View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

(For release 2:00 p.m.,
Central Standard Time,
October 21, 1958)

Remarks of J. L. Robertson
Member of the Board of Governors
of the
Federal Reserve System
Before the 72nd Annual Convention
of the
Iowa Bankers Association
Fort Des Moines Hotel, Des Moines, Iowa
October 21, 1958

"Monetary Policy in a Dynamic Economy"
I am glad to have been invited to speak here in Des
Moines. While it is true my home was in Broken Bow, Ne­
braska, Iowa was a sort of second home because I went to
school in Grinnell College. As a matter of fact, I was
lucky enough to crowd into two years spent there as much
fun as most people get out of four, and in the process
picked out a wife - who was b o m in Cuppy's Grove, alleg­
edly the garden spot of Iowa« So you can see why I have a
soft spot in my heart for this state.
At Grinnell we had a famous professor who was very
solicitous about his students. He would take us to his
home - one by one - converse a while, and then tell us how
he sized up our character and future prospects. I am sure
his counseling helped many a student.
I can well remember when my turn rolled around. I
swaggered over in my football sweater, only to find that I
soon had to shed it, roll up my sleeves, and work for a
couple of hours helping him wax a big chest he was refin­
ishing o All the time he kept questioning me, and in response
I told him, with some mixture of pride and braggadocio, the
facts of my long life - (I was then nineteen). I told him,
for example, that I had worked as a ranch hand, during the
summers, from the time I could straddle a horse, and spent
my free time, during the school years, serving both morning
and evening newspaper routes, janitoring the Presbyterian
Church, and jerking sodas at the drugstore - my unfree time
being devoted exclusively to football. Nor shall I forget
soon his summation: "Now son," he said, "you are a good
boy but don't go to the city and try to match wits with the
bright boys. You go back to Broken Bow and get a nice job
in a filling station."
Although at the time all the wind was taken out of
my sails, I am certain now - and you will be, too, by the
time I finish - that both you and I would have been better
off if I had followed his advice, gone back to Broken Bow,
and stayed there.
I hope that not too many of your members have been
discouraged by the somewhat hackneyed title of my remarks -

- 2 -

"Monetary Policy in a Dynamic Economy*' „ The only justifi­
cation is that it happens to state with considerable preci­
sion what I want to speak about today. I would like to speak
about monetary policy, for that is my business, and to re­
late it to the dynamic nature of our economy because that is
becoming, more and more, the crucial factor in our economic
Now, generally, the term dynamic is used in a favor­
able sense. We seldom apply the adjective to anything we
disapprove or deplore. A dynamic economy is one that is
growing rapidly, adopting new techniques, and adapting its
products and its ways of doing business to changing needs,
tastes and circumstances» The dynamic nature of the Ameri­
can economy was illustrated by de Tocqueville more than one
hundred years ago in this way: "I accost an American sailor",
he said, "and inquire why the ships of his country are built
so as to last for only a short time; he answers without hesi­
tation that the art of navigation is every day making such
rapid progress that the finest vessel would become almost
useless if it lasted beyond a few years. In these words,
which fell accidentally, and on a particular subject, from
an uninstructed man, I recognize the general and systematic
idea upon which a great people direct all their concerns."
We need to recognize, however, that the process of
rapid change is accompanied by many difficulties. By its
very nature, a dynamic economy cannot be a problem-free econ­
omy. Being a central banker, it is my task not just to praise
the workings of our economy but to be aware of its problems particularly those that the central bank can help to solve.
In order to properly place the central bank in the pic­
ture, one must understand the basis for its interference in
the monetary system. It is found in the simple proposition
that "money does not manage itself. Although you as bankers
may manage your own affairs with the utmost prudence and wis­
dom, and each business may conduct itself sensibly in accord­
ance with its own best interests, as may each fanner and each
consumer, nevertheless, the sum total of these simultaneous
activities may produce undesirable effects. Specifically,
inflation or depression may occur even when each unit in the

