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I MU !: \ u Y L f ROLLING ADJUSTMENTS AND ORDERLY ECONOMIC GROI)T^>, ~ ; ~ '^.h-rr-hvi^ (Remarks,of C 0 Canby Balderston, Vice Chairman,, Board of GoveVn'ors of the Federal Reserve System, before'the Conference of Business Economists, Statler Hotel, Washington, D 0 C 9 J on February 14, 1957 The question I wish to raise is whether or not we are approaching a confluence of economic forces that will stop the recent and current roll- ln S adjustments. Will forces that are nation-wide or world-wide give our economy another inflationary spurt or throw it into a tail spin? We Or, may look forward to a continuation of rolling adjustments within a framework high resource use? In posing this central question, I villi place it in a setting pro- dded by two other questions: the dollar been protected? First, how well has the purchasing pov/er of Second, what is orderly economic growth? fe^ well has the purchasing pov/er of the dollar been protected? Marked changes in the purchasing pov/er of the dollar are inconsistent with stable growth,. Depreciation of the dollar by general price in- c a s e s results from a situation such as that of recent months, in which demands for new goods and services exceed the ability of the economy to make them available at constant prices. a The excessive upward push of prices nd wages by those business and labor groups that have the economic pov/er to enforce their demands also accentuates the process of inflation, The record of recent-years for protecting the purchasing power of the dollar has certainly not been all that can be desired. Following sharp Price rises in the early postwar years and during the Korean crisis, there w as a brief period of overall price stability even though there were dis- parate movements within the general index. r After rrdd-1955, however, prices 14 °se substantially. Average wholesale prices rose 6 per cent: consumer - prices, 3 per cento The purchasing power of the dollar has thus declined during the past year and a half, and its depreciation was of a magnitude to cause us concern. Moreover, one of the best criteria of price stability is whether or not there is speculation. An excess of the latter suggests that the price movement is too great, whether the rate of price advance be large °r small0 If this were our first encounter with inflation during our recent history, these, developments might concorn us less. must be added to those of 1946-48 and 1950-51. But the recent changes Taking the postwar period 'as a v/hole, one gains the impression of an intermittent, but relentless, depreciation of the dollar. It is this cumulative price advance of the post- War years that makes our recent price increases so disturbing. Some feel that these increases will not be offset by downward price movement, and that price rises follow a one-way street. During the moderate postwar recessions, V; ith conditions of falling output and employment, average prices went down a little in 1949 but not at all in 1953. Consequently, price increases, even relatively moderate ones, take on a significance that they might not have people felt they could assume that there would be offsetting declines. Even relatively small price increases begin to seem important if added on to a succession of earlier ones. The second disturbing implication is th-.t individuals and busin esses might begin to make their decisions on the assumption that there will be si a continued depreciation in the value of the dollar. Gns that some of them already have begun to do so. of wage agreements containing escalator clauses. Indeed, there are Witness the growth The disastrous consequences - 3 - a general acceptance of an assumption of continued inflation are so farreaching as to be almost beyond calculation, Nothing could be more destruc- tive of our hopes for grovrth that is stable, liat is orderly economic growth? 1 • Willi II. III! midmrn mmmmmm * • «• « , i i . i HI • I m i<m 1 Perhaps the more interesting questions relate to the orderliness of grovrth, This concept cannot mean that each type of economic activity grows at the same rate, and at an unchanging onec A two per cent rate of growth does not necessarily mean that the output of automobiles, shirts, and bread increases precisely two per cent each year. me It does not necessarily ^n that business expenditures for plant and equipment grow at a steady two Per cent rate, that inventories be enlarged, or rail travel increase two per Ce nt each year. Neither does it connote that the debt of different classes borrowers will rise at equal rates; nor that total debt will rise at precisely the same rate as output. In an economy in which folks are free to make their own decisions a bout consuming and investing, and in which innovations are frequent, shifts ^ the composition of both spending and borrowing are bound to happen. What needed is that total economic activity make reasonably full use of our Productive resources while average prices are kept stable0 This shifting c °ttposition of economic activity without unwholesome variation in the total implied in the concopt of "rolling adjustment", A true rolling