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Karl R. Bopp, President
Federal Reserve Bank of Philadelphia

January 20, 1966


Board of Directors
January 20, 1966






Mr. Chairman, as you know, I have been in the habit of giving an
opening statement each year when we usually have a number of new directors.
This year, since Howard Petersen, our only new director, is familiar with
the Federal Reserve System, I thought it might be appropriate to modify the
procedure a bit.

In addition, I find that after I have done the same thing

eight or nine times, the steam goes out of it no matter how important it may

I have, therefore, distributed to all directors a copy of last year's

initial statement, modified only to bring the statistical material up to date.
At the next few sessions of the Board I shall comment at greater
length on a number of items in the general statement.

Ify remarks will reflect

my basic philosophy and approach to problems of central banking.

They will serve

as a background that Bay explain why I come up with the specific recommendations
that I shall make from time to time in the very complex economy that we have.
Today I shall discuss objectives of policy.

You have before you a

list of objectives that have been pursued by central banks and the monetary
actions designed to achieve each of those objectives.

(Objectives of Policy, p. 2)


Calling for or permitting
an easing of credit


Calling for or permitting
a tightening of credit

1* Full employment........

Less than full employment.

Jobs in excess of workers*

2. Stable price level.....

Declining prices.

Rising prices.

3» Convertibility of the

High and/or rising primary
international reserves*

Low and/or declining primary
international reserves.

4. Adequate growth........

When growth is inadequate.

When growth is too rapid to
be sustained.

5» A fixed rate of interest

When savings are inadequate.

When savings are excessive.

6. Productive credit......

Increase in monetary volume
of output.

Decrease in monetary volume
of output.

I have included No. 5 —
Productive credit —

A fixed rate of interest —

and No. 6 —

only because they have actually been advocated and indeed

been pursued by central banks.

In my own view a fixed rate of interest is

incompatible with a dynamic free enterprise economic system and productive
credit is a tantalizing notion but quite irrational in real economic terms.
I shall be happy to develop these conclusions on another occasion, but prefer
not to do so today.
I think there would be general agreement that we would like to have
our economic system achieve the first four objectives on the list.

When I

first studied money and banking in the 1920,s, we demonstrated with careful
economic analysis, that these objectives were internally consistent and achievable.
Stripped of qualifications, the essence of our analysis ran something
like this.

Suppose you start with an economy in recession.

The recession would

be characterized by less than full employment and falling prices (in those days

(Objectives of Policy, p. 3)

the general level of prices, not merely individual prices, fell as well as

The lower prices would tend to increase exports and to reduce imports.

The resulting favorable balance of trade would be paid for with gold.


in recession all objectives would call for an easier monetary policy.
The purpose of the easier policy would be to stimulate demand.


initial impact of enlarged demand would be on volume, more employment and greater
utilization of plant and equipment.

Profits would rise because fixed costs

would be spread over the larger volume.
As revival continued, operations would approach efficient capacity
levels and unemployment would decline.
wages would rise.

As unused margins shrank, prices and

The favorable balance of trade would be reduced and ulti­

mately be succeeded by an excess of imports over exports.

At this point all

objectives would call for monetary restraint.
I must confess that the logic of this analysis was compelling to us
in the 1920*s.

It still sounds convincing, granted the inarticulate premises.

Doubts concerning these premises arose in the early 1930's, when,
despite what was thought to be relatively easy money for a considerable period
of time, revival failed to appear around the corner.
Many individuals concluded that monetary policy is a completely
impotent tool of economic policy.

Fiscal policy, which was brought into the

discussions as a supplement to monetary policy, emerged by supplanting monetary
policy entirely.
This shift in emphasis was reflected in graduate enrollments.
and banking was a popular graduate major in the 1920's.
for a couple of decades from the mid-1930's.


It all but disappeared

In recent years many students

have again become excited about monetary theory and policy.
These developments have influenced my own thought.

I have developed

(Objectives of Policy, p. 4)

some convictions but I am less certain than I was forty years ago.

I hope I

am still young enough to learn as experience unfolds.
You have before you a set of charts, which portray in quantitative
terms the extent to which we have achieved the first four objectives since 1957.

Full Employment.
The first set of charts (p. 5) relates to the full employment objec­


This objective is of great importance in its own right.

tragedy when a qualified person wants a job and cannot find one.
deeply about this.

It is a serious
I feel very

I recall a period after the First World War when my father,

an excellent union carpenter, sought a job diligently — but in vain — day
after day for months.

