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Eighth Annual
Sponsored by the
Minnesota Society of
Certified Public Accountants
Radisson Hotel, Minneapolis
November 28, 1962

Frederick L. Deciing
President, Federal Raser
Bank of Minneapolis

I have chosen as my subject for this talk "Economic Growth" partly
because it is topical and partly because it is a topic in which I have a deep
and long time interest.

That interest, incidentally, is one that has been

shared by a great many people over a long time.

Many of them would not recognize

the term ''economic growth1 which is a relatively new expression.

I used to talk

about ‘
economic development” others called it 'expansion1 or v a bigger pie; or
"the sky's the limit".

When Jim Hill built the Great Northern, when the Mesabi

was opened up, when the cattle and wheat country was developed, there waa not
much talk of "growth" or "growth rates’ but this was economic growth in fact
and It produced the “
bigger pie1 and the 1 better Life5 .
What I hope to do in this talk is to put this matter of economic growth
into perspective for you and to suggest some things that, in my opinion, can be
and should be done and some things that should not be done to maintain and achieve
economic growth.
In my remarks you will hear several references to two pieces of
literature on economic growth: one, E. F. Denison's excellent and recent book
’ Sources of Economic Growth in the United States and the Alternatives Before Us'*
and the other a series of eighteen articles in the October 20 issue of the HEW

I commend both of these to you as well done and readable.
I begin by considering briefly aocoe aspects of the nature, measurement

and record of economic growth.

The concept of economic growth is complex, and

despite widespread discussion, there seems to be a great deal of opinion difference
as to just what a correct concept is.

Denison defines economic growth as the

increase in national product (total output) in terms of constant dollars (that
is, with price changes eliminated from the figures), and states explicitly that
he gives no consideration to economic progress in general or economic welfare,
that no account is taken of leisure, changes in income distribution or uses of

This definition has the virtue of being fairly explicit and it is a

concept used by a great many people who study and talk about growth.

It also

has the virtue of being quantifiable in reasonably precise terms, that is, if
one is willing to accept the concepts and measurements of national product.


suffers, however, from this very virtue because it is a rather narrow concept.
General economic progress and welfare may be difficult to measure but they are
of high importance to people.

Income distribution and use do affect the level

of living and the goodness of life and many people prefer at least some leisure
to more in the way of tangible goods.
There is no need to labor this point, but one other related comment
may be made even though it is obvious.

The composition of the national product

and the nature of the thrust which causes it to increase differ over time and
between countries or regions.

A national product geared to a free consumer

society which is affluent differs from one geared to the same type of society
but one which still has to meet mostly basic needs.

And both of these differ

from a national product geared to a war economy or to a society without much
freedom of choice.

Similarly the power of the thrusts to increase the product

both in total or in specific part differ.

It does not necessarily follow, how­

ever, that a high-powered thrust for a war economy or one in which freedom of
choice is limited is better than a lower-powered thrust in another type of
It is important to recognize two or three other points about the nature
of economic growth.

Here I talk in the narrow terms of national product and

again cite Denison who points out that it is essential to distinguish between


growth of "potential” or "capacity*
output to potential output.



to produce and changes in the ratio of actual

Capacity depends upon quantity and quality of labor

and capital, on knowledge and its application, and on resources and their use.
Changes in actual output depend largely on the relationship between aggregate
demand and potential output.

Changes in the national product between any two

dates are governed by both capacity and demand, but the causes of change, inter­
pretation of it and policy measures to be taken and their implications for future
growth all are different.
It is quite common to hear references to the rate of economic growth
in a given year.

These have relatively little meaning.

Year to year changes in

national product vary greatly, as much as plus or minus IS to 20 per cent, and
changes of 8 to 10 per cent are not uncommon at all.

These figures, incidentally,

are for changes in real product; that is, without any price change effects.


changes from year to year reflect mainly changes in actual output or the effect
of aggregate demand.

Long term growth rates, those applying to 25- or 50-year

periods, are much smaller in magnitude and changes in them are hard to achieve.
Actually changes in long term growth rates of the order of 1/10 of a percentage
point represent significant achievements.

