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Statement of
William McChesney Martin, J r , ,
Chairman, Board of Governors of the Federal Reserve System
before the
Joint Economic Committee

February 6, 1959


Mr. Chairman:
When I testified before your Committee last year, on behalf of
the Federal Reserve Board, economic activity in this country was receding.
Contraction in output and employment was general.
rising at a disturbing pace.

Unemployment was

No one could be sure how far downward

adjustment would go, or how long it would last.
We pointed out then that, with the exception of the catastrophic
recession of the thirties, every moderate cyclical decline since World
War I had been checked in the course of a year.

It was further

emphasized that many forces were present in the economy that were
favorable to eventual recovery.

But at that time we did not know, nor

did we then expect, that vigorous recovery would so soon be in full
swing, and that contraction from 1957 levels of activity would be shorter
in duration than most preceding economic recessions.
Even while the Committee's Hearings were going on, some were
beginning to view the outlook more optimistically.

In January, corpora¬

tions, taking advantage of easier conditions and lower interest costs in
financial markets, were offering an increasing volume of new issues in
anticipation of future needs for funds, and to refund shorter-term debt.
State and local governments were bringing to market bond issues that were
deferred earlier, and were stepping up the pace of bond offerings to provide
for public works.


2 -

Farmers continued to foresee favorable output and price conditions
in agriculture and were bidding up further the prices of farm land.


with slackened customer demand for credit and with strengthened reserve
positions, were bidding more aggressively for assets.

By February,

bankers were accelerating expansion of the assets and deposits of their
institutions, thus increasing more rapidly the economy's stock of cash
balances and raising its over-all liquidity.
Within a matter of weeks following last year's hearings, personal
income and consumer spending had ceased to decline and, in fact,
showed modest recovery.
an upward trend.

Production and employment soon after resumed

Whether these developments, though encouraging, fore¬

shadowed wide revival in activity was not known at the time; not until the
June-July period did the current flow of information and reports provide
substantial confirmation that general economic recovery was actually
under way.
From that stage on, currently available data, reflecting trends in
markets, production, and employment, showed that recovery was both
broadly based and vigorous.

Pickup in employment, however, lagged behind

that of output as is usual in early phases of cyclical upswing.

At the year

end, eight months after recovery set in, the level of total output in the
economy approximated that prevailing at the output peak of 1957.
Recovery has been so rapid and widespread as to indicate that the
revival phase of the economic cycle has by this time probably run its course.


3 -

The economy has reattained its pre recession level and now appears to be
entering a phase of resumed economic growth,
Federal Reserve Action to Combat Recession
This brief review of changing levels of economic activity during 1958
provides a backdrop for specific comments about Federal Reserve policy
and action over the past 16-month period of recession and recovery.
As reported to you last year, Federal Reserve policy began to
shift in a counter-recession direction in late October and early November
of 1957. About that time, the System directed its open market operations
to supplying reserves more liberally to the banking system.

It also re¬

duced the discount rates on member bank borrowings from the Reserve

As the stream of factual information verified the emergence of

recessionary trends, Federal Reserve actions and policies became more
aggressive and discount rate, open market, and reserve requirement
instruments were actively applied in complementary fashion to foster
ease in credit markets and encourage bank credit and monetary expansion.
From late fall 1957 through April 1958, there were four reductions
in Federal Reserve Bank discount rates, from 3-1/2 per cent to 1-3/4
per cent.

Through continuing open market operations from late fall of

1957 to early last summer, the Reserve System supplied the commercial
banks with some $2 billion of reserve funds.

Through three successive

reserve requirement reductions in late winter and early spring of last
year, the System released for the use of member banks about $1.5 billion


4 -

of their required reserves.
The total amount of reserve funds supplied by the System to
commercial banks over the nine months, November 1957-July 1958, was
enough to enable member banks to reduce their discounts at the Reserve
Banks from $800 million to about $100 million, to offset sales of gold to
foreign countries amounting to about $1.5 billion, and to finance a
commercial bank credit expansion of almost $8 billion.

