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FROM TODAY'S VANTAGE POINT An a d d r e s s by Delos C. Johns P r e s i d e n t , F e d e r a l R e s e r v e Bank of St. Louis Before the AGRICULTURAL CREDIT CONFERENCE Arkansas Bankers Association Marion Hotel, Little Rock, A r k a n s a s T u e s d a y , J a n u a r y 19, 1954 FROM TODAY'S VANTAGE POINT When it b e c a m e n e c e s s a r y some weeks ago to give Jeff B u r n e t t a title for the r e m a r k s I shall make today, I was influenced by two things. First, I hadn't then made up my mind about what I wanted to say and, t h e r e f o r e , wanted a title which would not put me in a s t r a i t jacket. P e r h a p s you will a g r e e that the t i t l e , " F r o m Today's Vantage Point", like a Mother Hubbard, will cover n e a r l y any subject. Second, and of even g r e a t e r weight, I a m at this season approaching the third a n n i v e r s a r y of my a c c e s s i o n to the p r e s i d e n c y of the F e d e r a l R e s e r v e Bank of St. L o u i s . Since the shortfall is but a few d a y s , it is p l e a s a n t to me to p r e t e n d that today is the third a n n i v e r s a r y . It is p l e a s a n t b e c a u s e that m a k e s it a l m o s t the third a n n i v e r s a r y of my f i r s t official t r i p into A r k a n s a s , the only whole State in the Eighth F e d e r a l R e s e r v e D i s t r i c t . One of my f i r s t e x c u r s i o n s away f r o m St. Louis was to the Little Rock B r a n c h . You w e r e then and always have been so hospitable and g r a c i o u s to me that I like to come back. Aside f r o m t h e s e p e r s o n a l and confessedly sentimental c o n s i d e r a - tions, an a n n i v e r s a r y i s an a p p r o p r i a t e time for pausing, looking about, observing w h e r e you a r e , how you got t h e r e , which way you a r e pointed, and p e r h a p s doing a little philosophizing. At any r a t e , by your l e a v e , t h a t ' s what I would like to do today. During the p a s t t h r e e y e a r s the people of the United States achieved a level of m a t e r i a l p r o s p e r i t y which a few y e a r s ago was no m o r e than d r e a m stuff. In 1951 the g r o s s national product, i. e. , the s u m total of the value of goods and s e r v i c e s produced by the people of this country, exceeded $300 billion for the first time. This figure r o s e by about $20 billion in each of the next two y e a r s . - 2 P r e l i m i n a r y e s t i m a t e s indicate that the g r o s s product for the p a s t y e a r was $367 billion, v e r y close to the m a g i c a l $400 billion m a r k which in the 1940 f s we thought might be achieved by 1975. It should be r e m a r k e d , too, that, since 1951, c o n s u m e r p r i c e s have r e m a i n e d v e r y n e a r l y stable, so that the r e a l gains to the people of the country in this r e c e n t p e r i o d have indeed been substantial. By a l m o s t any m e a s u r e we choose to take, these have been in a m a t e r i a l sense the t h r e e b e s t y e a r s in the h i s t o r y of our economy. Unemployment h a s been close to an i r r e d u c i b l e minimum, consumption expenditures have been at a l l - t i m e highs, and people have been able to save m o r e each y e a r than ever before except for the four a b n o r m a l and unwelcome y e a r s of World War 11. Everything c o n s i d e r e d , until quite recently only two a d v e r s e f a c t o r s have p e r s i s t e n t l y given c o n c e r n to us all, and special concern, I know, to you who live, work, and do b u s i n e s s in A r k a n s a s . One of these unfavorable f o r c e s h a s been the weakening of f a r m p r i c e s and consequent drop in f a r m i n c o m e . The second h a s been the continued existence of the s o - c a l l e d !r dollar g a p " in our foreign t r a d e , in the p r e s e n c e of which we have been able to maintain the r e c e n t level of our exports only by r e a s o n of our m i l i t a r y aid to foreign c o u n t r i e s and our d i r e c t economic aid to v a r i o u s and sundry nations of the world. Within the p a s t six months or so t h e r e has been added to these two special p r o b l e m s the m o r e g e n e r a l one