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Sp eechby Darryl R. Francis, President,
Federal Reserve Bank of St. Louis,
At Mid-South. Farm Equipment Association Convention,
Sheraton Peabody Hotel, Memphis, Tennessee,
January 16, 1968

It is good to have this opportunity of discussing some of
the nation’s economic problems with this group of farm equipment


Having spent a number of years both here and in Missouri

in the farm credit business, I can appreciate the importance of farm

equipment distribution to the nation's economy.

But more to the

point of this discussion, I also recognize the importance of credit

in farm equipment sales.

The farm equipment industry is one of the more dynamic
sectors of the nation’s economy.

Capital expenditures for farm

machinery in 1966 totaled $4. 8 billion.

This was $2. 1 billion, or

75 per cent greater than such outlays in I960 a.nd more than 10 times
the value of similar outlays in 1940.

With this vast interest, your

concern with public policies that may have an influence on agriculture
is understandable.

Thus, it is to these policies that I will direct most

of this discussion.

In order to provide an appropriate setting for public policies
relative to economic activity, I shall review the course of our economy
since the current upswing began in early 1961.

In this review I have


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divided the seven years under discussion into four sub-periods,

1961 through 1964, la
and late 1966 to date.

During the first period, 1961 through 1964, steady economic

expansion occurred.

As a result, unemployment was reduced from

about 7 per cent of the labor force in early 1961 to less than 5 per

cent in late 1964.

Industrial plant utilization rose from 75 per cent

to 86 per cent of capacity.

These gains were accomplished in an

orderly fashion without great frictions, shortages, or imbalances,
and the trend of prices did not deviate substantially from a 1. 5 per

cent upward trend rate.
Major tools of economic stabilization were moderately

stimulative in this period of balanced economic expansion.


in the money stock of the nation was at a 2. 7 per cent annual rate
compared with an average 2 per cent rate in the previous decade.

The influence of fiscal actions (government expenditures and taxes)

on the economy became more expansive.
During the second period, from late 1964 to early 1966, the
pace of economic expansion quickened.

This period was marked by

the acceleration of military purchases for Vietnam.

Total spending

on goods and services rose at a 10 per cent annual rate.

Most of the

increase in spending was matched by a 7. 7 per cent rate of gain in

- 3 -

real output.

The rapid expansion in output further reduced

unemployment from about 5 per cent to less than 4 per cent of the
labor force and increased industrial plant utilization from 86 per

cent to over 90 per cent of capacity.

Prices rose at the somewhat

faster 2 per cent annual rate from late 1964 to early 1966, butJ

considering the rise in total demand, the rate of inflation was less
than might have been expected.
Fiscal and monetary actions were very expansionary during

The Federal budget became more stimulative.

It moved
from a surplus of $6 billion in 1964 to a near balance in early 1966.

this period.

The monetary authorities provided reserves to member banks in

order to avoid a sharp tightening in credit conditions in response to
the strong credit demands.

The reserves provided for a rapid

expansion in commercial bank credit.

growth of money to accelerate.

This, in turn, caused the

The rate of gain in the stock of money

rose from the 2. 7 per cent rate in the earlier period to a 4 per cent
rate from mid-1964 to the spring of 1965, and further to a 6 per cent
rate from the spring of 1965 to the spring of 1966.

This acceleration

in monetary growth was very expansive.
In the third period, from early 1966 to late 1966, the rate

of growth in total spending slowed somewhat.

However, relative to

the ability of the economy to produce as it approached capacity, total

\j Data apply to the high-employment budget.

- 4 demand remained excessive.

The upward climb in over-all prices

rose from the 2 per cent rate in the previous period to a 3 per cent

rate in this period.

Monetary restraint was an important factor in the slower

growth in spending in late 1966.

From April 1966 to January 1967,

there was little change in the money supply -- a very restrictive

monetary action compared with the 6 per cent increase in money in
the previous 12 months.
By the fall of 1966 a restraint on spending was noticeable.
Some spending units began to reduce outlays to conserve cash and

revised their expectations downward.

Credit demands tapered off.

Interest rates, after reaching a peak in the early fall, declined

until early 1967.

Lower rates gave an impression of an easier

monetary situation despite continued slow growth in the money stock.
Final purchases by the private sector (gross national product less

Federal Government outlays and net purchases of inventories) slowed
to a 4. 4 per cent rate from the first to third quarters of 1966 and

further to a 2. 6 per cent growth rate in the final quarter of 1966.


comparison, such purchases grew at about a 10 per cent rate from
late 1964 to early 1966.
The marked slowing in the growth of final spending by consumers

and businesses during 1966 was partially offset by accelerations in

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Government spending and by some, apparently undesired, increases

in business inventories.

Despite the pause in economic growth in late 1966, inflationary
pressures remained strong.

Over-all prices increased at a 2. 3 per

cent annual rate in the first half of 1967, following the 3 per cent rate

of increase in the previous three quarters.

