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Frederick L. Deming, President
Federal Reserve Bank of Minneapolis

Paper given before
The American Statistical Association
122nd National Convention
Minneapolis
Sunday, September 9, 1962

--------------- -

)(

CENTRAL BANKING AND
^ ECONOMIC GROWTH

—

/'

"An efficient monetary mechanism is indispensable to the steady develop­
ment of the nation*s resources and a rising standard of living.

The function of

the Federal Reserve System is to foster a flow of credit and money that will
facilitate orderly economic growth and a stable dollar."— ^
"Monetary policy has an important contribution to make toward faster
growth, but only as one part of a broader public program for growth that would
include tax measures, expenditures, and debt management as well as monetary
measures....... The monetary contribution would be to exert a stabilizing in­
fluence on demand and prices; the initiating force in shifting output structure is

2/

most appropriately sought in other public agencies and in the private economy."—
The above quotations make it obvious that the Federal Reserve System
regards economic growth as a primary objective of central banking.

They also make

clear, however, that economic growth is one objective, or perhaps it is more
accurate to say that it is a qualified objective (e.g., "orderly economic growth
and a stable dollar"), that central banking contributes to growth through its
stabilization efforts and its underwriting of money and credit flows (e.g., "foster
a flow of money and credit that will facilitate" and "exert a stabilizing influence
on demand and prices") and that central banking1s contribution is but one part of
a growth program and not an important initiating force in such a program.

1/

The Federal Reserve System - Purposes and Functions, Fourth Edition,
Washington, D.G., 1961, p. 1

2/ Answers of the Board of Governors to Questions of the Commission on Money and
Credit, Question III, pp. 2-3; mimeographed document, 1960. To be published as
part of the documentary papers of the Commission on Money and Credit



X

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2

-

My purpose in citing these quotations and underlining certain phrases
is to put the role of monetary policy with respect to economic growth into proper
perspective.

The direct contribution of central banking to growth is pervasive

but general and lies mainly in the creation and maintenance of a money and credit
climate in which growth can occur rather than in specific stimulants to growth.
3/
It is significant, I believe, that Denison1s recent book— on growth lists in its
last chapter 31 specific actions to increase our growth rate, but that not one of
them is a specific action in the field of central banking, that only one is specific
with respect to fiscal policy and it calls for a tax structure neutral with respect
to resource allocation, and that only two or three have any connection with either
money or fiscal policy actions.
Denison does note that greater success in minimizing the amplitude and
4/
duration of recessions would be favorable to capital formation and growth— and
states, "We can be fairly certain that .... periods in which investment demand is
excessive and inflationary pressures arise will alternate with periods in which
investment is insufficient to absorb the saving that would be undertaken at high
employment-income levels.... We need a policy that will be appropriate to whatever
develops.11— ^

He also says that monetary policies resulting in lower interest rates,

greater ease of borrowing and larger holdings of liquid assets by business will
6/
stimulate investment.—

In general, however, his treatment of monetary policy

(and for that matter, fiscal policy) is casual and in keeping with the general
point evidenced in the first quotations cited; it is important but general and
pervasive in effect.

In other words, I might summarize by saying that bad monetary

policy probably will inhibit growth but good monetary policy will not guarantee

3/

Denison, E.F. , The Sources of Economic Growth in the United States and the
Alternatives Before U s , Committee for Economic Development, New York, 1962.
4/ Ibid., p. 135
/ Ibid., p. 134
6/ Ibid., p. 129

5




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growth.

3

-

Good monetary policy is important, perhaps vital, to growth, but the

initiating forces for growth are found in other areas.
Having, I hope, put monetary policy into perspective with respect to
economic growth, I pass to some general observations as to the character of mone­
tary policy.

Most central bankers, I believe, would state that monetary policy

is a pragmatic art rather than a precise science.

Despite the work done over a

long time, no single monetary theory provides clear and unequivocal guidance for
monetary policy under all circumstances of time, place, and institutional charac­
teristics of the economy.
This should not be taken to mean that there is no conceptual framework
for monetary policy.

