Full text of Statements and Speeches of Monroe Kimbrel : Interest Rates in a Free Economy : Rotary Club, Chattanooga, Tennessee

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Rotary Club
Chattanooga Speech

8 18-66
-

INTEREST RATES

To a n astronaut,

Chattanooga and Atlanta may

they are hardly neighbors.
fortunate
great

Yet

city.

T h r o u g h m y a s s o c i a t i o n w i t h them,

We at

is j u s t a

stone*s

the A t l a n t a

on in C h a t t a n o o g a

b e c a u s e we m u s t

I have

B a n k try

unemployment has
the n a t i o n a l

Employment

d r o p p e d to l e s s

rate.

is

3 percent

This

increased economic activity placed more

as m e a s u r e d by b a n k debits,

l u b r i c a t i o n to f a c i l i t a t e

trade area banks

S y s t e m e x t e n d e d 18 p e r c e n t mo re
9 percent more
Many

And

the e c o n o m i c
Reserve

loans

jumped 1

"health"

District,

demands
the

this June

force,

"pulse"

first

o v e r 1965*

of g o o d s a n d

of the

of w h i c h

lower than

u p o n the b a n k s ,

flow

of

and Chattanooga's

percent

which
services.

Federal Reserve

than a y e a r e a rlier and attracted

figures are probably

to r e c o g n i z e

old h at

Chattanooga's

to y o u ,

and certainly y o u don't

economic advances

in r e c e n t y e a r s .

luxury of a c c e p t i n g r apid economic

gains

of c o u r s e .

the v i g o r o u s e x p a n s i o n y o u ' v e e x p e r i e n c e d h e r e ,

p e c u l i a r to t h i s a r e a ,
economic gains have




is g o i n g

s p e n d i n g d u r i n g the

that are m e m bers

Y o u m a y e v e n h a v e a l l o w e d y o u r s e l f the
as a m a t t e r

that

deposits.

of these

statistics

to f e e l

of its w o r k

of these events,

of t h i s y e a r ,

Chattanooga

I am

in y o u r

that C h a t t a n o o g a ' s ec o n o m i c

half

Those

come

is a t a n a l l - t i m e h i g h ,

than

I n the l i g h t

p r o v i d e m u c h o f the

because

to k e e p u p w i t h w h a t

constantly assess

Our diagnosis

is s t r o n g a n d v i g o r o u s .

to m e ,

but

throw from Atlanta.

Federal Reserve

is a p a r t .

together,

other associates

s i x - s t a t e a r e a e n c o m p a s s e d b y the S i x t h F e d e r a l

Chattanooga

need

seem close

they seem like n e i g h b o r s

e n o u g h to have m a n y b a n ki n g friends a n d

Chattanooga

the

IN A F REE E C O N O M Y

is t y p i c a l

of t h a t

b e e n e n j o y e d by c i t i e s

throughout
from. M a i n e

rath e r than being

the n a t i o n .

Phenomenal

to C a l i f o r n i a .

Th e

entire

-2-

n a t i o n is, a s y o u k n o w ,
record

for any peacetime

measured
it w a s
1961

now well

in d o l l a r s

in i960.

period

Unemployment has
today.

was a c hieved with relatively

rise

Our output
is n o w

Moreover,

until

o f 6.7 p e r c e n t

this economic

j u s t a m a t t e r o f luc k ,

such tremendous growth without

in the

of goods a n d

such increases.

general price

unused manpower and productive

We

it

drastic

were able

level be c a u s e we p ut

capacity.

A

steady

increase

and experience
exceeds

tell us

the a b i l i t y

this

that

is w h a t

inflation

our goal
is

o f o u r e c o n o m y to p r o d u c e

if the

them.

can get

them away

cost

raises prices.
general

because

lose because

more

sets

because

conditions.

uses.




demand for goods
of environment,

them only by bidding

of p r o d u c t i o n and,

pressures become

"wins"

during inflation.
than those

they w i t h d r a w are w o r t h less

prices

difficult planning,

of future

price

repaid wi t h dollars w o r t h less

the d o l l a r s

los e

the

Theory

in turn,

so s t r o n g t h a t

in.

remind y o u that n o b o d y

they are

Consumers

increases

A n d b e f o r e y o u k n o w it,

inflation

Let me

This

in

it w a s

to be.

In that kind

producers who need additional men and machines
from o t her uses.