of combatting f o r c e s which tend to d e p r e s s the l e v e l s of income and employment in our economy a s a whole 0 Intelligent efforts to solve t h e s e t h r e e old and new p r o b l e m s r e q u i r e us to reflect on t h e m soberly ? objectively, and unselfishly. We must look about - 3 us "from today 8 s vantage point 1 . and f o r m judgments about the future which we may live to b l e s s o r , p e r i s h the thought, to c u r s e . The f i r s t b r e a k in f a r m p r i c e s after World War 11 began in mid-1948. An upturn was apparent e a r l y in 1950, and the favorable trend was given further impetus by the outbreak of war in Korea. Since e a r l y 1951, however, f a r m e r s 1 p r i c e s have generally gone down, and the drop since late s u m m e r of 1952 h a s caused w i d e s p r e a d w o r r y . Meantime the efforts of the F e d e r a l Government through Commodity C r e d i t Corporation to maintain rigid support p r i c e s for the b a s i c c o m m o d i t i e s have led to e m b a r r a s s m e n t s which a r e becoming m o r e and more acute. C C C ' s c o m m i t m e n t s on loans and i t s accumulation of i n v e n t o r i e s , which together exceeded $3 l / 2 billion on June 30, 1950, fell by m o r e than half to l e s s than $1 1/2 billion by late 1952. Thereafter gradual i n c r e a s e s in c o m m i t m e n t s brought C C C ' s total investment to n e a r l y $2. 5 billion at the end of D e c e m b e r , 1952; and in the l a s t y e a r this figure h a s been m o r e than doubled, to an a l l - t i m e high as of now of over $5 1/2 billion. in sight. Nor i s the end The P r e s i d e n t in his special f a r m m e s s a g e to the C o n g r e s s a few days ago, on J a n u a r y 11, felt it n e c e s s a r y to ask that the borrowing authority of CCC be i n c r e a s e d f r o m $6 3/4 billion to $8 l / 2 billion, effective July 1 of this y e a r . We all know, of c o u r s e , that what we r e f e r to a s the " f a r m p r o b l e m " h a s been m o r e than these t h r e e y e a r s in developing. A g r i c u l t u r e suffered much h a r d s h i p long ago, between 1873 and 1896, but these y e a r s w e r e e r a s e d f r o m the m e m o r i e s of many by a q u a r t e r century of f a r m p r o s p e r i t y which followed, the s o - c a l l e d "Golden Age of A g r i c u l t u r e " . Since the p o s t - W o r l d War 1 d e p r e s s i o n - 4 - of 1920-21, however, the A m e r i c a n f a r m e r h a s been in difficulty m o r e or l e s s constantly. Only during World War 11 and in the y e a r s i m m e d i a t e l y after, when we w e r e feeding the peoples of a w a r - t o r n world, was a g r i c u l t u r e really prosperous. All this suggests b a s i c a l l y and fundamentally a s e r i o u s need for the reallocation of r e s o u r c e s in a g r i c u l t u r e . The s p e c t a c u l a r advances r e c e n t l y made in mechanization and in the applications of science to f a r m i n g have not proved to be unmixed b l e s s i n g s , for these advances have caused the supply of f a r m p r o d u c t s a s a whole to run ahead of the demand which e x i s t s for t h e m at p r i c e s which will cover the c o s t s of production on most f a r m u n i t s . P e r s i s t e n c e of the c o m m i t m e n t to rigid support p r i c e s , even after the demand for f a r m p r o d u c t s generated by World War 11 had languished, h a s complicated the l o n g - r u n p r o b l e m to such an extent that one finds the question s e r i o u s l y asked: "How long can the c o m m i t m e n t to rigid p r i c e supports be further continued without its proving to be an u n b e a r a b l e tax b u r d e n ? " Not u n r e l a t e d to the f a r m p r o b l e m a r e the difficulties of maintaining a s a t i s f a c t o r y volume of international t r a d e . The p r o b l e m of securing a balanced foreign t r a d e , like the a g r i c u l t u r a l p r o b l e m , h a s existed ever since the end of what is now the old m e n ' s w a r , World War 1. That was my w a r , incidentally. Indeed, the "dollar gap 11 of which we r e a d a l m o s t daily h a s been with us m o r e than thirty y e a r s , and one t e m p o r a r y solution after