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FEDERAL RESERVE BANK ECONOMIC POLICIES TALK by Federal Hugh D. Galusha, Jr. President Reserve Bank of M i nnea polis at the 13th Annual Conference of the M i d -C ontine nt Research and Development Curtis Hotel September 27, 1966 Council FEDERAL RESERVE BANK ECONOMIC POLICIES My topic has been listed as "Federal Reserve Bank Economic Policies'* , and so has Dr. Struble's. national m o n e t a r y policy. I have assumed Now o b viou sly a full hour on this subject would both your patience and y ou r credulity, topic to Dr. Struble. this would have primary reference to so I am relinquishing any claim on this As a v i s i t o r to Minneapolis, he is entitled to speak in an area of his particular competence without having all by a native of his host city - and as an audience, of this absorbin g tax the good lines preempted you are entitled to a discus sion subject by an informed and perceptive analyst instead of a b e wilder ed and dispiri ted participant who has been lost in the forest so long he is no longer aware of either the forest or the trees. Instead - and w i thou t consulting the program committee, this forum to unburd en myself of some thoughts about developing a pattern for economic growth. It seems to me that an unusually good laboratory. the Ninth Federal Reserve District affords A lt hough the district is huge both industry and population are - 1800 miles by 450 - scattered thinly enough to be fully exposed. Skews w h i c h devel op in the appli cation of broad national easily ob served policies can be more - needs and aspirat ions have a special dimension. I am not unduly disturbed by the questions about Federal district lines. I have chosen These are as good as any, I suspect. Reserve Bank Efforts to es tablish g e o g r a p hicall y d escribed districts that will encompass any more than the roughest kind of econo mic h o m o gene ity are not going to be successful. District, economic activities are similarities surprisingly diverse. lose significance when specific areas, under examination. Even in the Ninth Broad categories of geographic or economic, are There are three EDA regions p resently in the discussion stage for states and parts of states in the western half of the district, with c o n s i d erable overlap geographically. There is one involving parts of three states in - 2 - the eastern part of the District. of the proponents Political alliances and personal interests seem to be stronger than economic parallels. The p r o li ferati on of districts, and wasteful, for wh a t e v e r purpose, seems inefficient and especially so when economic intelligence is a prerequisite decisi on making. to It was for this reason that the region of the Upp er Midwest Research and Development Council was made coterminous with the Ninth Federal Reserve District. C hannels of communication, even though not of the best perhaps, have considerable j ustification from their existence and history. p art icularly present very difficult patterns. vivendi over the years, Split states We have worked out a certain modus but to start again and again with additional fragmentation is hardly calculated to make the proble m easier. Then, about. too, these patterns of economic activity have a habit of shifting If Appalachia, for example, of its depressed condition, average presently has valid ity as a region because then what happens to it w hen it is brought up to the standards of the United States? It, therefore, seems obvious that before we complicate further the pattern of regional economic research, what we have. let's The Federal Reserve Bank districts are in existence. look at They have patterns of research built up over years - plain old numbe r gathering, if you will - that have great usefulness. A great deal is known about this district - far more than is currently being used, and more is being added all the time. The problems uncovered have piled up to awesome proportions - the pile is now seI f -generating - it is of such proportions the zealous researcher can happily, if not profitably, spend his time researching the research. If sheer weight of research were a model of economic growth and wisdom. with national economic sufficient, But it is not. this district should be We are about on a par levels in the m a j o r indices - no better - and if we are - 3 - no worse, credit is not due to consciou sly directed effort, Viet Nam; good weather, demand. crops, and prices; There is no reason to expect, and the general and not ouite What is needed? lagging the nation, There are at least these three courses of action: Main Street has not C o nce rn is generally found - usual ly of a simplistic order of what we need is a n ew plant - prefe rably General Electric or U. this concern, going a little so high on the upside. Comprehending the other two is the first - communication. been mobilized. level of industrial that absent a change in the neutral factors, we will not revert to our historical pattern of deeper into the troughs, but to the w ar in the individual is able to outside his door. Schools, streets, the S. Steel. With leapfrog over all the immediate problems local regulatory climate, can be c o m f o r t ably forgotten in the assurance of success when the n e w plant comes in. Money that could much bette r be applied by the contributor himself is channeled into a