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OUR ECONOMY D e l i v e r e d by H a r r y A. Shuford, P r e s i d e n t F e d e r a l R e s e r v e Bank of St. Louis at the F o u r t h Annual M a r k e t i n g T h e o r y in Action Conference C h a s e - P a r k P l a z a , St. L o u i s , M i s s o u r i F r i d a y , F e b r u a r y 19, 1965 OUR ECONOMY Introduction I know - - for I have b e e n told - - that I a m appearing b e f o r e a s o p h i s t i c a t e d audience of u n i v e r s i t y and g r a d u a t e students with a m i x t u r e of businessmen. This p r e c l u d e s the opportunity for m e to d i s c u s s the o r g a n i z a t i o n and a d m i n i s t r a t i o n of the F e d e r a l R e s e r v e System, so I will r e f e r to it only briefly in o r d e r to set the stage. The F e d e r a l R e s e r v e S y s t e m is a typically A m e r i c a n institution. In i t s organization it is a unique blending of the public and p r i v a t e s e c t o r s , and, like a d e m o c r a t i c institution, in the p e r f o r m a n c e of its r e s p o n s i b i l i t i e s t h e r e a r e b u i l t - i n c h e c k s and b a l a n c e s . The p r i m a r y p u r p o s e of the F e d e r a l R e s e r v e i s to c o n t r i b u t e to s u s t a i n a b l e growth in our economy, with high levels of e m p l o y m e n t and r e a s o n a b l e p r i c e stability, and with a workable b a l a n c e in i n t e r n a t i o n a l payments. This the F e d e r a l R e s e r v e a t t e m p t s to do by i n c r e a s i n g or d e c r e a s i n g the funds available for spending. To a c t with d i s c r e t i o n - that i s , to act to influence things - r e q u i r e s (1) that we have an informed judgment as to the c u r r e n t s t a t e of our econony, (2) that we have an informed j u d g m e n t as to how our economy ought to b e , and (3) that we have a p r e t t y well thought-out idea of how to get from w h e r e we a r e to w h e r e we want to be. T h i s involves t h e o r y in action. So what I have to say in the next 20 m i n u t e s or so is s i m i l a r to what we in the F e d e r a l R e s e r v e S y s t e m a r e doing e v e r y day. The i m p r e s s i o n s and j u d g m e n t s which I shall r e l a t e a r e not the r e s u l t of a m a s s i v e study pointed at today, F e b r u a r y 19. R a t h e r , today, F e b r u a r y 19, I p r o p o s e simply to i n t e r r u p t a - 2 continually evolving p r o c e s s and r e p o r t to you the p r e s e n t s t a t e of m y thinking about our economy. 1964 Was a Successful Y e a r My f i r s t point is that 196 w a s a t r e m e n d o u s l y successful y e a r : economic activity was at a high level, and h a s continued to r i s e into 1965; 1964 w a s the fourth y e a r of continuous expansion; it was the 19th y e a r of g e n e r a l p o s t w a r prosperity. It isnrw n e c e s s a r y to r e g a l e you with a h o s t of s t a t i s t i c s about l a s t y e a r to p r o v e the point. However, I would like to m e n t i o n s e v e r a l f a c t o r s which e p i t o m i z e the p e r f o r m a n c e of the economy. T o t a l e x p e n d i t u r e s , or g r o s s national p r o d u c t , r o s e at a 5. 9 p e r cent r a t e from late 1963 to late 1964, about the s a m e as the r a t e of i n c r e a s e since 1956. I n d u s t r i a l production, which a c c o u n t s for about o n e - t h i r d of the nation 1 z p r o d u c t i o n activity, i n c r e a s e d 8 p e r cent in 1964 c o m p a r e d with a 4 p e r cent a v e r a g e annual r a t e of i n c r e a s e since 1956.. A healthy a s p e c t of our p r o d u c t i o n p i c t u r e in 1964 was that r e l a t i v e l y little went into i n v e n t o r i e s . They a r e now about one and one-half t i m e s a month*s s a l e s ; this i s low c o m p a r e d with the situation we u s u a l l y have at such an advanced stage of b u s i n e s s expansion. This situation, w h e r e i n we do not h a v e l a r g e i n v e n t o r i e s hanging over th.e m a r k e t , is one of the f a c t o r s which a u g u r s well for the i m m e d i a t e economic future. Along with the i n c r e a s e of p r o d u c t i o n , we have had a s u b s t a n t i a l i n c r e a s e of employment. Total e m p l o y m e n t in l a t e 196-1- was 2. 4 p e r cent h i g h e r than a y e a r e a r l i e r . This showed s t r e n g t h in the d e m a n d for labor, since the n u m b e r of p e r s o n s aged 20-6'- is e s t i m a t e d to have i n c r e a s e d only about half that rapidly (1. 