Much of the slowing in

price increases reflected a changed supply situation in agricultural

products, bringing about a decline in quotations for farm products,
processed foods, and feeds.

In the fourth period, late 1966 to date, activity first declined
somewhat and then accelerated sharply.

Of the two major tools of

the Government for influencing the pace of economic activity, one was

a stimulative force and the other was a restraining force in early 1967.

Fiscal actions provided a strong upward thrust to spending; in fact,
spending by Government (Federal, state and local) accounted for the

entire increase in total spending in the first half of 1967.

These outlays

through the "multiplier, ” probably had a stimulative effect on consumer
and business expenditures.

The lack of growth in money from the

spring of 1966 to early 1967 had a dampening effect on private spending.

. Sometime during the late spring of 1967 another marked and
sustained change occurred in the pace of economic activity.


spending rose at an estimated 9 per cent annual rate in the last half
of 1967 after going up at a 3. 4 per cent pace in the first half.


- 6 -

output of goods and services, which had changed little on balance
early in the year, expanded at an estimated 5 per cent annual rate

in the last half despite several major strikes.
This change from economic pause to rapid growth can be

attributed to both fiscal and monetary developments.

very stimulative in the summer and fall of 1967.
change, however, was in monetary factors.

Each was

The sharpest

The money supply rose

at the rate of\ per cent after having remained unchanged during
the previous period.

Fiscal actions, which were already the most

stimulative since World War II, may have become slightly more
Summarizing developments since 1961, the combination
of fiscal and monetary policies provided balanced and steady

economic expansion until the end of 1964.

In late 1964 these policies

became more expansive, and by early 1966 demand for goods and
services became excessive, and noticeable price increases occurred.

Monetary restraint beginning in early 1966 began to slow expansion
late in the year, and by early 1967 activity was showing virtually no


Despite the pause, however, inflationary pressures remained

strong in the first half of 1967.

By late spring, economic activity

had turned up again as a result of stimulative fiscal and monetary


The upswing continued through the year with substantial

price inflation during the last three quarters.

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As a result of this excessive demand and price inflation,

the Federal Reserve System has taken two steps which generally
point to less expansive monetary conditions.

Last November the

System raised the discount rate from 4 to 4-1/2 per cent on
eligible paper of member banks.

More recently reserve require­

ments of the larger member banks were increased.

It is perhaps because of these moves and the upward trend
of interest rates in recent years that I have been assigned the topic

entitled, ’’The Economic Squeeze. ” I shall comment on it by
addressing myself to the question of what would likely happen if

less expansive fiscal and monetary policies are adopted.

In answer,

I suggest that total demand for goods and services would decline

from the current excessive levels after a brief time lag.

This would

reduce pressure on the capital markets and tend to lower interest


But a more immediate impact on rates would probably occur

as a result of reduced government borrowing and more stable price
Government deficits necessitate borrowing, and such demands

for savings have the same upward pressure on interest rates as a
similar amount of borrowing in the private sector.

Less Government

spending or higher taxes would reduce the deficits, thereby reducing
needs for credit and the accompanying upward pressure on interest

- 8 The effect of price expectations on interest rates is often


Nevertheless, it is quite real.

Savers must protect

the purchasing power of funds lent, and borrowers are willing to

pay higher rates if they expect to repay in cheaper dollars.


example, if savings through the investment route yield a real rate
of return of 4 per cent and prices are rising 3 per cent per year,

savers would require a stated rate of 7 per cent to realize the 4
per cent real return on their savings.

In this case, if savers have

an opportunity to invest in capital goods where real rates of 4 per
cent are still obtainable, savings institutions must pay a comparable
rate to obtain loanable funds.

Borrowers are as willing to pay the

7 per cent when they expect prices to rise at a 3 per cent rate as

they are to pay 4 per cent under stable price expectations.

It is

this upward pressure on nominal rates necessary for a constant

real rate of return that has pushed the nominal rates up to such
high levels during the past two years.

What will happen with a less expansive monetary policy?
In answer I shall comment again on 1966 developments when these
policies prevailed.

You will recall that interest rates rose for

about 3 or 4 months after the stock of money stopped growing.


for goods and services, however, soon began to moderate and a reductio
in rates followed.

The more restrictive actions occurred in the second

quarter of 1966, and by late September interest rates began to decline.

-°From these comments you can conclude that I am not

impressed with fears of higher rates or a money crisis resulting

from less expansive monetary operations.

To the contrary, I

suggest that the expansive monetary and fiscal policies of recent

years have been the important factors that pushed interest rates

A somewhat less expansive monetary policy than prevailed

through most of 1967 would likely result in less demand for goods
and services, more stable prices and, after a short time, lower

interest rates.

While on this topic of interest rates, I would also like to
point out that most of the so-called ’’money crisis” or "credit

crunch" in 1966 reflected legal impediments to proper market

Many states have excessively restrictive laws with

respect to interest rates.

