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3 M 8 broad topic of discussion cznblca tir; to do
sewral things; First^ v© c&a consider sorio probleus of
3 mediate teport&nce to yop ard the nation*

Second; I can

toil you something of official deliberations relative to
national zsonet&ry policy. fhird<, it gives no an opportunity
to obtain your reaction to


of our ideas at the IVCoral

Sescrvc Bsnh of St. Louis relative to cconcnic sterilisation
policies and procedures*
Xte-aand for Goode and Services
Introductory to a discuccica of current economic
conditions j°l &h*?ll casaat on the «ox*sy tram/ly end the
national budgets

Thece factors a^jarc-ntiy contribute to tSa

volume of op&ndiJig or total demand for z^ods

os£ fscrviees.

USiroujjhout luktory^ the quantity of sioney in circulation has boon associated villi the l^vel of prices*


PiCaacux Baporor, llorcuo Jhxsliua, in the Second Cestury A«X>*
Increased the quantity of laoncy in circulation by raising
the copper content of silver co&uSj &&& torero inflation


* 2«
* *
Jtey gold dineoverieo have been associated irith
rising juices In a nnrJber of eaaee* Geraany, following
World liar J, attempted to service Its >^rtima debt h y print**
ing excessive quantities of currency*

By 1920 prices had

skyrocketed to 15 times their vartiae peak*

On the doiramrd

8ide, oar groat depression of the 1930*0 is associated vith
a reduction in the stock of moroy*
la the simple agricultural economies predominant
In isost nations prior to about iSjJO* changes in the money
supply and price level probably had little effect on overall econoinic activity.

It did, however, alter the veolth

relationships between debtors and creditors. Money supply
increases and rising prices itaj>rove the lot of debtors at
the expanse of creditor. A declining noney supply and lower
Ibices increase the vealth of creditors at the e^pen^e of
thooe in debt* Itaployaent and total output, however, m s
probably not greatly affected in theae early non-corCToreial
econoisies by either inflations or deflations. Firm


restively assail, a large portion of the people vexe


ei^loyed, and the m j o r proportion of a casBm&lty'a output
VQB used in the hosae or locally.
During the current century, b ^ e v o r , vo havs began
to recognise that cgmey play$ a snore important part in economic

Greater specialisation of production, both at the

national and international levels, hao increased the importance


- 3m
of exchanging goods and services, Siius, the part played by
our medium of exchange* &oneyj has b^en enlarged*


evidence of this rising importance of noney* I h a w a chart
which indicates the rate of change in the laoney supply and
the associated economic contraction and expansion periods
f & m 1914 to


!Ehe experience of the past fifty years with respect
to changes in the noney supply, money plus time deposits, and
time deposits alone is presented in Chart I. The top tier
shows luonth-to-month changes in the Bonoy supply expressed
in annual rates. The middle and ho 1 ' o tiers present sisailar
data for time deposits and for Honey plus time deposits •
Most of xay discussion today wiil focus on the ooney supply
only* The shaded vertical bars on the charts denote periods
of economic contraction as determined hy the national Bureau
of Economic Kesearch*

The light areas conversely denote periods

of economic expansion,
Tae time series sho^m have been examined for periods
of uniform rates of change * that is, periods during which
there were no marked and sustained changes in the rates of
change* Shese periods are represented hy the horizontal hars
on the chart*
Experience during the past 50 years indicates that
isarked and sustained changes in the x*ates of growth in either
money or money plus tine deposits have usually heen followed
hy cyclical turning pojuts (note top and bottom tier of


* 2$ m

chart), This would seem to indicate tnut increases and
decreases in the money supply have not been matched by corresponding increases aid decrease in the demnd for isoney,
ffhus, the evidence is quite strong that changes in the supply
of money have contributed to significant corresponding
economic expansions and contractions*
She growth rates of naaey have generally declined
prior to business cycle peaks and have risen before cycle
troughs* !Ehis shows up most vividly in the major contractions.
For example, the 1930-21, 1929-33, and 1937-38 economic
contractions show major changes in rate of growth of money
supply during the directional charges in econosdc activity*
A comparison of the top tier of the ch&rfc with the bottom
tier shows that, except for periods of economic reconversion
after Wox\Ld War I and Woxld War II, the average rate of change
of money declined prior to eight of the nine business cycle
peaks while the average rate of growth of sioney plus time
deposits decreased preceding seven of the nine peaks,
!Ehe precise way in which xaoney affects economic
activity is the subject of such discussion. One group of
analysts believes that the m j o r intact of a change in the
rate of growth in the nonoy supply is quite direct* They
contend that the public is willing to hold a given artount of
money at a given level of tacoas and wealth. If the supply
of money is increased, however, the public has more money
than it desires to hold, and given the levels of income and




wealth, spending will increase. Idle labor and other resources
vill thus be put to work if they are not already fully utilised*