I recall my early days on the faculty at the University

of Missouri when graduates in all fields with long and successful experience
came back desperately looking for jobs —

any kind of a job.

Unemployment, particularly widespread unemployment, affects not only
the individual who is unemployed but also his immediate family.
spread social consequences.
to create trouble.

It has wide­

When many people are idle they have ample time

This is true particularly if the idle are young or are

disadvantaged in other ways.
arisen from unemployment.

A significant part of our social unrest has

Prosperity reduces the general level of our social

If, now, you look at the chart on employment, you will note the
significant growth that we have experienced, with only a small interruption
in 1958.

The charts also reveal, of course, that employment is related to the

size of the civilian labor force.

If you look at recent years a bit more

closely, however, you will note that the size of the labor force itself seems
to be influenced by the level of employment.

What seems to happen is that

when jobs are easy to get and employment rises rapidly, many individuals,

(Objectives of Policy, p.














(Objectives of Policy, p. 6)

particularly women and teenagers decide to seek jobs and thus enter the labor

When jobs are hard to get and employment is rising slowly, they simply

cease looking and leave the labor force.
It was during this period, you may remember, when unemployment was
consistently running above 5 per cent that I argued against increasing monetary

I have been placed with some strange bedfellows for taking this

position, but a central banker should not change his view because he may be
falsely accused.

This Bank, in turn, was a little slower than some in favor­

ing increased restraint.

We went along with the System but we did not lead

the parade.
I should now like to digress for a moment to call attention to a
facet of this problem which is not given in the charts here.

This concerns

the possible availability of human resources should we move from where we are
to an all-out war with full effort.

There are those who feel that with un­

employment at something like 4 per cent there would be no real unused human
resources that we could devote to such effort.

I do not personally happen to

agree with this, although obviously the amount of additional manpower is not
as great as it was before the Second World War.

Nevertheless, the per cent

of our population which is in the labor force is not at a peak.

The number of

noninstitutionalized individuals who are 14 years or older is running in the
order of 137 million people.

Of these, 78.7 million are in the work force and

that is 57*5 per cent.
During the Second World War, in 1944-, this figure reached an annual
average level of 63.1 per cent.

The difference is 5*6 per cent, or roughly

7.5 million people that could be brought in.

Now this might not be enough to

take care of a full-fledged war, but I think that if the pressures are great
enough,we still have the human resources.

(Objectives of Policy, p. 7)

On the other hand, short of that, I would have the judgment that to
pull these people not only into the labor force but to get them jobs would
require a degree of inflation that I think would be intolerable.

So I think

this is a resource which is there for use in case of emergency and, as I say,
I think there is such a resource, but it is not one that I think we could
really use and still hope successfully to achieve our other objectives as well.
I return now to some policy implications of the stubbornness that
has developed in the rate of unemployment, despite rapid increases in employment.
In earlier times revival quickly brought down the rate of unemployment.

In 1958-

1959» for example, unemployment was reduced by a third in less than a year, from
7.5to 5 per cent.

The stubborn level now appears to be a rate of about 5 per

If employment were our only objective, we would, as the table shows,
pursue an easy money policy until we had no unemployment or only perhaps seasonal
and transitional unemployment. But we have other commendable objectives.


critically important question for policy-makers is what level of unemployment is
implied to achieve the appropriate mix of over-all objectives.

The answer one

gives to this question involves value judgments as well as economic analysis.
Many competent individuals have expressed their views on this matter
and views of many have changed over time as we gain more experience.
primary reason


for being tempted to insist on a very low figure is genuine

concern for the plight of the individual without a job.

Pointing to a low rate

also are the achievements of such rates by ourselves during the war and by a
number of our highly industrialized competitors in recent years.

Pointing to

caution in striving for too low a rate are the undesirable consequences that
flow from inflationary pressures when aggregate demand is excessive.
Unfortunately, the problem is not static but dynamic.

A policy-maker

(Objectives of Policy, p. 8)

can tolerate a bit more unemployment if the economy is moving ahead than if
it is falling further behind.
Selection of a specific rate is influenced also by judgments as to
the accuracy of the relevant measurements, as to the minimum level of transi­
tional unemployment, as to the extent of structural unemployment, as to the
residence, skills, and qualifications of the unemployed, and similar factors.
My own view is that for the present we should pay increasing attention
to other objectives when the unemployment rate approaches and passes through the
4 per cent level.

