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For Release at 11 A.M.
LoS Angeles Time
(2 P.M., Eastern Daylight Time)
Octobey 27, 1965


Remarks of

Board of Governors
of the
Federal Reserve System

at the

22rtd Annual Meeting
of the
National League of
Insured Savings Associations

Los Angeles, California
October 27, 1965


I have returned to Los Angeles as a semi-native.


I moved here in the Army 23 years ago, I had my first contact
with the savings and loan industry.

I made an initial deposit

or share purchase in a local savings and loan in 1942.
Last week I checked to see what had happened to your
industry in the interim.

I found that California savings and

loan institutions had $300 million in shares outstanding in 1942.
Now they have over $20 billion.
7,000 per cent.

That is a growth of nearly

Nationally your industry has grown from under

$5 billion to over $106 billion, or by 2,200 per cent in the
same 23 years.
Growth on this scale demonstrates the excellent results
obtained through Government and industry cooperation.


Federal savings and loan insurance, the story would be very

When they operated completely on their own, our

banking and thrift institutions suffered from a long record of
losses, instability, and runs.

Because even the best felt

repercussions from the troubles of the worst, there is now a
nearly unanimous agreement that Government support, cooperation,
and regulation are necessary.
The savings and loan industry is a dramatic example of

So is our overall economy.

of output, wealth, a
steadily for 56 mont
our history.

Every day, we set new records
Our economy has been expanding

«^longest peacetime expansion in



The record of this expansion is striking.


February 1961-Gross national product is up over $173 billion.
The Federal Reserve index of industrial pro­
duction has increased 38 per cent.
Families have $117 billion extra in income
to spend or save.
Corporation profits are more than $21 billion
There are 5-1/2 million more people at work.
Unemployment has fallen from 6.9 to 4.4 per
Compared to the previous peak in May 1960-Deposits in commercial banks have risen by 52
per cent.
Savings in your savings and loan have gone up
by 88 per cent.

Causes of Downturns
While we all rejoice in this record, a great deal of
worry is evident.

Everywhere I go people ask one or the other

of these questions:


Hasn't the expansion gone on too long; doesn't
it have to end soon?


Isn't a record expansion bound to lead to over­
heating and inflation?

The simple answer to both is no.

Let me use the remainder

of my time to explain why caution and understanding are necessary
but fear is not.
First I would like to point out that many economists-myself included--have avoided use of the term "business cycle” for
over 20 years.

"Cycle1 is a poor term because for many people it

connotes an inevitable sequence of events.
cycle down.

What cycles up must

This is not the lesson of history.

depressions don't just occur.

Contractions or

They are caused and can be explained.

While past expansions have ended for a wide variety of
reasons, their causes can be grouped under four major headings.

a) War, international crises or shortages, or
similar outside forces have caused the economy
to operate for a time under forced draft.
Later this extra demand has fallen off.
b) Governmental operations. The impact on the
economy of governmental expenditures and taxes
has been sharply reversed by governmental
action or, as likely, inaction. This has
occurred either through a change in fiscal
policy or a failure to change it, as when
so-called "fiscal drag" went unrecognized
and unheeded.
c) Credit. The banks or the monetary authority
have brought about a slowdown in the expansion
or a contraction in the supply of credit.
d) Over-investment. Production of housing, of
inventories, or other types of investment
has exceeded a level sustainable by the growth
in final demand.


The New Economics
Better understanding of why past expansions have ended
has led to the concepts of the New Economics.

What does this term

I think it contains three related ideas:
First, agreement that a continuing expansion of income,

jobs, and welfare and a minimal price rise is a possible, and proper
national goal.
Secondly, recognition that reaching our goal requires
understanding and deliberate action in monetary, fiscal, and wageprice fields.
And, thirdly, widespread acceptance by business and
political leaders, and by the press and public that the nation's
requirements must be considered in making price and wage decisions
and that monetary and fiscal policy should be used more positively.
Most significantly, the ideas taught by economists for the past
25 years have gained wider acceptance.

Maintaining progress may

require a deliberate use of the Federal budget and of credit to add
to or subtract from total demand.

Government action should be

deflationary when total demands are threatening to outrun available

It should add to income when other demands fall short

of our growth potential.


The New Econoraics puts a heavy burden on gentlemen such
as you, who are recognized as experts in the areas of finance and
budgets and do so much to help form public opinion, to understand
and explain current economic events.

As business leaders, you are

well aware of major community needs such as those for schools,
parks, health, and national defense which can only be met on a
governmental basis.

As economic observers, you see immediately

the impact on your savings flows and mortgage demands when the
Government shifts from a policy of expanding to one of contracting
overall demand.

Monetary Policy
Relative price stability has characterized our present

Now, however, the backlog of unemployed resources has


The gap between production and potential output has


Clearly price increases are more likely.

If total demand

rises at a much faster rate than supply, inflation will be an
immediate danger.
These facts have led to a widespread debate on the proper
stance for monetary policy.