adjustment is one in which total output continues to show fairly steady, and noninflationary, growth while shifts take place in component parts0 ^ It means a goal of reasonable but not complete stability the general averages, and reasonably full utilization of resources, It ~ 4 - does not mean a perfectly steady rate of increase in output from month to month in all sectors in the economy, Improved living standards grow out of new technology and resources that generate new demands and shift production away from older industries0 a Among individual industries, there is continual process of birth, growth, and decline0 From this evolutionary Process emerges growth in total output, in productivity, and in the standard of livingo Such changes in industrial structure should be facilitated rather than obstructed so that production can grow fastest in the areas where demand is greatesto Mobility of resources is essential to a healthy economy, and to orderly economic growthe Stable growth in the economy as a whole is consistent with considerable instability in individual types of demand. A decline in government spending can be offset by a rise in private demand,* an expansion in business investment spending can be offset by a decline in residential construction; higher investment in steel can be offset by lower investment in auto manufacturing. Different types of demand take turns acting as the driving force in the economy, and at all tines total demand is more or less equal to total opacity. Two types of influence are at work here. Cn the one hand, there is the competition among businesses and consumers, as well as governments, national, state and local, for shares of the total credit and goods available in the economyo To the extent that demand slackens in one of these sectors, there can be an increased flow to other sectors. growth that we have been observing0 This is the rolling sustained - 5 - On the other hand, there is a mutual interdependence of demands: high consumer demand generates high business investment demand, and business investment generates income to stimulate added consumer demand. And^ more to the point, a drop in investment demand, whether from an excess of investment relative to consumption in some important area or from the lark of adequate finrnc:ng, can tend to drag down consumer demand by reducing incomes. is This the cumulative response to movements in individual industries that gives rise to booms and depressions, Nov; we come to a possible conjuncture of events. a PProaching a confluence that is of significance? Are economic forces One of the forces that needs to be examined, both here and abroad, is investment in plant and equipment. There seems to be evidence that such investment started to taper off in Great Britain and in Western Continental Europe in mid-1956. n The topping off of ew factory construction ante-dated and was independent of the weakening of the pound that began with the nationalization of the Canal. In England and Germany, this change resulted from the combined effect of monetary and fiscal Policy, l/hat was desired to check inflation finally came to passt In this country, industrial building also tapered off in the final half of last year. The F. W. Dodge figures for construction contracts for manufacturing buildings present an interesting trend. I/hereas the first barter of 1956 showed a 60 per cent gain over the corresponding figure for the year before, the contracts awarded during the final quarter showed a d rop of 30 per cent from the year ago figure. This slowing dovm in the rate growth in plant construction might lead one to question whether the increase of .v. per cent in capital investment in 1957 indicated by the KcGrawfi ill survey of last fall ought not now to be reduced;. - 6 - There are five other tendencies that should be watched with care6 °ne is excess capacity sufficient to put a damper upon price increases in some industries and to depress prices in others0 Resistance to buying at current prices. slackening of manufacturing orders^ The second is consumer The third, closely related, is The fourth is the reduction of manu- facturing inventories if they begin to seem too large in relation to the °rder rateo The fifth and final tendency is one that has been apparent in this country for at least a year0 I refer to the slackened pace of residen- tial construction,. Monetary policies in recent years have been aimed at promoting orderly growth and at the same time safeguarding the value of the dollarc It may be said that, so far, growth has been reasonably orderly, whether because of appropriate monetary policy or for other reasons0 Prices, after Remaining moderately stable for some time, have risen in the past two years0 This is a disturbing development, With little room for further overall ex- pansion at more than a moderate pace, we may be approaching a point where the trend of events will be determined more by the balance of adjustments keing made within the economic structure than by the forces of expansion that can be influenced by monetary policies. The apparent successes scored in recent years in this and other c °Untries by fiscal policy and by