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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 DOST** 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* The 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 foUoved* ** 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 were restively assail, a large portion of the people vexe gelf-* ei^loyed, and the m j o r proportion of a casBm<y'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 activity* 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* As 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 196k, !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/'con 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 T *• «** 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 expansionary* 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 1955. 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 While 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, juices 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 BVCXS&V 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<#&. EtePg>loynent &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$*k per cent during the past 3.5 years. Bocexit data phow no indication of a slac&ened pace i a the r a t e of credit increase. t o feorrotr heavily* State and local goverraaento have continued Federal budget develojzacmts have recently increased the GoveriFjent1^ demand for funds* T&ese rising credit don&nda "have put pressure on bax&s ar4 capital carpets* 53» vigorous luyins in the U* 8» econo;ay has put upward pressure on interest rates (Cixart DC). Higher interest r&tea have resulted despite a larce voltcas of saving and the rapid monetary expansion* Conclusion In conclusion, sharp rises in noney and bailing reserves, mid an e^panaivo fiscal situation, have helped to ®$&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* Xf ;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 pi |_ Lf 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 1958 I960 1962 1964 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 1959 Monthly Averages of Daily Figures 1960 1961 1962 1963 1964 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 (+)Suff>tu$;f(-H>eficit BHUonS of Doibrs 20 S e 0 8 0 n a t | y Adjusted Annual Rates ""•" Billions of Dollars 20 -20 1959 1960 1961 1962 1963 1964 1965 1966 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$6 and 1st half 1967 estimated by Federal Reserve Bank of St. Louis Prepared by Federal Reserve Bank of St. Louis Consolidated Cash Budget B i l l i o n s Of D o l l a r s 19S9 1960 Seasonally Adjusted Annual Rates 1961 1962 1963 1964 BilliotYS of 1965 1966 Dollars 1967 Latest data plotted: 1st and 2nd half 1966 and 1st half 1967 estimated by Federal Reserve Bank of St. Louis Sources: Bureau of the Budget and U.S. Department of Commerce Prepared by Federal Reserve B#nk of St. Louis S p e n d i n g a n d Production Billioni of Dollars 800 750 700 Quarferly Totals at Annual Rote s Billions of Potjorj 800 r I Seasonally Adjusted Annua/ Rates of Change L TOTAL DEMAND REAL PRODUCT 4th qtr.'64 -163% +8.37* to 4th qtr.'6S 1960 to 1965 +6.1% 722 700 +457o 640 650 650 -'- Total Demand ^ 600 750 600 550 550 Real Product 11 500 500 450 450 X 0 32 1959 IE 1960 X 1961 ~r 1962 ~r 1963 ~v 1964 ~r ~r 1965 1966 Source*. U.S. Department of Commerce Source of 1966 estimate: The 1966 Annual Report of the Council of Economic Advisers Latest data plotted: 4th quarter preliminary LL GNP in current dollars. 12GNP in 1958 dollars. Prepared by Federal Reserve Bank of S i iouis Prices frrdex 120 115 no 105 100 1959 1960 1961 1962 1963 1964 1965 1966 l i 1958=100 (GNP deflator) 12 1957-59=100 Sources: U.S. Department of Commerce and U.S. Department of Labor Source of 1966 estimate: The 1966 Annual Report of the Council of Economic Advisers Prepared by Federal Reserve Bank of St. Louis Status of the National Labor Force Millions of Persons 85 1959 1960. Millions of Persons 85 Seasonally a d j u s t e d 1961 1962 1963 1964 1965 1966 Source: U.S. Department of Labor Latest data plotted: January estimated Source of 1966 estimate: The 1966 Annual Report of the Council of Economic Advisers Prepared by Federal Reserve Bank of St. Lours Total Bank Credit Less Government Securities Compounded Annual Rates of Change Per Cent 25i 195$ Per Cent 25 Seasonally Adjusted 1960 1961 1962 1963 1964 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 5.01 1 1 1 1 1 1 „ ^ Per Cent 1 15.0 ^lf 3k 4.0 3.5 3.0 2.5 l A M ^ . / T s - H o n S h Treasury Bills u fX " 1959 «#"«V*v»% *"VtV«> 1960 <i—s^k*—v *—*+*»** 1961 *^/+sS"\ f***'** 1962 x x__r o 1964 1965 1966 s~*yK**** «-s/-«w*,N 1963 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
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