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iffLrelease on delivery 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.