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Wisconsin School of Banking
Post Graduate Seminar
Palmer House, Chicago
March 20, 1959
Anyone reading the newspapers, listening to discussion of economic
affairs or following professional economic literature today can detect
three broad issues in connection with monetary policy.

Two of these are

current in the sense that they are being discussed widely today, but they
can almost be classed as perennial for they have been equally widely discussed
on many occasions in the past.

The third is really current in the sense

that it concerns the immediate scene.
The two that are both current and perennial may be stated a b o u t
as follows:
(a) Monetary policy, like broad economic policy, claims to be concerned
with economic growth, high employment and price stability.
goals inconsistent and irreconcilable?

Are not these

Is it possible to have both growth

and high employment along with a stable price level?
(b) Is monetary policy really powerful enough to achieve its ends?
Granted the desirability of its objectives, can not they be obtained more
efficiently by other methods?

Can monetary policy do its job?

The third broad issue I call current in the immediate sense may
be expressed about like t h i s :
(c) Granted that monetary policy can do its job is it really doing it

Is current, or for that matter past, monetary policy in the right

posture; is policy w e 11-conceived and well-implemented?
There are, of course, variations on these themes but they all seem
to come down to the above three issues as being the central issues.
propose to discuss them in the order which I have given them.





The Objectives of Policy
In discussing these objectives of policy, I believe it will be
useful to cite a bit of the record on growth and prices and to consider
what we are talking about when we use the terms "growth1 and Hprice stability1 .
Perhaps the two most important things to note about economic growth
records are these.

First, the very long-term picture shows an average rate

of growth in this country of about 3 per cent per year compounded.
the record of the whole of the Twentieth Century to date.
lent to doubling real output every 25 years.

This is

That rate is equiva­

Second, this is an average rate

of growth, and growth in any one, two, or several year period may be substan­
tially higher or lower than average.

Thus we showed a growth rate of about

8 per cent in 1951, and of about 4 per cent in each of the next two years.
In 1954, output was 2 per cent less than in 1953, but in 1955 it expanded by
8 per cent again.

output declined.

Growth in both 1956 and 1957 was below average, and in 1958
The expected rise in 1959 is well above average*

The postwar

average as a whole is somewhat better than the average for the past 60 years.
Growth involves both the capacity to produce and the capacity to

We get physical output of goods and services by applying human

brains and muscle to natural resources.

As we improve the efficiency of this

human energy through better technology and by developing capital, we increase

To develop the capital we have to have saving - deferring

consumption today so as to have more tomorrow.
This process simply is not a smooth one.

We seem to get our

technological improvements in w a v e s ; we get changes in the rate of saving
and of capital formation; we even get changes in the rate of population growth.
We can make some adjustments to compensate for the strong ups and downs of
these factors but we cannot, nor do I think we ever will, smooth out the
growth curve completely.




One important point to be made here is that the consumption side
of growth is importantand services;

It is not enough to have capacity to produce goods

we have to have effective demand for these goods and services.

While economics teaches us that m a n ’ wants are insatiable, it has never
taught that man's want for any particular or specific good or service is

This is as true for public as it is for private goods and serv­

And this means that we have to have balanced growth in demand to

accompany the growth in capacity to produce.

If we fail to attain balance

or equilibrium, we will find instances where we have too much or too little
capacity or too much or too little demand.

These instances, as illustrated

by behavior over the past three years, produce inflationary tendencies or
Let us turn now to look at the price record over the long term.
Again it is necessary to use some figures to make the points clear.

If we

take the period from 1934 through 1958, we find that wholesale prices have
advanced 145 per cent and consumer prices 116 per cent in that 24 years.
This same period saw the Gross National Product expand by 186 per cent in
constant dollars.

About nine-tenths of the wholesale price rise and almost

four-fifths of the consumer price rise occurred between 1939 and 1951.


of course, is the period that saw the defense build-up, World War II and its
aftermath, and Korea.

Or to turn the example around, only one-tenth of the

wholesale price rise and one-fifth of the consumer price rise took place in
peacetime, classing the present cold war period as peacetime.

In contrast to

this, 40 per cent of the gain in real output occurred in peacetime and just
60 per cent in the years 1939-51.
It seems to me that there is little, if anything, in this record
to indicate a causal connection between inflation and growth.

Of course,




general economic theory and history both lead to the conclusion that inflation
tends to work against rather than for growth, and the record is consistent
with that conclusion.

The evil effects of inflation have been cited so often

in recent years that they need be given but brief mention here.

The adverse

effect on saving, which is required to finance the capital investment on
which growth is based; the tendency toward speculation and unwise or unwar­
ranted expansion; the upward push of costs which tends to price goods out of
reach of those who do not share equally in the inflation and thus weakens
markets; the social inequities of rapid shifts in income patterns: all are
well known developments.

None of these can be argued logically as being

promoters of g r o w t h , their actions naturally would seem to inhibit growth.
Thus the fact that the record shows occasions when we have had both growth
and inflation would seem to indicate at best, coincidence.
The record also seems to show that control of inflation is by no
means a hopeless task.

