Full text of Third Meeting on the Conduct of Monetary Policy : Hearings Before the Committee on Banking, Housing, and Urban Affairs, United States Senate, Ninety-fourth Congress, Second Session, May 3, 4, and 5, 1976

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T IR M E IN O T E C N U T O
H D ET G N H OD C F
MNTR PL Y
O E A Y O IC

HEARINGS
BEFORE THE

C O M M IT T E E
B A N K IN G , H O U S IN G
U N IT E D

O N

A N D

S T A T E S

U E B A N
S E N A T E

N IN E T Y -F O U R T H C O N G R E SS
SECOND SESSION
ON
OVERSIGHT ON THE CONDUCT OF MONETARY POLICY PUR­
SUANT TO HOUSE CONCURRENT RESOLUTION 133

MAY 3, 4, AND 5, 197G

Printed for the use o f the Committee on Banking,
Housing find Urban Affairs

U .S . G O V E R N M E N T P R I N T I N G O F F I C E
73-396




W A S H I N G T O N : 197$

A F F A

COMMITTEE ON BANKING, HOUSING AN D UR BA N AFFAIRS
JO H N SPA R K M AN ,
H A R R I S O N A. W I L
T H O M A S J. M cIN T
A LAN CRAN STON ,
A D L A I E. ST E V E N !
J O S E P H R. B ID E N ,
R O BE RT MORGAN,




8
332.11
U58sea

U.S. Congress. Senate.
B.H.&.U.A.
THIRD MEETING ON TH
E
CONDUCT OF M
ONETARY POLICY

C O N T E N T S
L IS T O F W IT N E S S E S

Monday, May 3
A r th u r F . B u r n s , C h a ir m a n o f t h e B o a r d o f G o v e r n o r s , F e d e r a l R e s e r v e
S y s t e m --------------------------------------------------------------------------------------------------------------------

P
age
3

Tuesday, May 4
L e o n a r d W o o d c o c k , p r e s id e n t, U n it e d A u t o m o b ile W o r k e r s ______________________3 0
A n d r e w F . B r im m e r , v is it in g p ro fe s s o r , H a r v a r d B u sin e ss S c h o o l --------------- ------- 3 0
J a m e s J . O ’ L e a r y , U .S . T r u s t C o ., N . Y ------------------------------------------------------------- ------- 3 0

Wednesday, May 5
G a r d n e r A c k le y , U n iv e r s it y o f M i c h i g a n ----------------------------------------------------------- --------8 4
D a r r y l F ra n c is , r e tir e d , la t e ly p re s id e n t, F e d e r a l R e s e r v e B a n k o f S t.
L o u is _______________________________________________________________________________ _____ 91
F r a n c o M o d ig lia n i, M a s s a c h u s e t t s I n s t it u t e o f T e c h n o lo g y _________________ _____ 9 7
A d d it io n a l D a t a R e c e iv e d f o r th e R ec o r d
T a b le s a c c o m p a n y in g D r . B r im m e r ’ s s t a t e m e n t :
D a t a r e s o u r c e s fo r e c a s t o f t h e U .S . e c o n o m y _____________________________
M o n e t a r y a n d r e s e r v e a g g r e g a te s r e c e n t g r o w th ra te s— p e r c e n t _______
S e le c te d in t e r e s t r a te s r e c e n t b e h a v io r a n d o u t l o o k ______________________
T a b le s a c c o m p a n y in g D r . O ’ L e a r y ’ s s t a t e m e n t :
H ig h lig h t s ---------------------------------------------------------------------------------------------------------N a t io n a l o u t p u t _______________________________________________________________
Q u a r te r ly p a t t e r n s ------------------------------------ ------------------ ------------------------------------T o t a l fu n d s r a is e d in c r e d it m a r k e t s _______________________________________
T o t a l fu n d s a d v a n c e d in c r e d it m a r k e ts ___________________________________
C h a rts ;
S e le c te d s h o r t -t e r m in te r e s t r a te s _____________________________________
Y ie ld s o n n e w issu es o f c o r p o r a t e b o n d s _____________________________
C h a rts a c c o m p a n y in g P r o fe s s o r M o d ig lia n i’ s s ta t e m e n t:
S ta b ility o f s o m e e c o n o m ic in d ic a to r s o v e r s e le c te d p e r io d s :
A . F in a n cia l in d ic a t o r s -------------------------------------------------------------- ----------B . R e a l in d ic a t o r s _______________________________________________________
F e d e r a l R e s e r v e s ta ff c o m m e n t s o n P r o fe s s o r F r ie d m a n ’ s s ta te m e n t o f
N o v e m b e r 6, 1 9 7 5 _______________________________________________________________
R e jo in d e r b y P ro fe s s o r F r ie d m a n t o F e d e r a l s ta ff c o m m e n t s ------------------------




(Hi)

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50
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61
62
62
63
64
65

111
112
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130

TH IRD MEETING ON THE CONDUCT OF MONETARY
POLICY

M O N D A Y , M A Y 3, 1976

U.S.

Senate,

C o m m it t e e o n B a n k i n g , H o u s in g a n d U r b a n A f f a ir s ,

W a sh in gton , D .C ,
The committee met at 10:06 a.m. in room 5302 of the Dirksen
Senate Office Building; Senator W illiam Proxmire (chairman of
the committee) presiding.
Present: Senators Proxmire, Sparkman, McIntyre, Biden and
Morgan.
The C h a i r m a n . Today we begin our semi-annual meeting on mon­
etary policy pursuant to the resolution passed in March 1975.
This calls upon the Board of Governors to “consult with the Con­
gress— about the Board of Governors’ and the Federal open market
committee’s objectives and plans with respect to the ranges of growth
of the monetary and credit aggregates in the upcoming 12 months.”
This morning, Dr. Arthur Burns, Chairman of the Federal Re­
serve Board will give us his report on the intentions of the Board
and the open market committee to conduct policies— again I quote
from the resolution— “to promote effectively the goals of maximum
employment, stable prices and moderate long-term interest rates.”
We shall have two other hearings. Tomorrow, Tuesday, May 4y
the committee will receive testimony from Mr. Leonard Woodcock,
president of the United Auto Workers; from Dr. Andrew BrimmerT
visiting professor at the Harvard Business School and recently a
Governor of the Federal Reserve System; and from Dr. James
O ’Leary, vice chairman of the United States Trust Co. of New York.
Then on Wednesday, M ay 5, our witnesses will be Professor Franco
Modigliani of the Massachusetts Institute of Technology, who is this
year’s president of the American Economic Association; Professor
Gardner Ackley of the University of Michigan, a past chairman of
the Council of Economic Advisers; and Mr. Darryl Francis, who
recently retired from the presidency of the Federal Reserve Bank
of St. Louis.
In welcoming you, Dr. Burns, I want to say that your regularly
scheduled consultation with the Congress is proving to be a most
useful occasion for us to examine the basic intentions of the Fed.
It has enabled the Congress, and the public too, to take a longer
perspective on monetary policy than the usual day-to-day watch on
the markets.
And, while the Congress has made notable changes in its treatment
of fiscal policy through the new budget process, the less marked




(1)

2

shift in its approach to monetary policy seems to me to be also of
great potential value.
The Congress is being challenged by these consultations, and I
hope that we can make a constructive contribution to them.
I believe, Dr. Burns, that this appearance before the Banking
Committee may be, for you, the easiest to date.
You have had a very good year. You have been able to find that
your analysis and your proposals of monetary strategy have been
borne out on the basis of our recovery and the basis of the perform­
ance of interest rates with the possible exception of long-term mort­
gage rates. A t any rate, nobody seems to be very upset with the Fed
at present. The year-old recovery is on track and monetary policy
had made a good and steady contribution to it. But I shall give you
only two cheers for that, because I believe that you are now the
beneficiary of the nation’s past distress, and of the deep tax cut that
Congress insisted on early last year. It might not be quite so easy for
the Federal Eeserve Board if the recession had not reached such
depths last spring.
I believe also that you try to make things easier for yourself by
announcing to the Congress ranges of intended growth of the mon­
etary aggregates that are so broad that you will feel yourself en­
titled to do whatever you please with monetary policy.
Let me emphasize that this not only makes the consultative process
less useful to the Congress. It fails to give the public an adequate
account of your intentions.
I understand that you have to deal with a very complex situation,
and that nobody can claim the ability to forecast monetary velocity
with any degree of accuracy.
But, the object of the exercise is to inform Congress of the Fed’s
intentions. I f circumstances change, the Fed is explicitly allowed,
in the terms of the resolution, to make necessary changes in policy.
The object is that the Fed declare its view of the monetary and
the general economic prospect over the next 12 months, how you view
things now, not whether you have hedged your estimates so that you
surely will not be proved to have erred.
I have far less trouble with your review of past events. Since our
last consultation, you have maintained the monetary and credit con­
ditions that have helped restore confidence.
The monetary aggregates have only recently begun a faster growth
rate, short-term interest rates have been at lower levels for a longer
time than many observers would have thought likely, and long-term
interest rates have moved downwards since last fall, although I say
that they are still, on an historical basis, much too high. However,
most of these are good developments, and the low inflation rate and
brisk first-quarter growth in the economy put us in a position to
benefit from monetary moderation.
That is why I foresee some difficult problems of monetary judg­
ment in the future rather than at present.
The economy seems set for 1976. But the real need is to anticipate
how to keep it advancing in 1977.
I hope that your statement, and our exchangs of thoughts, will
deal with that.
We will put your entire statement in the record.




3

Proceed any way you wish. Senator Sparkman ?
Senator S p a r k m a n . I have no statement.
The C h a i r m a n . Go ahead, sir.
STATEMENT OP ARTHUR F. BURNS, CHAIRMAN, BOARD OE
GOVERNORS, FEDERAL RESERVE SYSTEM
Dr. B u r n s . It is a pleasure to meet once again with this distin­
guished committee on behalf of the Federal Reserve Board. M y re­
marks today will begin with a review of our experience during the
first year under House Concurrent Resolution 133; and I shall then
turn to the course of monetary policy we consider appropriate for the
year ahead.
Last May, when the Board made its first report under the new
procedure, the economy was just emerging from the deepest reces­
sion of the postwar period. Unemployment was at the highest level
in many years, and a large part of our industrial plant stood idle.
Prices nevertheless continued to rise at a disconcerting rate. W ith
confidence of consumers and businessmen at a low ebb, the task for
monetary policy was clear— to facilitate a substantial recovery in
economic activity, and yet avoid aggravating our problem of infla­
tion.
In that initial report, I indicated that the Federal Reserve antici­
pated that M i— that is, the money stock defined so as to include only
currency and demand deposits— would grow between 5 and 7%
percent in the year ahead. For M 2 which also includes time and
—
savings deposits, other than large C D ’s, at commercial banks— a range
of Sy2 to 10y2 percent was specified. For M 3 a still broader measure
—
of money balances encompassing, besides the components of M 2 the
,
deposits at nonbank thrift institutions— the range was set at 10 to 12
percent.
When these growth ranges were first adopted, they applied to the
year ending in March 1976. Subsequently, because of the erratic
movements to which monthly figures on money are subject, the base
for measuring the growth ranges was shifted from the level of money
belances in a single month to the average level for a quarter.
A s time passed, the base periods were moved forward in accord­
ance with the requirements of the concurrent resolution. In July
1975, we presented ranges of monetary growth for the year ending
in the second quarter of 1976. In October, ranges were adopted for
the year ending in the third quarter of 1976. And this January, the
ranges were again moved forward to embrace the 12-month period
ending in the fourth quarter of this year.
We at the Federal Reserve have viewed these growth ranges as
useful guides for the conduct of monetary policy. However, the ob­
jective of monetary policy is not to achieve any preconceived growth
rates of monetary or credit aggregates, but to facilitate expansion
of economic activity and to foster stability in the general price level.
We have therefore stood ready to alter our projected ranges if new
developments in the sphere of employment, or production, or prices
suggested the need to do so. During this first year under the resolu­
tion, we did not find it necessary to change our annual growth ranges
for any such reason.




4

Some modifications in the growth ranges were advisable, however,
because of emerging trends in financial markets. Last October, the
ranges for M 2 and M 3 were widened by reducing the lower end of
each range by 1 percentage point. Under the credit conditions that
prevailed in the late summer and early fall, it appeared that some­
what less growth in these aggregates might be associated with any
given rate of expansion in M i— the narrowly-defined money stock.
More recently, this January, the range for M i also was widened by
reducing the lower limit by one-half percentage point. This adjust­
ment took account, among other factors, of the large transfer of
funds from demand balances to savings accounts at commercial
banks— a movement occasioned by a regulatory change in November
1975, when commercial banks were granted authority to offer savings
accounts to partnerships and corporations.
These modifications of the monetary growth rates were duly re­
ported to the Congress. Thus, when I appeared before the House
Banking Committee in February, I indicated that our range for the
year ending in the fourth quarter of 1976 was 4% to 7% percent for
M i, 7y2 to 10i/2 percent for M 2, and 9 to 12 percent for M». These
departures from the initial projected ranges are small, particularly
so for volatile financial magnitudes whose relation to economic ac­
tivity and prices has always been rather loose and imprecise.
Growth rates of the monetary aggregates over the past year have
varied from month to month, as they generally do. But as I have
noted on previous occasions, even sizable divergences from desired
growth rates have little practical significance if they last only a
few months. However, when indicators develop that the monetary
aggregates are likely to move significantly above or below the desired
ranges for a sustained period, remedial action by the Federal Reserve
may be needed.
Twice in the past year, the system made noteworthy adjustments
in its policy instruments to ensure that monetary expansion would,
over the longer run, stay on a moderate course. In M ay and June of
last year, when large Treasury disbursements of tax rebates and
special social security checks were made, growth rates of all of the
moneystock measures soared to extraordinarily high levels. This
development did not come as a surprise, but its magnitude was much
greater than we had expected from the special Treasury disburse­
ments. Consequently, we set forces in motion around midyear that
were designed to return the growth of the aggregates to their longerrun paths. These actions left their mark only temporarily on short­
term market rates of interest, but they had a lasting effect on public
confidence by confirming the Federal Reserve’s commitment to a
moderate course of monetary policy.
We also did not hesitate to act later last year when growth of M x
,
in particular, fell well below the desired range. Because of the rather
rapid pace of economic expansion, the relative ease of financial mar­
kets, and the absence of any evidence of a developing shortage of
money and credit, we were inclined to view the sluggish growth of
M i during that period as reflecting fundamental changes in financial
technology— changes that were reducing the amount of money needed
to finance economic expansion. We also realized, however, that is was
impossible to predict with any precision the scale on which further



5
e c o n o m ie s in th e u se o f m o n e y m ig h t b e r e a liz e d . W e th e r e fo r e t o o k
a s e r ie s o f s t e p s t o in s u r e t h a t t h e r a t e o f m o n e t a r y e x p a n s io n w o u ld
n o t s lo w

t o o m u c h o r f o r t o o lo n g . B e g in n in g in t h e la te f a l l, o p e n

m a rk e t p o lic ie s

becam e

to

sy stem . T h is

th e

b a n k in g

m ore

a c c o m m o d a tiv e
w as

r e fle c te d

in

in

p r o v id in g

reserves

d e c lin e

a

F ederal

of

fu n d s to a r o u n d 5 p e rc e n t. L a t e r o n , th e d is c o u n t ra te w a s r e d u ce d ,
a n d r e s e r v e r e q u ir e m e n t s a g a in s t t im e d e p o s it s w e r e a ls o lo w e r e d .
T h ese

a c tio n s

appear

to

have

born e

fr u it

d u r in g

th e

past

fe w

m o n th s . T h u s f a r th is y e a r , M x a p p e a r s t o h a v e g r o w n a t a n a n n u a l
ra te o f 6 to
o v e r th e

7 p e r c e n t, c o m p a r e d w it h

p r e c e d in g

6 m on th s. T h e

a r a t e o f le s s t h a n 3 p e r c e n t

in flu e n c e o f

th e

w h a t m o r e a c c o m m o d a tiv e p o lic y h a s s h o w n u p

S y s t e m ’s s o m e ­

a l s o i n M 2 a n d M 3,

b o t h o f w h ic h h a v e g r o w n a t m o r e r a p id ra te s d u r in g r e ce n t m o n th s .
L o o k i n g b a c k a t th e p a s t y e a r a s a w h o le , w e fin d t h a t th e p a c e o f
m o n e t a r y e x p a n s io n w a s g e n e r a lly in lin e w it h th e a n n o u n c e d r a n g e s .
D u r in g th e 12 m o n th s e n d e d in M a r ch 1976, M x g r e w
rose b y 9

p e r c e n t , w h ic h

b y 5 p ercen t,

r a n g e . M 2, o n t h e o t h e r h a n d ,

o r a t th e lo w e r e n d o f th e p r o je c te d

w a s a t t h e m i d p o i n t o f its r a n g e , w h ile

M s g r e w b y 1 2 p e r c e n t a n d w a s th u s a t t h e t o p e n d o f its r a n g e .
T h e a p p r o p r ia te n e s s o f th e m o n e ta r y p o lic y p u r s u e d b y th e F e d e r a l
R e s e r v e o v e r th e p a s t y e a r c a n n o t, h o w e v e r , b e e v a lu a te d b y m e r e ly
c o m p a r in g
a d o p te d
d id

a ctu a l

ra tes

ran ges. T h e

of

th e e co n o m y p e r fo r m ?

k e ts c o n tr ib u te

m on eta ry

e x p a n s io n

w ith

fu n d a m e n t a l q u e s tio n s a lw a y s
A nd

d id

d e v e lo p m e n t s in

t o th e a c h ie v e m e n t o f

our

p r e v io u s ly

are: H ow

w e ll

fin a n c ia l m a r ­

N a t io n ’s e c o n o m ic

o b je c ­

t i v e s ? L e t m e t u r n n o w t o t h e s e b a s i c is s u e s .
W h e n o u r lo n g e r ru n g r o w th
w ere an n ou n ced
m is ts , a s w e ll

ra n g e s f o r th e m o n e ta ry a g g re g a te s

a year ago, con cern

as b y

som e

w as expressed

M em b ers

of

by

som e

C o n g re ss, th a t th e

econ o­

ra tes o f

m o n e t a r y g r o w t h w e w e r e s e e k in g w o u ld p r o v e in a d e q u a t e t o fin a n c e
a good

e c o n o m ic

e x p a n s io n . I n te r e s t

ra tes

w o u ld

m ove up

s h a r p ly ,

it w a s a r g u e d , a s t h e d e m a n d f o r m o n e y a n d c r e d it r o s e w it h in c r e a s e d
a g g r e g a te s p e n d in g , a n d s h o rta g e s o f m o n e y

and

c r e d it m ig h t so o n

ch o k e o ff th e r e co v e ry .
W e
W e

at

knew

th e

F ederal

fr o m

a

R eserve

c a r e fu l

m o n e y b a la n c e s te n d s t o
n o m ic

u p s w in g . W e

d id

not

r e a d in g

of

r is e r a p i d l y

a ls o

su sp ected

tic e s m ig h t o f th e m s e lv e s b y

sh are
h is to r y

in

th is

th e e a r ly

th a t ch an ges

a c tin g s t r o n g ly

p e s s im is t ic

th a t

to

th e

sta g es o f an
in

fin a n c ia l

re d u ce th e

o f m o n e v n e e d e d t o s u p p o r t e c o n o m ic e x p a n s io n . A n d
s ig h t

of

th e

danger

th a t

c o u l d r e i g n i t e t h e fir e s
e v e n d e e p e r t r o u b le .
S u bsequ en t
econ om y

has

e v en ts

e x c e s s iv e

of

have

e x p e r ie n c e d

e x p a n s io n

in fla tio n
born e

and

out

p lu n g e

our

s u b s ta n tia l

of

of

eco­
p ra c­

am ount

w e n e v e r lo s t

m oney
th e

and

c r e d it

econom y

ju d g m e n t .

recoverv

v ie w .

tu rn ov er

The

s in c e

in to

N a tio n ’s

la s t

s p r in g ,

fin a n c e d in la r g e p a r t b y in c r e a s e d t u r n o v e r o f e x is t in g m o n e y b a l­
a n ces. D u r in g

th e

p a st th ree

N a t i o n ’s t o t a l p r o d u c t i o n

q u a rte rs, th e

rose at an

p h y s ic a l

a n n u a l ra te

of

v o lu m e

of

our

8 p ercen t, a n d

th e r e is n o c le a r s ig n a s y e t o f a n y d im in u t io n in t h e p a c e o f e x p a n ­
s io n .
T h e r e b o u n d o f th e in d u s tr ia l s e c to r o f o u r e c o n o m y h a s b e e n ev e n
s t r o n g e r . S in c e its lo w

p o in t in

A p r i l 19 75, th e o u tp u t o f fa c to r ie s ,

m in e s , a n d p o w e r p la n t s h a s in c r e a s e d a t a n a n n u a l r a t e o f 11 p e r c e n t .




6
T h e o u t p u t o f n o n d u r a b le g o o d s a lr e a d y s u rp a ss e s its p r e v io u s p e a k ,
a n d o f la te th e p r o d u c t io n o f d u r a b le g o o d s h a s b e g u n
b r is k ly . I n

F ebru ary

a n d M a rch , th e o u tp u t

of

v a n c e d m o r e r a p id ly th a n th e o v e r a ll v o lu m e o f
tio n .
A s

th e

le v e l

of

b u s in e s s

a c tiv ity

s tre n g th e n e d . E m p lo y m e n t a cro ss

rose,

th e

th e

N a tio n

to m ove

d u r a b le

goods

up
ad­

in d u s tr ia l p r o d u c ­
dem and

has

fo r

in c r e a s e d

la b o r
by

2 ^

m illio n s in c e la s t s p r in g , a n d n o w s ta n d s a t t h e h ig h e s t le v e l in h is ­
t o r y . T h e u n e m p lo y m e n t r a te h a s d e c lin e d fr o m
7%

abou t 9 p ercen t to

p e r c e n t ; t h e p r o p o r t io n o f j o b lo s e r s a m o n g t h e th e u n e m p lo y e d

h a s d im in is h e d s u b s t a n t ia lly ; th e g r o w t h r a t e in m a n u fa c t u r in g h a s
b e e n r is in g ; a n d t h e a m o u n t o f o v e r tim e w o r k h a s in c r e a s e d n o t a b ly .
T h e ra te o f u t iliz a tio n o f o u r in d u s tr ia l p la n t h a s a ls o im p r o v e d .
I n t h e m a jo r m a t e r ia ls in d u s tr ie s , o n ly 7 0 p e r c e n t o f a v a ila b le p la n t
c a p a c it y w a s e ffe c t iv e ly u s e d d u r in g t h e fir s t q u a r te r o f 1 9 7 5 . B y th e
fir s t q u a r t e r o f t h is y e a r , t h e r a t e o f u t iliz a t io n o f c a p a c it y in th e s e
in d u s tr ie s h a d c lim b e d t o 8 1 p e r c e n t . I n

s o m e in d iv id u a l in d u s tr ie s ,

n o ta b ly p a p e r a n d t e x tile , th e r a te o f c a p a c ity u se h a s r e tu r n e d t o a
le v e l c lo s e t o t h e p e a k s r e a c h e d d u r in g 1 9 7 3 -7 4 .
T h e s e g a in s o f p r o d u c t io n a n d e m p lo y m e n t h a v e r e s u lte d in h ig h e r
p e rs o n a l in c o m e s

and

in c r e a s e d

co n s u m e r p u r c h a s in g

p ow er. A fte r

a lo n g p e r io d o f d e c lin e , t h e a f t e r -t a x e a r n in g s o f w o r k e r s h a v e i n ­
c re a s e d s u b s ta n tia lly d u r in g th e p a s t y e a r in r e a l te r m s — n o t o n ly in
n o m in a l d o lla r s . B u s in e s s p r o fits , t o o , h a v e r e c o r d e d la r g e g a in s .
T h r o u g h o u t th is
b een fa v o r a b le

p a s t y e a r , c o n d itio n s

fo r

e c o n o m ic

in

fin a n c ia l m a r k e ts

e x p a n s io n , a n d th e y

r e m a in

have

so tod a y.

T h e m o v e m e n t o f in t e r e s t r a te s d u r in g t h e c u r r e n t r e c o v e r y c o n t r a s t s
s h a r p ly

w ith

th a t

observed

in

past

c y c lic a l

u p s w in g s .

S h o r t-te r m

in t e r e s t r a t e s n o r m a lly b e g in t o m o v e u p a t a b o u t t h e s a m e t im e a s
th e u p tu rn

in g e n e r a l b u s in e s s a c t iv it y , a lt h o u g h t h e e x te n t o f r is e

v a r ie s f r o m

o n e c y c le t o a n o th e r . I n t h e c u r r e n t in s ta n c e , w it h in fla ­

tio n s t ill c o n t in u in g a n d th e T r e a s u r y b o r r o w in g a t a n u n p r e c e d e n te d
ra te, th e v ig o r o u s r e b o u n d o f e c o n o m ic a c t iv it y m ig h t w e ll h a v e b e e n
ex p ected

to

exert

u pw ard

r a tes. H o w e v e r , a f t e r
s h o r t-te r m
to

a

p ressu re

on

b r ie f ru n -u p

s h o r t-te r m

in

th e

m ark et

su m m er

o f

in t e r e s t

la s t y e a r ,

r a te s t u r n e d d o w n la s t f a l l, a n d h a v e s in c e t h e n d e c lin e d

th e le v e l o f la te

1972. L o n g -te r m

ra tes h a v e

a ls o m o v e d

dow n;

y ie ld o n h ig h g r a d e c o r p o r a t e b o n d s a r e a t t h e ir lo w e s t le v e l in m o r e
th a n tw o y ea rs.
D e c lin e s in in te r e s t r a te s h a v e e x t e n d e d a ls o t o lo a n s f r o m
in s t it u t io n s . I n t e r e s t r a t e s h a v e c o m e d o w n o n

fin a n c ia l

r e s id e n tia l m o r t g a g e

lo a n s . T h e r a t e o f in t e r e s t o n b a n k lo a n s t o b o r r o w e r s o f t h e h ig h e s t
c r e d it r a t in g

has

d e c lin e d

s h a r p ly .

K a tes

p a id

t o m e r s a r e a ls o l o w e r ; in f a c t , in t e r e s t r a t e s o n

by

oth er

bank

cu s­

lo a n s t o s m a ll b u s i­

n esses a n d fa r m e r s h a v e fa lle n t o t h e ir lo w e s t le v e ls s in c e m id -1 9 7 3 .
M o re o v e r, th e sto ck m a rk et h a s sta g ed
a v era g e p r ic e o f a sh a re o n th e N e w

Y ork

a d r a m a tic

recovery. T h e

S to ck E x ch a n g e a t p res­

e n t is m o r e t h a n 6 0 p e r c e n t a b o v e it s 1 9 7 4 t r o u g h . A

la r g e m e a su re

o f fin a n c ia l w e a lt h h a s th u s b e e n r e s to r e d t o t h e m illio n s o f in d iv id ­
u a ls a c r o s s o u r la n d w h o h a v e in v e s t e d
Our

N a t i o n ’s

b u s in e s s

e n te r p r is e s

in c o m m o n

have

ta k en

stock s.

a d v a n ta g e

of

th e

p r e v a ilin g fin a n c ia l c lim a t e t o im p r o v e t h e ir liq u id it y p o s itio n . C o r ­
p o r a tio n s h a v e is s u e d




a h u g e v o lu m e

o f lo n g -t e r m

b on d s, a n d th ey

7
h a v e u s e d t h e p r o c e e d s la r g e ly t o r e p a y s h o r t -t e r m d e b t a n d t o a c q u ir e
liq u id

a ss e ts. F o r

c o n fin e d

la r g e ly

a

to

tim e ,

access

fir m s

w ith

to

th e

p u b lic

m a rk e ts

h ig h e s t

c r e d it

fo r

fu n d s

r a t in g s .

w as

O f

la te ,

h o w e v e r , s o m e lo w e r r a t e d fir m s h a v e f o u n d a m o r e r e c e p t iv e p u b lic
m ark et fo r
lo n g -t e r m

th e ir

d e b t is s u e s , a n d

fu n d s

th rou g h

oth ers

p r iv a t e

have

m e t th e ir n eed s

p la c e m e n ts

w ith

life

fo r

in s u r a n c e

c o m p a n ie s a n d o t h e r in s t it u t io n a l le n d e r s .
B e s id e s th is , th e im p r o v e m e n t in th e s t o c k m a r k e t h a s m a d e it c o n ­
s id e r a b ly

e a s ie r

fo r

m any

fir m s t o

r a is e

fu n d s fo r

new

in v e s tm e n t

p r o g r a m s o r f o r r e s t o r a t io n o f e q u it y c u s h io n s . N e a r ly $ 2 b illio n o f
n e w sh a res w e re s o ld t o th e p u b lic d u r in g M a r c h . A n d i f th e a v e ra g e
p a c e o f n e w s t o c k o ff e r in g s in t h e fir s t 4 m o n t h s o f t h is y e a r is s u s ­
t a in e d , 1 9 7 6 w ill see t h e la r g e s t v o lu m e o f c o r p o r a t e s t o c k flo ta t io n s
in o u r h is to r y .
T h e m ark et fo r
im p r o v e d

S ta te

s in c e la s t

and

lo c a l

fa ll, w h e n

th e

govern m en t
N ew

Y ork

s e c u r it ie s
C ity

has

a ls o

fin a n c ia l c r is is

m a d e in v e s to r s c a u tio u s a n d d r o v e u p b o r r o w in g c o s ts t o m a n y S ta te s
a n d t h e ir p o lit ic a l s u b d iv is io n s . S in c e t h e n , in te r e s t ra te s o n m u n ic i­
p a l s e c u r it ie s h a v e d e c lin e d , a n d t h e y a r e n o w w e ll b e lo w t h e ir 1 9 7 5
h ig h s . N e w

Y ork

C i t y ’s d iffic u ltie s h a v e h a d

o n t h e fin a n c ia l p o lic ie s o f lo c a l a n d

a r e s t r a in in g in flu e n c e

S ta te g o v e rn m e n ts th r o u g h o u t

t h e c o u n t r y ; b u t t h e v o l u m e o f n e w is s u e s o f m u n i c i p a l s e c u r it ie s h a s
r e m a in e d r e la t iv e ly la r g e .
T h e c o n d it io n o f fin a n c ia l in s t it u t io n s h a s a ls o im p r o v e d o v e r t h e
p a s t y e a r . N u m e r o u s s to r ie s h a v e r e c e n tly a p p e a r e d in th e p re s s a b o u t
s o -c a lle d p r o b le m

b a n k s , b u t m u c h o f th is w r it in g h a s b e e n m is le a d ­

in g — i f n o t a lt o g e t h e r in a c c u r a t e .
T ru e , som e o f o u r b a n k s, p a r tic u la r ly th e la r g e r b a n k s, g o t ca u g h t
up

in

th e

e u p h o r ia

of

in fla tio n a r y

d e v e lo p m e n ts

d u r in g

th e

e a r ly

1 9 7 0 ’s a n d p e r m it t e d t h e ir fin a n c ia l c o n d it io n t o d e te r io r a te . B y n o w ,
h o w e v e r , th e se
banks

a ttitu d e s

in c r e a s e d

r e d u c in g
g re a te r

have

d e c id e d ly

th e ir h o ld in g s

s h a r p ly
a tte n tio n

t h e ir r e lia n c e
to

can on s

ch an ged.

o f liq u id
on

o f

v o la t ile

p ru den t

o n b a d lo a n s . A

y e a r , la r g e

o n e -th ir d , w h ile

sou rces o f

fu n d s . W it h

m a n a gem en t,

b a n k s a ls o a c h ie v e d m o d e r a te in c r e a s e s in
o f a s u b s ta n tia l d r a in o n e a r n in g s fr o m

L ast

a ss e ts b y

c o m m e r c ia l

p r o fits — e v e n in

th e

fa ce

in c r e a s e d p r o v i s i o n f o r lo s s e s

la r g e sh a re o f b a n k p r o fits w a s u s e d t o b o ls te r c a p i­

t a l p o s itio n s , so t h a t th e

r a tio o f

c a p ita l t o

r is k

a ss e ts, w h ic h

had

d e c l i n e d s t e a d i l y d u r i n g t h e e a r l y 1 9 7 0 ’s , in c r e a s e d a p p r e c i a b ly . C o n ­
fid e n c e in th e b a n k in g s y s te m

h a s th e r e fo r e b e e n stre n g th e n e d , a n d

b a n k s t o c k p r ic e s h a v e b e e n r is in g a lo n g w it h s t o c k p r ic e s g e n e r a lly .
M a n y b a n k s a r e s t ill w o r k in g o u t s p e c ia l a r r a n g e m e n t s w it h
e sta te in v e s tm e n t tr u s ts a n d

real

o th e r cu stom ers w h o h a v e en cou n tered

d iffic u lt ie s in r e p a y in g lo a n s . T h i s p r o c e s s w i l l c o n t in u e f o r s o m e t im e .
B u t o u r c o m m e r c ia l b a n k in g s y ste m
c o n d itio n

has

in c r e a s e d

c r e d it d e m a n d s

O th er

im p r o v e d , a n d

d e p o s ita r y

our

as th e

in s titu tio n s

is b a s ic a lly s o u n d , it s fin a n c ia l

banks

are

recovery
are

w e ll

p rep ared

lik e w is e

w e ll

s itu a te d

c r e d it d e m a n d s in th e m o n th s a h e a d . S a v in g s a n d lo a n
in

p a r tic u la r ,

have

r e p a id

la r g e

a m o u n ts

to

m eet

to

m eet

p roceed s.

o f

debt

a s s o cia tio n s ,

b e s id e s

a d d in g

h e a v ily t o t h e ir h o ld in g s o f liq u id a ss e ts. F u r t h e r m o r e , w it h s a v in g s
in flo w s c o n t in u in g t o b e v e r y a m p le , t h e t h r i f t in s tit u t io n s h a v e o f
la t e b e c o m e

som ew h at m ore




a g g r e s s iv e

in

s e e k in g

to

expand

th e ir

8

m o r t g a g e le n d in g . O u t s t a n d in g lo a n c o m m itm e n t s h a v e r is e n t o th e
h ig h e s t le v e l in 3 y e a r s ; m o r t g a g e

in te r e s t ra te s h a v e

d e c lin e d , a n d

o t h e r te r m s o n m o r t g a g e lo a n s — s u c h a s d o w n p a y m e n t r e q u ir e m e n ts
— a re b e in g lib e r a liz e d .
I t is f a i r t o c o n c l u d e , I b e l i e v e , t h a t t h e p r u d e n t c o u r s e o f m o n e t a r y
p o lic y th a t th e F e d e r a l R e s e r v e h a s p u r s u e d o v e r th is p a s t y e a r h a s
im p r o v e d th e s ta te o f c o n fid e n c e a n d fo s t e r e d c o n d it io n s in fin a n c ia l
m a r k e ts t h a t c o n t r ib u t e d t o e c o n o m ic r e c o v e r y . M o r e o v e r , a fin a n c ia l
b a se h a s b e e n la id

f o r a s u b s t a n tia l fu r t h e r r is e o f g e n e r a l b u s in e s s

a c tiv ity .
W e m ay

r e a s o n a b ly lo o k

p r o d u c tio n

a n d e m p lo y m e n t in th e m o n th s a h e a d . C o n s u m e r s p e n d ­

in g , w h ic h

began

to

fo r w a r d

stre n g th e n

e a r ly

m o m e n t u m . R e t a i l s a le s h a v e

r is e n

y e a r , in c r e a s in g

in

2 .8

per

cen t

now

t o c o n tin u e d

in

1975, h as

at a

M a rch

fa s te r

been

p ace

a lo n e .

e x p a n s io n

g a th e r in g

s in c e la t e

C on su m ers

lo o k in g t o th e fu t u r e w it h g r e a te r c o n fid e n c e — t h e y

are

l a r g e r f r a c t i o n o f t h e ir c u r r e n t i n c o m e s ; s a le s o f n e w

of

la s t

are

now

s p e n d in g a

a u to s, in fa c t ,

h a v e r e g a in e d t h e le v e ls o f la t e 1 9 7 3 .
T h e u p su rge

of

con su m er

s p e n d in g h a s

r e s u lte d

in

a

s u b s ta n tia l

d e c lin e in t h e r a t io o f in v e n t o r ie s t o s a le s in m a n y lin e s o f a c t iv it y .
D e liv e r y tim e s a r e le n g t h e n in g in s o m e s e c to r s , a n d b u s in e s s m e n a r e
e n c o u n t e r in g m o r e d iffic u lty m e e tin g c u s to m e r n e e d s f r o m
hands. A s

a con sequ en ce, m a n y

t o r ie s t o le v e ls c o n s is t e n t w it h

fir m s a r e

s e e k in g t o

th e fa s te r p a ce

of

stock s o n

r e b u ild

in v e n ­

c o n s u m e r b u y in g .

T a k e n in t h e a g g r e g a t e , s t o c k s o f g o o d s h a v e r e c e n t ly b e g u n t o r is e ,
a n d th e n e e d f o r fu r t h e r a c c u m u la tio n w ill a c t as a s ig n ific a n t s tim ­
u lu s t o r e c o v e r y t h r o u g h o u t m o s t o f t h is y e a r .
R e s id e n tia l c o n s t r u c tio n
F ebru ary

a ls o

is m o v i n g

a h ead . H o u s in g

sta rts

in

a n d M a r c h w e r e a t a n a v e r a g e a n n u a l r a t e o f 1 .5 m i l l i o n

u n its — a b o u t 1 0 p e r c e n t a b o v e th e le v e l in th e f o u r t h q u a r te r o f la s t
y e a r , a n d 50 p e r ce n t a b o v e a y e a r a g o . T o d a te , th e r e b o u n d in r e s i­
d e n tia l c o n s t r u c tio n
But

w ith

ren ta l

has

been

va ca n cy

co n ce n tra te d

in

d e c lin in g ,

som e

ra tes

s in g le -fa m ily
p ic k u p

in

hom es.

th e

con ­

s t r u c tio n o f m u lti f a m ily d w e llin g s m a y a ls o b e e x p e c t e d th is y e a r .
L a r g e r e x p e n d it u r e s f o r b u s in e s s p la n t a n d e q u ip m e n t a ls o
p ro sp e ct.

T h ere

tem p o

a c tiv ity

of

a p p r o p r ia tio n s

have
in

of

been
th e

la g g in g

la r g e

t h e fin a l q u a r t e r o f

several

s ig n s

c a p ita l

m a n u fa c tu r in g

1975; new

r e c e n tly
goods
fir m s

orders fo r

of

a

se cto r.
rose

a re in

q u ic k e n in g
N ew

c a p ita l

s h a r p ly

d u r in g

n o n d e fe n s e

c a p ita l g o o d s

h a v e n o w in c r e a s e d 3 m o n t h s in a r o w ; p r o d u c t io n o f b u s in e s s e q u ip ­
m ent

has

p h y s ic a l

r is e n

b r is k ly

v o lu m e

of

d u r in g

to ta l

in c r e a s e d s ig n ific a n t ly in
of

c a p a c ity

u tiliz a tio n

th e

b u s in e s s
each

past

4

or

in v e s tm e n t

5
in

m on th s:
fix e d

and

th e

c a p ita l

has

o f th e p a st t w o q u a rte rs. W it h

in c r e a s in g ,

corp ora te

p r o fits

ra tes

m o v in g

up

s t r o n g lv , b u s in e s s c o n fid e n c e g a in in g , a n d t h e s t o c k a n d b o n d m a r k e ts
m u ch

im p r o v e d ,

it

is

r e a s o n a b le

to

expect

c o n s id e r a b le

s t r e n g t h e n in g t h is y e a r in b u s in e s s e x p e n d it u r e s

fo r n ew

fu rth e r

e q u ip m e n t

a n d n e w f a c ilit ie s — as n o r m a lly h a p p e n s in th e c o u r s e o f a b u s in e s s c v c le e x p a n s io n .
O ur

fo r e ig n

tr^ d e

b a la n c e , h o w e v e r , w ill p r o b a b lv

d im in is h

th is

y e a r . T h e v o lu m e o f e x p o r t s d e c lin e d s o m e w h a t in th e fir s t q u a r te r .
I m p o r t s , o n th e o t h e r h a n d , h a v e c o n t in u e d t o r is e in r e s p o n s e t o t h e
recov ery o f ou r econ om y , an d th ey n o w




e x c e e d e x p o r t s o n c e a g a in .

9
E c o n o m i c r e c o v e r y is w e ll u n d e r w a y in a n u m b e r o f f o r e ig n c o u n ­
t r ie s , n o t a b ly in

J a p a n , G e r m a n y , a n d F r a n c e . T h e o u tlo o k f o r th e

o v e r a ll v o lu m e o f in t e r n a t io n a l t r a d e th u s se e m s g e n e r a lly fa v o r a b le .
I

am , h ow ever, con cern ed

w o r ld

econ om y

of

a b ou t th e

recen t

p o s s ib le

d e v e lo p m e n ts

in

a d v e r s e e ffe c ts o n
in te r n a tio n a l

th e

exch an ge

m a rk e ts. T h e s tre n g th o f th e d o lla r in e x c h a n g e m a rk e ts o v e r re ce n t
m o n t h s is , o f c o u r s e , a t r ib u t e t o o u r e c o n o m y . B u t a b r u p t c h a n g e s :
in

th e

r e la t iv e v a lu e s o f n a tio n a l c u r r e n c ie s , s u c h

w itn e s s in g ,

add

to

th e

r is k s

and

th e

co sts

of

as w e h a v e b een

in te r n a tio n a l

tra d e.

W o r s e s t ill, t h e y te n d t o a d d t o a lr e a d y e x is t in g p re s s u re s o n g o v e r n ­
m e n t s t o in v o k e m e a s u r e s t o p r o t e c t t h e ir d o m e s t ic in d u s tr ie s . F o r t u ­
n a te ly , d e s p ite

th e

severe

e c o n o m ic

p r o b le m s

t r a d e r e s tr ic tio n s h a v e b e e n g e n e r a lly
'D i e

c o u n tr ie s

w h ose

c u r r e n c ie s

e x c h a n g e m a rk e ts a re th e v e r y
dem aged b y

e x tr e m e ly h ig h

o f

recen t yea rs,

new

a v o id e d .

have

of

la te

d e c lin e d

s te e p ly

in

o n e w h o s e e c o n o m ie s a r e s t ill b e in g

ra te s o f in fla tio n . I n

o u r ow n co u n try ,

n o t a b le p r o g r e s s h a s b e e n m a d e o v e r th e p a s t 12 t o 15 m o n th s in r e ­
d u c in g th e r a te o f in fla tio n . T h e 7 p e r c e n t r is e in
la s t y e a r w a s a b o u t h a l f t h e in c r e a s e r e c o r d e d

in

co n su m e r p r ic e s
1 9 7 4 . T h e r is e in

w h o le s a le p r ic e s s lo w e d e v e n m o r e .
In

r e c e n t m o n th s , th e r e h a s b e e n s o m e fu r t h e r a b a te m e n t o f in fla ­

t io n . T h e a v e r a g e le v e l o f w h o le s a le p r ic e s h a s r e m a in e d p r a c t ic a lly
un ch an ged

s in c e la s t O c t o b e r , a n d

th e

advan ce

in

con su m er

p r ic e s

d u r in g th e fir s t q u a r te r o f t h is y e a r w a s th e s m a lle s t in s e v e r a l y e a r s .
T h is

recen t

e n tir e ly fr o m

im p r o v e m e n t

in

p r ic e

p e rfo rm a n ce ,

h ow ever,

stem s

d e c lin e s in t h e p r ic e s o f f o o d s a n d fu e ls — p r ic e s w h ic h

h a v e te n d e d t o m o v e e r r a tic a lly . M e a n w h ile , th e p r ic e s o f o th e r g o o d s
a n d s e r v ic e s a r e c o n t in u in g t o r is e a t a t r o u b le s o m e p a c e , a n d w a g e s
a r e s t ill in c r e a s in g m u c h
o f

p r o d u c tiv ity .

s t ill c le a r ly

The

fa s te r th a n

u n d e r ly in g

u pw ard, and

th e lo n g -te r m

tre n d

in fla tio n

of

co sts

m u s t r e m a in

ra te o f g r o w th

and

p r ic e s

th u s

is

a m a jo r c o n s id e r a ­

t io n in fo r m u la t in g p u b lic p o lic y .
W e a t th e F e d e r a l R e s e r v e r e c o g n iz e o u r r e s p o n s ib ilit y f o r
in g to

a cou rse

of

m on eta ry

p o lic y

th a t w ill

p rom ote

n o m ic e x p a n s io n , so th a t o u r N a tio n m a y

r e g a in

o f

r e c o g n iz e

p r o d u c tio n

and

e m p lo y m e n t. W e

a ls o

s tic k ­

fu rth e r e co ­

s a tis fa c to r y
th a t

le v e ls

m on eta ry

p o lic y n e e d s t o b e c o n s is te n t w it h a n e v e n tu a l r e tu r n t o s ta b ilit y o f
t h e g e n e r a l p r ic e le v e l. O u r p r o je c t e d

ran ges

fo r th e m on eta ry a g ­

g r e g a te s in th e j e a r a h e a d h a v e b e e n e s ta b lis h e d w it h b o t h o f th e s e
o b je c tiv e s in
The

m in d .

ra n g es a d o p te d b y th e F e d e ra l

O pen

M a r k e t C o m m itte e

fo r

t h e y e a r e n d in g in t h e fir s t q u a r t e r o f 1 9 7 7 d iffe r o n ly a lit t le f r o m
th o se a n n o u n ce d

4%

p r e v i o u s l y . F o r M x, t h e

p r o je c te d

g ro w th

ra n g e is

t o 7 p e r c e n t ; f o r M 2, t h e r a n g e h a s b e e n s e t a t 7i|> t o 1 0 p e r c e n t ;

a n d f o r M s, a r a n g e o f 9 t o 1 2 p e r c e n t h a s b e e n e s t a b l i s h e d .
T h e g ro w th
in g

th e

ra n g e s fo r M i a n d M 2 h a v e b een n a rro w e d b y lo w e r ­

u p p er end

of

each

ran ge b y

a

c h a n g e is s m a ll, b u t it is a l o g i c a l s t e p

h a lf
in

p ercen ta g e

p o in t. T h e

lig h t o f d e v e lo p m e n ts m

fin a n c ia l m a r k e ts a n d in t h e n o n fin a n c ia l e c o n o m v .
O u r d e c is io n t o r e d u c e t h e u p p e r l i m i t o f t h e M x r a n g e r e fle c ts t h e
e x p e r ie n c e o f t h e p a s t y e a r , w h e n a v e r y m o d e r a t e r is e in t h e m o n e y
stock

p roved

s u ffic ie n t

to

fin a n c e

a

good

e c o n o m ic

recovery

w ith

d e c lin in g in t e r e s t r a te s . O n e r e a s o n is t h a t t h e p a c e o f in fla tio n m o d -




e r a t e d m o r e t h a n m ig h t h a v e b e e n e x p e c t e d o n t h e b a s is o f u n d e r ly ­
in g tre n d s o f w a g e s a n d co sts . O f la r g e r m o m e n t, h o w e v e r , h a v e b e e n
t h e r e c e n t a d v a n c e s in fin a n c ia l t e c h n o lo g y t h a t e n a b le t h e p u b l i c t o
r e d u ce th e q u a n tity o f c h e c k in g d e p o s its h e ld

f o r tr a n s a c tio n s p u r ­

p ose s. F u r th e r e c o n o m ie s in m o n e y u se a r e lik e ly in th e y e a r a h e a d ,
a n d a r e d u c tio n o f th e u p p e r e n d o f th e g r o w t h r a n g e f o r M i th e r e ­
fo r e seem s w a rra n te d .
S o m e d o w n w a r d a d ju s t m e n t in t h e u p p e r b o u n d a r y o f t h e g r o w t h
ran ge

fo r

M i m ig h t h a v e b e e n

fu ll y ea r

of

renew ed

c a lle d

e x p a n s io n

in

fo r

in

b u s in e s s

any

ev en t, becau se

a c tiv ity

is

a lr e a d y

a

be­

h in d us. I h a v e a d v is e d th e C o n g r e s s r e p e a te d ly th a t, a s e v e r y e c o n ­
o m is t k n o w s , t h e r a te o f m o n e t a r y e x p a n s io n w o u ld e v e n t u a lly h a v e
t o b e lo w e r e d t o b e c o n s is te n t w it h r e s to r a t io n o f g e n e r a l p r ic e s ta ­
b ilit y . T h e a d ju s t m e n t in t h e p r o je c t e d g r o w t h r a n g e o f M i o v e r t h e
y e a r a h e a d is a v e r y s m a ll b u t p r u d e n t s t e p in t h a t d ir e c t io n . F u r t h e r
d ow n w a rd

a d ju s t m e n ts

w ill

be

needed

as

th e

econ om y

re tu rn s

to

fu lle r u t iliz a tio n o f its la b o r a n d c a p it a l r e s o u r c e s .
S o m e o f t h e s a m e c o n s i d e r a t i o n s a p p l y a l s o t o M 2. T r u e , c h a n g e s i n
fin a n c ia l t e c h n o lo g y

have

had

le s s e ffe c t o n

M 2 th a n

on

M i, s in c e

s a v in g s a c c o u n ts a t c o m m e r c ia l b a n k s — w h ic h

a re in c lu d e d

h a v e in c r e a s in g ly

c h e c k in g d e p o s its f o r

com e to be

used

in

lie u

of

tr a n s a c tio n s p u r p o s e s . B u t , a s I n o t e d e a r lie r , g r o w t h
th e p a s t y e a r a ls o f e l l w e ll b e lo w
je c t e d

th e u p p e r en d

e a r lie r . H e n c e s o m e lo w e r in g

of

th e

M 2—

o f M 2 d u r in g

o f th e

upper

in

ran ge p ro ­

bou n d ary

o f th e

r a n g e a p p e a r e d t o b e j u s t i f i e d a l s o i n t h e c a s e o f M 2.
G r o w th o f M 3 o v e r th e p a s t y e a r h a s b e e n a t th e u p p e r e n d o f th e
ran ge

an n ou n ced

o r ig in a lly ,

th u s

r e fle c tin g

heavy

in flo w s

o f

con ­

s u m e r -ty p e tim e a n d s a v in g s d e p o s it s a t s a v in g s a n d lo a n a s s o c ia tio n s
a n d a t m u tu a l s a v in g s b a n k s . W e c a n n o t b e a t a ll c e r ta in t h a t th e s e
s a v in g s in flo w s w ill p e r s is t a t s u c h a r a p id p a c e . W e w o u ld , h o w e v e r ,
w e lc o m e

a

c o n tin u e d

m a jo r s u p p lie r s

of

a m p le

fu n d s

flo w

fo r

of

fu n d s

to

h o m e b u ild in g .

in s tit u t io n s

O ur

th a t

p r o je c te d

are

g ro w th

r a n g e o f M 3 h a s t h e r e fo r e r e m a in e d u n c h a n g e d .
T h e g r o w th ra n g e s o f th e a g g r e g a te s a d o p te d b y th e F e d e r a l R e ­
serve fo r th e y e a r a h ea d

r e p r e s e n t o u r p r e s e n t ju d g m e n t

as to

th e

r a t e o f m o n e t a r y e x p a n s io n th a t is c o n s is te n t n o t o n ly w it h c o n t in u e d
e c o n o m ic
gradu al

e x p a n s io n
u n w in d in g

p ro fo u n d
v a r io u s
p a n s io n

at
of

a

u n c e r ta in tie s

m on eta ry
and

th e

and

p e rfo rm a n ce

o f

133

m o d ify

a n tic ip a te d

r e c o g n iz e s

th a t

g ro w th

pace,

but

t e n d e n c ie s .

s u r r o u n d in g

a g g re g a te s,

R e s o lu tio n
its

s a t is fa c t o r y

in fla tio n a r y

th e

th e

w ith

ra tes

econ om y.

F ederal

of

fu rth e r

are, h ow ev er,

r e la t io n s h ip s

b etw een
th e

a ls o

T h ere

am ong

th e

m on eta ry

ex­

H ou se

R eserve

C on cu rren t

m ay

need

to

r a n g e s a s c ir c u m s ta n c e s c h a n g e . L e t

m e a ssu re th is c o m m itte e t h a t w e s h a ll r e p o r t f u ll t o th e C o n g r e s s o u r
a c tio n s a n d

th e

reason s

fo r

th em .

T h e F ed era l R eserve has been

p le a s e d b y

th e th o u g h tfu l w a y

in

w h ic h t h is c o m m it t e e h a s d e a lt w it h t h e p r o b le m s o f m o n e t a r y p o lic y
in its r e p o r t s o n th e s e m o n e t a r y o v e r s ig h t h e a r in g s . W e b e lie v e t h a t
th e d ia lo g b e tw e e n th e

S y ste m

a n d t h e C o n g r e s s s tim u la te d

by

th e

c o n c u r r e n t r e s o lu t io n h a s b e e n c o n s tr u c tiv e .
T h is d ia lo g is ju s t o n e

in d ic a t io n

th a t th e

C on gress

is a t t e n d in g

s e r io u s ly a n d e ff e c t iv e ly t o its r e s p o n s ib ilit ie s in th e fie ld o f e c o n o m ic
p o l i c y . A n o t h e r is t h e c o n c e r t e d e f f o r t b e i n g m a d e b y t h e C o n g r e s s t o




11
im p r o v e its p r o c e d u r e s f o r c o n t r o l o f th e F e d e r a l b u d g e t a r y p ro c e s s .
E v id e n c e o f g r e a te r fin a n c ia l d is c ip lin e

on

th e p a rt o f

C o n g r e s s is

h e lp in g t o r e s to r e th e c o n fid e n c e o f th e A m e r ic a n p e o p le in th e ir o w n
a n d t h e N a t io n ’s e c o n o m ic fu tu r e .
O u r c o u n t r y is s t ill f a c e d

w ith

m any

s e r io u s e c o n o m ic p r o b le m s .

T h e m e n a c e o f in f la t io n is s t ill w it h u s . U n e m p lo y m e n t is m u c h t o o
h ig h . P r o d u c t iv it y h a s b e e n la g g in g . T h e e x p a n s io n o f o u r in d u s tr ia l
p la n t is p r o c e e d in g a t t o o s lo w a p a c e . T h e h o m e b u ild in g in d u s t r y a n d
o th e r b r a n c h e s o f c o n s tr u c tio n a r e s t ill d e p r e s s e d . A n d in d e p e n d e n c e
in t h e e n e r g y a r e a is s t ill a d is t a n t g o a l.
O v e r th e p a s t y e a r o r so , h o w e v e r , w e as a N a tio n h a v e b e g u n t o
fa c e u p s q u a r e ly t o o u r m a jo r e c o n o m ic p r o b le m s a n d t o d e a l w ith
t h e m m o r e c o n s t r u c t iv e ly . T h e r e is n o w m o r e r e a s o n f o r h o p in g t h a t
o u r c o u n t r y w ill p r o c e e d r e s o lu t e ly t o e s t a b lis h t h e b a s is f o r a la s t in g
p r o s p e r ity .
T h e C h a ir m a n . T h a n k y o u v e r y m u c h , D r . B u r n s , f o r a s u s u a l ,

a

m a s t e r fu l a n a ly s is a n d v e r y in t e r e s tin g in d ic a t io n o f w h a t m o n e ta r y
p o lic y is g o in g t o b e f o r th e c o m in g y e a r .
D r . B u r n s , c o u ld y o u e x p la in h o w
ta ry

ta rg ets?

H ere

d e c id e d t o fo llo w

you

seem

to

t h e B o a r d fo r m u la t e s its m o n e ­

have

a

s itu a tio n

w h ere

a m o r e c o n s e r v a t iv e , c a u tio u s m o n e ta r y

you

have

p o lic y

in

th e c o m in g y e a r th a n la s t y e a r .
Y ou

h a v e lo w e r e d

p ercen t to 4 ^

th e

ran ge

of

M i,

fo r

to 7 p e rce n t. M id p o in t

e x a m p le , fr o m

w a s s ix

and

5 to

7%

a q u a rte r. N o w

t h e m i d p o i n t is fiv e a n d t h r e e -q u a r t e r s .
I n e x p la in in g th is , y o u s a y t h a t it w a s p a r t ly b e ca u s e th e c h a n g e in
fin a n c ia l m a r k e ts a n d b e c a u s e o f t h e n o n fin a n c ia l e c o n o m y a n d d e v e l­
o p m e n ts as y o u

go on

p ru d e n t step

th e d ir e c tio n

in

to

s a y th a t it w o u ld
o f r e s to r in g

seem

th a t a v e ry

g e n e r a l p r ic e

s m a ll

s t a b i l i t y is

a c h ie v e d b y t a k in g th is r e d u c t io n in y o u r m o n e t a r y r a n g e g o a ls .
H o w d id y o u a r r iv e a t th ese n u m b e rs ? W h a t fa c t o r s d id th e B o a r d
ta k e in t o a c c o u n t ?
W hat

I

am

g e ttin g a t

is w h a t

a s s u m p tio n s d id

th e B o a rd

m ake

a b o u t v e lo c it y , a b o u t in fla tio n , a b o u t e c o n o m ic g r o w t h ?
D r.

B urns. T h a t is a v e r y d iffic u lt q u e s t io n t o a n s w e r b e c a u s e th e

F e d e r a l O p e n M a r k e t C o m m it te e , a s y o u k n o w , c o n s is ts o f 1 2 in d i­
v id u a ls . A

g r e a t d e a l o f e v id e n c e is p r e s e n te d t o th e C o m m itte e b y

o u r s ta ff. E a c h o f u s r e v ie w s t h e e v id e n c e p r e s e n t e d , a d d s t o it , m o d i­
fie s i t i n

h is

ow n

fa s h io n . A t th e

en d , a fte r

d e lib e r a tin g f o r

som e

tim e , t h e C o m m it te e r e a c h e s a c o n c lu s io n . G e n e r a lly , b u t n o t a lw a y s ,
t h e c o n c lu s io n is u n a n im o u s .
The

C h a ir m a n . L e t m e f o l l o w u p b y b e i n g a l i t t l e m o r e s p e c if ic .

I s th e m o n e ta ry p o lic y , fo r
e x p e c t e d fis c a l p o l i c y
F or

e x a m p le , in flu e n c e d

in

any w ay by

th e

o f th e g o v e rn m e n t?

e x a m p l e , t h e P r e s i d e n t ’s p r o p o s a l

of

r o u g h ly

a $395

b illio n

e x p e n d it u r e p o lic y w it h a d e fic it o f a r o u n d $ 4 3 b illio n .
T h e C o n g r e s s a p p a r e n tly b e in g s o m e w h a t h ig h e r th a n th a t, c o m in g
in w ith b e tw e e n $ 4 1 2 a n d $ 4 15 b illio n
w h a t la r g e r d e fic it.

in

e x p e n d it u r e s a n d a s o m e ­

W h a t a s s u m p t io n d i d y o u m a k e w it h r e s p e c t t o fis c a l p o l i c y ? D i d
you

assu m e th a t th e

P r e s i d e n t ’s p r e s c r i p t i o n

w o u ld

be about w hat

th e F e d e r a l G o v e r n m e n t w o u ld d o , o r d id y o u ta k e a h a lfw a y p o in t ?
H o w d id y o u d e c id e t h a t ?




12
B urn s. T h e s t a f f l a i d b e f o r e u s t h e P r e s i d e n t ’s o r i g i n a l e s t i ­

D r.

m a te , r e c e n t r e v is io n s o f t h a t e s tim a te , t h e fig u r e s a r r iv e d a t b y t h e
t w o b u d g e t c o m m itt e e s o f t h e C o n g r e s s , a n d t h e s t a ff’s o w n
tio n . H o w

in d iv id u a l m e m b e r s o f th e c o m m itte e ju d g e d

p r o je c ­

th e m a tter,

I c a n ’t b e s u r e . I w i l l g i v e y o u m y o w n ju d g m e n t .
The
D r.

C h a ir m a n . G o o d .
B u rns. I f e l t t h a t t h e d e c is io n o f t h e C o n g r e s s w o u ld p r e v a i l ,

a n d t h a t t h e p r e s i d e n t ’s r e c o m m e n d a t i o n
I

p roceeded

on

th a t

a s s u m p tio n . M y

w o u ld n o t b e
c o lle a g u e s

a ccep ted .

p r o b a b ly

d id

as

w e ll, b u t I c a n ’t b e s u re .
The

C h a ir m a n . W h a t a r e y o u r e x p e c t a t i o n s b a s e d o n , t h i s m o n e ­

t a r y p o lic y a n d t h is fis c a l p o lic y t h a t y o u h a v e d e s c r ib e d ? W h a t d o
y o u e x p e c t th is t o d o t o p r o d u c t io n a n d g r o s s n a tio n a l p r o d u c t in th e
c o m in g y e a r ?

D r . B u r n s . I a m a lit tle tr o u b le d b y th e w a y in w h ic h y o u f o r m u ­
la te y o u r q u e stio n .
Y o u r q u e s tio n se e m s t o a ss u m e th a t y o u in th e C o n g r e s s a n d w e a t
th e F e d e ra l R eserv e

B oard

d e te r m in e

w h a t w ill h a p p e n

to

th e n a ­

t i o n ’s e c o n o m y . Y o u r f o r m u l a t i o n s e e m s t o ig n o r e t h e f a c t t h a t t h e r e
i s a p r i v a t e s e c t o r w i t h a v i t a l i t y --------The

C h a ir m a n . I ’m

g la d

you

co rre cte d

d i d n ’t m e a n t o i m p l y t h a t . A l l I ’ m

m e,

becau se

I

c e r ta in ly

s a y in g , is t h a t t h e o n ly a r e a s w e

c a n c o n t r o l c o n s c i o u s l y a s a* n a t i o n , a r e t h e f i s c a l p o l i c i e s a n d m o n e ­
ta ry

p o lic ie s

of

our

c o u n t r y , u n le s s

we

w ant

to

use

som e

k in d

o f

w h a t is g o i n g t o h a p p e n

in

in c o m e p o l i c y w h ic h w e d o n ’t h a v e .
Y ou

n a v e t o m a k e a s s u m p tio n s a s t o

t h e p r iv a t e s e c t o r . I w o u ld a g r e e w it h y o u t h a t is t h e m o s t im p o r t a n t
o f a ll, b u t w e d o n ’t h a v e t h a t k i n d o f c o n t r o l.
D r.

B u rns. I t h i n k t h e e c o n o m ic e x p a n s io n h a s n o w d e v e l o p e d a

m o m e n tu m

o f its o w n . E x p a n s io n is b e in g g e n e r a t e d b y t h e in t e r n a l

w o r k in g s o f th e e c o n o m y , a n d th e e c o n o m y n o lo n g e r n e e d s a n y s tim ­
u lu s f r o m

t h e fis c a l s id e o r a n y s p e c ia l s t im u lu s f r o m

th e m o n e ta ry

s id e .
The

C h a ir m a n . A l l r i g h t t h e n , w h a t a r e y o u r o w n a s s u m p t i o n s

as to p r o d u c tio n a n d g r o w th
D r.

in th e c o m in g y e a r ?

B urns. A s I in d ic a t e d in m y s t a t e m e n t , I se e n o e v id e n c e a s

y e t o f a n y d e c lin e in t h e r a t e o f e x p a n s io n , a n d I t h in k w e c a n v e r y
r e a s o n a b ly

lo o k

fo r w a r d

to

e x p a n s io n

o f o v e r a ll p r o d u c t io n

in

th e

y e a r a h e a d a t a r a te in t h e n e ig h b o r h o o d o f 7 p e r c e n t .
The

C h a i r m a n . H ow a b o u t p r i c e s , w h a t d o y o u e x p e c t t o h a p p e n

th ere ?
D r.

B urns. T h e r e I a m c o n c e r n e d . M v t h i n k i n g a b o u t p r ic e s h a s

b e e n o u t o f lin e w ith m e m b e r s o f m y s ta ff a n d m o s t o f th e e c o n o m ic s
p r o fe s s io n .
I

gu ess m y

cy c le

t r o u b le is t h a t I

p r a c tic a lly

a ll

m y

life .

h ave been
W hen

th ere

a s t u d e n t o f t h e b u s in e s s
is

an

e x p a n s io n

o f

th e

e co n o m y , I r a th e r e x p e c t p r ic e s to r is e ; th e y h a v e d o n e so h is to r ic a lly
A nd

w h e n th e e c o n o m ic r e c o v e r y s ta rts w it h

t io n r a te , a s in th e p r e s e n t in s ta n c e , I
in fla tio n m a y in t e n s ify .
W e h a v e d o n e b e tte r th a n I e x p e cte d

am

an

a lr e a d y h ig h

in fla ­

fe a r fu l th a t th e ra te

o f

so fa r o n th e p r ic e fr o n t. I

h o p e th a t w e w ill c o n tin u e t o d o so . B u t I c a n n o t d is r e g a r d th e fa c t
th a t th e im p r o v e m e n t in th e r a te o f in fla tio n , i f y o u




p u t a s id e f o o d

13
p r ic e s

and

en ergy

p r ic e s , s t o p p e d

arou n d

th e

m id d le

o f

la s t

year.

F o o d a n d e n e r g y p r ic e s te n d t o b e e r r a tic , a n d th e u n d e r ly in g t r e n d
o f t h e p r ic e le v e l is , I t h in k , b e t t e r d is c lo s e d w h e n t h e y a r e p u t t o o n e
s id e . O n d o in g s o , I fin d a b a s ic in fla t io n r a t e in t h e n e ig h b o r h o o d o f
6 , o r 61/^, o r 7 p e r c e n t . I

hope

we

can

do

very

m u ch

b e tte r, b u t

I

d o n ’t k n o w o f a n y b a s is h i s t o r i c a l l y f o r e x p e c t i n g t h a t w e a r e g o i n g
t o d o b e tte r in th e y e a r a h e a d .
The

C h a ir m a n . N o w , a s f a r

as

e m p lo y m e n t

p o i n t e d t o t h e f a c t t h a t i t ’s g o n e f r o m

is

con cern ed ,

9 p ercen t d ow n to 7 %

I t h in k th a t s u r p r is e d m o s t e c o n o m is ts a n d

you

p ercen t.

c e r ta in ly m o s t o f u s o n

th e c o m m itte e .
D r . B urns. I d o n ’t k n o w w h y i t s u r p r i s e d t h e m . T h e y s h o u l d s t u d y
h is t o r y ; th e n th e y w o u ld fin d f e w e r s u r p r is e s .
The

C h a ir m a n . A s o n e w h o h a s s t u d i e d h i s t o r y a n d i s l e s s s u r ­

p r is e d , t e ll u s w h a t y o u e x p e c t in th e c o m in g y e a r f o r u n e m p lo y m e n t.
D r.

B u rn s. A s y o u s t u d y b u s i n e s s c y c l e h i s t o r y , y o u f i n d t h a t i n t h e

fir s t 9 t o 12 m o n t h s o f a b u s in e s s c y c l e e x p a n s io n , t h e r a t e o f u n e m ­
p lo y m e n t h a s t y p ic a lly d r o p p e d

1%

t o 2 p e r c e n t a g e p o in ts . S o th e r e

is n o t h in g r e m a r k a b le in w h a t h a s h a p p e n e d t h is t im e .
A s f o r th e y e a r a h e a d , I e x p e c t th e ra te o f u n e m p lo y m e n t b y y e a r e n d t o b e d o w n to 7 p e rce n t o r a litt le b e lo w .

C h a ir m a n . N o w , y o u a r e — —
B u rns. B u t I m a y e a s i l y b e w r o n g .
T h e C h a ir m a n . Y ou s a y t h a t t h e d e c i s i o n t o r e d u c e M t , r e f l e c t s
The

D r.

th e e x p e r ie n c e o f la s t y e a r w h e n a v e r y m o d e r a t e r is e in t h e m o n e y
s t o c k w a s s u ffic ie n t t o fin a n c e a g o o d e c o n o m i c r e c o v e r y , w i t h d e c l i n i n g
in t e r e s t ra te s.
N o w , a r e m a r k a b le e le m e n t o f t h is w a s t h a t w e d i d h a v e a r a t h e r
s lo w

g ro w th

in th e

m oney

s u p p ly

and

as y o u

say,

we

d id

have

a

g o o d g r o w t h in th e e c o n o m y a n d w e d id h a v e m o d e r a t in g s h o r t -t e r m
in te r e s t ra te s .
H o w e v e r , o n e r e m a r k a b le a c c o m p a n y in g f a c t o r is , a s I u n d e r s t a n d
it , t h e r a t e o f in c r e a s e in t h e v e l o c i t y

of M i

w h ic h , as y o u

p o in te d

o u t o ft e n to u s, is a n e g le c te d e le m e n t h e r e .
T h e in c r e a s e in v e lo c it y d u r in g t h e p a s t y e a r w a s v e r y g r e a t , u n ­
p r e c e d e n t e d in t h e p a s t 2 0 y e a r s o r s o . F u r t h e r m o r e , t h e r e h a v e b e e n
fe w

in s ta n c e s o f s u s ta in e d

a c c e le r a tio n

la s tin g

m ore

th a n

th ree

or

fo u r q u a rte rs.
W e h a v e h a d th a t k in d o f s t im u la t io n , t h e in c r e a s e in v e lo c it y t h a t
h a s e n a b le d

us to

get

a lo n g

w ith

a

r e la t iv e ly

s lo w

in c r e a s e

in

th e

m o n e y s u p p ly a n d th e m o d e r a t in g in te r e s t ra te s.
T h e lo n g -te r m
cen t

per

a v e r a g e r a te o f in c r e a s e in v e lo c it y is a b o u t 3 p e r ­

annum ,

com pared

w ith

about

a

7%

p ercen t

in c r e a s e

in

v e lo c it y in th e fir s t q u a r t e r o f 1 9 7 5 a n d fir s t q u a r t e r o f 1 9 7 6 .
I n v i e w o f t h a t h i s t o r y , d o e s n ’t i t s e e m w e a r e l i k e l y t o g e t a s l o w ­
d o w n in v e lo c it y , a n d t h a t c o m b in e d w it h a s lo w d o w n in t h e in c r e a s e
o f t h e m o n e y s u p p ly , w o u ld s u g g e s t t h a t m o n e t a r y p o l i c y is g o i n g t o
b e m o r e r e s t r a in in g in t h e c o m in g y e a r ? W h y is t h a t w r o n g ?
D r.

B urns. T h e p r o j e c t e d r a n g e s f o r M i a n d M 2 h a v e b e e n r e d u c e d

s o m e w h a t. B u t y o u h a v e b een o n e o f o u r g r e a t c r itic s . S e n a to r , a n d
e a r lie r t o d a y y o u p o in te d to th e w id t h
w id t h o f t h e r a n g e s a n d in v ie w

o f th e ra n g es. I n

v ie w

q u a r te r s th e a v e r a g e ra te o f g r o w t h in M i h a s b e e n b e lo w
7 2 -3 9 0 — 76--------2




o f th e

o f th e fa c t th a t o v e r th e p a st th re e
th e lo w e r

14
lim it , th e r e is a m p le r o o m

f o r m o n e t a r y g r o w t h t o r e m a in c o n s ta n t o r

p o s s ib ly e v e n t o in c r e a s e a litt le .

C h a ir m a n . S o w h a t y o u a r e s a y i n g is t h a t a l t h o u g h t h e r a n g e

The

is l o w e r t h is y e a r t h a n

it

w a s la s t y e a r , th e

you

w e r e c lo s e t o th e b o t t o m

th e

m id p o in t

o f

th e

range

fa c t is t h a t

la s t y e a r

o f th e ra n g e . T h e r e fo r e , i f y o u
in

th e

c o m in g

year, y o u

w ill

are at

have

an

in c r e a s e in M x ?
D r . B u r n s . Y ou m i g h t h a v e a s m a ll in c r e a s e . L e t m e g i v e y o u a n
a n a lo g y .
Y o u h a v e a fa m ily w it h s m a ll c h ild r e n , a n d y o u w a n t t o set b o u n ­
d a r ie s w it h in

w h ic h th e c h ild r e n

t o in d ic a t e ju s t h o w

c a n p la y . Y o u

p u t u p little

s tic k s

fa r t h e y ca n g o . I n fa c t , th e c h ild r e n m a y p la y

clo s e t o th e h o u s e a n d n e v e r g e t to th e o u te r b o u n d a r y o f th e ir p la y fie ld .