1 p e r cent). I a m i n c r e a s i n g l y u n c e r t a i n as to what the unemployment figures mean. But, for whatever it is worth, the m u c h - a d v e r t i s e d unemployment r a t e , not adjusted for s e a s o n a l influences, was 4. 7 p e r c e n t at the end of 1964 c o m p a r e d with 5. 3 p e r cent a y e a r e a r l i e r . The unemployment r a t e for those seeking full-time work was 3. 7 p e r cent, and for those seeking full-time w o r k who have been unemployed five weeks or m o r e the r a t e was 2. 0 p e r cent. At the s a m e t i m e that we have had this excellent production and e m p l o y m e n t e x p e r i e n c e , p r i c e t r e n d s have not changed. This would s e e m to indicate that total d e m a n d h a s not b e e n e x c e s s i v e ; i. e. , that fiscal and m o n e t a r y policy have not b e e n too s t i m u l a t i v e . The g e n e r a l wholesale p r i c e index h a s b e e n about unchanged since 1958* Other p r i c e indexes have moved up, but t h e r e is s o m e question w h e t h e r they take adequate account of quality i m p r o v e m e n t s . C a u s e s of Economic S u c c e s s e s of 1964 L e t m e now t u r n b r i e f l y to s o m e of the c a u s e s of the economic s u c c e s s e s of 1964. H e r e is w h e r e " t h e o r y in action 1 ' e n t e r s the p i c t u r e . But f i r s t , a slight d i g r e s s i o n . I have often h e a r d the idea that t h e r e i s , on the one hand, such a thing a s n theory M and, on the other hand, such a thing as "practice. M In my e x p e r i e n c e with the formulation of m o n e t a r y policy I have b e e n g r e a t l y i m p r e s s e d by the fact that " t h e o r y " and " p r a c t i c e " (or "action") a r e not u n r e l a t e d - indeed* ^hey a r e i n s e p a r a b l e . In o r d e r to identify the " c a u s e s " of the economic s u c c e s s e s of 1964 it is n e c e s s a r y to appeal to t h e o r y in action. A l s o , in o r d e r to m a k e j u d g m e n t s about what is likely to happen in the n e a r - t e r m future, it is n e c e s s a r y to d r a w upon our ideas about t h e o r y . This i s e s p e c i a l l y the c a s e in p o l i c y - f o r m u l a t i o n . In the context of policy, it is n e c e s s a r y to r e l a t e (in theory) the specific a c t i o n s that the F e d e r a l R e s e r v e S y s t e m can take - r e s e r v e r e q u i r e m e n t changes, d i s c o u n t r a t e c h a n g e s , and open m a r k e t o p e r a t i o n s - in r e l a t i o n to the m y r i a d s of happenings in the economy - both d o m e s t i c and i n t e r n a t i o n a l . An evaluation of the c a u s e s of s u c c e s s e s in 1964 m u s t begin with the recognition of the r o l e of p r i v a t e e n t e r p r i s e - the willingness of b u s i n e s s and i n d u s t r y to invest, to build, to expand and p r o d u c e . for profit motive. T h e r e is no s u b s t i t u t e An evaluation of the c a u s e s of s u c c e s s in our economy m u s t a l s o give due recognition to those who anticipate wants and needs and who s t i m u l a t e d e s i r e s to p u r c h a s e . M a r k e t i n g people r e p r e s e n t a key link b e t w e e n the r a w act of p r o d u c t i o n and final sale to the c o n s u m e r ; e n t e r p r i s i n g people, who a r e b a s i c a l l y i n t e r e s t e d in fulfilling t h e i r own p r i v a t e d e s t i n i e s , m a k e the underlying d e c i s i o n s which mold the c h a r a c t e r of the economy. To a l a r g e extent, the job of m o n e t a r y policy is simply that of providing a stable m o n e t a r y e n v i r o n m e n t within which the p r i v a t e economy can flourish. In 1964 the money supply i n c r e a s e d about 4 p e r cent, continuing the r a t e of the y e a r b e f o r e . as a whole. This is about twice as fast a s for the p a s t 10 y e a r s - 5 C o n s i s t e n t l y with the i n c r e a s e of money supply, i n t e r e s t r a t e s changed little during the y e a r . Usually during economic expansion i n t e r e s t r a t e s r i s e . The F e d e r a l R e s e r v e , by facilitating the i n c r e a s e of bank r e s e r v e s , bank c r e d i t , and money supply, helped to keep i n t e r e s t r a t e s down and to k e e p the economy expanding. Finally, and in t e r m s of g o v e r n m e n t p o l i c i e s p e r h a p s the m o s t i m p o r t a n t , we m u s t c o n s i d e r the tax cut. If