another h a s been n e c e s s a r y to avoid an intolerably low level of foreign t r a d e . During the 1920 ! s p r i v a t e A m e r i c a n i n v e s t m e n t s abroad closed the gap, a s did gold i m p o r t s during the 'SO's. During World War 11 it was l e n d - l e a s e and, i m m e d i a t e l y after, l e n d - l e a s e and U . N . R . R . A. , which enabled us to maintain our e x c e s s of e x p o r t s . Then c a m e the B r i t i s h loan, A r m y Civilian Supply of goods in occupied c o u n t r i e s and, most i m p o r t a n t of all, - 5 the European Recovery P r o g r a m . More recently a combination of d i r e c t economic aid and l o a n s , plus United States Government off-shore p u r c h a s e s for m i l i t a r y aid, have enabled us to export a s much a s we have exported. If our Government had not in one way or another made between $4 and $5 billion available to f o r e i g n e r s in each of the l a s t two y e a r s , our exports must have been l e s s by n e a r l y that amount. How important the export m a r k e t s a r e to A m e r i c a n a g r i c u l t u r e is well known. In the p o s t - w a r period of 1946-1952 the total of A m e r i c a n e x p o r t s was $123 billion, of which $25 billion, or raore than one-fifth , consisted of a g r i c u l t u r a l p r o d u c t s , chiefly cotton, g r a i n s , and tobacco. our total exports w e r e paid for by i m p o r t s . But only $78 billion worth of Had the gap of $45 billion not been made up by United States Government aid, the A m e r i c a n f a r m e r would have been w o r s e off than he actually w a s . Unless such aid is to continue indefinitely in one f o r m or another, some way must be found of i n c r e a s i n g A m e r i c a n i m p o r t s . It is to be hoped that the Randall C o m m i s s i o n ' s r e p o r t , due shortly, will suggest politically acceptable ways of enabling the United States to i n c r e a s e its i m p o r t s . To put it another way, the United States must find a way to begin acting like the c r e d i t o r nation which it in fact has been for m o r e than t h r e e d e c a d e s . So much at this time for the two special p r o b l e m s which have long been crying for solution. A moment ago I r e m a r k e d that, a s a whole, A m e r i c a n s have been exceedingly p r o s p e r o u s during the l a s t t h r e e y e a r s . As you will r e m e m b e r , however, I was quick to add that we have been confronted recently with the p r o b l e m s which accompany and follow slackening economic activity. During 1953 t h e r e was an unfavorable t u r n in many of the key i n d i c a t o r s . - 6 Industrial production, the national income, construction c o n t r a c t s , and m a n u f a c t u r e r s ' new o r d e r s s t a r t e d to drop, while unemployment and c o n c e r n over the level of inventories i n c r e a s e d in the l a s t q u a r t e r . Because these unfavorable t u r n s did not come all at once and w e r e not p r e c i p i t a t e , t h e i r impact on income e a r n e r s , except in some f a r m a r e a s , h a s to date been neither sudden nor s e v e r e . Yet within the year just ended the throbbing boom of the e a r l y 1950 f s unmistakably faded. No one can be s u r e , of c o u r s e , of the magnitude and duration of the present drop. Looking back, it is c l e a r that b u s i n e s s activity changed d i r e c t i o n s o m e w h e r e around m i d - 1 9 5 3 . As m e a s u r e d by the Board of G o v e r n o r s ' Index of Industrial P r o d u c t i o n , which in D e c e m b e r stood at 128 p e r cent of its 1947-49 b a s e , the p r e s e n t decline h a s so far amounted to nine index points, or in other words a decline of 7 p e r cent. In t e r m s of the g r o s s national product, which peaked in the second q u a r t e r of 1953 at an annual r a t e of $372 billion, the drop h a s a p p r o x i m a t e d $10 billion, or 2 1/2 per cent. P a r e n t h e t i c a l l y , the r e c o r d of the 1949 downturn in these two indexes m a y afford an i n t e r e s t i n g c o m p a r i s o n . In 1949 production fell eleven points from peak to trough for a p e r c e n t a g e change of 10 p e r cent, and g r o s s product dropped some $11 