monetary policy are a cause of satisfac- tion, Our hope lies in so managing ourselves and our affairs as to stress the coordination and timing of fiscal and monetary actions. In late 1953 and 1954 we went through a modest recession Government spending for national security was cut sharply, and this was reflected ~ 7 ~ in & decreasing business outlay for new plant and equipment, as well as consumer outlays for durable goods. the preceding boom, also declined. Inventories, which had risen during This was a structural readjustment in the resources of the economy, and required that consumers and State and local governments increase their spendingo Monetary policy, debt management P-'licy* and fiscal policy were all used to foster this result0 The financial climate was irade favorable not only for toll road and business expansion, b ut also for mortgage and instalment credit0 Ta~>: rates were reduced by the Federal Government and the built-in stabilizers of unemployment aid and Progressive income taxes came into play0 These moves found striking expression toward the end of 1954 and ln 1955, building0 Easy credit sparked a remarkable increase in the rate of house Consumers;encouraged by liberalized instalment credit, bought •^rge numbers of 1955 automobiles, perhaps 1 million or more than they otherwise would have0 Observing the renewed recovery, businessmen rebuilt their inventories, and toward the end of 1955, began a tremendous expansion new plant and equipment„ As the cumulative forces that brought about an upturn pushed outPut near capacity, and as the demand for loans grew, the financial climate grew rapidly warmer,, Credit, while expanding, became more expensivec This change, together with some shortages in materials, slowed down the rate of il *crease in expenditures for goods and services, especially those whose volhad ballooned, chiefly as a result of easy credit conditions0 fe Its ef~ ots upon residential construction, which had risen to an extremely high i 9 Vel ; was especially evident, partly because ceiling rates of insured and ~ 8 - guaranteed mortgages reduced the ability of this market to compete against °ther demands for funds available for lending. More recently, the most potent expansive force has been business investment spending. a bility into question® Its rate has been so high as to bring its sustainThe most important point is whether or not over- capacity is being created,. This raises the problem of the quality of business decisions, of whether or not we have engaged in speculation in facilities rather than in stocks and inventories. If business makes decisions of inferior quality, investment may be a qualitative as well as a quantitative threat to stable growth. What is to be done to keep this type of spending and others in line with the total resources that we have available and in some reasonable Elation to one another? an From whence comes the overall discipline or guid- ce that can direct the economy towards a course of stable growth? ls This where monetary policy ccmes in, of course, along with other powers of ^ov"ernment that contribute to the cause of economic stabilization: Management policy and fiscal policy. debt It is the task of both monetary and fiscal policy to help create financial conditions that are appropriate to ^he needs of the economy, and that will encourage businesses, individuals, and governmental units to make the kind of spending decisions that are called by the logic of our overalls economic situation. The question with which I began is whether enough of these tendencies will bear upon the economy at the same time to bring about a significant feline in production and employment. Does a conjuncture of events impend that would interfere with the r °iling adjustment we have been experiencing and call into being forces that ^ould feed upon each other, thus leading to a downward spiral? V;e Or, should view the shifts that may be in process as no more than desirable easing pressures that were straining our resources and causing prices to rise? We still have huge latent demands, that have recently been un- satisfied, stemming from the great need for rmre roads, more schools, more fusing, and greatest of all, the military requirements of our uncertain world* T he immense road building program is in being and is about to roll. The Voters have already approved large additional financing for state and local construction« The mortgage market is bidding avidly for any savings available., budget now being debated with such anxiety reflects the increasing military b?.te upon our resources„ In addition to these demands already in existence, technological advance continues to accelerate. Stable economic growth with full employment is essentially a pro°ess of maintaining an appropriate balance between productive capacity and c °nsumption0 But neither monetary policy nor fiscal policy, nor the two in c °ncert, can maintain economic stability if group psychology runs rampant, Th ey cannot lift business from depression in the face of general despair; nor they prevent inflation if business decisions lack the quality of prudence.
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