I envision higher standards for the future.

To achieve them,

however, requires a successful attack on ignorance, inadequate training, and

Success also will require more rigorous economic analysis, more

information (e.g., on job vacancies by type and location) and better information
(more accurate and more complete on labor force, employment, and unemployment)

Stability of the Price Level.
I move now to the objective of price stability.

Our interest in the

price level is not quite as direct as our interest in employment.
particular interest in the absolute level of prices as such.

We have no

If, throughout

our history, the price of every good and every service had been exactly twice
what it has been in fact, we would be today precisely where we are in real terms,
even though all dollar prices, of course, would be double what they are.
Our interest in the price level derives from the evil consequences of
changes in it.

Changes in the price level redistribute wealth and income in­

A period of rising prices robs the creditor for the benefit of the

debtor because it enables the debtor to repay with cheaper dollars than he

A period of falling prices robs debtors for the benefit of creditors.
Changes in the price level also produce unwise business decisions.

Business decisions are based on dollar magnitudes on the assumption that the

(Objectives of Policy, p. 9)

unit of measure, the dollar itself, remains constant.

Since the businessman

is concerned with maximizing profits in the long run, he is necessarily vitally
interested in an accurate measure of what his profits actually are.

A changing

price level, however, produces a distorted view of profits.
Inventories and depreciation afford excellent illustrations of the

The process of production is a lengthy one in which the business­

man buys before he sells.

He buys pountless raw goods to be funneled into his

factories and machines and he usually keeps some inventory of his finished

If, month after month, prices are rising, then this stock appreciates

on his hands.

He is continually selling at a price better than he expected and

hence securing a windfall "profit."
These profits are inflated for another reason.

It is clear that a

manufacturer wears out his plant and equipment as he produces his output.
wear and tear, or depreciation, is a cost of production.


By the time the asset

is completely worn out, enough depreciation should have been charged to replace

If, however, depreciation is computed on the basis of original cost and

prices have risen during the life of the asset, the depreciation allowance will
be inadequate to replace it.

The cost of depreciation will have been under­

stated and profits correspondingly overstated.

George Terborgh has estimated

that the inflation in the decade 1947-1956 resulted in overstating corporate
profits by $43 billion.

Reported profits were $187 billion, whereas true

profits were $144 billion.

It does not take much imagination to appreciate

that business decisions may be irrational if they are based on the assumption
that profits are 30 per cent higher than they really are.
Here, then, sits the businessman, his profits inflated by windfall
inventory gains and by understated costs.

The future looks rosy indeed.

Expectations of future sales and profits lead him to expand his plant and

Rosy expectations also lead him to accumulate greater inventories,

(Objectives of Policy, p. 10)

both because his sales are rising and because he desires to lay in more stock
before the prices of that stock rise.

In short, we have a typical inventory

and capital spending boom.
Things go on rising for a while but then the bubble bursts.


businessman realizes that additions to productive capacity have outrun con­
sumer demand.

He realizes that his inventories are high relative to any

reasonable forecast of sales.
capital spending.

He cuts back on inventory purchasing and

The firms which supply him with inventory and which build

his plant and equipment are forced to cut back their production and lay off

Then, like a pebble dropped into a pond, the effects spread.


firms selling to the second group of suppliers and builders find sales declining.
More workers are laid off and hence consumer income falls.
ing, business sales fall even further.

With income declin­

In short, we have the familiar downward

spiral of business into the depths of recession, a recession which will continue
until top-heavy inventories and excess plant capacity are corrected.

Once more

inflation has helped breed the excesses which result in recession.
I move next to the history of prices.
of wholesale prices since 1800 (p. 11).

You have before you a chart

Now, there are very great hazards in

interpreting a chart of prices over the very long term.

The reason is the

obvious one that the things our forefathers actually bought and sold are, with
some rare exceptions, not the same things we buy and sell.

There are hazards

in long-term price comparison. Nonetheless, I think we can draw some general
conclusions of contemporary relevance from an index of prices over the long run.
It is perfectly clear that we have had four major inflations in our

These have all been associated with war:

first, the War of 1812;

second, the Civil War; third, the First World War; and, finally, the Second
World War.

The great inflations have been war-induced inflations —

point one.


(Objectives of Policy, p.

11 )


If you look a little more carefully, you see a significant and
rapid increase in prices in the I830*s —

actually 1832 to 183?.