Over the long pull, if we are to have high employment and a

growing economy operating at or about at its current capacity, the required rate
of real investment must be matched by a flow of real saving.

This is true because

economic resources are scarce and in a capacity operation resources going for in­
vestment purposes have to be taken from consumption purposes and saving represents
withholding of spending from consumption.
Created money or credit, then, can be no more than a relatively short-run
substitute for saving in financing investment.

It can bridge temporarily gaps

between the flow of current saving and needed investment when real resources are
available because the economy is operating below capacity.

It can aid in smooth­

ing the resource allocation process even under an economy operating at capacity.
Moreover, a growing economy needs an expanding supply of money and credit.

It

should not grow too fast for the economy to absorb, nor too slowly to fulfill its
functions, and the amount of money which is appropriate seems to be influenced by
the general level of liquid assets.




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4

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Actually, of course, the fact that central banking is more art than
science hardly makes it unique in the field of economic, political, or social
N

policy.

And the fact that precise determination of the effects of credit cost

versus credit availability, of changes in the money supply versus changes in
liquidity and velocity, is not possible does not mean that the general linkage
between monetary policy action and economic response is impossible to discern.
Quite obviously, central banking action affects bank reserves; such reserves
form the basis of the money supply and underpin commercial bank loans and in­
vestments; changes in these affect spending and saving.

Questions of "how much11,

flhow fast" and so on can be answered reasonably well at a particular point in
time - they merely are not, yet at least, susceptible to formula treatment.
The role of interest rates in the conceptual framework of central bank­
ing is complex.

Basically interest rates reflect the interplay pf demand-supply

forces in the saving-investment process and may be regarded more as an essential
allocation factor in the market than as a deliberate goal of monetary policy.

It

is obvious, however, that monetary policy affects the supply function and hence
influences the level and pattern of interest rates.

I have mentioned that Denison

states that monetary policy can aid growth by producing lower interest rates.

A

fundamentally contrary view is expressed by Benjamin Eiriksson of the Iceland
Bank of Development who argues that money is an economic agent which provides
the service of synchronization through its store of value quality. As such it
7/
receives interest in payment for its service.
It would follow that policies
which would lead to interest rate changes would have to consider their effect on
both saver and investor, both lender and borrower.

Thus if interest rates are to

be viewed as an objective of policy, neither high nor low rates are desirable or

77 Eiriksson, Benjamin, The Concept and Nature of Money, Reykjavik, 1962.




-

attainable at all times.

5

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In general rates should be low enough to stimulate in­

vestment when needed and high enough to stimulate saving when needed, as well as
flexible enough to serve the resource allocation function.
The above discussion leads naturally back to the objectives of central
banking which I view as falling into three broad classes - ultimate, intermediate,
and proximate.

This paper opened with quotations concerning the ultimate objectives

of central banking since they naturally are those most closely related to monetary
policy’s contribution to growth.

They may be restated here as high employment and

production, a rising standard of living and stable values.
Three comments may be made about these ultimate objectives.

First is

the fact that monetary policy formulation and execution is a continuous process,
and continuous review of developments provides the basis for continuous considera­
tion of policy.

The processes and procedures through which policy is executed ir*

the short run are and have to be far more definite and precise than the broad
goals but always have to be associated with them.
Second is the question of direct linkage between specific policy action
and ultimate economic response.

No one can say with certainty that specific

central banking action leads to ultimate economic response in precisely such a
way or such an amount.

The drive shaft between central banking action and

ultimate goal is too long and is linked to too many gears of indeterminate speed.
Nor can anyone state with precision what would have happened absent the central
bank action or with a different action.

But at a given point in time the indi^

cated direction of central bank action is fairly clear, and the continuous review
process makes it possible to change the speed and pressure of such action as the
course of developments in the ultimate goals is observed.




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6

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Third is the point that the ultimate goals may not always be compatible.
In one sense, this is true; in another sense it is completely misleading.

When

we deal with politico-socio-economic affairs, we almost always have conflicts.
The strength of a dynamic and democratic system lies in its ability to make ad­
justments that permit optimum attainment of the goals of a free society.

