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Opening Remarks
of
George W . Mitchell
M e m b e r , Board of Governors of the Federal Reserve System
on
Panel Discussion
at
A n n u a l Bankers' Forum
Georgetown University
j
October 2 , 1971

October 2, 1971
Georgetown Forum
My opening remarks will be brief, because X want
to make a contribution of time that you can use in the question
and answer period, since your questions and--I hope~-our answers,
can serve your particular interests in the subject area assigned
to this panel more precisely than we can in our remarks.
There is little I have to say about the balance of
payments.

But little as it is, it is probably more than you want

to hear after a week and more of extensive exposure to so many
skillful persuasions using balance of payments trends, analyses
and econometric projections.
The stability and performance problems of the domestic
economy can, of course, be significantly affected by our international trading, investment and assistance activities.

Even

though in the aggregate these activities involve a relatively
small share of the level or change of GNP, if we return to a
strong surplus position on trade and services — by expanding
our exports — the stimulative effect on our economy would be of
significant magnitude.
Of course, the process will take time.

Exchange

rate adjustments have their effects only with a lag.

Thus the

domestic repercussions of the increase in our balance on goods
and services should not be difficult to cope with.
I stress the need to correct our trade position by
expansion of our exports, rather than a reduction of imports,

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because we ought not to lose sight of the great importance
of imports to American consumers.

Good imported products,

reasonably priced, have enriched the choice of goods available
to us and made our income go further.
regarded as a boon, not a burden.

Such imports should be

At the same time, it has to

be recognized that import competition can create problems of
adjustment in the employment of our capital and labor.

These

are similar to the problems that would be created, even in a
closed economy, by technological advance.

The more serious of

these problems should be dealt w i t h , not by penalizing the
American consumer and raising the price level of the American
economy, but by domestic relief measures.
Emphasis on the advantages of imports suggests that
there is a tradeoff between the interests of American consumers
and those of U.S. foreign investors with respect to the structure
of the U.S. balance of payments.

If the United States were to

aim for a large and unrestrained outflow of capital to developed
countries, this would require an even larger trade surplus than
is now being talked about or more constraints on imports.

The

achievement of such a surplus would one way or another require
that imports become more expensive.
My own preference would be for a smaller capital
out flow--even if it required an lET-type apparatus over the
long run--and less costly imports.

-3-

Let me turn now to some domestic considerations.
Those developments in the U.S. economy which ordinarily foreshadow business trends for the future have become considerably
more difficult to interpret in light of the "freeze" and the
uncertainties of financial markets

and in the minds of

businessmen, labor and consumers with respect to content and
acceptance of the "Phase II" program.

How the public will

react to "Phase II" is an uncertainty that may persist for
sometime, even after its conditions are known.

While public

acceptance of the "freeze" has been excellent, the task of
dispelling expectation of a continuance or early resumption
of inflation will take time and will require an extraordinary
resolution on the part of all in the Government and in the
public.

While the price stability problem is a difficult one

it is not impossible and we have certainly succeeded in one
important aspect of dealing with it--namely, the elimination
of excess demands in the economy.
In my opinion, we have passed the point of no return
on our present policy course.

That is to say, we are committed

to surmounting whatever difficulties remain in the way of
achieving reasonable stability,and our growth and employment
goals are predicated on success in doing so.

I would put

the odds high that a reasonable stability will be achieved
next year.

In the meantime, we seem to be moving slowly toward
higher rates of real growth.
We appear to have achieved important adjustments in
defense and space outlays, inventory levels, and manufacturing
conditions.

In some degree these adjustments provide a floor

at which trends in output will be sustained or increased in
the future.

And any rise in utilization of plant is almost

certain to have a favorable impact on workers' real earnings,
profits and investor sentiment.
Some observers, mainly in the business community,
see concrete evidence of these tendencies in their own operations
and their confidence in recovery under prevailing conditions is
rising.

Number watchers, on the other h a n d , are more divided

in their readings.

Most shade their odds 011 the timing and

the vigor of the upturn when pressed to be specific 011 quarterby-quarter developments in the coming year.
I presume that on an occasion of this kind anyone from
the Federal Reserve would be expected to say something about
the money supply.

To live up to your expectations, let m e

raise some of the questions I am frequently asked.
Which of the several definitions of money is most
useful?

Do changes in growth rates of the money supply, however

defined, consistently reflect Federal Reserve action or intent?
Do they portend changes in economic activity 3, 6, 9, or 12 months
hence?

These and related questions indicate to me that the

• -5\

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financial community these days is deeply puzzled by money supply
theories.

Or it might be said anyone in that community who pays

attention to money supply development has to become an expert,
a disciple or a victim.
The money supply is not really something new in our
financial environment but is something newly perceived by
many people and hence has a faddish appeal as well as a real
significance.

