distance a n d in the short. 0ut a Resardless of the risk of being proven a poor prophet, I will ask what * iong view reveals. Among the trends that seem to me worthy of notice are three; The first is the recent high rate of population increase—about 1,,8 per a year as compared with less than 1 per cent in the 1930's. The most iundaquestion stemming from it is whether we can provide our growing population a constantly rising standard of living. I will leave the answer to this N a t i o n £ the" future-noting only that our history has been characterized by a per sistent upward trend, albeit with short-term irregularities. One aspect of population growth is the number of households formed each which affects the Construction of schools, roads homes ^ ^ ^ ^ , f i s h i n g s . Even though household formation is expected to decline during the ^ few years from earlier high levels, population growth will, « 1 ^ a sg a b o J t a n increase in household formation. Theaver.*ge size of howiehold 5 declined, It is estimated to have dropped from 4.93 persons in 1890, .o b / i 0 aid to 3*34 by 1954* For many decades tended to grow more rapidly than the population. D u r i n g the 1930 s t n e ***** of households added each year averaged about half a ^ a t e - p o s t w a r years, 1947 to 1950, nearly a million ^ d a half Since then ^ee v e r / t h e rate has fallen to 835 thousand a year, and during the lest oi this °ade seems likely to run even lower, perhaps 600 thousand. As to the impact of population growth upon the labor force, it is R a n t e d that enough jobs vail be required each year during the last halt oi current decade to absorb about 900,000 additional persons as compared with °0,000 in the first half, toing the l 9 6 0 « s , the problem of job creation will more than one-third greater for, during the early part of that period t h e Postwar babies will be seeking jobs at such a rate as to make the average a *nual increase nearly 1.2 million. A second factor is the gain in productive capacity during and since War I I ! " s gain cannot be measured accurately but its magnitude is rea c t e d in the investment in new plant and equipment. In the four years oi -2 ^47-50 American business spent over $20 billion a year on new plant and equipand, in the four succeeding years, nearly $27'billion annually. The latter ls almost five times the figure for 1939. In short, in the years A l l o w i n g the of World War II, American business has invested over $200 billion to replace, ^Prove and expand its productive facilities. Even after allowances for sub- • jjantial price increases since 1939 and for replacement of worn-out facilities, he ; net expansion in the physical volume of fixed capital has been'tremendous, example, steel capacity has been increased by over 50 per cent5 electric capacity, by about 150 per cento While we are unable to measure accurately the resultant growth in total industrial capacity, the growth exists and is sigicant c I mention this factor both because of the importance of these re-^ 5c nrces in the event of war and because of the obvious social g a m s from our bil 5B l l t i t y to create a larger pile of goods and services for consumers to enjoy. this social'gain is not without cost. As Emerson pointed out m his essay Compensation, "Every sweet hath its sour; every evil its good . . . » beneHFlT/hic h you receive, a tax is levied . , < , . . Every thing has'two evil«" For the manufacturer in a particular industry, _ r a d a n d a n SC t eowth in plant capacity may mean greater profit potential for himself, but ina s e d competition within his industry accompanied by downward pressure upon Prlce s . On the one hand, American business has enhanced its ability to create gc °4s and services, which provides material benefits for all and a useful and brake upon inflation; on the other hand, it has stepped up competition, ^ s s - c a p a c i t y puts pressure on prices and in turn on costs, (Competition, of J°2*ae, has been an integral part of the process by which new products have been PSQlJr o d u c e d and distributed and by which gains in productivity have been disiiriated throughout our economy.) A third factor is technological development. Since World War I , the b ! > e r of men engaged in industrial research has increased fifty-fold and as Hees of the Eastman Kodak Co. has pointed out, technical advance has been dee r a t i n g at a rate that has itself been accelerating. Yet this has been a g £iod very short in the history of mankind. 