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Jacksonville Meninak Club Jacksonville, Florida 11-6-67 WALKING THE TIGHTROPE I am very happy to be speaking to you tonight in the largest city in Florida,, Jacksonville has long been the wholesale and banking center for Florida. Its importance in this field was recognized forty-nine years ago with the establishment of the Jacksonville Branch of the Federal Reserve Bank of Atlanta. More recently, it has become an insurance center and a distribution center for imported manufactured goods for the entire Southeast. Completion of the new $27 million airport should enable Jacksonville to maintain its position as an important transportation and communications center, and the new $27 million expansion of Baptist Hospital should go a long way to con firm its position as a medical center. And the new Anheuser-Busch brewery and the Owen Steel plant will contribute to its importance in manufacturing. Thus , Jacksonville is continuing the growth that has made it such a dynamic and interesting place in which to live. The statistics we gather in our operations and our research activities confirm the impression one gets in driving around this beautiful city. For example, from 1960 to 1965, population of the metropolitan area increased 9.2 percent, and has since topped the half-million mark. Employment increased 16.2 percent from 1960 to 1966, while the unemployment rate declined from 3.2 percent to 2.2 percent and average weekly earnings in manufacturing rose nearly $20 to exceed $100 a week. Retail sales, stimulated by increased payrolls, rose by nearly 45 percent. Jacksonville's banking community both participated in this growth and helped to make it possible. Deposits in the metropolitan area rose 31 percent, -2- while loans went up by nearly 82 percent; and debits to demand deposits within the old city limits rose by 68 percent. Thus, over the past six years, the Jacksonville area has shared with the rest of the country an almost unprecedented growth in output, employ ment, and income. We all want this growth to continue, because it means increasing prosperity for ourselves and increasing opportunities for our children. Which brings me to the theme that I want to establish this evening: growth. our collective responsibility for maintaining stable economic We all--the business community, labor, government and the financial community--have large stakes in the maintenance of growth with stability. No one wants to return to the depressed conditions of the thirties nor to the inflation of the years right after World War II. ries with it responsibility. But opportunity car The Federal Reserve System bears a large share, but by no means all, of this responsibility. The Act which established the Federal Reserve System said that the System's purposes were to provide an elastic currency, provide facilities for discounting commercial paper, and improve the supervision of banking. It was recognized, even from the beginning, that these purposes, although desirable in themselves, were also means of helping to achieve the broader goals of price stability, high levels of employment, and rising levels of income and consumption. These broader goals have come to be more and more explicitly recognized, through legislation such as the Employment Act of 1946, as the ends to be sought by total national economic policy, of which the monetary policy of the Federal Reserve System is a part. The Federal Reserve System makes its influence felt by affecting the -3- amount of reserves available to member banks0 The more reserves the banks have available, the more loans and investments they can make, thus increas ing the buying power available to business, consumers, and government. less the reserve availability, the less credit banks can extend0 The At any given meeting of the Open Market Committee, policy makers have to decide which of these courses to follow. But this is not always an easy task. If millions of people are out of work, prices are falling, and produc tion is declining, there is no question of which direction monetary policy should move? obviously the System should supply reserves to the banks and do everything in its power to encourage credit expansion so as to put idle resources to work. If, on the other hand, prices are rising rapidly, job vacancies are increasing, and production bottlenecks are widespread, the obvious course is to restrict the growth of bank credit, perhaps, in ex treme cases, even to reduce total reserves. no problem for policy makers. At either extreme, there is It is, paradoxically, when the economy is behaving best that the policy maker's job is most difficult. Any airplane pilot knows that it takes more skill to maintain a given course and alti tude in the face of variable winds than it does to get there in the first place. And unfortunately, no automatic pilot has yet been invented