S ix

m on th s

la te r ,

y o u r n e ig h b o r s — y o u

fo r

som e

reason — m a yb e

c o m p la in ts

fr o m

c h a n g e t h e b o u n d a r y lin e . T h is t im e , t h e k id s

m a y g o r i g h t u p t o t h e b o u n d a r y lin e . I n t h e s a m e w a y th e s e p r o je c t e d
m o n e t a r y r a n g e s in d ic a t e F e d e r a l R e s e r v e t h in k in g , F e d e r a l R e s e r v e
in te n t. B u t t h e y
b e ca u se w ith in

d o n o t in d ic a t e w h a t w ill a c tu a lly h a p p e n , i f o n ly

w id e lim it s w e h a v e v e r y little c o n tr o l.

C h a ir m a n . M y t i m e i s u p. I w i l l b e b a c k .
Sparkm an?
S pa rk m an . D o c t o r , I g r a t e f u lly e n jo y e d t h is p r e s e n ta tio n

The

S e n a to r
S e n a to r
th a t y o u

have

g iv e n

u s th is

m o r n in g . I t

is , I

m ay

say, cu stom a ry

w i t h y o u t o g i v e s u c h v e r y fin e p r e s e n ta tio n s .
T h ere

are

a

fe w

th in g s

th a t

I

w an t to

ask

a b ou t,

of

a

gen eral

n a tu re.
D id

I

u n d ersta n d y o u

c o r r e c t ly , d id y o u s a y th e r a te o f in fla tio n

n o w is 6 o r 6 y 2 p e r c e n t ?
D r . B u r n s. I ’d ju d g e t h e u n d e r ly in g r a te o f in fla tio n t o b e a b o u t
th a t.
I n t h e fir s t q u a r t e r o f t h is y e a r th e a c t u a l c o n s u m e r p r ic e le v e l r o s e
a t a n a n n u a l r a t e o f 2 .9 p e r c e n t . A

D e p a rtm e n t o f

C om m erce

e s ti­

m a te p la c e d t h e a n n u a l r a te o f in c r e a s e in th e g e n e r a l p r ic e le v e l a t
a b o u t S y2 p e r c e n t , a s I

rem em ber.

B y a d ju s t in g th e s e fig u r e s t o r e m o v e f o o d p r ic e s , w h ic h a lw a y s m o v e
e r r a tic a lly ,

and

en ergy

p r ic e s ,

w h ic h

r e c e n tly

have

been

< ju it e

er­

r a t ic , I g e t a t w h a t I c o n s id e r t o b e th e u n d e r ly in g r a te o f in fla tio n .
T h a t h a s b e e n in th e n e ig h b o r h o o d o f 6 o r 6 %
S e n a to r

p ercen t.

S park m an . I f I a ls o u n d e r s ta n d y o u t o s a y t h a t u n e m ­

p lo y m e n t d u r in g th is y e a r h a s d e c lin e d t o a b o u t 7 %
D r.

B

urns.

That

w as

th e

u n e m p lo y m e n t fig u r e

p ercen t n o w ?
rep orted

by th e

L a b o r D e p a rtm e n t fo r th e m o n th o f M arch .
S e n a to r

S pa r k m a n . W h a t is h a p p e n in g in th e w a y o f p la n t e x ­

p a n s io n a n d n e w e q u ip m e n t a n d so fo r t h ?
D r . B u r n s. T h a t s e c to r o f o u r e c o n o m y h a s b e e n la g g in g . I t a lw a y s
t e n d s t o l a g , b u t in t h is e x p a n s io n , t h e l a g is m o r e p r o n o u n c e d t h a n
i t h a s b e e n h is t o r ic a lly . B u t s ig n s a re n o w m u lt ip ly in g t h a t a r e c o v ­
e r y in b u s in e s s fix e d in v e s t m e n t is g e t t in g u n d e r w a y .
S e n a to r
s o m e th in g

Sparkm an. W h a t

about

our

tra d e

b a la n c e s .

Y ou

s a id

a b o u t t h a t o u r b a la n c e o f p a y m e n ts .

D r . B u r n s. I t h in k o u r t r a d e p o lic y , b y a n d la r g e , h a s b e e n s o u n d .
I w a s v e r y p le a s e d b y th e P r e s id e n t ’s d e c is io n n o t t o im p o s e a q u o ta




15
o n s h o e im p o r ts . T h a t w o u ld h a v e c a u s e d g r e a t d iffic u ltie s , p o lit ic a l
a s w e ll as e c o n o m ic , f o r so m e o t h e r c o u n tr ie s o f t h e w o r ld .
I

th in k

we

have

been

fo r tu n a te ,

r e s tr ic tiv e tr a d e p o lic ie s in

th u s

fa r,

in

a b le

to

a v o id

s p ite o f th e u n e m p lo y m e n t th a t w e a n d

o t h e r c o u n t r ie s h a v e h a d . B u t t h e r e is r e s tle s s n e s s in o u r o w n c o u n ­
t r y , a s y o u w e ll k n o w , a n d t h e r e is r e s tle s s n e s s a b r o a d .
T h e r e ce n t tu r b u le n c e in e x c h a n g e m a r k e ts h a s n o t h e lp e d m a tt e r s
a n y . W h e n th e e x c h a n g e r a t e f o r a c u r r e n c y d e p r e c ia t e s , b u s in e s s a n d
g o v e r n m e n t p e o p le in o t h e r c o u n tr ie s m a y in t e r p r e t t h e d e p r e c ia t io n
t o b e t h e r e s u lt o f d e lib e r a t e g o v e r n m e n t a l p o l i c y , r a t h e r t h a n a s t h e
r e s u lt o f n a tu r a l m a r k e t fo r c e s . T h a t , o f c o u r s e , t e n d s t o b r e e d m o r e
s u s p ic io n , a n d m a y le a d t o r e t a lia t o r y p o l i c y a c tio n s . S o f a r , w e h a v e
b een v e r y fo r tu n a te ; th ere h a s b een p r a c t ic a lly n o n e o f th a t.

Sparkm an. D o e s th e d iffic u lt y t h a t B r it a in is h a v in g h a v e

S e n a to r

a n y r e a c tio n o n o u r o w n e c o n o m y ?
urns.

I

econ om y. B u t

B

I

D r.

am

not

t h in k

a w a re

th e

of

any

d iffic u ltie s

d ir e c t

of

e ffe cts

B r ita in

on

have

our

ow n

s tim u la te d

a

g r e a t d e a l o f t h o u g h t in o u r c o u n tr y .
A ll

of

oth er

u s in

g o v e rn m e n t, a n d

p u r s u its ,

are

fo llo w in g

m any

w hat

is

in d iv id u a ls
h a p p e n in g

in

b u s in e s s

in

B r ita in

and
w ith

g rea t con cern .
S e n a to r

Sparkm an. A fe w m o n t h s a g o w e w o r k e d o u t w it h F r a n c e

a n a g re e m e n t t o t r y t o s ta b iliz e c o n d itio n s b e tw e e n o u r t w o c u r r e n ­
c ie s . I s t h a t w o r k in g s a t is f a c t o r ily ?
D r . B u r ns. I n a ll h o n e s ty , I b e lie v e t h a t a g r e e m e n t h a s b e e n w id e ly
m is in te r p r e te d .
W h a t happened
coop era te

a t R a m b o u ille t , e s s e n t ia lly , w a s t h a t

m a n ife s te d

its e lf.

B ut

p o lic ie s

fo r

a d e s ir e

c o o p e r a tio n

w ere

to
not

s p e lle d o u t, a n d in th e a c tu a l c o n d u c t o f a ffa ir s , v e r y lit t le h a s r e s u lte d
as y e t fr o m

th e R a m b o u ille t u n d e r s ta n d in g .

I t is lik e t h e c a s e o f a h u s b a n d a n d w i f e w h o h a v e b e e n e s t r a n g e d ,
and

who

get

to g eth er

w it h

good

in t e n t io n s ;

a lo n g b e t te r . T h a t is w h a t w a s a c c o m p lis h e d

th ey

w ill

try

to

get

a t R a m b o u ille t: g o o d

in te n tio n s .
A s

to

a ctu a l

a c h ie v e m e n t, I

d o n ’t

know

o f

any

so

fa r .

In

fa ct,

s in c e R a m b o u ille t a n d th e la te r a g r e e m e n t in K in g s t o n , w e h a v e h a d
g r e a t e r in s ta b ility in e x c h a n g e m a r k e ts t h a n b e f o r e .
Som e
th in g s

p e o p le
w o u ld

m ay

be

argu e

w orse

th a t

s till.

I

in

th e

d o n ’t

absen ce

argu e

a c tu a l e ffe ct o n g o v e r n m e n ta l in t e r v e n t io n

th a t

o f

th ese

w ay.

I

m e e tin g s ,
th in k

th e

in e x c h a n g e m a rk e ts h a s

b e e n v e r y s m a ll.
S e n a to r

Sparkm an. L e t m e a sk y o u s o m e t h in g o f in t e r e s t t o a ll, I

a m su re , a t h o m e , a n d th a t h a s t o d o in t h e fie ld o f h o u s in g , s u p p o r t ­
in g o u r h o u s in g p r o g r a m s a n d t h e m o r t g a g e m a r k e t a n d s o fo r t h .
W h a t is th e o u t lo o k f o r lo n g - t e r m

m o rtg a g e ra tes?

D r . B urns. S e n a to r , i f y o u w o u ld t e ll m e w h a t t h e o u t lo o k is f o r
in fla tio n — lo o k in g a h e a d 2 y e a r s , 5 y e a r s , 1 0 y e a r s — I
to

an sw er y o u r

q u e s tio n . B u t

you

p r o b a b ly

w o u ld b e a b le

c a n ’t t e ll m e

th a t

any

m o r e th a n I c o u ld te ll y o u .
I c a n sa y t h i s : I f th e r a te o f in fla tio n c o m e s d o w n , y o u c a n b e r e s t
a s s u r e d th a t m o r t g a g e in te r e s t ra te s w ill c o m e d o w n — as w ill l o n g ­
term

in t e r e s t r a te s g e n e r a lly . T h a t is b e c a u s e

is b u ilt in t o o u r lo n g -t e r m




an

in fla tio n

ra tes. T h e y h a v e c o m e d o w n

p re m iu m

as e x p e cta ­

16
t io n s

of

in fla tio n

have

m od era ted ,

but

th ey

h a v e n ’t

com e

dow n

n e a r ly as m u c h as th e y s h o u ld .
S e n a to r

S parkm an. I in te r p r e t y o u r sta tem en t t o b e ra th e r o p t i­

m is tic w it h

r e fe r e n c e t o in fla tio n , so

th e in te r e s t r a te s t o

th a t, I

o p tim is tic o r lo n g -t e r m

I

h o p e th a t th e w a y

h o p e th a t m a y

b e in t e r p r e t e d

you

tie d

as b e in g

m o r t g a g e in te r e s t r a te s , t o o .

B u r n s . I am o p t i m i s t i c , p r o v i d e d t h e C o n g r e s s c o n t i n u e s t o

D r.

p r a c t ic e r e s tr a in t, a n d p r o v id e d th e F e d e r a l R e s e r v e s ta y s o n a m o d ­
era te cou rse. I f
C on gress,

or

if

we had
th e

a n e x p lo s io n in s p e n d in g o n th e p a r t o f th e

F ederal

R esearve

r a is e d

its

m on eta ry

g ro w th

r a n g e s s u b s t a n t ia lly , th e n t h e o u t lo o k f o r in fla tio n w o u ld b e g r im .
S e n a to r

S p a r k m a n . W e l l , t h a n k y o u v e r y m u c h . M y 10 m i n u t e s i s

up.
I w an t y ou to k n ow

I h a v e e n jo y e d v e r y m u c h y o u r p r e s e n ta tio n .

D r. B urns. T h a n k y o u , S e n a t o r .
T h e C h a ir m a n . S e n a t o r B i d e n ?
S e n a t o r B id e n . M r . C h a i r m a n , t h a n k y ou .
D r. B u rn s, h o w are y o u ?
I w o u ld lik e t o f o llo w

u p o n w h e r e w e ju s t l e f t o ff . T h a t is , w h a t

r e c o m m e n d a t io n s w o u ld y o u h a v e f o r u s in th e S e n a te a n d C o n g r e s s
g e n e r a lly , o f t h in g s w h ic h w e s h o u ld n o t d o , o t h e r th a n n o t in c r e a s in g
s p e n d in g . I s t h e r e a n y t h in g t h a t y o u see t h a t w e a r e p r e s e n t ly c o n ­
s id e r in g t h a t c o u ld im p e d e t h is e c o n o m ic r e c o v e r y a n d /o r a ffe c t in fla ­
tio n

a d v e r s e ly ?

B u rn s. I se e o n e d iffic u lt y . I d o n ’t k n o w h o w m u c h s u p p o r t

D r.

t h e H u m p h r e y - H a w k in s b i l l h a s in th e C o n g r e s s , a n d
how

I

d o n ’t k n o w

i t m ig h t b e a m e n d e d i f i t is p a s s e d b y t h e C o n g r e s s . B u t i f t h e

b i l l p a s s e d is a n y t h in g lik e it s p r e s e n t fo r m , it w o u ld b e v e r y
gerou s

fo r

our

econ om y,

r e le a s e s t r o n g n e w

in

m y

ju d g m e n t .

It

w o u ld

dan­

u n d o u b te d ly

f o r c e s o f in fla tio n .

T h e r e fo r e * t h a t b ill s h o u ld e ith e r b e s u b s ta n tia lly a m e n d e d o r p u t
o n t h e s h e lf f o r s o m e tim e .

B id e n . W h y w o u l d i t r e l e a s e s t r o n g f o r c e s f o r i n f l a t i o n ?
B u r n s . F i r s t , i f h i s t o i y is a n y g u i d e , t h e o b j e c t i v e o f a 3 - p e r ­

S e n a to r
D r.

c e n t u n e m p lo y m e n t r a t e is u n r e a lis t ic . I f m o n e t a r y a n d fis c a l p o lic ie s
w e r e u s e d t o m o v e o u r N a t io n s t e a d ily t o w a r d t h a t g o a l a n d t h a t is
t h e in t e n t o f t h e b i l l , a s I u n d e r s t a n d it .
A ls o , u n d er

th a t b ill, th e

b e g o n e ; m o n e ta ry p o lic y
d e n t o f th e U n ite d

F e d e r a l R e s e r v e ’s in d e p e n d e n c e

w o u ld

w o u ld , in e ffe ct, b e d ic ta t e d b y t h e P r e s i­

S ta te s . S o m e d a y w e m ig h t h a v e a P r e s id e n t w h o

w o u ld u r g e th e F e d e r a l R e s e r v e t o p u r s u e a p o lic y o f g r e a t r e s tr a in t,
but I

w o u l d n ’t c o u n t o n it .

S en a tor

B id e n . O n e l a s t q u e s t i o n , D r . B u r n s . I n y o u r s t a t e m e n t ,

y o u s a y th a t, a lt h o u g h t h e r e a re re ce n t im p r o v e m e n ts in

p r ic e p e r ­

fo r m a n c e , th e y stem

on

m a in ly

fr o m

fo o d

a n d fu e l. Y o u

go

to

say

t h a t , “ M e a n w h ile , t h e p r ic e s o f o t h e r g o o d s a n d s e r v ic e s a r e c o n t in ­
u in g t o r is e a t a t r o u b le s o m e p a c e , a n d w a g e s a r e s till in c r e a s in g m u c h
fa s te r th a n th e lo n g -te r m

r a te o f g r o w t h o f p r o d u c t iv it y .”

C a n y o u e x p a n d o n t h a t a lit t le b it, a b o u t w a g es, w h a t y o u h a d in
m in d a n d w h e re y o u see r a te se ttle m e n ts g o i n g in th e n e x t c o u p le o f
years o r th e n ex t y e a r ?
D r . B u r n s . Y e s , I w i l l b e g la d t o d o th a t.
L e t m e first a d d a fe w w o r d s on p ric es, i f I m a y .




17
S e n a to r

B id e n . S u r e .

D r . B u r n s . A n d t h e n t u r n t o w a g es.
I h a v e b e fo r e m e— I w a s lo o k in g f o r it e a r lie r in c o n v e r s in g w ith
S e n a to r S p a rk m a n — th e re co rd

o f b e h a v io r o f th e

C o n su m e r P r ic e

I n d e x w it h f o o d a n d e n e r g y ite m s r e m o v e d . W i t h th e s e t w o v o la t ile
a n d e r r a tic c a te g o r ie s e x c lu d e d th e a n n u a l r a te o f in c r e a s e in th e t h ir d
q u a r te r o f 1 9 7 4 w a s 1 4 p e r c e n t. T h e r e w a s th e n a s t e a d y d e c lin e u n til
t h e s e c o n d q u a r t e r o f 1 9 7 5 , w h e n t h e a n n u a l r a t e o f i n c r e a s e w a s 5 .1
p ercen t.
S in c e th e n , th e fig u r e s f o r s u c c e s s iv e q u a r te r s h a v e r u n a s f o l l o w s :
5 . 8 ; 7 . 1 ; 7 .7 . B e c a u s e o f d i f f i c u l t i e s o f m e a s u r e m e n t , I
t h e s e in c r e a s e s a s s ig n ific a n t , b u t I
T h e r e fo r e , a s I s a id b e fo r e , I

d o n ’t c o n s id e r

a ls o see n o fu r t h e r im p r o v e m e n t.

t h in k th e u n d e r ly in g r a te o f in fla tio n

is in th e n e ig h b o r h o o d o f 6 , 6 y 2 , p o s s ib ly 7 p e r c e n t .
N o w , le t m e tu r n t o th e w a g e r e c o r d .
T h e r e h a s b een som e m o d e r a tio n in th e ra te o f a d v a n c e in

w ages.

O n t h e b a s is o f fig u r e s f o r t h e fir s t q u a r t e r o f t h is y e a r , it a p p e a r s
t h a t t h e a n n u a l r a te o f in c r e a s e o f w a g e s t h a t is , c o m p e n s a t io n

p er-

h o u r — is a g r e a t d e a l h ig h e r t h a n t h e

p ro­

ra te

o f

im p r o v e m e n t in

d u c tiv ity .
T h e r a t e o f im p r o v e m e n t o f p r o d u c t i v i t y d u r i n g t h e fir s t y e a r o f
a n e x p a n s io n g e n e r a lly

is v e r y h ig h . P r o d u c t i v i t y

h a s r is e n

d u r in g

t h is y e a r o f e x p a n s io n , b u t t h e in c r e a s e is w e ll b e l o w h is t o r ic a l s t a n d ­
ards. T h e

s lu g g is h n e s s

in

p r o d u c tiv ity

e v id e n t

d u r in g

th e

past

15

y e a r s seem s to b e c o n tin u in g .
I e m p h a s iz e t h a t b e c a u s e I t h in k it is a lo n g e r r a n g e p r o b le m
s h o u ld b e o n

o u r m in d s , a n d

w h o se cau ses

and

th a t

r e m e d ie s s h o u ld

be

e x p lo r e d .
T h e s e t tle m e n t ju s t r e a c h e d w it h
v e r y t r o u b le s o m e . I d o n ’t k n o w

t h e t e a m s t e r s is o n e t h a t I

fin d

w h e th e r t h a t s e ttle m e n t w ill s t im u ­

la te t r a d e u n io n le a d e r s a r o u n d th e c o u n t r y t o d e m a n d o v e r s iz e w a g e
in c r e a s e s , b u t I f e a r t h e r e w i l l b e a t e n d e n c y in t h a t d i r e c t i o n .
In

a ll

fa ir n e s s

to

our

tra d e

u n io n

le a d e r s ,

I

s h o u ld

say

th a t—

c o n s id e r in g th e k in d o f w o r ld w e liv e in , a n d c o n s id e r in g t h e im p e r ­
fe c t io n o f m a n , a n d c o n s id e r in g w h a t is h a p p e n i n g in o t h e r c o u n t r ie s
by

and

la r g e , th e y

have

a cted

r e s p o n s ib ly

a re c o n t in u in g t o a c t r e s p o n s ib ly . I

w is h

and

th ey

by

and

w o u ld

la r g e , th e y

a ct s till m o r e

r e s p o n s ib ly .
S e n a to r

B id e n . T h a n k y o u v e r y m u c h .

I h a v e n o f u r t h e r q u e s tio n s .
The

C h a ir m a n . S e n a t o r M c I n t y r e ?
M cI n tyre. T h a n k y o u ,' M r . C h a i r m a n .

S e n a to r

I r e g r e t I c o u ld n ’t b e h e r e a t t h e o u t s e t . I

w a s te s tify in g

at G ov ­

e r n m e n t O p e r a t io n s ju s t b e lo w .
O n e q u e s tio n f o r D r . B u r n s r e g a r d in g m y in t e r e s t in t h r i f t in s t i­
tu tio n s a n d th e ir a b ilit y t o c o m p e te .
I n y o u r sta te m e n t, y o u m e n tio n t h a t t h r i f t in s tit u t io n s , a s w e ll a s
b a n k s , a r e w e ll s it u a t e d t o m e e t c r e d it d e m a n d s in t h e m o n t h s a h e a d .
L a s t w e e k , o n A p r il 2 9 , T h u r s d a y , J o h n H e im a n n , N e w

Y ork B ank­

in g C o m m is s io n e r , s ta te d th a t t h r i f t in s tit u t io n s in N e w

Y o r k S ta te ,

p a r t i c u l a r l y t h e s a v in g s b a n k s , a r e o p e r a t i n g w i t h le s s c a p i t a l t h a n is
s a fe , a n d a t th e y e a r e n d 19 75, t h e y h a d lo w e r c a p it a l le v e ls t h a n “ a n y
in s titu tio n c o u ld h a v e a n d s t ill o p e r a te w it h




s a fe t y .”

18
H o w d o y o u e x p la in th e d is c r e p a n c y b e tw e e n y o u r t w o a ssessm en ts,
and

how

s h o u ld

do

be

you

respon d

a llo w e d

to

to

is s u e

h is

s u g g e s tio n

p re fe rr e d

stock

th a t t h r ift
as

a

w ay

in s titu tio n s

of

b o ls te r in g

s a g g in g c a p ita l ?

D r . B u r n s . I th in k th a t in th e statem ents y o u cite th e b a n k in g
c o m m issio n e r a n d I a re c o n ce rn e d w ith d iffe re n t p rob lem s.
I w a s d is c u s s in g t h e in flo w o f fu n d s t o th e t h r ift in s titu tio n s , w h ic h
has

been

at

e x tr e m e ly

h ig h

ra tes.

T o

g iv e

you

som e

fig u r e s :

A t

m u t u a l s a v in g s b a n k s a n d s a v in g s a n d lo a n a s s o c ia tio n s t o g e t h e r , t h e
a n n u a l r a t e o f g r o w t h o f d e p o s i t s w a s 1 6 .0 p e r c e n t i n t h e f i r s t h a l f o f
1975 an d

1 4 .6 p e r c e n t i n

th e secon d h a lf. In

Ja n u a ry

o f th is y e a r ,

t h e g r o w t h r a t e w a s 1 5 . 9 p e r c e n t ; i n F e b r u a r y , 1 3 .3 p e r c e n t ; a n d i n
M a r c h , 1 5 .1 p e r c e n t .
T h e c o m m is s io n e r w a s d is c u s s in g th e q u e s tio n o f c a p it a l a d e q u a c y
o f t h e t h r i f t in s tit u t io n s . T h a t , I a m

s o r r y t o s a y , is a q u e s t io n t h a t

I h a v e n o t e x p l o r e d . I t h i n k h i s ju d g m e n t is t o b e t a k e n s e r io u s ly , a n d
h is

s u g g e s tio n

th a t I

w o u ld

about

r a is in g

fu n d s

th rou g h

p re fe rre d

stock

is

one

w a n t t o c o n s id e r s y m p a th e tic a lly .

M c I n t y r e . Y ou s a y m o r t g a g e c o m m i t m e n t s h a v e r i s e n

S en a tor

t o th e h ig h e s t le v e l in 3 y e a r s . T h e y a re u p , b u t a re t h e y w h e re t h e y
s h o u ld b e ?
D r.

B u rn s. I a m n o t g o o d a t ju d g i n g w h e r e t h e y s h o u ld b e . B u t

t h e y h a v e r is e n v e r y m a te r ia lly .
L e t m e g iv e
m en ts o f

you

th e

fig u r e s . T h e

a ll s a v in g s a n d lo a n

o u ts ta n d in g m o r t g a g e

a s s o c ia tio n s in M a r c h

c o m m it­

1975 w ere $13

b i l l i o n . I n M a r c h o f t h i s y e a r , t h e y w e r e $ 1 9 .4 b i l l i o n .
I h a v e b e f o r e m e a t a b l e g o i n g b a c k a n u m b e r o f y e a r s , a n d $ 1 9 .4
b i l l i o n is t h e s e c o n d

h ig h e s t fig u r e s h o w n f o r th e m o n t h

o f M a rch .

I t w a s e x c e e d e d o n ly in M a r c h 1973.
S e n a to r

M cI n t y r e . $ 1 9 .4 b i l l i o n i s e x c e e d e d o n l y b y t h e M a r c h

fig u r e in 1 9 7 3 ?

B u r n s . T h a t is r ig h t.
M cI n tyre. W h a t is s o s a c r e d a b o u t M a r c h ?
M r . B u rns. T h e fig u r e f o r M a r c h 1 9 7 6 is th e la t e s t I h a v e .
S e n a t o r M cI n t y r e . I s e e .

D r.

S e n a to r

T han k you.
D r.
story .

B u rns. F i g u r e s f o r e a r lie r m o n t h s w o u ld t e ll m u c h t h e s a m e

I h a v e o n e c o m m e n t t h a t b e a r s o n y o u r q u e s tio n o f w h e th e r m o r t ­
g a g e c o m m itm e n ts a r e w h e r e t h e y s h o u ld b e. W e h a d a n e x tr a o r d in a r y
re a l esta te b o o m

in o u r c o u n tr y , a n d w e a re s till s u ffe r in g th e a ft e r -

m a th o f th a t b o o m .
W h ile

o u r in v e n to r y

o f

u n s o ld

hom es has

c o m e d o w n , it is s t ill

la r g e — a b o u t a n 8 -m o n th s 5 s u p p ly . W e h a v e h a d g r e a t o v e r b u ild in g
o f o ffic e s t r u c t u r e s a n d m u l t i f a m i l y s t r u c t u r e s . I t w i l l t a k e s o m e 2 o r
3 y e a r s t o c o r r e c t t h a t c o n d itio n .
A

m od era te

e x p a n s io n

o f

o r d e r a t t h e p r e s e n t tim e . I f
a d d in g a n e w b o o m

r e s id e n tia l

c o n s tr u c tio n

is , I

t h in k , in

it p ro c e e d e d t o o r a p id ly , w e w o u ld b e

o n t o p o f d iffic u ltie s t h a t h a v e n o t y e t b e e n c o r ­

r e c t e d . T h e s e d iffic u ltie s , a s y o u w e ll k n o w , h a v e a ffe c te d o u r b a n k in g
sy stem
I

a s w e ll as th e r e a l e s ta te a n d c o n s tr u c tio n in d u s tr y .

w o u l d n ’t l ik e t o s e e

s tr u c tio n u n til
co rre cte d .

th e




a very

e x is t in g

r a p id

d iffic u lt ie s

e x p a n s io n o f r e s id e n tia l c o n ­
have

been

m ore

a d e q u a t e ly

19
Senator M c I n t y r e . I have an additional question.
I n y o u r sta te m e n t, y o u n o t e r e c e n t a d v a n c e s in fin a n c ia l t e c h n o lo g y
w h ic h

e n a b le t h e p u b lic t o r e d u c e t h e q u a n t it y o f c h e c k in g d e p o s it s

h e ld f o r tr a n s a c tio n p u r p o s e s .
T h a t r a is e s t h e q u e s tio n a b o u t t h e F e d ’s p r o p o s a l o n r e g u la t io n J ,
m u ch

o f th e c o m m e n t w h ic h

I

have

seen to

r e g u la tio n

e x tr e m e ly c r it ic a l o f t h e F e d ’s p r o p o s a l.
I s it fa ir to a ssu m e a t th is p o in t t h a t t h e F e d

J , has been

w ill a b a n d o n

any

in t e n tio n o f a g g r e s s iv e ly p u r s u in g a n a c tiv e r o le in p r o v id in g E F T S
s e r v ic e s a n d d e fe r m o r e t o th e p r iv a t e m a r k e tp la c e ?
D r.

B urns. I h e s it a t e i n a n s w e r i n g b e c a u s e t h e B o a r d h a s n o t d i s ­

c u s s e d th is
posed

q u e s tio n

am endm ent

r e c e n tly . W e

to

r e g u la tio n

p u b lis h e d
J

in

fo r

co m m en t th e

Ja n u a ry.

A t

th a t

p ro­

tim e ,

th e

N a t io n a l C o m m is s io n o n E le c t r o n ic F u n d T r a n s fe r s — a C o m m is s io n
w h ic h y o u h a d a g r e a t d e a l t o d o w it h e s ta b lis h in g , S e n a to r — w a s in
p r o c e s s o f b e in g o r g a n iz e d . T h e B o a r d t h o u g h t t h a t it o u g h t t o h a v e
t h e b e n e fit o f t h a t C o m m i s s i o n ’s t h i n k i n g b e f o r e

ta k in g a n y s ig n ifi­

c a n t n e w s t e p in t h is a r e a . T h a t w a s t h e B o a r d ’s v i e w a t t h e t im e , a n d
it is s t ill m y v ie w t o d a y .
I w o u ld w a n t t o p r o c e e d c a u t io u s ly . T h e r e a r e p h ilo s o p h ic q u e s tio n s
t o b e a n sw e r e d as t o th e r o le o f t h e G o v e r n m e n t a s a g a in s t p r iv a t e
e n t e r p r is e . T h e r e is a q u e s t io n o f t h e r o l e t o b e p l a y e d b y t h e F e d e r a l
E e se rv e , i f th e

G o v e r n m e n t is

to

be

l a r g e r e x te n t. T h e r e is t h e q u e s t io n

in v o lv e d
of

in

th is

w h e th e r th e

a c tiv ity

s e r v ic e s

to

a

s h o u ld

b e fr e e , as th e y h a v e b een , o r w h e th e r a p r ic e s h o u ld b e ch a r g e d .
O n t h e la s t s u b je c t , t h e B o a r d ’s in t e n t io n

is

c le a r . W e

in te n d

to

m o v e t o w a r d s a p r ic in g s y s te m , w h e th e r o u r a c t iv it y in t h is a r e a is
e x p a n d e d o r n ot.
B y

and

la r g e , h o w e v e r ,

C o m m is s io n . I

t h in k

we

I

w o u ld

ou gh t to

lik e

to

a w a it th e

be

g u id e d

by

th e

new

C o m m is s io n ’s fin d in g s

r a th e r th a n p lu n g in g a h ea d o n o u r o w n .

M cI n tyre. T h a n k y o u , M r. C h a ir m a n .
C h a ir m a n . Y ou h a v e t o l d u s y o u e x p e c t u n e m p l o y m e n t t o g o

S e n a to r
The
to

p erh ap s

7

p ercen t

in

th e

c o m in g

year,

p r o d u c tio n

to

in c r e a s e

a b o u t th e sam e, 7 p ercen t.
I s th is th e b e st w e c a n d o w it h o u t t r ig g e r in g in fla tio n t h a t w o u ld
b e u n a c c e p ta b le ?
D o y o u th in k w e ca n d o b e tte r th a n th a t ?
D r.

B u rns. W e m i g h t b e a b l e t o d o b e t t e r t h a n t h a t . W e c e r t a i n l y

c o u ld d o b e tte r th a n th a t i f w e w e r e w illin g t o u se d e v ic e s o th e r t h a n
m o n e t a r y a n d fis c a l p o lic y .
The
# D r.

C h a ir m a n . S u c h a s ?
B u rns. T h e l i s t i n c l u d e s a r a n g e o f u n p o p u l a r m e a s u r e s , p a r ­

t ic u la r ly in a y e a r s u ch a s t h is , S e n a to r .
I t h in k o u r u n e m p lo y m e n t in s u r a n c e b e n e fits a r e e x c e s s iv e . I h a v e
no

d o u b t th a t th e y

ten d

to

in c r e a s e u n e m p lo y m e n t ;

th a t h a s

been

d e m o n s tr a t e d b y s e v e r a l s tu d ie s .
I

t h in k

th a t th e m in im u m

w age

fo r

teen a g ers

serves

to

d e p r iv e

th e m o f m a n y jo b o p p o r t u n it ie s t h e y w o u ld o t h e r w is e h a v e .
I

t h in k th a t w e h a v e b e e n m u c h

h e n s iv e

jo b

ba n k s, a n d th a t w e

are

too

s lo w

in

d e v e lo p in g

in e ffic ie n t in

our

com p re­

tr a in in g

and

r e tr a in in g p r o g r a m s f o r w o r k e r s .
L abor

m arket

p o lic ie s

w o u ld

w e ig h

h e a v ily ,

in

m y

sch em e

o f

th in g s , in lo o k in g t o a n e a r -te r m r e d u c t io n in u n e m p lo y m e n t. T o p u s h




20
m on eta ry

and

fis c a l p o lic ie s

any

fu rth e r

th a n

at p resen t

w o u ld , I

th in k , b e h a z a rd o u s .
The
I

C h a ir m a n . I w o n d e r a b o u t t h a t .

s y m p a th iz e

g r e a tly

w ith

your

p o s itio n

as

you

k n o w , h o ld in g

d o w n F e d e r a l s p e n d in g . I t h in k th e F e d e r a l G o v e rn m e n t h a s g o tte n
too

b ig , t o o

in s e n s itiv e . W e

are

n o t s o lv in g

p r o b le m s

by

e x c e s s iv e

s p e n d in g .
A t th e sa m e tim e , I

th in k th e re co r d

in d ic a te s th is p a s t y e a r w e

h a v e h a d t h e b ig g e s t d e fic it w e h a v e e v e r h a d in o u r h is to r y .
I

have

a

copy

o f

h e ig h t o f W o r ld

th e

W ar

P r e s i d e n t ’s e c o n o m i c

rep ort.

E ven

at

I I , w e h a d n o t h in g lik e a $ 7 6 b illio n

th e

d e fic it.

T h e p r e v io u s b ig o n e w a s $ 5 4 b illio n .
O f co u rs e , w e h a d p r ic e c o n t r o l d u r in g W o r ld
we

w o u ld

have

had

g re a te r

in fla tio n

at

W a r I I , o th e r w is e

t h a t tim e . W e

had

a

$76

b illio n d e fic it, n o t o n ly t h e b ig g e s t in d o lla r s , b u t e x c e p t f o r W o r l d
W ar

II,

th e

b ig g e s t

p e r c e n ta g e w is e

in

r e la t io n s h ip

to

th e

o v e r a ll

b u d g e t . I n s p ite o f th a t, w e h a d a s h a r p ly m o d e r a tin g in fla tio n s it u ­
a t io n , g r e a t in c r e a s e in

F e d e r a l s p e n d in g , e n o r m o u s in c r e a s e in t h e

d e fic it, y e t, in fla tio n d r o p p e d m o r e s h a r p ly th a n w e e x p e c te d .
I

th in k

th a t

i t ’s o b v io u s

th a t th ere

w ere reason s, a n d

you

have

t o u c h e d o n s o m e o f th e m , e n e r g y p r ic e s s ta b iliz e d . F o o d p r ic e s te n d e d
to d rop .
B u t, I

th in k

w e h a v e n ’t g iv e n

q u ite

enough

a tte n tio n

to

th e re­

m a r k a b ly c o n s t r u c t iv e p e r f o r m a n c e o f w a g e s . Y o u t o u c h e d o n it , b u t
I th in k
h ere.
In

th e

w e ou g h t to

r e c o g n iz e th a t w e h a d

fir s t q u a r te r , m a jo r

a r e a lly

c o lle c tiv e b a r g a in in g

sh arp

con tra st

s e t tle m e n t s p r o ­

v i d e d f o r i n c r e a s e s o f 8 .8 p e r c e n t f o r t h e f i r s t y e a r o f t h e c o n t r a c t .
L a s t y e a r fir s t q u a r t e r it w a s
m o d e r a te r e d u c tio n

1 0 .2 p e r c e n t . W h i l e

t h a t is o n l y

a

in t h e in c r e a s e in w a g e s , t h e i m p o r t a n t t h i n g is

t h a t la s t y e a r t h e r e w a s a — t h e r e w a s v e r y lit t le p r o d u c t iv it y in c r e a s e .
In

f a c t , t h e r e m i g h t e v e n h a v e b e e n a p r o d u c t i v i t y d e c r e a s e , I ’m

not

s u r e . B u t t h i s y e a r t h e r e w a s a n i m p r o v e m e n t o f 4 .6 p e r c e n t i n p r o ­
d u c tiv ity .
A s y o u s a y , t h a t is n o t a s g o o d a s it h a s b e e n in t h e p a s t , i n r e c o v e r y
p e r io d s . N e v e r t h e le s s , it r e s u lt e d in a d r o p in th e in c r e a s e u n it la b o r
c o s t f r o m a n a n n u a l r a t e o f 9 .3 p e r c e n t l a s t y e a r t o o n l y 3 .7 p e r c e n t
t h is y e a r.
J u st cu t m u ch

m o re th a n

in

h a lf . O f c o u r s e , in v ie w

o f th e

fa c t

th a t la b o r c o s ts c o n s titu te a b o u t 70 p e r c e n t o f th e co s ts in o u r e c o n ­
o m y , th a t sh a rp d ro p

in c o s t w a s u n d o u b t e d ly a m a jo r e le m e n t , p e r ­

h a p s t h e m a jo r e le m e n t in t h e f a c t t h a t p r ic e s r o s e m u c h m o r e s lo w ly .
T h a t is n o t a l t o g e t h e r in c o n s is t e n t w it h

y o u r a rg u m en t th a t u n ­

e m p lo y m e n t c o m p e n s a t io n is t o o h ig h , m in im u m

w a g e s a re t o o h ig h .

B u t it d o e s s u g g e s t t h a t i f w e h a v e m o d e r a t e w a g e s e t tle m e n t s , t h a t
we

m ig h t b e

sh arper
th a t y o u

a b le

to

d im in u t io n

have
in

a

fa s te r g r o w t h

u n e m p lo y m e n t

su g g ested th a t are

in

in

th e

a d d itio n

econ om y
to

th e

w ith

a

e le m e n ts

in d e e d u n p o p u la r .

B txrxs. I w o u l d a g r e e w i t h t h a t , S e n a t o r .
T h e C h a i r m a n . Y ou d id to u c h on som e elem ents h ere, b u t I am c o n ­
ce rn e d a b o u t a n o th e r one.
D r.

L e t m e g o b a c k t o o n e o t h e r p o in t w h ic h
you

is v e r y in t e r e s t in g t h a t

a r e t o u c h in g o n th e H u m p h r e y -H a w k in s b ill.




21
I n o t ic e t h a t th a t h a s b e e n m o d ifie d .
D r . B urns. H a s it ?
T h e C h a ir m a n . I t ’s m y u n d e r s t a n d i n g i t ’ s b e e n m o d i f i e d s o
t h e 3 p e r c e n t g o a l f o r o v e r a ll u n e m p lo y m e n t is n o l o n g e r t h e
T h e n e w g o a l is 3 p e r c e n t f o r
s t a n d i t --------D r . B urns.

S ta tin g

th e

a d u lt e m p lo y m e n t. A n d , as I

goal

in

term s

o f

a d u lt

th a t
g o a l.

u n der­

u n e m p lo y m e n t

d o e s n ’t m a k e m u c h d iffe r e n c e .

C h a ir m a n . W e l l , I u n d e r s t a n d t h a t w o u l d b e l e s s o r m o r e

The

th a n a 4 p e r c e n t o v e r a ll u n e m p lo y m e n t.

B urns. I h a v e g o t t h e fig u r e s h e r e .
C h a ir m a n . T h a t i s i m p o r t a n t t o u s , b e c a u s e t h a t b i l l w i l l b e

D r.
The
b e fo re

th is c o m m itte e

and

we

w ill

have

h e a r in g s

in

th e

fu tu r e .

I

t h in k y o u r o p in io n o n th e b ill w o u ld b e v e r y im p o r ta n t t o th e c o m ­
m itte e .
D r.

B urns. L e t m e g i v e y o u s o m e fig u r e s .

I t h in k th e a d u lt u n e m p lo y m e n t r a t e is n o w d e fin e d a s r e f e r r in g t o
in d iv id u a ls o f a g e 18 o r o v e r .
C o n s id e r 1952 a n d
u n e m p lo y m e n t. I n

1953, w h en

we had

a r e m a r k a b ly

a n d t h e a d u l t u n e m p l o y m e n t r a t e w a s 2 .8 p e r c e n t . I n
u n e m p l o y m e n t r a t e w a s 2 .9 p e r c e n t , a n d
The

d iffe r e n c e

lo w

ra te

of

1952, th e t o ta l u n e m p lo y m e n t ra te w a s 3 p e rc e n t,

w as

la r g e r — b u t

s till

th e

1953, th e to ta l

a d u l t r a t e 2 .8 p e r c e n t .

ra th er

s m a ll— in

r e ce n t y e a r s o f v e r y lo w u n e m p lo y m e n t, 19 68 a n d

tw o

1969. I n

oth er

1968, th e

t o t a l u n e m p l o y m e n t r a t e w a s 3 . 6 p e r c e n t , a n d t h e a d u l t r a t e 3 .2 p e r ­
cen t. I n

1 9 6 9 , t h e t o t a l u n e m p l o y m e n t r a t e w a s 3 .5 p e r c e n t , a n d t h e

a d u l t r a t e 3 .1 .
The

C h a ir m a n . W e l l , a g a i n , I t h i n k i t i s a m a t t e r o f t h e d e f i n i t i o n .

I a m n o t su re it w a s 18 a n d a b o v e .
I f y o u m o v e th a t u p t o 2 4 a n d a b o v e , y o u g e t q u ite a d iffe r e n t s it u ­
a tio n . I f y o u h a v e th e a d u lt d e fin e d a s 2 4 y e a r s o ld

a n d a b o v e , o r 21

and above.
W h a t I ’m s a y i n g i s t h a t p a r t i c u l a r l y --------D r.

B urns. T h a t w a s m y p o i n t . A s t h e H u m p h r e y - H a w k i n s b i l l

s t a n d s n o w , it o u g h t t o b e f o r g o t t e n ; b u t i t ’s c a p a b l e

o f

g r e a t im ­

p rov em en t.
T h e C h a ir m a n . Y ou m a y n o t a p p r e c i a t e t h i s . B u t w i t h t h e i n f l u ­
en ce y o u h a v e , y o u g a v e , th e g o v e r n m e n t-a s -a n -e m p lo y e r -o f-la s tr e s o r t m o r e s u p p o r t t h a n I t h in k a n y b o d y e ls e d id , b e c a u s e o f y o u r
g r e a t p r e s tig e as a r e s p e cte d c o n s e r v a t iv e e c o n o m is t, w h e n
th e g o v e r n m e n t s h o u ld b e

an

e m p lo y e r

of

la s t r e s o r t, y o u

you

s a id

d i d , it]s

t r u e , s p e c i f y a t le s s t h a n t h e m i n i m u m w a g e . T h a t w a s q u i t e a m o d i ­
fic a t io n , b u t n e v e r th e le s s , w e c a n d is c u s s w h a t t h e w a g e o u g h t t o b e .
H ow

about

a c o m p r o m is e . H o w

a b o u t m a k in g

it

s o m e th in g

lik e

t h i s : B u t s a y in g a ft e r 10 w e e k s o f u n e m p lo y m e n t c o m p e n s a t io n , th e
p e r s o n r e c e iv in g i t h a s t o t a k e t h e j o b t h a t is a v a ila b le o r h e g o e s o f f
u n e m p lo y m e n t

c o m p e n s a tio n

at

th e

u n e m p lo y m e n t

c o m p e n s a tio n

w age?
D r.

B urns. T h a t

w o u ld

be

an

im p r o v e m e n t

on

H u m p h rey-

H a w k in s .
I w o u ld b e v e r y g la d to s t u d y t h a t s u g g e s tio n . B u t , le t m e d iffe r ­
e n t ia t e m y a p p r o a c h f r o m




th e a p p r o a c h o f H u m p h r e y -H a w k in s .

22
H u m p h r e y -H a w k in s

c o n tin u e s th e

f o r th e u n e m p lo y m e n t ra te . Y o u

o ld

gam e

of

s e ttin g

a

ta rg et

s e t o n e fig u r e , I s e t a n o th e r fig u r e .

I f y o u r fig u r e is lo w , y o u a r e a f r ie n d o f m a n k in d ; i f m in e is h ig h ,
I a m a se rv a n t o f W a ll S tre e t. A n d so fo r th , a n d so on .
I

t h in k t h a t is n o t a p r o fit a b le g a m e a n d w o u ld lik e t o d o

aw ay

w i t h it . I d o n ’t w a n t t o d e b a t e w i t h y o u o r w i t h o t h e r e c o n o m i s t s t h e
q u e s tio n o f th e p r o p e r u n e m p lo y m e n t ra te . N u m b e r s ta k e n o u t o f th e
a i r w it h o u t r e g a r d t o h is t o r y c a n n o t b e u s e d in d e v e lo p in g a w o r k a b le
s c h e m e a im e d a t a f u l l e m p lo y m e n t .
I

fa v o r a im in g

lite r a lly

m en t. B u t, w h erea s I
o f

la s t r e s o r t,

I

a t a zero

w o u ld

w o u ld

ra te o f in v o lu n ta r y

u n e m p lo y ­

h a v e th e g ov ern m en t b e th e

d e lib e r a te ly

m ake

th e se

e m p lo y e r

g o v e rn m e n ta l

jo b s

u n a ttr a c tiv e in te rm s o f p a y , s o th a t in d iv id u a ls w o u ld h a v e a g r e a t
i n c e n t i v e ---------

C h a ir m a n . I a g r e e w i t h t h a t p r i n c i p l e . I t h i n k t h a t p r i n c i p l e

The
is

r ig h t.

I

c o n tr o ls

th in k

th a t

th a t

you

is

can

th e

o n ly

s h a r p ly

w a y , sh ort

red u ce

of

r ig id

w age

u n e m p lo y m e n t

p r ic e

r e a lis t ic a lly

w it h o u t u n a c c e p ta b le in fla tio n .
Y ou

h ave to

b ill, o r y o u
I

th in k

som ehow

c lo s e th a t lin k in

th e H u m p h r e y -H a w k in s

d o h a v e s o m e t h in g t h a t w o u ld n ’t fly , I a g r e e w it h t h a t .
th e

w h o le

d e fin itio n

of

w hat

is

u n a ttr a c tiv e

enough

to

p r o v id e in c e n t iv e f o r p e o p le w h o a re g iv e n t e m p o r a r y e m p lo y m e n t in
t h e p u b lic s e c to r t o m o v e b a c k in t o th e p r iv a t e s e c to r w it h o u t in fla ­
tio n .

B u r n s . Y ou a r e a g o o d l e g i s l a t o r , a n d s o y o u s u g g e s t a c o m ­

D r.

p r o m is e . T h a t is th e w a y
B u t, w h en I
b e lo w

th e m in im u m

becau se I h a d
w o r k in g fo r

you

h a v e t o le g is la te p r a c t ic a lly .

su g g ested th a t th e F e d e ra l G ov ern m en t p a y
w a g e , i t w a s n ’t b e c a u s e I

in m in d th e 7 m illio n

a w age

a t o r b e lo w

am

a w age

h e a r tle s s . I t w a s

o r so in d iv id u a ls w h o a re n o w

th e m in im u m .

I f t h e G o v e r n m e n t g o e s a b o v e th a t, th e se in d iv id u a ls w ill t e n d t o
m ove

out o f

th e ir

p r iv a te

jo b s

in a n y ca se m ig h t b e m o re
p o s s i b l y e a s ie r .
I

w o u ld w a n t t o g u a r d

b e lie v e , as I

know

you

in to

th e

g o v e r n m e n ta l jo b s — w h ic h

se cu re , p o s s ib ly

a little m o r e

d ig n ifie d ,

a g a in s t th a t k in d o f m o v e m e n t, b e ca u se I

d o , in

fr e e

e n te r p r is e

in o u r

co u n try .

Y ou

h a v e b e e n fig h t in g o v e r th e y e a r s t o lim it th e g r o w th o f th e G o v e r n ­
m e n t. I f y o u s e t a w a g e o n a p r in c ip le o t h e r th a n m in e , I a m a f r a id
t h a t e x p a n s io n o f G o v e r n m e n t w ill c o n tin u e , p e r h a p s a t a n e x t r a o r ­
d in a r ily fa s t ra te.

C h a ir m a n . B u t l o o k

The

at

th e

p o s t-c a ta s tr o p h ic

e ffe c t

on

th e

e c o n o m y i f y o u p r o v id e w h a t y o u s u g g e s te d . I f a ft e r a s h o r t tim e o n
u n e m p lo y m e n t
tio n

r e c e iv e

c o m p e n s a tio n ,

le s s t h a n

th e

th ose

m in im u m

on

u n e m p lo y m e n t

w a g e , w h ic h

is

com p en sa­

a b o u t $ 4 ,0 0 0 a

y e a r , s a y $ 2 a n h o u r f o r 2 ,0 0 0 h o u r s .
N ow ,
$ 8 ,0 0 0
keep

$ 4 ,0 0 0
and

up

a

year

$ 9 ,0 0 0

on

w o u ld

m ean

u n e m p lo y m e n t

p a y m e n ts to

th e ir h o m e

d e s o la te . W o u ld b e in

a p o s itio n

p e o p le

who

c o m p e n s a tio n

and

are

now

and

are

g e ttin g
a b le

to

c a r , w o u ld ju s t b e a b s o lu t e ly

w h ere y o u

w o u ld t e n d t o h a v e th e

k in d o f s n o w b a llin g d e p r e s s io n w e h a v e so o ft e n h a d b e fo r e W o r ld
W ar II.
D r.
you

B urns. I

have

to

d o n ’t

fa c e u p




to

deny
th e

th a t th ere

are

d iffic u lt ie s . B u t

fa c t th a t th e a v a ila b ility

I

th in k

o f u n e m p lo y -

23
m ent

in s u r a n c e

fo r

a

lo o k in g fo r a jo b .
T h e C h a ir m a n . I

very

lo n g

agree.

I

p e r io d

th in k

keeps

m any,

m any

m any

p e o p le

p e o p le

on

fr o m
unem ­

p l o y m e n t c o m p e n s a t io n a d m it t h e s y s t e m is w r o n g .
C a n y o u co m m e n t o n th e a d e q u a cy o f th e C o u n c il o n W a g e P r ic e
S ta b ility ?
D o
an

you

th in k

e ffe c tiv e

th ey

have

enough

resou rces

and

a u th o r ity

to

do

jo b ?

B u r n s . N o, I d o n ’ t t h i n k t h e y d o . I t h i n k t h e y o u g h t t o h a v e

D r.

m o r e a u th o r ity .
I g e t a g r e a t d e a l o f m a il f r o m
c r itic a l
w o r ld

of

m y

v ie w s

on

b e in g a s it is , I

th is ,

m y b u s in e s s fr ie n d s w h o a r e v e r y

and

1

m ay

th in k w e d o h a v e

w e ll

be

w ron g. B u t

th e

a b u ses o f e c o n o m ic p o w e r

in t h e fie ld o f b u s in e s s a n d in t h e fie ld o f la b o r .
M a n d a tory

c o n tr o ls

m ay

w ork

w e ll

fo r

a

tim e ,

but

th en

th ey

d e t e r io r a t e ; t h e ir e ffe c tiv e n e s s e r o d e s .
I d o u b t w h e t h e r o u r m o n e t a r y a n d f i s c a l p o l i c i e s w i l l p r o v e s u ffi­
c ie n t ly r e s tr ic tin g t o p r e v e n t in fla tio n . A n d , t h e r e fo r e , I k e e p stre s s­
in g s tru c tu ra l p o lic ie s .
I

a ls o b e lie v e th a t w e , a lo n g

s e lv e s
how

e x p e r im e n tin g

to m ak e th em

w it h

w ith

in c o m e

oth er

c o u n tr ie s , w ill fin d

p o lic ie s .

W e

d o n ’t

q u ite

ou r­
know

w o rk , b u t w e w ill k e e p o n tr y in g .

W h a t I w o u ld lik e t o see u s d o in t h is c o u n t r y a t t h e p r e s e n t t im e
is

to

g iv e

th e

C o u n c il

on

W age

p o w e r — p o w e r to su sp e n d p r ic e

and

P r ic e

S ta b ility

o r w a g e in c r e a s e s in

a

little

m ore

k e y in d u s tr ie s

f o r a b r ie f p e r io d , p e r h a p s 30 o r 4 5 d a y s .

C h a ir m a n . W o u l d s u c h a n a c t i o n i n s t e e l , f o r e x a m p l e , h a v e

The
been

h e lp fu l in

y o u r v ie w ?

B urns. I w o u ld r a t h e r n o t c o m m e n t o n t h a t s p e c if i c in s t a n c e ,

D r.

n o t h a v in g s t u d ie d it. B u t t h a t m a y w e l l b e a g o o d e x a m p le .

C h a ir m a n . O n e o t h e r p o i n t w i t h r e s p e c t t o i n f l a t i o n .

The
Y ou
tio n

have

ra te

w arn ed

rep orted

u s in

by

th e

p r e v io u s te s tim o n y
F ed

u n d ersta tes

th e

th e

c a p a c ity

p o te n tia l

u tiliz a ­

fo r

in fla ­

t i o n e s p e c ia lly w h e n b o t tle n e c k s o c c u r in k e y s e c t o r s o f t h e e c o n o m y .
A s ou r recovery

p ic k s u p

stea m

do

b o t tle n e c k s th a t w ill h a v e a s e r io u s
w h a t d o e s th a t d o to th e e c o n o m y ?
D r.

you

fo r e s e e

in fla tio n a r y

a n y sh orta g es o r
e ffe c t

and,

if

so,

B urns. I w o u ld n o t b e s u r p r i s e d i f i n a y e a r o r a y e a r a n d

a h a lf w e fo u n d th a t th e r e w a s a s h o r t a g e o f c a p a c it y in s o m e o f o u r
r a w m a te r ia l p r o d u c in g
o f th em .
The
th in g ?
D r.

on ce

a g a in .

S te e l m ig h t

be

one

C h a i r m a n . W h a t i n y o u r v ie w c a n w e d o a b o u t t h i s , i f a n y ­
B urns. O n e r e a s o n w e h a v e h a d l i m i t e d i n v e s t m e n t i n o u r

co u n try
is

in d u s tr ie s

r e c e n tly

r e tu r n in g .

I

has been

th in k

cou ragem en t to

th e

a sh orta g e

th e

p o lic y

b u s in e s s

of

of

c o n fid e n c e , b u t

m o d e r a tin g

c o m m u n ity ;

it

in fla tio n

c o n fid e n c e
g iv e s

en­

b u s in e s s m e n

g iv e s

th e

fe e l i n g t h a t th e fu t u r e is m o r e s e c u r e .
B y
p o lic y

k e e p in g th e p r o b le m
go

w ill h e lp

o f in fla tio n

b e fo re

u s— n o t le ttin g

w ild a g a in , a n d n o t le t t in g m o n e t a r y p o l i c y
to m a in ta in

an d to

T h a t is o n e t h in g . W e
th a t cou rse.




go

fis c a l

w ild — w e

s tr e n g th e n c o n fid e n c e .

are d o in g th a t n o w

and

we

m u st sta y

on

24
B eyond

th a t,

I

th in k

b e v e r y h e lp fu l in

th a t

som e

ch an ges

in

our

ta x

la w s

c o u ld

s t i m u l a t in g b u s in e s s c a p it a l in v e s t m e n t .

C h a ir m a n . O n e a r e a w h e r e c a p a c i t y s h o r t a g e is e s p e c ia l l y

The

s ig n ific a n t is in th e e n e r g y a re a .
W e

had

te s tim o n y

b e fo re

th e

c o m m itte e

fr o m

V ic e

P r e s id e n t

R o c k e fe lle r a n d o th e r s o n th e ir p r o p o s a l fo r a n e n o rm o u s su m , $1 00
b illio n , fo r

an

en ergy

in d e p e n d e n c e a u th o r ity .

The

e ffe c t o n

th e c a p it a l m a r k e ts , o f c o u r s e , w o u ld

The

e ffe c t o f

th e

g ie s t o

F ederal

d e v e lo p — a n d

b r in g in g n e w

it

G o v e r n m e n t ’s d e c id in g

w o u l d n ’t b e

be

p ro fo u n d .

w h a t te c h n o lo ­

r e s e a r c h , it w o u ld

be

a c tu a lly

t e c h n o lo g ie s o n scen e, p r o d u c in g — w o u ld b e p r o fo u n d .

D o y o u h a v e a n y ju d g m e n t o n th e w is d o m o f t h a t ?
M r . B u rn s. I h a v e a d e fin it e v ie w o n t h e g e n e r a l p r o b le m . I t h i n k
in d e p e n d e n c e
th e

in

th e

a d m in is t r a tio n

en ergy
s h o u ld

area
be

is

a

goal

w o r k in g

th a t th e

tow a rd s

C on gress

fa r

m ore

and

a c tiv e ly

t h a n w e h a v e b e e n d o i n g . O u r r e lia n c e o n im p o r t s o f o i l is in c r e a s ­
in g , w h ic h

m ean s th a t o u r

a num ber o f A ra b

econ om y

m ay

b e a t th e m e r c y

s h e ik s m a y d e c id e t o d o in

of

w hat

th e w a y o f p r ic e

or

in t h e w a y o f e m b a r g o s . I t h in k o u r n a tio n a l s e c u r it y r e q u ir e s t h a t
we

a c h ie v e

en ergy

in d e p e n d e n c e , o r

s u b s ta n tia l in d e p e n d e n c e , o n c e

a g a in .
A s

fo r

I

b illio n
I

th e

p r o p o s a l, th e

w h e th e r

th e

o r $30 b illio n , a n d I
say

a la r g e

keep

R o c k e fe lle r

know

w o u ld

fo r

of

th e

d o n ’t

th e

o n ly

books

o u tla y ,

and

I

The

w o u ld

th in k

p rop osal

su m

is

is

$100

aw esom e.
b illio n ,

on

th e

fin a n c ia l
we

p rop osa l

a llo w

s id e .

I f

we

d e fin e t h a t — w e

o r ig in a lly

put

e x p e r t lik e

go

in

ou g h t to

fo r w a r d

by

t h a t is w r o n g .

S e n a to r, o f

o ff-b u d g e t o u tla y s . T h e tr u e
b illio n th a n $7 6 b illio n .
an

$50

o ff-b u d g e t a c c o u n tin g f o r t h is t y p e
a budget

d e fic it th is

year

p r o x im a t e ly $ 7 6 b il l i o n . T h a t e x c lu d e s s o m e $ 9 b illio n , i

If

or

n o t su re a n y b o d y d oes.

m a tte r h o w

s tr a ig h t.

s p o k e e a r lie r ,

am

th in g

p rogram — n o

a d m in is t r a t io n

Y ou

one

r ig h t

d e fic it,

y o u r s e lf ca n

th e r e fo r e ,

m is s ta te

th e

is

m ore

of

ap­

b e lie v e , o f
n e a r ly

d e fic it b y

$85

$9 b illio n ,

o t h e r s a r e u n l i k e l y t o k n o w it s t r u e s iz e .
t h in k

our

a c c o u n tin g

a s s im p le

I

and

s tr a ig h tfo r w a r d

to

m ove

to

C h a ir m a n .

The

a u th o r ity
D o

you

sa fe ty

e lim in a te

net

in

th e

have

th e

So

s h o u ld

be

s im p le

as w e

and

s tr a ig h tfo r w a r d —

c a n m a k e it.

C on gress

ought

o ff-b u d g e t c a te g o ry .

you

w o u ld

put

th e

en ergy

in d e p e n d e n c e

b u d g et.
any

fu n d

ju d g m e n t

fo r

a s s is tin g

on

th e

$25

c o u n tr ie s

b illio n

th a t

s o -c a lle d

have

been

O E C D

s e r io u s ly

a ffe c te d b y e n e r g y s h o r ta g e s ?
M r.

B u r n s . I h a v e b e e n i n fa v o r o f t h a t , a n d I s t i l l am , as m u ch

f o r p o l i t i c a l r e a s o n s a s f o r e c o n o m ic r e a s o n s . I d o n ’t t h in k t h a t t h e
c o u n tr ie s in E u r o p e s h o u ld b e a t th e m e r c y o f w h a t a n A r a b p o te n ­
ta te

m ay

The

w an t to

w r in g

fr o m

th e m .

C h a ir m a n . F i n a l l y , I h a v e a g r e a t d i f f ic u lt y , a s y o u k n o w ,

w it h t h is r a n g e .
It

seem s to

R eserve
th at

you

m e

B oard
are

we

can

a r e n ’t b e in g

te ll

fr e e , o f

us

w hat

cou rse, to

to ld
your

ch an ge

as p r e c is e ly
a im s

are,

th e— a n d

as th e

F ederal

r e c o g n iz in g
th e re

is

no

fu lly
w ay

w e c o u l d m a k e y o u u n f r e e b e c a u s e , a s y o u s a y , w e c a n ’t c o n t r o l t h e
s itu a tio n .




25
D r. B u r n s. W e h a v e red u ced th e ra n g e , S e n a to r.

C h a ir m a n . W e l l , y o u h a v e t h e s a m e ra n g e y o u s t a r t e d o ff

The

w it h la s t y e a r.
D r. B urns . T h a t’s

correct; 2.5 percentage points.

C h a ir m a n . I s n ’ t t h a t s u c h a b r o a d a r e a ?

The

4.5

A f t e r a ll, i f y o u h a v e a
th a t

is

q u ite

c o n s e r v a tiv e .

p e r c e n t in c r e a s e in th e m o n e y s u p p ly ,

If

you

7

have

p ercen t, th a t

is — t h a t

q u ite s t im u la t iv e .
T h e r e is s u c h a b i g d i f f e r e n c e t h a t w e a r e n ’ t s u r e r e a l l y
p o lic ie s

or

as

su re

as— th e

la s t , y e a r a n n o u n c e d

B urns .

D r.

G erm an y

C en tra l

B ank,

I

is

w h a t th e

u n d ersta n d

a n 8 p e rc e n t g o a l.

W e l l - --------

C h a ir m a n . W h y w o u l d n ’ t i t b e p r o p e r f o r y o u to sa y i t i s

The

5 .7 5 , r e c o g n i z i n g t h a t y o u a r e n ’ t g o i n g t o b e o n t a r g e t ?
W o u l d n ’t t h a t b e m o r e i n f o r m a t i v e ?

B urns .

M r.

M y

ow n

ju d g m e n t ,

and

th a t

of

m y

c o lle a g u e s ,

has

b e e n t h a t it w o u ld b e m o re m is le a d in g t h a n in fo r m a t iv e .
If,

le t

us say, w e

an n ou n ced

a

fig u r e

o f— to

ta k e

a rou n d

num ­

b e r— 6 p e rce n t, a n d i f w e h a d th e a b ilit y to h it th a t ta r g e t o r co m e
c lo s e

to

it,

and

if

we

a ls o

had

th e

in t e n t io n

s in g le fig u r e w o u ld b e m o r e in f o r m a t iv e t h a n
B ut

we

have

no

su ch

in te n tio n .

W e

to

sta y

w ith

it ,

th e

a ran ge.

s h o u ld n ’t

have

any

su ch

i n t e n t io n ; th e w h o le g e n iu s o f m o n e t a r y p o l i c y lie s in it s fle x ib ilit y .
The
W e
in t o
fo r

C h a ir m a n . L o o k a t t h e f l e x i b i l i t y y o u h a v e .
w o u ld

ex p ect— an d y o u

r e c o g n iz in g
a

w eek

but you

or

th a t

a

we

m on th

or

a re fr e e t o co m e u p

c o m m itte e

or

th e

H ou se

have done

c a n ’t

expect

m aybe

a

a fin e j o b
a n y th in g

little

and you

m ore

of

e d u c a tin g u s

lik e

t h is

th a n

a

ta rget

m on th —

d o c o m e u p b e fo r e e ith e r th is

c o m m itte e

every

3

m on th s

to

r e v is e

it,

c h a n g e i t , m o d i f y it.
So

th a t i f

you

had

t o ld

us

th a t

it

w o u ld

be,

fo r

5:75

e x a m p le ,

p e r c e n t a n d it w a s m o r e t h a n t h a t o r le s s t h a n t h a t f o r
t w o , w e w o u ld c e r t a in ly u n d e r s ta n d th a t.

a m on th o r

T h e n w h e n y o u c a m e u p y o u c o u l d c h a n g e it a n d e x p l a i n it .
I t ju s t seem s t o m e th a t w e w o u ld h a v e a m o r e p r e c is e a n d u s e fu l
fo r m u la t io n o f w h a t y o u r m o n e t a r y p o l i c y is in s t e a d o f a r a n g e t h a t
e n c o m p a s s e s a lm o s t a n y t h in g .

Dr. B u rn s. Y ours is a respectable opin ion.
I

m u st

sa y th a t

th a t

p o s itio n

w as

argu ed

by

th e o p e n m a r k e t c o m m itt e e . I t h a s n o t p r e v a ile d

som e

m em bers

so fa r , a n d I

of

s h a ll

c lo m y b e s t t o s e e t h a t i t d o e s n o t p r e v a i l i n t h e f u t u r e .
The
m in d .
I
I

C h a ir m a n . I

hope

you

w o u ld

c o n s id e r

o p e n in g

up

your

r e a l i z e i t i s a v e r y ---------

D r . B urns . T h a t is t h e t r o u b l e w i t h m y m i n d , t h a t i t i s s o o p e n .
am g o in g to in v ite y o u to o p e n y o u r s .
L et
The

m e g iv e

you

s o m e f i g u r e s , S e n a t o r ---------

C h a ir m a n . Y o u r m i n d

c lo s e d o n th is o n e , e s p e c ia lly
y o u r b e s t r e g a r d le s s .
D r.

B urns .

a t a n y g iv e n
have.

A ll

th a t

I

can

is

open

w hen

d o.

on

m any

say

th a t I

th in g s ,

you

S e n a to r , is t o

tim e o f th e k n o w le d g e




you

have

are

but

g o in g

m ak e th e
or

th a t I

it
to

is
do

b est use
th in k

I

26
L e t m e g i v e y o u s o m e fig u r e s w h ic h h a v e in flu e n c e d , a n d c o n t in u e
to

in flu e n c e , m y

th in k in g .

F or

th e

m on th

a fig u r e f o r M i t h a t im p lie d g r o w t h

of

fr o m

M a rch

we

p u b lis h e d

F e b r u a r y a t a s e a s o n a lly

a d j u s t e d a n n u a l r a t e o f 6 .1 p e r c e n t .
W e u s e d o n e p a r t i c u l a r m e t h o d o f s e a s o n a l a d ju s t m e n t. H o w e v e r ,
w e m ig h t h a v e u s e d a n y o f a n u m b e r o f r e s p e c ta b le m e th o d s .
I h a v e b e fo r e m e a t a b le s h o w in g a d o z e n o r so d iffe r e n t s e a s o n a l
c o r r e c t io n s t h a t m ig h t h a v e b e e n a p p lie d . I f w e h a d u s e d a d iffe r e n t
s e a s o n a l,

th e

g ro w th

4 .8 p e r c e n t , o r
F or

ra te

in d ic a te d

fo r

M arch

m ig h t

have

been

i t m i g h t h a v e b e e n 9 .7 p e r c e n t .

th e m o n th

of

F ebru ary, we

p u b lis h e d

a fig u r e

th a t im p lie d

g r o w t h a t a r a t e o f 6 .5 p e r c e n t . U s i n g d i f f e r e n t s e a s o n a l s , t h e g r o w t h
ra te m ig h t h a v e b e e n

zero o r

1 0 .6 p e r c e n t .

N o w , S e n a t o r , t h a t is n o t t h e e n d

o f t h e s t o r y ; th e s e fig u r e s a r e

r e v is e d .
T h e C h a ir m a n . L e t m e j u s t s t o p a t t h a t p o i n t .
I

w o u ld

agree

w ith

you

w h o le h e a r t e d ly

m e a n a n y th in g e v e n i f y o u
so

m any

in

t h is c o u n t r y , a n d

a b e r r a tio n s

in

th e

m oney

th e a c tiv ity

d is t o r t th is .
W h a t a s e a s o n a l, o f

th a t

a

m on th

w o u ld n ’t

d i d n ’t h a v e a s e a s o n a l b e c a u s e t h e r e a r e
s itu a tio n ,

c o u r s e , th e r e fo r e

h a v e s o m e th in g a litt le m o r e

th e

o f th e T re a s u r y

c r e d it

s itu a tio n

a n d so fo r th

can

e lim in a te d , t h a t w e s h o u ld

p r e c is e th a n

w e have.

B u r n s. S e n a t o r , I d i d n o t m e a n t o i m p l y t h a t a r a n g e o f 2 .5

D r.

p e rcen ta g e

p o in t s f o r

M i is r ig h t a n d t h a t a r a n g e o f 2 p e r c e n t a g e

p o i n t s w o u l d b e w r o n g . A l l I m e a n t t o s a y is t h a t a m o d e r a t e ly w i d e
ran ge

is

e s s e n tia l

if

th e

m is in fo r m e d .
T h e C h a ir m a n . L e t
a b o u t th e

adequ acy

me

in

say

o f th is

I t seem s to m e i f y o u
in c r e a s e

p u b lic

real g ro w th

arou n d

in

th e

C on gress

c o n c lu s io n

th a t

ra n g e , p a r tic u la r ly

assu m e, as y o u
of

arou n d

o f 6 p ercen t, th a t a d d s u p
o f

and

to

not

I am

to

be

con cern ed

th e m id p o in t.

h a v e, th a t w e w ill h a v e

7 p ercen t, an d

a need

are

an

in fla tio n

an

ra te

t o fin a n c e m o n e y t r a n s a c t io n s

13 p ercen t.

T h a t w o u ld

m e a n w ith

5 .7 5 o r 6 , t h a t y o u

an

in c r e a s e in t h e m o n e y s u p p l y

o f, say,

w o u ld h a v e t o h a v e a v e lo c it y a t a lm o s t a s h ig h

a r a t e a s it h a s b e e n o v e r t h e la s t y e a r a n d a ll o u r e x p e r ie n c e is t h a t
t h a t is u n lik e ly .
T h e r e fo r e , m y
o f

a

p o lic y

you

c o n c lu s io n
a re lik e ly

w o u ld

be

th a t if y ou

fo llo w

th is k in d

t o b e r e s tr ic tin g th e m o n e y s u p p ly

w ith

a r e s u lt t h a t in te r e s t r a te s w o u ld te n d t o s ta r t r is in g .

B urns. Y o u r c o n c lu s io n w o u ld b e in e s c a p a b le i f t h e F e d e r a l

D r.

E eserve

set

fo r th

som e

ta rg ets

and

th en

w ent

to

s le e p

fo r

a

fu ll

year.
W e a r e n o t g o i n g t o g o t o s le e p e v e n f o r 1 d a y o r 1 h o u r , S e n a to r .
O u r jo b
n u m b er.

is t o w a t c h

t h e e c o n o m y a n d n o t t o w o r s h ip th is o r th a t

T h e C h a ir m a n . I r e a l i z e y o u a r e g o i n g t o
a s I s a y , t h is a r it h m e t ic ju s t d o e s n ’t a d d u p .
D r.

be

w id e

a w a k e, b u t.

B urns. I h a v e fig u r e s o n r e c e n t c h a n g e s in th e v e lo c it y o f M i

b e fo re
annual

m e.
ra te

9 p ercen t;
p ercen t.