If resource use is approaching capacity, the increased money
supply will, however, have its pritiary impact on prices. In*
other m>rds, if everyone yho

uant$ to *rork is already employed*

an increase in the stock of laoney v i n have little impact on
real output*
In the case of a contraction in the money supply,
this group believes that people vill have less noney than
they want to hold, therefore, they vill reduce spending in
an attempt to gain control of larger amounts, thus reducing
demand for goods and services, Employment and other resource
use trill also tend to decline.
Another group of analysis believes that nsoney has
its taajor impact on the econoiBy through changing interest
rates. They point out that an increase in the money supply
tends to reduce interest rates, isaking investsaent more
profitable. As investment in real capital rises, employment
rises and use of other resources are zaora fully utilised,
thus boosting total economic activity. Conversely, an
increase in interest rates tends to inhibit investment and
reduce economic activity.
Although there romins some doubt as to precisely
haw noney affects economic activity, most analysts believe
that money is important and the body of evidence as indicated
by the chart is impressive in pointing up the association of
mmey trith economic activity.


«. 6 *
Fiscal Operations
Piocol operations of the U* S* GoYemnent aro also
generally beliefs to have an important impact on spending
and ag£p*egate desaand, G&g&xm&ixb spending in excess of inta&e
(taxes) tends to increase total spending and ie considered

On the other hand* G o w n m ^ n t spending at loner

levels than the tex

intake tends to dcu^en aggregate domain

and contract economic activity*
I&paet of Ctarent Hcmatary end Fiscal Ordinations on fot&l Benand
At this point it ceans appropriate to review recent
rionefcary and fiae&l actions and saaie 00120 judgments as to their
impact on total deaand in roco&t zaonths,
Ifenotary l^ralopi^nts
ffeictary actions have been very expansionary since
mid~l965 (Chart II)» Money supply grotrth accelerated from
what vm

already a rapid rate of expansion*
fhe nation's tionoy supply (demnd deposits plus

currency) has grown at a 7 p w cent annual rate since June.
This iras the fastest rate of expansion for a $even~month
period in thirteen years# Honey incroaeed at a k per cent
rate from September 1962 to Juno 1965 and at a 1*5 P ^ cent
rate from 1953 to 19^2.
Historically^ sustained periods of strong ssonetary
grosrtfo as indicated earlier have been accompanied, vith a
lagj hy a rise in spending*

Since the econony is mm fairly


- 7taut, an exceptionally rapid increase in spending could foUoir
the recent high rate of monetary growth. In this case monetary
gro¥th might result more in price rises than in expansion of
real output.
5he increase in money in the past half year has
been facilitated by an expansion in the volume of bank reserves.
3Che growth of reserves that member banks have available to
support private demand deposits, the largest component of the
money supply, has advanced at a 6 per cent annual rate since
mid-1965* XbdLs recent rate compares with a 2*0 per cent rate
from September I962 to mld-1965 and a 1.3 P e ^ <^ent rate from
1951 to I962. A major factor in the recent gain of reserves
was net Federal Reserve purchases of Government securities•
*Che fiscal Situation
*Rie Government's spending and taxing actions in
the last half of I965 trere the most stimulative in many years
(Charts III and X?). Both the cash budget and the national
income and accounts budget shotf substantial deficits*
Expansionary steps during I965 include excise tax cuts,
increased social seeur.tty outlays> expanded domestic social
welfare programs, and higher than anticipated outlays
necessitated by the escalation of activity ip Vietnam.
An exxxmsiosary fiscal situation is also in prospect
for this year. Rising Government expenditures may more than
offset the recent tax increases. Increased social security
taxes, reinstated excise taxes on automobiles and telephone


- 8 service,, and built-in increases in Inoaae tas reeeipte vill
provide goiae additional revomre* On balanae, hm?OYer# the
Geyerumat**! fiscal actions ere expected to provide a stressor
stimulus to the ecoznoQf ia 1956 than in the latter half of
fiscal actional are somewhat lesa flexible tbE&
awoetayy aetioxus* She latter c&a he altered quickly* It is
eossaeisly thought that Government expenditures, especially
those concerned with rational defense, ere not easily a&epted
to the goals of ecosanic stabilisation policy*

Xn other words,

such e^peuditurea generally take top priority once foreign
policy decisions Have been ractc* Cnan-eo in t&& rates are
perhaps the primary vcy by which f iscri operations caa be
adjusted to the ccoxjosftic enviror^nt*