Thus,

should continue

inevitable

increases

in the n a t i o n » s

inflation.
that

growth

to w o r k p r e v i o u s l y

possible

doubt

in

to g r o w wit h o u t

c o n t r i b u t e d to t h i s n o n i n f l a t i o n a r y g r o w t h .

I have no

services,

is i m p o r t a n t to

productivity also
to a v o i d

a

one-third g r e a t e r than

rate

1965,

expansion,

stable prices.

p r i c e s a n d w h y we m u s t p r e v e n t
significant

country.

been reduced from a

e c o n o m i c g r o w t h is n o t

n o t e h o w we h a v e a c h i e v e d

a

in t h i s

of constant purch a s i n g power,

to a r o u n d 4 p e r c e n t

Since

i n t o its s i x t h y e a r o f e c o n o m i c

and

Many

rise.

Businessmen

i n c r e a s e d r i s k s du e

lo s e

than

Creditors
t h e y len t .
those

because

lo s e
Savers

they deposited.

of h i g h e r costs,

to th e g r e a t e r u n c e r t a i n t y

o f the n a t i o n !s r e s o u r c e s a r e

funneled into wasteful

-3-

Higher prices make
our sales abroad.
our purchases
now ,

we a r e

the g o o d s we

Moreover,

se l l m o r e

foreign products become

from other countries.

Th e

spending more a b r o a d than

far,

I ?ve b e e n t a l k i n g a b o u t

But an o t h e r price
usually

of eq ual

t h i n k o f the

this

reducing

is u n m e a s u r a b l e

increasing

harm.

s p e n d i n g here.

Even

Domestic

situation.

inflation

importance

interest

end result

for foreigners,

relatively cheaper,

f o r e igners are

i n f l a t i o n c o u l d do n o t h i n g b u t w o r s e n
So

expensive

is the

in t e r m s

interest

ra t e a s a p r i c e ,

o f the p r i c e

rate.

of goods.

A l t h o u g h we

it is j u s t that.

It

don*t

is the p r i c e

of m o n e y .
T h r o u g h th e
This

interest

is w h y m o n e t a r y p o l i c y

Reserve S y s t e m comes
supply

in a n y

one

The

of t h r e e w a y s .
the

interest

it c a n v a r y

banks provide

so i m p o r t a n t .
The

the

Just before

And

this

conditions are
is w h e r e

Federal Reserve

It c a n b u y

of reserve

influence




requirements.

the 1 9 6 1 b u s i n e s s e x p a n s i o n ,

steady

increase

expansion.

can

related.

the F e d e r a l
influence

the

of reserves a v a i l a b le

bank reserve positions

Government
charge

Since

for loans

the

the

securities;

reserves

it

to b a n k s ;
of commercial

Federal Reserve

of credit extended.

the F e d e r a l R e s e r v e

of s u p p l y i n g i n c r e a s i n g a m o u n t s

economic

for goods

o r s e l l u. S.

the a m o u n t a n d c o s t

In pursuing usch a policy,
to s t i m u l a t e

regulate

the F e d e r a l R e s e r v e B a n k s

t h r o u g h the p u r c h a s e

made possible a

can

basis upon whi c h banks extend credit,

to follow a p o l i c y
chiefly

Federal Reserve

ra t e

the l e v e l

to some e x t e n t c a n

desire

financial

of m o n e y a n d c r e d i t c h i e f l y b y a f f e c t i n g the a m o u n t

can change

banks,

is

economic and

i n t o the p i c t u r e .

to its m e m b e r b a n k s .

and

rate,

of reser v e s

o f U. S. G o v e r n m e n t

System

started

to it s m e m b e r

securities.

This p o licy

in b a n k c r e d i t .
the

F e d e r a l R e s e r v e w a s m o t i v a t e d b y the

The

does not turn even

r e a s o n f o r it s d o i n g

one w h e e l

in a

factory.

so is o b v i o u s .
Only

desire
Your

If y o u h a v e

-4-

money and

credit

to b a c k up t h i s

I n the e n v i r o n m e n t
every right
high and

to be

of th e e a r l y

stimulative.

the n a t i o n s

desire

d o the w h e e l s b e g i n to turn.

sixties,

Y o u will

factories were

the F e d e r a l

Reserve had,

remember that u nemployment

operating at

less

I believe,

then was

than capacity.