business d evelopment effort of the chamber and spent in u suall y fruitless efforts to attract a maj o r industry. utiliti es done, Industrial parks w ith the grading and credit and a favorable pattern of local regulation, an o rderly plan for city expans ion and improvement geared to a realistic tax base. These take time - seeming eons of time - spent in community m eeting s where the c o m p r o mises between the confl icting demands and desires of the community are beaten out. But it is hard going for an impatient people to go this route - yet is there any other? cated, The best research effort, the results of w hi ch are not c o m m u n i is a useless academic exercise in this field, at any rate. It has become increasingly po pular to blame the inertia of the business community, effort. the unwi lling ness of the farmer to participate in the total community This c r itic ism may have some justification, professional planner, concern, has the maj o r burden. but the researcher, There is a basic goodwill, among the mem bers of the business and farming communities. the a basic The m i s s i n g - 4 - bridge is the c o m m u nica tor - the person who makes the research intelligible to the layman, in the process of whi ch it becomes useful to the local leaders who can act eff ective ly on their own behalf. The second area of effort is in the area of political organization. Aft er the recent M i n n e s o t a primary this might seem an obvious indiscretion - like talking of a h a l t e r in the house of a man who has been hanged. I am not referring to political orga nizati on in a narr ow party sense, but in the larger sense of the body of ordinances, regulation, spawned the bewildering complex of state and though, and statutes which have local political entities. This pattern, which in large measure is part of our Anglo - S a x o n inheritance, may have been a useful one somewhere, sometime, but has little meri t today. on the rate of industrial growth cannot be measured, cannot be contested. its "Fiscal drag" but that it is considerable is a term of pop ular usage - "tdmg d r a g 1 is ’ local counterpart - the 1 tdmg1' standing for "too damn much government". 1 1 Instead of serving as the become the glue. m ore Its impact lubricant of society, local government has Zoning regulations and tax structures are just two of the sticky areas. Not only is the but the valiant, but the attitude designed to minimi ze the n novel, legal pattern of regulation calculated to de ter all social, that accompanies their enforcement is not their impact. It is tragic that the d i s posi tion to make and economic ex peri m e n t s 1 Judge Brandeis 1 spoke about as such an important part of our political heritage has been surrendered along with a substantial part of the national tax base to the federal government. The problem wit h this surrender has been that broad innovative programs on a national basis have a distress ing ph ilosophic resemblance to the bed of Procrustes when r e g i o n ally or locally applied. Of more than passing interest to me, then, was the clipping from the Seattle P o s t-Int ellige ncer of September 24, 1966, sent me by - 5 - a friend. It is concerned with a talk given by Norton Clapp, Board of the W e y e r h a e u s e r Lum ber Compan y of Tacoma, Ch airman of the and I quote: "One of W a s hingt on S t a t e ’s leading industrialists Friday night called for formation of a new Puget Sound regional government as a m oder n solution to a pres ent-da y ’horse and buggy' system that, in effect, blocks smooth development. "Clapp pulled few punches in d escribing the present government:' system of 'Governmental unit has been piled on top of governmental unit and things have become ex tremely c omplicated and auite u nco ordina ted - and often, very illogical. 'The problem today is, however, that we are still operating u n d e r the old system, which has been repeatedly patched up in attempts to meet changing needs. "Change will not be easy, he warned, adding: 'To begin with, we have a surprisingly large herd of sacred cows. The rigidity of muc h of our community and governmental structure, by its very nature, tends seriously to limit both the extent and the duality of our growth. Out institutions were designed to meet past n e e d s . ’" Any discus s i o n of regional economic growth eith er starts or is stopped (and sometimes both) with an expl orati on of financing. to come from? There are the two traditional sources - private and public treasuries. What does private investment require? return, and climate. security. Where is the m o ney going The obvious are opportunity, Less obvious is the importance of econ omic/ emotio nal Success begets success - bigness begets bigness. industrial park is the tough one. Venture capital u s ual ly timorous capital as well. "Venture" outset - and only later find out just h ow venturesome the risks at the they really have been. like the sight of another industrial building with reassuring smoke coming from its chimneys. N u mber 1 can be found in one of two places - the business alrea dy in the community, It is capital o ften turns out that way M ost investors think they have mini mized jitters 1 in the new is h unc h capital. unintentionally. N othing allays the pr e-commitment N umber and the outside one looking for a home. than the town. latter. Of the two, the former is 