Such laws which limit rates paid and

charged by savings institutions, i.e., commercial banks, savings
and loan associations, etc. , may do great damage to local

c ommuniti e s.

When the supply and demand situation with respect to loan­
able funds calls for high interest rates, savings institutions must

both pay and charge the higher rates or savings will find other outlets

where the real rate of return is greater.

Savings firms operating in

such areas thus fail to grow at the same rate as such firms in freer
market areas.

These slower growing firms thus do not get the funds

10 to lend and credit becomes unavailable to tlieir customers.


thus appears to me that most state restrictions on rates bear

heaviest on those institutions and borrowers whom the restrictions
are designed to help.

Conversely, they aid the Federal Government,

large businesses, and others that can successfully tap the central
money and capital markets where rates are free to move with
basic supply and demand conditions.

The young borrowers, the

innovators, and the fast-growing firms that would be willing to pay

some premium for risk are excluded from credit markets in these

Now a brief comment on your own field of activity, the
retail farm equipment industry, and its relation to public economic

As indicated earlier, any combination of less expansive

monetary and fiscal policies is likely to lead to lower interest rates

after a short time lag.

With the lower rates and greater availability

of loanable funds, purchases of credit-financed farm equipment

should be enhanced.

On the other hand, a continuation of the expansive public
policies of 1967 would likely lead to further inflation.

Rising prices

combined with excessive demand for loanable funds for capital goods
would continue to cause higher interest rates.

With current limitations

on interest rates in many areas, savings would tend to bypass savings



The result could be a slower rate of growth in savings

institutions which lend to farmers.

Some of the bypassing funds,

however, might find a way into the farm credit field through merchants

and dealers where rigorous rate ceilings are absent.

Ultimately, loanable funds like other productive resources
move to lines of production where returns are greatest.

If returns

to capital invested in farm machinery can compete with returns to

other types of capital in the economy, I see no reason why farm
machinery will not get its share of credit regardless of the public

policies which may prevail.

Speaking of returns to capital in agriculture, I shall briefly
comment on another recent headline which may have some impact on
American agriculture, namely, the devaluation of the British pound.

The devaluation of the British pound in November served
to theoretically lower prices cn British imports to the United States

by 14. 3 per cent and raise prices on our exports to Britain by about
the same amount.

Devaluation, therefore, had a favorable effect

on British balance of trade and an unfavorable effect on the trade of

countries which did not devalue.
The United States imports such items as scotch whiskey,

bicycles, and other manufactured goods from Britain.

The price

reduction on these items, which was expected when the devaluation

was announced, did not materialize, since British distributors

12 -

generally took higher mark-ups.

Thus, the devaluation will have

its greatest effect in higher returns to British producers and perhaps

more advertising rather than more favorable prices for British products

Fromthe standpoint of U. S. exports to Britain, however,
the devaluation may have greater impact.

In 1966 the United States

exported about one-half billion dollars in farm products to Britain,

chiefly corn, wheat, tobacco, cotton, and meats.

The price of these

products imported from the U. S. is now higher in Britain than
previously, so somewhat reduced imports from the United States

are expected.

In addition, several smaller nations such as New

Zealand and Denmark, which also supply agricultural products to
Britain, have devalued.

Thus, the relative price of agricultural

products from these countries has remained about unchanged, while
the price of U. S. products was raised, placing our products at a

competitive disadvantage.

Exports of United States’ farm products

have increased in most recent years.

Since 1955 farm commodity

exports for dollars (outside specified government programs) have
increased from $2. 3 billion to $5. 2 billion.

Thus, a normal rate

of growth in such exports in 1968 may more than offset any reduction

as a result of the British devaluation.

In summation, the U. S. economy was expanding at unsustain­
able levels during much of the past three years.

Resources approached

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Price inflation developed.

maximum utilization.

Rising interest

rates gave the appearance of restrictive monetary policies during

much of the period.

To the contrary, however, monetary policies

were highly expansive.

Restrictive monetary policies prevailed only

during the last three quarters of 1966 and a few weeks in early 1967.
In response to recent economic developments, the Federal

Reserve has raised the discount rate and increased reserve require­
ments, pointing to less expansive monetary policies.

I suggest that

less expansive monetary policies will lead to a decline in total
demand and lower interest rates after a short time lag.

The path

to lower demand would be smoother with a corresponding restraint
in fiscal policies, that is, a conabination of Federal spending and

taxes which will reduce the deficit.
I question whether any foreseeable combination of monetary

and fiscal policies will have much impact on farm machinery sales.

It appears to me that the financial institutions serving agriculture

can obtain their share of loanable funds under most conditions that
may develop.

If less expansive monetary policies have an impact,

it is likely to be in the form of lower interest rates to farmers after
a short time lag.

Such lower rates would tend to increase credit

flows through the established savings institutions and provide more

efficient credit sources to farmers.