For the United States Denison computes

that the annual average rate of growth from 1909 to 1929 was 2.82 per cent and
from 1929 to 1957 was 2.93 per cent.
It is highly important to recognize this point if one is to be realistic
about what can be done to achieve a higher long term growth rate.

Denison lists

31 actions which could be taken to achieve a higher average rate of growth in
the next two decades.

I should note that these actions represent what I would

call "reasonable" ones - that is, ’
reasonable*’in the sense that they might be

Hot one of them could increase the rate by more than 1/10 of a percentage

point and altogether they add up to less than 2 percentage points.
not all could be followed simultaneously.


It may be of interest to point out something about these actions.
Nine refer to measures concerning the size and quality of the labor force

1-1/2 additional years of education, reducing the death rate of people

under 65, reducing time lost by 3ickness, eliminating the waste due to crime,
eliminating waste from racial discrimination, allowing more immigration, etc.)
Taken altogether in the degree regarded as reasonably attainable, they would
increase the long term growth rate by less than 7/10 of a percentage point.
Eight other actions would lead to more efficient resource use by
eliminating restrictive and wasteful practices, trade barriers, fair trade laws,
etc., and speeding up more widespread application of knowledge we already possess.
Six actions would eliminate or reduce restrictive labor practices.

These fourteen

taken altogether would increase the long-term growth rate by just over 7/10 of
a percentage point.
Three other actions look hopefully toward eliminating seasonal unem­
ployment and reducing cyclical and structural unemployment significantly.
would add 1/4 of a percentage point to the growth rate.


Five actions would affect

capital and investment, increasing the volume of private investment by 25 per cent
and of public investment by much more.

These would add altogether less than

3/10 of a percentage point to the growth rate.
I have gone into some detail about this because it is of key importance
to understand that a doubling of growth rates or even of increasing our rate of
growth from 3 per cent to 4 per cent is very difficult to achieve.

It would be

quite a feat to increase the long term rate by 1/2 a percentage point.

As noted,

as Denison computes growth rates, it rose just 1/10 of a percentage point for the
1929 - 1957 period from the rate of the previous 30 years.
Another point that needs more general recognition is that economic
growth involves a variety of costs.

Among the articles referred to in the recent

NEW REPUBLIC is one by Simon Kiznets on "How to Judge Q»ality". Kuznets says




"As a general formula, the desirability of as high and sustained a growth rate
as is compatible with the costs that society is willing to bear is valid; but in
using it to judge economic problems and policies, distinctions must be kept in
mind between quantity and quality of growth, between its costs and returns, and
between the short and the long run.” He then wisely observes that a social
consensus must be sought on what is needed and desirable and the way to attain
such consensus, and more particularly how it can be made more intelligently
responsive to changing conditions, is a problem that should be of continuous
concern in a democracy.
Finally, in connection with Incurring costs of growth, Kuznets iden­
tifies the direct costs (such as additional input in investment and training),
somewhat less direct costs (such as adjustment of social institutions and pat­
terns of human life and work), and such indirect costs as obsolescence of
industries and areas and adjustments needed to soften these.

The way in which

such costs are met affects the rate and steadiness of the growth process.
I hope I have in this brief discussion conveyed to you that changes
in the long term growth rate are hard to achieve, that small changes are signifi­
cant and that growth incurs costs.

I hope I also have made clear that growth

should be taken to mean broad welfare and a better life, as well as more goods
and services, and that many people, once basic needs are met, may prefer to take
some of the fruits of growth in the form of more leisure rather than in the form
of more goods.
I turn now to consider what contribution monetary policy can and
should make to economic growth.
I begin with a quotation.

"Monetary policy has an important contribu­

tion 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 man­
agement as well as monetary measures.......The monetary contribution would be



to exert a stabilizing influence on demand and prices; the initiating force in
shifting output structure is most appropriately sought in other public agencies
and in the private economy.1—
The above quotation makes it obvious that the Federal Reserve System
regards economic growth as a primary objective of central banking.