In

th e

o f
and




th ir d

1 1 .3
in

q u a rte r

p ercen t;

th e

fir s t

in

of
th e

q u a rte r

1975

v e lo c ity

fo u r th
of

th is

in c r e a s e d

q u a rte r,
year,

at

at
a

at

an

a

ra te

o f

ra te

o f

8 .1

27
I t i s t r u e t h a t t h e r a t e o f g r o w t h i n v e l o c i t y is l i k e l y t o d i m i n i s h
a s s u m in g t h a t t h e r e a r e n o c h a n g e s in fin a n c ia l t e c h n o lo g y . T h a t
a s s u m p tio n m a y o r m a y n o t b e a c c u r a te .
B u t , S e n a to r , i f w e a r e m is ta k e n in o u r a s s u m p tio n s , as w e m a y
w e ll b e , w e d o n ’t s p e n d m u c h t im e in s h e d d in g t e a r s o v e r t h e p a s t.
W e k n o w w e a r e c a p a b le o f m a k in g m is ta k e s . B u t i t is o u r j o b t o
c o r r e c t t h e m , a n d I c a n a ss u re y o u t n a t w e w ill b e fa s t in d o i n g s o .
T h e C h a ir m a n . W h a t y o u a re s a y in g , i f th e v e lo c it y s h o u ld d r o p
d o w n t o 4 p e r c e n t o r 3 p e r c e n t , t h a t t h e n y o u w o u ld in c r e a s e th e
m o n e y s u p p ly a t a m o r e r a p id r a te t h a n y o u h a v e in d ic a t e d a n d y o u
w o u ld t e ll u s t h a t ?
D r . B u r n s . W e w o u ld c e r t a in ly r e c o n s id e r th e g r o w t h r a n g e s ,
a n d w o u ld d o s o b e f o r e v e lo c it y r e a c h e d t h a t le v e l. W h a t d e c is io n
w e w o u ld r e a c h , I c a n ’t s a y .
T h e C h a ir m a n . D r . B u m s , th a n k y o u v e r y m u c h .
I m u s t s a y t h a t y o u a r e a s u p e r b w itn e s s .
I h o p e y o u h a v e a s g o o d a y e a r t h is c o m i n g y e a r a s y o u h a d la s t
y e a r . I t w a s a m ig h ty g o o d o n e fr o m y o u r s ta n d p o in t. Y o u r p o lic ie s
t u r n e d o u t t o b e m o s t c o n s t r u c tiv e t o th e e c o n o m y .
T h a n k y o u v e ry m u ch .
D r . B u r n s. I w a n t t o t h a n k y o u , S e n a to r , f o r y o u r k in d n e s s a n d '
f o r th e c o n t r ib u t io n y o u a r e m a k in g .
I e n jo y e d m y la s t v is it w it h y o u , a n d w o u ld lik e t o s it d o w n w it h
y o u s o o n a g a in .
T h e C h a ir m a n . T h a n k y o u ? s ir .
T h e c o m m itte e
1 0 o ’c lo c k .

w ill

sta n d

in

recess u n til

tom orrow

[ W h e r e u p o n , a t 1 1 : 5 3 a .m ., t h e c o m m i t t e e
r e c o n v e n e a t 1 0 a .m ., T u e s d a y , M a y 4 , 1 9 7 6 .]




w as

m o r n in g

at

a d jo u r n e d ,

to




THIRD MEETING ON THE CONDUCT OF MONETARY
POLICY

TUESDAY, MAY 4, 1976
U . S . S enate,
C o m m it t e e o n B a n k i n g , H o u sin g a n d U r b a n A f f a ir s ,

W a s h in g to n , D .C .
The

c o m m itte e

1 0 :0 7

a .m .

in

w as

room

S e n a to r W illia m

recon ven ed ,

5302

of

pursu an t

D ir k s e n

to

a d jo u r n m e n t ,

S e n a te

at

O ffic e

B u ild in g ;

(c h a ir m a n o f th e c o m m itte e )

P r o x m ir e

th e

p r e s id in g .

C h a ir m a n . T h e c o m m i t t e e w i l l c o m e t o o r d e r .

The

Y esterd a y , w e

had

th e

a n n o u n c in g

h is

fo r m e d

C on gress

th e

C h a ir m a n

m on eta ry

ta rg et

and

th e

o f th e

fo r

th e

F ed era l R eserve B oa rd

c o m in g

c o m m itte e

year,

th a t th e

and

c o m in g

he

in ­

year, he

w a s g o i n g t o h a v e a s o m e w h a t s l i g h t l y t i g h t e r g o a l t h a n h e h a d la s t
year.
L ast year, he began

by

m o n e y s u p p ly . M i, w o u ld
T h is
cern s

year,

th is

it

w ill

S e n a to r

be

s a y in g

4*4

very

t h a t t h e g o a l , t h e in c r e a s e

in

th e

ra n g e b e tw e e n 5 p e rce n t a n d 7 y 2 p ercen t.
to

7

m u ch ,

p ercen t.

becau se

The

we

an n ou n cem en t

s till

have

very

con ­

heavy

u n e m p lo y m e n t . W e h a v e t o r e c o g n iz e t h e f a c t t h a t in th e fir s t y e a r
o f

recovery, on

m oney

th e

b a s is

in c r e a s e s s h a r p ly

of

a ll o f

and

our

in c r e a s e d

e x p e r ie n c e , th e
w ith

v e lo c it y

of

g r e a t r a p id ity

very

in

th e la s t y e a r .
T h is
in

th e

w as
I

w as

a b le
am

th e

m oney
to

reason

s u p p ly ,

m ove

w h y , in
in te r e s t

s p ite
ra tes

of

a

ra th er

m od era ted

lim it e d

and

th e

in c r e a s e
recovery

ahead.

v ery m u ch con cern ed

a b o u t w h a t h a p p e n s i f v e lo c it y s lo w s

d o w n , as it h a s t y p ic a lly in th e p a s t in th e s e c o n d y e a r o f r e c o v e r y
a n d t h e in c r e a s e m

th e m o n e y s u p p ly a ls o s lo w s d o w n .

W e m a y h a v e a s it u a t io n w h e r e in te r e s t ra te s w o u ld
a n d th e r e c o v e r y m ig h t b e
th a n it s h o u ld b e .

a b orted , o r

a t le a s t s lo w e d

r is e s h a r p ly
dow n

m ore

W e a ls o h a d a n in te r e s tin g d is c u s s io n o f th e H u m p h r e y -H a w k in s
b ill, w h ic h

w a s c r itic iz e d

eral R eserve B oa rd ,
m o n y o n th a t.

and

T h a t b ill com es b e fo re

v ig o r o u s ly b y
I

th in k

th is

we

th e

can

c o m m itte e

r e s p o n s ib le f o r th e E m p lo y m e n t A c t o f
p h r e y -H a w k in s

is a n

C h a ir m a n
have

som e

b e c a u s e th is

in

our

B u r n s p r o p e r ly
o f a p r o p o s a l.

a m en d m en t t o th e

s o c ie ty .

It

e m p h a s iz e d

does
of

r a is e

th e

(29)
7 2 — 39 0 — 7 6 --------3




F ed­
te s ti­

c o m m itte e

is

1946, a n d , o f cou rse H u m E m p lo y m e n t A c t o f

I t ’s a v e r y s e r io u s e f f o r t t o a n s w e r t h e p r o b l e m
p lo y m e n t

o f th e
u s e fu l

th e

q u e s tio n

in fla tio n a r y

1946.

o f c h r o n ic u n e m ­
th a t G o v e r n o r

e ffe c t o f th a t k in d

30
W e ll, w e
s ta n d in g

are

very

A m e r ic a n

p o in ts .
O u r w itn e s s e s

fo rtu n a te

c itiz e n s

are

M r.

W ork ers, D r, A n d rew
ness

S c h o o l,

R eserve
an o ld

and, o f

L eon ard

cou rse, th e

G e n tle m e n , w ill y o u

com e

D r*

in

us

h a v in g

w ith

W oodcock

fo r m e r

of

and

an

fo r w a r d

B r im m e r

th e

ou t­
v ie w ­

U n ite d

A u to
B u s i­

G overn or

of

we

D r.

th e

C o. o f

o u t s ta n d in g

and

and

th ree

d iffe r in g

p ro fe sso r, H a rv a r d

O ’L e a r y , U . S . T r u s t

o f th e c o m m itte e

M r. W o o d c o c k , th en

m o r n in g
b e fo re

B r im m e r , v is itin g

B oard , D r. Jam es
fr ie n d

th is

appear

w ill

F ederal

N ew

Y ork ,

e c o n o m is t.
hear

fir s t

O ’L e a r y , a n d

fr o m

th en

we

w ill h a v e s o m e q u e s tio n s .
I m ig h t s a y , g e n tle m e n , t h a t i f y o u w a n t t o a b b r e v ia te o r s k ip o v e r
y o u r sta te m e n t in a n y w a y , it w ill b e p r in t e d

in f u l l in th e r e c o r d .

W e d o w a n t t o h a v e a n o p p o r t u n it y t o a s k q u e s tio n s o f y o u .

STATEMENTS OF LEONARD WOODCOCK, PRESIDENT, UNITED AUTO­
MOBILE WORKERS; DR. ANDREW F. BRIMMER, VISITING PRO­
FESSOR, HARVARD BUSINESS SCHOOL; AND DR. JAMES J.
O’LEARY, U.S. TRUST CO., NEW YORK
W oodcock . T h a n k y o u , M r . C h a i r m a n .

M r.

I w e lc o m e th e o p p o r t u n it y t o s h a r e w it h th is c o m m itte e th e v ie w s
a n d c o n ce rn s o f th e U A W
W e

are

c o n v in c e d

r e s p o n s iv e

e c o n o m ic

th e p e o p le p la y
a g g re g a te s a n d
I t is n o w

in

th a t

m a tte rs a ffe c tin g m o n e ta r y p o lic y .

one

p o lic ie s

of

is

th e

th a t

r e q u ir e m e n t s
th e

e le c te d

fo r

sou n d

and

r e p r e s e n ta tiv e s

of

a n im p o r ta n t r o le in th e m a n a g e m e n t o f m o n e ta r y
in th e a llo c a t io n

o f c r e d it.

w e ll e s ta b lis h e d t h a t th e F e d e r a l R e s e r v e B o a r d g r e a tly

a g g ra v a ted

in fla tio n a r y

p ressu res

in

1972

w hen

it

s u p p lie d

a

too-

e a sy flo w o f m o n e y a n d c r e d it.
A t th e b e g in n in g o f th a t y e a r , it w a s a p p a r e n t th a t th e e c o n o m y
h a d sta rte d to
Y e t , w h ile

re co v e r fr o m
th e

m oney

it s d is m a l p e r fo r m a n c e in

s u p p ly — cu r r e n c y

p lu s

1 9 7 0 -7 1 .

dem and

d e p o s its —

h a d i n c r e a s e d a b o u t 6 .3 p e r c e n t d u r i n g t h e l a t t e r h a l f o f t h a t p e r i o d ,
in 19 7 2 — th e y e a r N ix o n
p e rce n t, e n c o u r a g in g
m e d ia te -te r m
c a p ita l

con su m er

o u tflo w s .

a d m it t e d

E ven

la t e r o n

p la n a tio n

g o t r e e l e c t e d — i t s g r o w t h a c c e l e r a t e d t o 8 .7

s p e c u la tio n , th e
and
a

b u ild u p

p r o -b u s in e s s

th a t, “ I t

w as h a rd

of

sh ort-

c r e d it,

b u s in e s s

and

huge

p u b lic a tio n
to com e

o f t h e F e d ’s a c t i o n s d u r i n g

to

su ch

and

in t e r ­

s h o r t-te r m
as

F ortu n e

a n o n p o litic a l e x ­

1 9 7 2 .”

I n 1 9 7 4 , c o n fr o n t e d w it h th e a c c e le r a tin g in fla tio n a r y s p ir a l w h ic h
it h a d h e lp e d
a d o p tio n
F rom
at an
g row th

of

to

cre a te , th e B o a r d

too

r e s tr ic tiv e

D ecem ber

annual

1973

w a s s lo w e d

to

of

ra te

p ercen t;

6

dow n

took

th e o p p o s ite

ta ck

w it h

th e

p o lic ie s .
June

1974, th e
fr o m

fu rth e r to

m oney

June

to

s u p p ly

D ecem ber

in c r e a s e d
1 9 7 4 , its

a n a n n u a l r a t e o f 3 .1 p e r c e n t .

A t th e sa m e tim e , th e C o n s u m e r P r ic e I n d e x w a s s o a r in g a t ra te s
o f 12 p e rc e n t.
A t th e t r o u g h q u a r t e r o f th e r e c e s s io n — t h e fir s t q u a r t e r o f 1 9 7 5 —
th e

m oney

w as on
p e r io d .

stock

its w a y




a c tu a lly

up

to

w h ile

th e

u n e m p lo y m e n t

th e h ig h e s t le v e l in

d e c lin e d ,

th e

p o s t-W o r ld

ra te

W ar

II

31
The

la s t h a l f o f

m is g u id e d

1975

p r io r it ie s in

W o r r ie d

about

p r o v id e d

yet

a n o th e r

s tr ik in g

e x a m p le

of

th e c o n d u c t o f m o n e ta r y p o lic y .

r e ig n itin g

in fla tio n

even

w hen

th e

econ om y

w as

t r y i n g t o g e t b a c k o n it s fe e t a f t e r t h e w o r s t c r is is in f o u r d e c a d e s ,
th e

F e d e r a l R e s e r v e a llo w e d th e

tr e m e ly
fo u r th

s lu g g is h

2 .3 -p e r c e n t

q u a rte rs o f

F ederal
o u ts id e
s ta n tia l
as th e

th e

m oney

w ere

w hen

th rou g h ou t

C h a ir m a n

w h ic h

a n a ly s ts

S y ste m

ra tes

has

in c h

d u r in g

la r g e r sh a re o f

th e

la r s — th a n

th ose

been

tru e

s till

tw o

n oted ,

han ds;

in c r e a s e

p r o b a b ly

G N P

a lr e a d y

ch an ges

had

stock to

ra te

up

at an ex ­

th e

th ir d

and

1975.

R eserve

of

m oney

annual

th a t

in

at

as

s u r p r is e d

in c r e a s e d

q u a rte rs.
as an

is , it s

at

T h is

in c r e a s e

v e lo c ity
sta g es

th o se

cam e

in

th e

su b­
about

ra te

a cco u n te d

G N P — as m easu red
c o m p a r a b le

as

ra th er

in

o f

at

fo r

a

cu rren t d o l­

th e

la s t

fo u r

p o s t w a r r e c e s s io n s .
W h e th e r v e lo c ity

w ill r e m a in

a t a h ig h e r ra te o n

a v e r a g e in th e

fu t u r e t h a n in t h e p a s t is o p e n t o q u e s tio n . W e c a n n o t d e p e n d o n t h a t
t o o ffs e t o v e r ly r e s tr ic tiv e a c tio n s b y th e F e d e r a l R e s e r v e B o a r d .
A l t h o u g h w e h a v e b e e n e n c o u r a g e d b y t h e in c r e a s e s in p r o d u c t io n ,
th e s t r e n g th o f c o n s u m e r d e m a n d a n d th e a b a te m e n t o f in fla tio n , th e
e co n o m y h a s a lo n g w a y
o f b oth

m anpow er and

t o g o b e f o r e it r e a c h e s a n a c c e p t a b le le v e l

c a p a c ity u tiliz a tio n , a n d

r a te s till s ta n d s h ig h e r th a n

in

th e u n e m p lo y m e n t

a n y y e a r s in c e

1947.

T h e F u ll E m p lo y m e n t a n d B a la n c e d G r o w t h A c t o f 1976, th e H u m ­
p h r e y -H a w k in s

b ill— w h ic h

w ill

p r o v id e

a

m eans

of

r e d u c in g

un^

e m p l o y m e n t a m o n g a d u lt s t o 3 p e r c e n t b y 1 9 8 0 — is a v i a b l e a lt e r n a ­
tiv e t o th e r e a c tio n a r y p o lic ie s o f th e p a s t 7 y e a rs.
W h i l e S . 5 0 / H , R . 5 0 is a m o s t im p r e s s iv e s t e p , it d o e s n o t p r o v i d e
a

fu ll

array

m on eta ry

of

T h e r e fo r e ,
m a k in g th e
con cern

to o ls , e s p e c ia lly

p o lic y

to

w ith

resp ect to

th e

in te g r a tio n

of

in to o v e r a ll p la n n in g ;

th is

c o m m itte e

w ill

have

a

ap t a S u ccess. M a tte r s w h ic h
th is

c o m m itte e

in

th e

m ost

im p o r ta n t

r o le

in

w ill b e c o m e o f p a r tic u la r

fu tu r e

in c lu d e

th e

c o m p o s itio n

o f th e F e d e r a l R e s e r v e B o a r d a n d o f th e O p e n M a r k e t C o m m itte e ,
a n d t h e m e c h a n is m s t h r o u g h w h ic h t h e le g is la t iv e a n d t h e e x e c u t iv e
b ran ch es

c o u ld

be

assu red

of

th e

F ederal

R e s e r v e ’s

c o o p e r a tio n

t o w a r d th e g o a ls o f e c o n o m ic p o lic y a n d its r e s p o n s iv e n e s s t o c h a n g e s
in fu n d a m e n ta l c o n d itio n s .
T h ere
th e term

is

now

le g is la tio n

b e fo re

C on gress

w h ic h

w o u ld

ch an ge

o f th e C h a ir m a n o f th e B o a r d t o c o in c id e w ith th a t o f th e

P r e s id e n t o f th e U n it e d S ta te s , w it h a 6 -m o n th la g . T h is w o u ld g iv e
e a c h n e w P r e s id e n t th e o p p o r t u n it y t o p e r s o n a lly fill o n e o f
k e y r o l e s in t h e o p e r a t i o n o f t h e N a t i o n ’s e c o n o m i c p o l i c i e s .
The

P r e s id e n t

w o u ld

a ls o

a p p o in t

(w ith

th e

S e n a te s

th e

a p p r o v a l)

th e p r e s id e n ts o f th e 12 r e g io n a l R e s e r v e b a n k s w h o a r e n o w c h o s e n
b y th e c o m m e r c ia l b a n k s.
A lo n g

w ith

p r e s id e n ts

seven

serve

on

B oard

th e

m em bers,

O pen

M ark et

fiv e

of

th e

r e g io n a l

C o m m itte e , th e

bank

c h ie f p o lic y ­

m a k in g b o d y w ith in th e F e d e r a l R e s e r v e S y s te m .
In

a d d itio n

to

P r e s id e n tia l

a p p o in tm e n t

o f

th e

r e g io n a l

p r e s i­

d e n ts , th e r e g io n a l b o a r d s w o u ld b e r e q u ir e d t o in c lu d e a m o n g th e ir
m em bers

a

fa ir

p r o p o r tio n

c r im in a tio n a n d w it h d u e
e d u c a tio n a n d co n su m e rs.




of

p u b lic

m em bers ch osen

c o n s id e r a tio n

to

th e

w ith o u t d is ­

in te r e s ts

of

la b o r ,

32
T h e se g r o u p s s h o u ld

a ls o b e r e p r e s e n te d , a s w e ll a s in d u s tr y

b a n k in g , o n th e B o a r d

and

o f G o v e rn o rs o f th e F e d e ra l R eserv e.

T h e te rm s o f th e g o v e r n o r s , n o w e x te n d in g f o r 14 y e a rs, s h o u ld b e
a b b r e v ia te d .
The U A W

h a s n o p o in t -b y -p o in t b lu e p r in t f o r a n a tio n a l e c o n o m ic

p la n n in g m e c h a n is m

n o r f o r th e in t e g r a tio n o f m o n e ta r y p o lic y

de­

c is io n s in t o s u c h m e c h a n is m .
H o w e v e r , w e b e lie v e

th a t th e flo w

ceed a lo n g th e fo llo w in g
P r e s id e n t

w o u ld

be

of

r e s p o n s ib ilitie s s h o u ld

lin e s : A t th e b e g in n in g o f

r e q u ir e d

to

p resen t

a

each

p rogram

p ro­

y e a r, th e

d e s ig n e d

to

a c h ie v e f u l l e m p lo y m e n t , f u l l u se a n d g r o w t h o f p r o d u c t iv e c a p a c it y ,
a n d h ig h e r a n d b e tte r d is tr ib u te d p u r c h a s in g p o w e r , w it h in a c o n te x t
o f d e m o c r a t ic p r io r it ie s .
H a v in g b e n e fite d f r o m
R eserve

B oard

as fr o m

A

broad

th e in p u t o f th e C h a ir m a n o f th e F e d e r a l

c a p a c ity

p o lic ie s

a v a ila b ility

r e v ie w

by

n a tio n a l p la n
agreed
A t

th e

of

a

top

e c o n o m ic

a d v is e r , a s

t h e r e s t o f t h e e x e c u t iv e ’s c h i e f a d v is e r s , t h is p r o g r a m

s tip u la te
c r e d it

in

t h is

an

a d eq u a te

m oney

a n a p p o in t e d b o d y in C o n g r e s s w o u ld
fo r

p o in t ,

w o u ld

en su re

s u p p ly

and

a t r e a s o n a b le in te r e s t ra te s .
fu ll

e m p lo y m e n t

u p o n , in c lu d in g

S y ste m

to

w e ll

w o u ld

th e

a p p r o p r ia te

B oard

o f

and

b a la n c e d

m on eta ry

G overn ors

b e m a n d a ted to ca rry

of

fo llo w , a n d a

g ro w th

p o lic v
th e

w o u ld

be

g u id e lin e s .

F ederal

R eserve

o u t th e c o n c o m ita n t m o n e ta r y

p o lic ie s th e r e in o u t lin e d f o r th e y e a r a h e a d .
T h e c h a n g e s w e a d v o c a te w o u ld t o t a lly a lt e r th e e x is t in g r e la t io n ­
s h ip b e tw e e n
tem

C o n g r e s s , t h e e x e c u t iv e a n d t h e F e d e r a l R e s e r v e S y s ­

in t h a t th e la t te r w o u ld b e c o m e o n e o f th e c r u c ia l in s tr u m e n ts

u tiliz e d b y
n o m ic

th e F e d e r a l G o v e r n m e n t in

g o a ls ,

ra th er

th a n

an

th e p u r s u it o f n a tio n a l e c o ­

in d e p e n d e n t

agen cy

w h ic h

as

o fte n

o b s t r u c t s a s a s s is ts t h e a c h ie v e m e n t o f th e s e g o a ls .
In

c o n c lu s io n , I

F ederal
needed

R eserve
to

assu re

u rg e th e C on g ress to
a c tiv itie s ,
th a t

and

m on eta ry

to

e x e r c is e

en a ct

p o lic ie s

th e
w ill

c lo s e

o v e r s ig h t o f

le g is la t iv e
be

ch an ges

c o n s is te n t

w it h

t h e a c h ie v e m e n t o f f u l l e m p lo y m e n t a n d o t h e r n a tio n a l g o a ls .
[T h e

c o m p le te sta te m e n t f o l l o w s :]

S ta t e m e n t of L e o n a r d W o o d c o c k , P r e s id e n t , U n ite d A u t o m o b ile , A e r o s p a c e
a n d A g r i c u l t u r a l I m p le m e n t W o r k e r s o f A m e r ic a , U A W

M y n a m e i s L e o n a r d W o o d c o c k . I a m P r e s id e n t o f t h e I n t e r n a t io n a l U n io n ,
U n ite d A u t o m o b ile , A e r o s p a c e a n d A g r ic u lt u r a l I m p le m e n t W o r k e r s o f A m e r ic a ,
U A W . W e r e p r e s e n t 1 ,4 15,0 00 U A W m e m b e r s , o r g a n iz e d i n t o 1,6 50 l o c a l u n io n s .
I w e lc o m e t h e o p p o r t u n it y t o s h a r e w it h t h is C o m m it te e t h e v ie w s a n d c o n ­
c e r n s o f t h e U A W i n m a t t e r s a f fe c t in g m o n e t a r y p o lic y . T h e s e q u a r t e r ly h e a r ­
in g s m a n d a t e d b y l a w s in c e M a r c h 19 75 p r o v id e a fo r u m f o r t h e d is c u s s io n o f
m o n e t a r y p o l i c y a n d a m e a n s b y w h ic h C o n g r e s s c a n r e q u ir e t h e F e d e r a l R e ­
s e r v e B o a r d t o d o c u m e n t p o l i c y g o a ls a n d e x p la in w h a t e v e r s h o r t fa lls h a v e
o c c u r r e d in it s p o lic ie s . T h e h e a r in g s a r e a s t e p in t h e r i g h t d ir e c t io n , b u t
a d d it io n a l m e c h a n is m s a r e n e e d e d . A s I w i l l e x p la in la t e r in m y t e s tim o n y
w e a r e c o n v in c e d t h a t o n e o f t h e r e q u ir e m e n t s f o r s o u n d a n d r e s p o n s iv e e c o ­
n o m ic p o l i c i e s i s t h a t t h e e le c t e d r e p r e s e n ta tiv e s o f t h e p e o p le p l a y a n im p o r ­
t a n t r o le in t h e m a n a g e m e n t o f m o n e t a r y a g g r e g a te s a n d in t h e a llo c a t io n o f
c re d it.
T H E E C O N O M IC S IT U A T IO N

T h e s ig n ific a n c e o f m o n e t a r y p o l i c i e s i s u n d e r s c o r e d b y t h e e v e n t s o f t h e la s t
f e w y e a r s . I t i s n o w w e ll-e s t a b lis h e d t h a t t h e F e d e r a l R e s e r v e B o a r d g r e a t ly
a g g r a v a t e d i n fla t io n a r y p r e s s u r e s in 1972 w h e n i t s u p p lie d a t o o e a s y flo w o f




33
m o n e y a n d c r e d it . A t t h e b e g in n in g o f t h a t y e a r , it w a s a p p a r e n t t h a t th e
e c o n o m y h a d s t a r t e d t o r e c o v e r f r o m it s d is m a l p e r f o r m a n c e in 1 9 7 0 -7 1 . Y e t
w h ile t h e m o n e y s u p p ly ( c u r r e n c y p lu s d e m a n d d e p o s it s ) h a d in c r e a s e d a b o u t
6.3 p e r c e n t d u r in g t h e l a t t e r h a l f o f t h a t p e r io d , in 1972— th e y e a r N ix o n g o t
r e e le c t e d — i t s g r o w t h a c c e le r a t e d t o 8.7 p e r c e n t e n c o u r a g in g s p e c u la tio n , th e
b u ild u p o f s h o r t - a n d in t e r m e d ia t e -t e r m c o n s u m e r a n d b u s in e s s c r e d it , a n d h u g e
s h o r t -t e r m c a p it a l o u t flo w s . E v e n a p r o -b u s in e s s p u b lic a t io n s u ch a s F o r t u n e
a d m it t e d la t e r o n t h a t , “ i t w a s h a r d t o c o m e t o a n o n p o lit ic a l e x p la n a t io n o f
th e F e d ’s a c t io n s d u r in g 19 72.”
I n 1974, c o n fr o n t e d w i t h t h e a c c e le r a t in g in fla t io n a r y s p ir a l w h ic h it h a d
h e lp e d t o c r e a te , t h e B o a r d t o o k t h e o p p o s it e t a c k w it h th e a d o p tio n o f t o o
r e s t r ic t iv e p o lic ie s . F r o m D e c e m b e r 1973 t o J u n e 1974, t h e m o n e y s u p p ly in ­
c r e a s e d a t a n a n n u a l r a t e o f 6 .0 p e r c e n t ; f r o m J u n e t o D e c e m b e r 1974, it s
g r o w t h w a s s lo w e d d o w n f u r t h e r t o a n a n n u a l r a t e o f 3.1 p e rc e n t. A t th e sa m e
tim e , t h e C o n s u m e r P r i c e I n d e x w a s s o a r in g a t r a t e s o f 12 p e rc e n t. A t th e
t r o u g h q u a r t e r o f t h e r e c e s s io n (t h e fir s t q u a r t e r o f 1 9 7 5 ), th e m o n e y s t o c k
a c t u a lly d e c lin e d , w h ile t h e u n e m p lo y m e n t r a t e w a s o n it s w a y u p t o th e
h ig h e s t le v e l in th e p o s t - W o r ld W a r I I p e r io d .
T h e l a s t h a l f o f 19 75 p r o v id e d y e t a n o th e r s t r ik in g e x a m p le o f m is g u id e d
p r io r it ie s in t h e c o n d u c t o f m o n e t a r y p o lic y . W o r r i e d a b o u t r e ig n it in g in fla tio n
e v e n w h e n t h e e c o n o m y w a s t r y i n g to g e t b a c k o n it s f e e t a f t e r th e w o r s t
c r i s is in f o u r d e c a d e s , t h e F e d e r a l R e s e r v e a llo w e d t h e m o n e y s t o c k t o in c h u p
a t a n e x t r e m e ly s lu g g is h 2.3 p e r c e n t a n n u a l r a t e d u r in g t h e t h ir d a n d fo u r t h
q u a r t e r s o f 1975. F e d e r a l R e s e r v e a n a ly s t s w e r e p r o b a b ly a s s u r p r is e d a s th o s e
o u t s id e o f t h e S y s te m w h e n G N P s t ill in c r e a s e d a t r a t h e r s u b s t a n t ia l r a te s
t h r o u g h o u t t h o s e t w o q u a r te r s . T h i s c a m e a b o u t a s a n in c r e a s e in th e r a t e a t
w h ic h m o n e y c h a n g e s h a n d s — t h a t is , i t s v e l o c i t y — a c c o u n t e d f o r a la r g e r s h a r e
o f t h e in c r e a s e in G N P ( a s m e a s u r e d in c u r r e n t d o ll a r s ) th a n h a d b e e n t r u e
a t c o m p a r a b le s t a g e s o f th e l a s t f o u r p o s t w a r r e c e s s io n s . I n a n y e v e n t, i t is
c l e a r t h a t th e F e d e r a l R e s e r v e r e t a r d e d r a t h e r t h a n e n h a n c e d th e r e c o v e r y
a n d t h a t a m u c h s t r o n g e r u p t u r n c o u l d h a v e b e e n a c h ie v e d w it h a n e a s ie r m o n e y
s u p p ly d u r in g t h a t p e r io d .
W h e t h e r v e l o c i t y w i l l r e m a in a t a h ig h e r r a t e o n a v e r a g e in th e fu t u r e th a n
In t h e p a s t i s o p e n t o q u e s tio n . W e c a n n o t d e p e n d o n t h a t t o o ffe s t o v e r ly
r e s t r ic t iv e a c t io n s b y t h e F e d e r a l R e s e r v e B o a r d .
A t t h e t im e t h is s t a t e m e n t w a s w r it t e n w e d i d n o t h a v e th e b e n e fit o f
C h a ir m a n B urns* a s s e s s m e n t a s t o t h e fu t u r e c o u r s e o f m o n e t a r y p o lic y . I n h is
t e s tim o n y o f la s t F e b r u a r y u n d e r H o u s e C o n c u r r e n t R e s o lu t io n 133, h e a p p e a r e d
r e a d y t o c la m p d o w n o n t h e m o n e y s u p p ly a g a in , s t a t in g t h a t im p r o v e d c o n ­
d it io n s in t h e e c o n o m y a n d in fin a n c ia l m a r k e ts w a r r a n t e d a lo w e r in g o f th e
b o t t o m e n d o f t h e p r o je c t e d g r o w t h r a t e o f t h e m o n e y s u p p ly fr o m 5 t o 4 %
p e r c e n t. A n d h e c o n c l u d e d :
“ A s t h e e c o n o m y r e tu r n s t o h ig h e r r a t e s o f r e s o u r c e u t iliz a tio n , i t w il l
e v e n t u a lly b e n e c e s s a r y t o r e d u c e t h e r a t e o f m o n e t a r y a n d c r e d it e x p a n s io n .
“ T h e F e d e r a l R e s e r v e d o e s n o t b e lie v e t h e t im e f o r s u ch a ste p h a s y e t
a r r iv e d . B u t in v i e w o f t h e s t r o n g e c o n o m ic r e c o v e r y t h a t h a s b e e n u n d e r w a y
s in c e la s t sp r in g , w e m u s t b e o n o u r g u a r d .”
A lt h o u g h w e h a v e b e e n e n c o u r a g e d b y th e in c r e a s e s in p r o d u c t io n , th e
s t r e n g th o f c o n s u m e r d e m a n d a n d t h e a b a te m e n t o f in fla tio n , th e e c o n o m y h a s
a lo n g w a y t o g o b e f o r e i t r e a c h e s a n a c c e p t a b le le v e l o f b o t h m a n p o w e r a n d
c a p a c it y u t iliz a t io n . W e a r e p a r t ic u la r ly c o n c e r n e d a b o u t th e h ig h r a t e o f
u n e m p lo y m e n t, e s p e c ia lly a m o n g c e r t a in c r u c ia l g r o u p s in o u r la b o r fo r c e , s u ch
a s t h e y o u n g a n d t h e m in o r itie s . A ll t o o o ft e n , w e h e a r g o v e r n m e n t a n d
b u s in e s s s p o k e s m e n r e jo i c i n g a b o u t th e d e v e lo p m e n t s in e m p lo y m e n t, in c r e a s ­
in g ly f o r g e t f u l o f t h e f a c t t h a t t h e u n e m p lo y m e n t r a t e s t ill sta n d s h ig h e r th a n
in a n y y e a r s in c e 1947.
M o r e o v e r , w h a t e v e r p r o g r e s s h a s b e e n a c h ie v e d so f a r in b r in g in g u n e m p lo y ­
m e n t d o w n w i l l b e h a r d e r to d u p lic a t e in t h e s a m e t im e s p a n a s th e r e c o v e r y
c o n tin u e s . U n le s s w e a r e a b le t o im p r o v e o n t h e a v e r a g e p a s t c y c lic a l e x p e r i­
e n ce , t h e u n e m p lo y m e n t r a t e c a n b e e x p e c t e d t o d r o p o n ly a b o u t 1.5 p e r c e n t a g e
p o in t s in t h e y e a r fr o m O c t o b e r 1975, t h e m o n th i t b e g a n t o d e clin e . T h a t
w o u ld l e a v e i t a t a r o u n d 7.0 p e r c e n t b y n e x t O c to b e r , in lin e w it h m o s t f o r e ­
c a s ts . T h e C o n g r e s s io n a l B u d g e t OfBe** ( C B O ) , f o r e x a m p le , h a s p r e d ic te d a n
o v e r a ll u n e m p lo y m e n t r a t e o f 7.0 t o 7.5 p e r c e n t b y t h e fo u r t h q u a r te r o f th is
y e a r a n d 6.4 t o 6.9 p e r c e n t b y t h e fo u r t h q u a r t e r o f 1977. I t is n o t e w o r th y




34
t h a t t h e ir p r o je c t io n s , a p p a llin g a s t h e y a r e , im p ly m o n e t a r y g r o w t h r a t e s
a b o v e t h e r a n g e s a n n o u n c e d in F e b r u a r y b y t h e c h a ir m a n o f t h e F e d e r a l
R eserv e B oard .
NEED FOB FULL EM PLO YM ENT POLICIES B Y T H E FEDERAL RESERVE BOARD

A s p o in t e d o u t b y C o n g r e s s io n a l B u d g e t O ffice d i r e c t o r A li c e R iv li n ,1 th e s e
p r o j e c t i o n s b r in g u n e m p lo y m e n t le s s t h a n h a l f w a y f r o m it s c u r r e n t 7.5 p e r c e n t
r a t e to th e lo n g -t e r m a v e r a g e o f 4 .9 p e r c e n t S h e w e n t o n t o a s k , “ C a n w e d o
b e t te r t h a n t h is u n e m p lo y m e n t f o r e c a s t o v e r t h e n e x t t w o y e a r s ? A n d c a n w e
d o b e t te r t h a n t h e lo n g -t e r m a v e r a g e o v e r , s a y , th e n e x t 1 0 y e a r s ? I b e lie v e
t h a t th e a n s w e r t o b o t h q u e s tio n s i s y e s , b u t t h a t d o n g b e t t e r b o t h r e q u ir e s
d e p a r t u r e s f r o m c u r r e n t p o l i c i e s a n d c a r r i e s s ig n ific a n t r is k s .” I a g r e e w it h
t h is sta te m e n t— a n d I w o u ld a d d t h a t f a i l u r e t o d o b e t te r i s th e b ig g e s t r is k
o f a ll.
C o n g r e s s d o e s h a v e a n o p p o r t u n it y t o a c t d e c is iv e ly o n g e t t in g u n e m p lo y m e n t
d o w n to m o r e t o le r a b le le v e ls . T h e F u l l E m p lo y m e n t a n d B a la n c e d G r o w t h
A c t o f 1976 (H u m p h r e y -H a w k in s b i l l ) — w h ic h w i l l p r o v id e a m e a n s o f r e d u c ­
in g u n e m p lo y m e n t a m o n g a d u lt s t o 3 p e r c e n t b y 1980— is a v i a b l e a lt e r n a t iv e
t o th e r e a c t io n a r y p o lic ie s o f t h e p a s t 7 y e a r s . T h i s b ill, o n e o f t h e m o s t s ig ­
n ifica n t p ie c e s o f le g is la t io n t o a p p e a r in C o n g r e s s s in c e t h e N e w D e a l, h a s
b e c o m e th e f o c u s a r o u n d w h ic h t h e p r o g r e s s iv e f o r c e s o f o u r n a t io n a r e r a ll y ­
in g . N o t s u r p r is in g ly , th e b ill h a s a ls o b e c o m e a t a r g e t f o r P r e s id e n t F o r d , w h o
r e c e n tly a c c u s e d i t o f b e in g “ a v a s t e le c t io n y e a r b o o n d o g g le ” t h a t h e in t e n d s
t o v e t o i f p a s s e d b y t h e C o n g r e s s . P r e s id e n t F o r d s e e m s t o t a k e c o m f o r t in
la r g e n u m b e rs , e s p e c ia lly w h e n u n e m p lo y m e n t is c o n c e r n e d .
T h e r e a r e t w o m a in fe a t u r e s o f t h e H u m p h r e y -H a w k in s b ill. F ir s t , t h e b ill
e s t a b lis h e s t h a t g o v e r n m e n t s h a ll p r o v id e jo b s f o r a ll w h o a r e a b le t o w o r k
a n d se e k w o rk : b u t c a n n o t o b t a in a j o b in th e p r i v a t e s e c to r . S e c o n d , th e b ill
r e c o g n iz e s t h a t t h e fis c a l a n d m o n e t a r y p o lic ie s u s e d t o “ fin e t u n e ” th e e c o n o m y
in th e p a s t q u a r t e r c e n t u r y a r e n o t c a p a b le o f d o in g th e j o b a n y m o r e , a n d
p r o v id e s t h a t t h e y b e s u p p le m e n te d b y so m e m e a s u r e o f n a t io n a l e c o n o m ic
p la n n in g in v o l v i n g th e A d m in is t r a t io n , C o n g r e s s a n d t h e F e d e r a l R e s e r v e
B oard .
W h ile S. 5 0 /H .R . 50 is a m o s t im p r e s s iv e ste p , it d o e s n o t p r o v id e a fu l l
a r r a y o f t o o ls , e s p e c ia lly w it h r e s p e c t t o th e i n t e g r a t io n o f m o n e t a r y p o lic y in t o
o v e r a ll p la n n in g . T h e r e fo r e , t h is C o m m it te e w ill h a v e a m o s t im p o r t a n t r o le
in m a k in g th e A c t o f s u cc e s s . M a t te r s w h ic h w i l l b e c o m e o f p a r t ic u la r c o n c e r n
t o th is C o m m it te e in t h e f u t u r e in c lu d e th e c o m p o s it io n o f th e F e d e r a l R e s e r v e
B o a r d a n d o f t h e O p e n M a r k e t C o m m itte e , a n d th e m e c h a n is m s t h r o u g h w h ic h
th e le g is la t iv e a n d t h e e x e c u t iv e b r a n c h e s c o u ld b e a s s u r e d o f t h e F e d e r a l
R e s e r v e ’s c o o p e r a t io n t o w a r d t h e g o a ls o f e c o n o m ic p o l ic y a n d it s r e s p o n s iv e n e s s
t o c h a n g e s in fu n d a m e n t a l c o n d itio n s .
T h e F e d e r a l R e s e r v e S y s te m h a s b e e n t r a d it io n a lly in d e p e n d e n t f r o m th e
e x e c u t iv e a n d le g is la t iv e b r a n c h e s . I t s g o v e r n o r s a r e g r a n t e d u n p a r a lle le d
a u to n o m y i n t h e f o r m o f lo n g t e r m s o f a p p o in t m e n t a n d a n in d e p e n d e n t s o u r c e
o f o p e r a t in g fu n d s . T h e d e c is io n s m a d e b y t h e F e d e r a l O p e n M a r k e t C o m m it te e
in it s c lo s e ly -g u a r d e d m o n t h ly m e e tin g s h a v e a m a jo r im p a c t o n e v e r y c it iz e n ’ s
a b ilit y t o o b t a in a m o r t g a g e a n d o n th e p r ic e h e w ill p a y f o r i t ; o n t h e e a s e
o f b o r r o w in g m o n e y f o r b u y in g a c a r ; u lt im a te ly , o n t h e lik e lih o o d o f h is
fin d in g a n d h o ld in g a jo b . Y e t n o n e o f th e m e m b e r s o f th e F e d e r a l O p en M a r k e t
C o m m itte e i s a n e le c t e d r e p r e s e n ta tiv e o f t h e p e o p le , a n d o v e r t w o -fift h s o f
th e m h a v e n o t e v e n b e e n p r e s id e n t ia lly a p p o in t e d .
T h e r e is n o w le g is la t io n b e f o r e C o n g r e s s w h ic h w o u ld c h a n g e th e te r m o f
th e c h a ir m a n o f t h e B o a r d t o c o i n c i d e w i t h t h a t o f th e P r e s id e n t o f th e
U n ite d S ta te s , w it h a 6 - m o n t h la g . T h is w o u ld g i v e e a c h n e w P r e s id e n t th e
o p p o r t u n it y t o p e r s o n a lly fill o n e o f t h e k e y r o le s in t h e o p e r a t io n o f th e
n a tio n ’ s e c o n o m ic p o lic ie s . T h e P r e s id e n t w o u ld a ls o a p p o in t ( w i t h th e S e n a te ’ s
a p p r o v a l) th e p r e s id e n ts o f t h e 12 r e g io n a l r e s e r v e b a n k s w h o a r e n o w c h o s e n
b y th e c o m m e r c ia l b a n k s. A l o n g w it h 7 B o a r d m e m b e r s , 5 o f t h e r e g io n a l b a n k
p r e s id e n ts ( i n r o t a t io n ) s e r v e o n th e O p e n M a r k e t C o m m itte e , th e c h i e f p o li c y ­
m a k in g b o d y w it h in th e F e d e r a l R e s e r v e S y s te m . I n a d d it io n t o p r e s id e n tia l
a p p o in tm e n t o f th e r e g io n a l p r e s id e n ts , t h e r e g io n a l b o a r d s w o u ld b e r e q u ir e d
t o in c lu d e a m o n g t h e ir m e m b e r s a f a i r p r o p o r t i o n o f p u b lic m e m b e r s c h o s e n

1 Congressional testimony on H.R. 50, 4/8 /76.




35
w it h o u t d is c r im in a t io n a n d w it h d u e c o n s id e r a t io n t o t h e in t e r e s ts o f la b o r ,
e d u c a t io n , a n d c o n s u m e r s . T h e s e g r o u p s s h o u ld a ls o b e r e p r e s e n te d , a s w e ll a s
in d u s t r y a n d b a n k in g , o n th e B o a r d o f G o v e r n o r s o f t h e F e d e r a l R e s e r v e . T h e
g o v e r n o r s a r e c h o s e n b y t h e P r e s id e n t, w h o u n le s s m a n d a t e d t o d o o t h e r w is e ,
w i l l m o s t c e r t a in ly c o n t in u e t o s t o c k t h e B o a r d w i t h p r o m in e n t r e p r e s e n ta tiv e s
o f t h e b a n k s a n d t h e c o r p o r a t io n s . C u r r e n t ly , t h e B o a r d b o a s ts 6 b a n k e r s
a n d 1 r e c e n t ly a p p o in t e d m a n u fa c t u r in g e x e c u t iv e . T h e t e r m s o f t h e g o v e r n o r s ,
n o w e x t e n d in g f o r 14 y e a r s , s h o u ld b e a b b r e v ia t e d . M e a s u r e s s u ch a s t h o s e I
h a v e e n u m e r a t e d w o u ld m a k e t h e F e d e r a l R e s e r v e m u c h le s s d e p e n d e n t o n th e
n a r r o w in t e r e s t s o f t h e c o m m e r c ia l b a n k s w h o n o w e x e r c is e t o o m u c h c o n t r o l
o v e r it.
A s I i n d ic a t e d e a r l i e r i n t h is t e s tim o n y , t h e c o n d u c t o f o u r m o n e t a r y p o lic y
n e e d s im p r o v e m e n t a n d g r e a t e r a d h e r e n c e t o e c o n o m ic g o a ls w h ic h w ill b en e fit
t h e m a jo r i t y o f t h e A m e r ic a n p e o p le r a t h e r t h a n th e b a n k e r s a n d s e c u r it ie s
d e a le r s . T h e r e i s a ls o a n e e d f o r m u c h g r e a t e r a c c o u n t a b ilit y th a n i s m a n d a t e d
b y H o u s e C o n c u r r e n t R e s o lu t io n 133.
T h e U A W h a s n o p o in t -b y -p o in t b lu e p r in t f o r a n a t io n a l e c o n o m ic p la n n in g
m e c h a n is m n o r f o r t h e in t e g r a t io n o f m o n e t a r y p o l i c y d e c is io n s in t o s u c h
m e c h a n is m s . H o w e v e r , w e b e lie v e t h a t t h e flo w o f r e s p o n s ib ilit ie s sh o u ld
p r o c e e d a l o n g t h e fo l l o w i n g lin e s . A t t h e b e g in n in g o f e a c h y e a r , t h e P r e s id e n t
w o u ld b e r e q u ir e d t o p r e s e n t a p r o g r a m d e s ig n e d t o a c h ie v e f u ll e m p lo y m e n t,
fu l l u s e a n d g r o w t h o f p r o d u c t iv e c a p a c it y , a n d h ig h e r a n d b e t t e r d is tr ib u te d
p u r c h a s in g p o w e r , w it h in a c o n t e x t o f d e m o c r a t ic p r io r it ie s . H a v in g b e n e fite d
f r o m t h e in p u t o f t h e c h a ir m a n o f t h e F e d e r a l R e s e r v e B o a r d in t h e c a p a c it y
o f a t o p e c o n o m ic a d v is e r , a s w e l l a s f r o m t h e r e s t o f t h e e x e c u t iv e ’ s c h i e f
a d v is e r s , th is p r o g r a m w o u ld s t ip u la t e b r o a d p o l i c ie s t o e n s u r e a n a d e q u a t e
m o n e y s u p p ly a n d c r e d i t a v a i l a b i l i t y a t r e a s o n a b le in t e r e s t r a te s. A r e v ie w
b y a n a p p o in t e d b o d y in C o n g r e s s w o u ld f o l l o w , a n d a n a tio n a l p la n f o r f u ll
e m p lo y m e n t a n d b a la n c e d g r o w t h w o u ld b e a g r e e d u p o n , in c lu d in g a p p r o p r ia t e
m o n e t a r y p o l i c y g u id e lin e s .
A t t h is p o in t , t h e B o a r d o f G o v e r n o r s o f th e F e d e r a l R e s e r v e S y s te m w o u ld
b e m a n d a t e d t o c a r r y o u t t h e c o n c o m it a n t m o n e t a r y p o l ic ie s t h e r e in o u t lin e d
f o r th e y e a r a h e a d .
T h e p r a c t ic e o f q u a r t e r ly a l t e r n a t e h e a r in g s b e f o r e th e S e n a te a n d th e H o u s e
B a n k in g C o m m it te e s s h o u ld c o n t in u e , b u t t h e s e m u s t p r o v id e a n o p p o r t u n it y f o r
C o n g r e s s t o d i r e c t th e B o a r d t o c h a n g e it s a c t io n s i f t h o s e C o m m itte e s s h o u ld
fin d th e m t o b e a t o d d s w it h t h e o b je c t i v e s o f t h e n a t io n a l p la n . T h e y c o u ld
a ls o p r o v id e a m e c h a n is m t o m o d i f y th e s p e c ifie d m o n e t a r y p o lic ie s i f t h a t is
r e q u ir e d b y c h a n g e s in fu n d a m e n t a l c o n d it io n s .
C on g ress* i n f o r m a t io n a l d e m a n d s s h o u ld b e w e l l d e fin e d . N o p r o p e r a ss e ss­
m e n t o f m o n e t a r y c o n d u c t is p o s s ib le u n le s s th e r e p o r t in g fr a m e w o r k r e fe r s
t o t h e s a m e m o n e t a r y a n d c r e d i t in d ic a t o r s in e a c h q u a r t e r ly h e a rin g . T h e
f r e e d o m t o e m p lo y a w id e r a n g e o f in s tr u m e n t s a n d in d i c a t o r s t o in t e r p r e t it s
p o l ic y in t e n t io n s c u r r e n t ly a llo w s C h a ir m a n B u r n s t o p r e s e n t it s e ffe c t s in a
d is in g e n u o u s ly f a v o r a b l e lig h t . M o r e o v e r , a d e lib e r a t e ly c o n fu s in g r e p o r t, c o m ­
p o u n d e d b y t h e s e c r e c y w it h w h ic h th e B o a r d a n d t h e O p en M a r k e t C o m m it te e
g o a b o u t t h e ir b u s in e s s , m a k e s i t m o s t d iffic u lt f o r c o n g r e s s m e n t o m a in t a in a
g r a s p o n t h e v a r i o u s is s u e s in m o n e t a r y p o lic ie s a n d t h e r e b y in h ib it s t h e ir
a b ilit y t o d e a l e ff e c t iv e ly w it h s u c h issu e s.
T h e c h a n g e s w e a d v o c a t e w o u ld t o t a l l y a l t e r t h e e x is t in g r e la t io n s h ip b e ­
t w e e n C o n g r e s s , t h e e x e c u t iv e a n d t h e F e d e r a l R e s e r v e S y s te m in th a t th e
la t t e r w o u ld b e c o m e o n e o f t h e c r u c ia l in s tr u m e n t s u t iliz e d b y t h e fe d e r a l
g o v e r n m e n t in t h e p u r s u it o f n a t io n a l e c o n o m ic g o a ls , r a t h e r th a n a n in d e ­
p e n d e n t a g e n c y w h ic h a s o ft e n o b s t r u c t s a s a s s is t s th e a c h ie v e m e n t o f th e se
g o a ls . T h i s p a t t e r n is q u ite c o m m o n a m o n g in d u s t r ia liz e d n a t io n s o f th e W e s t ­
e r n w o r ld , w h e r e c e n t r a l b a n k s o p e r a te a s a n in t e g r a l p a r t o f th e g o v e rn m e n t,
f u l l y r e s p o n s iv e t o t h a t g o v e r n m e n t a n d it s p o lic ie s , a n d a c t iv e ly p r o m o t e th e
e c o n o m ic a n d s o c i a l g o a ls o f t h e n a t io n t h r o u g h v a r io u s fin a n c ia l m e ch a n is m s.
F o r in s ta n c e , a 19 70 s t u d y b y th e H o u s e C o m m it te e o n B a n k in g a n d C u r r e n c y
s h o w e d t h a t in S w e d e n th e S v e r ig e s R ik s b a n k r e g u la t e s p r iv a t e b a n k s to
c h a n n e l fu n d s i n a c c o r d a n c e w it h th e g o a ls se t b y t h e n a tio n a l e c o n o m ic
b u d g e t s . H o u s in g , v i t a l in d u s tr ie s , a n d e x p o r t s a r e e m p h a s iz e d . I n a d d itio n ,
s t a t e b a n k s p r o v id e lo a n s f o r h o u s in g , a g r ic u lt u r e a n d s m a ll b u sin ess. T h e
b a n k i s h e a d e d b y a se v e n m e m b e r b o a r d o f d ir e c t o r s , s ix o f w h o m (u s u a lly
n o t b a n k e r s b y p r o f e s s i o n ) a r e e le c te d b y t h e P a r lia m e n t f r o m a m o n g it s o w n
m e m b e r s ; th e s e v e n t h is a p p o in t e d b y t h e g o v e r n m e n t. I n J a p a n , t h e N ih o n




36
G in k o m a k e s in d ir e c t lo a n s t o in d u s t r ia l fir m s t h r o u g h d ir e c t lo a n s t o c o m m e r ­
c ia l b a n k s o v e r w h ic h i t h a s d i r e c t c o n t r o l, a n d p r o v id e s lo a n s t o a i d s m a ll
b u sin e ss e s, e x p o r t s , a g r ic u lt u r e a n d h o u s in g . O t h e r p u b lic fin a n c ia l a g e n c ie s
u n d e r it s c o n t r o l in c lu d e a g o v e r n m e n t t r u s t fu n d b u r e a u w h ic h m a k e s in v e s t ­
m e n ts a n d lo a n s in t h e s e a r e a s a s w e l.
T h e s t u d y c o n c lu d e s t h a t a c t i v e p a r t ic ip a t io n in t h e a l lo c a t io n o f c r e d it i s a
c o n s t a n t r u n n in g t h r o u g h t h e o v e r w h e lm in g ly m a jo r it y o f c e n t r a l b a n k s o u t s id e
o f th e U .S . I n o u r c o u n t r y , th e v a r io u s c h a ir m e n o f t h e B o a r d h a v e r e p e a te d ly
a s s e r t e d t h a t t h e F e d e r a l R e s e r v e h a s n o r e s p o n s ib ilit y t o w a r d in d iv id u a l
s e c to r s o f t h e e c o n o m y , i t s j o b b e in g t o a d m in is t e r m o n e t a r y p o l ic y w it h a
b r o a d b r u s h . H o w e v e r , in t h e a c t u a l a p p lic a t io n o f t h is p o li c y c r e d i t h a s b e e n
a llo c a t e d u n e v e n ly w i t h t h e m o r e p o w e r f u l a n d m o r e a fflu e n t e le m e n t s o f s o c ie t y
w illin g a n d a b le t o o u t b id th e n e e d ie r s e c t o r s in t h e s t r u g g le f o r t h e a v a ila b le
fu n d s . A s a r e s u lt , e s s e n tia l a r e a s o f o u r e c o n o m y s u c h a s h o u s in g a n d u r b a n
d e v e lo p m e n t h a v e b e e n s t a r v e d f o r f u n d s a n d s c o r e s o f o u r fu n d a m e n t a l s o c ia l
a n d e c o n o m ic n e e d s r e m a in u n m e t.
A f a i r l y r e c e n t e p is o d e r e v e a ls h o w t h e F e d e r a l R e s e r v e d o e s in d e e d p r a c t ic e
c r e d it a l l o c a t i o n w h il e c la im in g t o b e n e u tr a l. I n 1974, t h e B o a r d t o ld t h e
c o m m e r c ia l b a n k s , t h r o u g h t h e r e g io n a l R e s e r v e b a n k s , t h a t t h e y s h o u ld b e
e x tr e m e ly s e n s it iv e t o t h e c r e d i t n e e d s o f t h e r e a l e s t a t e in v e s t m e n t tr u s ts
( R E I T s ) . T h e c o m m e r c ia l b a n k s n a t u r a lly r e s p o n d e d . S im ila r a c t io n s b y th e
B o a r d w e r e t a k e n w it h r e s p e c t t o p u b lic u t ilit ie s , a n d o p e r a t o r s o f c a t t le f e e d
lo ts . Y e t a t t h e s a m e t im e C h a ir m a n B u r n s w a s f o r m a ll y o p p o s in g a b ill b y
R e p r e s e n t a t iv e R e u s s * w h ic h w o u ld h a v e d ir e c t e d t h e R e s e r v e t o a llo c a t e
c r e d it t h r o u g h a s y s t e m o f s u p p le m e n t r e s e r v e r e q u ir e m e n t s — s u b je c t t o s o m e
p u b lic s c r u t in y .
T h u s t h e c h o i c e i s n o t w h e t h e r w e s h o u ld h a v e c r e d it a llo c a t io n o r n o t — t h a t
is a m o o t q u e s tio n — b u t w h e th e r t h e r e s h o u ld b e s o m e p u b lic g u id e lin e s t o t h e
p ro c e s s . I w o u ld h a v e d is a g r e e d w i t h s a v in g t h e R E I T s a n d t h e c a t t le f e e d e r s
o v e r p r o v id in g f o r l o w - a n d m id d le -in c o m e h o u s in g . B u t t h e c r u c ia l is s u e i s
th a t, in a g r e e m e n t o r n o t , n e it h e r I n o r a n y o f th e 1.5 m illio n U A W m e m b e r s
h a d a n y i m p a c t o n t h is c h o ic e t h r o u g h a n y o f o u r e le c t e d r e p r e s e n ta tiv e s .
I w o u ld l i k e t o c o n c lu d e w i t h a q u o t e b y P r o f e s s o r L e s t e r T h u r o w a t h e a r in g s
b e f o r e t h e S u b c o m m it t e e o n D o m e s t ic M o n e t a r y P o l i c y o f t h e H o u s e C o m m it te e
o n B a n k in g , C u r r e n c y a n d H o u s in g i n F e b r u a r y 1975. H e v e r y a p t ly p u t t h e
q u e s tio n o f e c o n o m ic c h o i c e in i t s p r o p e r in s t it u t io n a l c o n t e x t :
“ . . . i f y o u l o o k a t e c o n o m ic p o l i c i e s t h e r e a r e t w o c e n t r a l in g r e d ie n t s in
a n y e c o n o m ic p o lic y . O n e i s t h e w h o le p r o b le m o f t e c h n ic a l e c o n o m ic s , a n d t h e
o t h e r p r o b le m i s t h e p r o b le m o f v a l u e ju d g m e n t s a s t o w h o o u g h t t o b e h u r t.
“ E v e r y e c o n o m ic p o l i c y h u r ts s o m e b o d y in t h e s e n s e o f l o w e r i n g h is in c o m e .
“ N o w , . . . I t h in k t h a t y o u g e n t le m e n a n d t h e P r e s id e n t o f t h e U n it e d
S ta te s h a v e b e e n e le c t e d t o m a k e t h e v a lu e ju d g m e n t s a s t o w h o o u g h t t o b e
h u r t b y e c o n o m ic p o lic ie s , a n d . . . t h e p e o p le o f t h e F e d e r a l R e s e r v e B o a r d
. . . a r e s im p ly e c o n o m ic t e c h n ic ia n s , a n d w e h a v e n o t e le c t e d M r . B u r n s o r
a n y b o d y e ls e t o m a k e t h e v a lu e ju d g m e n t s a b o u t w h o o u g h t t o b e h u r t. W e
h a v e e le c t e d y o u t o m a k e t h o s e v a lu e ju d g m e n t s , a n d t h e r e fo r e I t h in k t h a t
C o n g r e s s a n d t h e P r e s id e n t s h o u ld b e h a v in g th e s a m e t y p e o f in flu e n c e o n
m o n e t a r y p o l i c i e s a s t h e y h a v e o n fis c a l p o lic ie s , a n d b u d g e t p o lic ie s . B e c a u s e
fis c a l p o lic ie s a n d m o n e t a r y p o lic ie s a r e b o t h p o l i c i e s b y w h ic h w e h e lp a n d
h u r t in d iv id u a ls , le a v in g t h e t e c h n ic a l e c o n o m ic s a s id e .”
I u r g e t h e C o n g r e s s t o e x e r c is e c lo s e o v e r s ig h t o f F e d e r a l R e s e r v e a c t iv it ie s ,
a n d to e n a c t t h e l e g is la t iv e c h a n g e s n e e d e d t o a s s u r e t h a t m o n e t a r y p o lic ie s
w ill b e c o n s is t e n t w i t h t h e a c h ie v e m e n t o f f u l l e m p lo y m e n t a n d o t h e r n a t io n a l
g o a ls .
T h e C h a ir m a n . T h a n k y o u . M r . B r im m e r .
M r . B r im m e r . T h a n k y o u , M r . C h a i r m a n . I w a s a s k e d s p e c i f i c a l l y
to

g iv e

a ls o

m y

ask ed

h a v e w ith
a c tiv itie s .
I

v ie w s
to

on

sh are

resp ect to

p rop ose

to

m on eta ry
w ith

p o lic y

fo r

c o m m itte e

th e

any

cu rren t

m ost

of

m y

com m en ts

year. I

o b s e r v a tio n s

C o n g r e s s io n a l m o n it o r in g

d ev ote

m e t o th is s e c o n d

th e

of
in

I

F ed era l R eserve
th e

tim e

a llo tte d

r e q u e s t. H o w e v e r , I w o u ld lik e t o p a u s e b r ie fly —

a The bill was patterned after an earlier one introduced by Senator Proxmire.




w as

m ig h t

37
w h ile a s k in g t h a t m y s t a t e m e n t b e p u t in t h e r e c o r d in its e n t ir e t y —
to m ak e a fe w

o b s e r v a t io n s o n th e e c o n o m ic s itu a tio n a n d th e im p li­

c a tio n s f o r m o n e ta r y p o lic y .
I w i l l n o t t a k e t h e c o m m i t t e e ’s t i m e t o
tou rs

of

ca sters

th e

n a tio n a l

now

e x p a n s io n
fo llo w

agree

in

econ om y

th a t th e

th e

p ace

o f

d u r in g

econ om y

e c o n o m ic

r e v ie w

1976

is

on

in

and
th e

a c tiv ity .

d e ta il th e c o n ­

1977. M a n y

road

The

to

fo r e ­

s u b s ta n tia l

fo r e c a s t

w h ic h

I

m o s t c lo s e ly is t h a t p r o d u c e d b y D a t a R e s o u r c e s , I n c . ( D R I )

in M a ssa ch u se tts.
I h a v e a tta c h e d t o m y s ta te m e n t a t a b le N o . 1 (p a g e 4 8 ) w h ic h su m ­
m a r i z e s D R I ’s f o r e c a s t fig u r e s . T h a t f o r e c a s t w a s m a d e b e f o r e t h e fir s t

?u a r te r

fig u r e s

w ere

r e le a s e d

r e c e n tly

by

th e

U .S .

D e p a rtm e n t o f

C om m erce. U n d o u b t e d ly , i t w i l l b e r e v is e d , b u t I t h in k th e b a s ic
t h r u s t w i l l r e m a in e s s e n t ia lly t h e sa m e . T h e r e a r e s e v e r a l a s p e c ts
o f th is fo r e c a s t w h ic h I t h in k d e s e r v e s o m e a tte n tio n .
C le a r ly ,

th e

e x p a n s io n

w ill

be

uneven.

C e r ta in

se cto rs

w ill

be

g r o w in g m u c h m o r e r a p id ly th a n o th e r s . I n p a r tic u la r , th e co n su m e r
se cto r

w ill

m o b ile s
The

be

a

w ill b e

m a jo r
q u ite

sou rce

of

stre n g th , a n d

s p e n d in g

on

a u to ­

tim e . T h is

is e s ­

stron g .

h o u s in g s e c to r

w ill r e m a in

w eak

fo r

som e

p e c ia lly s o w it h r e s p e c t t o m u lt ifa m ily h ou ses. T h is w ill b e th e case
in s p ite o f th e in c r e a s e d a v a ila b ilit y o f m o r t g a g e m o n e y .
A s I

lo o k

a h e a d in t o

19 7 7 , it is c le a r w e w ill h a v e a n o th e r y e a r

o f e x p a n s io n — m a k in g th e y e a r a s a w h o le . N in e t e e n s e v e n ty se v e n
w ill

p r o b a b ly

g iv e

us

som e

tr o u b le

becau se

o f

th e

unevenness

of

th e s o u r c e s o f e x p a n s io n . I w o u ld e x p e c t 1 9 7 6 , f o r e x a m p le , t o s h o w
s tr e n g th b a s e d m a in ly o n c o n s u m e r s p e n d in g fo llo w e d b y r e b u ild in g
o f in v e n to r ie s .
T h e n la te in
on

p la n t

year

and

e a r ly

e q u ip m e n t

and

th e

w ill

fo llo w .

next

year,

in c r e a s e d

s p e n d in g

th a t

s p e n d in g

on

But

p la n t

a n d e q u ip m e n t m a y n o t s u s ta in t h e e x p a n s io n t h r o u g h a ll o f 1 9 7 7 a t
a n y th in g lik e th e p a c e I
w o u ld

t h in k

year

n e ig h b o r h o o d

over

g ro w th

1977

m ig h t

see

t h e fir s t h a l f . S o I
real

g ro w th

in

th e

o f 5 y 2 p ercen t.

N e v e r th e le s s , th e
th e

w o u ld e x p e c t t o see in
year,

of

resp on se

th e

of

econ om y

e x p e c t e m p lo y m e n t t o

grow

e m p lo y m e n t

w ill

m ost

and

lik e ly

m o re s lo w ly

fr o m

u n e m p lo y m e n t to

be

uneven.

I w o u ld

h ere on , an d

unem ­

p lo y m e n t t o d e c lin e s o m e w h a t m o r e s lo w ly .
S o I w o u ld e x p e c t t h a t s o m e 7 m illio n p e o p le o r m o r e m ig h t s till
b e u n e m p lo y e d b y th e e n d o f th is y e a r .
A nd

if

I

w ere to

u n e m p lo y m e n t, I

lo o k

w o u ld

in
be

som e
q u ite

d e ta il a t th e c o m p o s it io n
d is tu r b e d . B la c k s

and

o f th a t

oth ers

w ill

u n d o u b t e d l y m a k e u p a m u c h b i g g e r s h a r e t h a n is t h e c a s e p r e s e n t ly .
T h i s p r o s p e c t f o r e m p lo y m e n t a n d la b o r f o r c e b e h a v io r is o n e r e a s o n
w hy

I

b e lie v e

i t is v it a l,

m easu res b e u n d erta k en

a

v ie w

I

sh are

(s u c h as p r o v is io n

w it h

o t h e r s , t h a t s p e c ia l

o f an expan ded num ber

o f p u b lic s e r v ic e j o b s ) t o c o p e w it h t h e p e r s is t e n c e o f u n e m p lo y m e n t
beyond

a le v e l t h a t

im p le m e n t a t io n
I

of

can

be

r e a s o n a b ly

m a c r o e c o n o m ic

ex p ected

to

respon d

to

th e

p o lic y .

w a n t t o stre ss t h a t p o in t , M r . C h a ir m a n . I

d o n ’t t h i n k w e c a n

r e a s o n a b ly e x p e c t t o g e t s u b s t a n t ia l fu r t h e r r e d u c t io n in u n e m p lo y ­
m e n t in

th e n e x t y e a r

p o lic y .




or

so

s im p ly

by

r e lia n c e

on

m a c r o e c o n o m ic

38
A s I

lo o k

in fla tio n .

I

ahead, I
do

not

U n ite d

S ta te s . T o

sou rces

of

th e

am

a ls o t r o u b le d b y

th in k

we

th e

have

any

p rosp ect o f ren ew ed
illu s io n s

about

th e

a c o n s id e r a b le e x te n t, w e h a v e b e e n b e n e fic ia r ie s

recen t

im p r o v e m e n t

o f th e fo r t u it o u s r e d u c tio n
in fu e l p r ic e s .
T h e s e w i l l n o t la s t . I n
th e U n ite d

s h o u ld

in

fo o d

in

th e

ra te

of

in fla tio n

p r ic e s a n d le g is la t e d

in

th e

r e d u c tio n s

m y ju d g m e n t , th e b a s ic r a te o f in fla tio n in

S ta te s to d a y

is

p r o b a b ly

in

th e

n e ig h b o r h o o d

of

5

or

6 p ercen t.
T h e r a t e o f in c r e a s e o f in d u s t r ia l p r ic e s is e v e n
day by

day

a d d it io n a l in d ic a t io n s o f in c r e a s e s

I am tr o u b le d b y th a t. I a m

in

fa s te r , a n d I

see

in d u s tr ia l p r ic e s .

a ls o t r o u b le d b e c a u s e I

d o n ’t t h i n k t h e

p u b lis h e d m e a s u re s o f c a p a c it y u t iliz a tio n in m a n u fa c t u r in g a r e t e ll­
in g us th e re a l sto ry .
R e c e n tly I h a d c o n v e r s a tio n s w ith m e m b e rs o f th e F e d e r a l R e s e r v e
B o a r d s t a ff, w h o c o m p ile d th e fig u r e s
but I

g o t th e im p r e s s io n

c o m p le te d

th e

r e v is io n

th a t i f

th ey

(th e m o st w id e ly u sed s e r ie s ),

th ey

are

w ere to

now

d o in g ,

p u b lis h , i f t h e y h a d
M r.

C h a ir m a n ,

th ey

w o u ld p r o b a b ly r a is e t h e o p e r a t in g r a t e o f m a n u fa c t u r in g b y 4 o r 5
p ercen t.
T h is s u g g e s ts th a t u t iliz a tio n

ra tes a re h ig h e r th a n

th e p u b lis h e d

d a ta in d ic a te , b u t t h e y a ls o s u g g e s t w e s t ill h a v e a g r e a t d e a l o f e x ce s s
c a p a c ity

fo r

th e tim e b e in g .

W h e n I r e fle c t o n th e p r o s p e c ts o f in fla tio n , I a m a ls o t r o u b le d a n d
c o n c e r n e d a b o u t t h e a b o v e -a v e r a g e s e ttle m e n ts w h ic h a re n o w e m e r g ­
in g fr o m
I

la b o r n e g o tia tio n s .

p e r s o n a lly

w as

tr o u b le d

by

th e

r e c e n tly

c o n c lu d e d

T e a m ste r

a g r e e m e n t w h ic h s e e m e d t o r e s u lt in a n a n n u a l r a t e o f in c r e a s e o f 10
p ercen t o r m ore. I

e x p e c t th e

rubber

w ork ers to

a im

fo r

a h ig h e r

se ttle m e n t. A n d la t e r o n in t h e y e a r , t h e e le c t r ic a l w o r k e r s a n d t h e
U n ite d A u t o m o b ile W o r k e r s w ill u n d o u b te d ly h a v e s t r o n g p r o p o s a ls
t o m a k e w i t h r e s p e c t t o w a g e s a n d b e n e fits .
I w a n t t o m a k e q u ite c le a r m y p o s tu r e t o th is , M r . C h a ir m a n . T h e
im p r o v e m e n ts b e in g s o u g h t a n d th o se b e in g g a in e d a re o b v io u s ly o f
b e n e fit t o

th e

u n io n s

and

th e ir m e m b e rs. T h e

e ffo r t t o

rem ove

th e

c e ilin g o n c o s t o f l i v i n g in c r e a s e s is o b v i o u s l y a b e n e fit a s w e ll. B u t
w hen

we

econ om y

s e t th e se b e s id e
as

a

w h o le ,

I

th e

lo n g -r u n

th in k

we

ought

o b je c tiv e s
to

be

and

g o a ls

con cern ed

o f

th e

a b o u t th e

p r o s p e c ts o f th e p o s s ib le r e cu r re n ce o f a n o th e r r o u n d o f w a g e -p r ic e ,
p r ic e -w a g e -in d u c e d in fla tio n .
# F o r t h a t r e a s o n , I t h in k it is v it a l t h a t w e h a v e m u c h m o r e a t t e n ­
tio n o r fo c u s o n s o m e k in d o f p o l i c y : I th in k it w o u ld b e m u c h b e tte r
i f th e A d m in is tr a t io n

w ere to

get

it s e lf in v o lv e d

d ir e c t ly

in

th ese

d is c u s s io n s — r a t h e r t h a n s t a n d in g b y w a it in g t o see t h e o u t c o m e w it h ­
o u t a s t r o n g e x p r e s s io n o f th e p u b lic in te r e s t.
I h a v e n o c o n c r e te p r o p o s a l t o im p le m e n t th a t, b u t I
r e g is t e r a c o n c e r n .
N o w , le t m e tu r n

aw ay

fr o m

th e

real econ om y

and

d id w a n t to
in s te a d

lo o k

a t c r e d it d e m a n d s a n d m a k e a fe w c o m m e n ts o n th e o u t lo o k f o r m o n e ­
t a r y p o lic y . D e s p it e t h e s t r o n g in c r e a s e in r e g is t r a t io n s o f n e w s e c u r i­
t ie s is s u e s

(e s p e c ia lly

d eb t)

in t h e la s t w e e k o r s o , I

t h in k

o v e r a ll

c r e d it d e m a n d s in th e U n it e d S ta te s in 1 9 7 6 w ill c o n t in u e t o b e q u ite
m o d e r a te . T h e r e w ill d e fin ite ly n o t b e a n y c r o w d in g o u t o n th e p a r t




39
o f t h e T r e a s u r y d e s p it e its n e a r t e r m

fin a n c in g

d iffic u lt ie s w it h t h e

r e c e n t r is e in s h o r t r a te s , b u t I t h in k o n b a la n c e th e c o r p o r a t e s e c to r
w i l l c o n t in u e t o r e s tr u c t u r e its d e b t. S o w e w ill se e a c o n t in u o u s flo w
o f l o n g t e r m is s u e s . E q u i t y is s u e s w i l l p r o b a b l y a ls o r is e s u b s t a n t ia lly .
B u t th e r e s to r a t io n o f liq u id it y in t h e c o r p o r a t e s e c to r in th e fa c e
o f

m od era te

e x p a n s io n

and

e q u ip m e n t

e x p e n d it u r e s

su ggest

c o r p o r a t io n s w ill n o t m a k e a n y e x c e s s iv e d e m a n d s .
A s I lo o k a t th e G o v e r n m e n t b u d g e t d e fic its b e in g

th a t

p r o je c te d

I

t h in k t h e m a r k e ts c a n h a n d le t h a t a s w e ll, e s p e c ia lly w it h th e v e r y
h i g h s a v in g s r a t e in t h e h o u s e h o ld s e c t o r — a n d t h e s u b s t a n t ia l liq u id ­
ity

on

th e p a r t o f b o th

n o n fin a n c ia l c o r p o r a t io n s

and

fin a n c ia l in ­

s t itu tio n s .
S o I th in k th e o v e r a ll c r e d it d e m a n d s w ill n o t b e v e r y
a ls o b e lie v e s h o r t -t e r m
la t e r

th is

year.