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 development into ^ a r s . On this time scale, it took man 49 years to get over beingf ae n o m a d — longer to get his first pair of pants. - - A few months ago a ™ Jfarned to write; two weeks ago the first printing press was built. Only within last 3 or 4 days have we really understood how to use electricity. 5 0n "And within the very last day have'come such amazing things as radio, ^ v i s i o n , dierel locomotives, r a y o n / n y l o n , sulfa d r u g s , - electric computers : - - 100-octane gasoline, color and sound in motion pictures 0 On our Se e n s e d time scale, jet planes, a dozen new antibiotics and hormones, and the lease of atomic energy all came into the picture" in the last hour or two. te Dr Wilson's portrayal of man's technical advance has the great virtue simplicity. Too often worthwhile ideas become lost in academic language 0 - 3The point that Dr. Wilson is driving home is that technology is the f s t significant characteristic of our time. It is true, of course, that it has ^creased to awesome proportions man's ability to destroy himself, but it has ^ s o enhanced his ability to achieve a satisfying material existence. Even ' though critics may feel that people have become overly interested in gadgets, U is my belief that the physical facilities for living a good life that are ^ possible by technology increase the chances of millions to enjoy the com°^ts once reserved to kings 0 In fact the evidences of this great advance surround us in such profusion as to make our children blase, and to dull their capacity to wonder 0 ^ reproductions at Williamsburg and Sturbridge of the facilities of the "good ^ v ciays" drive home, even to the unimaginative, the sharp contrast m modes of ?; ihg then and now. Not only has refrigeration'displaced the icebox, and made a °° Olete the once familiar stories of the iceman, but lessened dependence upon herb garden as well. The rapidity of change has made obsolescence a peras ive phenomenon, and the p r i c e — t h e welcome p r i c e — o f technical advance. If we turn to finance, its modernization is not confined to the introduction of mechanical devices,, The field has seen great strides in the direc^•on of financial stability. Witness the apparent strength and resilience of ^ financial structure to withstand shocks, whether inflationary or deflationary, of it depends upon our central banking system. The main purpose of the central banking mechanism, the Federal Reserve Astern, i s to help provide enough credit and currency to foster a high utilizaof the nation's physical resources, technical skills, and manpower without ^ U c i n g inflation. It is toward this goal that Federal Reserve policy is die t e d , Maintenance of the right amount of credit and currency at a given time given conditions is at the very heart of the central banking problem. s President Woodrow Wilson, Senator Carter Glass, Paul M . Warburg, and others responsible for the founding of the Federal Reserve System were ^ _ s ^ s i t i to the delicate balance needed between public control and domination t Ve the rights of individuals under our free enterprise system. Cc W o u l d d e s t r o y £a oi'dingly, they contrived a system whose structure is distinctive in central ^king # p a r t i y governmental, partly private. i s A. The System reflects in its design a touch of genius. Its founders ec . °gnized that' the United States had a heterogeneous population, tremendous I**iety in its industry, commerce and agriculture, and a banking system that g a ie n e d thousands of different units. Some of these were national banks, # !°? not. Had the United States been as small as England, with just a few p n ~ banks whose heads could be brought quickly into conference around the same the solution contrived by the designers of the Federal Reserve would have different. But just as problems of size and mass are reflected in the ^ u c t u r a l design of the short-legged hippopotamus and the long-legged giraile, the problems of this country's banks and commerce reflected m the ReI*** System. 'There is a legend in Africa that the giraffe was d e s i g n e d by a ^ i tre t e e . S o , in effect, was the Federal Reserve, except that the result has ° symmetry. - 4Among the freedoms that American citizens enjoy is the freedom of enterg e f o r m e r chairman of our Board, M r , Thomas B. M c C a b e ^ I look on L i k e t ^ Federal Reserve System as one of its great bulwarks. It is my view that ^sinossmen have a particular responsibility to see that the various aspects oi that freedom are defended. The point has been made by Chairman Martin that the philosophy of the s ?? tem may be likened to the concept of trusteeship 0 Trusteeship involves obN a t i o n s that extend beyond mere legality 0 It involves the highest ethical and standards in the