So to

say that the ultimate goals of central banking may not be compatible is to state
the obvious but without any understanding of our society.
Ideally, we want to attain all of the ultimate goals, and no one is
more important than another, nor are they separable in the long run.

In the short

run, lack of compatibility may exist quite often but also quite often does not
exist at all.

For example, at the moment, policy emphasis naturally is colored

by relatively high unemployment levels rather than by preoccupation with rising
prices, because the former exists and the latter is absent.
From the ultimate objectives it is useful to move all the way back to
consider the proximate objectives - those most directly controlled or influenced
by the central bank.

In this category I put bank reserves and, in a qualified

8/
sense, interest rates.

There is no real question about practical control over

reserve volume by a central bank.

Differences between countries in law and

custom and variations in technique lead to differences in degree of control but
for the purposes of this paper those differences are not significant.

It is,

I believe, inaccurate to speak of central bank "control11 over interest rates in
most countries but, as noted earlier, there certainly is central bank influence
in this area.

8/ In this paper there is no point to consider differences in degree of control
over total reserves, nonborrowed reserves, and free reserves in the United
States, nor differences in degree of influence over short, intermediate, and
long term interest rates.




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7

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I must resolve the apparent contradiction of listing interest rates as
a proximate objective of monetary policy after stating earlier that they are to
be regarded more as an essential allocation factor than as'a deliberate goal.

In

my view a central bank should not, and indeed cannot for long, impose an arbitrary,
non-market determined level or pattern of rates, nor attempt to peg such a pattern.
Obviously, however, central bank reserve policy influences rates and must implicitly
have some interest rate goals in mind.

These goals do not stand alone, however;

they are conditioned by reserve volume objectives.

Thus, without attempting to

impose the central bank1s view of an appropriate rate structure upon the money and
credit markets, proper central bank policy may well have a view as to what interest
rates will result from additions to or subtractions from reserves and therefore may
use short-term rates and the general rate pattern as goals along with the reserve
volume goal.

Furthermore, it may be quite appropriate central bank action to

pursue an interest rate goal somewhat more diligently than a reserve volume goal
at a particular conjuncture of circumstances.
The intermediate objectives lie roughly halfway between proximate and
ultimate objectives and have to do with spending and consumption, saving and
investment and thus include credit volume, money supply and the liquidity of the
banking system and the general economy.
The linkage between central bank policy actions, the response of those
factors in the proximate objective area, and the secondary response of the factors
in the intermediate objective area are seen with reasonable clarity.

Strictly

speaking, central bank control over intermediate objectives does not exist, but
practically central bank influence does, even though the degree of influence
varies with time, place, and circumstance and is not precise nor definite.
While the linkage between proximate and intermediate objectives is not
precise and definite, it is far more so than the linkage between intermediate and




-

ultimate.

8

-

Central bank policy strongly influences total bank deposits and bank

loans and investments.

Its influence is somewhat less definite on the convention­

al money supply and general liquidity but is apparent.

When funds flow into

ultimate particular uses, however, they are beyond central bank control.
We may summarize the discussion so far as follows:

Economic growth is

a primary objective of central banking policy but one that is qualified by terms
such as "orderly11 or "sustainable11.

Central banking* s contribution to growth

takes the form of providing a suitable money and credit climate in which growth
can occur and involves stabilization functions and the fostering of an adequate
but not excessive flow of money and credit for the economy.

Proximate objectives

are set in terms of reserve volume and, to a degree, interest rates.

These in­

fluence credit volume, money supply and liquidity which affect saving and spend­
ing which react on production, employment, income and prices.

Since the links

between proximate, intermediate and ultimate objectives are not determinate in
precise terms, central banking operates through a process of continuous review
and relies heavily on judgment.
At this point, I wish to move from hypothesis and concept to experience
and empirical analysis.

In so doing I raise three questions and suggest answers

to them.
1.

How does the record of the United States in economic growth compare
with that of other nations?

2.

Does experience indicate that monetary policy can and does contribute
to growth?

3.




Does the record of monetary policy in the United States indicate that
it has been appropriately conceived and timed in terms of contributing
to growth within the conceptual framework outlined?

