The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
THE BEST OF TIMES, THE WORST OF TIMES An Address to the Winston-Salem Kiwanis Club Winston-Salem, North Carolina September 6, 1973 by Monroe Kimbrel, President Federal Reserve Bank o f A tlanta " I t was the best o f tim es, i t was the worst o f t i m e s . . . . " the phrase Charles Dickens chose to begin A Tale o f Two C i t i e s . This was I t was an apt way to ch a ra cterize France and England at the time o f the French R ev olu tion . I t is an apt ch a ra cte riz a tio n o f economic con d ition s today. To an unusual degree, the various aspects o f our economy*s performance group themselves near the extremes o f good and bad. best o f tim es. In many ways, i t ijs the In many ways, i t i£ the worst o f tim es. My purpose today is to survey both sid es and to strik e a balance between the two. The Best of Times F ir s t , what makes th is the best o f times? It is the best o f times because our economy is generating more income and more products than ever b e fo re . I am not talkin g about in fla t io n making -2- a l l the numbers b ig g e r; I am ta lkin g about the re a l purchasing power o f our incomes and the re a l p h ysical amount o f our produ cts. per ca p ita , per fam ily, and for the nation as a whole. This is true American incomes w i l l buy more products than ever b e fo r e ; American industry is producing more products than ever b e fo re . I t is the best o f times in terms o f American employment. The fr a c tio n o f unemployed workers d eclin ed to 4 .7 percent in July, the lowest rate so fa r in the Seventies. I t is the best o f times in quite a while fo r the budgetary p o s itio n o f the Federal government: sid era b ly from 1972. The f i s c a l 1973 Federal d e f i c i t was down con In f i s c a l year 1974, we view the genuine prospect o f a balanced budget fo r the f i r s t time sin ce 1969. Do you measure the best of times by the amount o f c r e d it a v a ila b le ? American consumers and businessmen and in v estors are borrowing more funds and fin a n c ia l in s titu tio n s are lending more than ever b e fo r e . At our com m ercial banks, lending is 15 percent higher than i t was a year ago. What we c a l l the money supply--check ing account balances and currency in the hands o f the p u b lic - - is 7 percent greater than i t was a year ago. -3 - I f you measure the best o f times in terms o f our in te rn a tio n a l balance o f tra de, there is strength there, to o . Our current accounts with the r e s t o f the world are c lo s e to balance fo r the f i r s t time in y ea rs, and a l l the experts t e l l us the tid e has turned. Business p r o f it s ? You are probably more fa m ilia r with what is happening th ere; they are running 25 t o 30 percent higher than they were in 1972. Is th is the best o f times? It is the best o f times fo r American produc t io n , fo r incomes, fo r consumption, fo r employment, fo r the Federal d e f i c i t , fo r the amount o f c r e d it a v a ila b le , fo r our balance o f trade, and fo r b u si n ess. We would not lik e to have these measures any d iffe r e n t . I wish I could stop rig h t here. But I know you did not in v ite me here today to ta lk only about the good th in gs. I know th is because more and more persons keep asking me questions about the sta te o f the economy and what the Federal Reserve is going to do about i t . is the best o f tim es. But i t is evident from these questions that in many ways i t is a ls o the worst o f tim es. In many ways, i t -4 - The Worst o f Times "How can you boast about the n a tio n 's record output?" some o f you may ask, when as businessmen you fin d i t hard to get hold o f the m aterials you need to produce. Unemployment is low, but th is means some o f you c a n 't fin d a l l the trained and w illin g workers you want. t i v i t y are coming hard. Improvements in produc The papers ta lk about la y o ffs because o f shortages o f b a sic com m odities, and new bottlen eck s are d evelopin g. It is the best o f tim es, but i t is a lso the worst o f tim es. And while i t is true that the n a tio n 's output is se ttin g re co rd s, there are a ls o signs o f slowdown. The economy's re a l production grew at a 2 1 /2 -p ercen t rate in the second q u a rter--a weak showing a fte r 8 percent in the f i r s t quarter and 6 1/2 percent in 1972. fo re ca s te rs see slow growth ahead. Even the most o p tim is tic How, in the face o f these p rosp ects, can we c a l l th is the best o f times? I would have a hard time fin d in g a Winston-Salem housewife who would c a l l th is the best o f tim es. than they were a year ago. July food p rice s were about 13 percent higher And who knows what w i l l happen under Phase 4? I t is not ju s t food p r ic e s , e it h e r ; the index fo r a l l consumer items rose -5- about 6 percent in the same p eriod . Wholesale p rice s show s t i l l more i n f l a t io n , with farm and food p rice s fa r in the lead. With in fla t io n bad and apparently g e ttin g worse, how can we c a l l th is the best o f times? We seem