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Wisconsin Bankers Association, Milwaukee

June 25, 1958



I propose Co speak today about the objectives of economic policy.
This is a subject which is both timely and timeless.

Men have been concerned

about the objectives of economic policy throughout history and throughout
history there has been controversy about the relative importance of particular
objectives as well as controversy about the means employed to attain them.
Back in biblical days Joseph was concerned about the objectives of
economic policy.

One of the great problems of the day stemmed from the recur­

rent waves of heavy crops and crop failures.

To attain a reasonably stable

supply of grain over the crop cycle of feast and famine Joseph built warehouses
to store surpluses from the good years to meet the needs of the bad years.


efforts mitigated the distress occasioned by famine and thus advanced human
well being, the ultimate purpose of an economic system.
At the time of our Declaration of Independence the great Scotch
economist, Adam Smith, was concerned about the conditions needed for economic

He saw this as the major objective of economic policy saying that, as

production ’bears a greater or smaller proportion to the number of those who
are to consume it, the nation will be better or worse supplied with all the
necessaries and conveniences for which it has occasion".

He concluded that

the best way to attain growth was to avoid government or other interference in
economic affairs.

This is the famous doctrine of "laissez faire" or "let alone"

Another English economist, Thomas Maithus, was concerned with the possibility
that population growth would outrun growth in production of food.

Still another

David Ricardo, was concerned with inflation and depreciation of the currency.
And, more than one hundred years ago an English banker came to the conclusion
that full employment and general prosperity required the Government to expand
the currency.

The economic problems and the economic objectives that these men
studied and wrote about are still being studied and written about today.


a particular time and under particular circumstances, one or another economic
objective assumes greater or lesser importance.

It is perhaps an understate­

ment, for example, to say that the food shortage which bothered Maithus is not
currently a matter of concern in our country.

It is, however, a major problem

in many areas of the world.
For many years after the Civil War, the problem of falling prices
commanded a great deal of attention and prompted numerous proposals for the
modification of our monetary system, many of these aimed at currency expansion
so as to increase the money supply.

Bryan's well known "Cross of Gold" speech

in 1396 is perhaps the most famous exposition of the case for circulation

And the decade beginning with

World War I witnessed first a more

than doubling of the price level followed by a violent collapse of prices.
This experience was followed by considerable emphasis on the importance of
price stability, a condition which prevailed, together with fairly general
prosperity, in all but the early years of the twenties.
The thirties brought a new kind of economic problem which was destined
to shift the emphasis of economic,theory and to dominate public economic policies
of the future.

This was the problem of chronic unemployment.

To be sure,

unemployment had occurred before but it had not been of such great magnitude
nor of such long duration as it was in the Great Depression.

This was a

particularly serious malady since, unlike gyrations of the price level, it
necessarily brought our living standards - the volume of goods and services
we could consume - well below the capacity of the economic system.

The presence

of unused resources in an environment of great want was a paradox, the explana­
tion of which has occupied much of economic thought since the thirties.
At the close of World War II there was considerable fear that the
cutback in war production and the demobilization of the armed forces would

lead to widespread unemployment.

Hence the Employment Act of 1946 stated

that the Federal Government should use all practicable means to aid in achiev­
ing maximum employment, production and purchasing power,

The postwar inflation

again brought the objective of price stability into prominence, but without
reducing the importance of the objective of full employment.

And with a

rapidly increasing population it became evident that economic growth would
be needed to permit absorption of the labor force into full employment.
Today, I believe it is a fair statement to say that most people
would agree on three major objectives of economic policy;

sustained growth

in the economy so that living standards can rise; high employment so that
total production and consumption can be as large as the size of our labor
force permits; and stable prices to promote the best allocation of resources
and to eliminate the arbitrary redistribution of wealth which accompanies
violent changes in the price level.

Controversy, however, centers around the

question as to whether all three of these objectives are attainable at the
same time and, if they are not, which are the more important objectives.


question is of particular importance to bankers and especially to the Federal

It is often stated that the primary purpose of the Federal Reserve

is to influence the supply, cost and availability of money and credit with a
view to promoting high employment, stable prices and a rising standard of

This is, of course, merely a little different phrasing of the three

economic policy objectives noted above.
I turn now to consideration of the compatibility of the three ob­

Much has been written in recent years about the incompatibility of

the objectives of growth, high employment and price stability.

The point

most often made is that growth and high employment are compatible but that
price stability is not compatible with either.

It is asserted either that

rising prices are inescapable if there is to be growth and high employment,
or that rising prices are necessary to attain maximum growth and employment.




In either case, it is asserted, long-run inflation is inevitable if our output
potential is to be realized, although it might be hoped that prices would only
creep up. Important weight is given to the fact that we had great growth and
full employment during most of the postwar period even though we also had a
strong upward price movement.
To my mind a far more persuasive case can be made for the interdependence of the three objectives, a case based on both logic and history.
Without reasonably full use of resources, both human and material, we encounter
economic waste and therefore we attain something less than full-scale growth.
This is pure arithmetic.