This one,

it seems to me, was essentially a product of President Jackson's successful
war against the Second Bank of the United States.

As you know, he destroyed

the Second Bank of the United States and ushered in an orgy of new banks with
state charters.

This is a period of wildcat banking in the United States which

resulted in a great expansion in our money supply via a very inferior kind of
banking system.

And the net of all this increase in the money supply was a

significant increase in prices.
The second significant rise —

though nothing like the very tall

ones — you will notice came in the decade of the 1850's.

All you have to do

is recall 1849 to reach the correct conclusion that this was clearly a consequence
of the gold discoveries in California and in Australia.

The third of these

(Objectives of Policy, p. 12)

secondary increases in prices came from the late 1890's up until the First
World War, roughly.

This again was a result of gold discoveries_this time

in the Klondike and Cripple Creek —
total money supply.
Second World War.

which led to very rapid expansions in our

Finally, we have the rise from the late thirties up to the
This followed the revaluation of gold.

So that these have

all been associated with monetary phenomena, either changes in the base or
discoveries of new primary money in the form of gold.
I move next to the great declines.

They have followed wars.

the significant decline after the War of 1812 to roughly 1820.
War, we have another long continued price decline.

You see

After the Civil

Again a decline after the

First World War.
Interestingly enough, we did not have a decline after the Second World

Many people predicted that we would.

mined that this was going to happen.

Sewell Avery, for example, was deter­

The lack of progress of Montgomery-Ward in

the post-Second World War period is a reflection of his error of judgment.
my view, this new post-war experience was not an accident.


It seems to me to

illustrate that human intelligence applied to problems can, if everything works
out well, produce desirable results.

We did not have the anticipated great price

decline because of public and private actions to prevent it.

Organizations like

the Committee for Economic Development were founded to develop and promote a
smooth transition to peace.

It was felt deeply that if we had another terrific

recession the whole fabric of society might not hold together.
termination to do something about it.
normalcy or anything like that.
problems that were involved.

So there was de­

We did not talk about a return to pre-war

We did do something about the real economic

The Employment Act was passed in 1946.

You will notice that the very rapid declines following wars were in
turn followed by long-continued but slower price declines.

The development

after the War of 1812 was interrupted by the Jackson episode that I have men

(Objectives of Policy, p. 13)


These were periods of great social suffering, difficulties, and


One need only recall 1848 —

Western history.

one of the watershed years in modern

In my view, these were primarily the result of an inadequate

supply of the means of payment for the entire Western world, resulting from
an inadequate supply of gold.

The inadequacy was aggravated by the decision

of important industrial countries to adopt the gold standard (e.g., Germany
after the Franco-Prussian War).
As I mentioned earlier, declining prices put pressure on debtors
and may even force them into bankruptcy.

The persistent price decline after

the Civil War had much to do with the development of greenbackism; the free
silver movement; and similar so-called radical movements.

I think the debtor

class simply would not tolerate what was happening to it.

In my view the gold

standard would have ceased to exist as an international standard had it not
been for the wholly fortuitous discovery of gold in California in 1849


the wholly fortuitous discovery of gold in the Klondike and Cripple Creek in
the 1890*s.

Had these discoveries not occurred I think the gold standard

would have collapsed.
One conclusion I draw from this long experience is that our economic
system has no inherent tendency toward either inflation or deflation and that
we should be aware of the dangers and guard against both.
There always have been some who have felt there is an inherent tendency
toward deflation.

Usually they have been engineers or production men who emphasize

that increasing efficiency reduces real costs.
not confuse real costs with money costs.

Of course it does, but one must

Wage rates obviously can go up faster

than output per unit of time.
Others, who usually emphasize this latter possibility, insist that
our economy has an inherent tendency toward inflation.

In recent years they

(Objectives of Policy, p. 14)

have based their argument largely on the increased power of labor unions.
me, this is a new version of an old argument.
terms, can be heard throughout our history.
fathers used to work."
to be."


The same complaint, in different
"Men don't work the

"They loaf on the job."

way their

"Quality isn't what it used

This is nostalgia for a society that never existed in fact.
My own view is that there is no inherent price tendency in our economy.

Prices are a result of the monetary institutions that we create and the skill
with which we manage them.

This view is reinforced by our experience after

the Second World War and in the past eight or nine years.

I do have some

reservations on how well we will in fact manage in the period ahead.



I move now to the story of prices since 1957» and begin with whole­
sale prices.