we had not had the tax cut it i s unlikely that we could now be enjoying the d e g r e e of p r o s p e r i t y we a r e c u r r e n t l y having. In short, judged by employment, production, growth, and p r i c e l e v e l d e v e l o p m e n t s l a s t y e a r , policy a c t i o n s a p p e a r to have been a p p r o p r i a t e . The F e d e r a l budget situation which e m e r g e d from the t a x cut, the r a t e of i n c r e a s e of m o n e y which p r e v a i l e d before and during 1964 had s t i m u l a t i v e effects on the economy but do not a p p e a r to have b e e n inordinately expansive. Future Prospects With r e s p e c t to the future, one m a y h e a r a l m o s t e v e r y p o s s i b l e view. It is said that the dollar will be devalued and that t h e r e will be p r i c e inflation. At the other e x t r e m e , it is said that it is a v e r y old t i r e d expansion, that housing s t a r t s a r e down, and that r e c e s s i o n will come b e f o r e the y e a r ' s end. As for devaluation, it is s u r p r i s i n g that this m a t t e r k e e p s cropping up. The United States g o v e r n m e n t h a s taken a c o n s i s t e n t stand on this for m o r e than thirty y e a r s . In any event, doubts should have b e e n put to r e s t by the r e c e n t s t a t e m e n t by P r e s i d e n t Johnson that n t h e d o l l a r i s , and will r e m a i n , a s good as gold, freely c o n v e r t i b l e at $35 an ounce. n - 6 - T h i s point about the r e c o v e r y being 4 y e a r s old of itself s e e m s to m e to have little significance. You r e m e m b e r that when the r e c o v e r y was 2 y e a r s old it w a s thought r e m a r k a b l e ; when it r e a c h e d 3 y e a r s it was astonishing; what word shall we u s e now that we a r e entering the 5th y e a r ? Not n e c e s s a r i l y . H e r e again e n t e r s t h e o r y in action. for r e c e s s i o n m a y or m a y not b e p r e s e n t . Is it u n b e l i e v a b l e ? The conditions which m a k e Whether we have inflation or r e c e s s i o n , or go ahead in a-sound m a n n e r , depends in l a r g e m e a s u r e on whether the p r i v a t e e n t e r p r i s e economy continues to find outlets for profitable v e n t u r e , and on w h e t h e r we follow sound m o n e t a r y and f i s c a l policy. P o l i c i e s , in t u r n , m u s t be attuned to the p r o b l e m s facing the country. I have d i s c u s s e d the s u c c e s s e s of 1964. I would like to spend the final few m i n u t e s of- m y t i m e d i s c u s s i n g the d a r k e s t cloud now on the economic h o r i z o n our i n t e r n a t i o n a l p a y m e n t s deficit. B a l a n c e of P a y m e n t s The deficit in 1964 is r e p o r t e d to have b e e n $3 billion. F o r the fourth q u a r t e r it was at an exceptionally high r a t e , roughly $5. 8 billion; t h i s r a t e i s h i g h e r than the $2. 0 billion r a t e over the f i r s t t h r e e q u a r t e r s of the y e a r , and was the h i g h e s t q u a r t e r l y r a t e in the l a s t s e v e r a l y e a r s . The r i s e in the deficit w a s m a i n l y due to the r e s u m p t i o n of foreign s e c u r i t y i s s u e s in our c a p i t a l m a r k e t s and to an outflow of s h o r t - t e r m funds in the f o r m of loans by b a n k s , c o r p o r a t i o n s , and o t h e r s . Other f a c t o r s of l e s s significance w e r e involved but t i m e does not p e r m i t an i t e m i z a t i o n of each. The point is - - the deficit h a s continued for s e v e r a l y e a r s and at h i g h e r r a t e s than are desirable. It is e s s e n t i a l that we m e e t the p r o b l e m . - 7 As you know, a b r o a d p r o g r a m a i m e d at r e s t o r i n g a r e a s o n a b l e b a l a n c e in our i n t e r n a t i o n a l accounts was launched l a s t week by P r e s i d e n t Johnson in a s p e c i a l m e s s a g e to C o n g r e s s . While I m u c h p r e f e r g e n e r a l c o n t r o l s to d i r e c t specific c o n t r o l s , the situation now c a l l s for c o n c e s s i o n s and the F e d e r a l R e s e r v e S y s t e m i s in c o m p l e t e sympathy with the p r o p o s e d p r o g r a m . B a s i c a l l y t h e r e a r e four a r e a s that r e q u i r e attention: (1) T r y to i m p r o v e the t r a d e b a l a n c e . We enjoy a favorable b a l a n c e - o f - t r a d e . In the fourth q u a r t e r our e x p o r t s of goods and s e r v i c e s exceeded our i m p o r t s by $6. 