- 3 -

economy is acting sensibly, according to its own best inter­
ests as it sees them. Because of this we have learned over
the years, sometimes very painfully, that there is a funda­
mental need for monetary policy and for other public policy
in the economic field.
Bath monetary policy and other public policies can
and do influence economic activity and economic values, in­
cluding prices of commodities, wages of labor, capital assets
such as farm and urban land and structures, and stocks and
bonds. Governmental economic policy, if wisely formulated
and executed, serves to support and strengthen the capacity
of free men dealing in free markets to provide more of the
good things of life for themselves - and for future genera­
tions as well.
Monetary policy is only one aspect, although a stra­
tegic one, of general public policy which is directed toward
the twin goals of vigorous economic progress and economic
stability. (At times that seems like trying to carry the
ball simultaneously to the two goals on a football field.)
It has its influence on economic activity and values mainly
by means of its effect on bank reserves and thereby on bank
credit and the money supply. Sometimes we achieve this ef­
fect by changing reserve requirements of member banks, but
for day-to-day and week-to-week operations we rely on openmarket transactions and the discount functions, which comple­
ment each other as credit-control instruments.
In employing these instruments, we do not attempt to
determine the specific channels into which bank credit flows.
That is left to the multitude of decisions of lenders and
borrowers. But in determining the total volume of bank re­
serves, the Federal Reserve does exert a major influence on
general economic values because it affects the extent to
which the banking system is in a position to finance expendi­
tures by business, consumers, and governments.
However, it should be clearly understood that mone­
tary policy is not the all-powerful instrument some would
make of it. Far from it. It cannot determine the course
of the economy. It does not absolutely determine the level

- 4 -

of interest rates. It cannot even assure stability of in­
dividual or average prices - prices are determined by the
tastes, desires, and wherewithal of buyers in relation to
productive capacity and costs. Monetary policy cannot
guarantee a demand for any product or service at any price
the seller wishes to ask - and this applies even when the
price of the service is called "wages" • On the other hand,
it is certain that in the presence of upward price pressures
an unlimited supply of credit will stimulate speculative
commitments and encourage rampant inflation.
While I am about it, let me also point out that mone­
tary policy, by itself, cannot assure the maintenance of
full employment. We learned that in the 1930's. If im­
portant sectors of the economy have expanded too much or
too fast or are endeavoring to maintain prices higher than
buyers are willing (or able) to pay, some unemployment is
bound to result until appropriate adjustments have been made
or shifts of resources to other sectors have been effected.
Furthermore, monetary policy cannot - without becom­
ing an engine of inflation - assure the financing of the gov­
ernment debt at low rates of Interest at a time when other
demands for credit are strong. We learned that in the 1940's.
The Treasury must compete with other would-be borrowers for
the available supply of lendable funds, and hence must price
its securities on a basis that will attract investors. But
this does not mean that we must abandon public and social
objectives. This country is rich enough to devote large
amounts of resources to such uses - national defense, edu­
cation, social security, and the like. It simply means that
there must be a corresponding restriction on other public and
private activities. Put succinctly, appropriate monetary
policies do not conflict with or prevent the attainment of
public policy objectives - rather, they are an essential
means of adjusting private demands so as to facilitate the
attainment of public objectives.
Although monetary policy is subject to all these limi­
tations - and more - it still is able to exercise a strong
counterbalancing influence against those forces which would

- 5 -

otherwise cause inflation or depression. In fact, the
provision of appropriate credit and monetary supplies is
essential for the smooth and efficient functioning of the
economy and particularly for sustained growth. The re­
markable thing about economic developments in this country
in the postwar period is not that we have had some infla­
tion, which is certainly undesirable, or that we have oc­
casionally had considerable unemployment, which is of great
concern to us. Much more important is the fact that we
have had a high rate of growth and general prosperity with­
out a wild speculative boom followed by a disastrous and
prolonged depression. Monetary policy is entitled to some
of the credit for this generally favorable course of events.
As you know, monetary policy brings its influence
to bear on the economic situation as that situation is cre­
ated by the actions of businesses, consumers, and govern­
ments. It does so, as I indicated earlier, mainly through
its control over bank reserves, by which it influences the
lending and investing activities of commercial banks. I do
not want to minimize the importance of this influence, but
I should like to point out that the direct effect of Fed­
eral Reserve action is sometimes overshadowed by what may
be called the psychological effects.
One psychological effect is exemplified at times by
an exaggerated response to Federal Reserve actions. Another
consists of occasional anticipations of forthcoming actions
on the basis, not of economic factors, but of whatever events
here or abroad seem to be newsworthy at the moment. Re­
sponses and anticipations of these types have had a lot to
do with developments in financial markets in the past few
months. But before I turn to that, let me sketch a bit of
As you know, the United States economy is presently
thrusting itself with vigor out of a recession that began
about a year ago. Seldom have the dynamic qualities of our
economy been more strikingly exhibited.
In its industrial performance, the economy a year ago
moved into a sharp downslide. This followed a three-year