billion (from a substantially lower level to s t a r t with), or a shrinkage of 4 p e r cent. During the r e c e s s i o n of 1949 and again through the slump in c o n s u m e r durable s a l e s in 1951, it b e c a m e a p p a r e n t , however, that t h e r e a r e strong sustaining forces in the economy. A continuing rapid i n c r e a s e in population and a substantial r a t e of household formation p e r s i s t a s favarable f a c t o r s on the demand s i d e . Even the distribution of the population among age groups is favorable, for the babies of the p o s t - w a r boom a r e growing up to eat m o r e food and wear m o r e - 7 clothing. To such l o n g - t e r m natural supports m u s t be added c e r t a i n " b u i l t - i n " institutional f a c t o r s which operate to counteract a downward movement of activity, such a s social s e c u r i t y p a y m e n t s , unemployment i n s u r a n c e , the reduction in total tax demands a s national income d e c l i n e s , the support of a g r i c u l t u r a l p r i c e s , and so on. Such encouraging c o n s i d e r a t i o n s a s these have a c e r t a i n cogency and should, I think, keep us from becoming unduly frightened. m u s t not be deluded. At the s a m e t i m e we The positive signs of incipient r e c e s s i o n m u s t be neither overlooked nor lightly explained away. A s h a r p decline in b u s i n e s s activity would m a k e even m o r e s e r i o u s the a g r i c u l t u r a l and foreign t r a d e p r o b l e m s of which I spoke a moment a g o . We m u s t not forget that a high r a t e of industrial activity m e a n s both a sustained demand for f a r m p r o d u c t s and possible job openings for those who wish to leave a r e a s of s u r p l u s f a r m population. Rising i n c o m e s and employment m e a n , too, a high p r o p e n s i t y on the p a r t of A m e r i c a n s to i m p o r t goods and s e r v i c e s ; but c o n t r a r i w i s e , a slump in A m e r i c a m e a n s falling s a l e s by f o r e i g n e r s in this country, possibly spreading d e p r e s s i o n a b r o a d and t h e r e b y bringing about a decline in our own e x p o r t s . Surely we would all avoid a r e - c u r r e n c e of s e v e r e d e p r e s s i o n with its accompanying physical h a r d s h i p s and the degradation of those who a r e without livelihood and hope for the future. do not p r e a c h - r a t h e r I denounce - a psychology of f e a r . nature. I I a m an optimist by But o p t i m i s m in t h e s e m a t t e r s m u s t be b u t t r e s s e d by s a n e , c a l m , s t a t e s m a n l i k e thought, planning, and action. We m u s t diagnose our p r o b l e m s objectively and f e a r l e s s l y ; we m u s t decide on our c o u r s e of t r e a t m e n t and c a r r y it out with equal justice and c o u r a g e . - 8 Any approach to t h e s e p r o b l e m s of o u r s r e q u i r e s that we be a g r e e d on our objectives. I take it that A m e r i c a n s wish to p r e s e r v e the institutions of a capitalist economy, and that we a r e c o m m i t t e d to the proposition that allocations of r e s o u r c e s should be d e t e r m i n e d by the workings of a free p r i c e s y s t e m . This m e a n s that incentives m u s t be offered to h i m who would venture his capital in any endeavor, whether he be m a n u f a c t u r e r in Little Rock, banker in Pine Bluff, or f a r m e r in Greene County. to talk about f! Yet, as h a s been often r e m a r k e d , it is misleading a profit system. 1 , for o u r s is a who v e n t u r e s m u s t run the r i s k of losing. H profit-and-loss system". He Either that or we m u s t r e s i g n o u r - s e l v e s to an economic s y s t e m in which l o s s e s a r e s o c i a l i z e d . Among the questions we have to decide a r e t h e s e : Do we like the idea of socializing p r o f i t s ? Do we like the idea of socializing l o s s e s any b e t t e r ? Having pondered t h e s e questions, I suggest we p r o c e e d to a s k o u r s e l v e s whether we think it is the r e s p o n s i b i l i t y of Government to maintain over the y e a r s a fixed, high level of income for any special i n t e r e s t or group in the economy. We should keep o u r s e l v