From the middle of 1957 until the beginning of this year the

index varied between 99 and 101 per cent of the 1957-1959 average.

If you

recall the long-run chart, it is clear that we have not had as long an
interval of stability in more than 150 years.

No other modern industrial

country has ever experienced such an interval of stability.

We have, however,

as the chart shows, broken out of this range on the upside with a full year of
virtually continuous, though slow, upcreep.

(Objectives of Policy, p. 15)


I move next to the consumer price index.

Our record here apparently

has not been as good.

The primary reason has been the persistent increase in

the cost of services.

There is a widespread judgment of qualified individuals

that this index probably has an upward bias because of improvements in quality.
You might be inclined initially to dispute this judgment.

You might

mind, for example, the cost of medical services, including drugs.

have in

Doctors now

rarely make home visits; office calls are brief; drugs are expensive.

If, how­

ever, one keeps in mind the service performed —

the story

is different.

Time was when pneumonia was frequently fatal and even recovery

was long drawn-out.
lost from work.

curing the patient —

It was a costly disease, directly and in terms of time

I have a hunch our forebears would have considered a modem

cure cheap even for their time, but it was not available.
Improvement in quality has come also in goods as well as services.
Take the automobile tire.

I can remember when Sears Roebuck guaranteed tires

for 3,000 miles and how boldly they advertised when this was increased to 5»000

Imagine anyone even trying to sell such a tire today.


(Objectives of Policy, p. 16)

we have not devised a statistical technique to measure changes in quality
If quality changes could be measured it is quite possible that an
accurate consumer price index would reveal no upward drift at all.

In any

event, until very recently we have done very well with price stability as an
objective of policy.

I move next to convertibility as an objective of policy.

For the

United States this still means redemption of currency in gold at a fixed price.
Since this objective, more than any other perhaps, arouses great emotions, it
might be worth-while to see how England came to adopt the gold standard in
the first place.
Macaulay wrote:

"In the autumn of 1695» it could hardly be said that

the country possessed, for practical purposes, any measure of value of commodi­

It was a mere chance whether what was called a shilling, was really ten-

pence, sixpence, or a groat."

For example, the exchechequer found that coins

which should have weighed 220,000 ounces actually weighed only 114,000 ounces.

William and Mary appointed a committee to make recommendations for
solving the problems.

The membership was quite extraordinary:

Sir Isaac Newton,

Master of the Mint, John Locke, the great philosopher, and Lord Somers.
Sir Isaac recommended that the government call in the old coin at
face value and issue new full weight coins and that the ratio of silver to gold
be established at 16 silver to 1 gold (shades of Bryan!).
on the Continent the ratio was 15j to 1.
the results a century before!
tinent overvalued silver.

In major countries

Sir Thomas Gresham could have predicted

Relatively, England overvalued gold and the Con­

Gold was taken to England for exchange into silver,

which was taken to the Continent for exchange into gold, which ....


later recognized his error and recommended that it be corrected, but this latter

(Objectives of Policy, p. 17)

advice was not followed ^ ,
A century passes and England is once again
her old enemy,

France; this time under Napoleon.

involved in war with

She abandons redemption of

the currency but decides to resume convertibility after the war.

The mint, of

course, had very little silver to coin and Lord Liverpool decided to close it
to the free coinage of silver because England was "naturally a gold country"
and that "gold was the natural currency of England."

And, indeed, it was if

one admits, as he should, that it is only "natural" for even a Sir Isaac to
make a mistake and for this mistake to have "natural" consequences.
It is irrelevant but tempting to speculate what might have happened
if Sir Isaac had made a mistake in the other direction, say by adopting a ratio
of 15 to 1.

England might well have become "naturally a silver country."


the role that sterling acquired on the basis of English leadership in industry
and commerce throughout the world, who knows, the world might naturally have
been on the silver standard.
These are irreverent conjectures.
some fictional natural history.

Still, the faithful have propagated

One gains an impression that the gold standard

existed for centuries without interruption.

Yet it has not existed in modern

times for as long as a century, though England almost made it from 1822 to 1914.
My own view is that England arrived on the gold standard because of a
mistake by Sir Isaac Newton in


The gold standard survived the nineteenth

century only because of the miracles of new g6ld discoveries in the 1840's and

Finally, when one sees the incredibly small amount of gold frequently

held by the Bank of England, he is forced to conclude it was not a self-regulating system but was in fact maintained through management by the Bank of England.