-

9

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In an annex to this paper a series of tables and charts present data
pertinent to the answers to these questions.

In essence the data tell their

story without the need for comment but I propose to comment in some detail on
the tables and more briefly on the charts.
The five tables, A-I through A-V, present various data for nine countries.
Four of these countries are Common Market members whose growth performance in the
1950fs has been very impressive and which often are cited as examples for the
United States to study in its pursuit of higher growth rates.
two rapidly growing Asian countries:

Also included are

Japan, the foremost industrialized state in

Asia, and Taiwan, an underdeveloped nation with a very high growth rate.

The

United Kingdom is on the list; it has shown a lagging growth rate but is one of
the two great reserve currency nations of the world, as well as a great industrial
power.

The United States and Canada complete the list, the former for obvious

reasons, the latter as a well-developed Western Hemisphere state which has under­
gone a financial crisis.
This list of countries is designed to be illustrative rather than exhaus­
tive, although I do not believe that large scale extension’of the list would make
the points illustrated much, if any, more definitive.

The countries shown represent

mostly the highly developed industrial states and their experience can be most
easily and exactly compared with that of the United States.
as a special case, almost an extreme.

I have included Taiwan

It is a nation with no significant natural

resource base but one which through unusual circumstance has an extraordinary
supply of educated and managerial talent and which has been able to largely ignore
(although it is certainly aware of) balance of payments problems because of massive
injections of United States aid.
Tables A-I and A-II show data on industrial production and real gross
national product per capita for selected years.

For the purposes of this paper,

growth is measured by real gross product and industrial output performance.



I

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10

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recognize that many people believe this is too narrow a concept because it tends
to ignore, or at least underweight, general economic progress and welfare.

Com­

parisons are difficult enough, however, when done on the gross product or industrial
output basis and the use of such data does serve to insure against overstating
developments in the United States relative to those in other nations.
The reason for selection of the years for which data are given is quite
obvious.

1938 is the last year preceding World War II.

I do not represent it as

a "normal11 year, but it was a year of peace even though in Germany and Japan much
industrial effort was going into war production.
of the postwar boom.

1948 is taken as the beginning

Output in Japan and Germany was well below prewar, in France

and Italy it was not significantly different from prewar level.

1957 virtually

completed a decade of industrial expansion and marked the peak of a strong capital
goods boom in the United States.

1960 and 1961 represent the latest years for

which comparable data are available.
In the 1938-48 period only the United States and Canada show appreciable
growth.

These were the "Arsenals of Democracy" and expanded sharply to serve the

Western Allies as production centers.
devastation.

They also suffered none of war’s physical

Germany and Japan were savagely mauled by war and much of their indus­

trial base destroyed.

The other Western European nations just about stayed even; the

strength of war demand was largely offset by war destruction.

The United Kingdom and

the Netherlands were less touched by physical destruction than France and Italy.
In the 1948-57 period the war torn nations worked, with massive United
States help, to rebuild capacity and to meet current and deferred demand.

They not

only had to make up for war’s destruction but also for some of the gap in growth
that resulted from the depression of the 1930fs.

The United States and Canada had

no wartime gap to overcome and actually had made up some of the depression gap
during the war years.

Nevertheless, they too had deferred civilian demand to meet

and showed substantial growth in the period.



The United Kingdom suffered from many

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11

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complex economic maladies and special conditions; it lagged severely.

In Taiwan

the Chinese Nationalists worked to create a new nation.
To some degree these same forces continued to work in the last period
but their strength was diminished.

In both the United States and Canada deferred

demand had been largely met; it still existed in Western Europe, Japan and Taiwan.
Taking the period as a whole, the United States and Canada show more
growth in real product per capita and as much or more in industrial production
as do the Western European states and the Asiatic countries.
Kingdom shows a tendency to lag.

Only the United

Using the prewar year as a base, growth in

Germany, France, Italy and Japan, impressive as it has been, is less striking
than that in Canada and the United States.
My citing of the above record is not intended to deprecate the fine
performance of Western Europe, Japan and Taiwan in the 1950*s, nor to serve as
a basis for complacency about the United States record,

I believe it not only

desirable but necessary for us to grow faster than we have in recent years.