- 6 -

boom based on a surge of spending, first by consumers and
then by producers. These waves of spending stimulated over­
all economic activity and enlarged the productive capacity
of the economy, but the pace of expansion was too rapid and
in the process pressures were generated that led to rising
prices and living costs and to spreading inflationary senti­
ment. Hence the imbalances that led to the 1957 downturn.
As the recession deepened last winter and spring, to
many observers the outlook for an early return of prosperity
appeared unfavorable. The decline in activity was greater
than in either of the two previous recessions of the post­
war period. In the eight months after August 1957, indus­
trial production fell 13 per cent. Output of durable manu­
factures declined 20 per cent. Business outlays for capital
goods dropped fast and reported plans for such outlays prom­
ised no pickup until well into 1959, or later. Business
inventories were large and strong efforts were being made
to reduce them. Unemployment had risen sharply and was con­
tinuing at a high level. Consumers were demonstrating a dis­
tinct lack of enthusiasm for most of the products of the
automobile industry and were paying off debt in significant
In spite of these seemingly unfavorable signs, and
to the surprise of most analysts, the low point was passed
in April. Since then production has been rising at an un­
usually rapid pace. From April to September the Federal Re­
serve index of industrial production rose 9 per cent, thus
regaining two-thirds of the earlier decline. Instead of a
saucerlike low, such as occurred in the preceding recession,
when production touched bottom in the spring of 1954 but
recovery did not get under way until autumn, this time the
cyclical contour took the shape of a V.
Even before it became apparent generally that the re­
cession had touched bottom and was being followed promptly
by a strong revival, the stock market began to advance. The
advance started early in the year and at a time when cor­
porate profits were at sharply reduced levels. Since then

- 7 -

stock market optimism and activity has increased consider­
ably and stock prices have reached successive new highs.
This enthusiasm of the stock market is not entirely reassur­
ing. It may be correctly anticipating a much higher level
of profits than that reported in the latest official figures«
There are good reasons to think that profits are rising
rapidly; the volume of business operations is expanding and
productivity has been rising unusually fast. But the stock
market rise may also be a symptom of something else - the
growing acceptance of the doctrine of the inevitability of
inflation. If this belief is a significant factor in that
market or any other market, to that extent it and the econ­
omy are vulnerable to potentially destructive forces.
As it became increasingly clear outside the stock
market that the low point in activity had been passed last
spring, pessimism dissipated with remarkable speed. One of
the most reassuring evidences of renewed confidence in busi­
ness prospects was the announcement that the latest official
survey of business spending for new plant and equipment found
that, contrary to indications from previous surveys, outlays
had leveled off in the third quarter and would possibly turn
up during the rest of this year.
Now these evidences of economic recovery are very
gratifying. We can rejoice in the knowledge that our economy
has shown such resilience and buoyancy and is springing back
with speed toward full use of our human and material re­
sources. This is indeed dynamic1
While rejoicing, however, we can hope and endeavor to
assure that the recovery is a healthy one; that is, broadly
based and not too exuberant for its own good. After all,
an economy is not like a runner of the 100-yard dash, who
can sprint through the tape that marks his objective. If
the economy runs through the goal representing full use of
resources, it runs right into inflation. It is desirable,
therefore, that the recovery be encouraged but also that the
economy approach its constantly rising capacity-ceiling at
a growth rate that can be maintained. We want no more in­
flationary booms and no more busts. We want progress to be
as rapid and as steady as we can make it.

- 8 -

In financial markets, events have moved swiftly
since last June. In that brief period interest rates have
shot back up with great rapidity. Long-term yields have
returned to their peak levels of a year ago, when economic
activity was considerably higher and monetary policy much
more restrictive than in the past three months. Short-term
yields have also advanced rapidly, but they are still well
below last year's high levels.
The sharp break in medium and long-term market rates
in July was associated with the speculative activity that
developed in the Treasury's mid-June refunding operation.
Acting on the basis of expectations of further reductions
in interest rates (particularly in the longer-term area) and
consequently of a "free ride" on government securities from
their issue price, many investors were induced to take specu­
lative positions in the June exchange offering of 2-5/8 per
cent bonds. As we now know, many of these speculative pur­
chases were made on little or no margin, by investors with
little experience in the government securities market.
I need not dwell on the details of this unfortunate
episode. For our present purposes, the important point is
that, shortly after the bonds were issued, a combination of
events conspired to confound the speculators and, instead of
getting a "free ride", they found themselves faced with mar­
gin calls as their recently acquired security dropped below
par. Their efforts to sell out in order to meet margin calls
or to minimize losses gave bond prices a strong downward im­
petus .
However, the reversal in interest rate movements - from
a downward tilt in the spring to a steep upward climb in the
summer - cannot be ascribed solely to speculation. It un­
doubtedly magnified the swing in interest rates and bond
prices, but in itself did not cause it.
For a basic explanation of the interest rate reversal,
we must look, in part at least, to the growing public aware­
ness that the economy was moving out of recession (in June
alone industrial production rose more than 4 per cent), and
that there would be expanding public and private demands for