Without reasonable price stability, we add to the

uncertainty of business decisions, to speculation, and to questions about the
desirability of saving.

All of these tend to bring less efficient use of

resources and sharp swings in the volume of investment and thus do not contri­
bute to balanced growth.

This is pure history.

And, to bring the argument

full circle, without reasonably steady economic growth we fail to attain the
best full-scale use of resources.

This is arithmetic again.

Neither the American economy, nor any other, is perfect and conse­
quently we do not attain all objectives of economic policy at all times.
This is no real reason to abandon any of them.

It is a fact that we had growth

with price inflation during the past decade, of course, but this proves no
more than that we had both growth and inflation at the same time.

It does not

prove that the two are inseparable, nor in my judgment that this situation is

I believe that an important conclusion to be drawn from the record

of the postwar period is that we would have had less misapplication of capital
investment and consequently less trouble at the present had we been able to
contain prices better.
One further point deserves mention in connection with the objectives.
One lesson which economic history would seem to teach us is that total growth
and gains in productivity tend to come in surges, rather than as a smooth


upward sweep.



A free economy cannot operate perpetually at full capacity.

Among various reasons for this are adjustments necessitated by changing
tastes of consumers, changing technology and mistakes of judgment which inci­
dentally are made not only by capitalists but by commissars too.

It is as

though the economy must digest, catch its breath, and rest from time to time.
The real problem is to see that the breath-catching or resting phase does not
get to be an uninterrupted habit.
Since the physical volume of goods and services produced depends
upon the levels of employment and productivity, which in turn depend upon
investment, technology and labor quality, it is not likely that aggregate
output will always grow at a steady pace.

Even with unemployment at low

levels, growth will be affected by changes in the number of people who wish
to work and by erratic success in finding better ways to produce.

The presence

of short plateaus or even occasional mild dips in the gross national product
is not inconsistent with the objective of economic growth, particularly in a
market economy where productive resources must constantly shift to accommodate
the changing preferences of buyers.

Economic policies designed to prevent

any departure, no matter how small, from persistent growth in the output
statistics may create more damage than good.
By the same token, price stability as a goal does not call for price

Changes in buyers' wants will bring about some price changes.


advances may be needed to accommodate significant changes in consumer tastes.
In contrast, increasing productivity may call for price declines because goods
can be produced more cheaply.

In particular, I wish to emphasize that it is

desirable that prices be individually flexible.

If our economic system is to

function adequately in allocating resources, prices of individual products
must be reasonably free to rise or fall depending on the market situation.
Neither should we expect that the general level of prices can or will be held

What it is imperative that we avoid is a persistent, cumulative change

such as has

occurred in the past fifteen years.




To summarize, unless we use our productive capacity, we waste it and
as a result we fail to obtain our potential standard of living.

Unless we

protect the value of our money, we promote inefficiency and contribute in an
important way to an off-again-oa-again rate of growth that also falls short
of our potential.
Now let me turn to a brief review of the postwar economic record.
We came out of World War II with a very high level of liquid assets in the hands
of individuals and a relatively low level of private debt.
ployment produced high current income.

Continued high em­

All of these factors made effective

a high level of current demand which was reinforced by the heavy volume of
demand deferred during the war years and the depression years before the war.
Goods could not be produced fast enough to satisfy this demand and we had a
strong price increase - mostly due to the effects of the war.
In 1949 and early 1950 we had a dip, mostly an inventory adjustment
which was brought on mainly by the previous scramble for goods at rising prices.
We took that in stride and were coming out of the mild downturn when the Korean
War added another major factor of economic demand, setting off another sharp
but short-lived price increase.

From 1951 through 1953 we had reasonable price

stability with rising employment and steady economic growth.
Cuts in defense spending plus some inventory adjustment brought
another, milder, dip in 1953-1954.

We came out of that with a bang as a result

of the big capital investment boom and the sharp increase in housing and auto­
mobile demand.

Again, however, prices stayed reasonably stable until mid-1956,

at which time they began to show substantial strength as demand began to press
upon capacity to produce.
In 1957 the economy moved mainly sidewise until autumn.
then turned downward and we entered the current recession.

Its course

And in connection

with this recession let x e make a few pertinent points which have considerable
bearing on the course of monetary policy during 1957.




The dollar value of the nation's output was growing at an increasing rate during the first half o£ 1957, partly because prices were rising;
this served to intensify the already serious inflationary psychology pervading
the land.

Although capital investment, the key factor in the boom, was lower

in I quarter 1957 than in I quarter 1956, in the next two quarters it increased
and was higher than a year earlier.

Industrial production dropped slightly

in the early part of 1957 but then moved up again and in September was higher
than in April.

Not until October did it turn down appreciably.

In October,

unemployment was lower than in January or February and had fallen steadily
throughout the summer and early fall.
ficant increase.