In the early part of the year the money supply

rose at virtually unprecedented rates: February, 14.0 per cent;
M a r c h , 11.6 per cent; April 9.3 per cent, May 15.2 per cent;
June 9.1 per cent and July 10.1 per cent.
were these rates of change?
inflationary virus?

How significant

Did they portend a renewed

Against this background, how significant

was a money supply growth of 3.2 per cent in August and the
prospect of little or no change in the money stock in September?
To deal with these questions initially, let me note that
near monies in today's economy are the major source of the liquidity
for businesses and households.

The demand for M ^ is the demand for

transactions medium and is linked to changes in the payments
mechanism.

Thus, as currency and demand deposits have been used

more efficiently the demand for them has declined.

If the improve-

ments in the functioning of the payments mechanism that have been
taking place were to taper off, money demand would be pushed up
by the economy's growth.

Or if there were a sharp spurt in money

efficiency accompanying, say, a more widespread use of Federal
funds transfer, money demand could fall off sharply.

It is

instructive to look back on the effect of changes in money
efficiency on the demand for money.

€

-6-

The only kind of money supply that has increased
in relative terms over the past fifteen years is coin.

Coin-

in-use was .73 per cent of the annual rate of personal
consumption expenditures fifteen years ago; today, because
of the development of metering and vending machines, the
demand for coins has increased nearly 40 per cent.

Currency-

in-use, both large and small denominations, on the other h a n d ,
has been declining in importance; its role has shrunk by nearly
30 per cent since 1955.

Currency is being displaced by credit

cards and checks as individual transactions are accumulated in
charge accounts and subsequently settled by check.

There is

no indication this trend is abating; on the contrary, the
demand for currency apparently will be shrinking for some time
to come.
The major element in the money s u p p l y — d e m a n d
has also declined substantially.

deposits-

Using GNP as a proxy for money

demand, deposits declined 40 per cent between 1955 and 1970.
The reason in this case is, that even though demand deposits
are replacing currency and thus picking up some of that work
load, they are also being used much more efficiently.

Technology,

a changed attitude of corporate treasurers, and the promotional

efforts of the banking system have brought about a dramatic
change in the economy's demand for deposit money.
The counterpart of this economization of demand deposit
balances also appears in the steady growth in turnover or use of
those balances.

Since 1964--earlier data are not entirely

comparable--tot.al transactions by check have almost doubled-- to
about $13,000 billion per year.

In this period the demand

deposit component of the money supply increased by less than
30 per cent.

In the major financial centers turnover rates

virtually doubled in those years and in other metropolitan
areas, the increase was about 40 per cent.
Obviously, these changes in money use and technology
have a very important bearing on judgments on an appropriate
rate of monetary growth.

A four-to-five per cent growth rate

for money is absurdly low with the GNP proxy rising at 8-10 per
cent unless money "productivity" is increasing sufficiently to
make up the difference.

Developments in transaction technology

and banking practice have far more to do with longer term appropriate
growth rates in the narrowly defined money supply than remote, in
time or place, experience or Delphian pronouncements.
A partial explanation of the recent rapid rates of
monetary growth may be found in technical statistical
adjustments and shortcomings.

Seasonal adjustments for this

series are difficult because of the instability in timing and
duration of certain seasonal events.

The data themselves are

-8-

a by-product of reserve accounting procedures and thus are
exposed to several deficiencies which would not ordinarily
exist in a set of numbers collected for statistical purposes
only.
International and intermediary flows have been of
unprecedented magnitude in 1971; but from available data they
appear to have had significant effects on the demand for
money mainly outside of financial centers.
The annual rate of money transactions for the country
as a whole changed dramatically in three m o n t h s — F e b r u a r y , May
and August — but most of the change took place in New York.
There were increases of $800 and $600 billions in February and
August and a decrease of over $500 billion in May.

Most of

the rise in New York transactions for February and August and
the decline in May was accommodated by turnover changes.

In

February and August the annual turnover rate was close to a
record 200 times per year.
Outside of New York and other financial centers
transactions rose on an annual rate basis by over $100 billion
in February, M a r c h , April and June.

These increases were

accommodated in significant measure by increases in deposits
and, thus, we can identify in some degree the major source
of deposit rise.
It may be sometime before the financial developments of the year can be fully traced and their impact on

-9-

the average daily need for demand deposits appraised.

But

the very magnitude of financial flows suggests transaction
deposit levels needed to accommodate them have been substantial
and goes far to explain the very large money supply growth in
the early part of the year.
The net of my comment on the money supply is in two
parts.

First, in light of technological changes in the payments

system there is no known long-term rate for M L which can serve
as a reliable guide.

Second, the recent high rates of growth

in M i probably can be explained by the unprecedented

financial

flows in 1971 and imperfections in the statistical measures of

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