Production

c o u l d be e a s i l y e x p a n d e d a n d d e m a n d m e t b y s t a r t i n g u p

id l e m a c h i n e s a n d h i r i n g

the u n e m p l o y e d .

i n c r e a s i n g the

of m o n e y a n d

Th e

credit,

The a d d i t i o n a l

it c o u l d

credit,

put more men and
we

Federal Reserve

supply

stimulate

a l o n g w i t h the

resources

c a n rate a s e m i n e n t l y

in the

was aware

savings

is a p p r o p r i a t e

for all

o f 1 9 6 5 c o n d i t i o n s b e g a n to c h a n g e .

the e c o n o m y h a d b e e n c h a r a c t e r i z e d b y a g r e a t d e a l
in 1 9 6 5 we w e r e a p p r o a c h i n g
The

l o w rate

toward full

full

operations.

of 1 9 6 5

it w a s

th e c l e a r e s t

d o w n to 4 p e r c e n t .

started

resources.

Defense

T he a c i d t e s t w a s

the

signal

In a n effort

to i n c r e a s e

was

requiring more and more

and

mild

increases




Wholesale

four years

in c o n s u m e r p r i c e s

lacked

of ou r m a n p o w e r

up

started accelerating.

Rising prices,

supply

industrial prices

b e g a n to m o v e

their capacity,

producing additional

the w a y p r i c e s w e r e b e h a v i n g .

materials,

d u r i n g the p r e c e d i n g

6 percent;

Because manufacturers

t e l l us t h a t d e m a n d is i n c r e a s i n g f a s t e r t h a n the

stable

country.

t h a t we w e r e m o v i n g

of course,

finished products.

I pointed

of u n u t i l i z e d capacity.

stepping up their capital expenditures,

on the e c o n o m y .

as

and

they could no t k e e p up w i t h t h e i r orders,

orders were accumulating.

manufacturers
strains

Thus,

conditions,

In i960 unemployment had exceeded

the n e c e s s a r y w o r k e r s a n d c a p a c i t y ,
and unfilled

capacity.

Earlier,

capacity throughout

of u n e mpl oy men t was

capacity

t o w a r d the e n d

and

to o u r p r o d u c t i v e

of m o n e y an d credit.

in the l a t t e r p a r t

But

o f the A m e r i c a n p e o p l e a n d b u s i n e s s ,

the p o l i c y t h a t g e n e r a t e d t h a t e x p a n s i o n

But no particular monetary policy

out,

supply

the e c o n o m y w i t h o u t p u s h i n g u p p r i c e s .

to w o r k a n d a d d e d

successful

that by

of l a b o r ,

that had been

in 196 5 ,

a n d the p r e v i o u s l y

-5-

And

so,

economic
tim e

in l a t e

conditions

to c h a n g e

1965,

w i t h t he e c o n o m y

obviously were

f r o m the

different

1965 few m e n were

near capacity.
development

A

policy

Some

System gradually began
What

situation

this

today

we a r e

som e

true.
supply,

figure

gradual

the

tightening

thi s e x p a n s i o n
Reserve




tight m o n e y policy.
it is a r e d u c t i o n
if we

More m o n e y a nd credit

figures

is one

but right here

t r y to
is b e i n g

that less

show that quite

the

that shows

into prominence by

rat e

of ab o u t

3 percent.

rate

of

12

coin

I n the

increased at an average annual

in b a n k
System.

is

demand

Syst e m first brought

discount

ra t e

f r o m ^ to

supply has been
same p e r i o d ,

increasing

ti m e

deposits

Loans and investments
rate

supplied

of ov e r 6 percent,

credit has been supported by reserves
T he S y s t e m h a d n o i n t e n t i o n

opposite

in c i r c u l a t i o n p l u s

the m o n e y

percent.

credit

the b e h a v i o r o f the m o n e y

r a i s i n g the

of t h i s m o n t h ,

I am going

s e e m to b e l i e v e

total currency and

grown at an average annual

by m emb e r banks have

Federal Reserve

d o o m e d to f a i l u r e

B e t w e e n D e c e m b e r 1 9 6 5 — -when the F e d e r a l R e s e r v e

at an average annual

Federal

the

to c i t e

p e r c e n t — a n d the b e g i n n i n g

have

so m a n y p e o p l e

whereas

generally d e fined as

deposits.
the

because

available,

The e a s i e s t

the

than e v e r before.

figures,

is b e i n g m a d e

in

stimulative policy became

of us m i g h t a n s w e r t h a t

However,

because

being used at very

call a

Today I have a v o i d e d citing a lot of statistics,
to give

to work,

economic growth and prevent

some p e o p l e

Some

It was

d e s i g n e d to g e t the

Consequently,

reasoning with actual happenings.

made available

that was

rather than a

in ord e r .