Monetary expansion

from February through July stimulated by this Federal Reserve action was
at an exceptionally rapid rate--at an annual rate of 13 per cent for all
deposits, including time and demand deposits.

For the active money supply;

that is, demand deposits and currency seasonally adjusted, the rise was
at an annual rate of 8 per cent. After the shift in Federal Reserve policy
in the summer, expansion in the active money supply slackened, and for
the year as a whole it amounted to about 3-1/2 per cent.
Broader Effects of Monetary Action
Although the immediate impact of Federal Reserve policy was on
commercial banks, it clearly had broader effects upon the economy

For one thing, since commercial banks are direct participants

in some degree in all important credit markets, expansion in bank lending
and investing activities intensified competition among all lenders for the
acquisition of the available supply of credit-worthy loans and securities.
This worked to reduce the cost of financing to borrowers generally -businesses, farmers, consumers and home buyers, and all levels of
government. It also widened access of all potential borrowers to credit funds.


5 -

Another effect of the credit ease was a greater willingness on the
part of banks and other lenders to make new loans to business customers
and to renew outstanding credits.

This facilitated the orderly run-off of

excess business inventories accumulated in the preceding boom.

It also

furthered the completion of business programs of plant and equipment
expansion begun in that period.

With a $6 billion reduction in business

inventory holdings and a significant cutback in fixed investment programs
since recession began, it is perhaps remarkable that business loans out¬
standing declined only $1 1/2 billion in the year ending September 1958.
The ability of businesses to maintain their bank borrowing and also to
borrow more readily in capital markets not only cushioned downward
pressures on investment spending but helped many companies to
minimize cutbacks in their working force and payrolls, to maintain
dividends, and to strengthen liquidity positions.
In housing markets, the easier conditions broadened the avail¬
ability of mortgage funds.

Discounts were reduced on FHA and VA mortgages

subject to ceiling interest rates, and interest rates on new conventional
mortgages also fell.

As bank credit expansion gained in momentum, banks

participated in mortgage investment more actively than at any time since
the boom housing year of 1955.

The increased availability of mortgage

funds at lower cost, together with the maintenance of personal income,
was promptly reflected in a step-up of builder activity in constructing
new houses.


6 -

In the consumer instalment credit area, the increased availability
of funds made it possible for lenders to meet sound demands for credit
more readily, thus bolstering lagging demand for consumer durable goods.
On some transactions, terms were eased and, in addition, new credit
plans were developed and extended.

Easier credit conditions permitted

lenders to be more liberal in granting renewals and extensions of time for
repayment of outstanding credit.

Thus, the volume of repossessions and

credit losses was less than would otherwise have been the case, with
benefits to both borrowers and lenders.
Increased availability of funds also had an important impact on
State and local government financing and spending.

In many cases, the

lower cost of financing encouraged States and municipalities to borrow
in order to finance capital projects.

In a few cases, lower market rates

enabled local governments that had a legal ceiling on permissible interest
rates to return to the market.

The increase in spending by State and

local governments from the summer of 1957 to the summer of 1958 was
a billion dollars more than in the corresponding period of the preceding year,
These observable effects of easier monetary conditions which
developed from efforts to combat recession were, of course, important and

They are not to be overly stressed, however, for monetary

action is always only one element in Government counter-recession policy.
In turn, Government policy is always only one element in the total economic

Businesses, individuals, and State and local governments, in the

light of their own circumstances, were taking actions to adjust and adapt


7 -

their situations and to redirect their energies.

Their actions undoubtedly-

shaped the recovery and gave it momentum.
Changing Expectations
Achievement of monetary ease to combat recession so promptly
and amply was not without its problems.

One of the most acute was the

build-up of prices in the bond market as speculators counted on continuing
business recession, credit ease, and still higher bond prices.


reactions and expectations always play a role in swings in economic and
financial developments, but were of particular importance in financial
markets last summer as the economic outlook changed from one of a
continuing recession to one of early, vigorous recovery.
At that time, the improved economic outlook led to a sharp change
in expectations in regard to renewed inflationary pressures and a turnabout
in the trend of interest rates,

A much larger Federal deficit loomed up

than had been estimated, as well as the crisis and threat of military action
in the Middle East.