I

think, however, that the United States (and Canada, also) have done better than
some of the apostles of growth admit, and that the easy assumption that Western
Europe and Japan have broken through to a new era in growth rates needs to be

9/

demonstrated over a longer period of time.—

Tables A-III, A-IV and A-V are designed to present data for the same
nine countries with somewhat different periods used in the analysis.

Table A-III

shows data for real product, real product per capita and prices (cost of living)
for 1948-52, 1952-57, and 1957-60 or 61.

Table A-IV shows data on interest rates

j)/ This statement is consistent with the findings of studies on long-term growth
rates. See, for example, Kuznets study of long-term growth in 18 nations which
indicates that growth rates over the long pull do not vary greatly from nation
to nation, Kuznets, Simon, Six Lectures on Economic Growth, Free Press,
Glencoe.




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12

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in 1948, 1957 and 1962, and on money supply changes during the periods 1948-57
and 1957-61.

Table A-V merely brings together in one place certain data from

the other four tables.
For the purpose of this part of the analysis there is no point to using
the war period and its immediate aftermath, 1938-48; we can be satisfied to use
postwar experience.
done for two reasons.

The breakdown of the 1948-57 period into two sub-periods is
The Korean War had a pronounced impact on raw materials

prices generally and some impact on production in the United States, Canada and
Japan.

Those effects came mostly from 1950-52.

Perhaps more importantly, the

sub-periods separate out meaningfully the experiences of nations utilizing
orthodox monetary and fiscal policies as stabilization devices.
By using the word "orthodox11 in respect to monetary policies I mean
to imply that those policies were used flexibly and forcefully in attempts to exert
stabilizing influences on demand and prices, and foster money and credit flows to

10/

facilitate orderly economic growth.—

In keeping with the title of my paper, I

will confine my discussion to monetary policy, although obviously fiscal policy
was an important part of the "orthodox11 stabilization effort.

10/ Monetary policy techniques employed in the various countries differed,
partly because of differences in institutions, partly because of dif­
ferences in situations. I count in the monetary policy area, currency
reform, devaluation, blocking of accounts, capital levies to absorb
redundant currency, capital issue control, and restrictions on Govern­
ment use of central bank credit, as well as the more traditional
methods of monetary policy, such as discount rate changes, loan ceil­
ings, open market operations, and reserve requirements.




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13

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It will be useful to date roughly the beginnings of "orthodox11 monetary
policies in the nations employing them.— ^

West Germany and Italy may be counted

as beginning stabilization at the outset of the first period, 1948; the Netherlands
and Japan in 1951, ar*d France not until 1959.

The moderation of price rise in

France between 1952 and 1957 reflected in large measure a drawing on external
goods which caused a major run-off of French reserves and which led to a financial
crisis at the close of 1958.

In part, relative price stability reflected a lack

of sensitivity in the French cost of living index because of subsidies.

Actually

part of the price rise since the French stabilization is no more than statistical,
reflecting removal of many subsidies.
The United States, the United Kingdom and Canada may be classed as
following orthodox monetary policies throughout the period.
program is given in some detail later in this paper.

The United States

The United Kingdom program

has not been conspicuously successful, partly because of many special circumstances,
including Britain's position as a reserve currency nation, and partly because of
some lack of consistency in stabilization programs outside the monetary policy
field.

In a sense, Britain may be viewed as a nation which has successfully

11/ The datings used require a word of explanation. The West German currency
reform went into effect in June, 1948 and permitted flexible monetary policy
to operate effectively almost at once. Italian monetary stabilization was
carried out between 1947 and 1949; I use 1948 as a date for "orthodox11
policy because the Italians succeeded in holding prices in 1948 at the
1947 level. In the Netherlands a stabilization program began in 1945 with
currency reform. It was not particularly effective because of large
Government deficits and prices rose quite sharply over the next five years.
By 1951, however, the Dutch program was effective. In France, serious
stabilization efforts began in 1957 and culminated with the "heavy" franc
introduced early in 1960. Effective stabilization may be dated from 1959.
In Japan stabilization efforts began in 1946, but, similar to the Nether­
lands experience, were not particularly effective. Beginning in 1949^50
Japan moved more vigorously and by 1951 the stabilization program was
taking hold.




