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(Kiaaesote Bankers Association, St. Peal, Juno 11, 1957) P ° & 1 TOffAIm jgB M & l Tha titla of my talk today should giro a* wide onough latitude to talk about almost anything. Zt was not choaan for that purpoas, boMvtr, but was •alacted dallbarataly as tha background theas for a talk daallag broadly with thraa topics: "tight aoney", "economic resources", aad "crooping Inflation". . Lot m • v tall you first what I mean by tha background thame of "Today and Tomorrow". In tha Unitad Statas today uo find tha economy operating at a vary high laval. la teras of laduotrial plaat and labor forco it is operating at close to capacity, laployaaat la at record levels, unemployment is very low, personal incosM le at aa all tiae high, the gross national product, the doller value of all goods and services produced in the ecoaoay. Is running at an annual rate of $430 billion. $412 billion. For the full yoar, 1934, tha national product totalled By eny reasonable standard of Measurement the Aaerlcan economy is operating on a full-employment basis; since tha beginning of World War II it has shown great strength end resiliency, aad daeplte a mild dip or two, it has grown steadily. This econoery of ours caa continue to grow and can continue to show — great strength and resiliency aa tha yaaro advance. Long range forecasts - for 1963 and 1973 • indicate a growing population working with rising productivity to produce more goods and services aad earn more Income. of $300 billion is wall within sight now. A gross national product Projections for 1973 lndlcete that a ■ national product of aore than $700 billion could be attainable et that time, fatcfc "piese figures are in terms of current prices; they do not reflect any^prlce inflation. .- V •/ V This Central northwest la a greet geographic area, rich in natural resourcee - agricultural, alnerel and forest - with s strong people to work thoee resources. In the IVin Cities there has been created a virile Industrial, eoaaercial and financial complex to servo the area and to add to its basic strength. For the - 2 - sraa aa a whola, population is growth can and will coma. but there la a lot of room to grow, and Tha Central Northwaat ahould ahara In tha growth foracaat for tha country and. If wa work hard, can grow a llttlo faster. Tomorrow, in both nation and araa, can be even brighter than Today. la background theme. Such low lot me ralata that to tha thraa toplca: ’’tight money”, "economic reaources", and "creeping Inflation”. Tha link between tha background thema and tha thraa topics la capital lnvaatmant and aavlng. To gat tomorrow’s level of output, with more people working with hlghor productivity to produca more good* and aarvlcaa and earn mora Income, will raqulra aubatantlal growth In our capital lnveatment - In Induatry, In agrlcultura, In mining, In forestry, In tranaportatlon, In powar, and ao on. To permit tha capital lnvestattnt naodad will require continued uaa and perhapa growth In tha rata of ssvlngs. To Induce the neceeaary level of saving under our ay*ten of enterprise requires a atable dollar. The primary purpoae of the Federal Keaerve Syateai la to regulate the aupply, coat and availability of beak reserves, thereby Influencing the voluraa, coat and availability of money and credit in the economy. The Syatem attampta to carry out this primary purpoae so as to produce e reasomable balance between the amount of money and credit and the amount of gooda and aervicea la the economy which will lead to a high level of employmsnt, e rising standard of living, and maintain a atsble dollar. "Tight money” is the reflection of eredit demand outrunning available credit aupplv. It occurs when eredit supply is reduced below credit demand or when credit supply does not Increase ss much aa credit demand. The letter situation is typical of a boom and It is just what has occurred the past couple of yeara. The aupply of credit has Increased but the lncreese has not been lerge enough to meet the Increase In demend. - 3 - To put tha who la ertilt pictura la parapactiva, It la wall to ramaabar that tha total voluna of public and privata dabt la thla country la cloa© to $700 billion, with bank cradIt outstanding about $170 billion. For tha past faw yaara annual ineraaaaa la dabt hava avaratad $30 billions In 1953 tha riaa was $50 billion. Mott of thla dabt lncraass was financad by savings, bat fro® $4 to $10 billion aaeh yaar was la tha fora of bank cradlt. axpanalon tha oonay supply la aot lncraaaad; growth, tha mooay awpply grows also. Whan savings fInanea dabt whan bank cradlt fInaneaa dabt Onlaas an a^uivalant amount af goods and aarvlcas rasults, tha aat affact af an lneraaaa In tha aooay supply Is ltkaly to ba hlghar prlcas. Lat us axaalna thla situation a Uttla aora thoroughly by eonsldarlng tha natura and supply af acoaoaic raaoureaa. Thaaa raaourcas consist of raw isacarlals, of procassing and distributing systaaa, and of tha labor forca, tha paopla who produca goods and aarvleaa. thaaa rasourcas Is llaltad. At any glvwa point of tlaa tha supply of As a aattar of fact tha vary natura of acoaoalc