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January 23, I968
It is good to have this opportunity cf discussing some of t h enation's
economic problems at this meeting in memory of the "Kingdom of Callaway."
I feel greatly honored to have been given this platform for this evening's
discussion. Like the militia groups that gathered here during the early Civil
War days, we are still vitally interested in public policies. I shall, however,
limit my remarks to those policies that have an impact primarily on economic
In this country two major areas of public policy are utilized in an
effort to maintain sustainable national economic growth, effective full
employment, and reasonably stable prices. I refer to fiscal policy and monetary
policy. Fiscal policy has to do with the federal budget and monetary policy
is employed to regulate the availability of money and credit, in my succeeding
references to fiscal policy I shall employ the high employment budget. This
budget in terms of absolute figures is relatively meaningless, but 1 believe \{
to be the best means available to measure the influence of the Federal budget on
national economic activity. The influence of monetary policy may be measured
by many variables such as bank reserves, bank credit, interest rates, etc., but
I choose to use money supply because 1 believe it to be the consistantly most
reliable measure yet devised, By money supply 1 mean total demand deposits
plus currency in circulation.

In order to provide an appropriate setting for public policies

-2relative to economic activity, I shall review the course of our economy since
the current upswing began in early 1961. in this review ! have divided the
seven years under discussion into four sub-periods, 1961 through 1964, late
1964 to early 1966, early 1966 to late 1966, 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. Growth 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 1 per cent annual rate. Most of the increase in spending was matched
by a 7.7 per cent rate of gain in 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, but considering the rise in total
demand, the rate of inflation v/as less than might have been expected.
Fiscal and monetary actions were very expansionary during this
period. The Federal budget became more stimulative. It moved from a surplus
of $6 billion in 1964 to a near balance in early 1966.

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. This, in
turn, caused the growth of money to accelerate. 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
v/as 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 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 1 months.


Data apply to the high-employment budget.

-4By 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. In comparison, such
purchases grew at about a 1 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 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. Total 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. Real 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. Each was very stimulative in the
summer and fall of 1967. The sharpest change, however, was in monetary
factors. The money supply rose at the rate of 7 per cent after having remained
unchanged during the previous period. Fiscal actions, which were already
the most stimulative since World War 11, 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

-6no growth. Despite the pause, however, inflationary pressures remained
strong in the first half of i967. By late spring, economic activity had turned
up again as a result of stimulative fiscal and monetary policies. The upswing
continued through the year with substantial price inflation during the last
three quarters.
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
requirements of the larger member banks were increased.
Because of these moves and the upward trend of interest rates in
recent years, great concern as to the probable course of interest rates has
developed. I shall comment on this topic 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 rates. But
a more immediate impact on rates would probably occur as a result of reduced
government borrowing and more stable price expectations.
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 rates.

Government deficits can be financed in two ways:
creation (sales of securities by expanding the banking system) or through sales
of securities to the non-bank private investor. As a continuous and permanent
program, I can see substantial flaws in either method of financing government
expenditures. Although 1 am reluctant to compare government financing to that
of the individual firm or household, over the longer pull, it appears to me that
each must be brought into balance with income. Another similarity is that in
both cases decisions must eventually be made as to what we can afford, given
the level of resources that the people are willing to allocate to public use. This
problem has a fairly simple solution in the case of most individuals and firms.
Restraining influences come to bear rather quickly when excessive debts are
created by households. The restraining influences are more subtle, however,
in the case of governments. Their securities are still marketable. Money is
still acceptable. The problem is that interest rates are higher than they would
otherwise be and that the dollar has less purchasing power. We thus pay for
excessive government expenditures through reduced purchasing power of the
currency and through a reduction in value of all dollar denominated securities
and debt.
It appears to me that this nation should take a closer look at its
income and resources and come to some decision as to what it can afford to spend
in the public sector, given the self-imposed tax limitations of its citizens. Like the
individual household, it should then limit its expenditures to its income, given
perhaps some leeway for deficits during periods of serious recessions and
surpluses as such recessions recede.

-8The effect of rising prices on interest rates is often overlooked.
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. For 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 1965 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. Demand for goods and services, however, soon began
to moderate and a reduction in rates followed. The more restrictive actions
occurred in the second quarter of 1965, and by late September interest rates decline.
From these comments you can conclude that 1 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

-9and fiscal policies of recent years have been the important factors that pushed
interest rates up. 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, 1 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 functions. 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 communities.
When the supply and demand situation with respect to loababie 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 to lend and credit becomes unavailable to their customers. It
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 anddemand 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 circumstances;

- 1 •0
The Dollar and Gold
In connection with monetary problems, apparently one of the more
misunderstood relationships is that between the dollar and gold. Some people
believe that the size of the gold stock held by the U. S. determines the value of
the dollar. For all practical purposes, gold has been detached from domestic
money since 1933. It is still used for settling international transactions, and as
long as such transactions are settled in this manner, a stock of gold is
desirable. On the other hand, in our domestic economy, gold is only used for
commercial and industrial purposes. The price of gold is set by law at $35
per ounce. This only means that the U. S. Government stands willing to pay
$35 per ounce for gold and will sell gold to foreign governments and governmental
agencies at this price. The fact that the gold price is set at $35 per ounce does not
mean that gold determines the value of the dollar. On the contrary, the value
of the dollar has for several decades determined the price of gold. Furthermore,
the productive efficiency of our domestic economy, coupled with fiscal policies
and the stock of money, determines the value of the dollar. A rapid increase
in the number of dollars causes prices to increase and the value of the dollar to
depreciate. Conversely, a decrease in number of dollars causes their value
to appreciate. Thus, if we can find some means of settling international payments
without the use.of told, we can drop gold from our monetary system completely
without any impact on our domestic economy and without any gain or depreciation
in the value of money. Gold supplies could then be used for filling teeth,

-IIvvatch cases, and other ornaments, rather than being held under guard by
governments at great expense. We might view our.dollar-gold relationship in
the same manner as our price support programs for farm products. For
example, if the price is set too high, we accumulate a stock of gold. On the
other hand, if the price is set too low, our gold stock is depleted. That is the
case today, since we are losing gold abroad. If we removed dollar-gold price
relationships completely, however, we do not know what would happen to 'the
price of gold. It might even decline.
Another group views the current dollar-gold relationship as being
beneficial because of the constraint it places on domestic money creation.
For example, the legal requirement of 25 per cent gold backing for all Federal
Reserve notes outstanding ultimately places a limit on the volume of money
creation. In the periods, however, that such restrictions have been effective,
they have proven harmful to the economy. Such restrictions are more likely
to cause destabilizing monetary policies than policies which contribute to
maximum stability and growth. Thus, in recent decades when monetary
expansion .has approached the legal limits as measured by the gold stock, the
limits have been changed so as to permit an orderly increase in the stock of money.
Since we are not willing to submit to the drastic restrictions imposed
on monetary policy by rigid gold ties, I see little reason for maintaining any
domestic ties whatsoever with gold. In fact, as indicated earlier, such ties
have not really been effective since the early 1930's.