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Tuesday, May 24, 1960.

MONEY, SAVING AND GROWTH

by

M. S. Szymczak
Member of the Board of Governors
of the
Federal Reserve System

before the
Illinois Bankers Association

Palmer House,
Chicago, Illinois

Tuesday, 1:00 p.m. C.D.T.
May 24, 1960.

MONEY> SAVING AND GROWTH

The international developments that have dominated peopled
thinking in recent weeks have also introduced new elements that complicate
assessment of the course of economic and financial affairs here at home.
The fact that these developments are still in process makes it
impossible for anyone to foresee at this time what they will produce, or
what the effects upon our economy will be, but already they have reemphasized the necessity for keeping our economy on a sound, strong and progressive footing.
Economic activity, despite some slackening in February and
March, achieved in the first quarter a record level, and expansion was
resumed in April.

Recent improvement rests to a large extent on two fac-

tors—first, increasing consumer purchases, particularly of automobiles,
following the advent of mild weather, and, second, reconfirmation of business plans to increase outlays for plant and equipment.

In the last six

months, moreover, there has been some ebbing of inflationary pressures
and expectations.
Current Economic Situation
Reviewing somewhat more specifically the current economic
situation, preliminary estimates indicate that the gross national
product was at a seasonally adjusted annual rate of half a trillion
dollars in the first quarter, the highest on record.

The gain over

the last quarter of 1959 was nearly $17 billion. About half the gain
was accounted for by inventory accumulation as steel producers and
users rapidly replenished inventories after the strike and as dealers

- 2 -

accumulated stocks of new automobiles.

Investment in business plant

and equipment and exports of goods and services were up markedly.
Moderate increases occurred in consumption expenditures, mainly for
services, and on Government purchases of goods and services.
The industrial production index in March and April was 109,
two points under the January level of 111 largely as the result of
the decline in steel and auto production.

The steel rate is now

about 70 to 75 per cent, not far apparently from the current rate
of the use of steel in consuming industries.
The advent of spring weather was reflected in strong gains
in retail sales in most lines.

Sales of new domestic and imported

autos were at an annual rate of about 7 million cars in April and
early May and other durable goods sales were also at high levels
during the past month.
Continuing strength in the over-all economic situation
and in businessmen's confidence in the future was indicated by the
recent McGraw-Hill Survey of business plans for capital spending.
The survey, taken in late March and early April, indicated expenditures of almost #38 billion in I960, 16 per cent more than last year.
A rising trend of outlays in I960 was also shown by a survey conducted
earlier in the year by the Department of Commerce and the Securities
a r Exchange Commission.
ri
l i per cent over 1959.
l

In that survey the indicated increase was
New capital appropriations as reported to

the National Industrial Conference Board also promised a further rise
in fixed capital outlays.

-3Gurrent Financial Developments
Inflationary expectations dominated the behavior of
financial markets through much of the second half of 1958 and into
the late summer of 1959.

Stock prices rose and yields on fixed

income securities substantially exceeded those on stocks.

Declines

in stock prices during the early months of i960 and moderate bond
price recovery narrowed the spread, but bond yields are still about
one percentage point above stock yields.
Money market rates have fluctuated considerably in recent
months.

Rates on three-month bills, for example, declined sharply

during the first quarter to a low of 2.81; per cent near the end of
March.

Thereafter the bill rate rose, and recently it has been

fluctuating approximately between 3 and 3-3/1; per cent, still substantially below the early i960 peak of 1|.60 per cent.
In the monetary field, the reserve position of the banking
system has eased somewhat.

The decline in the money supply, which

had been taking place since last July, appears to have ceased in
recent months.

Financial markets, always sensitive to changes in

trends of business activity and expectations, show that investors have
not made shifts in holdings of a size that would indicate a decline
in confidence in business prospects for i960.

Financial attitudes

may be somewhat less exuberant than in 1959, but this has tended to
strengthen rather than weaken financial markets.

-

h

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Financial Saving
Recent economic and financial developments and reduced
inflationary psychology have been affected by and have in turn
influenced the recent course of financial saving.
process can be viewed in various ways.

The savings

First, saving can be viewed

in the aggregate; the nation's aggregate saving is equal to its
income less current consumption.

But this aggregate description

of saving does not tell us much about flows of financial saving
and their relevance to the course of economic activity.

To under-

stand and analyze these flows, one has to look separately at saving
by consumers, businesses, and all levels of Government.

A sector's

saving, together with its incurrence of debt, finances not only its
acquisition of tangible assets—for example, in the case of consumers,
homes and autos—but also becomes available to the economy through
acquisition of financial assets—for example, again in the case of
consumers, Government securities and time deposits.
Consumers do most of the economy's saving.

In 1959 their

gross saving amounted to almost #75 billion, more than three-fifths
of the nation's total saving.

A substantial portion of consumer

saving flows into financial assets.

In 1959 consumers made net

acquisitions of financial assets of almost $35 billion.

Of this

total about a third was in the form of time deposits, savings and loan
shares, and U. S. Savings Bonds.

Saving through life insurance and pension

-5funds accounted for another third. The remainder was in the form of
acquisitions of securities such as marketable U. S. Government bonds,
State and local government obligations, mortgages, and corporate
bonds and stocks.
A number of factors influence the financial forms in which
consumers save and these change from time to time.

Consumer uncer-

tainties with regard to employment and income may induce them to
sacrifice interest and dividend income for liquidity and safety.
On the other hand, higher interest rates induce consumers to move
out of money into interest-bearing forms of saving.

In 1959, for

example, individuals regarded as attractive issues of marketable
Government securities carrying rates of interest higher than those
on institutional forms of saving, and shifted some of their funds
to the higher yielding investments.
Concluding Comments
Monetary policy makes an important contribution to consumer
decisions to save or spend.

By influencing economic activity and

growth, particularly by contributing to the maintenance of stability
of the price level, monetary policy encourages saving.

Growth in the

economy is dependent on saving and reflects to a large extent the
amount of resources directed to capital goods production rather than
to production for current consumption.

The more resources are used

to increase future production the higher the growth rate is likely to
be.

Furthermore, by moderating cyclical swings that interrupt growth,

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and by stabilizing prices, monetary policy is a necessary ingredient
of the growth process.
In the current business cycle, as in past cycles, monetary
policy is playing a stabilizing role. By restraining the growth of
bank credit and money during expansion the Federal Reserve System
makes an important contribution to price stability and dampens
anticipation of inflation.
Higher interest rates in 1959 were a consequence mainly of
strong borrowing demands relative to the available supply of savings.
Although these higher rates induced a larger flow of saving into
financial assets, even this increased flow fell short of capital
market demands and market rates and yields continued to rise. More
recently, rates seem to have reached a level more consistent with
changes in market and business expectations regarding the threat of
inflation.
The recent course of international events underlines the
fact that there is constant change in the economic environment in
which monetary policy plays a part due to a variety of causes—economic, political and social, not to speak of structural changes.
As a result, monetary policy must undergo frequent change, nevertheless at all times contributing to the basic soundness of our
financial system.
to follow.

There can be no rigid formula for monetary policy

Monetary policy must be flexible, and a flexible policy

requires a constant flow of accurate economic intelligence as well
as sound judgment.