It also

makes 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, and
that central banking's contribution is but one part of a growth program and not
an important initiating force in such a program.
H y purpose in citing this quotation and underlining certain phrases
is to put the role of monetary policy with respect to economic growth into proper

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.
It is significant, I believe, that among Denison"s list of 31 specific actions
to increase our growth rate, not one is a specific action in the field of central
banking, and only two or three have any connection with either money or fiscal
policy actions.
I might summarize my position by saying that bad monetary policy
probably will inhibit growth but good monetary policy will not guarantee growth.
Good monetary policy is important, perhaps vital, to growth, but the initiating
forces for growth are found in other areas.

1/ 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 Cossaission on Money and Credit.




Having, 1 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 store 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.


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.
The role of interest rates in the conceptual framework of central bank­
ing is complex.

Basically interest rates reflect the interplay of 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 of money and




credit and hence influences the level and pattern of interest rates.

Any policies

which would lead to interest rate changes, therefore, should consider their effect
on both saver and investor, both lender and borrower.
rates are desirable or attainable at all times.

Thus neither high nor low

In general, rates should be low

enough to stimulate investment when needed and high enough to stimulate saving
when needed, as well as flexible enough to serve the resource allocation function.
The point I am trying to make by this brief excursion into the role of
central banking in the growth process and money and interest rate theory is, of
course, that creation of excess money and any attempt to force uneconomic interest
rates will not contribute to economic growth and probably will inhibit it.


here I believe it is instructive to look at growth experience In other countries,
compare it with U. S. experience and relate it to monetary and fiscal policy.
First, I refer to another of the NEW REPUBLIC articles, this one by
Edwin Dale of the New York Times entitled "Has Europe's Success a Moral?'*
Mr. Dale points out an obvious but often overlooked fact that one can find almost
any kind of economic policy mix one can imagine in recent European experience,
and associate that mix with high or low growth rates.

In general, however, he

notes that Europe has had high profits, high taxes on lower income groups, high
government spending and relatively small budget deficits.

He calls attention to

the ’
catch-up to affluence" aspect of growth in Europe and says that to some
extent it seems that ’
prosperity breeds prosperity".
Second, I refer to some recent analyses I had occasion to do in con­
nection with a study of central banking and economic growth.

In these analyses

study was given to data on economic growth as measured by industrial output and
real national product, both total and per capita; to price performance, as
— osiured by the cost of living, and to monetary policy as shown by changes in the

/ and interest rates.
»ugh 1961.

The data covered nine countries over the period

The results, I believe, are instructive.

Four of these countries are Common Market members whose growth per­
formance in the 1950‘ has bean very impressive and which often are cited as
examples for the United States to study in its pursuit of higher growth rates.
Also included are two rapidly growing Asian countries:

Japan, the foremost in­

dustrialized 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 undergone a financial crisis.
This list of countries Is designed to be illustrative rather than
exhaustive, although I do not believe that large scale extension of the list
would make the points illustrated much, if any, more definitive.

The countries

included represent mostly the highly developed industrial states and their exper­
ience can be most easily and exactly compared with that of the United States.
I have included Taiwan as a special case, almost an extreme.

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.
Now: I shall have to burden you with a few figures. We consider first
merely the record of growth in these nine countries and begin with 1938 simply
because it was the last prewar year.

It probably would be even better to go

back to 1929, just before the depression, but unfortunately comparable data are
not available.
~ ^ t w a r boom.

Our second reference date is 1948 which we take as beginning the
Our third date, 1957, marks the end of a decade of expansion and
capital goods boom in the United States.

The last reference date,

-ourse, the latest year for which annual data are available.



In the 1938-48 period only the United States and Canada show appre­
ciable growth.

In the U. S. industrial production increased 121 per cent and

per capita real product 50 per cent.
83 per cent and 52 per cent.

The comparable figures for Canada were

These nations were the "Arsenals of Democracy''

and expanded sharply to serve the Western Allies as production centers.
also suffered none of w a r ’ physical devastation.