- 9 -

funds and probably a more restrictive monetary policy. Fur­
thermore, the notion that continued inflation is inevitable
had gained increasing acceptance, and the continued rise in
consumer prices during the recession must have given further
strength to this view. This notion was not diminished by
the much-publicized fact that one result of actions taken
to cure the recession would be a large federal deficit.
(What was designed as medicine for the economy six months
ago is now dangerous, because while the patient's condition
has changed the dosage cannot be reduced fast enough.)
It would have been surprising if the expectations of
investors in financial markets had not been affected by this
picture. As it happened, the investing public did antici­
pate the advance in market interest yields and, by their ac­
tions, caused it to occur sooner.
Given the increased public awareness of even moderate
swings in business activity, the spread of the creeping in­
flation doctrine, and the speculative psychology that seems
prevalent in financial markets, what can we do to promote
sustainable recovery and growth without inflation? What can
we do if we are confronted with continuing relatively high
unemployment and unused industrial capacity and at the same
time speculative trends in financial markets that exert
strong upward pressures on interest rates?
There is no widely-accepted answer. But clearly the
first step must be to diagnose the problem. My diagnosis
leads me to the view that belief in the inevitability of in­
flation is close to the center of the problem. This belief
must be attacked at its roots to prevent its proliferating
until it becomes so widely accepted that productive processes
are disrupted, distortions develop, and the thesis is proved
false by a drastic fall in prices and capital values and
these are followed by very high levels of unemployment.
We must look at the underlying forces, avoid accept­
ing the economic fads of the day, and offer leadership to
the people everywhere who stand to lose most from inflation
and its aftermath. We must develop effective means for dis­
couraging the innocent and unwary from accepting the plausible
but false doctrine of creeping inflation. We must encourage

- 10 -

financial markets to become stronger, to develop greater
depth and to be more resilient in meeting the needs of the
people and in adjusting to shifts in the market forces. We
must encourage financial and economic analysts to greater
efforts in appraising the forces of supply and demand,
rather than devoting so much of their attention to outguess­
ing the Federal Reserve. A market preoccupied with trying
to outguess governmental actions is weaker and less selfreliant than a market conditioned to penetrating beneath the
surface of economic events in making its decisions.
As for preventing inflation, some contend that mone­
tary policy, by itself, has power so great that if it were
exercised to the fullest extent, with no other considera­
tion in view, it alone could stop even a runaway inflation
dead in its tracks* Unfortunately, this would be like
stopping a runaway train by putting an immovable barrier
across the rails. The train would be stopped all right,
but both it and its occupants would be shaken up pretty
badly, and considerable time would elapse before the trip
could be resumed!
I need not take the time to identify the other steps
that should be taken to keep our economic streamliner on the
track and moving along at a fast speed that is also safe and
can be maintained indefinitely. Suffice it to say that on
this train there are a number of firemen who must exercise
judgment and restraint regarding the amount of fuel supplied
to the engine, and there are several sets of brakes that
must be judiciously applied from time to time.
Putting aside figures of speech, let me say plainly
that the Federal Reserve is not merely paying lip-service
to a noble sentiment; we are determined to use our powers,
as wisely as we can, to maintain the integrity of the dol­
lar and thereby foster the maximum sustainable economic
progress of the United States. This job is not one that
can be done effectively through monetary policy unaided and
alone; but it can be done.
The task is difficult because mankind is not so civi­
lized that various groups readily subordinate group interests

- 11

to the broader good of the nation as a whole« In recent
decades we have seen Increasingly the power of public opin­
ion« The work in which the Federal Reserve System is en­
gaged can be conducted successfully only if it has the sup­
port of public opinion based on real understanding of what
is involved. If that understanding can be widely achieved,
it will not only safeguard the sound institutions of our
economic and governmental system, but will also lead to
statesmanlike and public-spirited policies on the part of
consumers, industry, and labor.
It is my sincere conviction that this task of achiev­
ing widespread tinderstanding of monetary problems and mone­
tary policies today presents to the banking community of
America its most meaningful call to energetic and dedicated