I might comment briefly on this debate.

In doing so, I want to make two things clear.

Our economy changes

A great advantage of monetary policy is that it can react

and shift with the economy.

A correct policy today might not be a

proper one a month, or even two weeks, from now.

Secondly, as you all recognize, the formation of monetary
policy is complex.

Final decisions by the 12-man Federal Open

Market Committee are made in the context of changing credit needs
and the fiscal plans and requirements of the rest of the Government.
Obviously any information you might glean today about my own views
in the transient circumstances of the day may have little relation
to any future decisions of the Committee as they are molded in
the crucible of public and private debates.

Criticism of Current Policy
Critics of current monetary policy range from those who
feel that recent moderate firmness is far too easy to those who
feel it is much too tight.
Criticism can be grouped roughly under six headings.

Some, as represented by certain European central

bankers, believe that adjustment in our critical balance of payments
situation can be brought about only by action so restrictive as to
risk deflation.

To contract demand, we should raise interest

Depressed countries import less and may export more.

Others fear the future because of Viet Nam.


judge that the amounts which rumors say we might spend on the
military could not be added to other demands without inflation.
As an offset, civilian purchases of houses and similar goods
should be contracted by a tighter monetary policy.



Some believe that any expansion must be paid for by

a later contraction.

They neglect the opportunities for growth.

Based on a false analogy that the higher you rise the farther you
must fall, they would like to see the fall start from our current
rather than some future higher level.

Others feel the rate of expansion must be slowed

because it contains, or may lead to, serious distortions that would
require a depression to correct.

Two different types of reasoning

end up believing in tighter policies.

Some maintain that continuing

credit expansion at current rates is bound to end in trouble.
Credit will either deteriorate in quality, or it will Jead to too
much spending with inflationary consequences.
the opposite point of view.

Others take almost

They feel credit must be contracted

to hold production at sustainable levels.

Continued expansion at

current rates means to them that some areas will exhaust demand
and be left with unsaleable backlogs of goods.

Such imbalances

will lead to a depression.
not too easy.

Still others hold that money currently is too tight,
They argue that our excellent record has been possible

only because sufficient money and credit have been available at
reasonable rates.

Some credit has come from additional reserves, but

much has come from tapping pools of liquidity left from previous

They feel that recent interest rate increases mark the

exhausion of this prior liquidity.

Unless reserves are made available

more rapidly, the supply of credit will be insufficient to sustain
normal growth.

Interest rates will rise.

will experience another recession.

Demand will contract,



Finally, some believe that monetary policy has been

too firm throughout the expansion.
been greater with cheaper money.

The rate of growth would have
Continuation of the expansion

can be assured only by much cheaper interest rates and the availa­
bility of far more credit.

Reject Cut of Hand
I think we can reject the first three views out of hand.
I believe, as do most people in Washington, that adjustment of our
balance of payments is an immediate serious problem.


Johnson has stated the firm Administration goal of bringing our
balance to equilibrium.

However, I judge that most officials

reject the depression road as an improper path to equilibrium.
Certainly I do.
Every time I hear someone urge deflation, I am reminded
of Lamb's famous story of the first roast pork.

You remember the

tale of the tribe whose hut burned with a pig inside.
the debris, they discovered succulent roast pork.

In clearing

For years

thereafter they burned another hut every time they wanted roast

Only gradually did they learn that you could cook more

efficiently and with less economic waste.
I see our payments problem in this same way.
sales are less than o per cent of our total income.

Our foreign

It is far more

efficient to deal with a lack of foreign balance directly, as we have
done through the inte
credit restraint prog
into a depression.

m tax and the voluntary foreign
(b&gh throwing the entire economy


Similarly it would be wrong for the Government to base
its monetary policy 011 Viet Nam rumors instead of on its own best
facts and estimates.

The Vice President, Secretary Fowler, and

Chairman Ackley have all said that probable increases in our defense
expenditures have been greatly exaggerated.

While these added

expenses are unfortunate because of the sacrifices involved as well
as the necessary postponement of tax cuts and more desirable
Government spending, present plans for additional military spending
do not require a basic shift in policy.
In fact, the best available spending and tax estimates
show that for this fiscal year, allowing for the announced increases
for Viet Nam, we may already be feeling the maximum expansionary
pressures in relation to supply to be expected from fiscal changes.
Similarly, the idea that cycles are necessary and that
expansions must lead to proportionate contractions has no basis in

Policy based on such beliefs has led to disastrous events

in the past.

We must believe that we do learn from past mistakes.

We need not repeat them.

Supply and Demand
In analyzing the other three contentions I named, we
must examine the present as well as expected relationships of
supply and demand and their impacts on wages and prices.



The current expansion has brought our employment and
operating rates closer to desirable levels than they have been in
nearly a decade.

What about the future?

While there is not yet

an official forecast for next year, the consensus of business and
university economists is that growth will continue at approximately
the same rate as in recent months.