carrying out of the mandate issued to the trustee. While ^I a rt mandate is in force, it implies the courage to take actions, however unpoputhey may be at the moment, that the trustee believes to be best for the Co ^ t r y and its economy. Naturally, the "trust indenture" of which we are speakthat is, the Federal Reserve Act, is not irrevocable because it may be changed at the will of the Congress, In bringing about this trustee arrangement to deal with the highly comproblems faced by a central banking system, the Congress is to be credited foresight in the degree of independence with which it has surrounded the ^ e m . The nuances of independence are not easily spelled out. They ^ v o l v e ^ o p p o r t u n i t y , like that of the judiciary, to act objectively without favor and ^thout fear, free of private pressures on the one side and partisan political Pressures on'the other* Aq nr Winfield Riefler testified before a Congressional Committee g e n t l y , "the monetary ^ d credit policies pursued by the Federal Reserve System Aof^^5 will continue to be guided by the philosophy embodied i o e „ the nurture and cultivation of sustained economic growth and stability f high levels of resource use. In more concrete terms this means that credit monetary policy will be directed toward furnishing the reserves needed by * * commercial banks to perform efficiently their function of . ^ c i n g the economy at a high level of resource utilization without contributing either to R a t i o n or deflation, and without encouraging developments that vail make for ^stability. So far as the cost and availability of credit are cone,emed, it that the System vdll try to promote a pattern of * 1 for the economy s savings in constructive activities. So far as the E n t i t y of credit is concerned, it vail work for a rate o f „ ***** supply appropriate to the growth in the resources available to the economy. V ' In addition, the funds of most depositors in commercial and savings p ^ s , and of shareholders in savings and l o a n associations are Protected by feciQ t h ral insurance: stock market credit is regulated; a Federal agency is charged 5 the responsibility for protecting the interests of the private ^ e s t o r in securities markets; and the emergency needs of the commercial banks for cash a n be met by borrowings from the Federal Reserve. QQ e Private financial mechanisms have also been introduced in recent cade s that help promote financial stability and growth. s The direct financing of consumers has grown greatly. It enables indiJ h low :fd middle incomes to acquire automobiles ^ h T r e S t has S e n vdth more facility and at moderate cost. In the m a m , such credit has been - 5extended on a sound basis with adequate down payments and monthly repayments yithin the means of the purchaser, and geared to cover the total cost well withthe life of the article acquired. Secondly, term lending to business concerns has been developed'by commercial banks, life insurance companies, and other institutional lenders. Such •Lending has tended to adjust the amount and character of the credit to the s Pecifi c needs of the b o r r o w e r Commercial banks and commercial financing companies have provided additional higher-risk credit to business firms on the b asis of accounts receivable, field warehouse receipts, and specific items of _ commercial and industrial equipment. This has aided small and medium-sized firms as well as marginal borrowers, . These newer types of business financing have tended to place more ^ e r m e d i a t e - and long-term funds in the hands of credit-worthy businesses; have tended to make funds available on terns not only satisfactory to the borrower, but sound for the lender" and the general economy. In addition to the S e private financing techniques, public credit agencies have stood ready to f0^ ef certain types of direct loans to farmers and to deserving small businesses ill gaps in the supply of funds from private institutions. 