But

stron g . I

b u s in e s s fin a n c in g r e q u ir e m e n ts w ill p ic k

th e se

w ill

not

be

e x c e s s iv e , a n d

m u ch

of

up
th e

fin a n c in g w ill ta k e p la c e in th e p a p e r m a r k e ts — r a th e r th a n a t c o m ­
m e r c ia l b a n k s.
A g a in s t t h a t b a c k g r o u n d , w h a t is t h e p r o s p e c t f o r m o n e t a r y p o l i c y ?
I w ill n o t t a k e u p t h e c o m m itt e e ’s t im e t o r e v ie w

th e w a y th e F e d ­

e r a l R e s e r v e se ts its ta r g e ts . C h a ir m a n B u r n s w a s q u e s tio n e d y e s te r ­
d a y , a n d h e g a v e som e n ew

in fo r m a t io n . L e t m e s a y q u ic k ly th a t—

a s f a r a s I a m c o n c e r n e d — t h e ’ r e c e n t b e h a v i o r o f s h o r t r t e r m in t e r e s t
r a t e s in r e s p o n s e t o w h a t w e n o w k n o w — s in c e y e s t e r d a y — is a m o d i ­
fic a tio n o f th e F e d e r a l R e s e r v e ta r g e ts f o r th e m o n e ta r y a g g r e g a te s
o v e r t h e n e x t y e a r is n o t a t a ll o u t o f k e e p in g w it h w h a t o n e s h o u ld
e x p e c t a t t h is ju n c t u r e o f th e e c o n o m ic r e c o v e r y .
A

fu ll y e a r

a fte r

to e x p e ct sh o rt term

th e

recovery

got

u n d e r w a y , t h e r e is n o

reason

in t e r e s t r a t e s t o b e e s s e n t ia lly th e sa m e a s t h e y

w e r e a y e a r a g o , m a y b e o n ly s lig h t ly h ig h e r . S o f th in k th e F e d e r a l
R e s e r v e ’s t a r g e t s a s p u b lis h e d n o w — a n d lo o k i n g o u t t o t h e y e a r end^
in g in M a r c h

o f 1 9 7 7 — a r e n o t u n r e a s o n a b le .

O f cou rse, I

have

a lw a y s h a d t r o u b le w it h th e

F e d e r a l R e s e r v e ’s

e x p o s it io n o f its g o a ls in te r m s o f th e m o n e t a r y a g g r e g a te s w it h o u t
e q u a l e m p h a s is o n c r e d it c o n d it io n s a n d in te r e s t r a te s as w e ll.
B u t g iv e n t h e w a y t h e y s ta te th e m — a n d e s p e c ia lly t h e w id e la t i­
tu d e in v o lv e d — I

t h in k t h a t is a n a p p r o p r i a t e

ra n ge.

I w a n t t o stre s s, M r . C h a ir m a n , th a t w e s h o u ld e x p e c t o v e r th e re s t
o f t h is y e a r s o m e s t e a d y b u t m o d e s t r is e s in s h o r t -t e r m

in te r e s t ra te s .

I t w o u ld b e a p p r o p r ia t e f o r th e F e d e r a l R e s e r v e t o d o th a t. I t s h o u ld
b e le s s a c c o m m o d a t in g t h a n i t h a s b e e n o v e r t h e la s t 4 o r 5 m o n t h s .
T h a t is w h a t
s in c e

we

do

w hat

w as

we

s h o u ld

done

e x p e c t in

w an t to

not

see th e

4

years

ago

a p e r io d
F ederal

w hen

th e

of

e c o n o m ic e x p a n s io n

R eserve

F ederal

repeat

R eserve

th is

year

o b v io u s ly

a llo w d m o n e y a n d c r e d it c o n d itio n s t o r e m a in t o o e a sy t o o lo n g .
S o w e s h o u ld e x p e c t so m e s n u g g in g
i n it .
A t

th e sam e

tim e

we

s h o u ld

up

a n d s h o u ld s u p p o r t th e m

b e c a u tio u s

and

th e

F ed

s h o u ld

be

c a u tio u s a b o u t m o v in g t o o fa s t a n d t o o fa r . S o I a m s u g g e s tin g so m e
s l i g h t , s t e a d y r is e s in r a t e s , a n d t h e y o u g h t n o t t o b e c r i t i c i z e d f o r it .
M r.
q u ic k ly

C h a ir m a n ,

le t

me

t o th e q u e s tio n

of

put

th a t

w h a t to

a s id e
do

and

m e n t s a y s e s s e n tia lly I d o n o t k n o w . B u t I
tio n s w h ic h

I

ad d ress

m y s e lf

a b o u t m o n ito r in g . M y

d o h a v e c e r t a in s u g g e s ­

w o u ld lik e t o c a ll t o t h e c o m m it t e e ’s a t te n tio n .




very
sta te­

40
I

p e rs o n a lly

t h in k i t is n o t s u ffic ie n t f o r t h e

p u t in t o th e p u b lic d o m a in

F ed era l R eserve

f o u r t im e s a y e a r th e s e t a r g e t s

fo r

to
th e

m o n e ta r y a g g r e g a te s e x te n d e d 12 m o n th s h e n c e w it h n o c o m m e n t o n
th e e c o n o m ic im p lic a t io n s

o f

th a t m o n e ta ry

p o lic y

if

th ey

w ere

to

a c h ie v e it.
G iv e n th a t p r o s p e c t, I t h in k th e C o n g r e s s o u g h t t o o r g a n iz e it s e lf
to m o n it o r th e F e d s o m e w h a t m o r e c lo s e ly . E s s e n tia lly , I a m s u g g e s t­
in g th a t th e C o n g r e s s , e s p e c ia lly th e t w o b a n k in g c o m m itte e s , t h o u g h
th is m ig h t a p p ly t o th e J o in t E c o n o m ic C o m m itte e a s w e ll, th e t w o
b a n k in g c o m m itte e s o u g h t t o e x p a n d

a n d stre n g th e n

t h e ir s ta ffs s o

th a t th e y ca n d o fo r m o n e ta ry p o lic y o n b e h a lf o f th e C o n g re ss w h a t
t h e b u d g e t o ffic e n o w d o e s f o r fis c a l p o l i c y o n b e h a l f o f t h e C o n g r e s s .
I

h a v e s o m e s p e c ific s u g g e s t io n s a s t o h o w

to

go

a b o u t th is .

I t a m o u n ts t o a s k in g t h e F e d e r a l R e s e r v e t o p u t its t a r g e t in th e
p u b lic

d o m a in

te c h n ic a l,

and

th en

a n a ly tic a l

lo o k

w ork

t o th e

w h ic h

F ed era l R eserve

w o u ld

su ggest

th e

s ta ff

fo r

th e

im p lic a t io n s

o f th a t m o n e t a r y p o lic y i f s u c c e s s fu l.
M r . C h a ir m a n , I h a v e a lr e a d y g o tt e n a n a d v e rs e r e a c tio n t o th a t.
I a m t o l d e s s e n t ia lly a s k in g f o r a d iv is io n b e t w e e n t h e B o a r d a n d its
s t a f f . I r e c o g n i z e t h a t p e o p l e m i g h t c o n f u s e t h e s t a f f ’s w o r k w i t h t h e
B o a r d ’s o r t h e O p e n M a r k e t C o m m i t t e e ’ s w o r k .
B u t I t h i n k w e o u g h t t o r u n t h a t r is k . A f t e r a ll, it is t h e F e d e r a l
R eserv e th a t sh a res th e

c o n s titu tio n a l a u th o r it y

w ith

th e

C on gress

t o c o in m o n e y a n d d e te r m in e t h e v a lu e t h e r e to .
O n th e

a s s u m p tio n

s ta ff p e r fo r m

th a t th e B o a r d

w ill in

fa c t

r e s is t h a v in g

its

th is a n a ly tic a l ta s k o f s p e llin g o u t th e im p lic a t io n s o f

th e s ta te d m o n e ta r y p o lic y o b je c t iv e s , I t h in k th e c o n g r e s s io n a l s ta ff
o u g h t t o d o it.
T h ey ou gh t to d o

it in

s u b s ta n tia l d e ta il s im ila r t o

w hat I

have

s u g g e s te d in ta b le 1 o f m y t e s tim o n y . O n ly w h e n th e r e is a t e c h n ic a l
c a p a c it y e q u a llin g t h a t o f t h e F e d o r a t le a s t a p p r o x im a t in g t h a t o f
th e F e d

w ill C o n g re ss b e

a b le t o

m o n ito r th e w o r k o f th e F e d .

S o , M r . C h a ir m a n , I th in k it w o u ld b e a p p r o p r ia te t o p u r s u e th a t
co u rse . I w o u ld b e d e lig h te d t o c o m m e n t fu r t h e r o n it i f y o u
The

C h a ir m a n . T h a n k

you

very

m u ch , M r.

w is h .

B r im m e r .

[ M r . B r im m e r ’s s t a t e m e n t f o l l o w s :]
M

onetary

P

o l ic y a n d t h e

E

c o n o m ic

O utlook

(T e s t im o n y b y A n d r e w F . B r i m m e r 1)
I a m d e lig h t e d t o a p p e a r b e f o r e t h is C o m m it te e t o g i v e m y v ie w s o n t h e
a p p r o p r ia te c o u r s e f o r m o n e t a r y p o l i c y d u r in g th e c o m in g y e a r . I w a s a ls o
a s k e d t o s h a r e w i t h t h e C o m m it te e a n y id e a s I m ig h t h a v e w it h r e s p e c t t o th e
F e d e r a l R e s e r v e ’ s p e r i o d i c r e p o r t in g t o t h e C o n g r e s s u n d e r C o n c u r r e n t R e s o lu ­
t io n 133 i n t r o d u c e d in t h e H o u s e o f R e p r e s e n t a t iv e s o n M a r c h 24 , 1975. I h a v e
d e v o t e d m o s t o f m y e f f o r t t o th e l a t t e r r e q u e s t, b u t I w i ll a ls o c o m m e n t b r ie fly
on th e p r o p e r c o u r s e f o r m o n e t a r y p o lic y . A s b a c k g r o u n d f o r t h a t d is c u s s io n ,
I w i l l s k e t c h b r ie fly t h e m a in c o n t o u r s o f t h e o u t lo o k f o r th e n a t io n a l e c o n o m y .
g e n e r a l e c o n o m ic

outlook

B y n o w , t h e r e s h o u ld b e n o d o u b t in a n y o n e ’ s m in d t h a t e c o n o m ic r e c o v e r y
fr o m t h e w o r s t r e c e s s io n s in c e th e G r e a t D e p r e s s io n is w e ll e s t a b lis h e d . I f
th e r e w e r e a n y lin g e r in g d o u b t s , t h e y s h o u ld h a v e b e e n e r a s e d b y t h e r e c e n tly

1 Dr. Brimmer is Thomas Henry CarroU-Ford Foundation Visitiner Professor in the
Graduate School of Business Administration at Harvard University. From March. 1966.
through August, 1974, he was a Member of the Board of Governors of the Federal
Reserve System.



41
r e le a s e d s t a t is t ic s o n t h e g r o w t h a n d c o m p o s it io n o f th e g r o s s n a tio n a l p r o d u c t
( G N P ) f o r t h e fir s t q u a r te r . M o r e o v e r , t h e p r o s p e c t is f o r fu r t h e r e x p a n s io n
w e ll i n t o 1977. A t t h e s a m e tim e , h o w e v e r , t h e p r o s p e c t s o f r e n e w e d in fla tio n
c a n n o t b e e n t ir e ly d is m is s e d .
M a n y f o r e c a s t s a r e a v a i l a b l e w h ic h s u g g e s t th e c o u r s e t h e A m e r ic a n e c o n o m y
i s m o s t l ik e ly t o f o l l o w d u r in g 19 76 a n d o n i n t o 1977. T h e fo r e c a s t w h ic h I
f o l l o w m o s t c lo s e ly i s t h a t p r e p a r e d b y D a t a R e s o u r c e s , In c . ( D R I ) . T h e
la t e s t D R I f o r e c a s t i s s u m m a r iz e d in T a b le 1, a t ta c h e d . T h is f o r e c a s t w a s
p r e p a r e d b e f o r e t h e p re U m in a r y fig u r e s f o r fir s t -q u a r te r G N P w e r e r e le a se d .
O n t h e b a s is o f t h o s e m o s t r e c e n t d a t a , D R I i s in t h e p r o c e s s o f r e v is in g it s
fo r e c a s t . H o w e v e r , t h e b r o a d fe a t u r e s o f t h e e c o n o m ic o u t lo o k s u m m a r iz e d in
th e t a b le w i l l p r o b a b ly n o t b e c h a n g e d v e r y m u c h .
A c c o r d i n g t o t h e B u r e a u o f E c o n o m ic A n a ly s is in t h e TJ.S. D e p a r tm e n t o f
C o m m e r c e , G N P ( a f t e r c o r r e c t in g f o r p r i c e c h a n g e s ) r o s e a t a se a s o n a lly
a d ju s t e d a n n u a l r a t e o f 7.5 p e r c e n t in t h e fir s t q u a r t e r o f t h is y e a r . F r o m t h e
fir s t q u a r t e r o f 1975 t h r o u g h t h e fir s t q u a r t e r o f t h is y e a r , r e a l G N P e x p a n d e d
b y 6 .9 p e r c e n t. A b o u t h a l f o f t h e $22.2 b ilU o n r is e in r e a l G N P d u r in g th e
fir s t q u a r t e r r e p r e s e n te d fin a l sa le s , a n d a b o u t h a l f w a s a c c o u n te d f o r b y a
r is e in b u s in e s s in v e n to r ie s . A s t r o n g r i s e ($ 1 4 .3 b i lli o n ) w a s a ls o r e g is te r e d
b y r e a l c o n s u m e r e x p e n d it u r e s .
L o o k in g a h e a d t h r o u g h t h e r e s t o f t h is y e a r , a c c o r d i n g t o th e D R I fo r e c a s t
m a d e in e a r ly A p r il, r e a l G N P in 19 76 m ig h t e x p a n d b y a b o u t 6 % p e r c en t.
T h e g a in in t o t a l c o n s u m e r s p e n d in g ( a b o u t 5.3 p e r c e n t in r e a l t e r m s ) w ill b e
t h e m a in d r i v i n g f o r c e b e h in d t h e g r o w t h in r e a l G N P . O n t h e o t h e r h a n d ,
b u s in e s s s p e n d in g f o r fix e d in v e s t m e n t m a y c lim b b y ju s t o v e r 4 p e r c e n t— w ith
r e a l s p e n d in g o n e q u ip m e n t a d v a n c in g b y a b o u t 4 % p e r c e n t a n d n o n r e s id e n tia l
c o n s t r u c t io n r e g is t e r in g j u s t o v e r a 3 p e r c e n t g a in . R e a l e x p e n d it u r e s b y th e
F e d e r a l G o v e r n m e n t m ig h t r is e a b o u t 3*4 p e r c e n t , a n d o u t la y s b y S ta te a n d
lo c a l g o v e r n m e n ts m a y e x p a n d b y j u s t u n d e r 3 p e r ce n t.
A m o n g o t h e r m a jo r s e c t o r s o f th e e c o n o m y , t h e p r o s p e c t s f o r h o u s in g c o n tin u e
t o b e m ix e d . D u r in g t h e fir s t q u a r te r , h o u s in g s t a r t s r a n a t a s e a s o n a lly a d ­
ju s t e d a n n u a l r a t e o f 1.4 m illio n u n its . T h e t r e n d is e x p e c t e d t o b e u p w a r d
t h r o u g h o u t t h e y e a r , b u t f o r 19 76 a s a w h o le , h o u s in g s t a r ts m ig h t a v e r a g e
a b o u t 1.6 m illio n u n its . B u t v ir t u a l l y a l l o f t h is m o d e s t g a in is e x p e c t e d t o
b e a c c o u n t e d f o r b y s in g le f a m i l y h o u s in g . M u lt i-fa m ily u n its a r e e x p e c t e d t o
c o n t in u e t o r e fle c t t h e a d v e r s e im p a c t o f r is in g p r o d u c t io n c o s ts in t h e f a c e
o f r e n t s t h a t a r e m o v in g u p m u c h m o r e s lo w ly . O n ly w h e n b u ild e r s s e e th e
p r o s p e c t o f r e a liz in g w id e r p r o fit m a r g in s s h o u ld w e a n t ic ip a t e a n y n o t ic e a b le
q u ic k e n in g in t h e c o n s t r u c t io n o f m u lt i- fa m ily u n its .
O n t h e o t h e r h a n d , c o n s u m e r s p e n d in g f o r a u t o m o b ile s i s e x p e c t e d t o b e v e r y
stro n g . T h e D R I f o r e c a s t p u t s r e t a il s a le s o f n e w a u t o m o b ile s in th e n e ig h b o r ­
h o o d o f 10 .7 m illio n u n its f o r 1976. M o r e o v e r , A m e r ic a n -m a k e s a r e e x p e c t e d to
a c c o u n t f o r a s ig n ific a n t f r a c t i o n o f t h e g a in o v e r 1975.
L o o k in g a h e a d t o 1977, it a p p e a r s t h a t r e a l G N P m ig h t r is e b y a b o u t 5 %
p e r c e n t. A m u c h la r g e r f r a c t i o n o f t h e e x p a n s io n n e x t y e a r w ill b e a c c o u n te d
f o r b y a s iz a b le p ic k u p in b u s in e s s o u t la y s f o r fix e d in v e s tm e n t. B y th e fo u r t h
q u a r t e r o f t h is y e a r , b u s in e s s fix e d in v e s t m e n t m ig h t b e r is in g a t a s e a s o n a lly
a d ju s t e d a n n u a l r a t e o f a b o u t 8 p e r c e n t ; b y t h e f o u r t h q u a r t e r o f n e x t y e a r ,
t h e r a t e o f e x p a n s io n m ig h t b e 11.2 p e r c e n t. F o r 1977 a s a w h o le , th e g a in in
b u s in e s s fix e d in v e s t m e n t m ig h t b e c lo s e t o 10 p e r c e n t — c o m p a r e d w it h ju s t
o v e r 4 p e r c e n t e x p e c t e d f o r 1976. T h e s e g r o w t h r a t e s a r e in r e a l term s.
I n v e n t o r y in v e s t m e n t ( i n c u r r e n t d o l l a r s ) m ig h t a m o u n t t o a b o u t $17 b illio n
in 1977 c o m p a r e d w it h j u s t u n d e r $12 b i l l i o n in 1976. I n c o m b in a t io n , th e s e t w o
ty p e s o f s p e n d in g s u g g e s t t h a t t h e b u s in e s s s e c t o r w ill b e a n im p o r ta n t s o u r c e
o f e c o n o m ic g r o w t h in 1977. T h e c o n t r ib u t io n o f c o n s u m e r s w i ll a ls o b e s ig n if­
ic a n t. C u r r e n t ly , D R I is e s t im a t in g t h a t t o t a l c o n s u m e r s p e n d in g in r e a l te r m s
m ig h t e x p a n d b y 5.1 p e r c e n t in 1977. I n g e n e r a l, i t s e e m s t h a t th e e c o n o m ic
r e c o v e r y w i l l c o n t in u e t h r o u g h 1 9 77 w it h li t t l e c h a n c e o f in te r r u p tio n . H o w ­
e v e r , s e v e r a l o t h e r f e a t u r e s o f th e e c o n o m ic o u t lo o k a r e le s s c o m fo r t in g .
EM PLO YM ENT PROSPECTS

T h e s t r o n g e x p a n s io n in p r o d u c t io n d u r in g t h e l a s t s e v e r a l q u a r te r s h a s a ls o
le d t o a s ig n ific a n t g a in in jo b s . B y M a r c h o f t h is y e a r , e m p lo y m e n t w a s b a c k
t o t h e p r e -r e c e s s io n h ig h o f a b o u t 8 6 % m illio n jo b s . T h is r e b o u n d in e m p lo y ­
m e n t w a s c le a r ly f a s t e r t h a n a n u m b e r o f o b s e r v e r s (in c lu d in g m e ) h a d e x ­




42
p ecte d . O n t h e o t h e r h a n d , u n e m p lo y m e n t d u r in g th e fir s t q u a r t e r o f t h is y e a r
a v e r a g e d 7.6 p e r c e n t. T h i s r a t e w a s n e a r ly a f u l l p e r c e n t a g e p o in t b e lo w th e
fo u r t h q u a r t e r a v e r a g e o f 8 .5 p e r c e n t
N e v e rth e le s s , a b o u t 7.1 m illio n p e o p le a r e s t ill u n e m p lo y e d . B y t h e e n d o f t h is
y e a r , th e n u m b e r m a y h a v e d e c lin e d t o a b o u t 6.5 m illio n . I f so , t h is w o u ld
re p r e se n t a n u n e m p lo y m e n t r a t e o f 6.9 p e r c e n t. I f t h e n a t io n a l e c o n o m y f o l l o w s
t h e g e n e r a l c o n t o u r s s k e t c h e d in t h e D R I fo r e c a s t , a b o u t 5.9 m illio n p e r s o n s
(6 p e r c e n t o f t h e la b o r f o r c e ) m ig h t b e u n e m p lo y e d a t t h e e n d o f 1977.
T h u s, r e fle c tin g t h e g r o w t h o f th e l a b o r f o r c e — d e s p it e a c o n t in u e d r is e in
e m p lo y m e n t— t h e le v e l o f u n e m p lo y m e n t w i l l d e c lin e s lo w l y t h r o u g h t h e e n d
o f n e x t y e a r . I t i s f o r t h is r e a s o n t h a t a n u m b e r o f o b s e r v e r s (a n d I in c lu d e
m y s e lf a m o n g t h e m ) t h in k i t i s v i t a l f o r s p e c ia l m e a s u r e s t o b e u n d e r t a k e n —
s u ch a s t h e p r o v is io n o f a g r e a t ly e x p a n d e d n u m b e r o f p u b lic s e r v ic e jo b s — t o
c o p e w it h t h e p e r s is t e n c e o f u n e m p lo y m e n t b e y o n d t h e le v e l t h a t c a n b e
r e a s o n a b ly e x p e c t e d t o r e s p o n d t o th e im p le m e n t a t io n o f m a c r o e c o n o m ic p o lic y .
OUTLOOK FOB PRICES

D u r in g t h e fir s t q u a r t e r o f t h is y e a r , t h e g r o s s n a t io n a l p r o d u c t d e fla t o r (t h e
m o s t b r o a d ly b a s e d o f a l l o f th e p r i c e i n d e x e s ) r o s e a t a s e a s o n a lly a d ju s t e d
a n n u a l r a t e o f 3 .7 p e r c e n t . D u r in g t h e fir s t q u a r te r , t h e c o n s u m e r p r ic e in d e x
( C P I ) r o s e a t a n a n n u a l r a t e o f le s s t h a n 3 p e r ce n t. T o a c o n s id e r a b le e x te n t,
th is g r e a tly r e d u c e d r a t e o f in fla t io n i s fo r t u it o u s . E s p e c ia lly in t h e c a s e o f
c o n s u m e r p r ic e s , t h e in d e x c a p t u r e d w i n d fa l l g a in s r e p r e s e n te d b y a t e m p o r a r y
d e c lin e in f o o d p r i c e s a n d le g is la t e d r e d u c t io n s in t h e p r ic e o f fu e ls . T h e r e is
n o r e a s o n t o e x p e c t t h a t th e s e h ig h ly fa v o r a b l e d e v e lo p m e n t s w i ll c o n t in u e f o r
v e r y lo n g .
In s te a d , t h e b a s ic r a t e o f in fla t io n in t h is c o u n t r y is p r o b a b ly in t h e r a n g e
o f 5 o r 6 p e r c e n t. I n d u s t r ia l p r ic e s a r e r i s i n g a t a n e v e n f a s t e r r a te . S e v e r a l
fa c t o r s a r e a t w o r k w h ic h s u g g e s t t h a t th e r a t e o f in fla t io n m ig h t a c c e le r a t e
s o m e w h a t d u r in g t h e fr e s t o f 1976 a n d in t o 1977.
O n e o f t h e s e i s t h e r i s i n g u t iliz a t io n r a t e in m a n u fa c t u r in g . D u r in g t h e fir s t
q u a r te r o f 1976, t h e c a p a c i t y u t iliz a t io n r a t e f o r a l l m a n u fa c t u r in g w a s a b o u t
7.8 p e r c e n t. F o r m a jo r m a t e r ia ls t h e r a t e w a s 80 .6 p e r c e n t. H o w e v e r , a s is
g e n e r a lly k n o w n , t h e s e m e a s u r e s (p u b lis h e d b y th e F e d e r a l R e s e r v e B o a r d )
u n d o u b t e d ly u n d e r e s t im a te t h e a c t u a l u t iliz a t io n r a te . T h e F e d e r a l R e s e r v e
B o a r d s t a ff i s in th e p r o c e s s o f u p d a t in g a n d im p r o v in g t h e ir c a p a c it y u t iliz a ­
tio n m e a su r e s. A lt h o u g h t h is w o r k s t ill h a s s o m e d is t a n c e t o g o , e n o u g h h a s
b een d o n e t o s u g g e s t t h a t t h e p r e s e n t ly p u b lis h e d e s t im a te f o r t h e u t iliz a t io n
r a t e in m a n u fa c t u r in g o u g h t t o b e r a is e d b y 4 o r 5 p e r c e n t a g e p o in t s . A n
in c r e a s e o f a lm o s t t h e s a m e m a g n it u d e o u g h t t o b e m a d e in t h e c a s e o f t h e in d e x
f o r m a jo r m a te r ia ls . S o, t h e a c t u a l u t iliz a t io n r a t e in m a n u fa c t u r in g m a y b e
in th e n e ig h b o r h o o d o f 75 p e r c e n t , a n d th e r a t e f o r m a jo r m a t e r ia ls m a y b e
a p p r o x im a t e ly 8 5 p e r c e n t. W h i l e t h e s e m e a s u r e s w o u ld s t ill s h o w a c o n s id e r ­
a b le a m o u n t o f e x c e s s c a p a c it y , t h e m a r g in o f u n u s e d r e s o u r c e s is p r o b a b ly
le s s th a n o n e m ig h t h a v e e s t im a te d s im p ly b y lo o k i n g a t th e c a p a c it y u t iliz a t io n
r a te s a s t h e y a r e c u r r e n t ly p u b lis h e d .
I a m a ls o p e r s o n a lly c o n c e r n e d a b o u t t h e a b o v e -a v e r a g e s e ttle m e n ts w h ic h
a r e n o w e m e r g in g fr o m l a b o r n e g o t ia t io n s . T h e r e c e n t ly c o n c lu d e d T e a m s te r s
a g r e e m e n t r e s u lt e d in a n a v e r a g e a n n u a l r is e o f o v e r 10 p e r c en t. I t is r e p o r t e d
th a t th e r u b b e r w o r k e r s (c u r r e n t ly o n s t r i k e ) a r e a im in g f o r a n n u a l in c r e a s e s
in e x c e s s o f 13 p e r c e n t. C o n t r a c t s c o v e r in g e le c t r ic a l w o r k e r s a r e s c h e d u le d
to e x p ir e in J u n e a n d J u ly , a n d t h o s e c o v e r in g a u to m o b ile w o r k e r s W ill r u n o u t
d u r in g th e f a l l. I n a l l o f t h e s e c a s e s , t r a d e u n io n s h a v e s o u g h t — o r w il l se e k —
a n u n c a p p in g o f th e c o s t o f l i v in g c la u s e s in a n e ff o r t t o p r o t e c t t h e ir m e m b e r s
fr o m fu t u r e in fla tio n .
I c a n w e ll u n d e r s t a n d w h y t r a d e u n io n n e g o t ia t o r s fe e l im p lie d t o p r e s s f o r
th e se o b je c t iv e s . A f t e r a ll, t h e y u n d o u b t e d ly f e e l t h a t t h e y h a v e t h e r e s p o n s i­
b ilit y t o s e e k m e a n s o f m in im iz in g t h e a d v e r s e e ffe c t s o f in fla t io n o n t h e ir
m em b e rs. B u t , fr o m th e p o in t o f v i e w o f t h e n a t io n a l w e lfa r e , th e s e d e v e lo p ­
m e n ts h o ld s e r io u s im p lic a t io n s . I f th e s e p a t t e r n s s p r e a d t o t h e r e s t o f th e
ec o n o m y , b e f o r e t o o lo n g , w e c o u ld a g a in b e c a u g h t u p in a v ic io u s c ir c le o f
w a g e p ric e ^ p r ic e w a g e in fla tio n . G iv e n t h is p r o s p e c t, I t h in k i t is v i t a l t h a t




43
so m e f o r m o f in c o m e s p o lic y b e r e a d ie d f o r a p p lic a t io n b e f o r e t h e s it u a t io n
g e ts s o f a r o u t o f h a n d t h a t t h e n a t io n w o u ld h a v e t o f a l l b a c k o n e x c e s s iv e ly
r e s t r ic t iv e m o n e t a r y p o lic y in a n e ff o r t t o m o d e r a t e t h e w o r s t e ffe c t s o f in fla tio n .
CREDIT DEMANDS * RECORD AND PROSPECTS
.

O v e r a ll c r e d it d e m a n d s in 1976 a r e lik e ly t o b e r a t h e r m o d e r a te . I n th e fir st
p la c e , t h e d e m a n d f o r fu n d s b y t h e F e d e r a l G o v e r n m e n t i s lik e ly t o b e m u c h
le s s t h a n w a s e x p e c t e d e a r lie r . T h e r e i s n o r e a s o n t o f e a r “ c r o w d in g o u t ” o f
p r iv a t e b o r r o w e r s b y t h e F e d e r a l G o v e r n m e n t in e it h e r 1976 o r 1977. T h e h ig h
p e r s o n a l s a v in g s r a t e (n e a r 8 p e r c e n t ) a n d th e s t r o n g e r liq u id it y p o s it io n o f
c o r p o r a t i o n s a n d fin a n c ia l in s t it u t io n s w i l l p r o v id e a s t r o n g m a r k e t f o r U .S .
T r e a s u r y issu e s. A s e c o n o m ic e x p a n s io n g a t h e r s s t r e n g th , la r g e r t a x r e c e ip t s
a n d t h e s lo w e r e x p a n s io n in F e d e r a l s p e n d in g w i l l r e d u c e s h a r p ly T r e a s u r y
n e e d s f o r fu n d s .
S ta te a n d lo c a l g o v e r n m e n t s w i l l a ls o m a k e li t t l e n e t d e m a n d o n th e c r e d it
m a r k e t. A s lo w e r g r o w t h in r e a l o u t la y s i s t o b e a n t ic ip a t e d . T o s o m e e x te n t,
t h is r e fle c ts th e a d v e r s e e ffe c t s o f t h e N e w Y o r k C it y e x p e r ie n c e o n t h e w illin g ­
n e s s o f S ta te a n d l o c a l o ffic ia ls t o p r o p o s e n e w s p e n d in g p la n s to t h e ir c itiz e n s .
B u t i t i s a ls o r e i n fo r c e d b y s lo w e r p o p u la t io n g r o w t h a n d th e r e d u c e d n e e d
t o s p e n d o n s c h o o ls a n d o t h e r e d u c a t io n a l f a c ilit ie s . S ta te a n d lo c a l g o v e r n ­
m e n ts w i l l a ls o e x p e r ie n c e a r e c o v e r y in r e v e n u e a s t h e ir l o c a l e c o n o m ie s
e x p a n d . T h e n e t r e s u lt o f t h e s e d e v e lo p m e n t s s h o u ld b e a m o d e s t g r o w t h o f
S ta te a n d l o c a l in d e b te d n e s s .
I n th e c a s e o f t h e h o u s e h o ld s e c to r , r is in g e x p e n d it u r e s w ill u n d o u b t e d ly
le a d t o s o m e e x p a n s io n in i n d iv id u a l lo a n d e m a n d . C o n s u m e r c r e d it (r e fle c t in g
d e m a n d f o r a u t o m o b ile s a n d o t h e r d u r a b le s ) i s a lr e a d y r is in g r a p id ly . B u t
p e r s o n a l s a v in g s a r e a ls o s tr o n g . G iv e n th e w e a k n e s s o f s p e n d in g o n h o u s in g ,
t h e d e m a n d f o r m o r t g a g e w i l l a ls o r e m a in s lu g g is h — in t h e f a c e o f s t r o n g flo w s
o f f u n d s t o s a v in g s a n d lo a n a s s o c ia t io n s a n d o t h e r in s t it u t io n s a c t iv e in th e
m o r t g a g e fie ld . T h u s , o n b a la n c e , I w o u ld n o t e x p e c t t h e h o u s e h o ld s e c t o r t o
e x e r t a g r e a t d e a l o f p r e s s u r e o n t h e c r e d it m a r k e t.
I n th e c a s e o f n o n fln a n c ia l c o r p o r a t io n s , c o r p o r a t e liq u id it y h a s b e e n r e s to r e d
t o a r e m a r k a b le d e g r e e . I n f a c t , th e s e fir m s h a v e e x p e r ie n c e d th e fa s t e s t
r e b u ild in g o f l i q u id it y s in c e t h e G r e a t D e p r e s s io n . I t n o w a p p e a r s t h a t n e w
is s u e s o f c o r p o r a t e b o n d s w i l l d r o p s h a r p ly in 1976 c o m p a r e d w it h t h e v o lu m e
s o ld a y e a r a g o . T h e r e a s o n s f o r t h is a r e a ls o q u ite c l e a r : th e y in c lu d e th e
s t r o n g e r in t e r n a l l i q u id it y p o s it io n o f th e b u s in e s s s e c t o r ; th e c o m p le tio n o f
n e a r -te r m d e b t r e s tr u c t u r in g , a n d a c a u t io u s a t t it u d e o n t h e p a r t o f c o r p o r a t e
e x e c u t iv e s t o w a r d t h e e x p a n s io n o f s p e n d in g o n p la n t a n d eq u ip m e n t. H o w e v e r ,
t h e d e m a n d f o r fu n d s t o fin a n c e a r e v iv a l o f in v e s t m e n t o u t la y s w ill b o o s t
b o n d fin a n c in g in 1977.
i n t h e s h o r t -t e r m s e c to r , c o r p o r a t e d e m a n d f o r c o m m e r c ia l b a n k c r e d it w ill
r e m a in w e a k t h r o u g h m o s t o f t h is y e a r . I n f a c t , e v e n w it h t h e r e b u ild in g o f
in v e n t o r ie s t h a t i s c le a r ly u n d e r w a y , c o m m e r c ia l b a n k le n d in g t o b u s in e s s
p r o b a b ly w i l l n o t e x p a n d v e r y m u ch . I n s te a d , fir m s w i ll p r o b a b ly r e ly m o r e
h e a v ily o n th e c o m m e r c ia l p a p e r m a r k e t a s a s o u r c e o f fu n d s . T h e h ig h p rim e
r a t e w h ic h c o m m e r c ia l b a n k s c h a r g e e v e n t h e ir b e s t c u s t o m e r s — c o m p a r e d w it h
r a t e s o b t a in a b le in t h e c o m m e r c ia l p a p e r m a r k e t — w i ll p r o v id e a s t r o n g in ­
c e n t iv e f o r b u s in e s s e s t o se e k a lt e r n a t iv e s t o b o r r o w i n g f r o m c o m m e r c ia l b a n k s.
O f c o u r s e , c o m m e r c ia l b a n k s in t u r n h a v e a n in c e n t iv e t o m a in t a in a s w id e a
m a r g in a s p o s s ib le b e t w e e n t h e c o s t o f m o n e y t o t h e m a n d th e r a t e s t h e y c a n
g e t o n lo a n s . T h e d iffe r e n t ia l is a m a jo r s o u r c e u p o n w h ic h th e y a r e c u r r e n t ly
r e ly in g t o r e b u ild t h e ir o w n e q u it y c a p ita l.
OBJECTIVES 6F M ONETARY POLICY

F o r a b o u t a y e a r n o w th e F e d e r a l O p e n M a r k e t C o m m it te e (F O M C ) h a s
b e e n m a k in g p u b lic it s lo n g -r a n g e t a r g e t s f o r t h e g r o w t h o f t h e m o n e ta r y
a g g r e g a te s . I n t h e r e c o r d o f p o l i c y a c t io n s t a k e n a t e a c h o f it s m o n t h ly m e e t­
in g s , t h e s h o r t -r u n t a r g e t s a r e a ls o se t fo r t h . T h e t a r g e t s a d o p te d a t th e F O M C
m e e tin g o f F e b r u a r y 1 7 -1 8 , 19 76 (t h e l a s t m e e t in g f o r w h ic h th e p o lic y r e c o r d
h a s b e e n m a d e p u b l i c ) a r e s u m m a r iz e d b e lo w .




44
L o n g -T e r m T a r g e t s : F o u r t h Q u a r te r , 1 9 7 5 -F o u r t h Q u a r te r , 1976
M i— 4 % - 7 % p e rc e n t.
Mz— 7 % ~ 1 0 % p e r c e n t
Ms—*9-12 p e r c e n t
S h o r t -T e r m T a r g e t s : F e b r u a r y -M a r c h , 1976
M i— 5 - 9 p e r c e n t
M 2 9 -1 3 p ercen t
—
R P D — % - 4 % p ercen t
F ed eral F u n ds— 4 % -5 % p ercen t
I n T a b le 2, t h e b e h a v io r o f t h e m o n e t a r y a n d r e s e r v e a g g r e g a t e s t h r o u g h
A p r il 2 1 i s a l s o s h o w n . S e v e r a l fe a t u r e s o f th e s e d a t a s h o u ld b e n o t e d . A s o f
m id -A p r il, t h e n a r r o w l y d e fin e d m o n e y s t o c k ( M i ) s h o w e d a t w o -m o n t h s e a s o n ­
a lly a d ju s t e d r a t e o f g r o w t h o f 7.1 p e r c e n t O v e r t h e l a s t q u a r t e r , t h e r a t e
g r e w a t a n a n n u a l r a t e o f 6.8 p e r c e n t — a b o u t t h e m id -p o in t o f t h e r a n g e s e t
a s a lo n g -r u n t a r g e t . I t w a s a ls o in th e b o u n d a r ie s e s t a b lis h e d f o r t h e F e b r u a r y M a r c h p e r io d . T h e g r o w t h r a t e f o r t h e m o r e b r o a d ly b a s e d m o n e y s t o c k ( M 2)
w a s 10 p e r c e n t o v e r t h e l a s t t w o m o n th s — a ls o w it h in t h e la t e s t l im i t s e t b y
t h e F O M C . T h e a c c e le r a t e d e x p a n s io n in th e m o n e y s u p p ly o v e r t h e l a s t m o n t h
h a s c a u s e d a g r e a t d e a l o f n e r v o u s n e s s in t h e m o n e y m a r k e t. O b s e r v in g t h e
s h a r p r is e , a n u m b e r o f m a r k e t p a r t ic ip a n t s c o n c lu d e d — i n c o r r e c t ly in m y
o p in io n — t h a t t h e F e d e r a l R e s e r v e w o u ld s h i f t it s p o lic y a n d b e g in t o e x e r t a
s ig n ific a n t d e g r e e o f m o n e t a r y r e s tr a in t. R e fle c t in g t h is c o n c lu s io n , s h o r t -t e r m
in t e r e s t r a t e s b e g a n t o m o v e u p n o t ic e a b ly t o w a r d th e e n d o f t h e t h ir d w e e k in
A p r il. H o w e v e r , g iv e n th e u n d e r ly in g c o n d it io n s in t h e e c o n o m y , t h e r e a p p e a r s
t o b e n o o b v io u s r e a s o n w h y t h e F e d e r a l R e s e r v e s h o u ld a d o p t a r e s t r ic t iv e
m o n e t a r y p o l i c y a t t h is tim e .
I n T a b le 3, t h e r e c e n t b e h a v io r a n d o u t lo o k f o r s e le c te d in t e r e s t r a t e s a r e
su m m a r iz e d . S e v e r a l c o m m e n t s a r e in o r d e r . T h e fe d e r a l fu n d s r a t e (u s e d
a s a g u id e b y t h e F e d e r a l R e s e r v e in it s d a y -t o -d a y c o n d u c t o f o p e n m a r k e t
o p e r a t io n s ) w a s in t h e n e ig h b o r h o o d o f 4 .8 p e r c e n t o n A p r il 22. T h is w a s
s lig h t ly a b o v e t h e m id p o in t o f t h e 4 % t o 5 % p e r c e n t r a n g e w it h in w h ic h t h e
c e n t r a l b a n k h a s b e e n a im in g — a c c o r d i n g t o t h e la t e s t p u b lis h e d F O M C p o l ic y
r e c o r d . A s t h e m o n e t a r y a g g r e g a t e s g r e w s h a r p ly a s A p r il u n fo ld e d , a n u m b e r
o f m a r k e t o b s e r v e r s b e g a n t o a n t ic ip a t e a n i n c r e a s e in th e F e d e r a l R e s e r v e ’s
fe d e r a l f u n d s t a r g e t ra te . H o w e v e r , a s e x p la in e d a b o v e , t h e o b je c t iv e e c o n o m ic
c ir c u m s t a n c e s w o u ld n o t ju s t i f y s u c h a m o v e .
T h r o u g h t h e t h ir d w e e k in A p r il, h ig h -g r a d e in d u s t r ia l b o n d s d e c lin e d
s h a r p ly — w h il e u t i l i t y b o n d y ie ld s r e m a in e d e s s e n t ia lly u n c h a n g e d . T h e s a m e
w a s t r u e o f y ie ld s o n t a x e x e m p t o b lig a t io n s . A s f e a r s o f a n e a r ly r e t u r n t o
m o n e t a r y r e s t r a in t s p e r m e a t e d t h e m a r k e t, b o n d y ie ld s a ls o r o s e s o m e w h a t
D e s p ite t h e s e r e c e n t g y r a t i o n s i n in t e r e s t r a t e s , t h e p r o s p e c t iv e p e r f o r m a n c e
o f th e n a t io n ’ s e c o n o m y s u g g e s t s t h a t o n e s h o u ld n o t e x p e c t t h e F e d e r a l R e s e r v e
t o a d o p t a s ig n ific a n t ly r e s t r i c t i v e m o n e t a r y p o l i c y in t h e n e a r fu t u r e . I n s te a d ,
i t a p p e a r s t h a t in t e r e s t r a t e s h a v e r e a c h e d t h e l o w p o i n t d u r in g t h e c u r r e n t
b u s in e s s c y c le . F r o m n o w o n , w e s h o u ld a n t ic ip a t e a r a t h e r g e n t le u p t r e n d in
in t e r e s t r a t e s t h r o u g h th e s u m m e r o f 1976. A s t h e d e m a n d f o r fu n d s r is e s la t e r
in t h e y e a r , w e s h o u ld a ls o e x p e c t a s o m e w h a t m o r e n o t ic e a b le r is e in s h o r t ­
te rm in t e r e s t r a t e s . T h e u p t r e n d w ill p r o b a b ly c o n t in u e t h r o u g h m id -1 9 7 7 .
T h is o u t lo o k f o r in t e r e s t r a t e s i s c le a r ly w h a t o n e s h o u ld a n t ic ip a t e d u r in g
a p e r io d o f e c o n o m ic r e c o v e r y . G iv e n th e F e d e r a l R e s e r v e ’s c o n c e r n f o r in fla ­
t io n — a c o n c e r n w h ic h a l l o f u s s h o u ld s h a r e — i t w o u ld b e u n w is e f o r th e
c e n t r a l b a n k t o s e e k t o p r e v e n t t h e k in d o f u p t r e n d in in t e r e s t r a t e s w h ic h
a n e x p a n d in g e c o n o m y c a n b e e x p e c t e d t o g e n e r a te .
CONGRESSIONAL ASSE SSM E N T OF M ONETARY POLICT

A t t h is p o in t , I w a n t t o f o c u s o n w a y s in w h ic h th e C o n g r e s s c a n im p r o v e
it s m o n it o r in g o f m o n e t a r y p o lic y . T o t h is e n d , t h e f o l l o w i n g s t e p s s h o u ld b e
ta k en :
1. A j o i n t H o u s e -S e n a te s t a ff s h o u ld b e e s t a b lis h e d t o a s s e s s a n d m o n it o r
F e d e r a l R e s e r v e m o n e t a r y p o lic y .
2. T h e F e d e r a l R e s e r v e s h o u ld b e r e q u ir e d t o s u b m it it s A n n u a l R e n o r t t o
C o n g r e s s b y a p p r o x im a t e ly t h e s a m e p e r io d s e t f o r t h e P r e s id e n t ’ s B u d g e t
M e s s a g e a n d A n n u a l E c o n o m ic R e p o r t .




45
3. A s a b a s is f o r C o n g r e s s io n a l h e a r in g s , t h e F e d e r a l R e s e r v e B o a r d s h o u ld
b e r e q u ir e d t o d o th e f o l l o w i n g :
( a ) P r e s e n t a r e v ie w o f i t s p e r f o r m a n c e c o m p a r e d w i t h t h e m o n e t a r y p o li c y
o b je c t i v e s it h a d s e t f o r i t s e l f th e p r e v io u s y e a r .
( b ) P r e s e n t a p r o je c t i o n o f t h e t a r g e t s f o r t h e m o n e t a r y a g g r e g a t e s a d o p t e d
b y th e F O M C f o r th e c o m in g y e a r .
4 . T a k in g th e F O M C ’s t a r g e t s a s given, t h e F e d e r a l R e s e r v e B o a r d ’ s s t a ff
s h o u ld b e r e q u ir e d to p e r f o r m th e f o l l o w i n g t a s k s :
( a ) D e v e lo p p r o je c t io n s (o n e y e a r a h e a d ) o f o u t p u t , e m p lo y m e n t , u n e m p lo y ­
m e n t, a n d p r ic e s implied b y t h e m o n e t a r y p o l i c y t h e F O M C h a s a d o p t e d .
( b ) P r o j e c t th e flo w s o f fu n d s i n m a jo r s e c t o r s o f t h e e c o n o m y , implied b y
t h e s t a ff’s fo r e c a s t .
( c ) D is c u s s t h e range a n d configuration o f in t e r e s t r a t e s implied b y t h e
s t a ff’ s p r o je c t io n s .
( d ) T h is e ff o r t s h o u ld r e s u lt i n a s t a f f r e p o r t t o a c c o m p a n y t h e B o a r d ’ s
r e p o r t t o C o n g re ss.
5. O n th e b a s is o f th e F O M C ’s m o n e t a r y p o l i c y t a r g e t s a n d t h e F e d e r a l
R e s e r v e B o a r d ’s s t a ff r e p o r t , t h e j o i n t H o u s e -S e n a t e s t a f f s h o u ld p r o v i d e it s
own a s s e s s m e n t o f m a te r ia l s u b m it t e d b y t h e F e d e r a l R e s e r v e .
6. I n m a k in g it s a s s e ssm e n t, t h e C o n g r e s s io n a l s t a f f s h o u ld in t e r v ie w in
person e a c h M e m b e r o f F O M C .
E a c h o f th e s e r e c o m m e n d a t io n s c a n b e a m p lifie d fu r t h e r .
Joint House-Senate Staff.— M e m b e r s o f C o n g r e s s s e r v i n g o n t h e b a n k in g
c o m m itt e e s w h ic h o v e r s e e th e F e d e r a l R e s e r v e S y s t e m ( a s w e l l a s m e m b e r s
o f t h e J o in t E c o n o m ic C o m m it t e e ) s h o u ld h a v e a p r o f e s s i o n a l s t a f f w it h t h e
r e s o u r c e s a n d t e c h n ic a l c a p a c it y t o m o n i t o r m o n e t a r y p o l ic y . I n e s t a b lis h in g
th e C o n g r e s s io n a l B u d g e t O ffice, C o n g r e s s t o o k a v i t a l — a n d lo n g -n e e d e d — s t e p
t o e q u ip i t s e l f t o u n d e r s t a n d a n d c o n t r o l t h e b u d g e t o f t h e U n it e d S ta te s . N o
lo n g e r i s th e C o n g r e s s h e a v ily d e p e n d e n t o n i n f o r m a t io n a n d a n a ly s e s s u b ­
m it t e d b y t h e E x e c u t iv e B r a n c h o f t h e F e d e r a l G o v e r n m e n t . S u c h a m o v e i s
a ls o n e e d e d in t h e c a s e o f m o n e t a r y p o lic y . A s m a t t e r s s t a n d n o w , t h e g a p
b e t w e e n th e C o n g r e s s a n d t h e F e d e r a l R e s e r v e w i t h r e s p e c t t o s t a f f r e s o u r c e s
a n d t e c h n ic a l c a p a c it y i s w id e in d e e d . S te p s o u g h t t o b e t a k e n p r o m p t ly t o
n a r r o w t h e m a r g in . T o so m e e x te n t, t h e p r e s e n t s t a ff s a r e a b le t o p e r f o r m t h is
ta s k . H o w e v e r , a s ig n ific a n t a m o u n t o f s t r e n g t h e n in g is a ls o n e e d e d .
Federal Reserve's Annual Report .— T h e A n n u a l R e p o r t o f t h e F e d e r a l R e ­
s e r v e B o a r d s h o u ld r e a c h th e C o n g r e s s d u r in g t h e s a m e p e r io d i n w h ic h t h e
P r e s id e n t ’ s B u d g e t M e s s a g e a n d E c o n o m i c R e p o r t a r e s u b m it t e d . T h e C o n g r e s s
n e e d s t o h a v e a ll t h r e e d o c u m e n ts i n h a n d b e f o r e i t c a n m a k e i n f o r m e d ju d g e ­
m e n t s w i t h r e s p e c t t o t h e r e q u ir e m e n t s o f n a t i o n a l e c o n o m ic p o l ic y . C u r r e n t ly
t h e B u d g e t M e s s a g e a n d E c o n o m ic R e p o r t a r e n o r m a ll y a v a i la b l e b y m id F eb ru a ry . H ow ever, it m ay b e A p r il o r M a y b e fo r e th e F e d e r a l R e s e r v e ’s
A n n u a l R e p o r t i s s u b m itte d t o C o n g r e s s . I f t h e B o a r d ’ s e n t ir e R e p o r t i s n o t
a v a ila b le e a r ly in th e y e a r , a d e t a ile d a c c o u n t i n g o f i t s c o n d u c t o f m o n e t a r y
p o lic y a n d a g e n e r a l s ta te m e n t o f it s p la n s f o r t h e y e a r a h e a d s h o u ld b e
p r o v id e d .
Statement of Monetary Policy Objectives.— F o r t h e la s t y e a r — in r e s p o n s e
t o C o n g r e s s io n a l m a n d a te — t h e C h a ir m a n o f t h e F e d e r a l R e s e r v e B o a r d h a s
b e e n a p p e a r in g a t s ix -m o n t h in t e r v a l s b e f o r e e a c h o f t h e C o n g r e s s io n a l o v e r ­
s ig h t c o m m itt e e s t o e x p la in t h e S y s te m ’ s c o n d u c t o f m o n e t a r y p o lic y . O n t h e s e
o c c a s io n s , h e h a s p r e s e n te d t h e r a n g e o f t a r g e t s s e t b y t h e F O M C f o r t h e
g r o w t h o f s e le c te d m o n e t a r y a g g r e g a t e s f o r f o u r q u a r t e r s a h e a d . T h e s e p e r io d i c
r e p o r t s c o n t a in a g r e a t d e a l o f i n f o r m a t i o n o n fin a n c ia l d e v e lo p m e n t s a n d
th e p e r f o r m a n c e o f t h e e c o n o m y in r e c e n t q u a r t e r s . ( A q u a r t e r ly r e p o r t p r e ­
p a r e d b y th e B o a r d ’ s s t a ff a n d p r e s e n t e d t o C o n g r e s s c o n t a in s a n e v e n g r e a t e r
a m o u n t o f h is t o r ic a l d a t a .)
Y e t, th e r e is l i t t l e o r n o e x p r e s s io n o f t h e e x p e c t a t i o n s h e ld b y t h e F e d e r a l
R e s e r v e B o a r d o r th e F O M C w i t h r e s p e c t t o t h e e c o n o m i c o u t l o o k a n d p r o s ­
p e c t iv e fin a n c ia l d e v e lo p m e n ts . T h is d e fic ie n c y s h o u ld b e r e m e d ie d .
T o a c c o m p lis h t h is e n d , I p r o p o s e t h e f o l l o w i n g :
1.
W h e n th e C h a ir m a n o f th e F e d e r a l R e s e r v e B o a r d a p p e a r s b e f o r e C o n g r e s s
e a r ly in t h e y e a r , h e s h o u ld p r e s e n t a r e v ie w o f t h e F O M C ’ s p e r f o r m a n c e w it h
r e g a r d t o th e m o n e t a r y p o lic y o b j e c t i v e s i t h a d s e t f o r i t s e l f t h e p r e v io u s
y e a r . A f u l l e x p la n a t io n s h o u ld b e g iv e n f o r a n y s ig n if ic a n t d e v i a t io n o f r e s u lt s
f r o m s t a t e d g o a ls .
7 2 - 3 9 0 — 7 6 --------4




46
2. T h e C h a ir m a n s h o u ld a l s o p r e s e n t a p r o je c t io n o f t h e t a r g e t s f o r th e
m o n e t a r y a g g r e g a t e s a d o p t e d b y t h e F O M C f o r t h e c o m in g y e a r . T h e s e a g g r e ­
g a t e s s h o u ld in c lu d e s o m e m e a s u r e o f b a n k c r e d it a s w e ll a s o f t h e m o n e y
s u p p ly , h o w e v e r n a r r o w l y ( M i ) o r b r o a d ly (M 2) d efin ed . A l o n g w i t h t h is
p r o je c t i o n , t h e C h a ir m a n s h o u ld b e a s k e d t o p r o v id e — o n b e h a l f o f t h e F O M C
— a n e x p o s i t i o n o f t h e r e a s o n s w h y th e t a r g e t s a d o p te d a r e t h o u g h t t o b e
a d e q u a te .
3. T a k i n g t h e F O M C ’s t a r g e t s a s g iv e n , t h e F e d e r a l R e s e r v e B o a r d ’ s s t a ff
s h o u ld b e r e q u ir e d t o s p e ll o u t i n s o m e d e t a il t h e te c h n ic a l im p lic a t io n s o f th e
m o n e t a r y p o l i c y g o a l s a d o p t e d b y t h e F O M C . T h e B o a r d ’ s s t a ff s h o u ld c o n ­
c e n t r a t e o n w o r k i n g o u t t h e e c o n o m i c a n d fin a n c ia l c o n s e q u e n c e s w h ic h m ig h t
b e e x p e c t e d t o f o l l o w — i f t h e s t a t e d o b je c t iv e s w e r e to b e a c h ie v e d . T h is t a s k
s h o u ld in c lu d e p r o j e c t i o n s o f o u t p u t , e m p lo y m e n t /u n e m p lo y m e n t, a n d p r ic e s —
o n a q u a r t e r ly b a s is f o r a t l e a s t o n e f u l l y e a r . S p e c ific a lly , th e p r o j e c t i o n s h o u ld
in c lu d e m o s t o f t h e it e m s s h o w n i n T a b le 1 d e s c r ib in g th e e x p e c t e d b e h a v io r
o f t h e e c o n o m y i n r e a l t e r m s . I n a d d it io n , t h e s t a ff s h o u ld p r o j e c t th e flo w s o f
f u n d s (p e r h a p s o n a s e m i-a n n u a l b a s is ) t h r o u g h t h e m a jo r s e c t o r s o f th e
e c o n o m y w h ic h m a y b e a s s o c i a t e d w it h t h e c o n t o u r s o f e c o n o m ic a c t iv it y
s k e t c h e d b e lo w .
T h e s t a ff p r o j e c t i o n s d is c u s s e d h e r e a r e c u r r e n t ly b e in g d o n e . W h ile t h e
r e s u lt s a r e n o t m a d e p u b lic , e c o n o m is ts o u t s id e t h e F e d e r a l R e s e r v e a r e
t h o r o u g h ly f a m i l i a r w i t h t h e t e c h n iq u e s e m p lo y e d b y t h e B o a r d ’s s ta ff. I n
f a c t , m a n y f o r m e r s t a f f m e m b e r s h a v e b e e n e m p lo y e d b y p r iv a t e in s t it u t io n s
( s u c h a s b a n k s a n d b r o k e r a g e fir m s a s w e ll a s r e s e a r c h o r g a n iz a t io n s ) w it h
t h e s p e c ific p u r p o s e o f t r a c k i n g a n d in t e r p r e t in g F e d e r a l R e s e r v e a c t iv it y .
F i n a l l y , t h e B o a r d ’ s s t a ff s h o u ld d is c u s s th e r a n g e a n d c o n fig u r a t io n o f
in t e r e s t r a t e s i m p lie d b y t h e s t a f f ’ s p r o je c t io n s . T h is e ff o r t s h o u ld r e s u lt in a
s t a ff r e p o r t t o a c c o m p a n y t h e B o a r d ’s R e p o r t t o C o n g re ss.
H e r e i t m u s t b e e m p h a s iz e d a g a in t h a t th e B o a r d ’ s s t a ff is b e in g a s k e d t o
u n d e r t a k e a t e c h n i c a l a n d p r o f e s s i o n a l a s s ig n m e n t. T h e y a r e n o t b e in g a s k e d
t o m a k e in d e p e n d e n t ju d g m e n t s r e g a r d in g th e p r o p e r r o le o f m o n e t a r y p o lic y .
S o m e o b s e r v e r s m ig h t a r g u e t h a t i t i s d iffic u lt— i f n o t im p o s s ib le — t o d is t in g u is h
b e t w e e n t h e s t a ff’ s a n a ly s is o f t h e c o n s e q u e n c e s o f p o lic y d e c is io n s a n d th e
g i v i n g o f p o l i c y a d v ic e . I w o u ld n o t a c c e p t s u ch a n a r g u m e n t. T h e e x c e lle n t
p e r f o r m a n c e o f t h e s t a f f o f t h e C o n g r e s s io n a l B u d g e t O ffice in t h is r e g a r d
p r o v id e s c o n v i n c i n g e v id e n c e t h a t i t c a n b e d o n e . I t m ig h t a ls o b e a r g u e d t h a t
t h e s t a ff’ s a n a ly s is a n d c o n c lu s io n s w ill b e ta k e n a s p r o x ie s f o r t h e ju d g m e n t s
a n d e x p e c t a t io n s o f t h e F O M C i t s e l f . I r e c o g n iz e t h is risk , b u t I b e lie v e i t is
w o r t h t a k in g .
A f t e r a ll, t h e F e d e r a l R e s e r v e S y s te m d o e s sh a r e — on a d e le g a te d b a s is —
t h e C o n s t it u t io n a l a u t h o r i t y g iv e n t o C o n g r e s s t o “ c o in m o n e y a n d r e g u la t e th e
v a lu e t h e r e o f .” T h u s , t h e C o n g r e s s m u s t lo o k to th e F e d e r a l R e s e r v e f o r g u id ­
a n c e a s t o t h e g e n e r a l c o n s e q u e n c e s w h ic h m ig h t b e e x p e c t e d t o f o l l o w f r o m
t h e B o a r d ’ s e x e r c i s e o f t h a t s h a r e d r e s p o n s ib ilit y . S in c e t h e B o a r d a n d th e
F O M C a r e r e lu c t a n t t o e n g a g e p u b lic ly in e c o n o m ic fo r e c a s t in g , i t s h o u ld b e
w i l li n g t o h a v e t h e s t a f f p r e s e n t it s p r o fe s s io n a l ju d g m e n ts .
4. O n c e t h e C o n g r e s s h a s r e c e iv e d th e F O M C ’ s p r o je c t io n o f it s m o n e t a r y
p o li c y t a r g e t s — a lo n g w i t h t h e F e d e r a l R e s e r v e B o a r d ’ s s t a ff r e p o r t — t h e jo i n t
H o u s e -S e n a t e s t a ff ( w h o s e e s t a b lis h m e n t is r e c o m m e n d e d ) s h o u ld p r o v id e f o r
t h e C o n g r e s s a n in d e p e n d e n t a s s e s s m e n t o f th e m a te r ia l s u b m itte d . S in c e th e
C o n g r e s s io n a l s t a f f w o u ld h a v e b e e n m o n it o r in g m o n e ta r y p o lic y in a n y c a se ,
i t s h o u ld b e a b le t o p e r f o r m t h is a ss e s s m e n t w it h o u t m u c h d e la y . I n m a k in g
it s a s s e s s m e n t , t h e C o n g r e s s io n a l s t a ff s h o u ld in t e r v ie w in p e r s o n e a c h M e m b e r
o f t h e F O M C . T h e s e v i e w s o f in d iv id u a l M e m b e rs w o u ld t h e n b e a p a r t o f t h e
r e c o r d a v a i l a b l e t o t h e C o n g r e s s w h e n i t u n d e r t a k e s it s o w n r e v ie w o f t h e
a d e q u a c y o f m o n e t a r y p o lic y .
CONCLUDING OBSERVATIONS

I r e a liz e t h a t t h e r e p o r t in g a n d m o n it o r in g p r o c e d u r e s s k e tc h e d h e r e r e p r e s e n t
s h a r p d iv e r g e n c ie s f r o m c u r r e n t p r a c t ic e . O n th e o t h e r h a n d , I b e lie v e t h e
C o n g r e s s n e e d s a b e t t e r w a y t o k e e p t r a c k o f th e F e d e r a l R e s e r v e ’ s im p le m e n ­
t a t io n o f m o n e t a r y p o l i c y a n d t o ju d g e th e e x te n t t o w h ic h t h a t p o li c y i s c o n ­
s is t e n t w i t h t h e n a t i o n ’ s o v e r a ll e c o n o m ic g o a ls ; I n m y o p in io n , t h e C o n g r e s s
is n o t b e in g s e r v e d w e ll b y t h e c u r r e n t a r r a n g e m e n t s u n d e r w h ic h th e F e d e r a l




47
R e s e r v e p r o je c t s f a i r l y b r o a d r a n g e s f o r t h e g r o w t h r a t e s o f a f e w m o n e t a r y
a g g r e g a te s . S in c e th e se p r o je c t io n s a r e n o t a c c o m p a n ie d b y a s y s t e m a t ic e x p o ­
s it io n o f th e re a s o n s w h y th e F e d e r a l R e s e r v e b e lie v e s th e i n d ic a t e d t a r g e t s
a r e a p p r o p r ia te , th e C o n g r e ss h a s n o r e a l b a s is f o r ju d g i n g t h e e ffic a c y o f
m o n e t a r y p o lic y . M o re o v e r , th e F e d e r a l R e s e r v e — a lo n g w it h th e C o n g r e s s —
o u g h t to b e c o n c e r n e d a b o u t th e im p a c t o f it s p o lic ie s o n a r a n g e o f e c o n o m ic
v a r ia b le s e x te n d in g w e ll b e y o n d a n a r r a y o f m o n e t a r y a g g r e g a te s . T h e r e s h o u ld
b e a n e q u a l a m o u n t— i f n o t m o r e — o f in t e r e s t in th e p r o s p e c t iv e b e h a v io r o f
o u tp u t a n d e m p lo y m e n t a s wT ll a s p r ic e s . A f t e r a ll, it is o n t h e t r e n d o f th e se
e
fa c t o r s t h a t o u r tru e e c o n o m ic w e ll-b e in g d e p e n d s .




TAB 1.—D
LE
ATA R S U C S F R C ST O T E U E O O Y
EO RE O E A
F H .S. C N M
[In billion of dollars—SAAR
s
]
1977

1976
1

II

III

IV

1

Years
III

IV

1976

1977

1978

1,191.9
194.9
81.8
16.7
15.1
145.5
250.9
1,898.2
1, 340.7

1, 219.8
203.0
83.3
16.9
15.2
149.4
256.8
1,946.0
1,354.6

1,067.3
164.5
63.4
11.8
12.0
135.9
226.5
1,682.8
1,261.4

1,177.6
190.9
79.5
17.0
14.4
145.2
248.0
1, 874.1
1,331.9

1,274.9
217.3
81.9
9.1
22.5
153.9
271.7
2,032.8
1,368.9

6.0
6.1
5.6
6.0
7.1

5.6
5.8
5.5
4.0
7.7

5.5
5.5
5.2
5.5
7.8

5.6
5.6
5.4
5.4
7.0

1.382
4.9
1.816
11.5
6.0
-37.1

1.246
9.8
1.568
10.7
7.2
-68.2

1.354
8.7
1.847
11.4
6.3
-43.7

1.389
2.6
1.691
10.8
6.1
-34.9

1
1

GNPand its com
ponents
T
otal consum
ption------- ---------------------- _________
B
usiness fixed investm
ent_____________ _________
R
esidential construction------- --------------- _________
Inventory investm
ent------ ------------------- _________
N exports-------------------------------------- _________
et
__________
Total Federal____________________
State and local___________ ___________ _________
G
ross n
ational product------------------------ _________
R G P (1972 dollars)_______________ _________
eal N

1, 026.4
157.4
57.0
9.5
11.1
132.1
219.3
1,614.3
1,233.9

1,054.4
161.7
61.1
9.5
12.4
134.7
223.9
1,659.3
1,252.2

1,080.7
166.6
65.5
12.4
12.3
136.4
228.8
1, 704.1
1, 270.6

1,107.6
172.2
69.8
15.9
12.1
140.5
233.9
1,753.4
1, 289.0

4.7
5.5
4.4
-1 .4
6.7

5.3
5.3
4.5
2.0
7.4

4.9
4.9
4.7
5.0
8.0

5.8
5.9
5.2
5.2
8.3

1.202
9.2
1.399
10.3
7.6
-76.1

1.230
9.8
1.504
10.5
7.3
-74.8

1.258
9.3
1.645
10.8
7.1
-64.4

1.293
11.6
1.725
11.0
6.9
-57.4

1,134.7
179.1
74.4
17.7
13.1
141.9
239.3
1,801.7
1,307.3

1,164.0
186.7
78.6
16.8
14.2
143.8
245.0
1, 850.6
1,324.9

P
rices and w
ages—A
nnual rates of change
Im
plicit p
rice deflator--------------- -------F
ixed w
eight deflator-----------------------Consum price index.......... ............ ...
er
W
holesale price index----------------------Adjusted average hourly earnings index..

5.4
5.4
5.2
5.7
8.0

5.5
5.6
5.4
6.1
7.7

5.6
5.6
5.6
6.4
7.4

P
rodu
ction and other key m
easures
Industrial production (67-1)...
Annual rate of change.............
H
ousing starts (m
illion units)..
R
etail unit car sales—total----U ploym rate (percent)..
nem
ent
F
ederal budget surplus (NIA)_.




1.322
9.3
1.840
11.1
6.6
-51.3

1.346
7.4
1.852
11.3
6.4
-47.1

1.365
5.9
1.879
11.6
6.2
-39.5

CO

Money and interest rates

M
oney supply (Ml)______________________
Annual rate of change____________________
N AA corporation u
ew
tility rate (percent)____
N high-grade corporate bon rate (percent)..
ew
d
Federal funds rate (percent)_______________
Prim rate (percent)_____________________
e

8.35
4.82
6.82

301.4
6.4
8.63
8.30
5.09
6.92

306.8
7.3
8.69
8.37
5.39
7.04

313.6
9.1
8.78
8.49
5.76
7.15

319.0
7.1
8.89
8.58

1, 326.6
880.0
8.0
136.4
83.0
39.3

1,366.1
895.1
8.2
142.8
86.9
30.6

1,400.3
902.9
7.8
153.1
93.2
18.3

1, 439.1
913.3
7.7
161.2
98.1
21.7

1,475.4
925.7
7.8
166.1
101.1
21.8

6.0
5.8
7.6
9.0
4.9
14.4
-14.0
17.2
0.6
2.5

6.1
6.4
4.8
5.6
3.2
21.7
6.4
6.6
5.3
2.4

6.0
5.4
6.6
7.8
4.3
21.3
8.6
9.3
3.1
2.2

5.9
5.1
8.0
9.5
5.0
19.2
9.9
9.7
0.5
2.3

296.8
2.9

86
.8

6.20

7.35

324.6
7.2
9.08
8.76
6.89
7.82

330.8
7.9
9.29
8.96
7.44
8.19

337.4

9.39
9.05
7.86
8.56

304.7
5.2
8.74
8.38
5.27
6.98

328.0
7.6
9.16
8.84
7.10
7.98

350.8
7.0
8.98
8.65
6.59
7.73

1,559.3
949.1
7.9
175.1
106.6
14.4

1,603.6
961.1
8.1
175.4
106.8
8.8

1,383.0
897.8
7.9
148.4
90.3
26.5

1, 538.8
943.8
8.0
171.9
104.6
15.8

1,681.7
975.4
8.2
172.2
104.9
0.2

4.2
4.3
11.2
15.2
2.3
0.7
8.5
9.0
—0.4
2.6

6.4
5.3
4.2
4.5
3.3
24.1
2.8
12.0
3.5
2.9

5.6
5.1
9.7
12.8
3.5
16.6
9.2
10.1
2.1
2.4

2.8
3.1
8.0
10.9
1.5
-3 .4
7.0
6.0
1.4
2.5

8.1

Incom
es
P
ersonal incom
e____________
R l disposable incom
ea
e______
Saving rate (percent)________
P
rofits before tax___________
P
rofits after tax_____________
F rth quarter percent change.
ou

1, 516.7
939.2
7.9
170.9
104.1
19.7

D
etails of real G P—Annual rates of change
N
G
ross n
ational product____
Total consum
ption________
B
usiness fixed investment..
Equipm
ent______________
N
onresidential construction..
R
esidential construction___
Exports________________
Im
ports________________
F
ederal Governm
ent______
State and local__________
Source: D R
ata esources, Inc.




5.8
5.0
10.6
13.9
4.1
20.4
9.9
11.0
1.7
2.5

5.5
5.5
11.7
16.5
2.2
15.5
9.4
11.5
3.4
2.6

4.8
4.5
12.3
17.1
2.4
9.3
8.7
9.8
2.0
2.5

CD

50
TABLE 2.—M N
O ETARY AND R SE V A G E A E R C N G O T R T S—PERCENT
E R E G R G T S E E T R WH A E
[Seasonally Adjusted A
nnual R
ates]
Last
m
onth

Last 8
w
eeks

L 13
ast
w
eeks

Last 26
weeks

Last 52
w
eeks

9.3
10.8
2.6

7.1
10.0
1.7

6.3
12.1
1.5

4.6
9.7
4.0

5.3
9.6
3.2

2.0
4.8
5.4
2.6

Category

-.4
8.0
7.2

-4 .5
-6 .1
9.6
8.8

-3 .5
-5 .1
7.8
8.5

-3 .0
-3 .6
7.2
7.5

M
onetary aggregates as of Apr. 14,1976:

M l___ ________ ______ ______
M2....................................