Concern about the drain of gold from the nation's

monetary reserves through sales of gold to the industrial nations of Europe
was a further cause of uncertainty.

The fact that the Canadian Government

announced a major refunding operation at sharply higher interest rates
was also a complicating factor.
In these circumstances, heavy market sales by holders of U. S.
Government securities in anticipation of higher interest rates
depressed bond prices.


Initially, this selling stemmed from temporary

- 8-

holders who had bought in anticipation of a continued rise in Government
security prices.

Some of these holdings had been acquired with funds

borrowed on thin margins in connection with the Treasury 's June financing

In many cases, selling was forced because the margins

vanished as security prices declined.
Prices of Government securities continued to decline under
pressure of steady liquidation and the reluctance of investors to purchase
market offerings in view of changed prospects for credit demands and
inflationary threats.

On July 18, the Federal Open Market Committee

concluded that the market situation had become disorderly and decided to
intervene temporarily in the medium- and long-term sectors of the
Government securities market.

This action was within the framework of

the Committeefs established operating rules.

From July 18 to July 23 the

System purchased $1,2 billion of securities involved in a Treasury re¬
financing and a small amount of other notes and bonds.
Thereafter, as market conditions became more orderly, no further
Federal Reserve open market transactions were effected outside the usual
area of short-term Government securities.

During late July and early

August, sales of Treasury bills by the System together with other factors
that absorb reserves more than offset the large volume of reserves
supplied to the market by Federal Reserve intervention in the Government
bond market.


9 -

Shift in Federal Reserve Policy
By this time, there was clear evidence in current statistics that
recovery in economic activity and production, though not yet in employment,
had gained considerable momentum and was likely to go forward without
serious setback.

Moreover, in view of the strength of consumer demand,

further decline in business inventory holdings and capital outlays was no
longer likely.

Monetary policy was now reinforcing the existing foundation

of productive activity and preparing the economy for a new advance.
About this time, inflationary expectations began to spread.


abrupt upward shift of interest levels in central money markets, while
precipitated by liquidation of speculative positions in Government securities,
reflected investor demand for an interest premium to cover the risk of a
depreciating purchasing power of invested funds.

It was accompanied by a

significant shift in investor allocation of newly available funds to common
stocks instead of fixed interest obligations, with hedging against inflation
a frequent explanation of the change in investor policy.

Large current

and prospective demands for credit by the Federal Government, State and
local governments, and home purchasers, also influenced the rising cost
of borrowed funds.

In the stock market, the volume of trading was expand¬

ing rapidly and the rise in stock prices carried the yields on common
stocks below the yields on bonds of the same companies.
Developments in our financial markets, as well as the very large
deficit which the Federal Government was facing, were occasioning concern,
abroad as well as at home, about the future of the dollar.

The extent of


10 -

concern among foreign financial leaders was clearly evident last fall at
the annual meeting of the International Bank and Monetary Fund at
New Delhi, India,
In the light of the rapidly changing economic situation, in many
ways highly encouraging but with inflationary and speculative psychology
spreading, the Federal Reserve, during the summer, began to moderate
the policy of credit ease with a view to tempering the rate of bank credit
and monetary expansion.
System open market operations after midsummer supplied only a
portion of the reserves needed to meet rising credit demands and to offset
the reserve drain of a continued gold outflow.

As a result, member banks

were obliged to draw down their excess reserves and to increase their
borrowings from the Federal Reserve Banks.

Such borrowing was made

more costly when Reserve Bank discount rates were raised in the late
summer from 1-3/4 per cent to 2 per cent, and at mid-fall when they
were again raised to a level of 2-1/2 per cent.
Since last summer, bank credit and the money supply have continued
to expand but at a rate much reduced from earlier in the year.


seasonal expansion in business loans was supplemented by a rapid growth of
real estate loans.

On the other hand, bank holdings of short-term U. S.

Government securities rose only moderately despite a substantial increase
in their supply to finance the Treasury's deficit.