e s r e m i n d e d that a s changes inevitably occur in the d e s i r e s of c o n s u m e r s and such changes a r e r e g i s t e r e d in the m a r k e t p l a c e , p r o d u c e r s of p a r t i c u l a r goods and s e r v i c e s , with like inevitability, will be a d v e r s e l y affected. Should those so faced with falling demand for t h e i r output be expected to have f i r s t r e c o u r s e to Government, or should they be expected f i r s t to have r e c o u r s e to the traditional tools of a freely competitive economy? Given a favorable political c l i m a t e , what tools of a freely competitive economy a r e available? T h e s e a r e some of them: (1) Ability and willingness to analyze m a r k e t s , to use imigination, to do r e s e a r c h or at l e a s t adopt its r e s u l t s , all toward the end of producing goods and s e r v i c e s that the m a r k e t wants or will - 9 t a k e ; (2) ability and willingness to achieve efficiency in production and thus to reduce production c o s t s ; (3) ability and willingness to achieve effectiveness in s a l e s m a n s h i p and efficiency in d i s t r i b u t i o n . To a g r e a t m a n y , after long y e a r s of war and p r e p a r a t i o n for w a r , some of t h e s e tools a r e new and s t r a n g e . o t h e r s they a r e not new but forgotten. To To a few, unfortunately, they a r e neither new nor forgotten, but unwelcome b e c a u s e it i s work to use t h e m , p l a i n , h a r d work, Another question we m u s t a s k o u r s e l v e s is whether we shall c a s t these tools into the d i s c a r d or f i r m l y encourage and r e q u i r e t h e i r u s e . It is not m y purpose to suggest a n s w e r s to all t h e s e q u e s t i o n s . I only suggest that you and e v e r y other citizen of this country continue to give t h e m your e a r n e s t and prayerful c o n s i d e r a t i o n . Nor do I m e a n to suggest or r e m o t e l y imply that Government has no role to play in promoting economic health and growth. I would be untrue to my convictions and distinctly out of c h a r a c t e r if I w e r e to leave you with any such i m p r e s s i o n . Even if you should r e s o l v e in your own minds that Government should not undertake to maintain e v e r y o n e ' s profit position, it will be obvious to you that Government has an a p p r o p r i a t e and e s s e n t i a l role to play; and that role is wholly consistent with the fundamental objectives to which I a s s u m e d a g r e e m e n t a m o m e n t a g o . In the f i r s t p l a c e , I apprehend t h e r e would be little or no dissent from the a s s e r t i o n that Government should stand r e a d y to provide d i r e c t relief in n e c e s s i t o u s c a s e s of d i s t r e s s with which Government alone, or b e t t e r than anyone e l s e , is able to deal adequately. Relief of the v i c t i m s of drouth, flood, or other c a t a s t r o p h i c c i r c u m s t a n c e is i l l u s t r a t i v e , but not exclusively definitive, of this c a t e g o r y of governmental action B In the second p l a c e , and offering an opportunity which is not only wider in scope but a l s o calculated to p r e v e n t d i s t r e s s a s well a s r e l i e v e it, Government - 10 m a y s e r v e a s a buffer against sudden and d r a s t i c drops in income during downward p h a s e s of the b u s i n e s s c y c l e . Stated o t h e r w i s e , Government m a y make i m p o r t a n t , e s s e n t i a l , and effective contributions to economic stability and to mitigation of e x c e s s e s in the b u s i n e s s c y c l e . Indeed it should be said, in m y opinion, not that Government "may 11 do t h e s e things but that it is i t s duty to do so. F o r a brief moment before I close let me invite your attention to the a d - m i n i s t r a t i o n of the second b r o a d c a t e g o r y of governmental action which I have just mentioned. We have r e c e n t evidence that m o n e t a r y authority, which in this country the C o n g r e s s has seen fit to delegate to the F e d e r a l R e s e r v e S y s t e m , can act p r o m p t l y and courageously to m i t i g a t e a downturn in b u s i n e s s activity. In r e s p o n s e to the economic changes