Adjusted bank credit proxy...............
R
eserve aggregates as of Apr. 14,1976:
N borrow reserves 2....................
on
ed
RPD's2__.........................................
M
onetary base..................................
Federal R
eserve C
redit......................

1 Percent change, sim annual rates: 4-week average ending on date indicated from 4-week average ending at the
ple
earlier period.
2U
nadjusted for changes in reserve requirem
ents.
Source: Calculated by D R
ata esources, Inc., from Federal R
eserve System data.
TABLE 3.—SE C D IN R ST R T S R C N B H V R A D O T O K
LE TE
TE E
A E E E T E A IO N U L O
[In percent]
Latest quote: 4-week average 4-week average
Thurs.,
ending W
ed..
ending W
ed.,
Apr. 22,1976
Apr. 21,1976
M 24,1976
ar.

Forecast
3d quarter.
19 (3
7

Short-term rates:
F
ederal funds...........................................
Treasury bills (3 mo)................................
Com ercial paper (90-110 d)............ ........
m
C
ertificates of deposit (3 mo).....................
Euro-dollars (3 mo)...................................
Com ercial bank prim loans....................
m
e
Long-term rates:
N issues of high-grade corporate bonds:
ew
AAA E
quiv. Ind..................................
AA utility..........................................
M
unicipals (bond buyer index)...................
U G
.S. overnm securities (10 yr or more)..
ent
U.S. G
overnm agencies (10 yr or more)...
ent

4.81
4.75
5.19
5.00
5.29
6.75

4.78
4.86
5.11
5.13
5.39
6.75

4.84
5.02
5.27
5.35
5.60
6.75

5.39
5.44
5.71
5.81
5.81
7.04

8.09
8.73
6.55
6.59
7.77

8.08
8.77
6.16
6.70
7.94

8. 51
8.92
6.92

8.37
8.69
6.74

6.86
7.87

Source: D Resources, Inc.
ata
D r . O ’L e a r y .
D r . O ’L e a r y . M r . C h a i r m a n , m a y I s a y f i r s t t h a t i s a g r e a t p r i v i ­
le g e t o h a v e th e o p p o r t u n it y t o a p p e a r h e re a n d a t th e r is k
b a r r a s s in g y o u , I

w a n t to say y ou

are d o in g

o f em ­

a g r e a t p u b lic s e r v ic e ,

b e i n g s o c l o s e t o t h i s w h o l e is s u e o f m o n e t a r y p o l i c y a n d t h e m a t t e r
o f g e t t in g a g o o d s u s ta in a b le g r o w t h in th e e c o n o m y c o n s is te n t w it h
r e d u c in g in fla t io n . T h i s is t o m y w a y o f t h in k in g t h e r e a l h e a r t o f
p u b lic p o lic y
jo b y o u

a n d it is g r e a t t o see s o m e o n e in y o u r s h o e s d o i n g t h e

a re d o in g .

I h a v e b e e n a s k e d b y th e s ta ff t o fo c u s m y re m a rk s o n th e in s titu ­
t io n a l s id e o f th e m o n e y a n d c a p ita l m a rk e ts a n d
B ut I

c a n ’t d o

th a t, o f

abou t F ed era l E eserve

c o u r s e , w it h o u t h a v in g

p o lic y , so

th a t

I

on

in t e r e s t ra te s .

s o m e th in g t o

w ill h a v e

som e

say

com m en ts

o n F e d e ra l E eserv e p o lic y too.
L e t m e sta rt. I
A n d d o it in
r u n n in g o n .
L et
sh ow s

m e say
th e

am

g o i n g t o s u m m a r iz e m y r a th e r le n g t h y p a p e r .

10 m in u te s o r

s o , d o n ’t b e w o r r i e d i f i t a p p e a r s I

fir s t t h a t w h a t h a s b e e n

e x tre m e

s e n s itiv ity

of

th e

h a p p e n in g
m oney

ana

in

th e

c a p ita l

am

la s t w e e k
m a rk e ts,

i n c l u d i n g t h e s t o c k m a r k e t , t o w h a t t h e F e d is d o i n g . T h e r e is t o d a y
in th e m o n e y c a p it a l m a r k e ts a se t o f e x p e c ta tio n s b a s e d o n w h a t h a s




51
h a p p e n e d in th e la s t 4 o r 5 y e a r s t h a t c o m m u n ic a te t o t h o s e m a r k e ts
in a m u c h la r g e r w a y e v e n a s m a ll a c t io n b y

th e F e d . I

th in k th is

is v e r y i m p o r t a n t t o r e c o g n i z e b e c a u s e in e f f e c t a m o v e b y t h e
to w a rd

a le s s a c c o m m o d a t in g

e ffe cts m a y b e a y e a r fr o m

p o lic y

now

is

d is c o u n t e d

out

to

F ed

w hat

its

in te r m s o f its im p a c t o n t h e m a r k e t.

S o , t h a t is a v e r y i m p o r t a n t i n g r e d i e n t i n

t h is w h o le p ic t u r e .

N o w , in p u t t in g t o g e t h e r m y fig u r e s o n s o u r c e s a n d u s e s o f f u n d s
o r m o n e y flo w s I m a d e c e r t a in
year. I

B r im m e r
fu n d s , I

a s s u m p tio n s a b o u t th e e c o n o m y t h is

lim ite d m y s e lf to th is y e a r . I
s a id

about

1977.

B ut

in

a g re e s tr o n g ly

m y

h a ve assu m ed th a t re a l G N P

6*4 p ercen t. T h a t m a y

tu rn

ou t to

w ith

w hat D r.

about

flo w s

t h is y e a r w ill in c r e a s e

be

it is n o t a b a d fig u r e t o w o r k w it h . I a m
r a t e f o r th e y e a r as a w h o le f a l ls in

a s s u m p tio n s
a

litt le

on

th e

lo w

of

about

s id e

but

a s s u m in g th e u n e m p lo y m e n t

th e ra n g e

o f 7 to

7 ^

p ercen t.

W e s t ill h a v e a r e la t iv e ly h ig h u n e m p lo y m e n t r a te , a n u n a c c e p t a b ily
h ig h u n e b ip lb y m e n t ra te . I a m
5 or 5%

a s s u m in g th e G N P

d e fla t o r in c r e a s e s

p e r c e n t f o r th e y e a r a s a w h o le o n t h e a v e r a g e b u t th a t it

is r is in g s o m e w h a t in

th e la tte r p a r t o f th e y e a r .

I n th e ca se o f m o n e y G N P , w h ic h a ffe c ts d e m a n d s f o r c r e d it , I a m
a s s u m in g c lo s e t o a 1 2 p e r c e n t in c r e a s e in m o n e y G N P . I a m

assum ­

in g c o r p o r a t e p r o fits w ill in c r e a s e a b o u t 2 6 p e r c e n t a f t e r t^ x e s . T h is
is im p o r t a n t in t e r m s o f c a s h f lo w

t o c o r p o r a t io n s a n d t h e ir n e e d t o

b o r r o w a n d s o f o r t h . I t is a n i m p o r t a n t i n g r e d ie n t in t h e p i c t u r e .
A f t e r I h a v e d o n e th e a n a ly s is I d id in m y s ta te m e n t o n s o u r c e s a n d
uses o f

fu n d s , I

a r r iv e d a t th e

fo llo w in g

I e x p e c t s h o r t ra te s th is y e a r t o
seen th e lo w

in s h o r t -t e r m

ra tes. F r o m

th e secon d h a lf o f th e y e a r, w e
w ill

be

up

about

1

fu ll

h ere on

w ill h a v e

o f s h o r t ra tes. I w o u ld e x p e c t b y
ra tes

c o n c lu s io n s .

r a is e g r a d u a lly . I

th in k

w e have

o u t, p a r tic u la r ly

a g r a d u a l, m o d e r a te

in

r is e

y e a r e n d th e g e n e r a l le v e l o f s h o rt

p ercen ta g e

T r e a s u r y b ills o r a n y o th e r s h o r t -t e r m

p o in t,

w h e th e r

you

ta k e

ra te.

I e x p e c t th e F e d t o m o v e t o w a r d a m o d e r a t e ly le s s a c c o m m o d a t iv e
c r e d it p o lic y a n d I th in k it s h o u ld . T h e F e d s h o u ld n o t m o v e v ig o r ­
o u s ly

th is y e a r t o w a r d

r e s tr a in t, b u t

ra th er

g r a d u a lly

and

m oder­

a t e ly . I t h in k t h a t is t h e p r o p e r p r e s c r i p t i o n .
I e x p e c t a s tr e n g th e n in g o f p r iv a t e lo a n d e m a n d , a lt h o u g h th e w a y
c o m m e r c ia l-in d u s t r ia l lo a n

dem and

at

th e

banks

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s ta y w e a k ca sts s o m e d o u b t o n s o m e o f th e fig u r e s I

c o n tin u e d

to

h a v e e s tim a te d

w it h m y u ses a n d s o u rc e s o f fu n d s . I m a y h a v e t o o la r g e a n in c r e a s e
in p r iv a t e lo a n d e m a n d .
I

a ls o e x p e c t, a n d o b v io u s ly

w e s h a ll h a v e a c o n t in u e d v e r y

v o lu m e o f G o v e r n m e n t fin a n c in g , m u c h
th e s h o r t-te r m m a rk e t.

la r g e

o f w h ic h w ill h a v e t o b e in

S o , in e ffe c t, I se e s h o r t -t e r m r a t e s r is in g m o d e r a t e ly a n d g r a d u a l l y
as a p r o d u c t o f th e

F ederal R eserve

p o lic y

and

as th e

p rod u ct

of

a n e x p a n d in g p r iv a t e lo a n d e m a n d a g a in s t a b a c k g r o u n d o f c o n t in u ­
in g

s e a s o n a l, v e r y

h e a v ily

G overn m en t

fin a n c in g

bu rd en ,

m u ch

of

w h i c h w i l l h a v e t o b e d o n e i n t h e s h o r t - t e r m a r e a . I d o n ’t t h i n k s h o r t
r a te s h a v e t o r is e v e r y m u c h . I t h in k t h e y s h o u ld n o t r is e v e r y m u c h .
I t h in k
ra tes.

it w o u ld b e u n fo r t u n a t e

if

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r is e

N o w , o n lo n g ra te s, I h a v e a ls o a n a ly z e d th e lo n g -t e r m
best it ca n b e sep a ra ted fr o m




in

sh ort

m a rk et as

th e s h o r t-te r m m a rk e t. W e fin a lly b r o k e

52
th rou g h on th e d ow n

s id e o f lo a n ra te s e a r ly la s t O c t o b e r a n d h ig h

r a te b o n d y ie ld s g o t d o w n , d e p e n d in g u p o n
r a tin g y o u
h a lf.

N ot

h ig h

w h a t p a r tic u la r q u a lity

ta k e , a fu ll p e rc e n ta g e p o in t o r p e rce n ta g e p o in t a n d
m u ch

o f

a

d e c lin e .

T hey

have

been

c lin g in g

at

a

a

very

le v e l.

F ir s t th e lo n g -t e r m m a r k e t is r e fle c tin g th e in fla tio n ra te . T h e b a s ic
i n f l a t i o n r a t e is s t i l l a r o u n d 6 p e r c e n t , a n d t h e r e is a c o n v i c t i o n t h a t
th e in fla tio n r a t e is a p t t o

a c c e le r a t e a t le a s t m o d e r a t e ly t h e s e c o n d

h a l f o f t h e y e a r . T h a t is a n

im p o r t a n t in g r e d ie n t in t h e lo n g -t e r m

m a rk e t.
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ra tes. I f
has had

fo r c e

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lo n g -t e r m
w ill

is

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lo n g

R eserve

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th e

r is e

i t is g o i n g t o h a v e a n

of

sh ort

e ffe ct, a lr e a d y

ra te s. W h e t h e r th a t e ffe ct t o w a r d h ig h e r

r a t e s i n t h e l a s t w e e k is a l a s t i n g o n e , w h e t h e r l o n g r a t e s

com e ba ck

dow n

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is

d iffic u lt t o

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have

tr ie d

in

m y

p r e p a r e d s ta te m e n t t o a n a ly z e th e s u p p ly a n d d e m a n d f o r lo n g -te r m
fu n d s a n d I

h a v e t o b e im p r e s s e d b y

a v e r y s tro n g s u p p ly

o f lo n g ­

te r m fu n d s r e la t iv e t o d e m a n d .
A t

th is

le v e l

o f

sh ort

ra tes

th e

flo w

in s tit u t io n s is v e r y , v e r y s t r o n g . I

of

fu n d s

in to

a d d itio n , th e life

th e

s a v in g s

in s u r a n c e c o m ­

p a n ie s h a v e h a d a d e fin ite m o d e r a t io n in t h e ir p o lic y lo a n s a n d
very

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p u ttin g

m oney

out

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th e

lo n g -te r m

are

m a rk e ts.

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p r o s p e c ts a r e f o r a fu r t h e r d e c lin e o f lo n g ra tes.
H o w e v e r , t u r n in g t o t h e d e m a n d s id e o f th e p ic t u r e , I t h in k it is
c le a r th a t th e r e w ill b e
th is y e a r

fo r

s p e ll o u t. I

th e

am

a

le s s e r v o lu m e o f c o r p o r a t e

reason s D r.

fin a n c in g f o r

B r im m e r in d ic a te d , w h ic h

I

tr ie d

to

t a lk in g a b o u t n o n fin a n c ia l c o r p o r a t io n s .

H o w e v e r , w e a re g o in g t o see, I

th in k , as th e y e a r g o e s o n , q u ite

a n in c r e a s e in d e b t fin a n c in g b v fin a n c ia l in s tit u t io n s . W e a r e g o i n g
t o se e a b i g in c r e a s e in e q u it y fin a n c in g , as I see th e p ic t u r e , s o t h a t
o n e s h o u ld n o t u n d e r e s tim a te th e v o lu m e o f d e m a n d

fo r

lo n g -t e r m

f i n a n c in g w h e t h e r i t b e d e b t o r e q u it y b y b u s in e s s fir m s .
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is

a ls o

a very

m a rk et b y fo r e ig n

la r g e

v o lu m e

of

dem and

th rou g h

th e b o n d

b o r r o w e r s , C a n a d a , in p a r tic u la r . I h a v e t r ie d t o

c r a n k t h a t in t o a ll m y e s tim a te s f o r u s e s o f lo n g t e r m

fu n d s .

M o r e o v e r , t h is is g o i n g t o b e a b i g h o m e m o r t g a g e fin a n c in g y e a r .
T h a t d o e s n ’t b o t h e r m e . I t d o e s n ’t in d ic a t e p r e s s u r e o n t h e m o r t g a g e
r a t e s b e c a u s e e s s e n t ia lly i t is t h e f a c t t h a t th e S . & L . ’s h a v e a t r e ­
m e n d o u s a m o u n t o f m o n e y a n d a re s ta r tin g to p u t it o u t. T h e r e a r e
areas

o f

w eak n ess,

c o m m e r c ia l

w h ic h

m ortg a g e,

an

are

very

area,

fo r

im p o r ta n t.
e x a m p le ,

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is t h e

w h ere

area

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of

banks

a n d l i f e in s u r a n c e c o m p a n ie s n o r m a lly in v e s t a b o u t h a l f t h e ir m o n e y .
T h a t m a r k e t is v e r y , v e r y d u ll, w it h v e r y lit t le n e w fin a n c in g g o i n g
o n in t h a t a re a .
T h e sam e t h in g
S o, one

lo o k s

fa c t th a t on

is t r u e

a t th e

w ith

s itu a tio n

a p a rtm e n t hou ses.
and

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b e im p r e s s e d

a s u p p lv - d e m a n d b a s is t h e r e is a g o o d

w ith

th e

case to b e m a d e

f o r lo n g - t e r m r a t e s m o v i n g t o lo w e r le v e ls . O n e e le m e n t in t h e s it u a ­
tio n

t h a t g iv e s m e p a u s e is t h e f a c t t h a t t h e T r e a s u r y n o w

h a s th e

r i g h t t o g o o u t 1 0 y e a r s in t h e is s u a n c e o f n o t e s f r e e o f t h e in t e r e s t
c e ilin g . I t h in k t h a t is a v e r y , v e r y im p o r t a n t d e v e lo p m e n t a n d o n e
t o b e w a t c h e d v e r y c a r e f u l l y a s a f a c t o r in th e s e m a r k e ts . T h e n e e d




53
t o e x t e n d a v e r a g e m a tu r ity o f t h e F e d e r a l d e b t is v e r y s t r o n g , it is
now

2 years a n a

9 m on th s. T h e

c o n s t a n t r o l l o v e r d e b t is d e fin it e ly

h a n d ic a p p in g t h e F e d in its fr e e d o m

t o m a n a g e th e m o n e y s u p p ly .

S o , lo o k in g a t a ll th ese fo r c e s — a t t h is w h o le

s itu a tio n — m y

fe e lin g

is th a t lo n g -t e r m ra te s w ill flu c tu a te a s t h e y a lw a y s d o , b u t m y ju d g ­
m e n t is

th a t lo n g

ra tes, h ig h -g r a d e

bond

y ie ld s ,

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ten d

to

sta y

s o m e w h e r e a t th e p re s e n t le v e l w it h flu c tu a tio n s , w it h a m o d e s t fir m ­
in g u p o f lo n g -t e r m

ra tes to w a r d th e e n d o f th e y e a r.

O f k e y im p o r ta n c e is th e F e d a n d s h o r t -t e r m

in te r e s t r a te s. I f t h e

F e d s h o u ld b e m o r e a g g r e s s iv e a b o u t its c r e d it p o l i c y a n d s h o r t r a te s
w e n t u p m o r e s h a r p ly th a n I e x p e c t th e m t o , th e c o n s e q u e n c e s w o u ld
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h a v e s o m e c o n c lu d in g c o m m e n ts w h ic h

ju s t g o in g t o c r y s t a lliz e in t h is w a y . G iv e n t h e u n e m p lo y m e n t

r a t e a s h i g h a s i t is , g i v e n t h e f a c t t h a t w e h a v e m a d e r e a l p r o g r e s s
o n th e in fla tio n fr o n t , I d o n o t t h in k th e F e d e r a l R e s e r v e s h o u ld d o
m o re th a n m o v e g r a d u a lly t o

a le s s a c c o m m o d a t iv e c r e d it p o l i c y

in

s p ite o f th e fa c t th a t th e r a te o f e x p a n s io n o f th e m o n e y a g g r e g a te s is
now

u p t o th e to p o f th e ra n g e s o n e s h o u ld

a ls o th e fa c t t h a t th e r e h a s a c t u a lly b e e n

ta k e in t o c o n s id e r a tio n

an

$ 8 -b illio n

d e c lin e th is

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c o m m e r c ia l b a n k s.

The

“ c r e d it

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a n oth er

very

im ­

p o r t a n t t o o l th e F e d u ses, h a s b e e n in c r e a s in g in t h e la s t 3 o r 4 o r 5
m o n t h s a t o n l y a 2 .9 p e r c e n t r a t e . T h e b u r d e n
is t h a t a t th is p a r t ic u la r p o in t o f t im e , t o o
le t u s s a y , o f m o n e t a r y p o l i c y

a g a in s t a n

o f w hat I

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say

r ig o r o u s a n a p p lic a t io n ,

in c r e a s e in

th e

m any

ag­

g r e g a t e is n o t ju s t ifie d . I t h i n k t h e F e d n e e d s a t t h is t im e t o p a y
l o t o f a t te n tio n t o w h e r e t h e e c o n o m y

s ta n d s in

a

te rm s o f th e in fla ­

t io n r a te , th e u n e m p lo y m e n t r a te . I fe e l t h a t t h e y a r e g o i n g t o h a v e t o
react to

th is h ig h

ra te o f e x p a n s io n

o f

m on eta ry

h o p e th e y w ill n o t o v e r r e a c t b e c a u s e i f t h e y

a g g re g a te s b u t

t o o v e r r e a c t in g it w ill h a v e a v e r y s e r io u s im p lic a t io n
in t e r e s t ra te s a n d

I

overrea ct o r ap p ear to
o n lo n g term

fo r th e r o c o v e r y .

T h a t is e s s e n tia lly a ll I h a v e .
[T h e c o m p le te sta te m e n t f o l l o w s :]
Statem en t

by

J am e s J. O ’L e a r y , V

ic e

C h a ir m

an

, U .S . T

ru st

C o.

FEDERAL RESERVE POLICY AND TH E OUTLOOK FOR T H E M O N E Y AN D CAPITAL M AR K ET S
AN D INTEREST RATES

I a m J a m e s J . O ’ L e a r y , V ic e C h a ir m a n o f t h e U n it e d S t a t e s T r u s t C o m p a n y
o f N e w Y o r k . I a m p le a s e d t o h a v e t h is o p p o r t u n i t y t o p r e s e n t m y v i e w s o n t h e
o u t lo o k f o r th e m o n e y a n d c a p it a l m a r k e t s a n d f o r in t e r e s t r a t e s in t h e r e ­
m a in d e r o f t h is y e a r . T h e F e d e r a l R e s e r v e p l a y s a k e y r o l e in t h i s o u t l o o k s o
t h a t I s h a ll b e c o n c e r n e d w it h m o n e t a r y p o l i c y a s w e l l a s o t h e r f o r c e s li k e ly
t o in flu e n c e th e m o n e y a n d c a p it a l m a r k e ts .

Some Observations on the General Business Outlook
T h e b e h a v io r o f in t e r e s t r a t e s is b o t h a f o r c e in flu e n c in g t h e c o u r s e o f g e n e r a l
b u s in e s s a c t iv it y a n d i t is a t t h e s a m e t im e in p a r t t h e p r o d u c t o f w h a t o c c u r s
in t h e e c o n o m y a s a w h o le . C le a r ly , t h e t o t a l d e m a n d s f o r s h o r t - a n d lo n g -t e r m
c r e d i t a r e a fu n c t io n o f t h e s t r e n g th o f g e n e r a l b u s in e s s a c t iv i t y . B e f o r e t u r n ­
in g t o t h e o u t lo o k f o r in t e r e s t r a t e s , t h e r e fo r e , i t w o u ld b e h e lp fu l t o r e v ie w
th p p r o s p e c t s f o r g e n e r a l b u s in e s s a c t i v i t y .
F ir s t , I w o u ld li k e t o m a k e s o m e g e n e r a l o b s e r v a t io n s . T h e r e c o v e r y w h ic h
h a s n o w b e c o m e a b o u t o n e -y e a r o ld h a s m a n y e n c o u r a g in g a s p e c t s a b o u t it.




54
a m o n g w h ic h a r e : ( 1 ) T h e b a s i c in fla t io n r a t e h a s b een c u t a b o u t in h a l f
s in c e t h e p e a k s o f 1 9 7 4 ; ( 2 ) T h e r e h a s b e e n a p r o n o u n c e d c y c lic a l im p r o v e ­
m e n t in p r o d u c t i v i t y — t o b e e x p e c t e d — b u t n o n e th e le s s i m p r e s s iv e ; ( 3 ) T h e
u n e m p lo y m e n t r a t e h a s f a l l e n f r o m 8.9 p e r c e n t t o 7.6 p e r c e n t ; ( 4 ) C o n s u m e r
a n d b u s in e s s c o n fid e n c e h a s s t r e n g th e n e d m a r k e d ly fr o m t h e g lo o m a n d u n ­
c e r t a in t y o f a y e a r a g o ; ( 5 ) T h e g e n e r a l le v e l o f sh o r t-te r m in t e r e s t r a t e s h a s
d r o p p e d t o n e a r ly o n e - h a l f o f w h a t i t w a s a t t h e p e a k s o f m id -1 9 7 4 , a n d lo n g ­
t e r m r a t e s h a v e f a l le n s ig n if ic a n t ly s in c e la s t f a l l ; ( 6 ) B u s in e s s liq u id it y a n d
c o m m e r c ia l b a n k l i q u i d i t y h a v e im p r o v e d g r e a t l y ; ( 7 ) C o r p o r a t e p r o fit s h a v e
r is e n a n d t h e s t o c k m a r k e t h a s m a d e a s t r o n g r e c o v e r y ; a n d ( 8 ) D e s p it e t h is
b in g a y e a r d i v i s ib l e b y f o u r , m o n e t a r y p o lic y s e e m s r e s o lu t e ly a im e d a t
a v o i d i n g t o o s t r o n g a r e c o v e r y a t t h e c o s t o f a n e w e s c a la t io n o f in fla tio n .
R e c e n t b u s in e s s s t a t i s t i c s s u g g e s t t h a t th e p a c e o f r e c o v e r y i s a c c e le r a t in g ,
s o t h a t i t i s p e r t in e n t t o a s k w h e t h e r th e r a t e o f a d v a n c e m a y b e c o m e m o r e
v ig o r o u s in t h e m o n t h s a h e a d a n d th u s t o u c h o f f a n o th e r e s c a la t io n o f th e
in f la t io n r a t e . T h i s i s a c l e a r d a n g e r , b u t c e r t a in b a s ic c o n d it io n s in t h e
e c o n o m y s u g g e s t t h a t w e s h a ll r e m a in o n a s u s ta in a b le e x p a n s io n p a t h w it h o u t
a n y s h a r p e s c a la t io n o f t h e in f la t io n r a t e : ( 1 ) C o n s u m e r s a r e s t ill s h o w in g a
h e a lt h y c a u t i o n in t h e i r s p e n d in g a n d s a v in g b e h a v io r , a n d th e s a m e c a n b e
s a id a b o u t b u s in e s s fir m s in t h e ir w illin g n e s s to a c c u m u a lt e in v e n t o r ie s o r t o
s t r e n g th e n c a p i t a l s p e n d i n g ; ( 2 ) C o m m e r c ia l b a n k s a n d o t h e r le n d in g in s t i­
t u t io n s a r e m o r e q u a l i t y c o n s c i o u s a b o u t n e w lo a n s a f t e r th e lo s s e x p e r ie n c e o f
r e c e n t y e a r s ; ( 3 ) I n t h e f a c e o f t h e fin a n c ia l p r o b le m s o f N e w Y o r k C ity a n d
S ta te , a s w e ll a s o t h e r s t a t e a n d l o c a l g o v e r n m e n t u n its , the s t im u lu s t o g e n e r a l
e c o n o m ic a c t i v i t y f r o m s p e n d in g b y s t a t e a n d l o c a l g o v e r n m e n t is b o u n d t o b e
le s s t h is y e a r t h a n o n a v e r a g e in p r i o r p e r io d s o f b u s in e s s r e c o v e r y ; ( 4 ) D u e
t o t h e f a c t t h a t in f la t io n h a s m a d e m a n y p r o je c t s t e m p o r a r ily u n e c o n o m ic ,
a lo n g w i t h h ig h fin a n c in g c o s t s a n d t h e n e e d t o c h a r g e h ig h r e n ts , t h e r e c o v e r y
o f c o n s t r u c t i o n o f a p a r t m e n t b u ild in g s a n d c o m m e r c ia l p r o je c t s is a p t t o la g
f o r m a n y m o n t h s ; ( 5 ) B u s in e s s r e c o v e r y in o t h e r m a jo r i n d u s t r ia l c o u n tr ie s ,
w it h t h e e x c e p t io n o f W e s t G e rm a n y * se e m s c e r t a in to r u n b e h in d th e U .S .
e x p a n s io n , t h u s t e n d in g t o m o d e r a t e o u r r e c o v e r y , a n d ( 6 ) M o n e t a r y p o lic y is
d e t e r m in e d t o k e e p t h e p a c e o f r e c o v e r y g r a d u a l e n o u g h to a v o id a n e w r o u n d
o f in fla t io n .
T u r n i n g t o a s p e c ific f o r e c a s t f o r 1976, a s s h o w n in T a b le 1, w e a r e e s t im a t ­
in g t h a t r e a l G N P w i l l i n c r e a s e a p p r o x im a t e ly 6.25 p e r c e n t t h is y e a r o v e r la s t ,
t h a t t h e u n e m p lo y m e n t r a t e w i l l a v e r a g e b e tw e e n 7.0 a n d 7.5 p e r c e n t, a n d
t h a t t h e G N P d e fla t o r w i l l in c r e a s e a b o u t 5 .0 -5 .5 p e r c e n t (c o m p a r e d w it h 8.8
p e r c e n t in 1 9 7 5 ). T h u s , w e a r e a n t ic ip a t in g a g o o d r e c o v e r y b u t o n e w h ic h w il l
le a v e t h e u n e m p lo y m e n t r a t e q u it e h ig h . A t t h e s a m e tim e, o n a y e a r -t o -y e a r
b a s is , w e e x p e c t a d i s t i n c t im p r o v e m e n t in th e in fla t io n p ic t u r e c o m p a r e d w it h
la s t y e a r .
T a b l e 2 p r e s e n t s e s t im a t e s o f G N P a n d it s c o m p o n e n t p a r t s in c u r r e n t
d o ll a r s — t h a t is , b e f o r e c o r r e c t i n g f o r in fla tio n . W e a r e e x p e c t in g a n 11.7
p e r c e n t in c r e a s e o f G N P in t h e s e te rm s, w it h p a r t ic u la r ly s t r o n g g a in s in
s p e n d in g f o r d u r a b le c o n s u m e r g o o d s , r e s id e n tia l c o n s t r u c tio n , a n d p r o d u c e r s ’
d u r a b le e q u ip m e n t.
T a b l e 3 p r e s e n t s t h e q u a r t e r ly p a t te r n w h ic h w e e x p e c t o f so m e o f t h e
p r in c ip a l e c o n o m ic i n d ic a t o r s . I n g e n e r a l w e a n tic ip a te a f a i r l y s t e a d v r a t e o f
e x p a n s io n o f r e a l G N P a n d a f a i r l y s t a b le in fla tio n r a t e in t h e 4 - 6 p e r c e n t
r a n g e , w i t h s o m e m o d e r a t e e s c a la t io n o f in fla tio n in th e f o u r t h q u a r te r . A s
w il l b e n o t e d in T a b l e 1, w e e s t im a te t h a t a f t e r -t a x c o r p o r a t e p r o fits w i ll
in c r e a s e a b o u t 2 6 p e r c e n t t h is y e a r .

The Outlook for Short-Term Interest Rates
T h e r e h a s b e e n , a n d s t ill is , a g r e a t d e a l o f a g r e e m e n t t h a t s h o r t -t e r m
in t e r e s t r a t e s w i l l r is e t h is y e a r , b u t t h e r e is c o n s id e r a b le d iffe r e n c e o f o p in io n
a s to h o w so o n a n d h o w m u ch . A t th e en d o f F e b ru a ry th e F e d e ra l R e se rv e
a u t h o r it ie s c r e a t e d a fl u r r y o f e x c it e m e n t w h e n t h e y a p p e a r e d (C h a r t 1 ) t o
h a v e r a is e d t h e i r t a r g e t o n t h e F e d e r a l fu n d s r a t e fr o m 4 % p e r c e n t t o 5
p e r c e n t o r p o s s ib ly a b i t h ig h e r . M o n e y m a r k e t e x p e r t s e x p la in e d t h is a p p a r e n t
m o v e o n t h e g r o u n d s t h a t m o n e y s u p p ly (M 2 c u r r e n c y p lu s d e m a n d d e p o s it s
—
p lu s t im e d e p o s it s o f t h e c o m m e r c ia l b a n k s n e t o f l a r g e c e r t ific a t e s o f d e p o s it s )
w a s e x p a n d in g a t a r a t e n e a r t h e t o p o f t h e t a r g e t r a n g e o f t h e F e d e r a l R e ­
s e r v e a n d t h a t t h e p a c e o f b u s in e s s a c t iv it y w a s q u ic k e n in g t o t h e p o in t t h a t
t h e a u t h o r it ie s f e l t t h a t t h e y s h o u ld m o v e t o a s lig h t ly le s s “ a c c o m m o d a t iv e ”




55
c r e d i t p o lic y . H o w e v e r , in s u b s e q u e n t w e e k s t h m o n e t a r y a u t h o r it ie s p e r m it t e d
t h e F e d fu n d s r a t e t o c o m e b a c k d o w n t o t h e 4 % p e r c e n t le v e l in s p it e o f t h e
f a c t t h a t M M 2 h a s f o r t h e p a s t q u a r t e r b e e n i n c r e a s in g a t a n a n n u a l r a t e
n e a r t h e t o p o f t h e F e d ’s t a r g e t r a n g e — a n d t h e b u s in e s s r e c o v e r y c o n t in u e d
t o b e q u ite stro n g . P e r h a p s t h is s e e m in g r e v e r s a l o f t h e F e d ’s a c t i o n m a y b e
e x p la in e d b y th e f a c t t h a t a r is e o f s h o r t r a t e s i n t h e U .S . a t t h is t im e w o u ld
h e lp , t o str e n g th e n a n a lr e a d y s t r o n g d o l l a r a n d t h u s w o u ld a g g r a v a t e t h e
r e c e n t t u r m o il in fo r e i g n e x c h a n g e m a r k e t s . T h e m in u t e s o f t h e O p e n M a r k e t
C o m m it te e in m id -F e b r u a r y c o n t a in n o e v id e n c e o f a c h a n g e o f p o li c y .
A s t h is t e s tim o n y i s b e in g w r it t e n , “ F e d w a t c h e r s ” a r e d e b a t in g o n c e a g a in
w h e t h e r t h e a u th o r it ie s h a v e j u s t m o v e d t o a le s s a c c o m m o d a t iv e c r e d i t p o li c y
in t h e li g h t o f th e r e c e n t s u r g e o f m o n e y s u p p ly . I t i s t o o e a r l y t o b e s u r e o f
th is , b u t m y o w n b e l i e f i s t h a t t h e a u t h o r i t i e s h a v e n o t y e t m a d e a n y s ig n if ic a n t
ch an ge.
W h a t i s lik e ly t o b e t h e c o u r s e o f F e d e r a l R e s e r v e p o l i c y i n t h e w e e k s a n d
m o n t h s a h e a d ? T h is i s o b v io u s ly a c r u c i a l q u e s t io n s o f a r a s th e p r o s p e c t s f o r
s h o r t -t e r m r a t e s a r e c o n c e r n e d . M o n e t a r y p o l i c y w i l l b e g o v e r n e d b y th e
fo l l o w i n g fo r c e s , sp m e o f w h ic h a r e i n t e r r e l a t e d : ( 1 ) t h e r a t e o f m o n e t a r y
e x p a n s i o n ; ( 2 ) th e s t r e n g th o f t h e b u s in e s s r e c o v e r y a n d t h e F e d e r a l R e ­
s e r v e ’s e x p e c t a t io n a b o u t i t ; ( 3 ) th e in f la t io n r a t e a n d t h e F e d ’s e x p e c t a t io n
abQ ut i t a n d ( 4 ) c o n d it io n s in th e fo r e i g n e x c h a n g e m a r k e ts .
G iv e n m y o w ii f o r e c a s t o f th e p r o s p e c t s f o r b u s in e s s a c t iv it y , I e x p e c t t h e
F e d e r a l R e s e r v e t o m o v e g r a d u a lly a n d m o d e r a t e ly t o a le s s a c c o m m o d a t iv e
c r e d it p o l i c y in th e w e e k s a n d m o n t h s a h e a d . I d o n o t a n t ic ip a t e a v ig o r o u s
m o v e t o w a r d c r e d it r e s t r a in t u n t il p o s s i b l y i n t h e fin a l q u a r t e r o f t h e y e a r ,
i f irid e e d i t s h o u ld c o m e e v e n th e n . H o w e v e r , t h e m o n e t a r y a u t h o r it i e s se e m
d e te r m in e d t o se iz e t h is c h a n c e t o k n o c k o u t i n f la t io n s o t h a t I m a y b e u n d e r ­
e s t im a t in g th e f o r c e w it h w h ic h t h e y m a y m o v e t o w a r d r e s t r a in t .
M y “ f e e l ” o f F e d e r a l R e s e r v e p o l i c y a n d l i k e l y m o n e y m a r k e t c o n d it io n s in
t h e p e f i o d a h e a d s u g g e s ts t h a t t h e o d d s a r e h ig h t h a t w e h a v e p r e t t y m u c h
s e e n th e lo w s o f s h o r t -t e r m r a t e s t h is y e a r . B y l a t e s p r in g , I e x p e c t s h o r t
r a t e s t o r is e g r a d u a lly , e s p e c ia lly a s t h e b u s in e s s a d v a n c e s t r e n g th e n s s o m e ­
w h a t in th e . s e c o n d h a l f o f th e y e a r g e n e r a t i n g r i s in g p r iv a t e l o a n d e m a n d s .
I t is v e r y d ifficu lt to m a k e a ju d g m e n t o n t h e e x t e n t o f . the; r is e , b u t I w o u ld
e s t im a te th a t b y y e a r -e n d th e p r im e r a t e o f t h e b a n k s w i l l h a v e m o v e d f r o m
t h e c u r r e n t 6 % p e r c e n t le v e l t o 7Y2~ 7% p e r c e n t . C o n s is t e n t w it h t h is I w o u ld
e x p e c t o t h e r s h o r t -t e r m r a t e s to m o v e u p a b o u t % o f o n e p e r c e n t t o a f u l l
p e r c e n t a g e p o in t.
W h a t a r e th e fo r c e s b e h in d s u c h a r i s e ? A s a lr e a d y n o t e d , I e x p e c t F e d e r a l
R e s e r v e p o lic y t o b e c o m e g r a d u a lly le s s a c c o m m o d a t i v e in t h e f a c e o f a
c o n t in u in g b u s in e s s r e c o v e r y , a h ig h r a t e o f m o n e t a r y e x p a n s io n , a n d a
te n d e n c y f o r th e in fla tio n r a t e t o b o t t o m o u t a n d p e r h a p s t o e s c a la t e a b i t a s
t h e y e a r g o e s on . A s s h o w n in T a b le 4 , in w h ic h I h a v e e s t im a t e d t o t a l fu n d s
t o b e r a is e d in v a r io u s c r e d i t a n d e q u it y m a r k e t s t h is y e a r ( i n e a c h c a s e t h e
e s t im a te m e a s u r e s th e n e t in c r e a s e in o u t s t a n d in g d e b t o r e q u it y i s s u e s ) , t h e
r e c o v e r y o f b u s in e s s a c t iv it y m a y b e e x p e c t e d t o i n c r e a s e p r iv a t e s h o r t -t e r m
lo a n d e m a n d s m a r k e d ly . F o r e x a m p le , I a m e s t im a t in g t h a t t h is y e a r t h e
t o t a l o u t s t a n d in g “ b a n k lo a n s n o t e ls e w h e r e c la s s if ie d ” ( e s s e n t ia lly t h e c o m ­
m e r c ia l a n d in d u s tr ia l lo a n s o f t h e b a n k s ) w i l l in c r e a s e b y $1 3 b illio n , c o m ­
p a r e d w i t h a n e t d e c lin e o f $12.6 b i l l i o n in 1975. S u c h a n in c r e a s e w o u ld b e
c o n s is t e n t w it h th e n e t a c c u m u la t io n o f $11 b i l l i o n o f b u s in e s s i n v e n t o r i e s
w h ic h w e e x p e c t t h is y e a r (c o m p a r e d w i t h a n e t liq u id a t i o n o f $1 4 .6 b i lli o n
in 1 9 7 5 ) a n d w it h th e im p r o v e m e n t o f h o u s in g a n d c a p i t a l s p e n d in g w h ic h
w e a n tic ip a te . F u r th e r m o r e , I e x p e c t o u t s t a n d in g c o n s u m e r c r e d i t t o e x p a n d
a b o u t $20 b illio n t h is y e a r , c o m p a r e d w i t h o n ly $5 .3 b i ll io n in 1975. O t h e r
a r e a s o f sh o r t-te r m c r e d it s u ch a s c o m m e r c ia l p a p e r w i l l s h o w s i m ila r in c r e a s e s .
A d d e d t o th e s iz e a b le in c r e a s e in p r iv a t e s h o r t -t e r m c r e d it t h is y e a r , a s s h o w n
in T a b le 4, th e F e d e r a l G o v e r n m e n t w i l l h a v e a n e s t im a t e d n e t n e w m o n e y
r e q u ir e m e n t o f a b o u t $77 b illio n in 19 76 a n d m u c h o f t h is fin a n c in g w i l l h a v e
t o b e d o n e in s h o r t -t e r m is s u e s in c o m p e t it io n w i t h t h e r i s e o f p r iv a t e s h o r t ­
t e r m fin a n c in g . A d d e d t o d ir e c t U .S . G o v e r n m e n t is s u e s , t h e r e w i l l b e a l a r g e
a m o u n t o f F e d e r a l a g e n c y issu e s, a s e s t im a t e d in T a b l e 4.
A s s h o w n in T a b le 5, h o w e v e r , w h ic h p r o v id e s e s t im a t e s o f t o t a l c r e d i t
w h ic h w i l l b e a d v a n c e d th is y e a r a n d t h e v a r i o u s s o u r c e s o f t h a t c r e d it , c o m ­
m e r c ia l b a n k s a r e e x p e c t e d t o in c r e a s e t h e i r t o t a l l o a n s a n d in v e s t m e n t s b y
a b o u t $66 b illio n , c o m p a r e d w it h o n ly $2 6 .6 b i l l i o n la s t y e a r . M u c h o f t h is




56
in c r e a s e w i l l b e in s h o r t -t e r m lo a n s a n d in s h o rt-te rm G o v e r n m e n t issu e s.
S im ila r ly , w i t h g r e a t l y im p r o v e d c a s h flo w t h is y e a r b u s in e s s fir m s w il l m a k e
la r g e a d d i t i o n s t o t h e i r h o ld in g s o f s h o r t-te r m liq u id a s s e ts . I w o u ld a ls o
e x p e c t t h e s a v in g s in s t it u t io n s , w i t h t h e ir v e r y la r g e n e t in flo w o f fu n d s , to
b e a d d in g t o t h e i r h o ld in g s o f s h o r t -t e r m in s tr u m e n ts , e s p e c ia lly a s s h o r t -t e r m
r a t e s r is e .
I n g e n e r a l, th e n , t h e f o r c e s w h ic h m a y b e e x p e c t e d t o m o v e s h o r t -t e r m
in t e r e s t r a t e s h ig h e r t h is y e a r a r e a s t r e n g th e n in g o f p r iv a t e s h o r t -t e r m lo a n
d e m a n d s a s t h e r e c o v e r y p r o g r e s s e s , a c o n t in u e d h e a v y v o lu m e o f G o v e r n m e n t
s h o r t -t e r m fin a n c in g , e s p e c ia l l y in th e s e c o n d h a l f o f th e y e a r , a n d v e r y im ­
p o r t a n t ly a g r a d u a l m o v e b y t h e F e d e r a l R e s e r v e t o w a r d a le s s a c c o m m o d a t iv e
c r e d i t p o lic y . A s I h a v e i n d ic a t e d , i t i s e x tr e m e ly d iffic u lt t o a s s e s s t h e w e ig h t
o f th e s e fo r c e s , b u t m y ju d g m e n t is t h a t t h e y w ill c a u s e a m o d e r a t e r a t h e r
t h a n a s h a r p in c r e a s e o f s h o r t -t e r m ra te s. I t is h a r d t o s a y h o w m u c h w e ig h t
t h e i n s t a b ilit y o f f o r e i g n e x c h a n g e f a t e s w ill h a v e in F e d e r a l R e s e r v e p o lic y ,
b u t I s h o u ld t h in k i t w o u ld w o r k t o w a r d a m o r e m o d e r a t e r a t h e r t h a n a
s h a r p in c r e a s e in o u r s h o r t -t e r m r a te s .
W h a t a r e t h e im p l i c a t i o n s o f a r is e o f s h o r t-te r m ra te s, e v e n i f t h e g r a d u a l
a n d m o d e r a t e c h a r a c t e r w h ic h I e x p e c t ? F ir s t, it w i ll l o w e r th e c o s t t o
in v e s t o r s o f r e m a in in g in s h o r t -t e r m liq u id in v e s tm e n ts a n d r e d u c e t h e p r e s s u r e
t o m o v e f u n d s t o lo n g -t e r m in v e s t m e n t s . S t r ic t ly o n a n a r b it r a g e b a s is , t h e r e ­
f o r e , i t w i l l t e n d t o le s s e n t h e o t h e r w is e d o w n w a r d p r e s s u r e o n lo n g -t e r m
in t e r e s t r a t e s . S e c o n d ly , t h e r is e o f s h o r t -t e r m r a t e s w ill t e n d t o in c r e a s e
c o n c e r n o n t h e p a r t o f s a v in g s in s t it u t io n s t h a t t h e ir c u r r e n t v e r y s t r o n g n e t
in f lo w o f f u n d s w i l l b e r e d u c e d a n d t h a t u lt im a te ly a n o th e r r o u n d o f n e t o u t ­
f lo w o r “ d i s in t e r m e d ia t io n ” m a y b e lo o m in g a h e a d . T h e e ff e c t o f s u c h a
p s y c h o l o g y w o u ld b e t o c u r t a i l t h e a g g r e s s iv e n e s s o f s a v in g s in s t it u t io n s a b o u t
c o m m it t in g fu n d s t o t h e m o r t g a g e o r b o n d m a r k e ts . T h ir d ly , t h e r is e o f
s h o r t -t e r m r a t e s w i l l s t r e n g t h e n t h e e x p e c t a t io n t h a t a n in c r e a s e o f lo n g -t e r m
r a t e s m a y n o t b e f a r a h e a d , a n d t h is w ill e n c o u r a g e s a v in g s in s t it u t io n s t o
r e m a in i n s h o r t -t e r m o u t le t s a n d t o w a it f o r th e e x p e c t e d h ig h e r lo n g -t e r m
r a t e s . I t w i l l a l s o i n d u c e b o r r o w e r s t o c o m e t o m a r k e t f o r lo n g -t e r m lo a n s
b e f o r e r a t e s g o h ig h e r . M o r e o v e r , r is in g s h o r t-te r m r a t e s w i l l m a k e u n d e r ­
w r it e r s m o r e c a u t i o u s a b o u t b i d d in g f o r c o r p o r a t e b o n d is s u e s , a n d i t w i l l
c a u s e d e a le r s t o b e m o r e c a r e f u l a b o u t a c c u m u la t in g in v e n t o r ie s o f b o n d s .
T h u s , t h e e x p e c t e d r is e o f s h o r t -t e r m r a t e s t h is y e a r , e v e n t h o u g h it m a y b e
o n ly g r a d u a l a s I e x p e c t , w i l l t e n d t o k e e p lo n g -t e r m r a t e s h ig h e r t h a n w o u ld
o th e r w is e b e th e case.

The Outlook fo r Long-Term Rates
T u r n i n g t o lo n g -t e r m in t e r e s t r a t e s , t h e r e a r e w id e r d iffe r e n c e s o f v ie w
a b o u t t h e o u t lo o k . A s w i l l b e o b s e r v e d in C h a r t 2, th e r e h a s b e e n a s ig n ific a n t
d e c lin e s in c e e a r l y l a s t O c t o b e r in t h e y ie ld s o n n e w is s u e s o f A a -r a t e d lo n g ­
t e r m u t i l i t i e s a n d i n d u s t r i a l b o n d s . T h e y ie ld s o n u t ilit ie s h a v e c o m e d o w n
n e a r ly 1 y2 p e r c e n t a g e p o in t s a n d t h e in d u s t r ia ls a fu l l o n e p e r c e n t . S im ila r ly ,
s in c e l a s t f a l l t h e r e h a s b e e n a c o m p a r a b le d r o p in r a t e s o n h o m e m o r t g a g e s ,
d i r e c t p la c e m e n t s o f c o r p o r a t e b o n d s , a n d m o r t g a g e s o n in c o m e p r o p e r t ie s s u c h
a s a p a r t m e n t s , s h o p p in g c e n t e r s , a n d c o m m e r c ia l p r o p e r tie s g e n e r a lly . S o m e
a n a ly s t s e x p e c t l o n g -t e r m r a t e s t o f a l l fu r t h e r in th e n e a r-te r m , b u t t h e r e a r e
w id e d iffe r e n c e s o f v i e w o n t h e e x t e n t o f th e d e c lin e a n d h o w lo n g s o ft n e s s
in lo n g -t e r m r a t e s w i l l la s t .
W h a t a r e t h e f o r c e s in t h e lo n g -t e r m c a p ita l m a r k e ts w h ic h a r e a f fe c t in g
y ie ld s a n d w h ic h a r e li k e l y t o a f fe c t y ie ld s in t h e r e m a in d e r o f th e y e a r ? A
b a s ic f o r c e i s t h e r a t e o f in f la t io n a n d m o r e im p o r ta n t ly th e e x p e c t a t io n o f
le n d e r s a n d b o r r o w e r s a b o u t t h e f u t u r e c o u r s e o f in fla tio n . B o t h le n d e r s a n d
b o r r o w e r s h a v e u n d o u b t e d ly b e e n im p r e s s e d b y th e d o w n t r e n d o f in fla t io n
d u r in g t h e p a s t y e a r . T h e d i s t i n c t im p r o v e m e n t in th e in fla t io n p ic t u r e h a s
p la y e d a p a r t in t h e d e c lin e o f lo n g -t e r m r a te s . M y d is c u s s io n s w it h m a n y
lo n g -t e r m in v e s t o r s a n d w i t h a c r o s s -s e c t io n o f lo n g -te r m b o r r o w e r s s u g g e s t,
h o w e v e r , t h a t t h e p r e v a i l i n g e x p e c t a t io n i s t h a t t h e b a s ic in f la t io n r a t e i s n o t
a p t t o d e c lin e m u c h f u r t h e r a n d t h a t b e f o r e y e a r -e n d it i s a p t t o b e r is in g
a g a in . T h i s e x p e c t a t io n , i f i t is in d e e d th e p r e v a ilin g on e. w ill t e n d t o m ilit a t e
a g a in s t a f u r t h e r la r g e d e c lin e o f lo n g -te r m r a te s . I t w ill te n d t o s t r e n g th e n
t h e b e l i e f t h a t t h e F e d e r a l R e s e r v e w ill b e c o m e le s s a c c o m m o d a t iv e a n d t h a t
s h o r t -t e r m i n t e r e s t r a t e s w i l l r is e . I t w ill a ls o m a k e lo n g -t e r m i n v e s t o r s m o r e
r e s is t a n t t o p u r c h a s in g lo n g -t e r m b o n d s o r m o r t g a g e s a t s ig n ific a n t ly l o w e r
y ie ld s .




57
A s I h a v e a lr e a d y n o te d , s h o u ld s h o r t -t e r m i n t e r e s t r a t e s r is e , t h is w i l l t e n d
t o lim it a n y fu r t h e r f a l l o f lo n g -t e r m r a t e s , a n d i f s h o r t -t e r m r a t e s s h o u ld
r is e s h a r p ly , i t w o u ld b e a s ig n ific a n t f o r c e t o w a r d r is i n g lo n g -t e r m r a t e s — f o r
r e a s o n s I h a v e g iv e n e a r lie r .
T h e b e l i e f t h a t lo n g -t e r m r a t e s w i l l f a l l f u r t h e r in t h e m o n t h s a h e a d r e s t s
fir m ly o n c u r r e n t a n d p r o s p e c t iv e s u p p ly a n d d e m a n d c o n d it io n s in t h e lo n g ­
te r m c a p it a l m a r k e ts . I n T a b le 4 I h a v e p r e s e n t e d e s t im a t e s o f t h e p r in c ip a l
a r e a s o f d e m a n d f o r lo n g -te r m fu n d s . A s w i l l b e n o t e d , I a m e s t im a t in g t h a t
t h is y e a r th e n e t in c r e a s e o f o u t s t a n d in g c o r p o r a t e b o n d s w i l l b e a b o u t $21.5
b illio n , a m u c h l o w e r fig u r e th a n t h e r e c o r d $ 2 7 .0 b i l lio n in 1975. T h e l o g i c
b e h in d th is e s t im a te is t h a t c o r p o r a t i o n s w i l l h a v e a m u c h g r e a t e r a b ili t y t o
fin a n c e t h e m s e lv e s th r o u g h r e t a in e d e a r n in g s t h is y e a r . W e a r e e s t im a t in g
th a t c o r p o r a t e c a s h flo w w ill i n c r e a s e 2 0 p e r c e n t t h is y e a r . A t t h e s a m e t im e ,
t h e r e c o r d t o t a l o f c o r p o r a t e b o n d fin a n c in g l a s t y e a r c o n t a in e d a v e r y la r g e
v o lu m e o f fu n d in g o f s h o r t -t e r m d e b t in t h e lo n g -t e r m c a p it a l m a r k e ts . T h e
v o lu m e o f fu n d in g o f s h o r t -t e r m d e b t s h o u ld t a p e r o f f t h is y e a r , b u t a t t h e
s a m e t im e t h e im p r o v e d fin a n c ia l p o s i t i o n o f m a n y fir m s w h ic h c o u l d n o t
q u a l i f y f o r lo n g -t e r m b o n d fin a n c in g in 19 75 w i l l p e r m it s u c h fir m s t o flo a t
lo n g -t e r m is s u e s t h is y e a r . M o r e o v e r , t h e s t r e n g t h e n in g o f c a p it a l s p e n d in g
w h ic h I e x p e c t t h is y e a r w i l l t e n d t o a d d s o m e w h a t t o t h e v o lu m e o f n e w
issu e s. I n a d d itio n , th e r e w ill u n d o u b t e d ly c o n t in u e t o b e l a r g e d ir e c t p la c e ­
m e n ts o f issu e s i n t h e e n e r g y a r e a . F o r a l l o f t h e s e r e a s o n s , I e x p e c t t h e n e t
in c r e a s e in c o r p o r a t e b o n d is s u e s t o b e c o n s i d e r a b l y s m a lle r t h is y e a r t h a n
la s t, b u t s t ill a h ig h fig u re . A t t h e s a m e t im e , h o w e v e r , n e t n e w is s u e s o f
e q u itie s b y n o n fin a n c ia l c o r p o r a t io n s a r e l i k e l y t o b e v e r y la r g e t h is y e a r . A s
s h o w n in T a b le 4, I a m e s t im a t in g t h a t t h e a m o u n t w il l in c r e a s e t o $1 3.5
b illio n t h is y e a r , c o m p a r e d w it h $9 .5 b i l l i o n i n 1975. T h i s e s t im a t e is in lin e
w it h t h e in c r e a s e d v o lu m e o f e q u it y is s u e s s o f a r t h is y e a r . I t i s b a s e d o n t h e
view* t h a t c o r p o r a t io n s a r e u n d e r p r e s s u r e t o s t r e n g t h e n t h e ir e q u it y b a s e a n d
th a t t h e b e h a v io r o f e q u ity p r ic e s w i l l b e fa v o r a b l e e n o u g h t o e n c o u r a g e e q u it y
fin a n c in g .
I t s h o u ld a ls o b e n o t e d t h a t I a m e s t im a t in g t h a t 1 9 76 w i l l w it n e s s a n o t h e r
la r g e n e t in c r e a s e in b o n d fin a n c in g b y f o r e i g n is s u e r s . I n 1975, a s s h o w n in
T a b le 4, th e n e t in c r e a s e in f o r e i g n b o n d is s u e s ju m p e d t o $6 .1 b illio n , a n d i t
se e m s l o g ic a l t o e x p e c t a t le a s t a m o d e r a t e ly h ig h e r fig u r e ($ 6 .5 b i l l i o n ) t h is
y e a r i f lo n g -t e r m r a t e s in o u r m a r k e t s a r e a t t r a c t i v e , a n d t h e fig u r e c o u ld b e
h ig h e r . F u r th e r m o r e , a s s h o w n in T a b l e 4, t h e r e is a p t t o b e a s ig n if ic a n t
in c r e a s e t h is y e a r in th e n e t n e w is s u e o f s t o c k s a n d b o n d s b y fin a n c ia l in s t i­
t u t io n s s u c h a s c o m m e r c ia l b a n k s , fin a n c e c o m p a n ie s , in s u r a n c e c o m p a n ie s ,
a n d o t h e r fin a n c ia l in s tit u t io n s . T h e n e e d i s p a r t i c u l a r ly s t r o n g f o r t h e c o m ­
m e r c ia l b a n k s t o r a is e a d d it io n a l c a p i t a l t h r o u g h t h e is s u a n c e o f s t o c k s a n d
b o n d s a n d t h e b a n k s a lr e a d y s e e m t o b e r e fle c t in g t h is n e e d s o f a r t h is y e a r .
A s w i l l b e se e n in T a b le 4, I a m e x p e c t i n g a s u b s t a n t ia l in c r e a s e t h is y e a r in
t h e n e t e q u itie s a n d b o n d is s u e s b y fin a n c ia l in s t it u t io n s . T h i s w ill b e e s p e c ia lly
t r u e i f lo n g -t e r m r a t e s te n d t o d e c lin e .
S u m m a r iz in g th e d e m a n d t o b e e x p e c t e d t h is y e a r b y c o r p o r a t i o n s in t h e
lo n g -t e r m c a p it a l m a r k e ts , i t s e e m s t o m e t h a t t h e le s s e r v o lu m e o f c o r p o r a t e
b o n d fin a n c in g b y d o m e s t ic n o n -fin a n c ia l c o r p o r a t i o n s w il l b e m o r e t h a n o ff s e t
b y a s ig n ific a n t ly h ig h e r v o lu m e o f c o r p o r a t e b o n d fin a n c in g b y fin a n c ia l
c o r p o r a t io n s a n d a m a r k e d ly h ig h e r v o l u m e o f e q u it y fin a n c in g b y b o t h n o n ­
fin a n c ia l a n d fin a n c ia l firm s.
T u r n in g t o o t h e r p r iv a t e s e c t o r s o f t h e lo n g -t e r m c a p it a l m a r k e t , i t w i l l b e
n o t e d in T a b le 4 t h a t I a m e s t im a t in g a m u c h l a r g e r n e t in c r e a s e ($ 4 9 .5 b il ­
l i o n ) in s in g le -fa m ily h o m e m o r t g a g e s t h is y e a r t h a n la s t . A s t h e n e t in f lo w
o f fu n d s t o s a v in g s a n d lo a n a s s o c i a t i o n s h a s c o n t in u e d t o r u n a t r e c o r d
a m o u n ts , th e r e h a s b e e n a p r o n o u n c e d e a s in g i n t h e a v a il a b i li t y o f h o m e m o r t ­
g a g e c r e d it a n d in m o r t g a g e in t e r e s t r a t e s . F u n d s a r e fl o w in g s t r o n g ly in t o
m o r t g a g e fin a n c in g o f e x is t in g h o m e s a n d t h e g r e a t e r e a s e in t h e s a le o f
e x is t in g h o m e s i s b e g in n in g t o b e f e l t in b e t t e r s a le s o f n e w h o u s e s a n d in a
s t r o n g e r r a t e o f h o u s in g s ta r ts . H o u s i n g i s s t i l l b e in g h a m p e r e d b y h ig h p r ic e s ,
b u t I a m b e c o m in g in c r e a s in g ly c o n fid e n t t h a t t h e 1.8 m i lli o n a n n u a l r a t e o f
s t a r t s ( T a b le 3 ) w h ic h w e a r e p r e d i c t i n g f o r t h e f o u r t h q u a r t e r w i l l b e
r e a liz e d . I t s h o u ld a ls o b e r e c o g n iz e d t h a t t h e in f la t io n r a t e o f 8 - 1 0 p e r c e n t in
t h e c o s t o f h o u s in g w ill b e a n im p o r t a n t f a c t o r i n t h e h i g h e r n e t i n c r e a s e o f
h o m e m o r t g a g e c r e d it . T h e s ig n if ic a n t ly l a r g e r i n c r e a s e in o u t s t a n d in g h o m e
m o r t g a g e d e b t t h is y e a r s h o u ld n o t b e in t e r p r e t e d t o m e a n t h a t u p w a r d p r e s ­
s u r e s n e c e s s a r ily l i e a h e a d f o r i n t e r e s t r a t e s o n h o m e m o r t g a g e s . T u r n i n g t o




58
T a b l e 5, i t W ill b e n o t e d t h a t I a m e s t im a tin g t h a t t h e s a v in g s a n d lo a n a s s o c i­
a t io n s W ill e n j o y a r e c o r d $ 4 9 b illio n in c r e a s e in t h e ir a v a ila b le fu n d s t h is
g r a d u a l, a n d t h a t t h e n e t i n f l o w o f fu n d s t o t h e m u tu a l s a v in g s b a n k s w ill
y e a r , a s s u m in g t h a t t h e r is e o f s h o r t -t e r m in t e r e s t r a t e s i s o n ly m o d e r a t e a n d
a ls o b e v e r y s t r o n g — $1 2.0 b i l l i o n v e r s u s $10.5 b illio n la s t y e a r . T h u s , i t is
e a s y t o s e e t h a t t h e l a r g e i n c r e a s e in h o m e m o r t g a g e c r e d i t c a n o c c u r in a
c l im a t e o f s o m e f u r t h e r d e c lin e o f h o m e m o r t g a g e in t e r e s t r a t e s a t le a s t in
t h e n e a r -te r m .
T h e a r e a s o f p a r t i c u l a r w e a k n e s s o f d e m a n d f o r lo n g -t e r m fin a n c in g th fs
y e a r s e e m c e r t a i n t o b e t h e m u lt if a m ily r e s id e n tia l m o r t g a g e m a r k e t a n d t h e
c o m m e r c ia l m o r t g a g e m a r k e t . A s w i l l b e n o t e d in T a b le 4, I a m e s t im a t in g
t h a t t h e n e t in c r e a s e in o u t s t a n d in g m o r t g a g e d e b t o n m u lt if a m ily p r o je c t s
w i l l r e m a in a t t h e d e p r e s s e d le v e l o f a b o u t $3.5 b illio n . A s w i l l b e n o te d ,
t h is i s f a r b e l o w t h e fig u r e s in t h e p e r io d 19 71-1 974 . T h e r e a s o n s f o r t h e o n ly
$3 .6 b i l l i o n i n c r e a s e in 1 9 75 w e r e th e e x c e s s o f s u p p ly in m a n y a r e a s o f t h e
c o u n t r y o f m u l t if a m i l y p r o j e c t s a n d th e d e p r e s s in g e ffe c t o f in fla t io n u p o n th e
e c o n o m ic v i a b i l i t y o f m u l t if a m i l y ' p r o je c t s . E a s in g o f c r e d it w ill h e lp t h is
s it u a t io n , b u t p r o b a b l y n o t a p p r e c ia b ly th is y e a r . S im ila r ly , it w ill b e n o t e d
in T a b l e 4 t h a t I a m e s t im a t in g a n e t in c r e a s e o f O u tsta n d in g m o r t g a g e d e b t
t h is y e a r o n c o m m e r c ia l p r o p e r t ie s ($ 8 .0 b i l l i o n ) e v e n lo w e r th a n t h e d e p r e s s e d
fig u r e in 1975. A g a in , i t i s s ig n ific a n t t o n o t e h o w la r g e t h e n e t in c r e a s e o f
c o m m e r c ia l m o r t g a g e s w a s in t h e 1 9 7 2 -1 9 7 4 p e r io d . W h e n w e tu r n p r e s e n t ly
t o c o n s i d e r i n g t h e s u p p ly o f lo n g -t e r m fu n d s , i t is p e r tin e n t t h a t m u tu a l s a v in g s
b a n k s a n d l i f e in s u r a n c e c o m p a n ie s n o r m a lly p la c e a h ig h p e r c e n t a g e o f t h e ir
in v e s t ib le fu n d s i n m o r t g a g e s o n in c o m e -p r o d u c in g p r o p e r tie s . W e a k n e s s o f
d e m a n d in t h is m a r k e t w i l l f o r c e th e m t o c o n c e n t r a te t h e ir in v e s t m e n t s in
co rp o ra te bon ds.
O n e o t h e r a r e a o f d e m a n d f o r lo n g -t e r m fu n d s i s th e m a r k e t f o r s t a t e a n d
l o c a l g o v e r n m e n t o b lig a t io n s . A s w i l l b e n o t e d in T a b le 4, I a m e s t im a tin g
t h a t t h e n e t i n c r e a s e in s u c h o b lig a t io n s w ill, a t $13 b illio n , b e s o m e w h a t lo w e r
t h a n t h e $15.4 b i l l i o n in 1975. T h i s se e m s c o n s is t e n t w it h th e g r e a t e r b u d g e t a r y
c o n s e r v a t is m b e in g f o r c e d o n s t a t e a n d lo w e r g o v e r n m e n t u n its , a s w e ll a s b y
t h e u n w illin g n e s s o f v o t e r s l a s t f a l l to a p p r o v e n e w c a p it a l p r o je c t s .
T u r n i n g t h e n t o th e t o t a l s u p p l y o f lo n g -te r m fu n d s , a s I n o t e d e a r lie r t h e r e
h a s f o r m a n y m o n t h s b e e n a v i g o r o u s n e t in flo w o f fu n d s in t o t h e s a v in g s
a n d l o a n a s s o c i a t i o n s d u e t o t b e d r o p in , s h o r t -t e r m o p e n -m a r k e t r a t e s a n d th e
c o n s e q u e n t r e in t e r m e d ia t io n o f fu n d s iiit o t h e s a v in g s in s tit u t io n s . T h e r a t e
o f n e t i n f lo w in t h e fir s t q u a r t e r w ill p r o b a b ly b e th e h ig h e s t f o r t h e y e a r ,
b u t u n le s s s h o r t -t e r m r a t e s r is e m o r e th a n I e x p e c t ift th e r e s t o f th e y e a r t h e
n e t in f l o w s h o u ld eix ceed t h a t o f 1975. M y e s t im a te J s t h a t t h e n e t in flo w
f o r t h e s a v in g s a n d l o a n a s s o c ia t io n s w ill b e $49 b illio n a n d $12 b illio n f o r
t h e m u t u a l s a v in g s b a n k s . T h e s e in s t i t u t i o n s . h a v e r e b u ilt t h e ir liq u id it y a n d
a r e n o w m o r e a g g r e s s iv e ly c o m m it t in g fu n d s t o m o r t g a g e a n d c o r p o r a t e b o n d
in v e s t m e n t s . A r is e o f s h o r t -t e r m r a t e s w ill m a k e th e m m o r e liq u id it y c o n ­
s c io u s a n d w i l l r e d u c e t h e i r e n t h u s ia s m a b o u t c o m m itt in g fu n d s t o lo n g -t e r m
in v e s t m e n t s , b u t t h e e x t e n t o f t h e r is e o f s h o r t -t e r m r a t e s w h ic h I a n t ic ip a t e
s h o u ld n o t b e t o o g r e a t a d e t e r r e n t t o lo n g -te r m in v e stm e n ts.
I n m a n y r e s p e c t s t h e l i f e i n s u r a n c e c o m p a n ie s w ill b e t h e d e c is iv e in flu e n c e
t h is y e a r in th e lo n g -t e r m c a p i t a l m a r k e ts. A s w i l l b e n o t e d in T a b le 5, I a m
e s t im a t in g a s iz e a b le i n c r e a s e t h i s y e a r in th e n e t n e w m o n e y flo w o f t h e l i f e
in s u r a n c e c o m p a n ie s . I n a d d i t i o n t o t h e la r g e r n e t in c r e a s e in a v a ila b le fu n d s ,
a s s h o r t -t e r m r a t e s h a v e fa lle n , t h e r e h a s b e e n a d is t in c t le s s e n in g in t h e
v o lu m e o f p o l i c y l o a n s w h ic h l i f e c o m p a n ie s a r e b e in g a s k e d t o e x te n d a t th e
g e n e r a lly p r e v a i l i n g 5 p e r c e n t c o n t r a c t r a te , so t h a t a s a r e s u lt a h ig h e r
p r o p o r t i o n o f t h e i r f u n d s i s a v a ila b le f o r in v e s t m e n t in c o r p o r a t e s e c u r it ie s
a n d m o r t g a g e s . U n le s s s h o r t -t e r m r a t e s m o v e u p m o r e s h a r p ly th a n I e x p e c t ,
t h e r e s h o u ld b e l i t t l e e s c a la t io n in p o lic y lo a n s th is y e a r. M o r e o v e r , a s n o t e d
e a r lie r , t h e w e a k n e s s o f d e m a n d f o r in c o m e -p r o p e r ty m o r t g a g e fin a n c in g w ill
t e n d t o f o r c e a m u c h h ig h e r p r o p o r t io n o f l i f e c o m p a n y fu n d s in t o c o r p o r a t e
b o n d in v e s t m e n t s . A n a d d i t i o n a l f a c t o r is th a t, w h ile l i f e in s u r a n c e c o m p a n ie s
e x p e c t t o d is b u r s e a s u b s t a n t ia l a m o u n t o f t h e ir fu n d s t h is y e a r t o m e e t
f o r w a r d c o m m it m e n t s t o b u y b o n d s a n d m o r tg a g e s , th e b a c k lo g o f f o r w a r d
c o m m itm e n t s , a lt h o u g h l a r g e , is c o m p a r a t iv e ly l o w r e la t iv e t o t o ta l c a s h flo w
e x p e c t e d t h i s y e a r . A l l o f t h is s u g g e s t s t h a t t h e l i f e c o m p a n ie s a r e a p t u n d e r
t h e s e c ir c u m s t a n c e s t o b e c o m e m o r e a c t iv e in p la c in g fu n d s in d ir e c t p la c e ­
m e n t s o f c o r p o r a t e b o n d s , w h ic h w o u ld m e a n t h a t m a n y firm s w h ic h h a v e th u s
f a r b e e n u n a b le t o r a i s e fu n d s in th e p u b lic b o n d m a r k e t w ill b e a b le t o s e ll
b o n d s d i r e c t l y t o t h e l i f e c o m p a n ie s . M o r e o v e r , th e l i f e c o m p a n ie s w ill u n d o u b t ­




59
e d ly c o n t in u e t o b e a c t iv e in p r o v i d i n g lo n g -t e r m t a x -e x e m p t b o n d fin a n c in g .
W it h t h e p r o n o u n c e d im p r o v e m e n t , o f l i f e c o m p a n y in v e s t m e n t e a r n in g s (d u rin g
th e p a s t d e ca d e , m a n y l i f e c o m p a n ie s h a v e m o v e d t o h ig h e r F e d e r a l in c o m e
t a x b r a c k e t s s o t h a t t h e a f t e r - t a x y i e l d o n t a x -e x e m p t b o n d s h a s b e c o m e v e r y
a t t r a c t i v e to m a n y c o m p a n ie s . I t i s n o t e w o r t h y t h a t t h e l i f e c o m p a n ie s w e r e
h e a v y b u y e r s o f th e h u g e is s u e s o f ta x -e x ie m p t b o n d s flo a t e d t h is y e a r b y t h e
N e w Y o r k P o w e r A u t h o r it y a n d t h e S t a t e o f M a s s a c h u s e t t s .
A s a l s o s h o w n in T a b le 5, I a m e s t im a t in g f u r t h e r in c r e a s e s in n e t f u n d s
a v a ila b le th is y e a r t o t h e u n in s u r e d p e n s io n f u n d s a n d t h e s t a t e a n d lo c a l
g o v e r n m e n t r e tir e m e n t fu n d s . A s w i l l a l s o b e n o t e d , i t s e e m s lo g i c a l t o e x p e c t
a m u c h la r g e r n e t in c r e a s e in f u n d s f r o m f o r e i g n i n v e s t o r s , $ 1 3 .0 b ill io n in m y
e s tim a te , c o m p a r e d w it h $8.0 b i l l i o n in 1975. T h e s e fu n d s w il l flo w in t o e q u it ie s ,
c o r p o r a t e b o n d s , T r e a s u r y s e c u r it ie s a n d o t h e r s h o r t -t e r m m o n e y m a r k e t
in s tr u m e n ts.
S u m m a r iz in g th e t o t a l p r iv a t e d e m a n d -s u p p ly s it u a t io n , it w o u ld se e m t o m e
t h a t f o r th e n e a r -te r m fu tu r e , p o s s ib ly t h r o u g h m u c h o f t h is y e a r , th e w e ig h t
o f th e p r iv a t e d e m a n d -s u p p ly f o r c e s i s t o w a r d s o f t e n i n g o f lo n g -t e r m r a t e s .
T h e r e is , h o w e v e r , o n e p o w e r f u l f o r c e a f fe c t i n g t h e lo n g -t e r m c a p i t a l m a r k e t
w h ic h w ill w o r k t o w a r d r e d u c in g t h e e x t e n t o f a n y f u r t h e r d e c lin e o f lo n g ­
t e rm r a te s . T h is is th e f a c t t h a t C o n g r e s s r e c e n t ly e n a c t e d le g is la t io n a u t h o r iz ­
in g th e U .S. T r e a s u r y to s e ll n o t e s w i t h m a t u r it ie s a s lo n g a s t e n y e a r s . P r e ­
v io u s ly , th e T r e a s u r y h a d b e e n l i m it e d t o n o t e s w i t h a m a x im u m m a t u r it y o f
se v e n y e a r s f r e e o f th e in t e r e s t r a t e c e i l i n g o f 4% p e r c e n t w h ic h a p p lie s t o
b o n d issu e s. N o w th e T r e a s u r y c a n s e ll n o t e s a s l o n g a s te n y e a r s in m a t u r it y
w it h o u t a n y in t e r e s t r a t e c e ilin g . I n a d d it io n , C o n g r e s s g a v e th e T r e a s u r y t h e
a u t h o r it y t o s e ll a n o t h e r $2 b i l l i o n o f b o n d s f r e e o f t h e c e i li n g r a t e . T h e
T r e a s u r y s t r o n g ly u r g e d t h is a u t h o r i t y in v i e w o f th e v e r y l o w a v e r a g e m a ­
t u r it y o f th e F e d e r a l d e b t — t w o y e a r s , n in e m o n t h s . W it h g r o s s fin a n c in g o f
t h e T r e a s u r y (n e w m o n e y p lu s r o l l o v e r ) n o w r u n n in g a t $ 2 7Q -$ 280 b illio n
p e r a n n u m , th e s h o r t a v e r a g e m a t u r it y o f t h e F e d e r a l d e b t m a k e s i t p a r t ic u ­
la r l y d iffic u lt f o r th e F e d e r a l R e s e r v e t o c a r r y o u t a n e ff e c t i v e m o n e t a r y p o lic y .
I t m a y be. a s s u m e d , t h e r e fo r e , t h a t t h e T r e a s u r y w i ll f u l l y u s e it s lim it e d
a u t h o r it y to s e ll lo n g -te r m b o n d s . I t m a y a l s o b e a s s u m e d t h a t t h e T r e a s u r y
w ill b e a g g r e s s iv e a b o u t flo a t in g n e w is s u e s in t h e 8 - 1 0 y e a r m a t u r it y r a n g e .
T h is w o u ld b e p a r t ic u la r ly t r u e i f y i e l d s o n in t e r m e d ia t e a n d lo n g -t e r m
G o v e r n m e n t b o n d s te n d e d t o d e c lin e . I t w o u ld b e l o g i c a l f o r t h e T r e a s u r y
t o b e g in to m a k e a m a jo r e ff o r t in i t s M a y r e f u n d in g t o s e ll s e c u r it ie s in
th e 8 - 1 0 y e a r m a tu r ity ra n g e , a s w e l l a s lo n g -t e r m b o n d s .
S h o u ld T r e a s u r y fin a n c in g in t h e 8 - 1 0 y e a r m a t u r it ie s b e h e a v y e n o u g h t o
r e s t r ic t a n y s iz e a b le d e c lin e o f i n t e r e s t r a t e s o n U .S . G o v e r n m e n t o b lig a t io n s
in th e s e m a tu r itie s , i t w o u ld a ls o r e s t r i c t a n y d e c lin e o f lo n g e r -t e r m T r e a s u r y
b o n d y ie ld s . T h e s p r e a d i n y ie ld b e t w e e n in t e r m e d ia t e a n d lo n g e r -t e r m G o v e r n ­
m e n ts, o n t h e o n e -h a n d , a n d h ig h -g r a d e c o r p o r a t e b o n d s o f in t e r m e d ia t e a n d
lo n g -t e r m m a tu r ity , o n t h e o t h e r , h a s b e c o m e v e r y n a r r o w . T h e r e is k e e n
c o m p e t it io n b e tw e e n th e h ig h -g r a d e c o r p o r a t e b o n d m a r k e t a n d t h e m a r k e t
f o r T r e a s u r y b o n d s. I t w o u ld s e e m t o m e , t h e r e fo r e , t h a t t h e p r e s s u r e o f
d e m a n d f o r T r e a s u r y fin a n c in g in t h e 8 - 1 0 y e a r m a t u r it y r a n g e w i l l li m i t
m u c h fu r t h e r d e c lin e o f T r e a s u r y y i e l d s i n t h e in t e r m e d ia t e a n d l o n g e r -t e r m
is s u e s a n d th a t t h is w ill te n d t o p u t a h ig h f lo o r u n d e r t h e y ie ld o n c o m p a r a b le
n e w is s u e s o f h ig h -g r a d e c o r p o r a t e b o n d s . T h e c a p it a l m a r k e t s a r e f a c e d w it h
a n in d e fin ite v o lu m e o f n e w is s u e s o f T r e a s u r y n o t e s in t h e 8 - 1 0 y e a r m a t u r i­
tie s , a n d th is s it u a t io n w i l l i n t r o d u c e a h ig h d e g r e e o f c a u t io n a m o n g t h e
u n d e r w r it e r s a n d d e a le r s a b o u t b u ild in g i n v e n t o r ie s o f b o n d s a s t h e y f a c e t h e
fu t u r e . I t is h a r d t o a s s e s s t h e im p o r t a n c e o f t h e f o r c e s w h ic h I h a v e d e ­
s c r ib e d , b u t I th in k t h e y w ill b e p o w e r f u l in t h e r e m a in d e r o f t h is y e a r .
A f t e r t h e a b o v e a p p r a is a l o f t h e v a r i o u s f o r c e s w h ic h w i l l b e in flu e n c in g
th e lo n g -te r m c a p it a l m a r k e ts in t h e m o n t h s a h e a d , w h a t t h e n c a n b e c o n ­
c lu d e d a b o u t t h e o u t lo o k f o r l o n g -t e r m in t e r e s t r a t e s ? F ir s t , g iv e n t h e s e n s i­
t iv it y o f th e lo n g -te r m m a r k e ts t o F e d e r a l R e s e r v e a n d T r e a s u r y d e b t m a n a g e ­
m e n t p o lic ie s , i t se e m s in e v it a b le t h a t h ig h -g r a d e c o r p o r a t e b o n d y ie l d s a n d
o t h e r lo n g -te r m r a t e s w ill b e s u b je c t t o s h o r t -r u n flu c t u a t io n s a r o u n d a g iv e n
le v e l a s th e y h a v e b e e n in r e c e n t y e a r s (C h a r t 2 ) . M y ju d g m e n t is, h o w e v e r ,
t h a t th e flu c t u a tio n s in y ie ld s o n n e w is s u e s o f p u b l ic ly -o ff e r e d lo n g t e r m
A a -r a t e d in d u s tr ia ls , t o t a k e t h a t i m p o r t a n t s t a n d a r d , i s a p t t o c e n t e r f o r
m u c h o f th e r e m a in d e r o f t h is y e a r a r o u n d t h e 8 % p e r c e n t le v e l, n o t f a r fr d m
t h e c u r r e n t r a te . I n o t h e r w o r d s , in t e r m s o f a g e n e r a l le v e l, m u c h i f n o t a ll
o f th e d e c lin e in p u b lic ly -o ffe r e d h ig h -g r a d e c o r p o r a t e b o n d y ie ld s h a s p r o b a b ly
a lr e a d y o c c u r r e d . T h e r e c e n t s h a r p in c r e a s e o f c o r p o r a t e b o n d y ie ld s , p r e ­




60
c ip i t a t e d b y t h e m a r k e t ’ s i n t e r p r e t a t io n t h a t t h e F e d e r a l R e s e r v e m a y b e
m o v in g t o w a r d a l e s s a c c o m m o d a t iv e c r e d it p o lic y , illu s t r a t e s t h e e x tr e m e
s e n s it iv it y o f b o n d y i e l d s t o a n t ic ip a t e d m o n e t a r y p o lic y .
A t t h e s a m e t im e , h o w e v e r , I d o n o t e x p e c t a la r g e r is e i n t h e le v e l o f
h ig h -g r a d e b o n d y i e l d s d u r in g t h e r e m a in d e r o f th e y e a r , b u t t h e r e s h o u ld b e
s o m e g r a d u a l fir m in g d e p e n d in g o n th e d e g r e e o f in c r e a s e o f s h o r t -t e r m r a te s.
T h e p u b lic is s u e s o f lo w e r -g r a d e c o r p o r a t e b o n d s a n d d ir e c t p la c e m e n ts —
u s u a lly lo w e r -r a t e d — m a y e x p e r ie n c e s o m e w h a t m o r e s o ft e n in g o f y ie ld s th a n
is t r u e o f t h e h ig h -g r a d e is s u e s . S im ila r ly , t h e in t e r e s t r a t e s o n h o m e m o r t g a g e s
a n d c o m m e r c ia l m o r t g a g e s w i l l p r o b a b ly b e s o f t e r th a n th e y ie ld s o n h ig h -g r a d e
c o r p o r a t e b o n d s d u e t o t h e c o m p a r t m e n t a liz a t io n o f t h e lo n g -t e r m c a p it a l
m a r k e t s a n d t h e s t r o n g fl o w o f fu n d s in t o t h e s a v in g s in s tit u t io n s in v e s t in g in
th e s e m a r k e ts . G e n e r a lly s p e a k in g , th e n , e x c e p t f o r t h e in e v it a b le s h o r t -t e r m
flu c t u a t io n s , w e a r e p r o b a b l y c l o s e t o t h e b o t to m in th e y ie ld s o n p u b lic ly is s u e d h ig h -g r a d e c o r p o r a t e b o n d s , b u t t h e r e i s p r o b a b ly s o m e w h a t m o r e s o f t ­
n e s s a h e a d i n t h e y i e l d s o n l o w e r -g r a d e p u b lic issu e s, d ir e c t p la c e m e n ts o f
c o r p o r a t e b o n d s , a n d r e s id e n t ia l a n d c o m m e r c ia l m o r tg a g e s . T h is a s s u m e s , I
s h o u ld r e -e m p h a s iz e , o n l y a m o d e r a t e in c r e a s e o f s h o r t -t e r m r a t e s in t h e r e s t
o f th e y ear.