With business sales and

liquidity showing rapid rise, the higher interest rates that developed in the

- 11 market helped to attract a substantial volume of funds of nonbank investors,
especially business corporations, into the purchase of the new short-term
Treasury issues.

As a consequence, the Treasury was able to finance

most of its deficit outside the banking system, and at the same time
banks were able to meet private credit demands accompanying economic
recovery, with only a moderate further growth in total bank credit and money.
Regulation of Margin Requirements
In addition to its broader monetary responsibilities, the Federal
Reserve is directed by law to prescribe margin requirements to guard
against excessive use of credit for purchasing or carrying stock market

By providing a means of dealing directly with this volatile type

of credit, margin requirements serve as a special-purpose supplement to
the general instruments of Federal Reserve action.

Since the flow of credit

into the stock market fluctuates with general business conditions, changes
in margin requirements are usually correlated with policy actions that
affect general credit availability.
Following the stock market decline in the early fall of 1957, total
credit to customers for purchasing and carrying stock market securities
declined by about 5 per cent and was back to about the level outstanding in

With this indication of abatement of credit use in the stock

market, the Board of Governors, early in January 1958, reduced the
required margin from 70 to 50 per cent.
With the increasing activity and rise in stock prices accompanying
economic recovery, stock market credit rose sharply, reaching by July a


12 -

level about 20 per cent above the volume at the beginning of the year.


view of the rapid rise in credit to finance trading in or temporary owner¬
ship of stocks and the emerging investment psychology favoring purchase of
stocks as an inflation hedge, the Board, early last August, restored the
required margin to 70 per cent.

As outstanding stock market credit

continued to rise following this action, the Board, in mid-October, raised
the required margin to 90 per cent.
The Current Situation
The shift in monetary policy during the fall aligned monetary
expansion more closely with the developing potential of the economy,


spending on durable goods and housing continued to expand and was reflected
in high levels of output of household durables, in a pickup in production of
1959 autos, and in a rise in new housing starts to one of the highest levels
in recent years,

Business inventory policies were switching from liquida¬

tion towards accumulation, and there was a widespread, though small,
upturn in capital expenditures.

At the same time, Federal, as well as

State and local government spending, was expanding rapidly in accordance
with budgetary authorizations adopted earlier.
In financial markets moderate curtailment of credit availability
and higher interest rates served to dampen speculative excesses then
developing, to restrain and spread out the volume of new corporate and
municipal security financing, and to facilitate the financing of the large
Federal deficit outside the banking system.

The restraint of corporate

- 13 and municipal security financing followed some anticipatory borrowing by
these issuers earlier in the year when long-term interest rates were lower.
At the turn of the year, business capital financing was again rising, and
there was a large calendar of authorized but unissued State and local
government securities.
Total economic activity, measured in real terms, has regained
its earlier peak.

The active money supply has increased by about 2-1/2

per cent above the prerecession level, and holdings of other liquid assets,
including time deposits, are up sharply.
growth is established.

The financial basis for further

While economic prospects are generally favorable,

there are several areas - - unemployment, exports, prices, and Federal
finance - - that are matters for continuing concern.
Despite the rapid recovery in production and sales, unemployment
remains disquietingly high.

The lag in employment is in part the result

of a marked increase in productivity.

The present availability of capital

and manpower resources represents a potential for near-term growth of
the economy without inflation.

As output of goods and services expands in

response to growing demands, opportunities for employment should
increase as they have in past periods of economic expansion.
In exports, which declined sharply until early last year, recovery
has not yet set in.

The export decline was largely in materials and fuels

and was due in part to the ending of boom conditions abroad; resumption
of economic expansion is now beginning in industrial countries abroad and
eventually there should be some improvement in foreign demand for our

- 14 exports.

It is significant, however, that the European countries which

announced a broader convertibility for their currencies at the end of
1958--and other countries too—are giving our exports of manufactures
stiff competition in price and quality, and these countries are now able
to devote a larger share of their resources to their own exports than
they could in earlier postwar years.