we have noted during 1953, F e d e r a l R e s e r v e c r e d i t policy shifted from one of r e s t r a i n t to one d i r e c t e d toward a m e a s u r e of e a s e in the money m a r k e t . By e a r l y May t h e r e w e r e indications that the c r e d i t and capital m a r k e t s w e r e becoming too r e s t r i c t i v e for the p r e s e r v a t i o n of economic stability, and the F e d e r a l R e s e r v e S y s t e m began adding to bank r e s e r v e s through the p u r c h a s e s of T r e a s u r y b i l l s . In t o t a l , t h e s e p u r c h a s e s p r o vided roughly $1 billion during May and June, substantially easing bank r e s e r v e positions by m i d - y e a r . P r e s s u r e on bank r e s e r v e s was further e a s e d by a reduction of about $ 1 . 2 billion in r e s e r v e r e q u i r e m e n t s during e a r l y July. Fur- t h e r p u r c h a s e s in the open m a r k e t over the second half of the year and advances to Government s e c u r i t i e s d e a l e r s under r e p u r c h a s e a g r e e m e n t s in December and e a r l y t h i s month also contributed to e a s e in the m a r k e t by countering the usual y e a r - e n d t i g h t n e s s . So long as p r e s e n t conditions obtain, b a n k e r s m a y - 11 expect that they will be e n c o u r a g e d to lend by having adequate r e s e r v e s made available to t h e m . It is not unreasonable to suppose that the continuing a v a i l a - bility of c r e d i t to both s h o r t - a n d l o n g - t e r m b o r r o w e r s will be a major factor in limiting and inhibiting the r e c e n t b u s i n e s s downturn. It m a y b e , however, that Government m u s t lean at t i m e s m o r e heavily on the i n s t r u m e n t of fiscal policy. Notwithstanding the d e s i r a b i l i t y of striving in good t i m e s to avoid deficits and consequent addition to the public debt, it m a y be that r e s o r t to deficit spending m a y be indicated, if n e c e s s a r y to s t e m a tide of deflation. T h e r e a r e those who hope, however, that a new approach to such spending m a y be developed, and that the i n s t r u m e n t of fiscal policy m a y be so sharpened that it can be effectively d i r e c t e d at those i n d u s t r i e s and those l o c a l i t i e s which a r e e s p e c i a l l y in need of a s s i s t a n c e . To sum up, let us say that it is the obligation of government in m i d - 2 0 t h century to provide a salubrious climate within which free e n t r e p r e n e u r s m a y operate. These r i s k t a k e r s a r e entitled to have a s s u r a n c e that they m a y l a r g e l y r e a p the fruits of t h e i r r i s k s and l a b o r s and that the Government will by a p p r o p r i ate action do what it can to p r e v e n t a grinding deflation from distorting and t o r t u r i n g the f r a m e w o r k of the economy. In determining what is a p p r o p r i a t e , we should be sensible of the i m m e d i a t e and - m o r e i m p o r t a n t - the l o n g - r a n g e effects of damming up the flow of r e s o u r c e s from one use to another by expedient, long continued i n t e r f e r e n c e with the allocative m e c h a n i s m of a free p r i c e s y s t e m . We m u s t t u r n our faces in the d i r e c t i o n of cooperation, even a g g r e s s i v e cooperation, with the nations of the world t o w a r d the goal of removing i m p e d i m e n t s to i n t e r national t r a d e . We should g u a r d against u s e of the powerful i n s t r u m e n t s of - 12 m o n e t a r y and fiscal policy in such a way a s to e n c o u r a g e and r e w a r d inefficient and wasteful b u s i n e s s m e t h o d s . We m u s t , in s h o r t , do m o r e than lip s e r v i c e to the ideal of a free economy if our free institutions a r e to s u r v i v e . If we a r e to enjoy the benefits of the m a r v e l o u s a p p a r a t u s of competition, we m u s t p e r m i t it to work. H e r e in the State of A r k a n s a s , where the happy signs of growth, development, and p r o g r e s s a r e all about you and where your gains have been won in a g r e a t competitive s t r u g g l e , I suspect I have not said anything you do not a l r e a d y know and b e l i e v e . 000OOO000
@FedFRASER