to be caught in a worldwide in fla t io n . Consumer p rice s are up in p r a c t ic a lly every country o f the w orld, in most places at rates even worse than ours. While American consumer p rice s went up 6 p ercent, Japanese p rice s increased 12 percen t, I ta lia n p rice s rose 11 p ercen t, B ritis h p rice s 10 percen t, and Swiss and Canadian p rice s 8 p ercent. These fig u re s are symptoms o f a worldwide in fla t io n that is a ls o operating on our economy. How can th is be the best o f times? How can th is be the best of times when the in te rn a tio n a l monetary system is in turm oil? As many o f you have d iscovered la t e ly during your tra v e ls abroad, the d o lla r buys le ss and less overseas. Since 1970, i t has d eclin ed o n e - f if t h in value against major in d u s tria l cu rre n cie s. In te r n a tion a l trade is disrupted by export co n tro ls and by the worldwide shortages they were imposed to combat. Back in th is country. I can hear you say to me, " I t 's a l l very w e ll to ta lk about more c r e d it being a v a ila b le , but what about the high in te re s t ra tes ?M -6 - "When the U. S. Government has to pay 9 percent to borrow ," you may add, "something must be wrong. Moreover, lenders are asking, and borrowers are paying, in te re s t rates that would have seemed preposterous a few years a g o ." "At in te re s t ra tes lik e th e s e ," you ask, "how can anyone expect to finance the home b u ild in g or the business expansion scheduled fo r next year? This is not the best o f tim e s." "Furtherm ore," you may say, "the Federal Reserve is ra isin g in te re s t ra tes ju s t when the economy seems to need lower in te r e s t r a t e s ." Knowledge able bankers may point to the recent increase in the discount ra te , the ra te the Federal Reserve charges banks. o f la s t year; i t is now 7 1/2 p ercent. I t was 4 1/2 percent at the end The Federal Reserve a lso raised reserve requirem ents, making i t harder fo r banks to make loans. "My banker fr ie n d s ," you might contin ue, " a ls o t e l l me that the Federal Reserve has supplied so few reserves to the banking system that banks are paying 10 or 11 percent to borrow from each o th e r ." the rates banks can pay fo r time d e p o sits. The Fed has a ls o ra ised -7- MSo fa r as c r e d it con d ition s are con cern ed ," you may conclude, "th is is the worst o f tim e s." R econ cilin g the Best o f Times and the Worst o f Times What we would lik e to do, o b v iou sly , is to preserve the featu res o f our economy that make th is the best o f times and to improve the features that make i t the worst o f tim e s --to keep what's good and to change what's n ot. But from my vantage point th is is a ls o the most fru s tra tin g o f times because the p o lic ie s necessary to improve what's not good in our economy are a lso lik e ly to work against the good featu res we would lik e to keep. In p a r tic u la r , i t is our high le v e l o f production and p ro sp e rity which has brought shortages, in fla t io n , and high in te r e s t ra te s . Moreover, i t is our rapid rate o f economic growth re ce n tly which v ir t u a lly guarantees a slowdown soon. The rapid expansion has brought us near f u l l employment, which makes i t p h y sica lly im possible fo r the economy to expand now as i t did when id le la b or, m a terials, and machines were a v a ila b le . Rapid economic growth can occur only when the economy is recovering from a re ce s sio n and has id le resources to employ; we have used up the sla ck . -8- The in te re s t rate and p rice p ictu re is eq u ally fr u s tr a tin g . Even under ordinary circum stances, strong increases in production crea te strong demands fo r c r e d it , bidding up in te re s t rates d esp ite siz e a b le additions to the supply o f c r e d it . When the demand fo r c r e d it outpaces the supply, even a su b sta n tia l supply, in te re s t rates r is e , even in ordinary circum stances. But these are not ordinary circum stances. P rices have rise n more and in te re s t rates have moved higher than they normally do in an expand ing economy. At le a st two unusual fo rce s are at work, compounding the fr u s tr a tio n . Foremost o f these fo rce s is the worldwide economic expansion. Boom con d ition s in p r a c t ic a lly every part o f the world are adding to in fla tio n a ry demands fo r th is n a tio n 's resou rces, which can now be purchased with cheaper d o lla r s . The other fru s tra tin g fo rce is c lo s e r to home: t iv e f i s c a l and monetary p o lic y . the legacy o f a stim ula D e fic it financing by the Federal govern ment may have been appropriate when the economy needed stim u latin g; but we do not need that stimulus today. -9- The same c r it ic is m might be applied to monetary p o lic y . tion s to the money supply are appropriate in a re ce s s io n . employment, they con tribu te to in fla t io n . L iberal addi But at f u l l Our economy would probably be b e tte r o f f today i f we at the Fed had recognized e a r lie r the need fo r slow -. ing down monetary expansion. Why