However, since tag

chaises mu$t be eBaete«2 by Coss&zess, they taoy be subject to
& considerable ^egialative" a£& "c&sinistratlve1* lag between
need a&d execution,
Sending a&d ffroduetieii
£\2dg$ent$ relative to the adequacy of total demand
are w d e partially on the baei& of recent trends in spending
e M production. Since last ouga&r a broadly baaed rise in
aggregate deaBand, encouraged by expansionary policy develops
laentSj has resulted in a large increase in outputs


current dollar QW rose at an 8*7 per cent annual rate froa
the second to the fourth quarter of 1965* real GBP rose at


* 9•
* *
a 7 pe* cent rate (Chart ? ) •

$obal depend haa been so great

that resource narkets have tightened* and pricey including
interest rates^ have ri^en*
the Jump in the nation's real output of goods and
©ervieeg at a 6 per cent annual rate from the second to the
fourth quarter of X$65 caaj?ares vith a &.3 P$^ cent rate
from 3$60 to 196% and a 2 . l per cent r&te from 1953 to i960,
Brioes ssay be considered the tseasacring stock that
indicates the divergence between spending and real production.
If spending rieea at u faster rate them output of gooda s M
aervicei^ prices nill rise* On the other hand* if spending
declines, resource ufio tm 1 prices vlll trend dc&nsmrd.
V&eb of the strong Increase in denand for goodsi end
services elnce last


has t^iUcd over into price risenf

Indicating that the nation1 s resources for production are
approaching fall utilization*

!Ehe increase in $• S* wholesale

prices during the last year and a half has been a wasfood.
departure from stability experienced frorx I958 to &id**l9$*
(Chart fl)*

Wholesale prices started to rise in mid-19^ &nd

increased at a 2.1* per cent annual rate to Soptesiber I965*
Since then these pricca h&ve rioen at about a h per cent aimual
rate* !Eh© riae in the price indexes since iaid-19^ has been
broadly based and has been paced by sharp rises in prices of
sensitive industrial mtcriala and of cgrlcultural canaoditles*


** xo Comvemr prices have cone up at a 2*8 per ceat
annual rate since August compared with a U per cent rate
of increase froa 1953 t o 1<#&.
&rj>ley^at Is ea^only uced aa a measure of the
Jevel of resoisrce nm*

fhe &tvan% increase in output in

recoat moatha was m l e possible in port by mrJied increases
ita e^ployraoat (Chart H I ) ,

payroll er^loyaent rose a t a *>,2

per cent atmual rate frcsn Jtoe to January com|>ared t?ith «a
average 1*8 per cent from i960 t o 1064* !?otal enploy&eafc
rose at a 3,9 per cent rate front Jt*ae t o Janutiry compared
n i t h a 1«% per cent rate jfiwrc 19&0 to 196^*
Ikmad.for Credit
Also Indicative of the o v e r a l l strength of the
eeono:ay are the rates of a d v i c e of bank credit (Chart Vtll)
and interest rates*

Corporations have turned increasingly

t o out0ido sources for invcat^mat fiwdo.

2?otal basic credit

Xeso Govei^x0at eecuritieo has increased a t the mmzingly
high rate of l$*k per cent during the past 3.5 years. Bocexit
data phow no indication of a slac&ened pace i a the r a t e of
credit increase.
t o feorrotr heavily*

State and local goverraaento have continued
Federal budget develojzacmts have recently

increased the GoveriFjent1^ demand for funds*

T&ese rising

credit don&nda "have put pressure on bax&s ar4 capital carpets*


53» vigorous luyins in the U* 8» econo;ay has put
upward pressure on interest rates (Cixart DC).

Higher interest

r&tea have resulted despite a larce voltcas of saving and the
rapid monetary expansion*
In conclusion, sharp rises in noney and bailing
reserves, mid an e^panaivo fiscal situation, have helped to
®$&ify a etroiig rise in economic activity vhieh began in
early l$5l.
Tm increase in spending as 3o$£ured by the dollar
value of goods and services ha** increased substantially, end
in recent quarters the rate of cuin has been unusually high.
Heal output of gooda aad services has increased
tepidly in recent smtho but at a somewhat slower rate than
the rate of spending*
Part of the strong deoand for goods and cervices
has thus spilled over into price increases., Since September
vltolcsole prices have risen at a k*'( por cent annual rate*
Jlarfcber indication of the tightening isarkot on the
supply pide vac the strong upaord puish in employment* J?ay«
roll employsient ros® at a 6.8 per coat annual rate froa
September to Jfantiary, and by year1 a ond the unoi^loymant
rate had declined to k*X per cent, its lotrest rate in afcsost
a decade*
SJra&alated to tern*? of nonet&ry policy end Interest
ratC0, current conditions nay he analysed on the basin of
three possibilities* Given a prospective e>:pan0ive flocal


» 12 program^ a large part of the burdca of mlntainiag balanced
growth appo&ro to rest currently on wonotary policy*