Not until November did it show a signi­

Prices, both wholesale and retail, showed strength throughout

the year, and, in fact, are still rising.
These are all physical or dollar value measures and might be said to
constitute part of the statistical record.

But on top of these, the rise in

stock prices was saying that investors foresaw further inflation and the rise
in interest rates testified to a tremendous demand for credit.
Current conditions and sentiment through early fall indicated a strong
inflationary movement backed up by a strong psychological belief that it might
well continue.

As a result, monetary policy was restrictive until about

mid-October, 1957.

It reached its high point in the discount rate advance in

After mid-October, as the current signs began to show that the break­

out from the sidewise movement was downward, monetary policy eased and became
easier as the downturn continued.

The discount rate has been reduced from

3 1/2 percent to 1 3/4 percent, in several steps.
been reduced in three steps.

Reserve requirements have

And Open Market policy has aimed at providing

additional reserves to the commercial banking system.
The net result of these credit easing actions has been a phenomenal
expansion in bank investments and in total bank credit, a very striking drop
in capital market, money market and loan interest rates, a very sharp gain

in bank and corporate liquidity, and the bringing forth of a considerable
volume of borrowing in the capital markets.

The total money supply has in­

creased and the increase has come at a time when, even in an upswing in activity,
it is normal to see a seasonal contraction.
Let me put in a few figures to illustrate these developments.


September and May, member bank borrowings at Reserve Banks declined from about
$1 billion to little more than $100 million.

Excess reserves have increased

and thus member banks have shifted from a net borrowed reserve position of
about $500 million to a free reserve position of about $500 million.
The shift in net reserve positions by more than $1 billion does not
tell the whole story.

The point to be noted is that in maintaining a free

reserve position while member banks are expanding their assets and deposits,
the System has been pursuing an active policy.

As banks have utilized the

reserves provided by System operations, additional reserves have been made
That the banks have been using the reserves made available by the
System is indicated by the fact that commercial bank loans and investments
increased more than

$3 billion in the seven months from the end of September

1957 to the end of April.

In the same period a year earlier, bank credit had

increased only $3 billion.
The growth in bank credit has been mainly in the form of United
States Government and other securities, and this has contributed significantly
to an easing in the money and capital markets.

Bank loans to businesses and

consumers have declined with economic activity.

On the other hand, mortgage

holdings of banks have increased somewhat and loans on securities, which pro­
vide important support to the capital markets, have also risen.
The substantial increase in commercial bank credit in the period
since last fall has been reflected on the deposit side primarily in a record
growth in time and savings deposits.

The active money supply, as represented




by demand deposits and currency, has increased about $1 1/2 billion or 1 percent
since September.

But time deposits at commercial banks have gone up almost

$5 billion or 9 percent as depositors have elected to transfer demand deposits
to time accounts. Whether in time or deaard forra, the growth of bank deposits
is serving to increase the liquidity of the economy and thus to provide the
financial basis for renewed economic growth.
The transition from restraint to ease in monetary policy has pro­
duced a marked reaction in financial markets.
fallen sharply.

Short tern interest rates have

For example, the rate on Treasury bills, an indicator of the

availability of funds in the money market, has declined from over 3 1/2 percent
in October to less than 3/4 percent recently.
Longer tern market yields have coiae down about 3/4 of a percentage
point from their peaks last autumn.

But there has been a heavy volume of

security flotations in these markets - avid this, of course, is the desired
objective of lowered interest rates.

State and local governments, which in

some cases postponed borrowings during the period of monetary restraint, have
borrowed 30 percent more in the capital market this year than in the first five
months of 1957.

Corporate borrowing has so far been only slightly below the

record volume of 1957.

Foreign borrowers and international institutions have

also borrowed more heavily in the United States capital market than last year.
Thus monetary policy has contributed to an increase in the availability
and a reduction in the cost of borrowed funds.

Commercial banks have reduced

their lending rates and, with their reserve positions eased, they are in a
condition to respond to increased loan demands.

Meanwhile, their security

purchases have provided a large flow of funds to the money and capital markets,
thereby facilitating private and governmental borrowing in those markets.
At some times, the proper course of public policy is more clearly
visible than at other times.

Currently, for example, most of the signs indicate

that economic activity has already declined by more than in the recessions of

1949 and 1954.

This fact lends powerful support to public policies aimed at

stimulating the demand for goods and services and thereby creating jobs.


does not argue, however, that we should forsake completely the other objectives
of economic policy, nor does it argue for unsound methods of attaining our
goal of higher employment.
Now, to conclude this talk I cone back again to the question of
economic objectives against a background of action and change.

At the moment

we want higher employment than we have and we want a resumption of growth.
Thus we emphasise policies that will help attain these conditions.

At the

moment, while prices are still rising, they reflect more seasonal movements
than real strength so we need not emphasise this goal as strongly as we did
in mid-1957. But it is still an objective co have price stability and in time
it may well be the paramount objective again.

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