to guide the economy safely on its course. Just as the pilot must anticipate storms that might blow him off course and prepare to make the necessary changes, so the monetary policy maker must be able to foresee the disturbances the economy is likely to face in the near future, because there is always some lag between action and response. And economic forecasting, in spite of all advances in computer -4- techniques, is still even less exact a science than weather forecasting,, Still, the record of the last six years is, we believe, pretty good. From early 1961 to the middle of 1966, the Federal Reserve System sup plied increasing amounts of reserves to its member banks, chiefly through open market operations. As a result, all during the period there was a consistent rise in bank credit. This additional credit supplemented the saving of consumers and businesses. It helped to put men and resources to work and added to our productive capacity. The unemployment rate fell markedly from the high levels of the 1960-61 recession, factory operations moved nearer capacity, and at least until 1965, prices remained remarkably stable. This was what we wanted--stable economic growth without inflation. By the latter half of 1965, however, it became apparent that inflation ary pressures were building up. The unemployment rate was rapidly getting down to the 4-percent rate that the administration had set as a target; factories were getting very close to capacity utilization; and, as a result, prices were rising too rapidly for comfort. In particular, wholesale prices, which had been almost unchanged since 1958 , rose about 4 percent in a year. Although production continued to increase, demand for goods was increasing even faster and was outrunning the economy's productive capacity. circumstances, the Federal Reserve had to make a decision. In these It could continue to supply additional reserves in sufficient quantities to permit the banks to satisfy all their loan applications at unchanged interest rates, and, of course, there are always pressures to keep the credit tap open. No one likes to stop a good thing, and inflation always gives the illusion of pros perity. People see their incomes increasing and businesses see their sales -5- going up, and they may not realize immediately that they can't buy any more with the extra money because everything costs that much more. On the other hand, the System could restrict the amount of reserves available to the banks. This would tend to hold down the growth of purchas ing power and thus restrain the rise in prices, but it would also mean a rise in interest rates, as borrowers competed for the available loan funds. It would, incidentally, also make it more difficult and expensive for the Treasury to finance the Federal Deficit, inflated because of the war in Viet Nam. The Federal Reserve chose the policy that seemed necessary in the cir cumstances, although it was perhaps not the most popular one. 1965, the System raised the discount rate from 4 to 4^ percent. In December of This action was designed to make it more expensive for banks to borrow from the System in order to expand their loans. against time deposits were raised. Twice during 1966, reserve requirements Open market operations supplied less addi tional reserves to the banks than they would have liked, although, until the second half of the year, total reserves actually continued to increase. In the meantime, the Federal Government had also contributed to slowing down the inflationary spiral through such actions as putting corporate tax payments on a pay-as-you-go basis sooner than originally planned, reinstat ing the excise taxes on automobiles and telephone charges that were dropped at the beginning of 1966, reducing the under-withholding of personal income tax, and reducing non-defense expenditures. Unfortunately, the tax programs did not have their full effect until after a considerable time lag and so, until September of last year, nearly all the strain of holding inflation in check had to be borne by Federal Reserve monetary policy. As a result, -6- interest rates rose to record postwar levels and banks found themselves caught in the tightest liquidity squeeze in many years. In September, President Johnson asked Congress to suspend temporarily the 7 percent tax credit on investment in machinery and equipment and the accelerated de preciation provisions on new buildings, and announced that the government would take whatever steps were necessary to combat inflation. These fiscal measures, taken together with monetary restraint, produced the desired result. The price rise was moderated, the formerly feverish pace of inventory accumulation slowed down, and in 1967, industrial produc tion actually declined slightly0 As soon as it became evident that the boom had cooled off, the Federal Reserve reversed its policy of restraint and began once more to