This is the story as told by George F. Warren and Frank A. Pearson in their
PRICES, New York, 1933, p. 159*

(Objectives of Policy, p. 18)

Thus, a mistake, miracles, and management describe the System more accurately
than does a mystical natural providence.
Do not misunderstand me.
monetary system —
of exchange —

I think that on balance an international

essentially this means a system of relatively fixed rates

is preferable to a system of national currencies with freely

fluctuating rates, despite its presumed intellectual attractions.
An international system, however, requires genuine international
cooperation on the part of the members based on rational economic principles.
Such a system should indeed put pressure on a member which has an unfavorable
balance of payments because it has pursued policies of over-full employment
and inflation.

It should not, however, put pressure on a member that has an

unfavorable balance of payments despite significant unemployment and stable
or even falling prices.
As you know, negotiations are now in process to reform and supple­
ment the international monetary system.

Fortunately, we are not at the moment

operating in a crisis atmosphere.
I move now to recent developments in our balance of payments.
can see from the chart (p.

19 ),

since the Suez crisis in 1957»

As you

we have been running at a persistent deficit ever
Throughout this period (except for a brief in­

terruption in 1959) we have had a large excess of exports over imports of both
goods and services.

This excess, however, has not been large enough to finance

our foreign defense, Government aid, and private investment abroad.
our short-term liabilities to foreigners have doubled from about



As a result
billion to

billion and our gold stock has declined from over $22 billion to less

than $14 billion.

This brings us to the last objective I shall discuss this mornings

adequate growth and a rising standard of living.

Barring a nuclear war, our

(Objectives of Policy, p.


* Before special government transactions

(Objectives of Policy, p. 20)

children and grandchildren are almost certain to have a higher standard of
living than we enjoy.
may be solved.

For them, the hard core of our basic economic problems

This may not be an unmixed blessing.

portance in work.

There is joy and im­

The thrill of the craftsman at whatever task is one of

life's real satisfactions.

Long hours of leisure are not necessarily satisfy­

ing, even when they are voluntary.
Monetary policy has relatively little to do with the germinal elements
of growth.

One of these ingredients is the sporadic appearance of genius,

frequently motivated by what most people consider a naive desire to comprehend:
Newton, Descartes, Harvey, Gibbs, Einstein, Fermi.
application of knowledge to invention:
to human organization:

Another ingredient is the

Burbank, Edison, Firestone, Ford; and

Taylor, Mary Follett.

Other ingredients are the

character of a people and availability of natural resources.
My own view is that, although a central banker should be interested
in growth as is any responsible citizen, he should not establish any specified
rate of growth as a specific objective of monetary policy.

He should, instead,

concentrate on achieving the best balance among the three objectives that I have
already discussed.
Hopefully, this will produce a maximum sustainable use of available

This, in itself, is a large contribution to growth.

Beyond this,

however, the actual rate of growth depends on matters that are not reached
directly by monetary policy.
wish to work.

One of these factors is how hard and long we

It has been estimated that in the past fifty years we have

taken about half of our productivity gains in the form of increased leisure
and about half in the form of more output.

We could grow much faster if we

worked longer and harder.
Another factor is how we divide our actual output between consumption

(Objectives of Policy, p. 21)

and investment.

The more we consume the less remains available for investment

to increase our growth.

It is an appropriate role of Government to influence

consumption, saving, and investment through fiscal policies, but it is not a
primary responsibility of the monetary authorities.
The important concern of the central bank should be to contribute
all that monetary policy can contribute to full utilization of resources.
It is the responsibility of the individual citizen and the Government to
determine the distribution of our total resources between work and leisure,
between consumption and investment.
You have before you (p. 22) charts that reflect as best we can
capacity and output of our manufacturing industries.
tion has only recently exceeded

90 per

As you can see, produc­

cent of capacity.

I hope, Mr. Chairman, that this brief statement will give you a
general idea of my basic philosophy and prejudices.

My recommendations on

monetary policy arise from the application of these principles to developments
in the economy.

You will recall that until very recently I have been slow to

recommend increasing firmness in credit conditions.

The primary reason has

been the persistence of excessive unemployment, the stability in our price
level while those of our international competitors were rising.

In my view

these factors outweighed our adverse balance of payments and gave hope, indeed,
that it too could be rectified.
Recently, however, we have come far closer to full utilization of our
manpower and productive resources and prices have risen.

These developments,

in my view, fully justify the recent actions of the System.

(Objectives of Policy, p. 22)