Concluding Comments
T h e b e h a v i o r o f b o t h s h o r t -t e r m a n d lo n g -t e r m in t e r e s t r a t e s w h ic h I h a v e
f o r e c a s t i s c o n s is t e n t w i t h a g r a d u a l a n d m o d e r a t e r a t e o f g e n e r a l b u s in e s s
e x p a n s io n t h is y e a r . G iv e n t h e c o n d it io n s w h ic h I e x p e c t , w e s h o u ld b e a b le
t o g e t t h r o u g h a n o t h e r y e a r w i t h o u t t h e h u g e T r e a s u r y d e m a n d s f o r fu n d s
“ c r o w d i n g ” p r i v a t e b o r r o w e r s o u t o f th e m a r k e t H o w e v e r , a c c o m m o d a t io n o f
t h e T r e a s u r y ’s h u g s d e m a n d s t h i s y e a r w it h o u t t o o g r e a t a n e x p a n s io n o f
m o n e y w i l l b e a c l o s e “ fit” a n d w i l l p r e s e n t t h e m o n e t a r y a u t h o r it ie s w it h
v e r y s e r io u s p r o b le m s . M o r e o v e r , s h o u ld t h e v o lu m e o f T r e a s u r y n e w m o n e y
f in a n c in g r e m a in h ig h i n 1977, a l o n g w it h a c o n t in u in g b u s in e s s r e c o v e r y a n d
r is in g p r i v a t e l o a n d e m a n d s , “ c r o w d i n g o u t ” se e m s lik e ly t o e m e r g e a s a
c r i t i c a l p r o b le m i n fin a n c ia l m a r k e ts .
T h e F e d e r a l R e s e r v e a u t h o r i t i e s a r e n o w in th e m id s t o f a n e x t r e m e ly d iffi­
c u lt p o U c y s it u a t io n , w h ic h m i g h t b e o u t lin e d a s f o l l o w s :
1. O v e r t h e m o s t r e c e n t t h r e e m o n th s , b o t h M i a n d M 2 h a v e in c r e a s e d a t
r a t e s n e a r t h e t o p o f t h e t a r g e t r a n g e s w h ic h t h e F e d e r a l R e s e r v e a u t h o r it ie s
h a v e s e t a s c o n s is t e n t w i t h e n c o u r a g in g s u s ta in a b le e c o n o m ic e x p a n s io n a n d
y e t b r i n g i n g in f la t io n u n d e r c o n t r o l . M o r e o v e r , th e r a t e o f m o n e t a r y e x p a n s io n
se e m s t o b e a c c e le r a t in g . T h i s d e v e lo p m e n t s u g g e s ts t o m a n y t h a t t h e F e d e r a l
R e s e r v e m u s t b e g in t o s h i f t t o a le s s a c c o m m o d a t iv e c r e d it p o lic y , a lt h o u g h
t h e r a t e o f e x p a n s io n o f t h e m o n e t a r y a g g r e g a te s f o r a lo n g e r p e r io d , e .g ., t h e
p a s t s i x m o n t h s , i s s t i l l b e l o w t h e t o p o f th e t a r g e t r a n g e s , e s p e c ia lly f o r M i.
I n a d d it io n , a g r e a t d e a l o f t h e r e c e n t e s c a la t io n o f M i c a n b e e x p la in e d b y
t h e r e d u c t i o n i n T r e a s u r y c a s h b a la n c e s , w h ic h w ill te n d t o b e r e v e r s e d a s
t h e T r e a s u r y r e b u ild s it s b a la n c e s f r o m t a x c o lle c t io n s .
2. S in c e t h e b e g in n in g o f t h is y e a r , c o m m e r c ia l a n d in d u s t r ia l lo a n d e m a n d
a t t h e c o m m e r c ia l b a n k s h a s b e e n w e a k . S in c e e a r ly J a n u a r y t h e r e h a s b e e n
a n $ 8 b i l l i o n d e c lin e in o u t s t a n d in g c o m m e r c ia l a n d in d u s t r ia l lo a n s (s e a s o n ­
a l l y a d ju s t e d ) a t t h e w e e k ly r e p o r t in g la r g e c o m m e r c ia l b a n k s , o r 6 .6 p e r c e n t.
M o r e o v e r , s in c e t h e m id d le o f l a s t N o v e m b e r th e r e h a s b e e n o n ly a 2 .9 p e r c e n t
a n n u a l r a t e o f i n c r e a s e i n t h e “ c r e d i t p r o x y a d ju s t e d ” , a n o t h e r m e a s u r e w h ic h
t h e F e d e r a l R e s e r v e u s e s t o ju d g e th e r a t e o f c r e d it e x p a n s io n . T h e b e h a v io r
o f b o t h lo a n d e m a n d a n d t h e “ c r e d i t p r o x y a d ju s t e d ” w o u ld s u g g e s t t h a t i t is
p r e m a t u r e f o r t h e m o n e t a r y a u t h o r it ie s t o b e g in t o p u ll in t h e r e in s o f
m o n e t a r y e x p a n s io n .
3 . T h e fir s t q u a r t e r s h o w e d a s ig n ific a n t fu r t h e r d e c lin e i n t h e in fla t io n r a te ,
w i t h t h e G N P d e fla t o r i n c r e a s in g a t o n ly a 3 .7 p e r c e n t a n n u a l r a t e a n d t h e
c o n s u m e r p r i c e i n d e x a t 4 .4 p e r c e n t a n n u a l r a te . H o w e v e r , t h e r e is a g e n e r a l
e x p e c t a t i o n t h a t f r o m h e r e o n d u r in g t h e r e s t o f t h e y e a r t h e r e w i l l b e a
r e n e w e d e s c a l a t i o n o f t h e in f la t io n r a te , b u t p r o b a b ly o n ly o f m o d e r a t e p r o ­
p o r t io n s . G e n e r a lly s p e a k in g t h is w o u ld a ls o s u g g e s t th a t i t is p r e m a t u r e to
m a k e a n y s ig n ific a n t m o v e t o w a r d a le s s a c c o m m o d a t iv e c r e d it p o lic y , e s p e c ia lly
w h e n i t i s c o u p le d w it h t h e s t i l l h ig h u n e m p lo y m e n t r a t e o f 7.5 p e r c e n t . I t
m u s t b e r e c o g n iz e d , h o w e v e r , t h a t e x p e c t a t io n s a r e a v it a l f o r c e in t h e e c o n o m y
a n d in t h e m o n e y a n d c a p i t a l m a r k e ts . G iv e n t h e e x p e r ie n c e o f r e c e n t y e a r s ,
i f t h e m a r k e t s c o m e t o b e lie v e t h a t t h e F e d e r a l R e s e r v e w i l l b e s lo w t o r e a c t
t o a h ig h r a t e o f m o n e t a r y e x p a n s io n , th e e x p e c t a t io n o f a r e tu r n t o a h ig h




61
in fla t io n r a t e w ill s t r e n g th e n a n d in t e r e s t r a t e in c r e a s e s w i l l o c c u r n o m a tte r
h o w h a r d th e F e d tr ie s t o p r e v e n t th e m f r o m d o in g so.
4.
A t th e s a m e tim e , s h o u ld th e F e d e r a l R e s e r v e n o w b e g in t o m o v e t o w a r d
a le s s a c c o m m o d a t iv e c r e d i t p o lic y , t h is w o u ld le a d t o a s e t o f e x p e c t a t io n s in
th e m o n e y a n d c a p it a l m a r k e ts w h ic h c o u ld b e d a m a g in g to th e b u sin e ss
r e c o v e r y . M y e a r lie r d is c u s s io n o u t lin e d h o w th e s e e x p e c t a t io n s w o u ld d e v e lo p .
T h e r is e o f s h o r t -t e r m r a t e s w o u ld in t e r r u p t a n y fu r t h e r d e c lin e o f lo n g -te r m
r a t e s a n d c o u ld e a s ily le a d t o a r is e o f lo n g -t e r m r a te s . T h e in c r e a s e o f in te r e s t
r a t e s c o u l d b e d a m a g in g t o t h e s t o c k m a r k e t, a v e r y im p o r t a n t b a r o m e te r o f
c o n s u m e r a n d b u s in e s s c o n fid e n c e . T h u s , s h o u ld F e d e r a l R e s e r v e p o lic y to u c h
o ff a s ig n ific a n t in c r e a s e o f in t e r e s t r a t e s , i t c o u ld e a s ily t a k e a lo t o f th e
b lo o m o f f th e r e c o v e r y .
T h u s , t h e F e d e r a l R e s e r v e a u t h o r it ie s a r e fa c e d w it h a s e r io u s d ile m m a
w h ic h w i l l r e q u ir e a h ig h d e g r e e o f s k ill in t h e ir p o li c y a c t io n s . T h e c u r r e n t
s it u a t io n p o in t s o u t c le a r ly w h y o n e s h o u ld n o t b e d o g m a t ic a b o u t th e c r it e r ia
th e F e d e r a l R e s e r v e s h o u ld u s e in s e t tin g p o l i c y — a t le a s t in th e c o m p a r a t iv e ly
s h o r t -t e r m . T h e a u t h o r it ie s m u s t c o n s id e r a n u m b e r o f f a c t o r s b e y o n d m o n e y
su p p ly . I h o p e t h a t m y a n a ly s is s h o w s w h y th e F e d m u s t ta k e a c c o u n t o f
in t e r e s t r a te s , lo a n d e m a n d , th e c r e d i t p r o x y , th e u n e m p lo y m e n t s it u a t io n , a n d
th e d ir e c t io n o f th e in fla t io n r a t e in s e t t in g p o lic y . T h is is n o t th e tim e , in
m y v ie w , t o le t t h r e e m o n t h s o f a h ig h r a t e o f e x p a n s io n o f th e m o n e y
a g g r e g a t e s b e t h e d e c is iv e f o r c e in th e m o n e t a r y p o li c y d e c is io n . A t th e sa m e
tim e , w e a r e c lo s e t o th e p o in t a t w h ic h t h e a u t h o r it ie s s h o u ld b e g in to b e
g r a d u a lly a n d c a r e fu l l y le s s a c c o m m o d a t iv e in t h e ir p o lic y p o s itio n .

TABLE 1.— HIGHLIGHTS
Percent change
1975

1974
Gross national product................. .............
Personal consumption expenditures,.. .............
FRB index of industrial product (1967= 100)........
Corporate profits after taxes........... .............
Housing starts (in millions of units)..,.
Personal income...................... .............
Real gross national product.......... . .............
Producers' durable equipment........ .............
.............
Money supply1(in billions of dollars)..
Unemployment rate (percent).... .... .............
GNP price deflator (1958=100)....... .............
.............
Consumer price index (1967= 100).
...... ......
Wholesale price index (1967=100)
Plant and equipment expenditures...^..............

1,406.9
885.9
124.3
79.5
1.34
1,154.7
1,210.7
93.5
674.6
5.6
116.2
147.7
160.1
112.4

1.498.8
963.8
113.4
71.2
1.16
1.245.9
1,186.0
95.8
725.6
8.6
126.4
161.3
174.9
113.5

1976E
1.675.0
1.067.0
123.5
90.3
1.60
1.377.0
1.260.0
109.0
779.0
7.4
133.0
170.4
182.3
125.5

1975-1974

1976-1975E

6.5
8.8
—8.8
-9.0
-13.4
7.9
-2.0
2.5
7.6

11.7
10.7
8.9
26.8
37.9
10.5
6.2
13.3
7.4

8.8
9.2
9.2
1.0

5.2
5.6
4.2
10.6

* Includes currency in circulation, demand and time deposits, and large certificates.
TABLE 2.— NATIONAL OUTPUT
[In billions of dollars]
Percent change
1974
Gross national product................. .............
Personal consumption expenditures , . .............
Durables........................... .............
Nondurables....................... ...... ......
Services......... ................ .............
Gross private domestic investment
.............
Nonresidential total:____ _____ _____.....
Nonresidential structures.....
Producers’ durable equipment ________;
Residential structures.........
— _______
Change in inventories.............. ________
Government purchases........ ......... ...... .....
Federal Government................ . ............
National Defense............... . ............
Other......................................... State and local government............. ............
Net exports1.................. ......... ............
1 Includes military expenditures*
72-390— 76-------5




1975

1976E

1975-1974

1976—
1975E

1,406.9
885.9
121.9
375.7
388.3
212.2
147.9
54.4
93.5
54.6
9.7
301.1
111.7
77.4
34.3
189.4
7.7

1,498.8
963.8
128.1
409.8
426.0
182.6
148.5
52.7
95.8
48.7
-14.6
331.2
123.2
84.0
39.2
208.0
21.2

1,675.0
1,060.0
152.4
441.4
466.5
242.9
164.5
56.1
108.5
67.4
11.0
356.9
134.3
89.8
44.5
222.6
14.3

6.5
8.8
5.1
9.1
9.7
-13.9
0.5
-3.1
2.5
-10.8

11.7
10.0
19.0
7.7
9.5
33.0
10.8
6.5
13.3
37.7

10.0
10.3
8.5
14.3
9.8

7.8
9.0
7.0
13.5
7.0

62
TBE .—UREL PTEN
AL 3 QATRY ATRS
17 at a
95 cul
II
I
I
I
Billions of 1972 dollars. .. 1,159.0 1,168.0 1,202.0
Percent change________ -9.2
3.3
11.9
Inflation— annual rate (per­
cent):
GNP deflator...... .......
7.8
4.3
7.1
Consumer price index___
8.3
6.2
8.4
Unemployment rate (percent)..
8.4
8.9
8.5
Broadly defined money sup­
ply (percent change). _____
7.6
5.8
5.8
Current GNP (billions of dol­
lars)......... ............... 1,434.0 1,461.0 1,529.0
Aftertax corporate profits (bil­
lions of dollars)....... .....
59.6
66.6
78.8
Personal disposable income:
Billions of dollars......... 1,024.0 1,082.0 1,087.0
Annual rate of change
(percent)__________
3.2
24.5
2.0
Housing starts (millions of
units)............................... 981
1.05
1.26
Plant and equipment expen­
ditures (billions of dollars)... 114.6
112.5
112.2

17 et ae
96 simt
II
I
I
I

I
V

I
V

1,216.0
4.9

1,238.0
7.5

1,252.0
4.9

1,268.0
5.1

1,284.0
5.0

6.8
6.6
8.5

3.7
4.4
7.6

4.6
4.5
7.6

4.9
5.0
7.4

6.0
5.5
7.2

6.6

5.4

8.0

10.0

10.0

1,573.0

1,616.0

1,652.0

1,694.0

1,740.0

79.9

85.0

89.5

92.1

94.5

1,114.0

1,140.0

1,166.0

1,198.0

1,226.0

10.3

9.3

9.1

11.0

9.3

1.37

1.41

1.55

1.70

1.80

111.8

118.5

122.5

127.5

133.5

TABLE 4.— TOTAL FUNDS RAISED IN CREDIT MARKETS
[In billions of dollars]
1970
Total funds raised in credit markets . ..
By nonfinancial sectors_________
U.S. Government:
Public debt securities____
Agency issues and mort­
gages....................
Private domestic:
Corporate equities.........
State and local obligations..
Corporate bonds________
Home mortgages...........
Multifamily
residential
mortgages...............
Commercial mortgages....
Farm mortgages...........
Consumer credit...........
Bank loans *...............
Open-market paper........
Foreign:
Corporate equities______
Bonds......................
Bank loans*__________
Open-market paper........
U.S. Government loans.....
By financial sectors.................
Federally sponsored agencies__
Private financial sectors:*
Corporate equities.........
Corporate bonds...........
Mortgages.................
Bank loans *...............
Open-market paper and
R.P.'s___ ____ _____
Loans from FHLB's______

1971

1972

1973

1974

19751

1976 2

110.9
98.2

164.0
147.4

198.5
169.4

239.3
187.4

218.1
180.1

208.5
197.3

269.8
247.3

12.9

26.0

13.9

7.7

12.0

85.8

-.1

-.5

3.4

2.0

11.4
17.6
18.8
26.1

10.9
14.4

7.4
13.7
9.2
43.3

5.7

11.2
19.8
12.8
5.8
5.3

1.8
6.0

6.7
3.0
4.6

.1

.9
-.3

.8

1.3
12.7

8.2

4.7
3.1
.7
-.5
-5.0
1.3

8.8
10.0
2.0
11.2
7.8
- 1.2

4.8

< .9
*> «

1.6
.3
1.8

16.6
3.8

4.1
17.4
19.7
31.7

9.5
15.4
27.0
35.9

13.5
13.0
21.5
49.5

7.8
11.5
4.9
9.6
27.3

3.6
8.4
4.5
5.3

3.5

19.2
18.9
-.5
5.5

8.4
17.0
4.4
22.9
35.8
-.4
8.3

—
.4

-.2

-.3

12.2

39.6
10.3
14.8

2.6

1.0
- 1.0
1.8
29.1
6.2
2.6

2.9

1.0
2.8
2.2

1.7
52.0
19.6

3.0

7.0
1.7

6.8

1.8

4.9
O)

9.8
7.2

2.1

-2.7

* Preliminary.
2 Estimated.
* Less than $50 million.
« Not elsewhere classified.
* Banks, insurance companies, finance companies, etc.
Source: 1970-1974— Flow of Funds, Federal Reserve Bank.




-

.8
2.3
- 1.2

3.4
5.1

77.0

-.6

13.5

(*)

6.6
12.1
2.2

-

-

12.6
1.6

4.5

.1
6.1

1.0

8.0
4.8
20.0

13.0
3.0
5.0
.5
6.5
5.5

4.7
7.1
1.7
38.0

22.1

3.7
-.5
2.7
11.3
10.3

1.7
1.4
-1.3
7.5

1.9
1.3
2.3
-4.0

3.0
5.0
2.5
3.0

-.1

3.4
-3.9

4.0
-3.0

6.7

2.0
2.0
8.0

22.5

63
TABLE 5.— TOTAL FUNDS ADVANCED IN CREDIT MARKETS
(In billions of dollars]
1970
Total funds advanced.............
By private domestic nonfinancial sectors.
Households..........................
Nonfarm noncorp business..........
Corporate business..................
State and local government.........
By U.S. Government.....................
By financial institutions..................
Federally sponsored credit agencies..
Federal Reserve System.............
Commercial banking................
Savings and loan associations.......
Mutual savings banks..............
Credit unions.....................
Life insurance companies...........
Uninsured pension funds............
State and local gov’t retirement
funds.............................
Other insurance companies.........
Finance companies..................
REIT’s..............................
Open-end investment companies_
_
Security brokers and dealers........
By foreign...............................

1971

1972

1973

1974

19751

1976

110.9
-4.1
-2.7
.6
-2.3
.3
2.8
101.3
10.0
5.0
35.2
11.6
4.1
1.5
9.0
6.9

164.0
-8.4
-14.2
.7
7.0
-2.0
3.2
142.0
3.2
8.9
50.6
29.2
10.0
2.6
11.8
7.4

198.5
8.5
1.3
1.1
2.6
3.6
2.6
176.7
7.0
.3
70.7
36.4
10.4
3.1
13.8
6.5

239.3
31.2
21.6
1.3
7.9
.4
3.0
201.7
20.3
9.2
86.7
27.1
5.4
2.9
15.6
7.2

218.1
30.8
22.1
.9
7.5
.3
7.4
167.8
24.1
6.2
64.6
21.0
3.3
2.7
16.1
8.1

208.5
39.8
11.8
1.2
21.1
5.7
10.6
150.1
11.5
8.5
26.6
40.6
10.5
5.2
17.6
12.4

269.8
34.7
10.0
2.2
19.0
3.5
11.0
211.1
9.0
10.5
66.0
49.0
12.0
6.0
19.5
14.5

6.1
4.9
.7
2.1
1.7
2.4
11.0

6.2
6.2
4.1
2.5
.4
-1.1
27.3

7.8
6.6
10.8
4.9
-1.8
.3
10.7

9.2
5.0
10.1
4.5
-2.5
.9
3.5

12.3
4.5
4.0
.9
.9
-. 9
12.1

13.0
5.7
-. 3
-2.6
1.4
<3
)
8.0

14.3
5.8
3.5
-1.5
115
1.0
13.0

1 Preliminary.
* Estimated.
* Less than $50 million.
Source: 1970-1974— Flow of Funds,Federal Reserve Bank.




64
C h a r t 1.

SELECTED -SHORT-TERM

INTEREST RATES

AVERAGES OF D A IL Y RATES ENDED FRID AY

1973

percent

1976

LATEST DATA PLOTTED ARE AVERAGES OP RATES AV A IL A BL E FOR THE WEEK EK >IN G , A P R IL 23,

1976
MAR.

APR.

MAY

5
12
19
26
2
9
16
23 X
30
7
14
21
28

FEDERAL
F U tC S a i

3-MONTH
TREASURY
B IL L S

1-YEAR
TREASURY
B IL L

3 -5 YEAR
GOVERNMENT
S E C U R IT IE S

4 .9 5
4 .8 6
4 .7 7
4 .7 9
4 .8 4
4 .7 3
4 .7 7
4 .7 8

5 .2 0
4 .9 9
4 .9 8
4 .8 7
4 .9 7
4 .9 1
4 .8 0
4 .7 3

5 .9 8
5 .8 6
5 .8 2
5 .6 7
5 .7 6
5 .5 9
5 .3 6
5 .4 1

7 .3 6
7 .3 0
7 .2 5
7 .1 4
7 .1 4
7 .0 4
6 .8 8
e .8 7

1976

LONG-TERM .
G O V ERH CN T
S E C U R IT IE S
6 .9 6
6 .9 1
6 .8 9
6 .8 0
6 .7 8
6 .7 2
6 .6 5
6 .6 8

* AVERAGES OF RATES A V A IuA B LE .
m SEVEH-OAV AVERAGES FOR WEEK E W IN G WEDNESDAY T *0 OAYS EA R L IE R THAN DATE SH O W .
CURRENT DATA APPEAR IN THE BOARD O f GOVERNORS' H .9 RELEA SE.




pREPARFn * Y FFftPRAl

RFSFRVF BAN* OF ST . L O U IS




Y IE L D S O N

NEW

IS S U E S O F C O R P O R A T E
1974 -

1974

BONDS

1976

1975

1976

66
T h e C h a i r m a n . T h a n k y o u , g e n t le m e n , f o r t h r e e v e r y fin e a n a ly s e s ,
th e y a re m o s t h e lp fu l.
I w o u ld lik e t o s t a r t o f f w it h t h e fir s t p o in t I r a is e d in m y o p e n in g
rem a rk s

about

th e

redu ce

th e

and

m a in ta in

to

d e cis io n

by

ta r g e t, m a x im u m
th a t

th e

F ed

ta rg et, a t

r e d u c tio n

in

y esterd a y

le a s t ,

th e

lo w e r

to

som ew h a t

7y2 dow n

fr o m
le v e l

fr o m

5

to

7

4y2

to

p ercen t.
N ow , I

g e t fr o m

b oth

D r . B r im m e r a n d

D r . O ’L e a r y

an

an sw er

t h a t t h is r e d u c t io n is a b o u t r ig h t , t h a t t h e y t h in k t h is is a w is e c o u r s e .
I d i d n ’t g e t a r e s p o n s e o n t h a t f r o m

M r. W o o d co ck . I

w o u ld lik e

t o a sk a ll o f y o u g e n tle m e n t o r e s p o n d t o th is fa c t .
I f th e e co n o m y u n d e rg o e s a rea l g r o w th
you

g e n tle m e n

seem

to

in d ic a t e

is

w h ic h D r . B u r n s a n d a ll

lik e ly ,

I

t h in k

M r.

W oodcock

w o u ld lik e a b ig g e r g r o w t h , b u t t h e y a ssu m e w e w ill h a v e a g r o w t h
o f a b ou t 7 p ercen t. R e a l g r o w th o f a b o u t 7 p ercen t.
I f w e h ave an

in fla tio n

r a te o f a b o u t 6 p e r c e n t, w h ic h

t o t h in k is a b o u t w h a t y o u m ig h t e x p e c t , y o u
cen t g re a te r

a v a ila b ility

of

fu n d s

to

you

seem

w o u ld n e e d a 1 3 -p e r ­

a cco m m o d a te

th is

a c t iv it y , in

w h ic h y o u h a v e r e a l g r o w t h o f 7 a n d in fla t io n o f 6 p e r c e n t .
N ow , if

you

have

o n ly

about

a

6 -p e rc e n t

in c r e a s e

in

th e

m oney

s u p p ly , w h ic h is c lo s e t o t h e m id p o in t o f t h e 4 y 2 t o 7 , t h e n y o u

are

g o i n g t o h a v e t o h a v e a v e r y , v e r y la r g e in c r e a s e in th e v e lo c it y
m o n e y to g iv e y o u th a t k in d

of

o f g ro w th .

L a s t y e a r , i t ’s t r u e , w e d id h a v e a b i g in c r e a s e in th e v e lo c it y , b u t
as I

sa y , a ll o f

about

th ree

o u r e x p e r ie n c e

or

fo u r

q u a rte rs

in d ic a t e s t h a t t h a t p e te r s o u t a f t e r

o f

recovery.

T h e r e fo r e , w e m ig h e x p e c t th e v e lo c it y t o s lo w

dow n. I f

it s lo w s

d o w n t o its a v e r a g e , w h ic h is a b o u t a 3 -p e r c e n t in c r e a s e in v e lo c it y ,
th e n w e a r e g o i n g t o h a v e a r e a lly s e r io u s s h o r t fa ll.
Y o u a re g o in g to h a v e an
g o in g

to

have

h ig h e r

a d v e rs e e ffe ct o n t h e r e c o v e r y . W e

in te r e s t

ra tes,

we

are

g o in g

to

have

are

s lo w e r

g r o w t h , w e a r e g o i n g t o h a v e m o r e u n e m p lo y m e n t o r a t le a s t a le s s e r
e r d u c t io n in u n e m p lo y m e n t th a n w e a ll e x p e c t.
M r . W o o d c o c k , w o u ld y o u
H ow

do you

resp on d to th a t?

fe e l a b o u t M r. B u rn s , D r . B u r n s ’ a n n o u n ce m e n t o f

y esterd a y ?
M r . W o o d c o c k . O f c o u r s e , M r . C h a ir m a n , a s y o u
a m a te u r o f th e tr io , so th a t I

know , I

am

th e

ca n s im p ly s a y w h a t m y p r o fe s s io n a l

a d v is o r s h a v e s a id t o m e . T h a t is , i f w e

are to h a v e

a real g ro w th

in G N P o f 7 p e r c e n t d u r in g th e n e x t f o u r q u a r te r s , a s s u m in g a n in ­
fla tio n

r a te in th e r a n g e o f 5 y 2 t o

ra te o f in c r e a s e in

6 ^ ,

it w o u ld

n e c e s s a r ily sta te

a

h ig h e r t h a n 7 y 2 p e r c e n t , w h ic h is t h e t o p e n d

o f th e p r e s e n t s c a le s , u n le s s v e lo c it y g r o w s b y 4 y 2 t o 5 y 2 p e r c e n t .
A s you

h a v e ju s t o b s e r v e d , in

t h e l a s t t h r e e q u a r t e r s , i t w a s 6 .3 .

O n ly , I a m t o ld , in th e r e c o v e r y fr o m

t h e r e c e s s io n o f 1 9 4 9 , a ls o in ­

v o lv e d w it h th e e n t r y t o th e K o r e a n w a r , d id w e h a v e c o m p a r a b le r a te s ?
W e ju s t d o n ’t b e l i e v e t h a t is g o i n g t o h a p p e n .
^T h e C h a i r m a n . T h a t ’ s r i g h t . I t ’ s b e e n 2 5 y e a r s s i n c e w e h a d t h a t
k in d o f in c r e a s e in v e lo c it y .
M r . W o o d c o c k . T h a t ’s c o r r e c t .
W e are v ery m u ch

w o r r ie d

a b o u t a s lo w in g

dow n

g r o w th , b e c a u s e w e d o h a v e th is tr o u b le s o m e p r o b le m




in

th e

ra te

o f very

of

h ig h

67
unemployment. 7.5 percent, that was the peak of unemployment in
the last worse recession prior to this one, that of 1958-59.
O f course, it’s complicated by the very substantial change in the
work force mix. W e have some new problems out there that macroeconomic policies of the past are not going to meet.
The C h a i r m a n . Before I get to the other panelists, let me ask you,
an intriguing point that you made in your paper, you didn’t have a
chance to discuss it in your oral statement, was that in the 1972
Presidential election, the Fed followed what you and I and many
people construed as a political course, including Fortune magazine,
as you point out. That is they increased the money supply at what
many considered a reckless rate, around 8 or 9 percent, during much
of that 1972 campaign, when unemployment was dropping, when in­
flation was a serious problem and the inflationary consequences were
considerable.
This is 1976. Again we have a Republican President. Again we have
a situation where many anticipated we were going to have a rela­
tively easy monetary policy. W e haven’t had that, although you point
to the 1972 experience, I think wisely and properly, and I nave been
concerned about that.
I must say that hasn’t developed. Does that give you any notion
that maybe in the next 6 or 7 months you might have the ease in
monetary policy to accommodate the election and then after the elec­
tion, look out for the flood?
Mr. W o o d c o c k . I don’t anticipate that, because I think if those
steps were to be taken for political purposes they would have to be
onstream at this juncture to have any visible effect.
So, I don’t see that present in the— at the present time.
The C h a i r m a n . Dr. Brimmer, how do you defend what seems to
me just offhand basic simple arithmetic, to be too tight a policy?
Dr. B r im m e r . Mr. Chairman, I would want to explain why I be­
lieve the steps taken by the Federal Reserve recently are appropriate
steps.
Before I do that, you asked Mr. Woodcock a question about 1972.
The C h a i r m a n . Yes, sir.
Dr. B r im m e r . I was among the persons who voted for and con­
ducted that policy of 1972 for most of the year.
In a followup letter to Fortune Magazine, I denied the truth of
the assertion------The C h a i r m a n . I recall that.
Dr. B r im m e r . The policy was for different purposes.
I think the more we repeat that assertion, the more credence we
give to it, so I am unhappy, Mr. Chairman, to see it come up.
The C h a i r m a n . I t’s awfully hard for me to avoid that, I must
say. You see, it goes all the way back to the 1960 experience when
Chairman Burns was very emphatic in his concern that a strict,
stringent monetary policy probably cost President Nixon that very
close election he lost to President Kennedy.
Dr. B r im m e r . I am sure you mean Mr. Burns, who was then Mr.
Burns, teaching at Columbia University and not associated with the
Federal Reserve System.
But I agree that was the basis for much o f the, if not suspicion,
at least uncertainty about this whole thing. I will come back to that




68

if you give me chance, but let me address myself specifically to the
question you raised about the appropriateness of the growth targets,
for the balance of 1976, given the expected growth of the economy.
First, I would hope you, the committee and Congress, and the
public at large would dismiss the sharp focus on M x the narrowly
,
defined money supply.
Unfortunately, most economists of the monetarist persuasion have
succeeded only too well in teaching the public that that is an im­
portant variable to watch.
It is an unimportant variable, and it ought not to be watched so
carefully.
The C h a i r m a n . Then we are asking the Fed to come up and
make the wrong report to us.
W e asked them to report on M i, M 2, M 3 and the others. But we
do concentrate on that, because, as you say, almost everybody, with a
few exceptions, and a few very enlightened exceptions, like you
say, that this is a an inadequate measure.
Dr. B r im m e r . Mr. Chairman, something has happened to M 1 I
#
have not read Chairman Burns’ testimony, but I have talked to some
of the staff, and I know some of the work being done other places
to examine the contents of M i and its behavior over time.
Several things have happened.
First, there has been a sharp change in the public’s demand for
money, based partly on the technological factors the Chairman de­
scribed, but also on basic public taste, changes in public taste.
After all, we have taught the public quite a lot about holding
money balances. W e say, “ You ought to minimize them if they are
idle,” so there has been a significant drain out of currency and
checking accounts into earning assets.
And, the existing measures of the money stock capture these only
partially.
For example, M 2 captures savings in commercial banks; M 3 cap­
tures more in savings institutions.
But, when you have “now” accounts and other hybrids, how do
we know what the situation is?
I would suggest, if you have a money stock measure, it ought to
be one of the broader ones.
I do not know how to relate it to the real economy. I never did
know. But I am more uncertain now than ever befor. So I would
look more, as Dr. O ’Leary suggested, to the behavior of credit,
prospects for the growth of bank lending and other kinds of short­
term credit.
The C h a i r m a n . Dr. Brimmer, you have got to have a simple indi­
cator if you are going to get any attention from the Congress.
The fact is, you get too little attention now from the Congress on
monetary policy, because you, not you, but the profession has made
it so complicated and obscure that few can understand it. The re­
sult is that everybody drifts away from it.
Economists focus on the money supply. And I think maybe the
best focus would be interest rates.
People understand that, they have to borrow money. They know
what happens when they go to buy a home and the mortgage rate




69
is 9 percent. That means they don’t buy the home, or they don’t
buy the car if financing costs are too high.
Dr. B r im m e r . I agree with you.
The C h a i r m a n . Perhaps we can deal with that one.
D r. B r im m e r . I agree, Mr. Chairman, that is why I based much
of my comments this morning on the prospects for interest rates,
I deplored the behavior of market participants and other observers
to short-run fluctuations in Mt in my statement. A s I look ahead,
and I will go beyond 1976 into early 1977, in some work I did
to get a fix on the outlook for interest rates— I came up with the
following: I f you take the average for the second quarter of 1976
and look at the interest rate implications of the kind of economic
forecast which D M has put forward, you get the following con­
tours for the second quarter of 1977. Say a year out.
I do not think it is unreasonable to think of that kind of horizon.
This suggests that short rates— typified by Federal funds— might be
up about 2 percentage points, from an average of just over 5 to an
average of just over 7.
A 7 percent Federal funds rate a year from now would not be
unreasonable.
The C h a i r m a n . W ould not be unreasonable, you say?
Dr. B r im m e r . It w o u l d n o t b e , in m y ju d g m e n t , g iv e n th e b e h a v io r
o f th e e co n o m y .

I would expect high-grade corporate bond rates, a year from
now, to be up perhaps 50 basis points, a half a percentage point,
maybe a little more, maybe a little less.
I did not work out the implication for mortgage rates, but I would
expect them to track along------The C h a i r m a n . Track along at a higher level?
Dr. B r im m e r . I would expect mortgage rates to be up slightly,
maybe not as much as half a percentage point, but up a little bit.
The C h a i r m a n . This is bad news. Mortgage rates have been up so
high, 1975 is the worst housing year we have ever had, ever. W e
actually produced more houses in 1947, when the country was much
smaller. The reason was that interest rates are so high. I f they are
going to go higher, that is really bad news.
Furthermore, the effect of higher consumer interest rates on peo­
ple who want to buy durables like automobiles and others, it is
bound to have an adverse effect if that is going to go up, just bound
to. So when you said, you used an adjective that indicated at least
implicit approval of that. Did you mean that, that increased interest
rates would be proper, acceptable in terms of what we need in the
economy ?
Dr. B r im m e r . I think it would be quite appropriate if mortgage
interest rates a year from now were up slightly. Notice I said less
than a half percentage point. But we should not want to peg a par­
ticular sector of interest rates if other economic conditions would
not warrant keeping those rates in that zone. Let me repeat. I said
that if corporate bond rates are up about a half a percentage point,
mortgage rates would probably be up some, but less than that. How
much less I do not know, but I would expect them to be less. But I
would not expect mortgage rates a year from now, with all other
interest rates being up somewhat, to be unchanged.




70
The C h a i r m a n . I f the farmer wants to buy his tractor, the busi­
nessman who wants to build an addition on to his plant and so
forth, is going to be faced with that discouraging pricing factor on
the availability of capital, he is going to have to pay more for it so
he will be less inclinea to go ahead. That will slow it down, won’t it?
Dr. B r im m e r . I did not forecast a significant reduction in the avail­
ability of credit. I suggested the price of credit might be up a little
bit more than it is today.
The C h a i r m a n . There has never been a time in history when you
couldn’t get credit if you would pay for it. Price is the name of the
game, isn’t it?
Dr. B r im m e r . Mr. Chairman, the net position I am taking is that
we should want money and credit policies to be consistent with the
seeking of continuous economic expansion, while hedging a bit
against the recreation of those conditions which will rekindle infla­
tion. That is a compromise position. W e should not advocate no
change in interest rates over the next year. W hich would mean 2
years in recovery and no change of rates. I think that would be un­
reasonable.
The C h a i r m a n . I would like to see change, but I would like to see
them go the other way, go down.
Dr. O ’Leary.
Dr. O ’L eary. This line of discussion is very, very interesting. First,
on the question of M i, I feel very much the way Dr. Brimmer does,
that if you had to select a particular measure o f money, it should be
one of the broadly defined ones, M 2 or M 3. 1 am in an institution that
is very heavily involved in investment management. I can see in a
practical sort of way, what this change in technology is. When you
have short rates as high as they are even though they have come
down some, there is a very, very definite reluctance to hold cash.
One wants to put his money to work to take advantage o f those higher
rates. So, that, since the end of 1972, I believe, you will find very
little increase in demand deposits. Most of the increase in money
supply has been currency. The demand deposit situation has been
quite flat and I think it is a function of the very high short-term
rates and unwillingness of people to hold noninterest-bearing assets.
They put them out into other instruments.
So, that I think you capture money supply better if you take ac­
count of the time deposit and use a broader definition of money
supply.
The C h a i r m a n . Let me ask you, Dr. O ’Leary, when you talk to
your bank management people, you are the person they rely on for
economic advice. W hat measure do you use ? Don’t you use M i, don’t
you use that as an important element in explaining what is happening
to the financial markets and what then can expect?
Dr. O ’Leary. W e do use Mt because of the fact that it is part of
the process of thinking. In other words, there are enough people in
the financial markets who are paying attention to M i that, in setting
our own strategy, let’s say, investment strategy, we can’t ignore M i
because it is part of the whole thinking process.
But in my own case, in trying to decide what the Fed will do, I
would put infinitely more reliance on M 2 because of the fact that
thero has been a very strong change against holding demand de­




71
posits, with interest rates as high as they are. So, that one can’t
ignore M i because that is what the monitors are using and presum­
ably the Fed is paying attention to it.
But if you were to raise the question of whether the Fed has its
target too low, I would say as you try to make that judgment, it
would be better to take M 2. I f you assume an increase in the current
dollar G N P of, say, 12 percent, we are closer in terms of the rate of
expansion o f M 2 to that particular level and there is less in the way
of an upward interest rate implication that if you use Mi.
The C h a i r m a n . Supposing we get away from M i, M 2 and M 3 for
awhile because as Dr. Brimmer and I were discussing, I think it is
true most people understand interest rates better. Do you agree with
Dr. Brimmer’s point that interest rates are likely to increase and
that that probably is correct at this stage of the economic situation ?
Dr. O ’L eary . Could I make one point on this ?
First of all, I do agree thoroughly with the thought you suggested,
that one of the targets that could be most easily understood, is the
rate of interest. This is, I think, you will quickly recognize, anathema
to the monetary theorists. But it seems one should look at interest
rates very carefully. One of the problems, let’s say that the S. & L .’s
would have today, or the savings banks, is that they know what they
have been through in the last 3 or 4 years in short-term rates have
risen. A t the present moment, with short-term rates down, they are
aggressively putting money out into home mortgages. I f they get the
impression short rates are on the way up, they are going to fear
another round of “ disintermediation.” The events of the last 3 or
4 years will cast a shadow on the aggressiveness with which the
S. & L ’s put long-term money out. This takes the edge off the decline
of long rates.
Right now, the life insurance companies have a very strong cash
flow. But if they begin to think short rates are going to move up they
are going to start worrying about policy loans and their aggressive­
ness right now about putting money out is going to be reduced. So,
I don’t underestimate the power of a change in interest rate. It works
its way right through the whole system and is going to affect housing
and everything else. So, that, this is a very critical point in time.
The C h a i r m a n . I think everything you are saying, as I under­
stand it, suggests that the rise in interest rates will have a depressing,
unfortunate effect, if the S. & L .’s expect rates to rise, they will be
less inclined to be aggressive in seeking mortgages now. They will
wait until the rates go up so they can earn more money. Therefore,
it is very important it would seem to me to follow policies that do
all we can to hold interest rates down, especially in view of the fact
that certainly mortgage rates are historically at immensely high
levels. There has never been a time in history when they have been
consistently over 8 percent.
To say they are going up, that is really------Dr. O ’L eary . Let me respond this way. I think it is important to
have the markets recognize and understand that any rise in rates is
going to be moderate. They ought not have the expectation that the
rise will be sharp. I don’t know how you can do that, but I think
there are ways it can be done.




72
The other point I would like to make that shows how complicated
this is that if the Federal Reserve, with the rate of monetary expan­
sion currently at the upper end of the range, fails to react to the
high rate of monetary expansion, by being less accommodative, that
would feed the expectation that the authorities are going to make
the same old mistake they made in 1972 and we would get rising
rates anyway because a higher rate of inflation will be discounted.
The C h a i r m a n . WTiat Dr. Burns said, and I think there is wisdom
to it, is the way you get expectations on interest rates down and get
a better behavior of interest rates is to develop some credibility on
inflation.
I f the assumption develops that you are going to have double-digit
inflation again, it’s going to be extremely hard to find any policy
that is going to hold interest rates down.
On the other hand, I think you implied that in your statement.
Dr. O ’L eary . Absolutely.
The C h a i r m a n . On the other hand, if you can adopt policies that
will convince people that prices are not going to rise sharply, you
have a good, chance to win that aspect of the interest rate battle.
That brings us to a point I would like to ask you gentlemen about.
I want to start off with Mr. Woodcock, because he’s done a lot of
thinking on this, and a lot of work on it, he’s been right in the fore­
front of it.
The Humphrey-Hawkins bill comes before this committee as I
indicated, it’s in the Labor Committee now, it will come to our com­
mittee before it goes to the floor.
That has an objective which I think most Americans thoroughly
support, that all people ought to have a chance to work.
It does have a very strong inflationary implication, at least in the
view of some people. The view is that if you reduce unemployment
to 3 percent, even if you make it adult unemployment at 3 percent,
on the basis of past experience, you may move into a situation which
w^ould be inflationary.
Dr. Burns’ point is that if you do this by providing jobs in the
public sectpr at wages which are comparable to the private sector,
then you create a wage inflation situation which is very hard to
resist.
In other words, there are millions and millions of people now who
are making close to the minimum wage or even below it.
Now, if you are going to provide jobs of 9 and $10,000 in the public
sector, all of that pay increase is going to have to be translated some
way or another, much of it into higher costs, higher prices.
And, then the inflationary effect therefore will be very great.
W hat is your response to that ?
It seems to me that is the one prime weakness of the HumphreyHawkins bill. Maybe it’s not enough to prevent its being passed, but
I think it’s a great vulnerability.
Mr. W o o d c o c k . M v response to that, Mr. Chairman, is that I don’t
think we can accomplish the purposes of Humphrey-Hawkins without
a considerable degree of national economic planning.
I f this nation commits itself, as I think it has, to commit itself to
a national goal of a full employment economy, then the behavior of
the American labor movement is going to have to change.




73
I think it would have the wisdom and the capacity to change. It
would become part of the planning process.
I look at the Swedish model. Here is a nation that’s had a social
democratic government for 40 years, yet has a higher degree of pri­
vate enterprise than does the United States.
Those that equate Britain and Sweden just haven’t looked at those
two nations. There, the blue collar trade union movement, the CO,
the white collar, the Federation of Swedish Industries, the govern­
ment itself, try and determine what is needed to be done to have the
economy grow at a certain rate.
They work out on a central basis the general sharing of the pie.
A nd then it goes down to the constituent unions to have that central
predetermined policy implemented.
A nd the American labor movement could not continue in that kind
of an economic climate to pursue a policy where each union has com­
plete autonomy, just goes ahead and does its own thing and without
regard to what the impact on other sectors, that would have to
change.
I think that the movement would have the capacity and wisdom
to change.
The C h a i r m a n . N o w perhaps the experience that we had in
1961 and 1962, when we had an income policy, wage price guideline,
and labor agreed at that time to limit the wage increases to the long­
term productivity increases, roughly, that the American economy
enjoyed, that is, about 3 percent, that seemed to work for a while
until it finally was fractured in the airlines strike about 4 or 5
years later.
But, it did work for some time.
Mr. W o o d c o c k . W ell, the automobile settlements of 1961 exceeded
the 3 percent guideline. The one that got the great visibility was
the airline mechanic settlement, because there had been an agree­
ment worked out in the W hite House which was then rejected by
the workers and a very substantial hike in that settlement was made.
That is where it got all the visibility.
The C h a i r m a n . But you see, the difficulty here is that most of
the wage determinations are not made in collective bargaining.
Collective bargaining is very, very important but as you know, far
better than I do, about 70 or 80 percent of the wage settlements
are outside collective bargaining contracts.
W hen you create a situation where you are employing people at
substantial pay, working for the government, one kind of public
service job or another, it’s going to be just necessary if you run a
business, small or big, and want to employ people, you have got to
pull them out of this public employment and maybe your job is less
attractive, less dignified, tougher, meaner. You are just going to
have to pay more than before.
In a way, that might be an improvement for the country, and a
great improvement, enormous improvement for the people working.
But, it seems to me, it’s hard to deny the inflationary effect of
that.
Mr. W o o d q o c k . W ell, any policy that would say that wage and
salary movements will be restricted to the long-term national or
social productivity is an absolutely unworkable policy.




74
That is to say, that the working population must bear the full
brunt of inflation and the rest of the economy just should have all
that burden on to them. It can’t work, it won’t work.
When we look at the inflation of 1972 through 1974, as I remember
the numbers, the domestic figures on average was 6.9 percent, the
imported inflation, was 21, 22 percent. And the worst part of that
inflation was outside our national reach, unless we begin to take
more sensible policies regarding O P E C and the oil cartel.
The C h a i r m a n . Let me get into one other aspect, I know you
have to leave at 1 1 :30, there are so many things that I would like to
question all of you gentlemen on, let me just ask you, Mr. Woodcock,
on this point.
You talk about providing a different monetary structure, and you
refer specifically to greater authority by the Congress and by the
President over the Fed.
You would have the President appoint the Chairman of the Fed­
eral Reserve Board within 6 months after he takes office, for exam­
ple.
And you would have the Congress confirm and the President ap­
point the Federal Reserve Bank presidents.
I think there is a lot to that.
I am somewhat concerned about, of course, I am all for, because
of my position, I am all for giving the Congress greater authority
and i think the Constitution would support that.
The Constitution makes the Fed a creature of the Congress. I am
not so sure about the President. I think that is not in accordance
with the Constitutional am not sure that would serve the interest
of good monetary policy.
The one reference that you made to Presidential interference
particularly reenforces that, the 1972 experience.
I f you had the President with greater control of the Fed, wouldn’t
there be a temptation on the part of the President to use the Federal
Reserve Board for his own political purposes ?
Wouldn’t he be inclined to have an expansive situation just be­
fore the election?
Wouldn’t that be a bad situation?
Mr. W o o d c o c k . W ell, obviously, that temptation could be there.
Let me say I am more concerned by making the Federal Reserve
Board more responsive to the elected representatives o f the people
however that may be done.
The C h a i r m a n . On the other hand, in the last year it would
seem on the basis of hindsight, and I was one of the critics of the
Fed, I thought they ought to have a much more generous policy, an
expansive policy, as were you and as were many others, yet on the
basis of hindsight, it looks as if the Fed’s policy worked out fairly
well.
Not that it couldn’t have been better, but we did have a reduction
in prices, we did have a growth in the economy, we did have a
diminution in unemployment.

I am not sure that we would have had policies that would have
been that effective if we had had either Congress or the President
m directly and explicitly running our monetary policy.
ore
#What would be your defense against the charge that elected offi­
cials are inclined to be inflationists, that they, favor rising wages,



75
rising profits, better conditions, they follow those policies, that lead
most easily to economic expansion but those policies lead to inflation.
And if the elected officials had their finger on the monetary
mechanism more securely than they do and directly than they do,
it would have an inflationary effect?
M r. W o o d c o c k . During this period, there has been as much con­
cern expressed about inflationary pressures in the Congress and in
the executive as well, it’s not just the prerogative of the Federal
Reserve Board.

The C h a i r m a n . Do y o u t h in k b e c a u s e th e in f la t io n a r y c o n c e r n o f
th e v o t e r s is ju s t as r e a l a n d e m p h a t ic as th e c o n c e r n a b o u t b e t te r
e c o n o m ic g r o w t h t h a t in fla t io n w o u l d n ’t g e t o u t o f h a n d ?
Mr. W o o d c o c k . I suspect that even though unemployment is very
high, as long as it’s trending down— when the unemployment rate
is trending down, even though it’s extremely high, those who are
at work quit worrying about it.
And then you transfer their concern back again to the problem of
inflation.
The C h a ir m a n . Then you talk about credit allocation and we
already have, as you point out, a lot of credit allocation. There is no
question about that. It is not a matter of whether we have it or
don’t have it. W e have the Import-Export Bank, Farm Home A d ­
ministration, S B A and regulations Q , we have the tandem plan for
housing, we have the proposal by the administration of a $100billion-energy-independence authority, a $100 billion to finance vari­
ous projects that the market won’t take in the engineering area.
W e have a $25 million safety net proposal for providing funds
for underdeveloped countries who are suffering from the effect of
energy, high energy prices so we have allocations now.
But I wonder if we ought to make that credit allocation more
comprehensive. It is true that the market makes efficient decisions
in the area of credit. W h y do you feel we should have even greater
credit allocation in veiw of the fact that we now have credit alloca­
tion with respect to housing, small business, and some of these other
social purposes plus emergency areas like energy?
Mr. W o o d c o c k . W ell, it could be at any given point in time there
may be an expansion needed of what is in place* But with regard
to the treal estate investment trusts, the Fed made a very strong
suggestion that the commercial banks should be sensitive to their
needs and given their power, that was the same as credit allocation.
It seems to me in that atmosphere, there is not a proper weighing
of social needs as against economic problems or needs.
The C h a ir m a n . Dr. Brimmer, you talked about having the staff
of this committee question the staff of the Federal Reserve Board to
develop information and better understanding o f monetary policy.
M y problem frankly is that right now the Members of Congress
are being drowned with information. W e get so much information
now we can’t begin to use it, we print reports nobody reads. W e make
a speech on the floor o f the Senate that you and your staff work on
for days, nobody is there to hear it. It might be in the Congressional
Record, I doubt it. So it seems to me it’s a matter of finding ways
to make monetary policy information simple, clear, and relevant, so
poeple feel it really counts, it really has an effect, they will pay
attention.




76
It seems to me that is the question rather than developing a great
deal more information than we have at the present time.
You have to find some way of getting the attention of the Con­
gress and the public for this very important instrument of eco­
nomic policy.
How do we do that?
Dr. B r im m e r . W ell, I share your view, Mr. Chairman. First I
think you ought to throw out a great deal of the information you
get and stop presenting it. That is the burden of what I am saying.
I think, Mr. Chairman, that the four times a year appearance of
the Chairman of the Federal Reserve before Congress is a legacy
which ought not to be allowed to become a tradition.
The C h a i r m a n . W ell, we just started that, that is— at least when
he comes up we get a little attention. W e get some attention in the
press, some attention by members. W e get the opportunity to have
you come in and comment on it, which you are doing today.
Dr. B r im m e r . That may or may not b e a good thing, Mr. Chair­
man.
The C h a i r m a n . I think it’s a good thing, so f a r .
Dr. B r im m e r . I am suggesting in this sketch of the scheme at the
end of my comments that you have a good, hard focus on monetary
policy early in the calendar year, along the same lines and roughly
at the same time that the budget message is before the Congress and
that the economic report is before the Congress. A t that time we try
to get a fix in substantial detail about monetary policy and its eco­
nomic implications. And you let it run for a year.
I would hope you would stop encouraging the Fed to come up once
every quarter and explain every little squiggle in the monetary
aggregates.
Maybe once toward the middle of the year when there is sort of
a reassessment of the economic outlook, at the same time that the
Joint Economic Committees looks at it would be another good time
to take a look, twice a year rather than four times. In that review
you ought to be concerned with the kind o f information that relates
monetary policy to the real economy.
While bond dealers and others might be interested in day-to-day
and month-to-month variations, and so on, the Congress ought not
be concerned with that.
I would hope this committee would take the lead and deemphasize
that kind of highly technical apparatus which I agree with you is
more diverting than instructive.
The C h a i r m a n . I think that is a very good point. W hat we
ought to do is try to get this whole debate focussed as much as
possible on jobs and prices, on interest rates, on profits, on things
that really excite and concern people, and should.
W ell, let’s try that, then. Dr. O ’Leary, you testified that the
policies that the Fed is advocating are about right. Let me ask you,
if they follow a more expansive policy, if they increase the money
supply at a higher rate, do you think that would increase produc­
tion and reduce unemplovment ? And if so, what should we have to
pav for that in terms of inflation?
Dr. O ’ L e a r y . I f they followed a more expansive policy in the
period immediately ahead. The general fear would be that this was
the beginning of evidence of the same mistake.




77
The C h a i r m a n . Because unfortunately with the election coming
up, I think you have a good point. This is May 4. Let’s say they
follow a moderate policy and then begin to follow a more expansive
policy in November.
Dr. O ’L e a r y . I look at what the Fed is doing as sort of a correc­
tion in their course at this particular point. They have a situation
in which the psychology of the markets would expect them to be
less accommodative but not strongly so. I f they take that step it
could very well be that you would have a repetition of what has
occurred in the past. After all, they took a step in May and June
of last year and then they were able to come back to an easier
credit policy.
In February, the markets interpreted that the Fed was moving
toward a less expansionary policy. It was undoubtedly a poor in­
terpretation, and I think it was a rather salutary thing at the time.
To continue progress toward a lower inflation rate, a near-term
move by the Fed toward a slightly less accommodative policy, which
they seem to be doing, is a healthy thing and gives us better assur­
ance that we can move through 1977 without the excesses. Do you see
what I am driving at?
The C h a i r m a n . Yes, but Dr. O ’Leary, you are an outstanding
expert in this area. W hat can the Fed do ? There are limitations on
what they can achieve.
Sometimes we get the feeling they can achieve anything they
wanted to. I f they wanted to reduce unemployment to a very low
level in a short time, people argue they could do it. W ell, I think
they couldn’t. But I would like to have you tell us what they could
achieve. Supposing they wanted a followup policy of putting people
to work, not in the next few months because as yon say that would
have political implications that would be suspect. But many people
are concerned about 1977. 1976, as Dr. Brimmer pointed out, looks
pretty good, but 1977 doesn’t look nearly as good for many reasons.
W hat can they do to provide in 1977 a real drop in unemployment.
Mr. Woodcock properly pointed out that it’s disgraceful for us to
accept a 7 percent unemployment level, and you said it was much
too high, or even 614 percent or 6 percent. W h at can thev do to
really make inroads in the unemployment level, if anything?
Dr. O ’L e a r y . I welcome that question. Coming out o f what we
have come out of in the last 3 or 4 years, it is highly important that
we give top priority to convincing the public that we are going to
get the inflation rate down and hold it down. W e all agree to that.
I don’t know whether everybody does, but I feel it is vital that we
deal with the inflation problem. I t ’s a very destructive process and
it’s got to be dealt with. A t the same tiimC I do not accept the idea
of running our economy with a lot of slack in it for a long period
of time as the way of being sure you get down to a low inflation
rate. It seems to me that one has got to recognize the destructive
effects on our young people and on our minority groups of the fact
that there aren’t job opportunities.
So we have to recognize that. I t ’s intolerable over any sustainable
period of time to have a high unemployment rate as a price of
keeping inflation down. M y own feeling is that the Fed has an
important but limited role. It can’t do everything here. I think one
72-390— 76------- 6




78
o f the most encouraging things that lias happened is the machinery
that has been set up in the Congress in the area o f the budget. It
gives the promise for the first time that the budget at the con­
gressional level is going to be brought within the framework of
trying to so something about sustainable growth, full employment
and consistent with price stability.
The C h a i r m a n . Dr. O ’Leary, you see the problem is that you
want to and I want to and I think all of us want to see the private
sector move in in an expansive way. The one way monetary policy
most devastatingly affects the private sector is in housing. Those
high mortgage rates are just death in housing. There is no question
we have had a housing slump every time there is a credit crunch.
Interest rates go up, housing starts to go down. W e can put 2
million people to work if we had the additional million housing
starts that the 1968 Housing Act calls for. It calls for 2.6 million
housing starts a year, we are going to have 1.6 million instead. The
reason we don’t have that, it seems to me the fundamental and prime
reason, is the fact that interest rates on mortgages are too high. Isn’t
there some policy the Fed as the money manager in our economv or
the Fed in conjunction with the Congress and President can follow
in order to get housing going? This is the housing committee o f the
Congress. This is our responsibility.
Dr. O ’L e a r y . Housing happens to be my greatest interest.
I would like to answer that, but I would like to just finish what
I was going to say. That is, that I feel, as we look out 2 or 3 years,
the most important thing, in terms of public policy is that we be
openminded, because I don’t think we yet have the policy tools that
are going to permit us to encourage an expansion that gets down
to the point where there are good job opportunities for everyone.
W e can’t do it, I don’t think, through fiscal and monetary policy.
W e have got to be openminded about other ways to do it.
Now, Andy mentioned an incomes policy. An incomes policy is
an anathema to labor, to most business people, I suppose, but I
think we have to be openminded and recognize that this may have
to be a tool we use effectively as sort o f a third leg in public policy.
W e have to be openminded. W e shouldn’t be scared by the use of
the word planning. W e are planning all the time already, as it is,
it’s just a question of doing it a little more effectively.
So, I see the most critical problem we have is how to get that
unemployment rate down, but consistently with price stability at
a Tower level.
I think a 3 percent unemployment rate probably is too much of
a pressure situation, but if you had other tools to go along with
monetary policy and fiscal policy, you might be able to do it, and
do it consistent with keeping the inflation rate down.
Now, in housing, my own feeling about housing is that the prob­
lem o f housing at the present time is much more a problem of the
impact of inflation, the high cost of housing and associated with it,
the high interest rate.
Rut, more than just high interest rates, the price o f housing.
I am told— —
The C h a i r m a n . W ell, the price of housing, you take a $41,000
house with a 30-year mortgage at 9 percent, the fact is that interest




79
is $70,000 on the house before you are through, and the cost of the
house is $41,000.
Cost of labor is about $6,000, at least directly.
Dr. O ’L eary. I am all for getting that rate down.
The reason I think the Fed should be very careful at this time
about creating the expectation that short rates are going to go up
very much, is that it’s going to hurt the availability o f home
mortgage credit.
I think at this time we^ought to have abundant availability of
home mortgage credit. That is why I say, when one talks about
money supply and so forth, he is overlooking the important impact
of interest rates.
I f interest rates are expected to go up sharply, you are going to
have every saving and loan and every savings bank in the country
running scared that disintermediation is not too far out in the
future.
So, the sensitivity of interest rates and need for the Fed to be very
careful about what they do at this stage o f the game with still 7 y2
percent unemployment is still very great.
In reading Arthur Burns’ testimony yesterday, I think he rec­
ognizes these things. I think the authorities are on the right track and
one doesn’t expect, one need not expect to have them overdo it.
A s a result of what has happened in the money markets in the
last week, I will bet you find that the Fanny Mae auctions will
expand tremendously and the home builders and mortgage bankers
are going to be into Fanny Mae to get commitments in large amounts
and you are probably going to see even within a week, some stiffen­
ing of home mortgage rates as a reflection o f what has happened
already in the bond market.
Those markets are most sensitive. The mortgage bankers, home
builders have gotten very, very sophisticated in seeing the connec­
tion between short-term money rates, the bond market and the
mortgage market. They are going to react.
I can predict within 2 weeks-— The C h a i r m a n . Y ou are predicting higher mortgage rates.
Dr. O ’L eary. W hat they will be saying in effect, is that i f the
Fed is going to move toward restraints, that short rates are going
up, savings and loan’s and savings banks are less aggressive and
thev are going to be seeking protection from F N M A .
The C h a i r m a n . That is exactly what has me concerned.
I know you have to go.
I would like to ask one more question before you leave, just take
another minute or two.
Mr. Woodcock, your testimony, I think, has been extremely help­
ful to us this morning. But I am still concerned about what we do
about the inflation, which all o f us agree is a serious problem, not
only in itself, but in the effect it has in pricing people out o f the
market and in triggering recession.
Do you see any immediate practical action that can be taken?
For example, the wage price review board, another agency under
this committee, it’s been able to do a few useful things, but it didn’t
speak up with any effect on the increase in steel prices, for example.




80
I t ’s been very understaffed, only has something like 25 profes­
sionals, only half of whom work on the whole private sector, infla­
tion problems.
Do you see anything we can do to provide a more effective in­
comes policy in that area, practically, in the next year or so?
I realize you have these overall planning objectives which are
constructive, but I am just talking about what we can do now.
Mr. W o o d c o c k . Our experience with the 1971-72 wage price in­
comes policy was in general not good.
I personally opposed the legislation when it was proposed in
1970. I was down here on both sides. I got patted on the head by
the republicans for speaking good common sense, but after August
of 1971, they, of course, switched their field.
W hat is going on in Canada now is not very helpful as to how
well this sort of thing can operate.
I don’t think you can drop a policy in a relative vacuum. It’s
going to be part o f—people have got to understand that what is
involved here is the equity of the nation and their equity within
that national equity.
I f a significant segment of the economy thinks they are being
picked on, they are going to find wavs to resist.
W e talk about the rubber workers. They have to have a big settle­
ment. Traditionally, rubber wages, auto wages went relatively to­
gether. They have a different system than we have. W e have tradi­
tionally had modest annual increases, but protected by the cost of
living clause.
That kind of wage policy is the only one that has a chance to
work. It’s after the event and over time it becomes increasingly less
of a protection.
Rubber workers used to be getting an additional increase in the
first year o f their contract, they would catch up and maybe move a
bit ahead.
But, because they have had no, escalator whatsoever, their wages
now on the production side are $1.25 behind auto, in skilled trades
thev are $1.65 an hour behind auto.
They need that to catch up to their historic position. That simply
catches them up, knowing that shortly thereafter, we will be back
at the bargaining table.
There is no easy answer.
A s I have said before this committee on many occasions, we would
welcome a price/wage review board, which would go to the price
dominated companies like General Motors and Ford in the auto­
mobile industry or any company that is the price leader, that dom­
inates so much o f the market.
I f they propose to make changes in prices, that they be required
under subpoena to lay down all the facts so at least it gets to the
public light o f day.
I f it’s a unionized operation, the same thing with the union. Its
demand would cause inflationary pressures, mandate price increases,
that it all be laid out in the light of day.
There would be no more than, in our estimate, 100 such com­
panies and let the light of public opinion shine upon these things.
W hen we had the price board, the General Motors Corp. came
down here, Ford Motors came down here.