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14

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invoked stern policies to meet intermittent financial crises, but has relaxed
too much between such crises.
Canadian experience is interesting because it has some features in
common with French experience.

An adverse balance of payments on trade account

was offset for some time by capital inflow.

While monetary policy was reasonably

conventional, budget deficits and, more recently, some nationalistic discourage­
ment of capital inflow led to increasing difficulties, and when capital inflow
actually reversed, Canada ran head-on into a financial crisis due to loss of re­
serves.

Devaluation, large foreign borrowings, and more orthodox budget policy

actions of mid-1962, coupled with orthodox monetary policy, have been conspicuously
successful in resolving the crisis and bid fair to be successful in the long run also.
Taiwan, alone among the nations listed in the table, has not followed
an effective stabilization program, although recently some efforts have been devoted
to that end with the reestablishment of the Central Bank of China.

Taiwan, as noted,

is a special case, but, in another sense, is representative of many other under­
developed nations.
out regard for cost.

Taiwan has pursued extremely expansionary programs almost with­
Under ordinary circumstances these would have resulted in

foreign exchange crises and very drastic stabilization measures or bankruptcy.
In the case of Taiwan, United States aid largely offset the foreign exchange
drains, a situation not unknown in many other underdeveloped countries, particu­
larly some of the Latin American states.

It does not follow that policies such

as those pursued in Taiwan contribute to growth; it merely indicates that it is
helpful to be a strategically located underdeveloped nation if one wishes to be
extravagant.
Table A-III, I believe, demonstrates that relatively low price in­
creases may be associated with relatively high growth rates, and that the former
has accompanied orthodox stabilization programs.




This is marked for the 1948-60

-

15

period as a whole and for the sub-periods.

-

Japan before 1952 and Taiwan through­

out the period are the only real exceptions.
Table A-IV indicates that neither inflation of the money supply nor an
overlarge money supply produces low interest rates.
is particularly instructive.

Here the example of Taiwan

A large part of the interest charge in Taiwan

represents an inflation premium which lenders demand.

Reduction of inflationary

pressures and in the rate of increase in the money supply in the period after
1957 led to reduced interest rates.

Recent Canadian experience also is interest­

ing in this connection.
Neither do the tables indicate any close connection between low interest
rates and high growth rates or the converse.

Instead, the rate pattern seems to

indicate that rates reflect, or perhaps it would be better to say, have been
allowed to reflect demand-supply interrelationships and the marginal productivity
of capital.
In sum, the major lesson to be learned from the data in the tables seems
to be that monetary policy can contribute to growth through its stabilization
efforts, or, at a minimum, that such efforts do not impede growth.
in this respect would seem to be reasonably conclusive.

The record

Another lesson would

seem to be that interest rate policy should be shaped to fit the situation, stimu­
lating investment and/or saving as particular conditions arise.
Tables A-I through A-V have suggested answers to the first two questions
I raised.

Charts B-I and B.-II, and Charts C-I, C-II, and C-III, with their accom­

panying record of policy actions, suggest answers to the third question.

The

first two charts, one based on 1929, the other on 1945, merely show for the United
States real gross product, gross product in current dollars and the broad money
supply (currency, demand deposits and commercial bank time deposits) over the years.
They indicate the excess liquidity built up in the depression and war years has




-

been absorbed gradually.

16

-

They also indicate that money supply growth has been

rather consistently ahead of real product growth; in fact, probably too close to
current value product growth.

The general conclusion to be drawn is that if

monetary policy has erred, it has erred on the side of ease rather than restraint.
The C series of charts and the policy record brief give a detailed
picture of the course of monetary policy in the United States over the past twelve
years.

The colored background on each chart represents changes in the general

tone of monetary policy - easy (gray), restrictive (red), or neutral (white).

/

12

These changes in the 11tones11 of monetary policy are taken directly from
the official policy record of the Federal Open Market Committee as it appears in
the annual reports of the Board of Governors of the Federal Reserve System.