raaourcas Is that tbay ara ralatlvaly scarca. Aa Important part of tha flald of aconoalca Involvas study of tha afflclaat uaa af scarca raaoureaa so ss to "aconoalsa" In thalr uaa. Vow tha supply of aconoailc raaourcas can ba lncraaaad, of eouraa, but — tha procass takas sosw timm. Population grears and aora paopla caa ba found for tha labor forca, but thla Involvas tlaa. axlstlng capacity, but thla Involvas tlas. thoroughly, but thla lavolvas tlaa. Plant and aqulpaaut can ba addad to Raw aatarlala can ba axploltad aora In othar words, whan an aconoay Is oparatlng at closa to capacity, tha mara fact that paopla want aora gooda and aarvlcas will aot produca thoaa additional goods and sarvlcas ovamlght. can ba aat only whan capacity ta produca la aspandad. Tha additional daaand Parhapa tha aost dramatic illustration of this kind of situation arisas during wartlaa whan tha daaaads of ths civilian aconoay ara cut back by rationing so that military daaands caa ba aat. - 4 - When the economy is operating at sub.taatlally I m i than capacity, an lacreaee In damand, arialag althar from lncama or from cradIt, may call mora axisting capacity late active uaa without aay appraclabla affaet oa prlcaa. But when tha economy is oparatlag at eloaa to capacity, aa lncraaaa la demand generated not fro* incoma or aavlag bat from cradlt merely laeraaaaa tha aapply of aonay and doa. not quickly aad la equivalent else lncraaaa tha supply of gooda and .ervlca*. T*a. morn aonay chaaaa about tha saae -apply of gooda aad aarvlcaa aad tha major affact la rising prlcaa. Fundamentally, ever alaea World Var II eloaad, tha ^ d ^ a l ^ ^ U a haaa facad with a altaatloa uhara damand waa outrunning capacity, ha. thara h a v baan brlaf parloda whan tha •ccmmy waa la a dowatraad, but tha major trand has baan upward and Inflationary. Thla ha. baan particularly trua of tha pa.t two yaar. and la tha fundamental causa of tha so-called "tight money" condition. Money 1. tight because there le greater demand for It aad tha grouth In tha supply ha. been held down. T*ere .earn, to be opinion la tht. country which hold, that the “tight money' problem would be eolved If Federal fteserve policy would ba cradlt available we could h a v moru housing, mora made, more schools, acre plant *nd s'ulpmeet. more eutoe, aad more everything. The hard fact la that lncreaslag the .uppiy ef cradltftwould make nothin, bat aonay more available. Tha largar •apply of moaey would aot bring out more resources la tha short run. but It would brlag higher prieoa. Aad it would not even care the "tight money" situation. For with higher prices even more money would be needed to command the goods and services aad to finance transactions. Supply would still ba relatively smaller than demand. The only way to cure the "tight money" altuatlon is to bring savings and Investment clossr Into bslaacs either by lacraaaing aavlag., or by cuttlag back investment, or by a continuation of both. Zt is l O M t l a w U M r t * d that failure to pomit ertdlt tt expand to as to satisfy si! daasad reeulte la sons poopIs being hurt sad benefits only lenders of aoney through highor Interest rstss. It sasas to as tbt^t this is s aattsr of words rachor thsa of foots. Zt Is perfectly trao thst s restrictive erodit policy loods Isadora to screaa tholr crsdits aors car*folly and rosolts la soas rejections of loan sppllestlsas, sad that ssaewhat stlffsr tsras koop saas borrowsrs out of tho market. This Is exactly whst s rostrlctivo crodlt policy is suppossd to do; it it did not da this, it woold aat ho rostrlctivo nor would it ho affsctlve. TJodor oar systsa of fros sotorprlss wo slloosts scsres rssowrcoo through tho prlco systsa. This procadars is •opposed to and, in fact, it doos toad to lot tho aoro sfflclsat ussrs of rosoarcas obtain thoa, sad thoroby loods to a aaxlaua level of totsl output» Bosourcos aay bo allocated la othor woys, bat thsy havs to bs allocated in saas wsy. Thors is no systsa of rosourco allocation that will permit allocation of rosoarces thst do not exist. On tho rocord, owr systsa asaea to lsad to tho host general resource use; at Isast it Issds to ths hlghsst standard of living in tho world. Insofar as this crodlt screening process Issds to soas prospective borrowers rscelvlng loss than they wish sad thoroby keeps thsa froa bidding up tho prlcoo of scsres resowrcee, it would seen to help rether than hurt the economy. Unless tho process loods to uaeaploy— at generally it eon scarcsly be said to be harmful. It asy, indeed it should, losd to soet deaead being deferred until a later tine. Because of tho belief that a restrict Ire aoney policy hurts soas people there Is always s certain sasaat of sgltstloa for speelel protection or shsltar for particular groups of bovrawers. Quits often this takas ths fora of ststutory aexlanas on rstss to bo charged borrowers. Schools ere Important; therefore credit should be suppilsd school districtsSasll businsss is Important, agriculture Is - 6 Important, housing It Important; therefore credit should flow to that* field* at low ratee. Mo d m can d l i a g m with tha faallag that crad It ehould flow to theee uaas whan worthy