While this reflects progress towards

international balance, our producers need to adjust to these competitive
forces abroad if they are to share in growing world markets.
Prospects for our international payments position thus merge with
the third problem; that is, our price system. A market economy such as
ours depends upon the price mechanism to allocate resources by reflecting
the interplay of demand and supply.

The price mechanism cannot do its

job of efficient resource allocation in accordance with the changing demands
of consumers unless there is some flexibility in individual prices.


does not mean that wide swings in the general price level are desirable.
The price paid by Smith represents the income of Jones.

But there is

cause for concern when, in spite of a decline in the demand for his product,
Jones raises his price, and an opportunity to stimulate both output and
employment is thwarted.

This is particularly disturbing when it comes on

top of a price rise that Jones made when the demand for his product
increased. Such a one-way movement of prices--whether it is explained
as demand-pull, cost-push, or both - - i s not compatible with an efficient
market system. If it were to be continued, it would pose a serious threat

- 15 to the otherwise favorable prospects for healthy growth in consumption
and production.
Now as to Federal finances, it is essential at this stage of the
economic cycle that the Government should attain a balanced budget and
then achieve some surplus as economic advance continues.

Whatever the

desirable level of expenditures, deficits, while justified in time of
recession, should be avoided when economy is at a high level of activity.
It is also of vital importance to have a healthy, broad-based
Government securities market that enables the Treasury to lodge its
debt outside the banking system. In other words, the Treasury must be
able to compete effectively and flexibly with other borrowers for the
available supply of savings.
Appropriate debt management policies, while contributing to
financial stability, are in turn dependent on such stability. Investors cannot
be induced to purchase fixed income securities if they fear a steady
erosion of the purchasing power of the dollar.
The banking system has an important role to play in aiding the
Treasury's financing.

This role involves assistance in the broad distribu¬

tion of securities and, in accordance with the volume of reserves made
available and the meeting of essential private credit demands, the
retention by banks of that portion of the Government debt that is consistent
with stability of the dollar.

Resort to financing Government deficits through

the banking system entails the creation of new supplies of money rather than

the use of existing funds.

16 -

In a period of high economic activity, this is a

high road to monetary inflation.

There can be no effective control of

inflation if the banking system is made the major source of funds to
finance government deficits.
Government Policies and Economic Growth
As the United States economy emerges from the recession of 195758, it seems likely, if past experience is a guide, that we are on the
threshold of a new period of economic growth.

This is an opportune

occasion, therefore, to consider the question of appropriate public and
private policies to foster steady expansion of the economy,
Economic growth is a principal objective of governmental policy
in every country of the world.

The rate of growth is widely accepted as an

indicator of the performance of an economy, A word of caution is in order,
however, regarding the very difficult task of measuring growth.


measurements, particularly when they cover long periods of time and
comparisons of one country with another, are necessarily approximations.
They vary with a host of factors, including the scope of activities covered,
both public and private;

the character of such activities; quality as

contrasted to quantity of output; and many others.

Nevertheless, regard¬

less of these measurement difficulties, growth estimates, properly
constructed and interpreted, can be useful aids in appraising economic
Desirable economic growth goes beyond increases in line with a
growing population and labor force.

It involves a rate that makes possible

- 17 rising living standards through increasing consumption per capita for present
and future generations.

This requires increasing output per worker; that

is, higher productivity through advancing technology.
In our economy, consumption takes the form mainly of consumer
purchases of the goods and services supplied in free markets by private
producers and merchants.

Our living standards also encompass services

provided by the various levels of government.

Fundamentally, economic

growth at a more rapid rate than population increase is the response of
men to their ever-increasing wants.
Among the other reasons for seeking economic growth is the im¬
portance of demonstrating to the world that free economies under democratic
political systems can outperform regimented economies under dictatorial
political systems in providing high and rising living standards for all of
the people.
Economic progress, however, cannot be measured merely by
percentage increases in the quantity of output. Also at stake is the opportunity
to live as free men, the responsiveness of the productive system to the
desires and tastes of consumers, the quality of goods and services, the
degree of leisure and opportunities for using it in a satisfying way, and our
willingness to aid other nations seeking similar advantages.