81
The rules said, if they wanted a price increase, they had to lay
down the productivity of that enterprise. “ O h,” they said, “ we don’t
know what our productivity is.”
They have been telling us that for 29 years. They don’t know
the productivity. They know the cost of a screw to the third decimal
point, but not their productivity.
The price board let them get away with it. They turned to B L S
and said “ Give us simulated productivity figures for the auto
industry.”
B L S gave them 4.6 percent. They shouldn’t have been able to get
away with that.
American Motors gave productivity figures to back up their pro­
posed price change. It’s because of the— when you try to administer
the whole system, unless you put a massive bureauracy in place, it
just is not going to work.
So, I suggest that in a voluntary sense, we pick selected targets
and let us see what the weight of public opinion can do with regard
to this.
The C h a i r m a n . Very g o o d .
W ell, I want to thank you very much, thank all of you gentlemen.
This has, as I say, has been extremely useful and interesting testi­
mony.
The committee will stand in recess until tomorrow morning at 10
o’clock, when we hear further on this subject.
[Whereupon, at 1 1 :39 a.m., the hearing was recessed to reconvene
at 10 a.m., Wednesday, May 5, 1976.]







T H IR D

M E E T IN G

ON

THE

CONDUCT

OF

M ONETARY

P O L IC Y

W EDNESDAY, M A Y 5, 1976

U .S . S e n a t e ,
C o m m it t e e

on

B a n k in g , H

o u s in g

and

U

rban

A

f f a ir s ,

Washington, D.C.
The committee was reconvened, pursuant to adjournment, at 10
a.m. in room 5302, Dirksen Senate Office Building, Senator W illiam
Proxmire (chairman of the committee) presiding.
Present: Senators Proxmire and G am .
The C h a i r m a n . The committee will come to order.
W e start off today with Prof. Gardner Ackley and M r. Darryl
Francis.
Gentlemen, we are very indebted to have you as two o f the out­
standing economists in the country particularly expert in the area
of monetary policy. W e have had 2 days o f hearings as you may
know. W e had Dr. Arthur Burns testify on Monday and we had
three distinguished economists testify yesterday.
W e have a problem as I see it. The Chairman of the Federal
Reserve Board announced that there would be a reduction in the
upper range o f the increase in money supply, Mly from 7y2 Per"
cent down to 7. So we’d have a 4 ^ to 7 percent range. This raises
the question as to whether or not this would be sufficient to pro­
vide the credit for a growth in the economy which seems to be gen­
erally anticipated in real terms o f 7 percent and inflation o f 6
percent. Arithmetic would indicate the need for about a 13 percent
increase, much of which could be taken care of, o f course, with
velocity as it was last year. A s many people understand, velocity
is erratic and unpredictable, but the experience has been that last
year’s experience in velocity is unprecedented and it’s been the first
increase of that size in 25 years and it’s been by and large a velocity
increase which is identified with the first stages o f recovery and
the increase in money supply and the velocity I should say has
been around 3 percent, not the 7 percent which would be required
if you’re going to be able to finance the kind o f recovery that Dr.
Burns expects with only an increase o f around 6 percent or so in
the money supply.
W ell, that’s one of the issues certainly that’s before us.
Another is, who should run monetary policy ? Whether or not the
President and the Congress should have a greater voice in monetary
policy than we have had before as elected officials. Also, what other
economic policies are necessary to make monetary policy effective?
W hat kind of fiscal policy we should have ? The effect o f the
Humphrey-Hawkins bill which will be before this committee within




(8 3 )

84
the next week or two for consideration, and which Dr. Burns very
much opposes and some Members of the Congress are very enthusi­
astic in their support, the effect of credit policy such as the Rocke­
feller proposal for energy independence authority, a $100 billion
loan guarantee program over a period of 7 years or so, the safety
net proposal made by Dr. Kissinger, a $25 billion loan program.
Obviously, these programs would affect monetary policy and the
overall availability of credit.
W e are concerned in this committee with the kind o f housing
policy which would be appropriate with monetary policy that the
Fed is proposing and whether or not an incomes policy is practical
and some degree of wage-price influence or control. A ll these issues
are, of course, of great importance for our economy. You gentle­
men are the experts. Dr. Modigliani will be here a little later I
understand. H e’s been delayed
Professor Ackley, University of Michigan, was chairman of the
Council of Economic Advisers under President Lyndon Johnson’s
administration; Mr. Darryl Francis, who recently retired from the
position of President of the Federal Reserve Bank of St. Louis, are
our witnesses who are here. W e are going to ask Dr. Ackley to
start off. Your full statement will be printed in the record and
you may summarize in any way you wish but we would appreciate
it if you could confine your statement to something like 10 minutes
or so so we could have as many questions as possible. Go right
ahead.
STATEMENT OF PROF. GARDNER ACKLEY, UNIVERSITY OF
MICHIGAN
M r. A c k l e y . Mr. Chairman, my prepared statement is rather
brief and by omitting several portions of it I think I can read it
and still keep within your time limit, if I may.
It is a pleasure and honor to have been invited to participate in
this fourth series of consultations on the conduct of monetary policy.
The more extensive discussion of problems and issues which these
consultations have facilitated can only be welcomed on all sides
as a contribution to a better understanding of the appropriate role
of monetary policy in our economy. It is in that spirit of promoting
discussion that I intend to use this opportunity to make certain
comments which may appear to some people to be unduly critical
o f the Federal Reserve, of the Congress, and of the ideas of some
of my fellow economists.
I will omit page 2 o f my statement, which deals with monetary
policy— and fiscal policy too— during the recent recession. It con­
cludes that both monetary and fiscal policies contributed— in my
opinion, undesirably— to making this the deepest and longest re­
cession in nearly 40 years.
Instead, however, I begin with a discussion of more recent mone­
tary policies over the past year. I am highly critical of the re­
sponse o f the Federal Reserve to the blip in the growth of the money
supply which was associated with the tax refunds and other special
fiscal payments o f May 1975. The Fed’s response to this quite fore­
seeable and understandable blip led to a rise of 1 percent point or




85
more in most short-term interest rates— a bulge which, in most
cases, took 6 months or more to unwind. Three-month Treasury
bill yields— which had averaged 5.34 percent in June— climbed to
6.44 percent in August; 90 to 120 day commercial paper averaged
5.67 percent in June and rose to 6.79 percent in September; the
banks’ prime rate went from 7 percent in June to 8 percent on
September 15. Even long-term rates rose by up to 50 basis points;
and it was not until March of this year that the index o f long­
term Treasury bond yields returned to its level of last June.
I don’t know how much or how long this unnecessary and un­
natural bulge in interest rates moderated or delayed economic re­
covery. But if it delayed one young worker entering the labor force
from finding his first real job, or postponed the return to work
of one laid-off family breadwinner, its cost exceeded its benefits.
The only excuse I have ever seen given for this strange affair is that
the Fed knew that the bulge was meaningless but others might n o t;
therefore, it had to tighten in order to prove its “machismo” : to
demonstrate its credentials as intrepid battler against inflation.
Since last fall, I have no serious complaint about the Fed’s mone­
tary policy. The open market committee appears to have no diffi­
culty resisting any temptation to require interest rates to plunge
to whatever lower levels would have been necessary in order to
maintain the rate of growth of M t or M 2 within its own target
ranges. From June to September, Mt grew at an anual rate of only
3.6 percent, and M 2 at 6.7 percent; from September to December
the rates were 1.9 percent and 6.5 percent. I don’t know how low the
Fed would have had to push interest rates if it had desired to main­
tain monetary growth rates within its targets. But I don’t criticize
it for instead holding Federal funds at around 5 ^ percent in No­
vember and December, then sliding the rate down to 4 % percent
to 4 % percent in January through April. To have pushed rates
further sharply down in an effort to maintain the short-term growth
o f the money stock within the target range would have been just as
quixotic as it was to chase the funds rate up to 6 y2 percent in
August last year, in response to the temporary rise to a 10.1 percent
growth rate of M i and and o f 12.9 percent in M 2 between March
and May.
A s you can see, I am no supporter o f a steady growth of M i—
or of M 2 or M 5 as the key to prosperity, price stability, and
—
human happiness. I have never believed that the demand for money
is highly stable— or, if you prefer, that its reciprocal, “ velocity” is
stable. Factors which no one has been able fully to identify or ex­
plain caused velocity to speed up enormously last fall and winter—
just as it has often done from time to time in the past. I saw no
reason to reinforce that speed up o f velocity with a faster rise in
M than actually occurred. Nor will I see any automatic and undebatable need to avoid a speed up in M growth o f velocity again
slows down— as I suppose and indeed I predict that it will one of
these days.
A s you can also see, I have no prejudice against stability o f in­
terest rates. Indeed, I believe that such stability contributes far
more to the stability of business expectations than would a stability
of money growth achieved by highly unstable interest rates. I would




86

not have objected— in fact, I would have liked it better— if the re­
cent interest rate stability had been maintained at a level a per­
centage point no harm and could have done some good. But I wel­
come the stability, and I welcome even more the respite from pursu­
ing the chimera o f stable monetary growth. I only hope it lasts.
I guess I don’t need to tell you that I am not a monetarist. Mone­
tarists believe that velocity is highly stable, and therefore holds
that only a stable growth of M can produce stable— and somehow
noninflationary— growth in G N P. Although the error of this belief
has been often demonstrated, the experience of recent quarters
again dramatizes it. The table which appears in my written state­
ment shows rates o f growth of M i and of M i velocity over recent
quarters. Certainly, instead o f the smooth 2 to 3 percent a year
growth of velocity which monetarists usually describe, velocity has
jumped around erratically during this period. I f growth of M i had
been perfectly stabilized, growth of M V would still have been
exceedingly erratic. Indeed, my guess is that if the growth of M i
had been completely stable the growth of velocity would have been
even more erratic that it was.
I ’m not sure how the Congress and its committees got converted
to the monetarist, prescription of a stable growth of monetary
aggregate. Y et you have been converted— at least to a degree. Reso­
lution 133 insists on expressing the goals of monetary policy— (at
least after the first half of 1975)— solely in terms of monetary growth
rates, with no reference to the state o f the economy, the distance
from full-employment, the need to protect the housing industry from
severe dislocation, the level of interest rates which will help to pre­
vent— or will achieve— that dislocation, the actual and desired levels
of business investment, and the strength of existing incentives
thereto, and so on.
I n m y v i e w , t h e r a t e o f g r o w t h o f th e m o n e y s u p p l y — o r o f a n y
o n e o f th e s e v e r a l m o n e y s u p p lie s — c o n s titu te s o n ly o n e d im e n s io n
o f m o n e t a r y p o l i c y ; a n d m o n e t a r y p o l i c y c o n s titu te s o n l y o n e t o o l
o f t o t a l s t a b iliz a t i o n p o l i c y — a n d o n e th a t is b y n o m e a n s f u l l y r e ­
lia b le . P r e o c c u p a t i o n w i t h t h is o n e d im e n s io n o f t h is o n e t o o l is a
d e n ia l o f h u m a n in t e ll ig e n c e a n d a n e n e m y o f e c o n o m ic s t a b iliz a ­
tio n .

You sent me, Senator Proxmire, a copy of H .R . 12934 which,
among other things— most of which I don’t care much about— would
revise the charter for these consultations in a direction which I
consider a distinct improvement over the language of H .R . 133.
But I think that revision should go considerably further.
Basically, it seems to me that what Congress should be concerned
with in these consultations is the same thing that the Fed should
be concerned with in its internal deliberations. Both should be di­
recting their attention, and the country’s attention, not to past
and future growth rates of monetary aggregates but to the past
and future development o f the total economy, and to ways in which
monetary policy can better contribute to making that development
what we want it to be, always recognizing that the best path of de­
velopment can only compromise the many and competing goals of
economic and social policy. The Federal Reserve and the Congress
need to recognize what monetary policy can and what it cannot do—




87
and what total “demand-management” policy can and cannot do.
A nd we need always to compare the benefits o f what monetary
policy can contribute toward achieving some goals with the costs of
such policy in terms of other goals. The Fed should be encouraged
to use the best economic forecasts and simulations that its own su­
perb research staff can provide, to guide a flexible and discretionary
policy. And it should be urged to stop being frightened by the
monetarists.
Now, what do the above views imply about monetary policy for
the year ahead? Given the prospect for the economy which, in broad
terms, is held both by the administration and most private forecast­
ers— and, I presume by the Fed, as well-—what should policy now be ?
I believe that any appreciable tightening— either in terms of
money growth or interest rates— would be quite premature, so long
as this economic prospect appears to be working out more or less as
anticipated. To be sure, if growth o f velocity should slow down
sharply for several quarters, so that it takes substantially faster rates
of monetary growth to stabilize interest rates at around or slightly
above present levels, I would probably let interest rates rise a bit,
thereby to slow down the growth o f M . But not otherwise. A nd I
would in no case allow monetary policy seriously to interfere with
housing activity, unless there were signs of inflationary pressures
originating in housing construction or of imminent residential over­
building— neither of which now seems likely this year.
Thus, I very much regret that Chairman Burns told this committee
on Monday that the Fed has reduced, even though slightly, the
upper limits for its targets of monetary growth over the next year.
I f velocity should continue to grow very rapidly, the lower targets
might pose no problem. But if growth of velocity should slow down—
as it seems to me very possible, even probable that it will— the new
targets could pose significant problems. Indeed, so could the old ones.
Please note that an autonomous slowing down o f velocity growth
can in no conceivable sense be interpreted as a sign that spending
for goods and services is about to take off or that inflation is more
likely, or that anything is happening that calls for a tightening
of policy.
I would prefer not to have targets for monetary growth, but if we
are to have them, the notion that right now is the time to reduce them
seems to me quite without justification.
The C h a i r m a n . Thank you, D r. Ackley.
[Complete statement follows:]
Statem ent

of

G ardner A

ckley,

T

he

U

n iv e r s it y

of

M

ic h ig a n

It is a pleasure and honor to have been invited to participate in this fourth
series of consultations between the Congress and the Federal Reserve System
on the conduct of monetary policy. The more extensive discussion o f problems
and issues which these consultations have facilitated can only be welcomed on
all sides as a contribution to a better understanding o f the appropriate role
of monetary policy in our economy. It is in that spirit of promoting discussion
that I intend to use this opportunity to make certain comments which may
appear to some to be unduly critical: o f the Federal Reserve, o f the Congress,
and of the ideas of some o f my fellow economists.
Although I have often been a critic o f Federal Reserve policies, I have also
often supported them. In particular, I recall how, as Chairman o f the Council
of Economic Advisers under President Johnson, I (along with many others)




88
worked very hard to secure the President’s tolerance, at least in public, for the
sharp tightening o f monetary policy which the Federal Reserve very properly
initiated in 1966. This was an occasion, you will recall, when fiscal policy was
creating a clearly inappropriate and excessive growth o f aggregate demand.
I am sure that most o f you know that Lyndon Johnson’s instinctive approach
to interest rates and bankers, and particularly to central bankers, strongly
resembled that of his fellow-Texan, the late Congressman Wright Patman. But
we succeeded; and LB J remained quiet.
Today, however, I want to discuss more recent policies o f the Federal Reserve
System. I was and remain highly critical of the Fed’s policy during 1974 and
the first half of 1975. I regard it as nearly inexcusable that monetary policy
remained in a posture o f extreme tightness—on any and every definition—
throughout almost the entire period of the recession that began in late 1973
and ended in the first quarter o f 1975. The fact that inflation was running at
a very high rate during this period seems to me no excuse at all. With economic
activity collapsing—which was certainly evident by mid-1974 even to outsiders
without access to the Federal Reserve’s remarkable informational resources—
the Fed surely knew that the inflation had absolutely nothing to do with cur­
rent aggregate demand or money supply.
Indeed, the inflation—whatever its complex origins—-strengthened the case
for a sharp increase in monetary growth rates in 1974. Instead, during the 12
months from December 1973 to December 1974, nominal Mi brew by only 4.7% ;
and the real money supply (Mt deflated by the GNP price index) was allowed
— or made— to decline by nearly 6%. Most interest rates, already at record
levels, continued to rise at least until fall of 1974—and then declined mainly
because the economy was so weak. And the “ signal” o f a discount rate reduction
(from the unprecedented 8% level) was withheld until December 1974; nor
was there a reduction in reserve requirements until February 29, 1975.
I may add that I am equally critical of fiscal policy during the recession.
As measured by the budgetary surplus at any constant unemployment level,
fiscal policy was allowed to become steadily and substantially tighter through­
out the entire recession p eriod: it switched toward ease only after the recession
had already ended.1 I believe that this was the first time in any postwar
recession when neither fiscal nor monetary policy was used to moderate and
shorten the decline. Always before, one or even both policies turned toward
ease— sometimes within a few months following the peak. The failure o f either
to do so this time has to be at least one reason why this recession was the
deepest and longest in nearly forty years.
Nor am I favorably impressed by the response o f the Federal Reserve to the
blip in the money supply that was associated with the tax refunds and other
special fiscal payments o f May 1975. The Fed’s response to this quite foresee­
able and understandable blip led to a rise of one percentage point or more in
most short-term interest rates— a bulge which, in most cases, took six months
or more to unwind. Three-month Treasury bill yields—which had averaged
5.34% in June— climbed to 6.44% in August; 90 to 120 day commercial paper
averaged 5.67% in June and rose to 6.79% in September; the banks’ prime
rate went from 7% in June to 8% on September 15. Even long-term rates rose
by up to 50 basis points; and it was not until March o f this year that the
index o f long-term Treasury bond yields returned to its level o f last June.
I don’t know how much or how long this unnecessary and unnatural bulge
in interest rates moderated or delayed economic recovery. But i f it delayed one
young worker entering the labor force from finding his first real job, or
postponed the return to work o f one laid-off family breadwinner, its cost
exceeded its benefits. The only excuse I have ever seen given for this strange
affair is that the Fed knew that the bulge was meaningless but others might
n ot; therefore, it had to tighten in order to prove its “machismo” : to demon­
strate its credentials as intrepid battler against inflation.
Since last fall, I have no serious complaint about the Fed’s monetary policy.
The Open Market Committee appears to have had no difficulty resisting any
temptation to require interest rates to plunge to whatever lower levels would
have been necessary in order to maintain the rate of growth o f Mi or M2 within
its own target ranges. From June to September, Mi grew at an annual rate
1 The first quarter of recovery was 1975 : I I ; the fiscal policy changes which became
effective late in that quarter may account for the turn, but I doubt it. Their main
effect was felt later on.




89
of only 3.6%, and M* at 6.7% ; from September to December the rates were
1.9% and 6.5%. I don’t know how long the Fed would have had to push
interest rates if it had desired to maintain monetary growth rates within its
targets. But I don’t criticize it for instead holding Federal Funds at around
5% % in November and December, then sliding the ratio down to 4 % % to
4 % % in January through April. To have pushed rates further sharply down
in an effort to maintain the short-term growth o f the money stock within the
target range would have been just as quixotic as it was to chase the Funds
rate up to 6% % in August last year, in response to the temporary rise to a
10.1% growth rate of Mi and of 12.9% in Ma between March and May.
As you can see, I am no supporter o f a steady growth o f Mi (or o f Ms or
Ms) as the key to prosperity, price stability, and human happiness. I have
never believed that the demand for money is highly stable (or, if you prefer,
that its reciprocal, “ velocity” , is stable). Factors which no one has been able
fully to identify* or explain caused velocity to speed up enormously last fall and
winter—just as it has often done from time to time in the past. I saw no
reason to reinforce that speed-up velocity with a faster rise in M than actually
occurred. Nor will I see any automatic and undebatable need to avoid a
speed-up in M growth when growth o f velocity against slows down—as I suppose
that it will one of these days.
As you can also see, I have no prejudice against stability o f interest rates.
Indeed, I believe that such stability contributes far more to the stability of
business expectations than would a stability o f money growth achieved by
unstable interest rates. I would not have objected— in fact, I would have Hked
it better—if the recent interest-rate stability had been maintained at a level a
percentage point lower than the level we have experienced. It would have
done no harm, and could have done some good. But I welcome the stability,
and I welcome even more the respite from pursuing the chimera o f stable
monetary growth. I only hope it lasts.
I guess I don’t need to tell you that I am not a Monetarist. Monetarism is
the doctrine which believes that velocity is highly stable, and therefore holds
that only a stable growth of M can produce stable (and somehow noninflation­
ary) growth in GNP. Although the error o f this belief has been often demon­
strated, the experience o f recent quarters again dramatizes it. The table which
follows shows rates of growth of Mi and o f Mi velocity over recent quarters.
Certainly, instead of the smooth 2 to 3% a year growth o f velocity which
Monetarists usually describe, velocity has jumped around erratically during
this period. If growth of Mi had been perfectly stabilized, growth o f MV would
still have been exceedingly erratic.
Percentage growth at annual rate
Year

Quarter

1974..................... . ......................IV „ _ ._ ................................ ..................
1975............................ ..................1................................... ....................
I I .................................................. Il l ............................... ....................
IV..........................................................
1976............................ ................... 1......................................................

Mi
4.1
.6
7.6
7.2
2.5
2.7

Velocity of Mi

0
.6
.2
1 .8
1

—
2.6

9.4
8.6

Note.—Mi growth based on monthly averages of daily data; data for 1976 partly estimated.

I don't know why, when, or how the Banking and other Committees o f the
Congress got converted to the Monetarist prescription o f a stable growth o f
monetary aggregates as the test for a correct monetary policy. Perhaps it was
merely through the loud shouting and sincere missionary zeal o f Monetarism’s
high priests. Yet you have been converted— or at least ^half-converted. For
example, House Concurrent Resolution 133 insists on expressing the goals o f
monetary policy (at least after the first half o f 1975) solely in terms o f
monetary growth rates, with no reference to the state o f the economy, the
distance from full-employment, the need to protect the housing industry from
severe dislocation, the level of interest rates which will help to prevent (or
will achieve) that dislocation, the actual and desired levels o f business invest­
ment, and the strength o f existing incentives thereto, and so on.
In my view, the rate of growth o f the money supply (or o f any one o f the
several money supplies) constitutes only one dimension of monetary p olicy:




90
and monetary policy constitutes only one tool of a total stabilization policy—
and one that is by no means fully reliable. Preoccupation with this one dimen­
sion of this one tool is a denial o f human intelligence, and an enemy of
economic stabilization.
I often disagree with Chairman Burns. But at least he is not a Monetarist.
He understands that short-term fluctuations o f money growth associated with
fluctuations in money demand have no real meaning; that fiscal policy is at
least as important a tool as monetary policy; that interest-rate levels have
something to do with economic growth (perhaps even more than with short-run
stabilization) ; that housing can’t be forever the football o f stabilization policy;
that structural reforms and incomes policy (weak as they may be) must be
part o f the arsenal against inflation. And he repeatedly reminds us that we
cannot be satisfied so long as there are any workers involuntarily unemployed.
Chairman Burns needs your protection—and that of your Committee and of
the Congress—from the zealots o f the “ Shodaw Open Market Committee” and
their journalist friends.
Senator Proxmire sent me a copy o f H.R. 12934, which, among other things
(most o f which I don’t care much about) would revise the charter for these
consultations in a direction which I consider a distinct improvement over the
language of HR 133. But I think that version should go considerably further.
Basically, it seems to me that what Congress should be concerned with in
these consultations is the same thing that the Fed should be concerned with
in its internal deliberations. Both should be directing their attention, and the
country’s attention, not to past and future growth rates o f monetary aggre­
gates but to the past and future development of the total economy, and to
ways in which monetary policy can better contribute to making that develop­
ment what we want it to be, always recognizing that the best path o f develop­
ment can only compromise the many and competing goals of economic and
social policy. The Federal Reserve and the Congress need to recognize what
monetary policy can and what it cannot do—and what total “ demand-management” policy can and cannot do. And we need always to compare the benefits
o f what monetary policy can contribute toward achieving some goals with
the costs o f such policy in terms o f other goals. The Fed should be encouraged
to use the best economic forecasts and simulations that its own superb research
staff can provide, to guide a flexible and discretionary policy. And it should
be urged to stop being frightened by the Monetarists.
I have not said what I expect the economy to do in the year ahead, and
what that should mean for monetary policy, and I hesitate to do so. You have
access to considerably better forecasts than I am able to provide, since I am
neither the proprietor o f a large econometric model, nor able to spend much
time sifting the tea leaves o f the latest economic data. I assume, however,
that—given extension o f the tax cuts that would otherwise expire at midyear,
and given expenditures in the range which the Senate and House Budget
Committees are proposing—the recovery will continue at a rate averaging
between 5*4 and 7Y2% a year in real GNP, and that the rate o f inflation will
be whatever it will be (and that rate quite independent of this year’s fiscal
and monetary policies). I said last fall that I though the inflation rate would
be between 4 and 8% this year, and I haven’t changed my opinion. (Incident­
ally, I don’t think that in present circumstances anyone should pretend to
predict the inflation rate within a narrower band of uncertainty than 4 per­
centage points.)
Given this prospect—for what it is worth—what would I propose for mone­
tary policy? I believe that any appreciable tightening (either in terms of
money growth or interest rates) would be quite premature, so long as the
above economic prospect appears to be roughly correct I f growth o f velocity
slows sharply for several quarters so that it takes substantially faster rates
of monetary growth to stabilize interest rates around or slightly above present
leevls, I would let interest rates rise a bit, and try to slow down the growth
of M. But not otherwise. I would not let monetary policy seriously interfere
with housing activity in 1976 unless there are signs of inflationary pressures
originating in housing construction or o f imminent residential over-building—
neither o f which now seems likely.
But judgments like these can and should be continually made and revised—
by the Fed, the Administration, and the Congress—as we go along, and as
new data become available. What we need to avoid is locking policy into any
mechanical rule, but instead start using the best analysis of the best economists,




1)1

seasoned by the good sense of those who must administer the policies, and ever
guided by a vision of the needs o f our economy and our society, and, above all,
o f the needs and wants of the individuals who compose them.

The C h a i r m a n . Mr. Francis.
STATEMENT OF DARRYL FRANCIS, RETIRED PRESIDENT OP THE
FEDERAL RESERVE BANK OF ST. LOUIS
Mr. F r a n c i s . Mr. Chairman, I appreciate the opportunity of spend­
ing some time with you and your associates here this morning. M y
paper is brief but I will attempt to summarize it and leave parts of
it for the record.
I would like to begin with my view of monetary policy in 1975
and I think the performance of the Federal Reserve System in 1975
was about like I would like to have seen. On average, the growth in
the narrowly defined money supply came out to around 5 percent and
that is a figure that seemed reasonable to me at the beginning of the
year and does now.
I think, also, that the ranges that have been proposed from time
to time by the Chairman of the Board are within reason, particu­
larly when viewed from the perspective of midrange of what he’s
talking about. I therefore admit that I differ with the previous
speaker in that I would not like to see us move to the upward limits
o f that range because in my view o f our historical experience, when
we have had monetary expansion at those levels we have been unable
to sustain the economy and have wound up with more inflation than
at least some of us would like to have.
For that reason, a good part of my paper this morning was devoted
to a bit of historical look by time periods mainly since W orld W a r I I
of the impacts of stabilization policy, the combination of fiscal and
monetary actions by different time periods, and how the economy has
performed during those different time periods. I simply selected two
major periods, one beginning in 1952 and running through the third
quarter of ’61, then picking up there and following on through all of
1974.
I think it’s rather interesting that for the first period of 1952
through late 1961 the government was operating in such a fashion in
terms of spending that the Treasury was required to increase the pri­
vately held debt by only about $21 billion or a little over $2 billion
per year. I think it’s interesting also that the Fed during that period
provided sufficient reserves to the banking system to permit a growth
in the money stock of about $23.5 billion. It’s rather interesting, Mr.
Chairman, to observe that the growth in the money stock was suffi­
cient to completely accommodate the new requirements of the Treas­
ury with some excess.
Now in terms of the performance of the economy for the period as
a whole— and we have some ups and downs within both o f these
periods— but for the period as a whole, we saw money stock growth
at an average o f 1.8% per year, real output moved ahead at 2.6
annual rate.
The C h a i r m a n . W hat period are you discussing now?
Mr. F r a n c i s . This is 1952 through the third quarter of 1961.
The C h a i r m a n . Thank you.




92
Mr. F r a n c i s . And prices were rising at approximately 2 percent
and I think it’s interesting that on average for the period unemploy­
ment averaged out at 4.9 percent.
Now moving on to the second period, beginning with the last
quarter of 1961 and carrying throughout 1974, a period in which I
think we saw substantially more in the way of governmental activism
in terms of programs designed, as I interpret it, to improve our
ability to increase production, to reduce unemployment and bring
about a more equitable distribution of income between the various
income groups in this country. Now for that period as a whole, Fed­
eral spending stepped up rather substantially. W e had numerous
fiscal actions, a tax decrease early in the period, followed shortly by
an escalation of the Vietnam activity, the creation of the Great So­
ciety, later on the tax increase which gradually wound out and
finally another experiment with wage and price control. These pro­
grams were brought on-line in the main without increasing taxes to
even partially pay for their cost, without selling to the public securi­
ties that had to be paid in a given time by the taxpayer, but rather,
by the process of creating sufficient new money to cover the entire
cost of the programs. During that period the Treasury came to the
market and raised something over $109 billion from the private
sector. The Federal Reserve permitted an increase, absolute, in the
money supply, narrowly defined, of $136.5 billion and not again that
sufficient new money was created and injected into the economic sys­
tem to completely accommodate the total requirements for new
money of the Treasury plus a substantial amount in addition.
The money stock increased on average during the period over 5
percent per year, real output did move up to 3.6 percent a year on
average; but I would point out some of that perhaps was related to
the Vietnam activity. The price level rose on average at an annual
rate of 4.1 percent and the unemployment rate averaged out for the
period at 4.8 percent, almost identical to the previous period.
Then rather quickly, I ’d like to pull out the last 5 years of the
latter period, 1969 through 1974. The Treasury came to the public
for new money of roughly $64.5 billion. The Fed provided enough
reserves for an addition of something over $72 billion to the money
supply and again I ’d point out a sufficient amount to fully accom­
modate the new needs of the Treasury with some excess.
The performance of the economy shows money supply growing
over 6 percent at annual rate, real output dropped back to 2.5 per­
cent, prices were growing on average for the five year period at near
6 percent, and the unemployment level averaged out at 5.4 percent.
Now I recognize that you could point out very quickly that the
5-year period covered parts of two recessions, but it also covered one
of the highest levels of production we have had and one o f the
lowest levels of unemployment.
Now it seems to me that on the record for this period of time that
all of the activities that we have indulged in to increase production
and decrease unemployment haven’t worked out very well. A s I study
these time periods and the period as a whole, it seems to me that
with the rather massively increased spending of the Federal Govern­
ment and an equally massive expansion by the monetary authority,
we have not proved that we were able to increase the production po-




93
tential in this country or that we were able to reduce the level of
unemployment. Indeed, the outstanding accomplishment that comes
out of it is the much higher level of inflation, and I question that
that was a healthy development as far as the country is concerned.
In terms of the redistribution of income, I think it’s interesting
to note that in 1974 the lower 20 percent of earners in this country
were getting about 5.1 percent of the income stream and by 1974
after all of the efforts that had been made they were still getting only
about 5.4 percent. The top 20 percent of the earners portion dropped
about 2 percent during the period and, on balance, I would say that
in the process of increased spending, increased borrowing and in­
creased monetary expansion, there was no significant change in the
distribution of income between the various levels of income earners
in this country.
Now I would like to proceed with just a few more figures, if I may,
of more recent vintage. I think it’s rather interesting to note that
for the period o f 1970 to mid-1973 when the Treasury added about
$60 billion to the publicly held debt, the money supply was increased
by $51 billion or at an average rate of something over 7 percent, and
given the autonomous reduction in output, inflation moved into the
double digit level.
Then the later period of equal length, from mid-1973 through 1975,
the Treasury added approximately $92 billion to the publicly held
debt, but the money supply was permitted to increase by only $33
billion, or at the annual rate we mentioned earlier of 5 percent, and
I ’m inclined to believe that if such a policy is continued by the
Federal Reserve it’s reasonable to expect that inflation will decline
to significantly lower levels and, indeed, current data indicates that
the process is already underway.
In a period of almost unprecedented high spending and debt in­
crease inflation is winding down, in my view because of more modest
additions to the money stock.
I would like to say a word, Mr. Chairman, with reference to some
of the proposals that have been surfaced about changes in the Federal
Reserve System. I would simply express the view that I think that
the structure of the system as originally conceived and modified later,
is all right and I would not like to see the general structure of the
Federal Reserve System changed by legislative action. I think the
regional nature has been good. Rather than seeing it weakened, I
would like to see it improved or strengthened because it seems to me
that the regionally selected presidents of the Federal Reserve banks
do bring to the policy formulation table viewpoints garnered from
business and community leadership that would be painfully absent
i f they were not there.
Now, as to the concurrent resolution of the last year, it seems to
me that it has brought about an improved dialogue between the
Congress and the Federal Reserve System and I consider it a good
first step. The provisions for the Cnairman o f the Board of Gov­
ernors for regular discussion with the banking committees of both
houses of Congress with respect to the long-range goals of the Sys­
tem was, to my view, a healthy development and I would like to see
it continued.
72-390— 76----- -7




94
While it is true that information is available from week to week
on short-term movements o f the monetary aggregates, it is my view,
Mr, Chairman, that one further step could improve not only con­
gressional understanding and overview, but also the process of busi­
ness budgeting as well, since the rate of monetary expansion has an
important impact on the success of forward projections. I hold the
view that the 45-day lag in reporting the short-term goals of the
System should be eliminated. In its place, I would suggest a press
conference by the Chairman of the Board of Govenors at 4 p.m.
eastern time following the conclusion of each Federal Open Market
Committee meeting, at which he would lay out the actions of the
committee for the public to know.
Now in making this suggestion, I am well aware of the probable
outcry on the part of many that if the short-range objectives of the
System were known the smart players in the game in the market
would realize some handsome gains. I would counter that view with
the suggestion that most of the market participants that I have
observed have well trained “Fed watchers” who do a rather good job
of decoding in a relatively short time what the Fed is doing, and I
believe if the short-run objectives were made immediately available
after their formulation everybody involved in market participation
would be on a more equal basis than could possibly be the case under
the cloud of secrecy which now exists for the 45-day lag period. This
additional change in the reporting of the Federal Open Market Com­
mittee actions would seem to me to provide most of the information
needed by the Congress and I believe could lead to improve policy
formulation.
By way of summary, I am confident that the ultimate objective for
long-run sustainable growth, stability of prices, and effective full
employment depends 0 a rapid movement by the Federal Govern­
11
ment to balanced budgets and a rate of monetary expansion that does
not exceed the potential long-run rate of growth of real product.
Thank you very much.
The C h a i r m a n . Thank y o u v e r y m u c h , Mr. Francis.
[Complete statement follows:]
S t a t e m e n t of D a r r y l R . F r a n c is

Mr. Chairman and members of the committee, I am delighted with the oppor­
tunity you have given me to discuss some of the provisions expressed as the
sense of Congress in the concurrent resolution about a year ago. I think it
Would be useful in the beginning for me to lay out a few basic beliefs I have
developed over the years with reference to the economic system in this country
and its performance. I believe strongly that the free enterprise system we have
developed has been the most successful of all the various systems pursued
throughout the world and I believe that it has provided for all the American
people a standard of living that has been enjoyed by not other society in our
history. It is my belief that the economic system that has developed in this
country is basically a stable one, but I would hasten to add that it is subject
to the destabilizing impacts of stabilization policy.
I am convinced that government spending, in and o f itself, has very jU'ttle
and very short-run influence on economic activity. I feel equally certain that
government spending and the deficit it so frequently brings about, in and of
itself, is non-inflationary. The impact government spending has on our economy
depends on the Way it ife financed.. Spending financed by taxing simply repre­
sents a transfer of purchasing power from the private to the publie sector. The
same can be said for spending financed by bonds sold to the public which
ultimately must be paid by the taxpayer. But over the years, since World War




95
II, we have fallen into a pattern in this country of supporting increased gov­
ernment spending not by taxing, not by sale of bonds to the public, but rather
by a process of financing it with newly created money. This process indeed does
have an impact on economic activity, employment and prices. Further* I am
confident that the trend growth rate of monetary expansion determines the
level of prices or the rate of inflation. Further, it is quite evident to me that
significant deviations around the monetary growth rate has an impact on
production and employment and contributes significantly to the business cycle.
As a result, over a long" period of observance, I am convinced that a balanced
federal budget and a moderate rate of monetary expansion is an absolute
necessity to the long-run best interest o f this country.
With those statements o f general belief, I would like, for a while, to review
some modern economic history o f this country and the performance that has
emanated from the many attempts to create higher production and lower un­
employment through stepped up levels o f government speeding and money
creation. I should like to review two major periods of time since World War
II. The first period begins with 1952 and continues through the third quarter
of 1961. This period represents, I think, a time of relative stability. The second
period begins with the fourth quarter of 1961 and runs through all of 1974.
Then, I think it is o f interest to take the last five years o f the second period
for further review.
During the period of 1952 through the third quarter of 1961, the federal gov­
ernment required the Treasury to borrow from the public approximately 21
billion dollars or roughly 2.2 billion dollars per year. The Federal Reserve
System bought sufficient securities in the open market to provide reserves to
the banking system that permitted an increase in the narrowly defined money
stock of approximately 23.5 billion dollars. Please note that for the period as a
whole, there was sufficient newly created money injected into the economic
system to completely accommodate the needs of the Treasury with some excess.
In terms of the performance o f the economy for the period as a whole, the
money stock grew at 1.8% per year, real out-put advanced at the annual rate
of 2.6%. prices rose at a 2% annual rate and on average for the entire period,
unemployment was 4.9%. .
The second period which began under the battle cry of ‘let’s get this country
going* represents a period o f a high degree o f governmental activism and influ­
ence in the economic process. During the period from late 1961 through 1974,
we experienced many efforts to use various fiscal actions and government con­
trols to accomplish the goals of higher production, lower unemployment and a
more equitable distribution of income between all levels o f earners. We experi­
enced a tax decrease, an escalation in the Vietnam activity, the creation of the
great society, a tax increase which was subsequently wound-out and the ill
fated experiment with wage and price controls. For the period as a whole,
governmental spending was stepped-up substantially as new legislation brought
new urograms on line. The Treasury was required to increase the publicly held
debt of the federal government by over 109 Mil ion dollars. The Federal Reserve
provided sufficient reserves to the banking system to increase the money supply
bv about 136.5 billion dollars. Again, please note that for the period as a who*e,
enough newly created money was injected into the economic system to fully
accommodate the entire needs of the Treasury with a goodly number of billions
of dollars in addition. Looking at the performance during the period, we see
a rate of growth in the money stock that averaged out at 5.1%. real p^odtict
indeed moved up to 3.6%, prices advanced on average at 4.1% and unemploy­
ment a v e r te d out at 4.8%. almost identical to the previous period.
P u llin g out the la st five years o f the second period, 1969 through 1974. th*
'T'rpasu^v w as obHp'atPd to raise from tho public new dobt o** ap p ro x im a te *
A4.5 billion dollars. T he Federal R eserve bought securities in the open market
in a sufficient am ount to perm it an increase in the m oney supply o f over 72
billion dollars and onc<* again. pTease note that the am ount o f newlv created
m oney put into the o^onomic srptem w as sufficient to fu lly accommodate the
entire n^eds o f the T re asu ry with Rome pxoa*« The perform ance fo r tTif^ f?^rn
vear period w a s an average grow th rate in the monev stork of 6 2 % . a rato of
increase in real product th at fell back to 2 5 % . an avora^e am rial rate of
inflation o f 5 .8 % and final^v, an avei'as'e unem ploym ent k ve i of 5 .4 % . T am

awa^e th/it one oonld ouickly point out that dunnsr this five rear period we
exrei*ierr^d r>arts of two separate recessions but it is also true that dnrinar the
period we were at the highest level of production in our history and r^achod




96
one of the lowest levels o f unemployment. Therefore, I think the conclusion
that one can take from each o f these periods in relation to the other is valid.
I f we review this mass o f data, three things clearly stand out. First, increas­
ing levels of government spending financed by large deficits paid for in effect,
through the money creation process did not result over the long run in an
increase in our ability to produce. Second, it is equally evident that the process
did not result in any evidence o f its ability to reduce unemployment. Third,
and perhaps most important, it is quite evident that out o f the increased
spending and deficit financing, along with equally massive creation o f money
emerged a devastatingly higher level o f inflation and a tremendous increase in
the Federal Debt which will be a drain on taxpayers for as far as one can
see ahead.
Another interesting result or perhaps failure o f the experience has to do
with income redistribution. In 1947, the lower 20% o f earners in this country
received about 5.1% o f the income stream. In 1974, that share had increased
to only 5.4%, hardly a significant accomplishment. In terms o f the top 20%
of earners, the share o f the income stream was reduced by about 2% and as
one looks at the structure o f income, no significant change resulted from the
massive programs and the equally massive expenditures to bring them about.
It seems to me that as one studies the activities in which government has
involved itself and the resulting performance o f the economy in succeeding
periods, one must support the conclusion set out at the beginning o f this
testimony.
Turning to the Congressional overview o f the Federal Reserve System, it
seems clear to me that over the period since World W ar II, there is no evidence
of lack of support by the Federal Reserve of the governmental programs put
on line at great cost. Indeed i f my view that inflation is a monetary phenom­
enon holds true, as I believe it does, the evidence would say that the Federal
Reserve has been overly responsive to the needs o f the Treasury and further
that the lack o f accomplishment of the efforts involved in increased spending
since World War II failed as they did for reasons other than a lack o f sup­
portive role on the part of the Federal Reserve System.
Simply stated, increased spending and enlarged debt, fully accommodated by
expansion of the money supply by the addition o f newly created reserves to
the banking system, feeds additional income to all levels o f earners with no
significant shift from one group to another. Excessive utilization o f this com­
bination o f actions raises all levels of income more than otherwise because of
its attendant inflation.
It is true the real incomes o f all levels of earners since World War II have
increased almost proportionately but mainly as a consequence o f our ongoing
growth in resources and not because o f governmental spending actions thought
by some to bring the same results.
Now a few more statistics to support my contention that government spending
is inflationary only to the extent it is supported by monetary expansion. From
1970 to mid 1973, the Treasury added about 60 billion dollars to the publicly
held debt. The money supply increased by about 51 billion dollars or at an
average rate o f over 7%. Given the autonomous reduction in output, inflation
moved into the double digit level. Then from mid 1973 to the end o f 1975, the
Treasury added over 92 billion dollars to the publicly held debt but the money
supply was permitted to increase by only 33 billion dollars or at an annual rate
of about 5%. I f such policy is continued it is reasonable to expect that infla­
tion will decline to significantly lower levels over the years ahead. As a matter
of fact, current data indicates that this process is under way. In a period of
almost unprecedented high spending and deficits inflation is winding down
because o f more modest additions to the money stock.
Recently, we have been aware o f legislative proposals which would bring
about changes in the structure and operations of the Federal Reserve System.
The most significant proposed changes would appear to be designed to politi­
cize the system and weaken its regional representation. It would be my fervent
hope that these proposals do not find their way into legislative action. While I
have said that I believe the Federal Reserve System has permitted too much
monetary expansion, particularly during the last 15 years, I still believe the
basic structure o f the system to be sound and I would hope that its structure
and operation in general would continue along the lines set forth in the
original act and its later modification. I am confident that independent regional
input into the monetary policy formulation process is a very essential element




97

to better policy in the years ahead. Regionally selected and fully briefed
regional bank presidents bring to the federal open market committee an under­
standing o f current economic developments gleaned from business and com­
munity leadership that would be painfully lacking i f their participation were
eliminated from the deliberation. As a matter o f fact I would urge the Con­
gress to consider strengthening rather than weakening the regional structure
of the system. As a final note on this subject, it is my belief that the most
important contribution the Congress could make to greater soundness o f future
monetary policy actions would be a dedicated move to a balanced budget, thus
removing the pressure on the Federal Reserve for excessive monetary expansion.
As to the concurrent resolution o f last year, it seems to me that it has
brought about an improved dialogue between the Congress and the Federal
Reserve System. There may be some inconsistencies in the substance o f the
resolution but I consider it a good first step. The provisions for the Chairman
of the Board o f Governors for regular discussion with the banking committees
of both Houses of Congress with respect to the long range goals o f the system
was, to my view, a healthy development and should be continued. While it is
true that information is available from week to week on short term movements
of the monetary aggregates, it is my view that one further step could improve
not only Congressional understanding but also the process o f business budgeting
as well, since the rate o f monetary expansion has such an important impact
on the success o f forward projections. I hold the view that the 45 day lag in
reporting the short term goals o f the system should be eliminated. In its place,
I would suggest a press conference by the Chairman o f the Board o f Governors
at 4 :00 P.M. Eastern Time following the conclusion o f each federal open market
committee at which he would lay out the short range objectives o f the com­
mittee as developed in the meeting. In making this suggestion, I am well aware
of the probable out-cry that if market participants knew what the Fed was
doing in the short run, the smart players in the game could realize handsome
gains. I would counter that with a suggestion that most o f the market partici­
pants that I have observed have well trained Fed watchers who do a rather
good job of decoding in a relatively short time what the Fed is doing. I would
believe that if the short run objectives were made available immediately after
their formulation, everyone involved in market participation would be on a
more equal basis than can possibly be the case under the cloud of secrecy
which now exists for the 45 day period. This additional change in the reporting
of federal open market committee actions, it seems to me, would provide most
of the information needed by the Congress.
In summary, I am confident that the ultimate objectives for long run. growth,
stability of prices and effective full employment depends on a rapid movement
by the federal government to balanced budgets and a rate o f monetary expan­
sion that does not exceed the potential long run rate o f growth o f real product.

The C h a i r m a n . Our final witness this morning is the distin­
guished president of the American Economic Association. W e are
happy to have you, President Modigliani.
STATEMENT OF PROF. FRANCO MODIGLIANI, MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
Mr. M o d i g l i a n i , Thank you.
The C h a i r m a n . W e don’t have a copy of your statement. H ow
long a statement is it, sir?
Mr. M o d i g l i a n i . I will make it rather brief, Mr. Chairman. U n ­
fortunately, I have been unable to see the statement o f Mr. Burns.
It was supposed to reach me in Boston, but didn’t get there until
after I left. So I have only seen an account o f Mr. Burns’ statement
in the New York Times and have been unable to prepare a state­
ment.
The CiiAiRMAN.^Fine You go right ahead. W e would appreciate it
if you could limit your remarks to 10 ^minutes and the balance
of your statement will be printed in full in the record.




98
Mr. M o d i g l i a n i . I certainly will. Needless to say, while I am
the president of the American Economic Association, I speak en­
tirely on my behalf and in no way commit the rest of the Associa­
tion. I aim not speaking for Mr. Friedman, for instance, I ’m sure,
as you no doubt know.
Let me say first o f all that having just come in at this point and
heard the statement o f Mr. Francis, that I wish we had time to dis­
cuss that in greater detail and perhaps we might have it during the
question period. I found it quite interesting how one could look at
the same record and reach directly opposite results. I have looked
at the same record recently in a published paper published by the
Federal Reserve Bank of Boston and my conclusions differ greatly.
Since 1970 the money supply has been growing at a fairly rather
stable rate while before 1970 it grew very haphazardly as the record
shows. The record further shows that as long as it grew in a way to
accommodate the econom^r the economy was considerably more stable
than since 1970 when we have had a stable growth of the money
supply and we just expected the economy as it were to bounce
around to accommodate the money supply.
Perhaps I might submit for your inspection a copy of a chart
in that paper which makes the picture I think very clear (see p. I l l ) .
However, our first point is to comment on Mr. Burns’ statement
and by and large I find myself in agreement with what I heard Mr.
Ackley to say; namely, that what Mr. Burns has announced in
terms of his money growth for the coming vear is slightly disquiet­
ing, though it may not necessarily be highly disquieting. I think
we probably have an agreement that in 1975 Federal Reserve policy
turned out to be generally satisfactory. That is, because mone­
tarists looking at the money supply figures were satisfied with the
low rate of growth o f money while nonmonetarists have been satis­
fied that interest rates, have been kept at levels which are appropri­
ate for a speedy recovery o f the economy. They were kept within the
5 percent range except for the unnecessary bulge in the, summer
months. Julv, August, and September, when thev were allowed to
rise bv 150 basis points, that bulge was totally unnecessary and I ’m
afraid did a little harm, but for a short time a deviation cannot do
large harm. But by and large, except for that, policv was fine and
it fitted certainly what manv people hove asked bo done.
The fact that money supply grew slowly is somewhat of a mystery,
given those low interest rates and given the very large rise in real
output and money income. One would have expected mon^v growth
on the order of 10 to 11 percent which was the kind of figure which
many of us had suggested was appropriate ot produce those interest
rates. And. in my view there is no other purpose in proposing a
growth of money supply except in terms of the interest rates they
generate.
Now Mr. Burns has pointed out that the verv slow growth of the
money supply— which undoubtedly surprised the Fed also because
of the time the monev growth was actually lower than the lover
targets— has causes which we partly understand; namely, new de­
velopments at financial institutions.
There is a series o f developments, all of which by the way stem
from a continued maintenance o f prohibition of interest on demand
deposits. Because of that provision, there is more and more tendency




99
for substitutes to money to be created which we do not count as
money because of the rigidity o f definitions we need in measuring
things. W e can only measure a variable by defining it first. W e have
defined money as currency plus the demand deposits liability of
commercial banks. When a checkable account is issued by a savings
bank or when a time deposit becomes checkable^ then we don’t call
it money, although indeed it is money. So we have a variety of rea­
sons why velocity has quickened.
There have been other such development which are well known. To
the best of my knowledge, and according to all or nearly all o f the
numerous studies which have been carried out in the last year to
understand why the velocity has risen or why the demand for money
has declined, it would look like these new developments do not
fully account for what we have observed. I t ’s hard to tell because
some of these developments are hard to measure. The information
is scanty and what-not, but it does look like there is some residual
element beyond financial innovation which contributed to this year’s
development.
The reason I ’m stressing this point is because I ’m trying to evalu­
ate Mr. Burns’ proposal to slightly reduce the range o f growth o f
money for next year, reducing the upper bound from 7 y ± down to
<
7 percent.
One can raise the question as to whether this is a range that is
likely to fulfill the real requirements of the economy. Here again,
Mr. Chairman, as you know, I have already expressed the view
that one cannot formulate monetary policy, one cannot talk about
ranges for money supply or interest rates, without first specifying
what our real targets are, what are we aiming for in terms of real
output, employment, and in terms of what rate o f inflation may
reasonably be expected to go with those targets.
It seems to me that there is no reason— or at least I have had no
reason to change the targets I have held for a while, which is that
we want to try to return to 6 percent unemployment by the 'end of
1977. The reason for 6 percent as an interim target, as I have indi­
cated in previous testimony is because it’s a very safe target. A ll
the evidence suggests that as long as unemployment is not below 4
percent we can be quite confident that inflation will be continuing
to abate. And since I don’t expect to have zero inflation by then, I
want an interim target which insures a continued reduction o f
inflation.
Now to get the 6 percent in a matter of about a year and a lialf*
it
my judgment that we still need to preserve.a growth of real
outjmt between 7 and 8 percent for the rest o f this year anti then
decline somewhat beginning next year. Now this output growth of
7 to 8 percent will also be accompanied, to the.,best of my judgment
— and I think there is fairly good agreement on this— by inflation
rate in the order of 5 percent. W e may have a little luck and get a
little lower, or less luck and get a little higher inflation, but we will
not be very far away from that. Let’s say that 7 and 5 is 12 or 8
and 5 is 13, so we are talking about a rate of growth o f monev in­
come, a desirable rate o f growth o f money income of 12,' perhaps
13 or even 14 percent, something, in that order of magnitude.
Now one can raise the question whether, a growth of the money
supply o f no more than 7 percent will be sufficient. I f you go by last




10 0

year’s experience, the answer is clearly positive, because we got that
much growth over the last four quarters with around 5 percent
increase in money supply. So if we go by last year’s experience, that’s
fine. But if you go oy a longer historical experience, the situation
is less clear. There are really three possibilities. One is that the
financial improvements which have been at work last year, and the
other factor that increased velocity continue to work, in which case
5 percent would be sufficient. There’s next the possibility that these
developments which have gone on last year will come to a stop.
The moment those developments stop, the money stock will be
lower than it would be otherwise be, but its growth thereafter will
go back to historical levels. In that case, I would think that a growth
of the money supply, somewhere between 8 and 10, or around 9
percent, would be needed to finance that growth.
Finally, there is a possibility that some of the reduction in money
demands last year was due to sporadic events which could reverse
themselves, and in that we might require an even larger growth rate
than that.
The reason I think all this is important is not that we need to
say that we will raise the money supply at 12 percent. It’s fine to
say now that, as far as we can tell, on the basis of recent trends, a
4/ to 7 percent growth of Mi may be enough as long as we make
X2
it very clear— and I think it’s very important for the Federal
Reserve to make it very clear that there may be a strong need and
a strong case for a much larger growth of the money supply. There
may be a perfectly valid case for the money supply to rise not at
7 but 9 percent but for some periods even more. T think it’s impor­
tant to do it now before it happens because if it’s done at the last
moment on the spur o f interest rates threatening to rise very much,
and the Federal Reserve responds at the last moment, then there is
a case for thinking that the Federal Reserve is out of control and
therefore that the rise in the money supply should generate infla­
tionary expectations. W e should therefore make it clear now that 9
percent may be needed to maintain the level of interest rates which
are needed to insure the growth of money income, real income, and
prices which we want.
So the first point is that I doubt that it was a good idea for Mr.
Burns to cut down the range, but that the most important thing is
to make it clear right now that that range may be insufficient.
Now how would we know it’s sufficient or not? B y having a clear
plan as to what we are aiming at in real terms and what interest
rates will be required to bring that about. Once we know what
those interest rates are, we have to let the money supply accommo­
date those interest rates. W e should, of course, change those interest
rates if there is evidence that real income is rising faster than we
expected or that inflation is higher than expected for a given in­
come.
So there are circumstances under which we can change those
plans but not merely because the money demand is higher. That’s
not a good reason for changing that plan.
This, Mr. Chairman, leads me to the next issue which I would--like
to address for the next 5 minutes, which is the problem of the re­
form of the Federal Reserve System.




101

There is legislation pending to this effect and I would very much
like to urge the Senate to cooperate with the House in promptly
passing legislation with several items of reform. I personally dis­
agree with Mr. Francis on the notion that we should maintain the
present system. I think the proposal in the legislation before the
House Banking Committee proposing that the Presidents should
be appointed by the President of the United States with advice and
consent of the Senate is a sound idea and I ’m sorry that that legisla­
tion was temporarily defeated in committee. I think it’s a good idea
because I don’t think it’s at all inconsistent with Mr. Francis’ re­
quest or idea that presidents of the banks should be people from the
place, deeply rooted in that place. That seems to be fully consistent
with the fact that we make it clear that these people are not man­
aging some private interests. They are managing the Federal Re­
serve which is serving the public interests and since it’s serving the
public interests it is a part of the government in the broad sense and
it seems to me only appropriate that these people should be so
appointed.
However, I do regard this as a very minor issue and I would be
quite willing to compromise with Mr. Francis if he went along with
me on the other things like what should the Fed from now on do in
terms of its relations with the House and the Senate. I do believe
that you should make it statutory for the Federal Reserve Board to
report on the same frequency in which it has recently. So far it’s
based on a congressional resolution. I think it should become a law
for the Federal Reserve to report to Congress, essentially on the
same frequency which has applied so far. I think everybody agrees
that this system so far has worked quite well as far as it has gone.
I don’t think, however, it has gone far enough and I would again
like to urge that in the legislation it should be made clear that the
chairman of the Board of Governors should report to Congress not
only on the issue of the growth of money aggregates, which I believe
to be a purely technical affair. First of all, it should report on other
financial targets, and secondly, it should report on real targets. It
seems to me that the present set up is somewhat akin to Congress run­
ning a ship and asking the crew how much pressure it had on the
boilers— asking a little technical detail— instead of asking where are
you headed for, or even what speed are you going. It seems to me
that’s the kind of technical information you’re getting from the
Fed when they give you the rate of growth of money aggregates.
I t ’s no more than the steam pressure in the engine. I think we need
very much to know other dimensions, such as short-term interest
rates ranges. I don’t think we should insist on long-term interest
rates because those the Federal Reserve cannot control.
Mostly what we need to know is what are the real targets for
which those tools will be used? Now Mr. Burns in his testimony
before the House and I think perhaps also before the Senate has
frequently given a number of reasons why he should not be asked to
give such figures. He says that there are no such figures, that the
figures or forecast that which exist are subiect to error and so on.
It seems to me all this is really not a sufficient reason. H e’s also
indicated, that after all, he’s not the only one that makes aggregate
policy and, therefore, he cannot on his own announce targets.
72-390— 76-------8




102
Now it seems to me that this second proposition is largely dis­
appearing because Congress— the other major force making and in­
fluencing aggregate demand— is now engaged in a process, in a
budgeting process which will provide presumably reliable informa­
tion and commitments about tax rates and about expenditures which
are the other major component of a stabilization policy. W ith this
information, the Fed wields the only remaining important control
and, therefore, it ought to indicate what it is going to use these
controls for.
It seems to me that the need for such information which has
always been present has become dramatically apparent since 1974,
because 1974 was one year in which the Federal Reserve by its
policy of not letting the money supply rise any further and driving
interest rates to incredible levels caused the deep depression of late
1974 and early 1975. The economy was already sliding down. They
just gave us a further powerful push as we were going down.
Now the trouble is that we don’t seem to know to date whether
the Federal Reserve did that with high interest rates at the time
because it wanted 9 percent unemployment, or whether it did not
want 9 percent unemployment, but it overtightened and thereby
produced much more serious slide than intended. Now it seems
to me that makes a great deal of difference because if it failed we
ought to know. The failure can be excused-—especially in view of
the difficult moment— but it should be recognized and serve as a lesson.
I f, on the other hand, they were aiming at 9 percent unemploy­
ment, then it seems to me that was a very serious matter because
they had no business of aiming at 9 percent unemployment without
a clearance of Congress and a discussion around the country. And
in this context it seems to be to be very worrisome that when Mr.
Burns was asked by the House Banking Committtee whether he
had any regrets about the policy in 1974 he told them that one
regret he had was that the money supply grew a little fast in the
first half of 1974. I must interpret this to mean that Mr. Burns
thinks and felt that 9 percent unemployment was not high enough,
that we really should have had 10 percent.
W ell, if thats’ what he was trying to do and now has regrets he
didn’t get 10 percent, it seems to me he has no business deciding
what unemployment is to be in this country. He has a business to
enforce a program which has been reached by the Congress and the
administration. He can share in its formulation, and argue against
it if he feels it is not in the best interest of the country. He can
make his case against it, but once it’s been agreed, he must accept
the program and enforce it and, therefore, he should explain in his
statement how his policy is going to contribute to realize this
program.
So I do hope that the legislation will require the Chairman to
tell about real targets, not just about money aggregates.
The C h a i r m a n . W ell, thank you very much, Dr. Modigliani. I
want to thank all you gentlemen for a fascinating analysis of our
monetary policy.
Let me start out by pointing out to both Dr. Ackley and Dr.
Modigliani that whereas the resolution may not specify that the
Chairman should report to us not simply in terms of how the money




103
supply should increase, M i, and any other indicator, but the rela­
tionship of that to the state of the economy. Dr. Ackley particularly
criticized. I think, the Congress for not requiring that, and Dr. Modi­
gliani indicated that the Fed should report on it. W ell, the fact is, the
Fed did. I guess it may not have been as clear in the statement of Dr.
Arthur Burns, but it was brought out very clearly in the dialog.
For example, Dr. Burns gave us the following targets: the fol­
lowing expectations as the consequences of monetary and fiscal
policy for the coming year: overall national economic growth, about
7 percent; unemployment, about 7 percent; price increase, 6 per­
cent; interest rates for federal funds 4^4 to 5*4, short-term rate,
41/2 to 514. That’s pretty specific.
I don’t like those goals. I think we can do better, but he did
respond to the committee and we have that on record. So we are
relating monetary policy to the state of the economy and I would
agree wholeheatedly with Dr. Ackley’s criticism that this should be
our objective.
Now I ’d like to ask Dr. Ackley, to begin with, I started out in
my opening statement as you may have observed in pointing out
that it would seem that the Fed is relying on an extraordinary con­
tinuation of a high velocity of money to permit the 7 percent growth
the Chairman foresees with only about a 6 percent increase in the
money supply, recognizing that we’re going to have inflation of 6
percent. The arithmetic just isn’t there unless you have a very, very
big velocity increase.
I ’d like to ask you, Dr. Ackley, while you say the velocity is
erratic, isn’t it true that we have had an average velocity increase
of about 3 percent, that the enormous increase in velocity we have
enjoyed for the last year has been unprecedented, the first increase
of that size in 25 years, and that the velocity increase by and large
has been associated with the first stages of a recovery and, there­
fore, it’s unwise to expect that it would continue in the coming year?
Mr. A c k l e y . Mr. Chairman, I tried very hard to make it clear
that I thought this was a very unusual behavior of velocity; while
some elements of it can be explained, others cannot. In addition to
the elements which are explainable, both those changes that relate
systematically to interest rates and those that relate to changes in
the structure of the financial apparatus of the country, there have
been erratic changes. Such changes have occurred in the past and
will again occur in the future; therefore, it would be exceedingly
unwise to count continuously merely on the continued further
growth in the velocity of money. I agree with you that the arith­
metic doesn’t add up; and I associate myself full with Dr. Modig­
liani’s comments about the need to warn people now that if this
unusual and probably unsustainable trend o f sharply increasing
velocity does not continue, the increase in monetary aggregates will
have to be greater than it has been and greater than the Fed’s target.
The C h a i r m a n . I got the impression from you that you thought
this exercise of having the Chairman of the Federal Reserve come
before us was not a constructive exercise. Did I misunderstand you?
Because you seem to be alone in that. The Chairman now thinks
it’s good, although he lobbied very hard against it, and most of
the witnesses that have appeared not just this time but over the




104
last year have said they think it’s a good approach, and both of your
colleagues on the panel today seem to think it’s useful.
Mr. A c k l e y . I ’m sorry if I misled you. I think it has been useful.
I think it ought to be continued. The thing that I criticized and
obviously not very clearly was the notion that the hearings should
center on the growth of monetary aggregates. That, I thought, was
not a proper focus for the discussion. And, indeed it has not been,
;as you point out, the exclusive realm of your exploration nor even
to some extent of Chairman Burns’ response.
The C h a i r m a n . I ’d like to ask you, Mr. Francis, you gave us
some fascinating statistics on this contrast in the period 1952 to
1961 and 1962 to 1974 and you seemed to argue that a low moderate
increase in the money supply, 1.8 percent I think was the figure you
gave for the first ptriod, gave us a little better performance than
in the later period; is that right?
Mr. F r a n c i s . Mr. Chairman, actually, when you look at the per­
formance o f the first period against the last 5 years, they are very
close except that inflation is much higher and unemployment is
somewhat higher. The interim period------The C h a i r m a n . I want to come to that in a minute, but before
I do that, because I think there are some other very decisive ele­
ments, particularly the explosion of energy costs that have nothing
whatsoever to do with monetary policy that account for much of
what happened in 1970 to 1974, but let’s go back to 1952 to 1961
and 1962 to 1974. M i increased in the first period of roughly a
decade by 1.8 percent; in the second by 5.1 percent. W hat was the
result ? The result was I think a rather dramatic difference in out­
put. In the first period there was an increase of 2.6 percent in real
terms and in the second 3.6 percent. Now with a $l-trillion economy,
that’s a difference of $10 billion. Now it’s true price has increased
more. Unemployment was lower in the second period than in the
first, but the price increase I think we could say may have been
associated with the kind of adjustment that takes place in wartime
and we were in the Vietnam war. A s a matter of fact, I don’t think
in the American economic history we have had a war in which we
haven’t had a tremendous inflationary effect, usually bigger than
the Vietnam war, and that was a big war. It involved a great deal
of our resources.
So that it would seem to me if we compare those two periods
and rely as you seem to very largely on money supply as an indicaator of or an influence on economic results, it would seem that
the more generous increase in the money supply got better results.
Mr. F r a n c i s . W ell, I don’t read the story that way. The better
results of 3.6 to what extent that was influenced by production in
connection with the Vietnam war, I don’t know; but I would think
it would be an influence, but then after the end of the Vietnam
conflict and during the last 5 years o f that period we actually fell
back to a level of production comparable to the earlier period.
The C h a i r m a n . Yes, but again, monetary policy may have been
swamped by these other elements. When you have something that is
as prevailing as energy costs which goes into everything we buy, our
food, our clothing, our durables, as well as the gasoline and heating
oil, this goes throughout the economy and you have that increasing




105
two- or threefold, you’re just bound to have a situation in which you
have not only inflation but a pricing of people out of the market with
a corresponding unemployment.
Mr. F r a n c i s . That part of the problem, of course, came on right
at the end of the last period I was talking about, as you well know.
The C h a i r m a n . 1973-74 was hitting awfully hard.
Mr. F r a n c i s . Yes. So I don’t think you could really argue that
those impacts, while they were important, were the major impacts
on the period.
The C h a i r m a n . The major inflation and the major unemployment
came at the end.
Mr. F r a n c i s . The inflation rate, as reported and as we know, got
into 12 or 14 percent at one time and there are various guesses as to
how much of that was the result of those exogenous impacts of what
I call one-shot impacts to the price level developing— oil, the an­
chovies, the wheat, you name it— which did have some effect on the
price level. I think we all know that. Some people who have studied
the thing come out with a guess that maybe the ongoing rate of
inflation during that peak level of price increases may have been in
the vicinity of 9 percent and I don’t know if anybody really knows
the actual results of those other factors, but I think it’s very evident
that we had a fairly strong ongoing increase in the price level or
ongoing inflation through that period.
The C h a i r m a n . W ell, how do you answer Dr. Modigliani’s point
that a steady growth in the money supply advocated by you and
other outstanding monetarists economists was accompanied by an
erratice performance of the economy ?
Mr. F r a n c i s . W ell, the steady growth which he referred to, I be­
lieve, o f 1970 through 1975, I don’t know what statistics he is ob­
serving because I have a memory that we had in a period of 15 or 18
months money growing at over 7 percent in the 1972 period and
indeed up to close to 9 percent at a time. Then later on, in about a
7-month period in later 1974, it flattened out literally to zero and it
seems to me like there was a wider range of money growth in terms
of quarters or two quarters or three, whatever you want, during that
period of time than any of the other historical periods that I cov­
ered. So I ’m a little lost with the steady growth designation for
1970-75. I don’t think we had it.
Mr. M o d i g l i a n i . Could I answer that, Mr. Chairman?
The C h a i r m a n . Yes.
Mr. M o d i g l i a n i . First, I ’m very puzzled by Mr. Francis’ division
of time up to 1962 and thereafter when it seems to me that any man
from the moon looking at the data and trying to find division points
would find that division point at around 1966. U p to that point we
enjoyed reasonable stability, perhaps a little too much unemploy­
ment in the early sixties but certainly very stable prices and very
slow growth rate of money. I t’s only in 1966 that we get into a phase
of rising inflation that goes up to 1970, due to excess demand pres­
sure from the Vietnam war and overambitious government programs..
I don’t want to deny that for a moment. There certainly were a lot
of things.
M y analysis is based on quarterly changes from 1 year ago. So it’s
this quarter compared to the same quarter 1 year ago. I think looking




106
at any 1 month as in the chart exhibited on the podium is a grave
mistage. I would suggest that you hide that chart because anybody
who knows anything about the monetary statistics— and I have been
a member of the committee which has worked on that subject— can
tell you that in 1 month the error is so large that if you take the
difference between 2 months even at a distance of 1 year you get a
lot of noise. So I have chosen four quarter changes— the change be­
tween one quarter and the same quarter 1 year earlier. I f you take
an average of 3 months instead of a single month as the initial and
terminal point, you get the results shown in my chart. (The data
underlying this chart have been recently revised, but without chang­
ing the broad picture.)
The C h a i r m a n . That chart has the percentage changes in money
supply 1965 to 1975 on a monthly basis in the corresponding month.
M r . M o d i g l i a n i . Eight. Only 1 month, which really is not helpful.
The C h a i r m a n . I ’m told by Mr. Weintraub that this is annual
because it’s adjacent years.
Mr. M o d i g l i a n i . But it’s 1 month over the same month last year,
and I say keep away from such a short base. I f you do it for 1 week
or 1 day you will see what happens: it will exhibit even wilder
fluctuations, but those fluctuations have little meaning. I f you look
at my picture which is based on annual changes of quarterly aver­
ages— so it’s one quarter compared with the same quarter of the year
before— you will find that the growth of money was rather stable
from 1970 to the middle of 1974, around 6y2 percent— I don’t say it
was 6 i/2 percent exact. O f course not. You can’t do that if you tried.
But it is within a narrow range.
Now there are within that period a couple of quarters in which it
goes a little over eight and one quarter in which it dips below six, but
it is rather stable compared with previous history.
Mr. F r a n c i s . Down to zero ?
Mr. M o d i g l i a n i . Nothing ever fell below five and a half up to the
middle of 1974. A t the end of 1974, indeed, the money supply grew
very slowly.
Mr. F r a n c i s . The last 6 months of 1974 it went to zero.
Mr. M o d i g l i a n i . I ’m going up to the middle of 1974. That is the
period I ’m choosing. Thereafter, there was indeed a sharp decline
in money supply, but not until that point. Now, what I ’m comparing
are essentially those quarterly changes from 1970 to mid 1974. I ’m
saying that in this period money growth was not absolutely constant
— but it was a lot more stable than it was in other periods.
It seems to me that the chairman is quite right in pointing out
that you’re mixing quite different periods and what happens in 1973
is incomparable with other periods.
The C h a i r m a n . Let’s see if I understand what you’re doing, Dr.
Modigliani. W hat this chart does, it takes one month and compares
the average with that month with the corresponding month. W hat you
did------Mr. M o d i g l i a n i . Three months or one quarter.
The C h a i r m a n . And compared it to the same quarter the year
before. W ith that, you say you get a rather steady increase.
Mr. M o d i g l i a n i . I didn’t bring them with me. I thought I had, but
I think I left it.




