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release on delivery
Wednesday, October 12, 1966)

Summary of Remarks
Sherman J. Maisel, Member,
Board of Governors of the Federal Reserve System
at the
Joint Meeting of the Boards of Directors of the
Federal Reserve Bank of Cleveland

Moraine Country Club
Dayton, Ohio

October 12, 1966

Economic developments during the past year have been
characterized by a sharp increase in defense expenditures for
Viet Nam, and a continued—and probably over-exuberant—rise in
business investment in plant, equipment, and inventories.


accommodation of our resources to these two expanding uses has
been reflected in rising prices, increased demands for credit,
and higher interest rates.
While we have moved fast and far in these areas, there
now hopeful signs that the exuberance is calming down.


ever, this is by no means certain from the evidence so far at

on the other hand, there is always the possibility that

°nce demand slackens the process may go too far.

Should that

happen, monetary and fiscal policies would by necessity have to
change accordingly.
The problem this past year has been to shift a relatively small amount of resources to increased defense and busie s



The actual cost of this shift has not been great

terms of output and employment but has been high in interest
t s and psychologically.

It has caused distress to numerous

individuals, families and firms and to one or two major sectors

the economy, particularly housing.
Because of these negative developments it has been

*asy to overlook the favorable side.

Productivity and employ-


We reach new production

n t have continued to rise rapidly.


heights each month.

Industrial output has expanded at a fast

Pace and unemployment has approached desirable low levels.
The rise in Viet Nam expenditures and more than normal
business expenditures threatened to raise total demand by 4 per

ent or more above our real growth rate.


Resources have been

reed for these uses partly by increased taxes, partly by removal
some demand through higher interest rates and less available


edit, and partly by price increases.
From the start I have argued that the impact both on

the over-all economy, and on individuals in particular, would
have been far less if more reliance had been placed on taxes to
transfer these resources with correspondingly less reliance on

°netary policy or on price increases.
There are indications that a transition stage may have

been reached, if one can rely on recent press reports and surveys



business and consumer attitudes.

It is possible, too, that

shift in leading indicators of the past few weeks may also
indicative of a change in the wind.

The pressure from demand-

incentives seems to have decreased.
The pressures will be lessened if it turns out that
businesses are really cutting back on demand.


This would ease

Problem of transferring resources within the economy and

°uld reduce pressure on banks and the credit markets.



on these markets have also been reduced by the President's


P r °gram to lower the impact of Government financing on credit

More weight also seems to be given now to his repeated

urances that if more resources are required for Viet Mam they


l be balanced by reductions in other Government programs or

ky financing through higher taxes.
If the growth in demand should show positive signs

weakening the Government would have attractive alternative


It would not be necessary to raise taxes and steps

ould be taken to increase the flow of credit.
On the other hand, the price structure still seems out



Wage bargains are going up and commodity price in-

creases are still being announced with all too frequent regular


A major problem on the inflationary side is that we may

left with the built-in possibilities for a wage-price spiral,
Particularly if reasonable adherence to price-wage guidelines

annot be re-established.
While we can be optimistic, the need remains greater


an ever for alertness to the signs of significant change.


Matter which direction changes take, alacrity will be required


adjusting monetary, credit, and fiscal policies to the
olvi n g economic scene.