These aspects

of our economic performance will have a great influence on how the rest
of the world judges the merits of free versus regimented economies.

- 18 Economic Growth Without Inflation
When we consider the influence of governmental policies on economic
growth, it is useful to distinguish between two related aspects of the process.
First, growth involves expanding capacity to produce goods and services.
Second, it involves expanding demands for goods and services at a rate
sufficient to utilize the expanded capacity.
The first aspect of growth—an expanding output potential--depends
upon such basic factors as additions to the labor force, advancing technology,
and a flow of savings combined with a desire and ability on the part of pro¬
ducers to use them in the creation of a growing stock of modern plant and

The other aspect of growth depends upon a balanced expansion

in demands for final product by the major sectors of the economy--households,
businesses, governments at the State and local as well as the Federal level,
and demands from abroad.
For growth to be sustainable, an equilibrium between these two
sides of growth must be maintained. If total demands do not keep up with
the output potential, over-all growth will slacken, for the inducement to
business to add to productive capacity will lessen.

If total demands tend

to run ahead of the output potential, the general price level will begin to
rise and this, in turn, will have an adverse impact both on growth of demands
and on means of financing increased and improved capacity.

It will also

have adverse effects on the efficiency with which resources are utilized;
likewise, the equity or fairness with which final products are distributed
in markets among consumers, businesses, and savers.

- 19 What then is the function of monetary policy in relation to these
two aspects of growth?

In general, it is to attempt to provide credit and

monetary resources and an atmosphere in financial markets conducive to
the basic growth factors.

At the same time, aggregate demand for goods

and services should expand in close relation to the capacity to produce.
On the demand side, growth basically depends on spending out of
incomes earned in the production of goods and supplying of services.
Monetary policy facilitates the expansion of money holdings, through
sound credit expansion, consistent with the growing capacity of the economy
to produce without inflation.
On the supply side, basic growth factors are the labor force,
technology, and investment of savings.

Growth of the labor force is to

some extent influenced by over-all demands, but more generally by
population growth, age distribution, and social customs.


progress and the desire to save and invest savings productively are influ¬
enced by the monetary environment,

An atmosphere of price and financial

stability in general is necessary both to the incentive to save and to rapid
technological advance.

Thus, through continuous efforts to safeguard

the value of the dollar and to create a climate of financial stability in
which savers can have confidence in the future value of their investments,
monetary policy makes a contribution to economic growth quite apart
from its influence on demands for goods and services.
It is for these reasons that price and financial stability is essential
to the achievement of maximum economic growth,

We have had a fairly

- 20 good growth record over our history, but we have had too much instability
in our levels of employment and prices.

A major problem is to moderate

this instability so that the losses in employment and output of recession
periods will not depress our longer-term rate of growth.
there is


widespread concern about the danger of renewal of inflationary
The Federal Reserve shares that concern.

this situation is not to forecast inflation.

To point to dangers in

Public and private actions

appropriate to present circumstances can prevent these dangers from
Among potential inflationary factors first,perhaps foremost, is the
budgetary position of the Federal Government.

As the economy moves up

toward more intensive utilization of its productive resources, it is essential
that deficits give way to surpluses.
of danger,

There is no mystery about this source

If the will exists, the way will be found.

It clearly lies in

adaptation of Federal expenditure and tax policies in order to produce a
budgetary surplus in prosperous times.
Second, there are the problems arising from the so-called cost-push
inflation which is part of a spiral process stimulated by demand pressures.
In the period ahead there is a strong prospect that demands will continue
to expand.

In these circumstance, we must recognize the dangers both of

wage increases in excess of productivity growth and of price increases beyond
what the traffic will bear.

Business and labor leaders have a paramount

responsibility to the general public as they make wage and price decisions
over the coming year.

- 21 Then there is the easy acceptance of the idea that a little inflation
is not seriously harmful.

The experience in the government bond market, to

which I alluded, is a vivid example of the influence of inflationary expectations
in financial markets.