supply additional reserves to the banking system. It was just as important to prevent a recession in economic activity as it was to prevent the former inflationary excesses. The latest figures seem to show that this, too, has been successfully achieved. Bank loans have resumed their upward climb and industrial production, employment, and retail sales have all turned up. Gross national product, which actually declined in the first quarter of this year after making allowance for price rises, rose a healthy $4 billion in the second quarter and $6.9 billion in the third. But worringly prices seem perhaps to be on the rise once more. And there are enough indications of potential inflationary pressures to ensure a continuing plentiful supply of gray hairs for monetary policy makers. Viet Nam is a constant drain that has repeatedly upset the calculations and the best intentions of the Federal budget makers. Long-term interest rates, after falling in late 1966 and early 1967, are now higher than they were a year ago, indicating a strong demand by business for funds for expansion. -7- Can the growing productive capacity of the economy keep pace with the demands--both military and civilian-being put upon it? This is the ques tion that is most likely to absorb the attention of Federal Reserve policy makers in the months to come. On the other hand, if all our best hopes are realized, and a halt can be brought to the fighting in Viet Nam, this will create problems of read justment. Jacksonville businessmen must be acutely conscious of the dif ficulties that Jacksonville would face if the world situation would allow us to reduce significantly the size of our military establishment. We must all have, at least, contingency plans to handle a period of reconversion. It seems to me there are two principal lessons to be learned from the experience of the last two years. flexible. One is that economic policy must be We must be prepared to counteract inflation, as in 1965, and to reverse that policy, as in 1966, soon enough to prevent the necessary cool ing off period from developing into a recession. This flexibility is abso lutely essential and, because tax changes by the Federal Government inevitably require a good deal of time for congressional consideration, the monetary controls of the Federal Reserve System--and its freedom of action--are vitally necessary weapons. The other is that the Federal Reserve System cannot do the job alone. It must work cooperatively with Federal policies on taxes and expenditures, so that they reinforce one another and do not work at cross purposes. The System must also have the willing cooperation of banks, of the business com munity, and of labor. We all have a great stake in continued prosperity. Let us balance that opportunity with a sense of prudence and responsibility. -8- Jacksonville SMSA Percent Increase 1960-66 1960 1965 455,411 497,000 525,000 (Sales Management) Total non-agric. 145,500 161,900 169,100 16.2 Manufacturing 21,000 22,700 23,800 13.3 Government 23,000 27,300 29,400 27.8 Federal 10,000 10,500 11,100 11.0 3.2% 2.6 % 2.2% $80.60 $93.48 Population (July 1) 1966 Employment Unemployment rate Average Weekly Earnings--Mfg. $100.50 (Not comparable with prior years Retail Sales Sales Management Banking SMSA $598,897,000 All Insured Commercial Banks Deposits ) ) Dec. 31 Loans ) Debits--year (city only) $818,709 ,000 $866,083,000 44.6 Millions of Dollars 662.5 803.0 865.6 30.7 252.6 394.0 459.3 81.8 10.018 17.503 16.845 68.1 642.7 813.5 826.5 28.6 278.0 415.4 467.4 68.1 Jacksonville Trade & Banking Area Banking Deposits ) ) Dec. 31 Loans ) Debits--year -9- Anheuser-Busch $40 million brewery announced in May— employs 300, payroll $3 million. Owen Steel announced steel fabrication plant in March--employs 150 The Florida Supreme Court ruled proposed issue of $111 million in revenue certificates by Jacksonville port authority to build shipbuilding yard for Lockheed at Blount Island was unconstitutional. Issue now academic because Lockheed did not get Navy contract for fast development logistic ships (FDLS). Port Authority will nevertheless hold an opinion referendum November 7 hoping a favorable vote will make court reconsider. Also, has proposed a constitu tional amendment to permit industrial revenue bonds to build facilities for lease to private industry. Court's decision was based on position that bonds were private use of public credit. Florida surpassed Louisiana this year as top sugarcane producing state-Florida Trend. Expansion of Baptist Memorial Hospital to cost $27 million announced in July, on bank of river West of present buildings. Seven hundred and seventy eight beds on completion, 16 stories. Consolidation of Jacksonville and Duval County approved by voters August 8. Baldwin Atlantic Beach, Jacksonville Beach, and Neptune Beach still independent.
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