did we f a i l to adopt le ss expansive f i s c a l and monetary p o lic ie s ? We have to plead humanness. Policymakers have no p ecu lia r g i f t fo r read ing the fu tu re, and most o f us b elie v e d expansive p o lic ie s were best at the time. I wonder, moreover, whether cuts in Federal expenditures would have been supported by the p u b lic, e s p e c ia lly cuts fo r loca l programs. Neither am I sure that the p u b lic would have been happy had the Fed moved more ra p id ly toward re s tra in t than we d id. In fa ir n e s s , I should say that the Federal Reserve did in i t ia t e a r e s t r ic t iv e p o lic y la st f a l l - - a p o lic y that would probably have been su cce ssfu l in ordinary tim es. But again, these are extraordinary tim es, and ordinary p o lic ie s o f re s tra in t have not been s u c c e s s fu l. The demand fo r c r e d it has been stim ulated e x tra o r d in a r ily by in fla tio n a r y ex p ecta tion s. -1 0 - The extraordinary r is e in in te re s t rates during 1973 demonstrates the extraordin ary strength o f c r e d it demands. In te re st rates are high, we need to remember, not because the Federal Reserve has reduced the supply o f c r e d it but because o f e x tra o rd in a rily strong c r e d it demands. Quite ca n d id ly , I doubt that any r e a l i s t i c amount o f monetary expansion would have held in te re s t rates down th is year. We are now paying the p rice fo r complacent acceptance o f in fla t io n . We have liste n e d too c lo s e ly and fa r too long to arguments that in fla t io n is a l l r ig h t . We thought we could avoid the measures necessary to bring in fla t io n under c o n t r o l. Now we fin d those same measures forced upon us. More and more Americans are recogn izin g in fla t io n as a pervasive economic problem, and more o f us recognize that there is no quick way out o f our d iffic u ltie s . People ask me, "When w il l we get some r e l i e f on in te re s t ra te s?" I wish that I could give them a c le a r answer, but in a l l honesty I cannot. Let me instead rep ly with another qu estion : ing to borrow so much money? High c r e d it demands have pushed up in te r e s t r a t e s ; reduced c r e d it demands w il l reduce them. When w i l l you stop t r y So long as the demand -1 1 - pressures contin ue, we are going to have pressures on in te r e s t r a te s . The Federal Reserve can help to reduce these demand .pressures by holding down the growth o f money and c r e d it , not to zero but to a rate co n siste n t with su stain able economic growth. As Chairman Burns has in d ica te d , the Federal Reserve is prepared to do a l l i t can to achieve that g o a l. F is c a l p o lic y , to o , can help to reduce the stra in s on our economy. A lso, su ccess w i l l come more qu ick ly i f we have r e s tr a in t in wage demands by labor and in the p ricin g and expansion plans of busin ess. Meanwhile, the Federal Reserve is determined to avoid a repeat o f the c r e d it crunch we had in 1966 and 1969. At that time, banks and t h r i f t in s tit u t io n s were not allowed to bid fo r funds because o f Federal in t e r e s t-r a t e c e ili n g s . They could not lend funds to businesses and home buyers because they had no uncommitted funds to lend. This time the Federal Reserve, with the coop era tion of the FDIC and Federal Home Loan Bank, has moved to avoid th is so rt o f development. In the words o f Chairman Burns, "In d iv id u a l banks can obtain funds. . . i f th e y -- and u ltim a tely the business firms that are borrowing from them--are w illin g to pay the p r i c e ." -1 2 - On Balance The best o f tim es, the worst o f tim es. My answer, I admit, is p reju d iced . Which comes out ahead? I have fa it h in the a b i l i t y o f the American people to solve th e ir problems. In other words, I am o p t i m is tic enough to b e lie v e that we can keep most o f the best and elim inate most o f the w orst. We Americans have displayed an outstanding a b ilit y to get in to trou b le. F ortun ately, we have displayed an equal a b i l i t y to deal with our problems once we r e a liz e th e ir seriou sn ess. Compared with other parts o f the w orld, over the long p u ll Americans have done a good job in dealing with economic d iffic u ltie s . These are d i f f i c u l t tim es, these are fru s tra tin g tim es; but the d i f f i c u l t i e s are not too great to overcome. We are beginning to r e a liz e we cannot overcome our d i f f i c u l t i e s unless we take the necessary p ain fu l steps to reduce in fla t io n . I am encouraged by your in te re s t today. I am encouraged by the e f f o r t s being made by the general p u b lic to understand our problems. I am encouraged by the w illin g n e ss o f C on gress--in part as the r e s u lt o f pressures from i t s c o n s titu e n t s --to grapple with budgetary problems. I am encouraged -1 3 - by the coop era tion we are g ettin g from bankers, businessmen, and labor lea d ers. I have confidence that, with patience and determ ination, we can make the future indeed the best o f tim es.
@FedFRASER