9 billion. While the b a l a n c e in our favor was on the a v e r a g e g r e a t e r in 1964 than in 1963 or 1962, t h e r e w a s a g r a d u a l e r o s i o n after the f i r s t q u a r t e r . Efforts to expand our e x p o r t s need to be i n c r e a s e d . This c a l l s for new thinking, new planning, and new m a r k e t i n g on the p a r t of b u s i n e s s and i n d u s t r y . (2) Government P r o g r a m s (a) Aid. When a d o l l a r of foreign aid is spent in this country, the outflow of aid i s m a t c h e d by an export. The r e a l effect of t h i s s o r t of aid i s that we lose the goods and s e r v i c e s . If the aid m o n e y i s not spent in t h i s country, it m a y l a t e r show up in the f o r m of a c l a i m a g a i n s t our gold; this we a r e t r y i n g to avoid by tying aid to p u r c h a s e s h e r e . ed that about 80 to 86 p e r cent of a l l aid i s tied. It is e s t i m a t I am hopeful that f u r t h e r i m p r o v e m e n t s can be m a d e in this a r e a . - 8 (b) M i l i t a r y e x p e n d i t u r e s abroad. T h e s e amount to n e a r l y $3 billion, and c o n s i s t l a r g e l y of p a y m e n t s to U. S. P e r s o n n e l a b r o a d and supporting expenditures. The P r e s i d e n t has stated that, c o n s i s t e n t with national defense n e e d s , we will seek to further r e d u c e t h e s e outflows. We can do this by p o s s i b l e r e d u c t i o n of f o r c e s abroad, and by encouraging offsetting p u r c h a s e s of U. S. m i l i t a r y equipment by friendly foreign c o u n t r i e s . Travel U. S. r e s i d e n t s spent about $3. 0 billion on " t o u r i s m " abroad, m o r e than twice what f o r e i g n e r s spend in this country. A r e d u c t i o n in this would, of c o u r s e , work in the right direction. It is hoped that the l e g i s l a t i o n to r e d u c e d u t y - f r e e allowances to $50 will be helpful. Capital Outflows The c e n t r a l focus of the P r e s i d e n t ' s p r o g r a m is on m e a s u r e s to r e d u c e financial outflows. T h e s e outflows have b e e n heavy in r e c e n t y e a r s and in r e c e n t months have contributed to a w o r s e n i n g of our p a y m e n t s position. In the 4th q u a r t e r of 1964, for e x a m p l e , bank c r e d i t to f o r e i g n e r s expanded by $1 billion. At this t i m e , t h e r e f o r e , our chief c o n c e r n is with c a p i t a l outf l o w s - - s h o r t - t e r m , l o n g - t e r m , and d i r e c t . The P r e s i d e n t * * m e s s a g e of l a s t week contained p r o p o s a l s to do the job. He invoked the G o r e A m e n d m e n t , - 9 extending the I n t e r e s t Equalization Tax - - v/hose application had been l i m i t e d to i n v e s t m e n t s in s e c u r i t i e s - - to bank loans of m o r e than one y e a r . He a l s o p r o p o s e d that A m e r i c a n b u s i n e s s join with the F e d e r a l g o v e r n m e n t in a voluntary c r e d i t r e s t r a i n t c o o p e r a t i v e p r o g r a m to help p r o t e c t the d o l l a r . Concluding R e m a r k s At the o u t s e t I mentioned that the F e d e r a l R e s e r v e S y s t e m h a s s e v e r a l goals: sustainable growth with high l e v e l s of employment, r e a s o n a b l y stable p r i c e s , and a workable b a l a n c e in our i n t e r n a t i o n a l p a y m e n t s . T h e s e a r e our c o n c e r n s , but at the m o m e n t the p a y m e n t s p r o b l e m is of v i t a l c o n c e r n . As I have noted, we h a v e had 19 y e a r s of economic expansion in the United States and, m o r e r e c e n t l y , 48 months of continuous economic growth. T h i s is a good r e c o r d and one in which we can all take p r i d e . we m a y be riding for a fall. Some have said In my judgment, this is not n e c e s s a r i l y so. But we m u s t have the d e t e r m i n a t i o n and c o u r a g e to tighten our b e l t s when n e c e s s a r y to p r e v e n t i m b a l a n c e s and to p r o t e c t the value of the d o l l a r . When I say we, I c e r t a i n l y include those of us who have r e s p o n s i b i l i t i e s for formulating m o n e t a r y and fiscal policy. But equally and p e r h a p s m o r e i m p o r t a n t , it includes l a b o r , b u s i n e s s , i n d u s t r y - the g e n e r a l public. In other w o r d s , it includes you and m e , b e c a u s e in a d e m o c r a c y policy to be successful m u s t r e c e i v e the support of the people. I b e l i e v e we have what it t a k e s .