107
The C h a i r m a n . Y o u say what that does show is an increase at a
steady rate. Now how do you answer that, Mr. Francis?
Mr. F r a n c i s . W ell, I agree that I much prefer to look at quarterly
averages and they are more meaningful than weekly or monthly
averages, but I would still argue that in that period from 1970
through 1975 that we had some very substantial changes in the level
of money growth and, again in the period from late 1971 through
the first quarter of 1973 it was quite high, even comparing quarter
by quarter. Then we dropped off some and finally, in 1974, we had
a period— I believe it was 7 months in all, when there was virtually
no growth in the money supply.
The C h a i r m a n . N o w let me ask you, Mr. Francis, to get onto an­
other issue, you argue, as I understand it, that the increase in the
money supply should be at a somewhat slower rate than it has been
and I just wonder how a lower money growth rate could help, as you
say, to wind down inflation without aggravating unemployment.
Mr. F r a n c i s . A ll right. I said that I thought the experience of
1975 was quite good at 5 percent. I also would say that I would like
to see the expansion of money held at about that level through this
year and 1977.
The C h a i r m a n . This year and 1977 ?
M r. F r a n c i s . Yes, and by historical standards, Mr. Chairman, that’s
a fairly high rate o f monetary expansion.
The C h a i r m a n . I f you’re going to have your eye on the target of
growth and on the target of unemployment, as well as prices,
shouldn’t you recognize as you go along what the velocity is and
what results you’re actually getting?
W hat I ’m concerned about, again, I return to that arithmetic which
may be much too simple, but I cant’s escape it— —
M r. F r a n c i s . I think you’re putting the finger right on the prob­
lem. I f we attempt in the future, as we have to a degree in the past,
to try to use monetary policy in a fine-tuning effort over the short
period, I think we’re going to continue these periods of rapid growth,
drops in unemployment levels, followed when the inflation sets in by
the slowup and an uptake in the unemployment level.
The C h a i r m a n . Let’s assume you’re right and you may well be
right. W hat it means, doesn’t it, is that the people who have to bear
the brunt of coping with inflation are those who are out of work, the
unemployed, which will increase?
Mr. F r a n c i s . I agree, Mr. Chairman, that if we would discontinue
our efforts at what I call fine-tuning which hasn’t worked because of
the lags involved in monetary actions, I think you would find that
the business cycle would be less severe than we have experienced in
the past. I think we have contributed to it by attempting to move the
economy too fast at some times and attempting to slow it down too
much at other times.
The C h a i r m a n . Y o u argue that we have fine-tuning now, that we
have had fine-tuning by the present Federal Reserve Board?
Mr. F r a n c i s . I w o u l d s a y w e h a v e h a d a n e le m e n t o f it , y e s.
The C h a i r m a n . W ould you move back then to the policy we had
in the 1930’s?
Mr. F r a n c i s . W ell, we actually didn’t have much policy in the
1930’s, as you well know. Let me point out—




108
The C h a i r m a n . That’s it. W e had no policy of fine-tuning. W e had
a policy that was more or less of a laissez faire policy or reliance on
the------Mr. F r a n c i s . W ell, you didn’t have the same mechanism and I
would have to believe, Mr. Chairman, that had we had the Federal
open market committee functioning then as it is today, that at least
you wouldn’t have seen the money supply drop by roughly a third
during that great depression. So I think it’s kind of difficult to com­
pare the policy formulation process during that period with what we
have now.
The C h a i r m a n . W ell, let me ask you and the other gentlemen,
because Dr. Burns did comment on it and this bill comes before this
committee for consideration, the Humphrey-Hawkins bill. This is a
bill which as you know would change the Employment A ct to pro­
vide a goal for unemployment at 3 percent but it has been modified
to provide 3 percent for adults and would charge the President and
the Congress with adopting policies to achieve that goal.
I take it, Mr. Francis, from what you have said to us so far, you
think that would be a bad bill, as does Dr. Burns. Is that right ?
Mr. F r a n c i s . I rather think it would be. I think you might pos­
sibly achieve that goal on a very short run, but unless you’re also
willing to accept a high and escalating level of inflation there’s no
way you can maintain it.
The C h a i r m a n . Let’s put it this way. D r. Burns, himself, in a
speech in Georgia, as you may recall, 6 months ago, said the Govern­
ment could be an employer of last resort provided the wages are low
enough. H e argued that the wages would have to be below the mini­
mum wage, making it politically impossible, but it would be possible
to have a compromise, perhaps, at the level of unemployment com­
pensation or something of that kind, and at least people would be
working instead of idle on unemployment compensation and welfare.
Let me ask you, Dr. Ackley, what is your view on the HumphreyHawkins bill ?
Mr. A c k l e y . I have not studied the bill carefully. In fact, I do
not have a copy either o f the original nor of the amended bill, al­
though I think I understand its basic thrust. A s a political statement
of an ambitious target for public policy, I welcome the 3 percent
unemployment target. It seems to me we ought to have ambitious
targets, and that part is fine. And I also agree the bill— and with
Chairman Burns— that some form of residual public employment,
at low wage rates, modest wage rates— is an appropriate method of
handling residual unemployment, once you have accomplished what
you can through general measures of economic policy. But I do fear
that the mechanisms in the bill are quite inadequate to achieve these
very ambitious objectives without running severe dangers of over­
doing stimulus to the economy through monetary and fiscal policy.
The C h a i r m a n . D o you have any amendments that you would like
to suggest? I have great respect for your experience and your judg­
ment as a former Chairman of the Council of Economic Advisers.
You’re an extraordinarily able, practical economist who’s worked in
the Government and understands these problems very well. How
would you feel we could modify this, or could we?




109
M r. A ckley . A s I §ay, I have not seen the bill. I have not studied
it. I have iiot tried to write an alternative bill. I believe, however,
that the price leVel should somehow get into the bill, which I under­
stand it is iiot now, and that it should be recognized that if you want
to achieve thSse ambitious targets of unemployment you’re going to
have to do some Other things on the price side to avoid inflation.
The C h a i r m a n . Y ou say the price levels. W ould you condition it
bn some kind bf wage-price control or some kind of wage-price jaw­
boning br through, influence?
Mr. A c k l e y . I would certainly include some elements of both
important structural reforms to try to get some of the price rising
biases out o f bur economic structure, as well as some kind of a
serious income policy.
The C h a i r m a n . Dr. Burns suggested that we have a policy of
Exemptions from the minimum wage for young people.
Mr. A c k l e y . I support that.
The C h a i r m a n . And a policy of trying to find a way of providing
funds at lower wages.
Mr. A ckley . I was a little amused by Chairman Burns’ suggestion
that he would favor a program of residual public employment i f we
had a constitutional amendment— that’s literally what he said, a
(constitutional amendment— requiring that the wages under such a
program should never exceed the minimum wage. Although I don’t
believe the Constitution is the place for such things, I am sympa­
thetic with his basic objective. A s I understand it the HumphreyHawkins bill requires payment of the prevailing level of wages,
defined as the highest of any of these: the national minimum wage,
the State or local minimum wage, the prevailing wage in State and
local government, or the prevailing wage as indicated by the DavisBacon Act. W ell, the Davis-Bacon Act is one of the worst possible
things we should be using as a standard. It ought to be repealed. In
effect, the act requires payment of the highest union wages to all
workers in the construction industry. A standard like that for resi­
dential employment just doesn’t make sense.
The C h a i r m a n . I disagree with you on the Davis-Bacon Act. The
Davis-Bacon Act is a necessary act and I think it’s been badly abused.
It’s not really as restrictive as some people argue. However, I would
agree that to apply that same principle to overall employment policy
would be— without anv kind of wage-price controls, would just be a
Sure prescription for inflation and a very bi.< inflation.
?
Dr. Modigliani, how do you feel about this ?
Mr. M o d i g l i a n i . I would just like to make first one comment in
Connection with Mr. Francis. I think it would be very interesting if
we could get Mr. Francis to tell us whether he, assuming that Mr.
Burns’ forecast is within a desirable range, 7 percent real growth and
6 percent prices, which means roughly a 13 percent growth of money
income— whether he believes that a 5 percent money supply growth
would be sufficient to finance that. And if he doesn’t believe it,
whether he in fact would like to see a lower rate of growth of income.
The C h a i r m a n . Y o u asked the question much better than I could.
Mr. F r a n c i s . I believe that the 5 percent money rate of money
growth would handle it, and in adding numbers you automatically
build in an escalating inflation rate.




110

Mr. M o d i g l i a n i . W e ’re agreeing on 13 percent. W e all agree on the
target, but then the question will be, suppose that 5 percent will not
give us that 13 percent. W ould you be willing to see the money
supply grow faster i f more than 5 percent is needed to finance 13
percent? That’s the fundamental question, having agreed on a target
of 13 percent. I think in fact 6 percent inflation is a little pessimistic,
maybe 12 percent will do. But the question is, I ’m extremely uncer­
tain that 5 percent money supply growth will finance it. You say
it’s possible but I have grave doubts. I think it’s rather unlikely,
thought not impossible.
The C h a i r m a n . I think Mr. Francis has made it clear that he would
not increase that 5 percent even if you don’t get the 7 or 8 percent
velocity that you want to get, that you would have to hunker down
and take it for a while.
Mr. M o d i g l i a n i . It really fits the picture that I said before, de­
ciding on the money growth and let the economy bounce around
until it fits the monetary aggregates. This is exactly what I think
describes the position. Aiid my graph actually suggests that during
this period in which we let the money supply bounce around, con­
trary to what Mr. Francis believes, it actually turns out that output,
employment, and prices are less variable than they are thereafter
with a stable growth of money* So the bouncing around o f money
stabilizes the economy and not vice versa.
I will, if I may, insert that chart in my testimony.
The C h a i r m a n . Yes, without objection, that will be inserted.
[The following charts were received for the record:]




I ll
F ig u re 4

S A IL YO S M E O O IC IN IC T R O E S L C E P R D •
T B IT F O E C N M D A O S V R E E T D E IO S
A F A C LIN IC T R
. IN N IA D A O S
I. M
oney Supply

1 .0
0

10
0

90
8
0

9 .0

8
.0
'7 .0 -

6
.0
5 .0
4 .0
30

•.
20

1971

1972

1973

1974

4 quarter changes 1971:1 to 1 9 7 4 :2
A v . d e v. is .75.

c. S u m m a ry m easures of 4 quarter c h a n g e #
1961:1 to 19 7 0 :4
A v . d e v. is 1.4S.

A v . d ev. is 1.54.

II. M
onetary B
ase

•0
1.0
90

8
.0
7 .0

6.0
5 .0
4 .0
3 .0

2.0
1971

1972

1973

1974

4 quarter changes 1 9 7 1 :1 to 1 9 7 4 :2
A v . d e v. is .42.

»r c h a n g e s 1967 : 1 to 197 0 : 4
A v . d e v . is 1.11.

c . S u m m a ry fneasures o f 4 quarter change*
1961:1 to 1 9 70:4
A v . d e v. is 1.04.
3 .0

-

20

-

10

-

- I jO

-

-2 0

°

-3 0
1967
. Q uarterly c h a n g e s 1971.1 to 1 9 7 4 :4
A v . d e v. i* 1.10.

1968

1969

19 7 0

b . Q u a rte rly c ha n g es 19711 to 1 9 7 4 : 4
A v . d e v. is .48.

c .S u m m a r y measures o f 4 quarter
1961:1 to 1 9 70:4
A v . d e v. is 2 9 .

T h e solid horizontal line in e ach panel denotes the mean value of the variable while the distance betw e e n the solid and dashed
horizontal lines in e a c h panel denotes the absolute average deviation from the m e a n (e x ce p t in III and V w here the average
deviation is m easured around z e r o ).




112
F ig u re 4 (c o n tin u e d )

B R A IN IC T R *
. EL D A O S
IV R G P
. eal N

-------J 0
1 .0
-

80

-6
.0
______ - 4 0
- -2 O
-----------

0

-- .
20
- -4 .0

l..l
19 7 2

1973

1974

1975

"a .4 q u a tte rtth a n g e s 1 9 7 2 i to 1 9 7 5 2
’A v .t J e v . is 4 .5 9 .

I I

196 8

lI
1969

-- .
60
--.
80
I.L L L I.I
1970

1 -L-1 J

____ 1 0
-1 0

1971

b. A quarter changes 1968:1 to 1971: 4
A v . d e v. is 1.74.

V U ploym R
. nem
ent ate

c. S u m m a ry m e a s ure s of 4 quarter c h a n g e *

1962:1 to 1971:4
A v . d e v . is 1.82.
---------- 14-0
- 3.0

0

- -.
10

- -20
- _-3 .0
_________ I -4 .0
r change* 197*1 to 1 9 7 5 2

b. 4 quarter c ha n g es 1968:1 to 1971:4

A v . d e v. is 1.02.

A v . d e v. is .73.

V P
I. rices (G P Deflator)
N

c. S u m m a ry m e a sure s of 4 quarter c h a n g e *
1962:1 to 1971:4
A v . d e v . is .61.

-------1 .0
2
- 1 .0
1
- 1 .0
0
- 9 .0

■ 3.0

- 20
1968
■«. 4 quarter cha n ges 1972:1 to 19 7 5 2
A v . d e v . is 2 .9 4 .

T h e b e h a v io r o f the real in d ic a to rs

1969

1970

1971

b. 4 quarter c ha n g es 1968:1 to 1971:4

c. S u m m a ry m easures of 4 quarter c h a n g e*
1962:1 to 1971:4
A v . d e v. is 1.28.

is e x h ib ite d fo r a tim e in te rva l b e g in n in g one y e a r later tha n fo r th e fin a n c ia l in d ic a to r*

in o rd e r to m a k e s o m e a llo w a n c e fo r the lag w ith w h ic h m o n e ta ry v a r ia b le s are p re s u m e d to a ffe c t o u tp u t a n d p ric e * .
S o u rc e : N a tio n a l B u re a u of E c o n o m ic R e s e a rc h D a ta B a n k




113
Mr. M o d ig l ia n i. N o w you raised the question about the Hum­
phrey-Hawkins bill. I think that my answer is very similar to the
one that you have received from Mr. Ackley. First, because I also*
have not studied the bill carefully and I did not expect there to ber
discussion about it here. I have not prepared myself adequately ora
the subject. I have talked to people who have studied it, but not
studied it on my own. But from all I know about it, I think it wasr
very well described by Mr. Ackley, that it has a sound motivation.
It states targets which we ought to try to specify and try to aim
for, but that as it is formulated at present I would not be at all
prepared to support it because I believe there’s a strong danger o f
it being very inflationary. I have grave doubts that one can fix un­
employment target numbers by legislation, like 3 percent, no mat­
ter what comes. I think past experience has indicated that the
composition of the labor force changing does affect what amount o f
unemployment is consistent with stable prices. So I would certainly
hate to have in the law a statement as to what unemployment should
be.
On the other hand, I think its general purposes are sound and tile
idea of a public employment program as an employer of last resort*
which is an alternative to unemployment compensation, strikes me?
as a very sound idea. A t the same time, I also wish that more em­
phasis and more attention were given in that bill to the need for
other manpower policies. I think we can improve the function o f
the labor market by a variety of manpower policies and I think
we have done so far very much below par in terms of starting those?
policies, having funds available for starting them and trying to>
apply them.
The C h a ir m a n . I think that’s right, but I do think it is very,
very difficult. M y colleague, Gaylord Nelson, is chairman of the*
Manpower Subcommittee and I have talked to him about this and
he’s tried hard and sometimes he has difficulty with the administra­
tion, but there’s a fundamentally different problem here. You train
people for jobs and unless those jobs are available at the time they
go through the discipline and pain of training— and there’s nothing
there. I t ’s very disillusioning. It can be destructive o f people. So
that’s hard. I t ’s very, very hard to have a manpower program that
isn’t based on more and more jobs being available. The best trainer
is usually the person in the private sector who’s going to hire the
person and you learn by doing.
Mr. M o d ig lia n i. Certainly manpower policies are not a substitute
for aggregate demand management. I f you don’t have active man­
agement you can have people trained to the hilt and perfectly well
distributed— you may have exactly 3 men for every job, and they
are still unemployed.
The C h a ir m a n . One of the best examples is in Detroit in W orld
W a r I I where they were able to train field hands who had no experi­
ence in working in industry and they trained them very weir, very
quickly, and they were able to adopt and produce and increase their
productivity.
Mr. M o d ig lia n i. Right. They do have to go together, but the
problem is when we use aggregate demand tools we do tend to reach
a limit on unemployment which now seems to Be rather high; M y




114
estimate of 6 percent is probably overly pessimistic, but not very
far from what we could afford now. If we had better policies we
would be able to push that limit down.
The C h a ir m a n . Let me see if I can get from each of you, because
I don’t want to overlook it— it’s a very, very stimulating discussion
—where you approve or disapprove of the Mi target that the—and
M2 and M3 of course if you’d like to give us that—that Dr. Burns
proposed and whether you agree or disagree with what you think
are his goals, whether you think those are realistic or whether those
are appropriate. Start off with Mr. Ackley.
Mr. A c k l e y . I regret the lowering of the upper range of the
target figures, and I agree with Dr. Modigliani that it ought to be
made very clear that this is based on the assumption that velocity
will continue to increase rapidly and that if that fails to occur these
targets will need to be revised.
The C h a ir m a n . Now how about the prospects for unemployment
and prices?
Mr. A c k l e y . I ’m not clear what Mr. Burns may have said about
the prospects. I assume that his view of the outlook is rather like
that which seems to be generally shared these days, of a rather
good 7 to 7% percent expansion of real output and somewhere
between 4 and 8 percent increase in prices.
The C h a ir m a n . And yesterday Dr. O’Leary and Dr. Brimmer
both indicated they thought interest rates would rise in the coming
year and they thought that would be appropriate. They didn’t think
they would rise very much. They thought there would be a moderate in­
crease in the level of short-term rates. Do you think that’s appropriate
or inappropriate?
Mr. A c k l e y . I think that would be highly appropriate if longterms rates remain where they are now during the rest of the year,
so long as this economic prospect we have just described continues
to be realized.
The C h a ir m a n . Mr. Francis?
Mr. F r a n c i s . As I have already stated, I think that the ranges are
all right and I ’m not concerned about the small lowering of the top
range and I would have to fit into the general consensus I guess that
we should look forward to something like a 7 percent give or take
a little real growth in the remainder of this year and prices— infla­
tion somewhere in the 6 percent range.
The C h a ir m a n . H o w about unemployment?
Mr. F r a n c i s . Unemployment, 7 percent, possibly dropping a little
below.
The C h a ir m a n . D o you think that’s about the best we can do
with responsible policy?

Mr. F r a n c i s . I think that if we do that it will be very good. I
would be concerned if we tried to force it very much faster than that
because we would run the very real risk of getting into something
that was not sustainable, and I would like for once to see us come
out of one of these recessionary periods in a manner where we reach
reasonable full production and hold it and not go through this
wringing out again. I think there’s a possibility that we can do
that and this is what I started to say earlier when I said I ’d like to
see the 5 percent maintained through 1977 and then slowly winding




115
it down a little further to wring some more inflation out of this
economy. I think that she can be done with reasonably full em­
ployment, reasonably full utilization of resources.
The C h a ir m a n . Before I move to Professor Modigliani, Dr. Ack­
ley, would you agree that that’s about the best we can do and that
we should settle for that?
Mr. A c k l e y . You’re talking about 1976? There’s not a thing we
can do now that will make any difference.
The C h a ir m a n . Well, 1976-77, o f course. You’re right. There’s a
lag.
Mr. A c k l e y . Yes, I think we could do better in 1977 in terms of
real growth, but I think that’s a reasonable target and could be
achieved.
Mr. M o d ig l ia n i. Mr. Chairman, I think I would have to ask you
first for a clarification. Mr. Burns’ figures were given for the next
calendar year, or for the next year beginning in the first quarter?
What are they; 7 percent from when to when ?
The C h a ir m a n . 12 months from now.
Mr. M o d ig l ia n i. In other words, first quarter to first quarter
roughly ?
The C h a ir m a n . May 1 to May 1, yes.
Mr. M o d ig lia n i. And unemployment figure is to the end of the
period to May of 1977?
The C h a ir m a n . I think that’s correct. You’re right to question
me on that. It could be a misunderstanding. It could be that the
average unemployment during calendar year would be 7 percent
or it could be ending at 7. It would be quite a difference.
Mr. M o d ig l ia n i. Quite an enormous difference. Well, let me first
say that I find the target a shade below what I would advocate. I
would have preferred 7
percent as a target as a pronouncement,
somewhere between 7 and 8, so 7 percent does not leave me too un­
happy. For the next three quarters, I would say for the next four
quarters, to the end of the first quarter. At that point I do agree—
and I ’m glad there is a point of strong agreement with Mr. Francis
—that we should slow down because we want to get to 6 percent
unemployment moving not much faster than 3 to 4 percent per year
which is the long run sustainable growth rate, and I do completely
agree with Mr. Francis that every one of the previous occasions
we have gone through the point we should have aimed for at great
speed. And that’s been a terrible mistake and I have been concerned
with that every time it happened. I have been concerned with that
in 1966 and I have been concerned again in 1972-73 which we did
the same thing, and I would hope this time we would manage to
avoid that mistake. So in terms of output, I think the 7 percent
growth will still give us by the end of the period somewhere just a
shade below 7 percent unemployment. That would be my judgment.
This still leaves a substantial unemployment margin, so things
would turn out all right even if we were to exceed somewhat that 7
percent per year up to that point. But from that point on we ought
to start slowing down and that’s why I also agree with Mr. Francis
that we will need eventually a lower rate of growth of money sup­
ply-




116
The only question is what we need now by way of monetary
growth. There, I think we disagree, even if we do agree that we
should slow down later.
Finally, I have no disagreement with the inflation forecast. This
is the thing we control least closely and we have to hope for the
best. However, that 6 percent does seem reasonable at this point.
Now what does that imply first about the aggregates and then
about interest rates? Let m e first make one more remark about un­
employment. There is one special problem with unemployment that
I want to point out to you, Mr. Chairman, namely that I am very
unhappy with the seasonal adjustment which has been introduced
this year. I think those adjustments distort the picture. I believe
they went in the wrong direction and I believe they make the un­
employment decline in the first months of the year measurably
larger than it really was.
The C h a ir m a n , i went into that in great detail with Mr. Shiskin
when he appeared before the Joint Economic Committee and he
gave us not one but gave us literally 10, maybe that many, seasonal
options, and there was some difference but the difference wasn’t really
very great.
Mr. M o d ig lia n i. W ell, it is my definite foreeast that toward the
end of the year unemployment will show very little decline and
might even rise because of the seasonal adjustment. M y expectation
is that some of the large drop reported from December to January
and February will be lost in the second half o f the year. That’s my
impression. However, if we keep the some seasonal adjustments, and
we’re talking about May to May I think that will wash out.
W hat is implied for the aggregates? There I will summarize my
previous views by saying that I see extreme uncertainty in the rate
of growth of the money aggregates that is needed to accommodate
the target growth, great uncertainty related to financial detelopr
ments which we know of and related to some other forces which
we do not know. Under the circumstances, I think that reliance on
Mi in particular is extremely dangerous. I think M 2 is a lot better,
but Mi is an extremely dangerous tool to rely on. I would say it’s
conceivable that we will get by with 5 percent or 4*4 percent. I
assess the chances as being very low and I think there’s a fair
chance that we may need more than 7 percent to get there. I ’m sure
the Federal Reserve will be aware of this and will change its targets
if need comes, and that is connected with the question of interest
rates.
It is my view that Mr. Burns was answering about short-term
interest rates, tomorrow or maybe next month and maybe next
quarter. I personally have great questions that come the beginning
of next year interest rates can be as low as 5%. I would have ex­
pected them to move out o f that range and I expect by that time
if the economy is going the way it is and we are beginning to think
of slowing down, then we will need higher interest rate than that.
But I do agree with Mr. Ackley that it’s a little premature. W e
have time to think about that later but we should be prepared to
see higher rates then.
The C h a ir m a n . A ll right. Now I want to apologize to you for
taking so long. I do have a few other questions I ’d like to ask and
maybe we can handle those briefly.




117

Mr. Francis, you’re not alone, because I ’m sure there are many
people who share your philosophy with you, but among many o f
the economists who have spoken out you appear to be alone, at
least before this panel, on M x as a satisfactory measure.
Now I like it because it’s simple, because it’s one measure and I
know that that’s not a very good answer for economists, but it’s so
hard to get the Congress to stand still or the public to stand still
for any kind of discussion on monetary policy. I t ’s so complicated
now. W e lose our colleagues when we go on the floor to speak on it.
They kind of drift away. I t’s not that exciting a subject and they
don’t think it’s that pertinent, and if you begin to talk about M i,
M 2, M s and explain the differences you really lose them.
So I ’d like very much for that reason to attach myself to M i. A t
the same time, not only the two gentlemen who flank you today
but Chairman Burns and others are skeptical of it.
Mr. F r a n c is . W ell, I think we may have to live a while longer
before we are sure that there’s been any real change in the validity
of Mi vis-a-vis the other M ’s. Now some think that because of the
regulatory change making certain types o f corporate savings de­
posits available that this might lower the level of M x that would
get a given result as we might have gotten at half a percentage
point or something higher, and this may well work out. I ’m still
perfectly willing to work with M x. M 2 has been good except for
those years when the interest ceilings impinge on it and cause out­
flows and make it erratic. I f you could remove the interest rate
ceiling, then I would be perfectly happy with M 2.
But finally, the monetary base is pretty good to watch while we
make up our mind what if anything has happened to M x But in
.
answer to your question, I ’m perfectly willing to follow M i a while
longer before I give up that it is any less reliable.
Now, obviously, if you could build an M 25, you would have,
something that would more closely track G N P than M i or M 2 I
suppose, but if you’re going to use these things as goals or objec­
tives you’ve got to have something over which you can exercise
some control and in Mi and M 2 you can do that. W hen you get
beyond that I have some question whether they are usable objec­
tives of policy.
The C h a ir m a n . Thank you. Now, D r. Ackley, your other two,
colleagues on the panel have indicated their opinion on who should
run the monetary policy and whether or not Congress and the
President should have a bigger voice. There’s been no comment from
anybody on whether or not the President should be empowered to
appoint the Chairman of the Federal Reserve to serve for a period
of 4 years as Chairman within 6 months of his accession to office.
I ’d like your comment on that and also your comment on the observa­
tions made by Professor Modigliani with respect to Federal Re­
serve Presidents being appointed and confirmed, if you would give,
your opinion on these sources to us, because you’re very interested in
monetary policy and I know you have been frustrated sometimes.
Mr. A c k l e y . I certainly agree with the recommendation that the
term of the Chairman ought to be 4 years and ought to expire
shortly after the President’s term. I think that’s a reform which, so,
far as I know, everybody favors or has at some time in the past*
72-390— 76-------9




118
Beyond that, my views about the organization of the Federal Re­
serve System are really quite unorthodox and probably completely
impractical and of no interest to the committee. However, if you’re
going to start reorganizing the Federal Reserve in a serious way, I
would have some ideas about things you ought to do.
The C h a ir m a n . Well, briefly, what are they?
Mr. A c k l e y . I don’t know that I can be very brief. The Federal
Reserve as it now exists is, of course, a historical anomaly. It’s the
way it is because of a long history which began with ideas about its
role that bears no resemblance to the present concept of a central
bank. In the first place, I think that a central bank is an agency of
Government and it ought to be made absolutely clear that it’s like
any other Government agency. We ought to abolish the private
ownership of the Fed’s stock. We ought to put its employees under
the same civil service, and its budget under the same appropriations
procedures as any other Government agency. It’s not that I believe
the Federal Reserve is dominated by the private bankers. But just
because there’s no sense in having a different organization for this
part of Government policy making than for others. ^
The C h a ir m a n . Y o u don’t buy the notion that the impulse and the
political pressures on Congress and the President are such that we
could follow rather foolish inflationary policies if it were politically
run instead of run by people who are more insulated from the pol­
itics ?
Mr. A c k l e y . Of course, we make foolish mistakes. Our political
process is not without its failings; but should we say that money, of
all the subjects with which our political process deals, is the most
sensitive and delicate one that can’t be trusted to political decision ?
It’s all right to allow the political process to decide our foreign pol­
icy and our defense policy and our fiscal policy, and every other as­
pect; but in this area we can’t allow the possible mistakes of political
decisions. Well, it makes absolutely no sense to me. The whole business
of the independence of the central bank, and the notion that it’s sub­
ject matter has to be protected from political control because the
politicians make mistakes, is an argument which if you applied it
across the board says get rid of democracy.
The C h a ir m a n . What it’s really based upon is that these other
things can be exciting and interesting. This is something that’s dull,
complex, mysterious, and the result is that people aren’t that inter­
ested in getting involved in it. So they leave it to these bankers.
Mr. A c k l e y . Well, maybe so. I told you you wouldn’t like my
answer.
The C h a ir m a n . N o ; I like it. I agree with you it’s impractical. I
don’t think we’ll be able to do much with it, at least not soon, but it’s
very logical. I agree with you that the defense policy and foreign
policy is something you can say that can be taken out o f politics with
much more force than you can money policy, but it’s not, because
that’s something that we get excited about, interested in, and you
can make a speech on that and not put people to sleep.

Mr. F r a n c i s . I was just going to say something I may have omitted
in this historical bit I was working on. One of the things I was trying
to demonstrate is that, in my view, during our modern history, I see




119
no evidence where the Federal Reserve System has been unsupportive
or unaccommodative of the political process. W e have gone through
these periods with spending moving up without increasing taxes
comparably and the necessity to borrow has been fully accommodated
all the way through by the Federal Reserve. So I think the indica­
tion is that the Federal Reserve h$is had a pretty accommodating
policy through the years.
The C h a ir m a n . Aren’t you making D r. Ackley’s point? I f you’re
right, if it is accommodated now with the political process, what
difference does it make if we make it directly ?
Mr. F r a n c is . A ll I can say is that the history I had plotted since
1952 indicates a very cooperative central bank.
Mr. A c k l e y . Y o u would rather it wouldn’t be quite so cooperative?
M r. F r a n c i s . Right. I ’d like to see it less cooperative.
Mr. M o d ig lia n i. One brief comment on this. I t seems to me the
one period where we do not know to what extent the Federal Reserve
was involved is precisely the middle o f 1974, and the reason is W ater­
gate— we were all riveted to our T V ’s looking at what was going on
about Watergate. Even within the Government there wasn’t a dear
picture of how to handle the crisis. A nd I think they have made those
decisions on their own. But I think it’s true that the record indicates
generally that the Federal Reserve will go along and, after all, the
Chairman knows he ought to resign if he cannot pursue a policy
consistent with that of the administration. But that’s always true
even if the Chairman was like a Cabinet member. I f he disagrees
with the President on inflation policies or deflation policies, he can of
course always resign, and I think in some way the public under­
stands the message. So I don’t think there really would be any great
consequences from Mr. Ackley’s suggestion.
The C h a ir m a n . There were some very sharp differences between
President Johnson and Mr. Martin and there have undoubtedly been
some differences between Dr. Burns and President Nixon. I do think
it’s partly because the Chairman o f the Federal Reserve Board, at
least in recent years, have been met o f great stature whose views
have been accepted by Presidents. This is especially true of D r. Burns,
even though the President may have initially disagreed, they tend
to be swayed. I think they feel that monetary policy really isn’t their
area of expertise. I doubt if we will ever have a President that has an
area of expertise that could possibly approach that o f the Chairman
of the Federal Reserve.
Mr. A c k l e y . W e never will as long as he can say: “ Monetary
policy is the responsibility of those guys over there. Whatever hap­
pens is their fault.” And the monetary authority can sa y : “Whatever
happens to fiscal policy is the fault of the stupid blokes in Congress
and the Administration”. A ll you get is buckpassing. Y o u ’d have a
much better and more responsible attitude toward monetary policy
in the administration and the Congress if they felt they had to take
the blame for it. And I think you would get a better fiscal policy if
the Federal Reserve was a part o f the Government and couldn’t
blame the Congress and President for the mistakes o f fiscal policy.
I think it makes no sense, and it does indeed lead to long periods o f
severe dispute and going off in opposite directions in policy objectives




120
between the monetary authority and the administration; and the*
Congress. Although basically, in the end the Fed, may finally have
accommodated whatever happened, they might not have had merely
to “ accommodate” it, if they had been part of the Government, and
monetary considerations had been taken into account in the very
process making fiscal policy. Actually, fiscal and monetary policy
are separate policies only because they are administered by different
parts o f the Government. I f you had a single authority responsible
for first deciding what the surpluses and deficits in the budget should!
be, and at the same time how they are going to be financed— and
these decisions do have to be made simultaneously, one way or an­
other— they could be made in an integrated way in which you think
about both sides o f the question as you approach it.
The C h a ir m a n . Gentlemen, thank you very, very much for your
most helpful testimony. Thank you.
The committee will stand adjourned.
[Whereupon, at 1 1 :55 a.m., the hearing was adjourned.]




A P P E N D I X

C h a ir m a n

of t h e

B oard op G overnors ,
F e d e r a l R e s e r v e S y s te m ,

Washington, D.C., January 12,1976*
H on . W il l ia m P roxm ire ,

Chairman,
Committee on Banking, Housing and Urban Affairs,
U.S. Senate,
Washington, B.C.
D e a r M r: C h a ir m a n : In response to your letter o f November 14, 1975, I
asked our staff to evaluate carefully Professor Friedman’s various arguments,
as advanced in his recent testimony before your Committee, with regard to
present and alternative procedures for controlling the money stock. The staff
analysis is enclosed.
Please let me know if we can be o f further assistance to you on any matter
that involves our mutual interest in improving the effectiveness of monetary
policy.
Sincerely yours,
A r t h u r F. B u r n s .
F e d e r a l R e s e r v e S t a f f C om m en ts o n P r o f . F r ie d m a n ’ s S t a t e m e n t B e f o r e
S e n a te C o m m itte e o n B a n k in g , H o u s in g , a n d U rb a n A f f a i r s (N ov. 6,1975)

Senator Proxmire has asked for comment on the sections o f Professor Fried­
man’s recent testimony before the Senate Committee on Banking, Housing, and
Urban Affairs that pertain to present and alternative operating procedures for
controlling monetary aggregates. The issues involved are highly technical and
detailed. While several of them have been widely debated, though not yet fully
resolved, in scholarly journals and within the Federal Reserve System, others—
for example, Friedman’s staggered reserve settlement period proposal or a
proposal for reversing the lag in reserve accounting—have scarcely been exam­
ined by economists outside the Federal Reserve.
Friedman’s various specific suggestions and comments with regard to mone­
tary control relate to two fundamental recommendations:
1. That the Federal Reserve should attempt to maintain a steady rate o f
growth—even over short periods—in the money supply measure it takes as a
target. The Open Market Trading Desk o f the Federal Reserve Bank o f New
York should be instructed to conduct open market operations solely in order
to increase the monetary base by the amount prior forecasts suggest is most
likely to produce the targeted money growth. The Federal Reserve should dis­
pense with a Federal funds rate operating range altogether and accept what­
ever variation in short term interest rates is produced by the proposed control
procedure.
2. That the Federal Reserve should substantially revise certain banking regu­
lations to facilitate monetary control. The proposed revisions include establish­
ing a single reserve requirement for all member banks on all bank liabilities,
eliminating lagged required reserve accounting, and adopting staggered reserve
settlement periods for all member banks.
The points Friedman makes throughout his testimony that serve as support­
ing evidence for one or the other o f these recommendations will be examined
in this context.




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122
I . D E S I R A B I L I T Y O F R E P L A C IN G A F E D E R A L F U N D S R A T E O P E R A T IN G T A R G E T W I T H

A

M O N E T A R Y B A S E O P E R A T IN G T A R G E T

In order to achieve closer control o f the monetary aggregates and to reduce
the variability in monetary growth rates, Professor Friedman suggests utilizing
the monetary base (essentially currency plus bank reserves) as an operating
target, rather than the Federal funds rate. In evaluating this proposal, this
section of the paper discusses measures of recent monetary growth rates, the
economic justification for a certain amount of variability in growth rates, the
role of the Federal funds rate in monetary operations, and evidence with respect
to the relationship between the monetary base and the money supply.
Variations in money growth rates
Friedman contends that recent money growth rates have been substantially
more variable than the Federal Reserve actually intended, and have adversely
affected the economy. As background for judging the actual variability o f money
growth rates, Table 1 shows alternative measures o f the variability o f Mi and
Ms growth over the 1970-75 period that Friedman examines. These summary
statistics give the average and maximum deviation (without regard to sign)
of Mi and M2 from their average growth rates over this period. As may be
seen, the degree o f variability diminishes significantly as the time unit length­
ens, with the average deviation much larger for monthly than for quarterly
data, and also larger for quarterly than for semi-annual data.
TABLE 1.—DEVIATIONS IN ANNUALIZED SEASONALLY ADJUSTED RATES OF GROWTH OF Mi AND Ms FROM THEIR
AVERAGE RATE OF GROWTH, 1970 THROUGH SEPTEMBER 1975
Ms
Annual rates of change

Mi
Annual rates of change
Form of data
Monthly............................................................. ......................
Quarterly:
End month................................................ ......................
Average..................................................... ......................
Semiannual:
End month................................................
End quarterly average............................. ......................
Average..................................................... ....................

Mean
deviation

Maximum
deviation

Mean
deviation

Maximum
deviation

4.0

17.7

2.9

11.2

3.0
1.6

5.5
6.4

2.4
1.7

7.4
5.3

1.8
1.4
1.1

3.5
2.5
3.1

1.9
1.6
1.2

5.2
4.9
3.8

The variability in growth rates shown by Friedman in the table on page 2
o f this testimony depends heavily on the choice of months that he uses as
beginning- and end-points for his periods. In view of the relatively large
deviations from trend o f growth rates for particular months, swings in money
growth over short periods, including periods o f six months or so, can easily
be exaggerated by aberrant beginning- and/or end-points o f the measurement
period. Friedman’s figures for recent periods overstate the amount o f volatility
in monetary growth because his choice o f periods places great weight on
exceptional months.1 The maximum monthly deviation in Mi growth from its
average rate o f growth during the past five years occurred in January 1975,
which is one o f Friedman’s end-points for measuring recent growth rates.
1 When looking at month-to-month growth rates, it is important to recognize that the
monetary aggregates are subject to a variety of short-term transitory variations or
impulses. These transitory variations are independent of seasonal and basic longer-term
movements. They arise because of fluctuating payments among the public, the banks
and the Treasury; cash items in the process of collection; reporting and tabulating
errors; and so forth. Such phenomena may impart a transitory variation in the mone­
tary aggregates which will be seen as a temporary (upward or downward) movement
in daily or weekly deposit data. Though such transitory variations are short-term
phenoma and largely unrelated to ongoing private spending decisions, their impact on
month-to*month measured growth rates may be substantial. Indeed a 95 per cent
confidence interval for the systematic (non-transitory) growth rate for Mi has been
estimated as plus or minus five percentage points. Thus, for example, if the underlying
growth rate were 6 per cent, one would observe month-to-month changes about 8%
per cent or below 3 ^ per cent about one third of the time, and above 11 or below 1
per cent about 5 per cent of the time.




123
Table 2 presents money growth rates during various intervals from 1973 to
1975, and compares Friedman’s intervals o f variable length with other inter­
vals with the end-points slightly changed. It can be seen that alteration o f his
end-points leads to a rather different picture. The second panel o f the table
shows semi-annual periods (except for the last p e r io d ); these periods change
Friedman’s end-points in the last half o f 1974 and in 1975 by only one month.
Less variability in monetary growth is clearly evident in the second panel.
And even less variability is demonstrated in the third panel, where growth
rates are based on quarterly average end points, which put less weight on
individual months. In only one instance in the data shown in the third panel
of Table 2 (Ms in the second half o f 1974) did the semi-annual acceleration or
deceleration o f money growth reach three percentage points—in contrast to
variations of as much as 7.7 percentage points over similar periods in Fried­
man’s table.
TABLE 2.—RATES OF MONETARY GROWTH, 1973-75
[Seasonally adjusted annual rates]
Semiannual periods
Friedman’s table
June 1973 to June 1974

June 1974 to January
1975.
January 1975 to July
1975.
July 1975 to 4 weeks
ending Oct. 15,1975.

M,

Based on last month of
Ms half year *

8.7 December 1972 to June
1973.
June 1973 to December
1973.
December 1973 to June
1974.
.9 5.1 June 1974 to December
1974.
8.6 12.0 December 1974 to June
1975.
.3 4.4 June 1975 to 4 weeks
ending Nov. 12,1975.
5.6

Mi

Based on quarterly
Ms averages

9.1 4th quarter 1972 to 2d
quarter 1973.
4.7 8.3 2d quarter 1973 to 4th
quarter 1973.
6.3 8.7 4th quarter 1973 to 2d
quarter 1974.
3.1 5.5 2d quarter 1974 to 4th
quarter 1974.
6.1 10.6 4th quarter 1974 to 2d
quarter 1975.
2.0 6.2 2d quarter 1975 to 4th
quarter 1975.
7.4

M,

Ms

7.1

9.0

5.3

8.4

6.6

9.1

3.7

6.1

4.2

8.5

* 4.6

*8 .4

» The last period shown terminates with the 4 weeks ended November 12 in order to show the effect of an additional
month of data relative to the last period for which Friedman had figures.
2 Preliminary.

Reasons for variability in growth rates
A certain amount o f variability in monetary growth rates can be expected
in a dynamic and complex economy. The Federal Reserve does not view its
annual targets for the monetary aggregates as objectives to be adhered to
rigidly month-by-month, quarter-by-quarter, or even half-year by half year.
Experience demonstrates that the public’s demand for money and related assets
is not stable over the short-run. It would be counter-productive to attempt to
adhere to a pre-conceived, steady increase in the money supply under the cir­
cumstances. To do so would induce sharp short-term variations o f interest
rates.
The short-run behavior o f interest rates is much more likely to affect atti­
tudes of businesses, consumers, and financial institutions than are short-run
variations in money growth. For example, if the Federal Reserve had attempted
to keep growth in the narrowly defined money supply (Mi) within a 5 to 7y2
per cent, annual rate, band last May and June, when disbursements o f tax
rebate and social security checks temporarily raised growth to about a 15
per cent annual rate, interest rates would have risen very sharply. There would
have been a sharp diversion of funds away from thrift instittuions; mortgage
commitments would been greatly curtailed; asset values o f financial institutions
and market participants would have been severely eroded in a period when
economic recovery was barely under way and many institutions were just
beginning to recover from the impact of the recession. Consumers and busi­
nesses would probably have reduced current spending in face o f tighter credit
conditions and a weakened financial position. Subsequently, o f course, interest
rates would have dropped sharply as efforts were made to maintain money
growth in later months, but by then financial institutions would have been
concentrating on restoring their damaged liquity rather than on making loans,
and consumer and business spending probably still would have been adversely
affected by uncertainty as to the underlying financial outlook.




124
These undesirable effects o f a rigid monetaristic approach were avoided in
the conduct o f monetary policy last spring and summer. The Federal Reserve
permitted a sizable acceleration in money supply growth in May and June, but
also accepted a modest tightening of the money market so as to help ensure
that rapid monetary growth would not be too long sustained. As the pace o f
monetary expansion slowed in the summer months, the Federal Reserve en­
couraged an easing o f the money market, so as to help sustain growth in the
monetary aggregates. On average over the spring and summer, Mi increased
at a satisfactory rate, and this was accomplished without the adverse effects
on the economy that would probably have been generated by sharp interest
irate swings.
In general, there appears to be little evidence that short-run fluctuations in
inoney growth have significant impacts on economic activity and prices. To be
feure, relatively rapid or slow growth that is sustained over a period o f 6
months to a year may well begin to influence the economy. But even this is
by no means certain. I f there has been a structural shift in the same direction
in the demand for money relative to ONP, the relatively rapid or slow growth
may simply represent an adaptation to newly emerging preferences on the
part of the public for the forms in which they hold liquid assets or to the
need for cash balances in light o f changes in financial technology.
Thus, in assessing what money growth rates are appropriate, the monetary
authorities must take account of demand shifts or other factors affecting
changes in the velocity, or turnover, of money. The velocity o f money can
change considerably in short periods. For example, velocity tends to increase
rather sharply in the early stages of a business recovery as the public's con­
fidence in the economy is restored and consumers and businesses become in­
creasingly willing to spend out o f existing money balances. As the economy
moved strongly forward in the third and fourth quarters o f 1975, the increase
in velocity was especially rapid.
Shifts among money and money-substitutes also affect the velocity of money.
For instance, business firms have recently been given permission to hold
balances up to $150,000 in savings accounts at commercial banks. As a result,
they have apparently transferred sizable amounts from demand deposits to
savings accounts, since the funds are in practice available on demand and
interest is often paid from day o f deposit to day of withdrawal. Such a shift
in deposit balances would, o f course, increase the turnover o f the narrowly
defined money supply (M i).
When the public shows increased willingness to use cash balances more
Efficiently, as manifested by an increase in velocity, there is less need for addi­
tional cash balances. Thus, the amount of monetary growth required by the
economy will vary depending on how such factors as public psychology and
financial innovation are influencing the velocity o f money under giyen credit
market conditions.
Role of Federal funds rate
Use of the Federal funds rate as one important guide for day-to-day open
tnarket operations helps ensure that the central bank’s operations are con­
ducted in such a way as to foster orderly credit market adjustments and to
take account o f short-run variations in the demand for reserves and money.
In undertaking open market operations, the Trading Desk at the Federal
Reserve Bank o f New York is instructed each month to keep the Federal funds
rate within the tolerance range estimated to be consistent with the tolerance
ranges for monetary growth also specified each month. The Federal funds rate,
o f course, varies in the course o f the month and does change sharply over a
period of months in response to altered economic conditions and longer-run
changes in demand pressures on bank reserves and money relative to the
available supply.
I f money growth is persistently slower or more rapid than desired, the Fed­
eral Reserve would begin altering reserve availability to effect changes in the
Federal funds rate. This would begin to counteract the shortfall or overshoot
in money growth that had been occurring. In this process movements in the
funds rate may be relatively gradual because past experience demonstrates
that overshoots or shortfalls in money growth can often be self-reversing in
the sense that the public willingly readjusts its cash balances to more normal
levels. However, the funds rate has moved widely over relatively short periods
o f three to six months as the Federal Reserve has sought to keep money




125
growth over the longer-run within desired bounds in the face o f a persistingly
strong or weak demand for money on the part o f the public.
Friedman advises the Federal Reserve to attempt to eliminate short-run
disparities between actual monetary growth and its announced longer-run ob­
jectives by renouncing its objective of moderating short-run interest rate move­
ments. He defends this view primarily by arguing that a concern for stabilizing
short-run interest rates movements will actually result in more unstable interest
rate movements in the long run and self-reinforcing deviations in money growth
from targets.
He argues that at the onset o f a recession, fo r example, when interest rates
tend to fall, a funds rate operating target lowered too slowly would lower
monetary growth below the desired ranged. Were this lower growth sustained,
it might be expected to begin further reducing economic activity significantly
in about six months’ time. The associated decline in loan demand at that
point would then place additional downward pressure on interest rates. The
funds rate would again tend to fall below the operating target, and, if this
tendency were resisted by central bank action, the process would cause still
lower monetary growth, and so on.
While this scenario is theoretically possible, the empirical evidence does not
suggest that there have been self-reinforcing deviations in money growth over
successive six-month periods. During the past three years, monetary growth
has not been steadily low or high. Instead, as may be seen from the last two
panels of Table 2, money growth rates have varied moderately in opposite
directions. Thus, there has been no cumulative tendency for money growth to
be relatively high or relatively low from one six-month period to another, as
would be the case if the mechanism Friedman outlines had any practical
significance.
Friedman, however, asserts that the familiar interval o f six to nine months
between a change is money growth and its impact on spending, loan demand
and interest rates “ has shortened drastically as the market has come to under­
stand the process.” This statement represents a departure from the conven­
tional wisdom o f both Keynesian and monetarist strands o f macroeconomic
thought It requires careful empirical examination and verification before it
can be accepted as valid either by the economics profession or by policy makers.
It is likely, though, that the lag between movements in money growth and
movements of interest rates has been reduced through expectational forces. In
this case, a decline in money growth could lead relatively promptly to a drop
in interest rates as, for example, investor expectations o f inflation are reduced.
Or interest rates may decline because market participants anticipate that there
will be a near-term easing of the money market caused by Federal Reserve
efforts to encourage faster money growth. The economic implications o f such
a process are far from clear, though. For example, a drop in market rates
occasioned by slow money growth might conceivably encourage economic ac­
tivity—assuming the expected longer-run rate o f return on capital has not
changed—and thereby set in motion forces that will lead to an offsetting more
rapid money growth. In that case, there would not be a self-reinforcing tendency
for money to decline.
The Federal Reserve staff is continuing to examine the empirical evidence
concerning relationships between money supply variables, interest rates, and
economic activity—including specific questions connected with the use o f the
Federal funds rate as a day-to-day operating instrument for monetary policy.
Perhaps the results of future research will suggest that typical changes in the
Federal funds rate—which on average in absolute terms were almost % of a
percentage point per week from January 1973 through October 1975— have been
too gradual. Or, on the other hand, such studies may suggest that reserve
aggregates might provide a more efficient basis for conducting day-to-day open
market operations, either alone or in conjunction with a Federal funds rate
constraint. The Federal Reserve has in the past experimented with reserve
targets, such as total reserves and reserves available to support private
deposits (R P D ). The continuing review o f evidence and experience has led in
the past—and can be expected to lead in the future— to changes in Federal
Reserve operating procedures when justified in light o f the whole array o f
objectives and responsibilities of the System.
Friedman’s proposal is to scrap the tolerance range for the Federal funds
rate altogether, to ignore interest rate movements completely, and to move to




126
the monetary base as the sole operating target. He believes that the monetary
base is more predictably related to the money stock than is the Federal funds
rate.
Evaluation of monetary base
The relationship between the monetary base and the monetary aggregates is
neither constant, mechanical, nor perfectly predictable. For example, in one
recent period o f slow money growth, the last half of 1974, Mi grew by 3.1 per
cent, Ms at 5.5 per cent, while the monetary base grew at 8.7 per cent Over
this six-month period, the multiplier for Ma thus declined by 5.6 per cent, ad­
mittedly a rarity for such a long period.
For monthly data, the multiplier consistently demonstrates significant varia­
bility. For example, over the period Friedman cites as exhibiting particularly
erratic monetary growth— June 1974 to September 1975—the average monthly
per cent change in the Mi multiplier at an annual rate (without regard to
sign) was 5.1 per cent, and the maximum single change was 10.5 per cent.
As Friedman suggests, to the extent that the changes in the multiplier could
be forecast a month ahead o f time, monetary control using a monetary base
operating target would be improved.
Friedman refers to two procedures for predicting the change in next month’s
multiplier. The first, analyzed by William Dewald,2 is to assume next month’s
multiplier will equal this month’s multiplier (calculated from preliminary
data). In other words, this naive method always predicts a zero change in the
multiplier for the following month. By the second procedure, “ a more sophisti­
cated version o f this method o f operation,” Friedman appears to mean the one
proposed and examined by Albert Burger and others in various articles in
Federal Reserve publications cited by Friedman. Under this approach, the
prediction o f next month’s multiplier depends on an equation relating it to a
three-month moving average o f the current and lagged monthly multipliers
(calculated from partially preliminary data) and the current month’s per cent
change in the Treasury bill rate. Burger recently published an analysis8 of
how this technique would have performed from June 1974 to August 1975. It
turns out that the naive prediction of no change in the multiplier was just as
accurate on average as the prediction with the Burger approach over this
period.4 In short, the more sophisticated model had no more predictive power
than did the naive method over this interval.
Burger’s results suggest that had the Federal Reserve attempted to stay
along the target path for Mi each month, using his methodology, the diver­
gences over six-month periods o f actual and targeted growth rates o f Mi
would have averaged about one percentage point. However, the individual
monthly errors are sizable; the average monthly divergence between the
targeted and the controlled Mi (without regard to sign) was $1.3 billion, with
a maximum deviation o f $4.3 billion. Expressed at annual rates o f growth
these average and maximum deviations are 5.5 and 17.9 percentage points,
respectively.
The Board staff peformed the identical experiment with the more naive
approach. Its performance was not significantly different from Burger’s ap­
proach for this fifteen-month period, both over six-month intervals and over
monthly intervals. The average absolute and maximum monthly deviations were
$1.4 billion and -$2.9 billion, respectively for dollar figures, and 5.9 and -11.9
percentage points, respectively for annualized growth rates.
Both these studies, however, make simplifying assumptions which bias the
results in a way that reduces the average errors for both long and short
periods. Had the Federal Reserve actually been pursuing Burger’s procedure
over this period, the estimated equations in all probability would have de­
teriorated significantly. Particularly in view of the large monthly variations in
Mi growth, which the Federal Reserve is assumed to attempt to offset fully
in the next month in order to remain on a fixed target path, the growth rate
of the monetary base would have had to vary substantially more than it
actually did over the period studied. Substantially more variable interest rates
would have been implied which, together with lagged bank responses in chang­
2 William G. Dewald, “ Monetary Control and the Distribution of Money, Ph.D. disserta­
tion, University of Minnesota, 196.3.
3Albert Burger, “ The Relationship Between Monetary Base and Money: How Close?”
Review, Federal Reserve Bank of St. Louis (October, 1975).
4 The root mean squared errors in predicting monthly annualized per cent changes
in the Mi multiplier were 6.8 percentage points for the naive method and 7.3 per­
centage points for the Burger approach.




127
ing deposits, would have produced much more variability in the multiplier than
actually occurred. Thus, the predicted multiplier— which is based in part on
an average of past multipliers—would likely have been less accurate on average.
Larger misses of monetary growth targets than the studies indicate are there­
fore highly probable. In general, the question o f exactly how closely the Fed­
eral Reserve could attain its announced money growth targets over short periods
under Friedman’s proposal is still open.
Friedman does recognize that sizable week-to-week and month-to-month
errors will occur under his proposed operating procedure. But because under
his procedure the Federal Reserve attempts to compensate entirely in the next
month for a miss in the current month, he believes that the danger o f successive
misses in the same direction will be significantly reduced and that “ it is
literally inconceivable that if the Fed had followed this procedure during 1974
and 1975, it could have departed as far as it did” from its announced monetary
growth targets. This would be the case, however, only if short-run movements
in interest rates of much larger dimensions than have occurred in the past
were permitted.
In any event, it is by no means obvious that it is economically desirable to
severely limit shorter-run variations in money growth, or that it is possible
to specify the most appropriate money growth for a particular period—
especially a relatively short period—in advance. Appropriate short-run money
growth depends to a great extent on shifting, and often random, money flows
and demands. Since these factors cannot be predicted in advance the monetary
environment in the short-run that best serves the public interest may be more
nearly approximated through a funds rate operating range than through a
monetary base objective.
Two final problems with the monetary base as an operating target are that
it includes member bank borrowing and currency in the hands o f the non-bank
public. This presents control problems fo r the Trading Desk because banks can
offset the changes in the monetary base intended by the Federal Reserve by
changing their borrowing. Changes in currency holdings by the non-bank public,
while they need not affect the monetary base, do affect bank reserves and thus
affect both market interest rates and the multiplier that relates the base to
money. Alternatives to Friedman’s proposal would be to replace the monetary
base by the nonborrowed monetary base or by nonborrowed reserves. Over
recent years, these magnitudes have been almost as closely related to monetary
aggregates as the monetary base.6
A comment on the behavior and use o f the Board’s monthly money market
model is in order. Friedman’s remarks leave the distinct impression that the
Federal Reserve relies on this model exclusively in formulating the forecasts
which provide the basis for the operating strategy o f the Trading Desk. But
this model is only one o f many forecasting techniques, including judgment, that
the Federal Reserve employs to determine projections of interest rates, reserve
aggregates, and the money supply.
Moreover, Friedman’s contention that the monthly model’s one month ahead
prediction of next month’s Treasury bill rate is inferior to the naive prediction
that it will equal this month’s level is not correct over either the January 1969
to December 1974 period of the most recent model fit or the post-sample period
in 1975. Over either period the monthly model’s predictions o f the Treasury
bill rate—which depend in part upon the last, current, and next month’s Federal
funds rate—were closer on average than those o f Friedman’s naive model. The
superior performance o f the monthly model was even more marked fo r the
commercial paper rate, which is the rate, rather than the Treasury bill rate,
which appears with other rates in the model’s money demand and borrowed
reserves equations.
In general, empirical evidence appears to indicate that it is difficult to control
the money supply no matter whether most emphasis is placed on interest rates
or most emphasis is placed on bank reserves (or the monetary base). When
the Federal funds rate rather than reserve aggregates is taken as the primary
guide for day-to-day open market operations, reliance has to be placed on
knowledge of factors—such as income and other interest rates—that influence
the public’s demand for money to hold in order to achieve control over the
quantity o f money. These relationships have been the subject o f considerable
6 The Federal Reserve staff is continuing to study a variety o f reserve measures and
their multiplier relationships to money supply in an effort to determine which measures
and which multiplier forecasting techniques, including structural modeling and judgment,
might best play a role in monetary policy operations.




128
empirical research, which provides a basis for operating procedures that em­
phasize the funds rate. Nevertheless, the relationships have not proved to be
highly predictable, particularly in the short-run.
Control o f money from the supply side involves an ability to control reserve
aggregates (or the monetary base) and to be able to predict the multiplier
relationship between such aggregates and the stock money. These relationships,
too, are not highly predicable. The multiplier can vary—unpredictably and
erratically— for a large number o f reasons. The public can switch readily
between deposits that have high reserve requirements and those that have
relatively low requirements; these shifts often depend on the level of interest
rates, which is in turn affected by the behavior of the economy. A growing
fraction of the public’s deposits is also held at institutions that are not subject
to reserve requirements set by the Federal Reserve. Finally, banks’ demands for
excess reserves and borrowing from the Federal Reserve can shift in response
to credit demands on them or changes in bank lending attitudes and ex­
pectations.
Friedman’s regulatory proposals are designed to reduce uncertainties affect­
ing relationships between the quantities o f reserves supplied and the money
stock. The Federal Reserve has proposals before Congress (such as applying
reserve requirements set by the Federal Reserve to nonmember banks) with
the same objective in mind. The various Friedman proposals will be discussed
in the next section.
Before doing so, it should be pointed out that while there is value in reduc­
ing the potential slippage between reserves and money, it does not follow that
the Federal Reserve should adhere to a fixed, predetermined rate of growth in
reserves and/or money in conducting open market operations. As noted in
earlier parts of this paper, there are good economic reasons for permitting
variations in money growth and for accommodating, at least in part, short-run
changes in deposit flows and money demand.
II. T H E DESIRABILITY O F REVISION I N C E R T A I N B A N K I N G R E G U L A T I O N S

Friedman first recommends the elimination of the two-week lag in reserve
requirements, whereby Required reserves are based on deposits two weeks ago.
and the re-establishment o f contemporaneous required reserve accounting. The
Federal Reserve has been studying the impact of lagged reserve accounting
in order to appraise the benefits to banks through simplification of reserve
management as against the possible costs of lessened monetary control. Lagged
reserve accounting in and o f itself would appear to have little, if any, adverse
effect on monetary control if the Federal funds rate is the day-to-day target
for open market operations, because the control mechanism then depends
primarily on ability to predict the relationship between the public’s willingness
to hold money and short-term interest rates—and not on the relationship be­
tween a given reserve level and the money stock. Even if reserve aggregates
were given more emphasis as an operating target for monetary policy, the lag
in reserve accounting would present only a minor problem. It does appear to
limit the precision o f monetary control through reserves in the very short-run.
but a two-week lag poses no real impediment to monetary control over a more
relevant longer period o f three to six months.
Friedman also suggests a reverse lag reserve accounting proposal developed
by Laurent as a passible improvement over contemporaneous accounting. In
Laurent’s proposal, the reserves available to meet this week’s required reserves
would be the total reserves held in a previous priod, say, one week earlier. Thus,
banks would be required in a current week to adjust assets, “ net demand
deposits,” 6 and required reserves to conform to total reserves of the previous
6 In order to increase banks’ control over their required reserves and to reduce the
impact on their required reserves of factors outside their control, Laurent also proposes
a change in the definition o f net demand deposits, upon which required reserves are
calculated. Under the proposal, a bank’s net clearings— the value of checks deposited at
the Federal Reserve minus the value of checks drawn against the bank in the settlement
period— would create an equal amount of interbank deposits “ due to” other banks when
negative and “ due from ” other banks when positive. Deposits “ due to other banks in­
crease net demand deposits while deposits “ due from” other banks decrease net demand
deposits. Hence, depositor initiated flows of demand deposits between banks would leave
individual banks with unchanged required reserves in this week’s settlement period.
But if a bank sells earning assets, for example, its deposits “ due from” other banks
would rise as the buyer’s check is credited to the bank’s account at the Federal Reserve
and its net demand deposits would fall by the same amount in the current settlement
T&e bank’s required reserves would thus fall by a fraction of that amount.




129
week, and/or to have adjusted their total reserves of the previous week to
conform to anticipated deposits and required reserves in the current week. The
proposal appears to enhance the risk of disruptive market adjustments by banks
or, on the other hand, it could lead to excessively conservative reserve man­
agement, such as the practice of holding large amounts of excess reserves, as
banks attempt to ensure the availability of reserves to meet any unexpected
build-up in deposits in the period ahead. Friedman rightly considers this a
“radical” proposal, which certainly requires much more professional discussion
and evaluation before its implications can be fully understood.
Friedman further suggests establishing five reserve settlement periods, each
ending on a different day of the week, Monday through Friday, and assigning
one-fifth of the banks (or banks with roughly one-fifth of deposits) to each
reserve period. Such a scheme of staggering reserve periods would permit a
bank to obtain reserves for settlement purposes not only by borrowing from
the Federal Reserve or from other settling banks but also by borrowing Federal
funds from non-settling banks. He believes the latter alternative would help
smooth interest rate movements and require fewer “defensive” open market
operations by the Federal Reserve.
It is by no means clear, however, that staggering reserve settlement periods
would smooth interest rate fluctuations. As banks settling in the first period
attempt to adjust to monetary policy changes—
-for example, a tightening that
reduces reserve availability—they would tend to throw the burden of adjust­
ment onto other banks either by borrowing Federal funds or by selling assets
that are acquired by customers of other banks. Banks that settle in the next
period would then find that they have an even larger adjustment problem in
consequence of the adjustments made by banks settling in the initial period.
The process of adjustment would reverberate from one group of settling banks
to another, and might well involve an oscillatory process of alternative overand under-adjustments in deposits iand fluctuations in interest rates. The possi­
bility that the adjustment process might develop along these lines raises serious
questions as to the practical desirability of Friedman’s proposal.7
Friedman’s suggestion for establishing the same required reserve ratios on all
bank liabilities is puzzling. If short-run money control were the sole criterion
for assessing the reserve requirement structure, it might be argued instead that
reserve requirements should be equalized for deposit liabilities entering the
money supply and that reserve requirements oh other bank liabilities should
be eliminated. Equal reserve requirements on money supply liabilities and a
zero requirement on non-money liabilities would make it easier to forecast the
multiplier between reserves and money. The particular liabilities subject to
reserves would then depend on the definition of money to be controlled.
If Mi were the principal aggregate to be controlled, such an approach would
involve placing reserve requirements only on private demand deposits (at both
member and nonmember banks), with the level of requirements the same re­
gardless of the size of the individual bank’s deposit. If M2 were the aggregate
to be controlled, the relevant liabilities on which to apply equalized reserve
requirements would be demand deposits and time and savings deposits (other
than large negotiable CD’s) at commercial banks. The reserve requirement
would be eliminated on such liabilities as CD’s, U.S. Government deposits and
interbank deposits that are not considered part of the money supply. And if
M3 were the aggregate to be controlled, equal reserve requirements would need
to be extended to time and savings deposits at savings and loan associations
and mutual savings banks.
Reserve ratios also serve other important functions besides facilitating money
control, however. The present reserve requirement structure, while it may be
improved in a number of respects, does help ensure sound banking practices
by requiring higher reserve ratios for volatile demand deposits, provides for
competitive balance through lower ratios for small member banks, and en­
courages banks to manage their liabilities more prudently by skewing the time
deposit reserve requirement structure toward lower requirements on longerterm time deposits.
* Friedman does not indicate whether his proposal also involves basing the reserve
period on five working days rather than seven days, as is current practice. A five
working day reserve settlement period has the additional problem o f probably intro­
ducing an intra-weekly fluctuation in money market rates, since it would be desirable
for banks to avoid holding reserves over the week-end when they serve no purpose for
supporting deposits.




130
C o m m it t e e

on

U.S. S e n ate ,
B a n k in g , H o u sin g and U rb an A f f a ir s ,
Washington, D .C ., February 13,1976.

P r o f. M ilton F r ie d m a n ,
Department of Economics,
University of Chicago,
Chicago, III.
D e a r P r o f e s s o r F r ie d m a n :

Following your testimony before the Senate
Banking Committee on November 7, 1975, I asked the Chairman of the Federal
Reserve Board to respond to your specific suggestions for improving the condi­
tions of monetary policy.
Enclosed for your information is a letter from Chairman Burns transmitting
an analysis of your proposals prepared by the Federal Reserve staff. I plan to
include the Federal Reserve’s comments in our next hearing on monetary policy
together with any additional comments you may care to make. These hearings
are now expected to occur early in May.
I would appreciate receiving for the record any additional comments you
may have regarding the Federal Reserve’s analysis.
Sincerely,
W il l ia m P ro x m ir e ,
Chairman.
R e j o i n d e r b y M i l t o n F r ie d m a n t o “ F e d e r a l R e s e rv e S t a f f C om m en ts o n
P r o f. F r ie d m a n ’s S t a t e m e n t B e f o r e S e n a te C om m ittee o n B a n k in g , H o u s ­
in g , a n d U r b a n A f f a i r s (N ov . 6, 1975)”

I appreciate the opportunity to respond to the comments by the Federal
Reserve staff on my testimony before your committee on November 6, 1975.
As a long-time student of the published statements of the Federal Reserve
System over the past sixty years, I can testify that this comment is vintage
Federal Reservese: Everything the Federal Reserve did was the most effective
possible response to events impinging on the economy and the System from
outside; and unfortunate results were the consequence of events outside the
Fed’s control and the outcome would have been worse but for the prompt,
sensitive, and well-informed reaction of the Fed, based not on any simple
“model” but on “many forecasting techniques, including judgment” ; critics of
the Fed’s policies sometimes have a point, but they are insensitive to the
qualifications and subtleties that the Fed takes into account; and, finally,
repeated assertion that “facts” and “experience” support the Fed are presented
as a substitute for hard evidence. Above all, there is no objective quantitative
criterion by which to judge Federal Reserve performance. In short, trust the
Fed, since “the continuing review of evidence and experience has led in the
past—and can be expected to lead in the future—to changes in Federal Reserve
operating procedures when justified in light of the whole array of objectives
and responsibilities of the System.”
The quoted passages are from the present staff comment, but my paraphrase,
and these passages, apply just as well to the Federal Reserve’s annual reports
for 1932 and 1933, when the monetary system collapsed as a clear and direct
result of Federal Reserve mismanagement. The present apologia too should be
taken with a shaker’s-full of salt.
To turn to more specific points, which I shall discuss under the successive
headings used in the staff memorandum.
v a r ia t io n s i n m o n ey grow th rates

The staff objects that I have overstated “the amount of volatility because
[my] choice of periods places great weight on exceptional months.” There is
some merit to this objection but the alternative procedures the staff suggests
are even more defective in the opposite direction. I have used months, rather
than days or weeks, in order to avoid overstating volatility. But whatever
unit of time is used, it is essential not to use a fixed set of end points, as the
staff does in its Table 2. Those dates need not correspond to shift in Fed policy.
For example, suppose the Fed increased the quantity of money very rapidly
from March to September, then decreased it very rapidly from September to




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March. Measuring changes only from December to June and from June to
December, as the staff does in its Table 2, might show perfect stability!
As it happens, for the period covered by the staff’s Table 2, the fixed dates
are only off by a month or so from the actual turning points in Fed policy,
so the growth rates computed from the final month of the half-year for semi­
annual periods in the staff’s Table 2 only fudge a bit the variability shown by
my own calculations from months of turn; in the main, they tell essentially
the same story. Combining arbitrary dates with the use of quarterly averages
fudges even more, and though it does not completely eliminate the variability,
it certainly reduces it drastically. But these figures do real violence to the
actual situation—they are reminiscent of the six-foot man who drowned
crossing a creek that he had been assured averaged only five feet in depth.
Incidentally, it is amusing to compare the staff’s discussion here, which
plays down month-to-month variability, with its discussion later on where it
stresses that “individual monthly errors are sizable.” In each case, it takes that
side of the issue which it regards as opposed to the particular argument of mine
that it is criticizing—without recognizing that that puts it on both sides of the
fence.
REASONS FOR VARIABILITY IN GROWTH RATES

The one significant reason given why variability in money growth rates is
desirable is that constant monetary growth would “induce sharp short-run
variations in interest rates.” Two questions arise: Would it? And if so, would
that be harmful?
On the first question, the staff repeats several times the assertion that
steadier monetary growth would mean more variable interest rates, yet it offers
not a scintilla of evidence to support that assertion. In my testimony, I referred
to this assertion, said “I have long believed that it [steady monetary growth]
would have precisely the opposite effect” (i.e., mean stabler interest rates)
and referred to a recent paper by Professor William Poole that reaches the
same conclusion. The Fed staff neither offers additional evidence to support
its assertion nor refers to, much less answers, Professor Poole’s paper.
Surely it is not too much to ask that the Fed present carefully analyzed
evidence to support an assertion that is absolutely basic to its whole position.
On the second point, the interest rates that are important for housing and
investment are long-term rates. These tend to be highly stable despite sharp
variations in short-term rates. It is hard to see any significant harm that would
be done by short-term variations in short-term rates.
Note that in practice short-term rates have been highly variable. If the Fed
has indeed deliberately accepted variability in monetary growth to avoid
variability in rates, it has gotten very little in return. The end result has been
nether stable monetary growth nor stable rates.
In fact, as I argued in my testimony, I believe that the talk about interest
rate variability is rationalization pure and simple, designed to put the best
face possible on variation in monetary growth arising from the Fed’s stubborn
insistence on sticking to obsolete procedures of operation.
The other justification which the Fed gives for variability in monetary
growth is to offset variations in the demand for money (by which they mean
“demand schedule” ). This would be a valid reason if the Fed could detect
shifts in demand. But that is a big if. Time and again, the Fed has referred
to a shift in demand to excuse abnormally rapid or slow monetary growth.
Time and again, subsequent evidence has failed to confirm such a shift. A
recent episode, explored in detail by Michael Hamburger of the Federal Reserve
Bank of New York, was in 1971. Dr. Hamburger concluded in an article pub­
lished recently that there had in fact been no such shift as the Fed had
proclaimed to justify its monetary policy. Perhaps this time is different. But
where is the evidence?
ROLE OF FEDERAL FUNDS RATE

This section mostly simply repeats my own description of the way the Fed
now conducts policy. However, in one respect it misinterprets my position. In
referring to the self-reinforcing deviations in monetary growth that would result
from reliance on the Fed funds rate, I said that while the initial effect of




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higher than targeted monetary growth would be to hold down interest rates,
after an interval, which in the past has been about six months but seems now
to be markedly shorter, the effect would be to raise interest rates, thereby
forcing the Fed to increase money growth even more. The Fed interprets this
as referring to “successive six-month periods” and then offers utterly irrelevant
evidence for such periods. Let there be a six-month delay. The effect could
show up in a monetary explosion in the next three months, countered by a
belated jump in Federal funds targets, which might produce a reversal in
monetary growth, so that no effect would be present for a six-month period as
a whole. This is roughly what happened from, say, April or May 1975 to Oc?
tober or November 1975.
In this connection, the Fed has argued that “it is likely . . . that the lag
between movements in money growth and movements of interest rates has been
reduced through expectational forces,” thereby granting one of my main points
and rendering somewhat questionable its own answer to my criticism.
EVALUATION OP MONETARY BASE

In my testimony, I stressed that the relation between the monetary base
and monetary aggregates is not precise, so for the most part the staff agrees
in this section with my analysis.
It gives a somewhat different impression first, as I noted earlier, by here
putting emphasis on month-to-month variability, and second, by asserting,
without any evidence whatsoever, that “had the Federal Reserve actually
been pursuing Burger’s procedure over this period, the estimated equations in
all probability would have deteriorated significantly.” My own belief is precisely
the opposite. But neither the Fed’s assertion nor my impression is a substitute
for the kind of trial of the alternative procedure that I have been urging on
the Fed for nearly a decade.
The Fed’s other objections to the monetary base as an operating target seem
to me either trivial or wrong. In any event, they apply just as much to current
procedure, since, insofar as they are valid, they introduce errors in the Fed’s
estimates of the Federal funds rate required to achieve a specified monetary
target.
DESIRABILITY OF REVISION IN CERTAIN BANKING REGULATIONS

The one point here that requires comment is the Fed’s discussion of staggered
reserve settlement periods. I first proposed this to the Fed some ten or a dozen
years ago. At the time, the Fed made precisely the same objection that it does
now. I replied, giving a theoretical analysis that I thought persuasively demon­
strated that fears of an “oscillating process of alternative over- and under­
adjustments” were illusory and that the analysis leading to these fears was
faulty. I have yet to receive a reply indicating where I was wrong. Apparently,
the Fed did not consult its files. Faced with the same proposal, its standard
condtioned reflex operated—find some objection, however far-fetched, to any
argument suggesting that the way the Fed now operates is not the best of all
possible worlds.




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