is a t i g h t m o n e y p o l i c y ?
credit.

o f e a r l y 196 1 .

resources were

sustainable

shif ti ng to w h a t

in s u p p l y o f m o n e y a n d
document

to p r o m o t e

restraint was

very n e a r capacity,

idle m e n a n d r e s o u r c e s

idle a n d p r o d u c t i v e

of a b o o m - a n d - b u s t

appropriateo

from those

relatively easy policy

coun try out of a r e c e ss ion a n d put
late

operating at

supplied by

of c u t t i n g off

and

the

the g r o w t h

-6

of c r e d i t e n t i r e l y ,

and

b a n k i n g area,

loans

total

it h a s n o t

done

so.

I n th e

of m e m b e r b a n k s a t

Chattanooga

the e n d of J u n e

trade and

this y e a r were

7.7 percent h i g h e r than a y e a r earlier.
Nevertheless,
fact that
years.

interest

Surely

W h e n we

despite

the

g r o w t h in c r e d i t ,

rates are n o w h i g h e r than at any

this m u s t m e a n that m o n e y

remember that interest

we a l s o r e m e m b e r that prices
obvious

that demands

the

of m o n e y a n d credit.

greatly expanded demands
The

than

in the

last thirty-five

f r o m the

the p r i c e
operation

Today tight money

of b o r r o w i n g a n d w h e n
of b o t h d e m a n d a n d s u p ply,

expanded more

is a

result,

come

o f the

raise

from several

defense

effort,

from revenue;

directions.

has needed more mon ey

it h a s h a d t o b o r r o w ,

expanded their capital

spending;

they have

year has embarked

record-breaking capital expansion program;

and more

durable

these a n d

o f the

goods;

ris e

i n t o the b a n k i n g

demands,

the




until

American business

recently,

of these goods

record-breaking total

rates w o u l d have b e e n to

and made
base

Reserve

this

it h a s b o r r o w e d
has bought more

on credit.

All

d e m a n d for credit.

the

inject enough reserves

increased demands

for credit.

Th e S y s t e m

such a policy wou l d have prom o t e d a n unsustainable

reserve

Federal

therefore,

local governments have

borrowed.

consumer,

to s p e n d

o n l y w a y the F e d e r a l R e s e r v e S y s t e m c o u l d h a v e

s y s t e m to m e e t a l l

stimulated inflation,
o f e n l a r g i n g the

the

in i n t e r e s t

d o so b e c a u s e

The

State and

he b o ugh t a large part

Under such conditions,

did not

cost.

o t h e r f o rces a d d up to a

prevented a

of the

The F e d e r a l

Issues.

to m e e t a m a j o r part

rapidly than

in p a r t ,

eith e r directly or through agency

on a

the u n d e n i a b l e

for credit.

partly because

it c o u l d c u r r e n t l y

time

for credit must have

stepped-up demands have

Government,

faced with

is t i g h t .

rates are

result

it b e c o m e s
supply

we are

our balance-of-payments problems worse.
to e n a b l e

the b a n k i n g

S y s t e m lias l i m i t e d the

s y s t e m to m e e t a l l
g r o w t h i n the

boom,
Instead

credit

cred i t base.

-

Some

o f the

several

D e c e m b e r of last year,
is the p r i c e

t h a t the

steps

operations.

A measure

indicates

of m e m b e r banks.

credit demands.
have

of this

f o r the w h o l e

to som e

rat e w a s

In ad dition,

to supply reserves

borrowings

less

Federal Reserve Banks

less willing

difference

-

taken were

the d i s c o u n t

r e plenish their reserves.

the

7

extent

the

the

figure

A widening

banks,

w h i c h f o r the y e a r 1 9 & 5 a v e r a g e d

$ 9° m i l l i o n

in 1 9 6 5 ,

do not encourage

is n o w a b o v e

individual

borrox-Jing p r i v i l e g e s
be e n to make

banks

have

f o r fun d s ,

larger banks have
tended

to k e e p

to d e v e l o p

this

often called

open market

"net b o r r o w e d

reserves"«

r e s e r v e s a n d the

in m e e t i n g e n l a r g e d

in o r d e r to m a i n t a i n t h e i r r e s e r v e
Reserve System;
have

gradually

Since

in d e b t

positions,

and borrowings,

The n e t b o r r o w e d r e s e r v e

to stay

conservative

especially

special

i n c r e a s e d to t h e i r
figure,

averaging

the F e d e r a l R e s e r v e B a n k s

for extended periods and offer

lenders.

from getting

reserve

requirements

that banks

can pay

for certain types

commercial

certificates

o ut

on t i m e

banks have

through efforts

consumer-type

r a i s e d the




This

t h a t b o r r o w to

s y s t e m t h r o u g h its

$350 million.

used negotiable

competition

also asked Congress

percent.