4. Thirdly, more of home-mortgage financing has taken the form of longamortized loans, instead of short-term, single-payment loans. This develophas lessened the borrower's risk of an unexpected demand for repayment or ^ilure to obtain renewal. Like term-lending to business, this form of mortgage d ae nt c i n g also gears the repayment schedule to the ability of the borrower to 7 his obligations out of income. Moreover, the guarantee of mortgages has Tr^e U i t a t e d the development of a national market through which capital-scarce a s can tap the funds of those areas with an abundance of savings. , Finally, in foreign financing, there is the recent resurgence of "ankers' acceptances. A revival, in this country, of a market for bankers' Acceptances, as active as that of the 'twenties, would facilitate international " f a c t i o n s . Furthermore, it would help establish the structure of day-to-day ^aricial relationships required as underpinning for long-term international e hcling and borrowing, The problem of insuring growth without inflation involves a correct PPraisai of the future rate of expansion that the economy can sustain. Ihis appraisal needs to be made with as much precision as prophecy of future happenr ^ s will permit. Inasmuch as forecasting involves some projection of present t h e analysis of the latter must be approached with realism and objecf tivity. But appraisal of the future is not enough. To keep excessive optimism ?? ^ullionce in leash requires prudent judgment, and is the overriding obliganot only of business executives and of labor leaders, but particularly of "ankers. The latter have unusual opportunities to secure an overall view o1 I f economic scene and possess exceptional experience and skill m dealing with ^ks. - 6, In past venerations, many forward movements that appeared to be solidly based were in,jured°or destroyed by lack of sufficient caution and judgment to <^rb over-expansion and over-borrowing 0 What I am suggesting is that many of Jte great financial crises which have become part of our business tradition were th o f e unhappy result of speculative excesses and a too exuberant granting and use credit. Although many of these forward movements were soundly conceived and d a n c e d in their beginnings, they fell into difficulty later because of lack of Prudence It is superfluous to cite the historic cases of the bulbs of Holland, 0r e the Mississippi bubble, or the railroad boom that preceded 1893, because many 2f ^ u are old enough to have personal recollections of more recent crises. was the Florida land boom ending in 1926, and the overborrowing abroad tha t spoiled our foreign lending between the two world wars, even though sound arr a n g n t s had been worked out initially between responsible governments and r eme fsponsible banking houses„ There was the stock market boom that was ballooned % w a r d by billions of dollars of credit until its sudden return to earth after °ctober 1929. There were the difficulties encountered by the plan to merchandise ^ t g a g e s during the 1920's 0 The latter illustrates how a scheme calculated to a. definite need (and which would have contributed to the financial advance^a n c i of its time) was spoiled by a too-liberal appraisal of real estate values, Certainly there should be strong p u b by the lack of appropriate amortization. U c support for the President's request to the Congress for permission to ^ f y the down payment and terms of VA and FHA loans. gro And so, in our"current striving to provide h e a l t h y and continuing * t h without inflation, we might ponder such questions as the following. Is the quality of credit satisfactory in all areas of current expanIs the current rapid expansion of mortgage credit sustainable and sound? vail be its ultimate effect upon existing real estate values and the underJ ^0rtg debt? Is the extension of the principle of government guarantees in the *f Sage area likely to pose for the Government future problems of real estate ^ p o s a l ? is the public interest served when credit is granted to augment large ? ^ o n a l corporate empires? Did the growth of credit, other than that readily ^U te i f i a b l / a s security loans to brokers, dealers, and others contribute to decent rapid rise in stock prices? You will note that my questions point to three areas: (1) pec Speculative fever generated by current stock market activity; (2) Automobile production at an annual rate in excess of sales extations for 1955; and (3) Too easy mortgage credit leading to speculative residential con- S ^ t i o n [hit may outrun thf demand for housing (Present - ^ ^ ^ d " ^moralize people's sense of responsibility for debt induce ill-planned and E q u a l i t y construction, and bring about a decline in real estate values.; M v concern over the duality of credit arises out of the more basic ^estion: How can we provide for continuing and healthy growth witnou l Ob viously the expansion of credit and currency should be adequate to sustain °nomic growtho There are many examples in history, however, and not too J^ient history at that, to show how excessive and unsound credit expansion can thwart progress. It is our common responsibility to employ such caution as will counteract wishful enthusiasms and permit the full flowering of en economy so in promise and hope, ec
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