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M O P.m. C . D . T . , M a y 9 , 1974
^IQQ p.m. E.D.T.)


Summary of Remarks by
Robert C . Holland

M e m b e r , Board of Governors of the Federal Reserve System
before the
- Eighty-Seventh A n n u a l Convention
Kansas Bankers Association
Kansas C i t y , Kansas
May 9 , 1974


I am pleased to join in this pleasant occasion
and to share in your Kansas h o s p i t a l i t y .

But for all

our momentary good s p i r i t s , we are aware that we are
passing through difficult times as a n a t i o n .


us in a number of a r e a s , but not least in the

sphere of business and finance where to some extent you
and we are stewards of the nation's


There is a v e r y unhappy mix of economic trends
presently u n d e r w a y .

W e find shortages--actual and

a number of the products that have helped

to make life pleasant in the p a s t .

Partly because of

those shortages--or concerns about them--we find production
c u t b a c k s , sales s h o r t f a l l s , and unemployment bulges in
a number of business a r e a s .

A t the same t i m e , those supply

s h o r t a g e s , plus generally strong spending p a t t e r n s , have
combined to produce one of the most sharply rising price
levels this country has ever had to s u f f e r .
C l e a r l y , a lot has gone w r o n g .

Trying to under-

stand the causes of our difficulties can be h e l p f u l , but
searching for scapegoats c a n n o t .

These economic troubles

- 2 were not deliberately sought.

For the most p a r t , I believe

both public and private policy makers have been trying to
do what they thought best at the time.

But w e , and

much of the world along with u s , have been v i c t i m i z e d by
an unhappy interplay of e v e n t s .

There have been significant

unforeseen m i s a d v e n t u r e s , ranging from migrating anchovies
to stubborn A r a b s h e i k s .
mistaken ideas.

There have been a sprinkling of

A n d there have been lots of good intentions

frustrated in e x e c u t i o n .
By no means have all of the results been b a d .
The economic fortunes of some sectors have blossomed for
a time; o c c a s i o n a l l y , h o w e v e r , those blossoms have w i t h e r e d .
Last year's soaring agricultural prices brought a b o o m in
farm incomes, for e x a m p l e , but this year's partial reversal
in those prices is being accompanied by further rises in
farm costs that are already raising the spectre of a
renewed cost-price squeeze on the f a r m e r .
That is ironic, for right n o w the A m e r i c a n


looks like the most effective inflation-fighter in the



1974 harvest in prospect may do more than

any other single action to brake the spiral in food costs
and hence in the cost of living.

- 3 What can general economic stabilization policies
do to help in this set of circumstances?

I w a n t to be care-

ful not to be too optimistic about them.

Fiscal policy

has the capacity to help through selective programs

on the most disadvantaged, such as the pockets

of unemployment in depressed a r e a s .

On the other h a n d ,

there does not seem to be much practical chance this year
for any overall fiscal belt-tightening that could trim the
general demand impetus to the present i n f l a t i o n .
Price and wage controls have been tried and
found wanting in the public's e y e s .

A f t e r some initial

successes in 1971 and 1972, distortions began to
chafe unbearably and the controls were overwhelmed by the
subsequent inflationary o u t b u r s t .

By the time they

expired at the end of last m o n t h , few persisting believers
in them could be found.
T h e chief remaining instrument in our antiinflationary arsenal is monetary p o l i c y .

We have used

it hard and often during the past decade to try to slow
the inflationary spiral.

I think it has helped from

time to t i m e , but not without some unpleasant side

- 4 effects in the form of credit market d i s t o r t i o n s , disproportionate downward pressures on housing and several other
a r e a s , and historically high levels of interest r a t e s .
Yet now it once again

bears a v e r y heavy share of the

burden of fighting inflation, for the v e r y practical
reason that no other public policy too] seems


capable of doing more of the j o b .
If m o n e t a r y policy is to be a workhorse in
that anti-inflationary endeavor, then I must say to you
that banks are in for an uncomfortable time.

The basic

design of our financial system has banks at its c o r e ,
and it makes banks the chief channel through which the
bite of monetary restraint is spread through the e c o n o m y .
Your liabilities become costly and hard to s u p p o r t , your
bond portfolios

drop in market v a l u e , and you are

pressed to speak in discouraging terms to your good loan
customers, either in terms of higher interest rates or
constrained loan totals or b o t h .

The Federal Reserve talks

of such unpleasantries to you as high reserve requirements
and possibly increased interest rate ceilings on time

- 5 Plenty of causes of irritations w i l l arise
between u s .

There w i l l be human mistakes in a c t i o n s -

misunderstandings w i l l o c c u r — a n d imperfections in
institutions and markets may produce some jarring m o m e n t s .
Your role and ours will be in some respects
an unhappy one--but it w i l l be absolutely essential to
success in this b a t t l e .

Whatever the irritations and

secondary difficulties we f a c e , we both must put first
things f i r s t .

We need to give top priority to those

things that further the efforts to slow down inflation.
It is the nation's number one economic e n e m y .
community's biggest economic e n e m y .
greatest economic e n e m y .

It is your

It is your own bank's

The essence of banking is

taking custody of people's dollars and promising to give
them back in good shape.


If the dollar w h i c h is your

trade continues to be a rapidly depreciating

a s s e t , then you are in a



So I appeal to you--in your own interest and
the nation's--to be the leaders in the fight


- 6 inflation.

Give your support, and your w i s e s t c o u n s e l ,

to the makers of monetary and fiscal policy as they
pursue this s t r u g g l e .

That struggle is so fierce and

closely contested that you could help to make the