Reserve S ystem has been

b a n k s m a y be h a v i n g

F a c e d w i t h the h e a v y d e m a n d f o r l o a n s ,

The

Federal

In

o n l y to c o v e r u n e x p e c t e d c o n t i n g e n c i e s , the e f f e c t h a s

the b a n k s m o r e

their competition

f r o m ^ to

charge m e m b e r banks

$^ 6 7 m i l l i o n ,

$700 m i l l i o n .

others.

o f the n e t b o r r o w e d r e s e r v e p o s i t i o n

difficulties

More and more

of a b o v e

than

banking system between excess

b e e n f o r c e d to b o r r o w f r o m the F e d e r a l

present level

raised

to the b a n k i n g
is the

dramatic

of d e p o s i t ,

savings

of h a n d ,

to a t t r a c t

s t e p p e d up
tim e

whereas

instruments.

set a

of c o n s u m e r s a v i n g s

t h a t a d d i t i o n a l pox^ers t o r e g u l a t e

recently

c e i l i n g on r a t e s

instruments.

the

others

In a n eff o r t

the F e d e r a l R e s e r v e

deposits and

deposits.

It h a s

r a t e s p a i d on time

-8-

and

s a v i n g s d e p o s i t s be

Insurance

Corporation,

Broadly
a

stated,

g i v e n to the F e d e r a l R e s e r v e ,
a n d the Horae L o a n B a n k B o a r d .

th e

functions

o f the F e d e r a l

flow of m o n e y a n d cre dit that will

stable

dollar,

and a

the p o l i c y m u s t

the b o u n d s
us

prices
the

g r o w t h c a n n o t be

is e x c e s s i v e .

I n the

rate

and

lasted as

continue

pressures

t h o u g h s o m e t i m e s we

developments,
moreover,
extent

in the

w i t h the

difficulties

t h a n e v e r to a c h i e v e
No

one

themselves more

than

sam e p o l i c y - m a k e r s

times




it ha s .

obvious

that

wholesale

Almost

industrial

40 p e r c e n t

almost

is p a r t l y
I am also

our ability

of p a y m e n t s

of

At

the
sure

60 p e r c e n t .
reason
that how

to h o l d p r i c e

from inflationary
the p r e s e n t m o m e n t ,

s t e m m i n g to a

rising prices make

of a balance

tell

f i r s t q u a r t e r of t h i s

inflation.

it m o r e

considerable
difficult

of i n t e r n a t i o n a l payments.

of m o n e t a r y a n d c r e d i t p o l i c y a c t i o n s b y

the F e d e r a l R e s e r v e p o l i c y - m a k e r s

your help and understanding

a

This m e a n s

second quarter,

five y e a r s

from

surplus,

the l i m i t a t i o n s

recognize

growth,

rising prices

individually profit

in ou r b a l a n c e

in o u r t r a d e

their responsibilities

c o n t r i b u t i o n t o the a c h i e v e m e n t

difficult

one g a i n s

our long-run goal

recognizes

i n the

to e x p a n d d e p e n d s u p o n

long run no

from a reduction

in the

to f o s t e r

d e m a n d c a n be k e p t w i t h i n

of 3.5 percent.

long as

l o n g the e c o n o m y w i l l
Even

seems

f i r s t h a l f of t h i s y e a r ,

d u r i n g the p r e c e d i n g

this p e r i o d of e x p a n s i o n has

It

Presently,

i n the g r o s s n a t i o n a l p r o d u c t

of pr i c e s

d o wn.

change.

to produce.

yea r was explained by rising prices;
Stability

orderly economic

sustained unless

increased at an average annual

dollar increase

Reserve S y s t e m are

in i n t e r n a t i o n a l p a y m e n t s .

conditions

o f the e c o n o m y 5s a b i l i t y

that demand

facilitate

long-run balance

change as economic

orderly economic

the F e d e r a l D e p o s i t

do.

Nevertheless,

in m a k i n g the g r e a t e s t p o s s i b l e

o f o u r n a t i o n 5s l o n g - r u n a s p i r a t i o n s .

in the F e d e r a l R e s e r v e

these

S y s t e m ’s e f f o r t s

I beseech

in t h e s e