In sharp contrast to this

experience, Germany said Japan were savagely mauled by war and much of their
industrial base destroyed.

In 1948 West German industrial output was 47 per cent

below 1938; in Japan it was 63 per cent down.

Per capita product was off 16 per

cent in Germany from 1936 to 1949; in Japan it was down 44 per cent from 1938 to

England and Holland showed very small growth in the period; they were less

touched by physical destruction than France and Italy which just about stayed

In those four nations the strength of war demand was about offset by war's


In terms of industrial output 1948 was 15 per cent ahead of 1938 in

Holland, 11 per cent ahead in England, 7 per cent ahead in France and 2 per cent
ahead in Italy.

Net product figures tell about the same story.

In the 1948-57 period the war-torn nations worked, with massive United
States help, to rebuild capacity and 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 1930's.

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 complex economic maladies and special conditions; it lagged severely.
In Taiwan the Chinese Nationalists worked to create a new nation.
Let us go back to the figures and here deal only with per capita real
product since the industrial production figures tell the same story.

Per capita

product in Germany rose 79 per cent and in Japan 111 per cent in the decade.


In Taiwan the gain was 82 per cent.
per cent, respectively.
cent, respectively.

Italian and French growth was 58 and 52

In the Netherlands and England it was 34 and 25 per

Canada and the United States showed the smallest gains:

21 and 18 per cent, respectively.
To some degree the same forces continued to work in the last period,
1957 to date, but their strength was diminished.

Japan shows the highest growth

rate, followed by Italy, Germany, Taiwan, the Netherlands, France and England,
in that order.

In the United States and Canada per capita product grew only

Taking the period as a whole, however, 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.
the United Kingdom shows a tendency to lag.


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 think, however, that

the United States (and Canada, also) have done better than some of the apostles
of growth admit, and that the ea3y assumption that Western Europe and Japan
have broken through to a new era in growth rates needs to be demonstrated over
a longer period of time.
For the second part of the analysis we need consider only the postwar
period and here we deal with growth, prices, interest rates and money volume.
When we arrange data on national product, per capita product, cost of living,
interest rates and money volume by periods from 1948 to 1961, some other inter­
esting results emerge.

Here I shall not bother you with figures at all but

merely indicate the results.

Relatively high growth rates tend to be associated




with relatively low price increases, which in turn tend to be associated with
orthodox stabilization programs which were used flexibly and forcefully.


Germany and Italy began such programs in 1948; the Netherlands and Japan in 1951,
France not until 1959.

The United States, United Kingdom and Canada followed

such policies throughout the period.
Taiwan, alone among the nations studied, has not followed an effective
stabilization program, although recently some efforts have been devoted to that

Taiwan, as noted, is a special case, but, in another sense, is representa­

tive of many other underdeveloped nations.

Taiwan has pursued extremely expan­

sionary programs almost without regard for cost.

Under ordinary circumstances

these would have resulted in foreign exchange crises and very drastic stabiliza­
tion measures or bankruptcy.

In the case of Taiwan, United States aid largely

offset the foreign exchange drains, a situation not unknown in many other under­
developed countries, particularly 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.
The analysis demonstrates that relatively low price increases may be
associated with relatively high growth rates, and that the former have accom­
panied orthodox stabilization programs. This is marked for the 1948-60 period
as a whole and for the sub-periods.

Japan before 1952 and Taiwan throughout the

period are the only real exceptions.
The analysis also indicates that neither inflation of the money supply
nor an overlarge money supply produces low Interest rates.
Taiwan is particularly instructive.

Here the example of

A large part of the very high 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.
is interesting in this connection.

Recent Canadian experience also




Neither does the analysis 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 pro­
ductivity of capital.
In sum , the major lesson to be learned from the data 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.
would seem to be reasonably conclusive.

The record in this respect

Another lesson would seem to be that

interest rate policy should be shaped to fit the situation, stimulating invest­
ment and/or saving as particular conditions arise.
I should make reference here to a point which I have given only casual
attention in the preceding discussion.

