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£or Release on Delivery (Approximately 1:00 p.m., E S T , Monday, March 3 , 1958.)' Summary of Remarks of C . Canby Balderston, Vice Chairman 9 Board of Governors of the Federal Reserve System, at the University of Pennsylvania Alumni Club Luncheon, in Baltimore, Maryland, on Monday, March 3» 1958. The basic economic question that has been facing our nation is how" to provide c e Obviously, the expansion of credit currency should be adequate to sustain economic growth. It is equally obvious that *cessive and unsound credit expansion can thwart progress. If the purchasing power of th • j e e °ntinuing and healthy growth without inflation. dollar declines persistently, the incentive to save is undermined and business *ecutives in their decision-making tend to substitute speculation for the goal of long- VVJNW ef ficiency. Instead of making decisions prudently in the light of well-founded d o t a t i o n s , businessmen are tempted to speculate on steadily rising costs and values, aj 2 nbli n g upon being able to pass o n , in price increases, the additional costs of forward 0mi ° nitments. ^ av Out of such imprudence come the unsustainable booms and subsequent crises e punctuated our industrial history. It is my conviction that the two objectives of monetary and fiscal p o l i c y — ec °nomi c growth and monetary s t a b i l i t y — a r e inseparably linked. sta n d or fall together. In the long run,, they The orderly sustainable growth of our economy, and the provi- x °n of the savings necessary to it, are most unlikely unless the purchasing power of t h e dollar is kept stable. But has the growth of our economy been orderly? <* the Any objective appraisal Period 1955 to date would lead to an answer in the negative. a c In 1955 5 we had °nsumer boom featured by residential construction and by automobiles. In that we had 1 million 300 thousand housing starts and sold about 7-1/2 million new lUt m ° °biles. ^tal a n d p r In that y e a r , 30 per cent of the increase in total debt, both govern- ivate5 w a s i n residential mortgages. Consumer instalment debt increased ^ k e d i y i n volume as the terms of automobile paper were liberalized. - 2 In the following y e a r , 195&, total consumer spending increased substantially further even though housing starts fell 16 per cent to 1 million 100 thousand and the number of automobiles sold dropped over 20 per cent to about 6 million. Once again a ar ^ g e share of the rise in debt, public and private, was accounted for by residential -this time 42 per cent as against 29 per cent during 1955* Su me There was also Perim P osed on rising consumer spending an extraordinary expansion of plant and equipnt. Such spending was 22 per cent larger than the year before. Perhaps it was r P °ttpted by the consumer boom, perhaps by the faith that demand would expand unceasingly bs C a u s e of population growth and technological advance. Some plants were built because expectation that building costs would continue to rise year after year and that t h e sooner the building was undertaken, the lower the total cost. Cien In any case, confi- e Th e° turned into ebullience that induced miscalculations and imprudent decision-making. result of all this was excess capacity and cost-price dislocations. The latter have J-Sd + S ° me a profit-squeeze for some manufacturers and to price resistance on the part of consumers. In short, the growth of the economy has been disorderly and has led to imprudecisions, wasteful and inefficient practices, some prices that are unacceptably and a degree of unemployment that is of general concern. Apparently, the seeds of 4.1 n e current recession were laid in the 1955-57 boom. Whatever steps are now taken enable the economy to regain its health, certain misconceptions that may have accenthe boom need to be recognized. One misconception that is part of our intellectual currency is that a little a year, would double the price level every 35 years. It is not possible to conl a t i o n i s a g o o c i thing. A little inflation, sometimes thought of as roughly 2 per ®nt Oust a "little" inflation. Once the community accepts the prospect of continued lnf c N a t i o n and begins to make its business decisions in the light of that prospect, the M l a!n t ceases to creep. It learns to w a l k , run, and finally gallop even though the •°P may carry it over the brink of the precipice that everyone agrees must be avoided. - 3 i s a traditional view that debtors are benefited by inflation and that sound or hard money i s detrimental to their best interests. raore Debtors are led to believe that a little money;, in whatever form, be it fiat money in France or Civil War greenbacks h e r e , d enable them to p a y off their debt obligations more readily and have more money to s Pend» 0 And in fact this is the case. What is not made clear by the Mirabeaus and tyans i s that the disadvantages of the process far outweigh the advantages to those Vei 7 people who unthinkingly join the clamor to give them more m o n e y . Another misconception is that inflation is inevitable. ln 2 inflation is inevitable is both self-defeating and dangerous. The belief that creepIt is self-defeating be e caus e it i s the rational foundation for escalator clauses that tie wage rates to the 0& ° t of living and accelerate the wage-price spiral. to This leads some company executives believe that if they are going to need more plant capacity they had better get it befor It l s e construction costs rise further, thus bringing on the very malady they dread. dangerous because it has an insidious effect upon the quality of decision-making businessmen. s They feel that it is better to err on the side of overbuilding and keep up with the competitive Joneses for creeping inflation will tend to make misof capacity look like canny decisions. This brings me to a final misconception: Ut ° ^convenience. that inflation can be stopped with- This is the fallacy that most hampers any serious effort on the part of s p o n s i b l e authorities to preserve the stability of the economy. To control infla- t e * > we must avoid spending more than we earn in production, which means restraining by delaying some expenditures. In the long r u n , investment must be financed by taxation, or by real savings from current income if the advantages of a stable are to be achieved. The decade of the sixties is one to which we can look forward with hope if we a u ^oid the perils of war and of inflation. The second, and perhaps the first p e r i l , ^ i r e s wise, far-sighted financial husbandry. There have been few periods in history - 4 W h e n People—intelligent people, t o o — h a v e not despaired of the future of their insti- tutions, o f ne They have been beset by grave perils before. *ree men without renewed faith in their capacity to rise to the occasion when stark cessity demands i t . in And one cannot study our own history without increased confidence the good sense of the American people, and in their willingness and ability to make anci a 0 f Yet one cannot read the history a ccept hard decisions. There is truth in the Chinese proverb: U the tomorrows are in the seeds of today." "All the flowers
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