borrowers la thaaa fla Ida seek cradlt at tha merket. Ae a mattar of fact, a considerable amount of credit always has and always will flow to than. And in m a y easss this cradlt flow* to them under tha hroad protactIre cover of Goveraaeat policy aimed at haIplat Cham. Two observations saan pertinent at this palat. First, whila It may ba public policy to shaltar soma borrowara, it should ha recognised that la a damocracy with a fraa market all borrowara cannot ha shalterad. And to aheltar sane means that they are given preferential call on reeeurcee sad others have to scramble harder to control tham. Second, many of these borrowers might get aloag much better If the type of shaltar provided ware not In the fora of legal aoKlwnss Interest rataa which they can pay. Where thaaa borrowers have been permitted to pay going market rataa far funds they have fowad ae particular ahortagae of credit. And that leads ae to a ceaaaat about latereet rataa in general. 1 have said that Federal Keeerve policy has aimed at heldlng down credit expaaalon. This action, la tha faee of strong damend, has raanltad la higher interest rates. The volume of money and tha laval of interest ratea both cannot be stshlllsed at the asms time under our system af fraa enterprise. If the supply of money is maintained la balance with economic reeowrces, than tha level and structure of Interest rates "'mutt vary la keeping with tha streagth of cradlt demead. Ia fact, appropriate rates are thoee which help bring tha demand for cradlt and the supply of savings Into equilibrium. If theee higher retes eccoapllsh this, they benefit the economy generally. The other dey, in a talk made hern la ft. Peal, Governor Balderaton of the Federel Reserve Board cited a wary significant ceaa with respact to Stste and local govarmseat expandlturee. First ha noted that despite higher Interest retes, the coat of borrowing money for atate and local governments - 7 - >T amounts co only 2 per cent of‘total txp*Ddlt«r«i. Then ho gave two alternative* for capital Investment In the year 1965, assuming the sane physical volume In each case. In case A, however. Interest rates held constant at about 3 1/2 per cent, but prices rose 2 1/2 per ceat a year. rates rose to 5 per ceat. In ease 1, prices held constant but interact The total cost with stable prices but higher rate* would be roughly 10 per ceat smaller than it would be with rising prices but stable Interest rate*. Mow let a* turn to the last topic I wish to discuss, "creeping inflation". There has been e lot of tslk recently that s price rise of 3 per ceat a year is not too high a price to pay for easing the "tight money' sltustlon, and that it actually would be good for ua to have such s "mild" price rise because ic would stimulate business. Thera are others who argue thet such a price rise will cone anyway, so we slight as well face the facts. It will come, thla latter group say*, because rising costs will force it. I an in disagreement with both of the schools of thought. I must admit that despits a restrictive monetary policy in 1956 prices rose about 3 pet cent and the econoe^ did not collapse. I should point out, however, that this development meant that half the increase in the national product from 1955 to 1956 reflected higher prices rether than real output. And I should point out further that prices had held very stesdy for the proceeding five years, so that the 3 per cent in 1956 did not come on top of 15 per cent for the past half decade. But e price rise of 3 per cent per year compounded would mean that prices would double every 25 yaars, and I submit that this would be a very high pries Indeed. To put this in another, perheps more slgnlficsnt way. It would m e m that the velue of our money would be cut In half every 25 years. It would mean that there would be little or no incentive to save end consequently it would mean that the chances of balancing saving and Investment would become quite resets. Who buys a 15-year bond if the money he gets bsck st maturity la worth juse half a* much as It was when the bond wae bought? In the second piece, I would have grave doubt* that "■lid" price rises could ba kapt "alld" forever. to spend would grow. Vlcb tha Incentive to ssvs diminished, the incentive And with easy credit, rising prlcaa and stronger rsasona to spend, tha "creeping 1aflatIon" of a 3 por ceat rlaa par year vary likely would become soon a walking and than a running inflation. At leest thia baa baan tha racord of history. Neither do I think such an annual prlea rlaa inevitable. Sound fiscal and monetary policy couplod with public support and acceptance of such policy should keep the value of tbs dollar relatively stsbls. It will tsks work and courageous action but It can be done if there continues to be public support. And now I c a m full circle end back to ay original theme of Today and Tomorrow, If we can keep our dollar stable we can better eecure the saving to finance the investment which will make possible s very bright tomorrow. doing reasonably well today. rea 1. Ve are I hope that tbs promlss of tomorrow can be made
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