Particularly in the period from 1951 through early

1936, when there was substantial growth without appreciable inflation, does
the record give encouragement.

Actually the whole postwar period from 1948

on looks fairly good, even though there was a Korean War and a major defense
program continues still.
Perhaps it would be desirable at this point to come a little closer
to defining price stability than has been done so far in this talk.


stability does not mean price rigidity nor does it mean that individual prices
should stay constant.

Our kind of market economy calls for the price mechanism

to allocate resources by reflecting the cross-effects of demand and supply.
As changes in particular demands and supplies constantly occur, this allocation
process cannot take place unless individual prices have some flexibility.
The general level of prices, however, should stay relatively stable.

It can




register moderate ups and downs over reasonable periods of time without
detracting too much from the general beneficence of stability.

The key

point is that prices should not move rapidly or constantly in either
What I have tried to show here is that there is no inconsistency
in pursuing the goals of growth, high employment and price stability.


the contrary it is inconsistent to pursue any one or two of these and ignore
the other*

In fact, such a course is not only inconsistent but probably

impossible of achievement.
We want a growing economy in this country; in fact, we have to have
a growing economy to produce a high level of employment and to produce the
volume of goods and services we need for a more abundant life, for an adequate
defense establishment and for the host of public services we demand.


have the basis for such an economy, we have the resources and the technology
co grow in the future at an even higher rate than in the past.
The Efficiency of Policy
I do not think we need to spend a great deal of time on this point.
Critics in this field take, quite often simultaneously, two almost completely
opposing points of view.

On the one hand it is asserted that monetary policy

is completely ineffective and on the other hand that it is so powerful that
it should not be used.

Neither position is valid.

No one connected with monetary policy asserts that it can achieve
all objectives of economic policy all by itself under all kinds of conditions.
It is no economic panacea.

What it is is an impersonal and indirect kind of

economic stabiliser that is important in our kind of economy but which is
just one of several tools of importance.




Ralph Young of the B o a r d 1s staff recently testified before the
Senate Subcommittee on Anti-Trust and Monopoly.

Included in his statement

were the following paragraphs on the role of monetary policy in the economy.
"Monetary policy works to achieve these objectives by utilizing
tools that affect the reserve position of commercial banks and, there*
fore, the total volume and cost of money and credit in the economy.
Changes in the volume and cost of money and credit influence the
economy through their direct impact on aggregate expenditure and
their indirect influence on the climate for investment.

The immediate

effect of monetary changes is on spending financed by credit.


financed outlays tend to fluctuate more widely over the cycle than
most expenditures, partly because they are largely for semi-durable,
durable, and capital-type goods, and for inventory of these goods.
Expenditures for such goods, whether by producers or consumers, are
by their nature postponable.

Thus, variations in purchases financed

by borrowed funds tend to have strategic effects on general levels
of economic activity.
•'The effects of monetary and credit policy flow from the applica­
tion of general monetary instruments.
and impersonal.

These influences are indirect

Monetary policy is not in a position to determine

the demand for soup or soap, cars or carpenters.

It functions best

in providing an environment or climate in which the decisions made
by individuals on the basis of market principles will be consistent
with national economic objectives.

If individual producers or sellers

judge demands and tastes correctly in terms of price and quality, they
reap the benefits.

If they misjudge the m a r k e t , they are obliged to

readjust their productive operations.

It is the responsibility of




each producer and seller to judge these things for himself and to
adapt to shifting wants and needs as expressed in the market.
^Monetary policy, or for that matter other Government policy,
can not and should not undertake to make market judgments or adapt-*
ations for individual producers.

If monetary policy should undertake

to finance whatever demands for credit are made upon the banking
system, or permit itself to be used to ‘
justify1 all decisions made
by producers, whether correct or faulty, it would become an engine
of inflation, not a force for stability and sustainable growth.
Monetary policy must be concerned with the interests of all the
people, consumers as well as producers, not with particular interests
or industries.
"Obviously5 monetary and credit policy can not do everything
needed to attain stable g r o w t h ; it must be supported by appropriate
fiscal and other public policies, as well as by prudent private policies.
During periods of expanding demands, accompanied by speculative
psychology and expectations of creeping inflation, monetary policy
has no option but to assume a restrictive posture.

If it did not

assume such a p o s ture, widespread expectations that prices and costs
would be steadily raised might indeed lead to farther spiraling of
costs and prices.

Individual or group efforts then to hedge against

or by escalation to protect against inflation would tend to aggravate
inflationary forces rather than to bring them into balance.?
One final point should be made tm the efficiency of policy.


increases in the supply of money relative to the supply of goods and services
are not followed on a one-to-one basis by increases in prices, the general
tendency of prices to rise with undue increases in the supply of money is




supported by too much historical evidence to be denied.

Thus assertions

that we do not have to be concerned about the size of the money supply
have little, if any, historical basis.

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102