92.3758% easier and cheaper A bsolu t e l y essential is a receptive economic climate in the It is axiomatic that business goes where it is wanted. If there is a single common den omi n a t o r of the successfully surviving communities in this district, it is the collective will of their business communities whi ch m a n i fests itself across the whole spectrum of community structure. M ost ly though it appears as a quality of old-fashion ed enthusia sm for business, an e n thusia sm that is both innovative and realistic. But what about the public assistance? communities. This m ust come first for most Seed corn in the form of urban renewal and area red evelopment fund must be secured from federal agencies in most instances. say all, is not a l a w y e r ’s conservatism, The only reason I don' but because I do k n o w of one community in the district that was entirely financed from the private sector. The m o d e r n mayor' s office must include on its staff at least one t e c h nician familiar wit h the array of federal agencies op eratin g in this field. may be unfortunate, it may be an affront Science in the economic field, I think it is a good way, It to those who would practice C hristian but it sure is the A m e r i c a n way. As a pragmatist because for most communities it is the only w ay and it does work. This brings me full circle to regionalism. programs are being regionally administered. Fortunately, most of these There is no practical workable a lternative to a continued exp ansion of the regional platform. Only by this means can we a c c o mplish the nece ssary fitting of the p r ogr am to the individual c ommunity and still achieve a me asure of adm inistrative efficiency. Only w ay can talent and mon e y be pooled - and still be reasonably accessible this to the local community. On the private side, the same must be done. The regional councils, of which yours is one, are important in providing forums for the interchange of - 7 - ideas. cial It is difficult to find the same measure of progress in private f i n a n structures. Bank Holding companies have provided a measure of capital interchange in this district. Insurance companies do have regional contact offices with outlets in the m a j o r communities, usually through the banks. There are regional brokerage firms with branch offices through the district. On the industrial side, m ost of the regional u t ility companies are making distinguished contributions to local planning and are helping to find ways to finance needed projects. If we were to judge by the uni f o r m noise is as easy or as di fficult one place as another. bigness helps. But is it really? financing Again It is a lot easier to put a deal together in the Twin Cities than in Blooming Prairie, Minnesota, Mr. level of protests, Foley yesterday. that mythical ev erytow n referred to by You must have more than a good idea - e ntrepreneural skill, and investment expertise are the differe nce between a successful be ginning and none at all. I suspect the man from Blooming Prairie m ay feel he has been to languish u n f a irly - and languish p ro bably so - but unfai r l y may be too hars h for what is a normal market process. The problem of pooling capital is i n e x t r i cable from this one - and I think is ov ershadowed by it. won't get it solved this morning. I am ouite certain we But some type of po oling of talents on a regional basis must come about if Blooming Prairie is to be helped. it was hoped, would be such a vehicle, than spectacular. The S B I C ’s, but their record has certainly been It m ay be the regional council will be the answer. wag e r that if this hurdle can be surmounted, ecualized, left if not eliminated. Here the capital less I would shortage will be truly special credit ag ain must be paid the u t ili ty companies. It has been said that we need a m o r ato rium on solutions, solution leads to more problems. for each In a recent meet ing of the M i n n e sota Executive Committee of the U p p e r Midwest R esearch and Development Council, St. Cloud, where an excellent record of industrial develop ment has been made, discussed his community's progress. As I recall, jobs there than they had ten years ago. in the political overlap of township, they have nearly 2000 more In the process, city, wit h a special dime nsion caused by its these was the M a y o r of the problems inherent and county have become exacerb ated location in three counties. long and I suspect could have been The longer had there been more One of the committee members commented afterwards that the first mistake made was to attract the n ew industry and problems seemed to come thereafter. stantial truth. start the growth pattern, - list of time. they for all their In this facetious comment there was a s u b Growth does bring n ew problems. But so does decay, and which group of problems would you rather have? There is a drive - a desire to better our communities that m ust be served. While our knowledge of the process of economic growth is hardly c o m p r e hensive, there does exist the essential building block material. It is the res ponsibility of all of us who have expressed our concern for building economic growth to first become involved in the design of a pa ttern of growth, assist in the execut ion of the design, m a i n te nance of continued growth. then to and finally to commit ourselves to the