;Curftb0r restrictive aotion& becorts n&eossery, given the
great demnd for credit^ interest rates may be pushed 00210*
vfcat feigner in equating auch demand vii& available supplies •
If current policies pi*ove sufficient to curb demand
at reasonably etable prica levels* little <&oase in rate^
nould appear probable.
Cte the other hand* if dcaaand obould decline substan~
tial3y> which appears unlikely at the iiiomnt^ a mors c:cpansive
mnot&ry policy w o l d tend to reduce rctea* A m r o e^pansivo
fiscal policy twuld tend to put upward pre^sura on rates,
fheso observations nuct bo further toBporod by
whateverflevelopssontcitdie place regarding Federal expenditures
and taxo0#

Money Supply and Time Deposits, 1914-1964
Annual Rates of Change
Money Supply

—PTT~ 1



Time Deposits

J 9 36
_ averages of annual rates of chance, weighted l«2-t, computed from seeaonailT adfasted data.
Ban indicate average rate* foe periods of no nacked aod sustained change n toe rate* of change (data m Tables II
*o JVj.
Vertical eluded areas indicate periods of bosinert recessions (data In Taste I ) .

Prepercd by Research Department
Federal Reaenre Back of St Lotris





Data prior to 1*47 from A M»*»l*ry Hhury #/ ibt XJnhtd Stmt*, /MM*50, Milton Friedman and Anna JacoVsea
Schwarta, a study by the National Bureau of Economic Research (Princeton Princeton University Press, 1963),
Table A I.
Data for 1947 and af«tr from the Board of Governors of the federal Reserve System.

Money Supply
Compounded Annual Rates of Change
Per Cent


Monthly Averages of Daily Figures






Per Cent

r965 "1966

Bars on chart are periods of no marked and sustained changes In the rates of change.
Percentages are annual rates of change between months indicated.
—4.atestckttaplotted? January preliminary

Prepared by Federal Reserve Bank of St. Louis

U.S. Government Fiscal Operations
BHUonS of Doibrs

S e 0 8 0 n a t | y Adjusted Annual Rates

Billions of Dollars



1960 1961 1962 1963 1964 1965


Sources: U.S. Treasury Department, Council of Economic Advisers, Board of Governors
of the Federal Reserve System, and Department of Commerce
1st and 2nd half t9$6 and 1st half 1967 estimated by Federal Reserve Bank of St. Louis

Prepared by Federal Reserve Bank of St. Louis

Consolidated Cash Budget
B i l l i o n s Of D o l l a r s



Seasonally Adjusted Annual Rates





BilliotYS of





Latest data plotted: 1st and 2nd half 1966 and 1st half 1967 estimated by Federal Reserve Bank
of St. Louis
Sources: Bureau of the Budget and U.S. Department of Commerce

Prepared by Federal Reserve B#nk of St. Louis

S p e n d i n g a n d Production
Billioni of Dollars



Totals at Annual Rote s

Billions of Potjorj


Seasonally Adjusted
Annua/ Rates of Change
4th qtr.'64
to 4th qtr.'6S
1960 to 1965









Total Demand ^




Real Product 11
















~r ~r

1965 1966

Source*. U.S. Department of Commerce
Source of 1966 estimate: The 1966 Annual Report of the Council of Economic Advisers
Latest data plotted: 4th quarter preliminary
LL GNP in current dollars.
12GNP in 1958 dollars.
Prepared by Federal Reserve Bank of S i iouis














l i 1958=100 (GNP deflator)
12 1957-59=100
Sources: U.S. Department of Commerce and U.S. Department of Labor
Source of 1966 estimate: The 1966 Annual Report of the Council of Economic Advisers

Prepared by Federal Reserve Bank of St. Louis

Status of the National Labor Force
Millions of Persons



Millions of Persons

Seasonally a d j u s t e d







Source: U.S. Department of Labor
Latest data plotted: January estimated
Source of 1966 estimate: The 1966 Annual Report of the Council of Economic Advisers

Prepared by Federal Reserve Bank of St. Lours

Total Bank Credit Less Government Securities
Compounded Annual Rates of Change
Per Cent


Per Cent

Seasonally Adjusted






1965 1966

Bars on chart are periods of no marked and sustained changes in the rates of change.
Percentages are annual rates of change between months indicated.
Latest data plotted: January

Prepared by Federal Reserve Bank of St. Louis

Yields on Selected Securities
Per Cent







„ ^
Per Cent

^lf 3k




l A M ^ . / T s - H o n S h Treasury Bills u


" 1959







x 1965x__r o



ULMonthly averages of daily figures.
12 Monthly averages of Thursday figures.
Latest data plotted: January
Sources: Board of Governors of Jhe Federal Reserve System
and Moody's Investors Service
Prepared by Federal Reserve Bank of St. Louis