If so, demand will expand at

about the same pace as potential output.

Rates of unemployment

and capacity utilization will change only slightly from the present.
These rates do not threaten inflation.
September was 4.4 per cent.

Unemployment in

In many categories, there are still

more people seeking work than in 1953 and 1956.

Although a few

skills are in short supply, no major labor market reported an over­
all shortage.

Past experience indicates that specific shortages

can be met rather readily through training and upgrading.
A similar situation exists with respect to our overall

of plant and equipment.

Few serious bottlenecks have appeared.

While we lack good information on capacity, utilization appears
to have risen steadily from a low of around 70 per cent in 1961
to the vicinity of 90 to 91 per cent in recent months.

This is

still somewhat below the preferred rate for peak efficiency.
However, since it is an average, some industries--mainly in durable
goods--are operating above their preferred levels.


Prlces and Wages
We know that absence of generally excessive demand is,
unfortunately, no guarantee of price stability.
cost-push from pricing or wage-setting.

There can be a

Does such a push seem

Industrial prices are &Jpout 1.4 per cent higher than at
the start of 1S64.

This is more than the total amount of increase

for the entire period since 1959.

Until the recent price flurries,

these prices had moved up and down, but had no upward trend.


would all hope that the highly successful six-year record could
be maintained.
The wage situation appears promising.

Although some

increases, particularly in construction, far exceed the guidelines,
in manufacturing

unit wage costs have decreased in the past two

The rise in productivity has outpaced that in money wages.

Furthermore the calendar of labor negotiations for the coming nine
months shows few major problems.


The most difficult areas are nonferrous metals and

These are basic industries in which prices have been

Their demand has reached or exceeded capacity.


and profits have expanded, but the fact that capacity is rising
also may moderate further movements.

With these and other minor

exceptions, existing cost increases seem selective rather than

They give no indication of a cumulative interaction

of rising prices and costs.

Business and labor statesmanship

appears to be better than at times in the past.

While a few giant

firms could cause prices to rise regardless of any justification
from the basic supply and demand picture, such action appears less
likely than in the 19501s.
The price-wage situation does not add up to signs of

While tighter credit could be forced by the

irresponsible action of a few in key industrial firms, such prospects
appear less probable than in the last decade.

Lacking such cost-

push, the supply and demand situation shows little justification
for tighter credit.


The Supply and Demand for Credit
Another debate concerns the amount of credit made
available to the productive sectors over the last year and a half.
A rate of increase close to 9 per cent in bank loans and investments,
and an almost 7 per cent rise in liquid assets--the deposits of
banks, savings and loans, and mutual savings banks plus short-term
Treasury securities--exceeds the growth in GNP.

This expansion

has been accompanied by stable mortgage interest rates, a rise of
14 per cent or 50 basis points in the bill rate, and a 20 basis
point increase in corporate bond yields.
Some feel that such a growth in credit cannot be

They believe that an expansion accompanied by this

much additional debt must contain within it the seeds of its own

Others argue that such a view of the economy is,

like the belief in inevitable cycles, simply incorrect,,


the establishment of the Federal Reserve we have had no expansion
that ended because of too rapid a rise in credit.
On the opposite side, many critics believe that too many
expansions have ended because of a failure of credit to expand.
They fear that recent events herald a similar prospect.


credit expanded at a 9 per cent annual rate, the money supply grew
only at 4 per cent, and nonborrowed reserves at less than 3-1/2.
They see the recent interest rate movements as a reflection of a
lack of liquidity.

They fear a recurrence of prior periods in

which they believe growth was reduced by too little credit.


The optimists for next year base their predicted gains
on a continued expansion of plant, equipment, and inventories.
Such expectations of high investment assume that credit will be
available and at costs similar to this year.

If credit were to

tighten more and interest rates were to continue their rise, the
present optimistic predictions would have to be revised downward.
This would concern most people greatly.

It would be welcomed,

however, by those who believe that one should always stop expansions
when the first signs appear of possible price rises.

In concluding, I would like to return to the two basic
questions asked at the start.

I think it is clear that nothing

inherent in the length of this expansion requires either a downturn
or an inflation.

The proper uses of fiscal and monetary policy

have maintained an excellent economy.

We have had growth without

major distortions or price increases.
The continuation of our current growth rate is, however,
far from certain or automatic.

It is no more necessary than is a

If excesses develop; if prices and wages chase each

other; if demand falls in too many specific sectors; if we make
poor policy choices, the expansion will be slowed or halted.

To maintain growth and prosperity, it is vital that we
all have a clear understanding of our current economic situation
and the types of policies which have made this expansion possible.
The American people deserve and want to support the best possible

For this they need proper knowledge.
Our economy is dynamic.

of independent decisions.

Progress depends on millions

Our excellent record of the past four

and a half years is based on an environment of aid and cooperation
which has made it possible for our economy to develop its full

We must all work to maintain our present momentum.