To the extent that such attitudes come to be reflected

in decisions on wages, prices, consumption, and investment, they help to
bring about their own realization.
These are the major reasons for concern about the possible develop¬
ment of inflationary pressures.

To be fully aware of a danger, and to face

up to it, is not to despair or to capitulate, nor does it mean being blind to
other national needs, including sustained economic growth.
The Federal Reserve System will continue to the best of its ability
to contribute, so far as it can, to continuing prosperity and economic growth,
without inflation.

Such decisions as it must make within its particular

province manifestly are not enough to assure attainment of the national
objectives to which we all subscribe.
management, labor, agriculture

What this Congress decides, what

and, indeed, the public generally decide

to do will win or lose the battle against debasement of the currency with
all of its perils to free institutions.
The state of the nation tomorrow - - its progress and prosperity - rests with the decisions of today.

A \ *.



Employment gains have lagged output gains in this recovery, as
they usually do.

The lag, however, has been greater than in preceding

postwar recovery periods, and the level attained by unemployment has been
both higher and somewhat more sluggish in its response to rising activity.
Thus, while real GNP and industrial production are currently both within
striking distance of earlier highs, nonfarm employment— up



its recession low— has regained less than a third of its recession loss


.U million Jobs.
Since September, there has been little evidence of any extensive

general rehiring of workers other than for seasonal reasons.

In the two

preceding postwar recession-recoveries, employment stabilized for a
number of months after the recession bottom, but once recovery set in,
employment increases were not halted until a new peak was reached.
What accounts for the slower picku p in employment in this
cycle than in preceding postwar cycles?

Several factors may be mentioned.

Productivity increases in manufacturing industry have

apparently been higher this time than in the earlier recovery periods,
reflecting very high modernization investment in preceding boom as
well as the greatly expanded industrial research and development programs
of the boom period.

For instance, automobile output in December, while

only H per cent lower than in December 1956, provided one-fifth less in
production worker employment than two years earlier.

The railroads,

while carrying about as much freight as in late




per cent

A Federal Reserve Board staff paper presented for the record of the Joint
Economic Committee by Chairman Martin at a hearing February 6 , 1959*


less employment.

Similarly, the coal mines have been about equalling

output levels of a year ago with about


per cent fewer employees.

The larger productivity gains of this recovery period may
also be a factor in recent stabilizing of average hours of work per
week in all manufacturing industry.

Virtually all of the recession

decline in hours worked had been recovered by last September and
there has been no further gain since.

In earlier postwar cycles,

hours of work continued to increase long after this stage of recovery
It is important here to note that, since 1955# there seems to have
been a downward drift in the length of the workweek.

It may well be that labor cost increases of recent

years have made management more cost conscious than in any earlier
period and that greater efforts are now being applied to limiting
employment and overtime increases in order to keep costs down.


postwar growth in fringe benefits now makes record-keeping costs
and benefit liabilities rise rapidly as new workers are hired, and
this would operate to slow down management decisions to add to
work forces.
(3 )

In machinery and other industries associated with

investment outlays, employment has shown little recovery rise because
expansion in fixed investment has not yet shown marked revival.


the past, expansion of nonproduction worker employment, associated
especially with research and development, has been correlated with
rising investment.

In the preceding two cycles, business investment

had shown much more revival than has been shown up to the present
point in this cycle.


Wonmanufacturing employment, which had shown strong growth

through the whole postwar period, with only modest slackening of expansion
in the two preceding downturns, declined moderately in this recent
recession and has shown little expansive tendency in recovery.


by the rise in nonindustrial GWP since last spring, perhaps as sharp or
sharper productivity gains have been experienced in nonmanufacturing
activities as in manufacturing industries during this recovery period.
Presumably these nonmanufucturing activities are digesting earlier
postwar increases in their working force.

The industries in which recession declines in employment

have been highest and greater than in preceding recessions have been
durable manufacturing, railroads, and mining.

These industries have

been subject to a secular decline in postwar years in employment of
semi-skilled workers, with reductions in semi-skilled jobs more
accentuated in each succeeding recession-recovery period.

