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

BANKING A N D THE ECONOMY

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 .
afflict

Troubles

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

trust.

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

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

farmer

looks like the most effective inflation-fighter in the
world.

His

big

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
focused

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

presently

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
deposits.

- 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.
stock

in

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

losing

business.

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

against

- 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
difference.