One of the features which has character­

ized the high growth nations in the postwar period has been a high level of

In part, as Indicated, this has resulted from need to make up the

depression gap and war destruction.

In part it has mirrored the strength of

postwar demand for consumer goods.

It has not been inhibited by stabilization

programs and it apparently has been fostered by fiscal policies which promote
high profit levels.
A great deal of attention today is being given to the question of tax
reform and tax reduction in this country.

There seems to be general agreement

that our present tax structure constitutes a drag on the economy and that reduc­
tion in the relative tax take and reform of the structure would be helpful in
stimulating additional growth.

I have no disagreement with this general proposi­

tion but I have one caveat to enter.

The United States economy at present is

operating at the highest i«vel in history.

It has not done as well as many people,

I among them, hoped but it has done reasonably well.

I do not believe that the

economy needs the so-called “
3hot in the arm” tax treatment and therefore that

it would be well Co approach the tax problem with respect and caution.

We need

reform and we probably need rate -reduction for long term growth purposes.


my part I would press for the long-term gain rather than the short-term gain.
Now I want to make one final point about growth by referring to 3ome
economic development work being done right here in this region - the Upper Midwest.
In this work I think may be found one of the real secrets of growth.
This region has a lot of territory, not many people and, in some
respects, a lagging growth rate.

The latter results mainly from the failure of

new activity to provide enough jobs for people released from the great wealth
resources of the region, agriculture, timber and mining, as those activities
decline in relative importance.

As a consequence t h e r e t m e been a heavy rate

of out-migration and thus a below national average rate of population growth,
pockets of structural unemployment, high welfare and educational costs, and slow
growth in total income.
A lot of people have known that these things were happening and con­
siderable concern has bean expressed over them.

Recently a group of Upper Midwest

businessmen, under the leadership of J. Cameron Thomson, formed the Upper Midwest
Research and Development Council.

They raised some money among themselves and in

addition obtained a major grant from the Ford Foundation.
mating $1,500,000 were obtained.

Together, funds approxi­

Working with the University of Minnesota primarily,

but with other educational institutions in the region also, this sum has been
" invested" in a major research study designed to find out facts and make projections
of future trends, to distinguish the favorable and unfavorable trends and to dis­
cover alternatives which will strengthen the favorable trends and offset the
unfavorable ones.
Then research ends and action begins, through a multitude of committees
staffed with leaders in agriculture, industry, labor and public life, who


endeavor to bring the facts to the people of the region and secure popular support




for programs designed to increase economic activity in the region and thus

provide more jobs and more income.
I have not time to go into detail about this effort but I want to tell
you of just one virtually realized accomplishment - a Research Institute which

should stimulate further one of our growth industries * electronics, and provide
a catalyst for other growth industries by furnishing scientific and economic
research facilities for all kinds and sizes of business as well as doing contract
work for government-financed research projects.
Mow my moral should he clear.

The Upper Midwest Council believes in the

old maxim that HGod helps those who help themselves/4 This is dynamic capitalism
at work*

The great economist, Schumpeter, contended that growth came as a result:

of innovation and innovation required innovators,
which fire the engine*

I call them ^ spark plugs"'

Fortunately we have some spark, plugs in this area, the

engine will be fired; it then is up to us to keep it running and to accelerate

Sov let me draw together the threads I have been spinning and weave
them into a fabric.
First, growth Li hard to define, harder to increase, and there seems
to be no very precise formula to achieve and maintain a higher rate of growth,
Second, mone^

v >olicy can contribute to growth through its stabilizing

effects and through provision of a flow of money and credit*

Good monetary policy

probably is a requisite for growth, as is good fiscal policy*
Third, it

to be generally agreed that too high taxes tend to

inhibit growth and therefore tax reform and t^r reduction would be highly useful.
It is important that both fiscal and monetary policy stimulate investment rather
than retard it.
nally* we need more “
spark plugs1 * Ko matter how favorable the
fiscal and monetary climate can be made to be, the innovators have to he present
and they have to take action to

stitute for brains and anercrva

rev up the growth engine.

There is no good sub­