This means,

of course, a sizable problem of transfer of employment to other gainful
activities, a problem that can be only resolved slowly.
With the rise in employment opportunities lagging, that is
to say, showing slower advance than in preceding postwar recoveries,
what about the unemployment problem and prospects over the months
ahead ?
Unemployment has been higher all through this recessionrecovery period than in earlier postwar cycles.
seasonally adjusted high of


It reached a

per cent of the labor force in the

summer and declined to about 6 per cent subsequently.

In numbers of

unemployed, the decline has been about 1 million workers.



While unemployment has been higher than in preceding cyclical
dips, the general pattern of rise and decline has not been dissimilar
to that of preceding cycles.

The seasonally adjusted unemployment did

not fall below 4.5 per cent of’the labor force in the 1949-50 recovery
until about


months after recession ebb, and in the 1953-54 recovery

this rate was not pierced until after 10 months.
the unemployment rate fell to under


In the Korean boom,

per cent, but in the


boom, 4 per cent constituted a floor and most of the time the rate
fluctuated just above 4 per cent.
In the two earlier postwar recoveries, employment rose and
unemployment declined at the same time that sizable additions were
being made to the working force.

In the recent recession, part of

the rise in unemployment was due to the large number of secondary
earners who entered the working force when primary earners had their
pay reduced or lost their jobs.

The recent decline in unemployment

has reflected in part withdrawal from the work force of many of these
secondary earners as well as withdrawal of some older and younger
workers for want of job opportunities.
Recovery in job opportunities has been uneven for different
groups of workers.

Younger workers have generally faired better than

older workers, and females better than males.

Relatively high rates

of unemployment persist for durable goods workers, semi-skilled and
unskilled workers, and for nonwhite workers.

Among those with long

duration unemployment, durable goods workers, miners, and railroad
workers are numerous in relation to their role in the labor force.



Recovery re-employment has also been uneven geographically.
In California, employment has returned to prerecession highs.


Michigan, it has fluctuated only seasonally and unemployment is currently
well above last year's rates.
surplus labor markets was


At midsummer, the number of substantial
out of 1^9, and by the present month the

number of such markets had declined by only 13*

The concentration of

substantial surplus markets continues to be in the east and midwest.
Two observations about current labor market conditions seem
warranted from this review.

First, on the supply side, a conjuncture

of secular and cyclical forces seems to have contributed to the present
volume and composition of unemployment.

As we have noted, a high

proportion of the unemployed is concentrated in durable goods and
related industries, making the continuing unemployment problem a
cluster of localized problems rather than a general problem.
may also work to make unemployment slack linger on.

But this

The terms

"technological unemployment" and "labor immobility" undoubtedly will
be used more frequently again to describe a possibly slower decline
in the unemployment rate than featured the earlier cycles.


given appropriate job opportunities, the American worker has been
extremely mobile in adopting to new occupations and new conditions.
Second, on the demand side, the labor market in the recent
period has, on the whole, been experiencing a less vigorous demand
for labor than in the comparable phase of the other postwar cycles.
But as consumption expenditures rise further and as capital expenditures
begin actively to expand, demand for labor will surely strengthen, and
particularly in the durable goods areas where unemployment is now



Gains in worker productivity are typically high in the

recovery phase of the cycle and then slow down in the expansion phase.
Gains in output in the expansion phase increasingly require utilization
of older facilities and these facilities take more manpower per unit of
How fast available manpower resources will be taken up in the
period ahead depends on the pace of further expansion in aggregate demand
and especially of durable goods demand and on the strength of competitive
responses, especially price response, in meeting additional growth in

If expansion in money demand is dissipated in price advance,

the employment impact will, of course, be lessened.
Taking into account the relatively larger pool of unemployed
manpower at this stage of the present cycle compared with earlier postwar
cycles, it seems reasonable to observe that manpower availability will
not become a limiting factor on the further increase in total production
nearly so soon as it did in the two preceding cycles.
If inflationary tendencies can be checked, currently available
manpower resources and unused capacity can provide the basis for an
extended period of economic growth.