The

Open Market Committee held more than 140 meetings in the twelve years covered by
the charts.

Broadly speaking, policy changes may be viewed as being of two de­

grees of strength - major and minor.

The major shifts have been marked generally

by changes in the directive (during most of the period by changes in the b clause
of the directive) given by the Committee to the Account Management.

Minor shifts

12/ The word "change" must be emphasized since the colors do not necessarily
represent the general tones of policy. Ideally, both change and general
tone should be shown and could be by using different color intensities.
It was not possible to produce a chart in that form in time for the pre­
sentation of this paper.
For much of the period the colors shown do indicate general tone as well
as changes in tone. Two notable exceptions may be cited, however, as
examples. In the first few months of 1957 the color background shows
shifts from red to gray and the reverse. The tone of the whole period
was restrictive; the changes really should be viewed as shifts from more
to less restraint or vice versa. Thus that period would show up more
accurately were various shades of red used. In much of 1960 and 1961
the general tone would require various intensities of gray since the
general tone was easy even though there was a slight shift to less ease
late in 1961. Finally, it should be noted that the white background for
1962 does not indicate neutrality; since the policy record for that
period is not yet published, the background should be viewed as absent
of color rather than as white.




-

17

-

have been marked by what I call "shades11 in the instructions given to the
Account Management within the framework of the directive. The policy record
shows both directives and "shades11. All of these are listed in the policy
record brief in the annex.

During the twelve years there were 30 changes in

directive and 47 "shades" in the instructions.

It is from these that the col­

ored backgrounds are derived.
I should point out again that monetary policy formulation is a contin­
uous process and consequently that transitions from ease to restraint or vice
versa are made gradually.
The "tones" of monetary policy reflect primarily the open market oper­
ations of the System.

There are other monetary policy tools, of course, and

changes in these also are shown in the policy record brief and on Chart C-I.
There were 8 changes (1 increase and 7 reductions) in reserve requirements
(including the steps taken to free vault ca.sh for reserve credit), 9 changes
(5 increases and 4 reductions) in margin requirements, and 19 changes (11 in­
creases and 8 reductions) in the discount rate during the twelve years.

Regula­

tions W and X also were operative in the early part of the period.

The number of policy changes indicate that monetary policy was flexible
in this period.

To answer the question as to whether it flexed in the right

13/
direction at the right time, there are plotted on Chart C-I data on reserves—
and short-term interest rates to represent the proximate objectives, on Chart C-II

13/ A note on the data on total and nonborrowed reserves is in order. The
data are adjusted for the reserve requirement changes so, in effect,
the curves represent constant reserve requirements. They also are ad­
justed for seasonal. It is necessary to make these adjustments to
make the reserve data meaningful.
It might also be noted that the general tone of policy may be judged
by the course of the proximate guides to policy.




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data on bank credit, the money supply (including commercial bank time deposits),
liquid assets, and the gold stock to represent the intermediate objectives, and
on Chart C-III data on income, production, unemployment, prices and investment
to represent the ultimate objectives.

These data should not be taken to be ex­

haustive of the guides and objectives of policy; they are reasonably illustrative,
however.
Comment on the charts can be quite brief.

The course of policy seems

to show that shifts were reasonably timely, adequate and effective.

They indicate

that monetary policy never attempted to reduce credit volume or the money supply
in absolute terms, but merely to reduce at times their rates of growth.

Responses

of the proximate objectives seem to have been reasonably prompt and the course of
the ultimate objectives, which also may be viewed as general guides to the tone
of policy, matches fairly well with the course of policy.
The answer suggested to the third question then is that monetary policy
has been reasonably well timed and its goals reasonably well achieved.

Therefore,

it would seem that monetary policy has made such contribution as it could to growth.
It seems unnecessary to recapitulate the empirical evidence, but I
think it worth noting in conclusion that the record of experience offers small
comfort either to those who class monetary policy as impotent or unimportant or
to those who view it as more of an impediment than an aid to growth.

Where it

has been employed appropriately and courageously it has helped to create a climate
in which growth could flourish if the other factors making for growth were present.