Regional President Speech

BULLETIN OF THE ROBERT MORRIS ASSOC& TES - DECEMBER 1950 (Summary of K. R. Bopp* s speech at White Sulphur Springs 11/7/50) The Economic and Business Outlook For 1951 By DR. KARL R. BOPP Vice President and Economist, Federal Reserve Bank of Philadelphia An expert, I take it, is one who 1949 we were again pulling up, and speaks confusingly about a subject between June of 1949 and June of he doesn’t know anything about, 1950 the index of industrial pro­ but in such a way as to make the duction increased about 40 points. audience feel that it is their fault Even prior to the outbreak in rather than his. I would like to Korea, we were again having slight discuss with you, a little bit, busi­ revivals of inflation, and it seemed ness prospects and economic pros­ as though the rest of the year pects as I see them, particularly as would be a good year with moder­ they have been affected by the in­ ate inflation, but rather acute in vasion of South Korea. Before do­ some spots, particularly housing ing that, I think we should take a and durable consumer goods. very brief, but very long view of this economy. Immediate Economic Impact Pre-Korea Review of Korean War We have had, since prior to the It is at this point that the in­ outbreak of the Second World War, vasion of South Korea took place, an increase in physical output of and I think perhaps the best thing the general order of magnitude of to do there is to see what was the two-thirds to three-fourths. We immediate economic effect. It was have had an increase in prices since not an increase in governmental ex­ that time in the general order of penditures. The government im­ magnitude of two-thirds. As a mediately planned to spend a lot consequence, our gross national ex­ more money, but the increase in penditures, the over-all picture, are governmental expenditures has up to two and a half times what been very slow in moving forward. was pre-World War II, and our I think the expenditures for goods money supply is about three times and services in the third quarter of what it was then. In short, we this year were less than a billion have had virtually ten years of pro­ dollars, at an annual rate, more longed prosperity and inflation. than in the second quarter. It is quite true that this infla­ The immediate impact was in tion, at least temporarily, seemed civilian expenditures. You will re­ to be brought to a halt early in call the scare-buying we had on the 1949, when the index of industrial part of consumers. There was a production fell from about 195 to great increase in expenditures for 161, but we recovered from that in those things that were scarce dur­ very rapid order. By the middle of ing the Second World War, particu­ 181 Robert Morris Associates Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis larly consumer durable goods, auto­ lion, and that leaves a million to mobiles, and housing. come from those now producing for civilian purposes. In making these expenditures, consumers and business were not That does not seem an insur­ only spending their very large in­ mountable economic problem. If comes, which were at an unpreced­ we think of it in those real terms, ented level, but were cashing in we get a rough idea of the present some of their earlier savings, and order of magnitude. in addition were going into debt We can move next from the man­ at a rather rapid rate. That is the power problem to the real resource immediate impact. problem. We have to do this in terms of dollars, but what I am do­ Economic Magnitudes Confronting Us ing here is to express it in terms Let us look into some of the eco­ of dollars of constant purchasing nomic magnitudes that seem to con­ power. Whether that is what we front us. The basic economic mag­ have in store or not, I will come to nitude is that of manpower. In the later. second quarter of this year, we had We will have to take care of a labor force of about 64.8 million roughly 20 billion dollars of addi­ people. Of those, three and one- tional defense expenditures, which third million were unemployed. A is the annual rate anticipated a million and a half were in the year from now. In order to do that, armed services, and one million we are going to have to either in­ seven hundred thousand, roughly, crease our output or we will have were in defense industries, leaving to do without some of the civilian 58.3 million producing civilian goods goods we have. As I have indicat­ and services. Now, if the present ed, we have some chance of bring­ estimated expenditures for defense ing people into the labor force, em­ take place as planned, and if we ploying some of the unemployed, have the increase in the armed using some of our stand-by factor­ forces to 3 million as planned, then ies, working longer hours, a little what is the nature of our man­ more efficiently perhaps. It is pos­ power problem? Roughly, we will sible that we can get within a bil­ need an additional million and a lion or 2 billion dollars of this total half for the armed services and an­ in these ways alone, and again, the other 3 million to produce defense problem in terms of what has to be materials, giving us a requirement subtracted from the civilian econ­ of 41/2 million people. Where will omy, if we work at our best, does they come from? not seem to be of such great mag­ Our labor force can be expected nitude. Why, then, become dis­ to increase with some people out of turbed about it? Essentially for it now coming back into it, to the one reason. If we produce in the extent of about 1.7 million. Unem­ order of 17 or 18 billion dollars ployment might be reduced by a more of goods, we will be paid for million and a half to one million producing those goods and we will eight hundred thousand, so we can not have the additional goods to get from people not now working consume because they are to go into % something like 3i/2 of that 4 mil­ the defense effort. In short, we 182 December 1950 Bulletin Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis will increase incomes by 17 to 18 periphery of the area and out into billion dollars, but we will not in­ the economy. crease the things we can buy with So that seems to be the problem. those incomes by anything. In fact, You slap on price ceilings and wage we will have some subtraction from controls, and that shoves the prob­ the present level. That, essentially, lem one step further. You will re­ it seems to me, is the nature of our call that in the Second World War problem. we had direct controls pretty well all around. Unless something is done, we will If not everybody can get all he clearly be faced with an excessive wants at the existing established demand over supply of goods and price, somebody has to say who is services at existing prices, and that going to get what is available and tends to force prices up. There are who is going to have to be denied. two ways that have been proposed If that is the road we choose to fol­ to deal with the problem. One is low, I think we should not complain the method of direct control. that it requires an enormous bureaucracy, and I use it in its best Direct Controls sense. We need people of extreme­ The method of direct control op­ ly high intellectual capacities and erates essentially like this: You integrity and honesty to administer look at the economy and see the a system to tell what each price area in which prices have risen shall be and who shall receive the most rapidly, and you say, “We goods and who shall not. have to stop the price rise in this During the World War, we had area.” You clamp on a price ceil­ an elaborate rationing system, ing. It is quickly discovered that, which was inevitable under a sys­ if selling prices are limited, you tem of direct controls. We had the have to do something about costs. red and blue coupons for food The most important cost item in stuffs. the economy as a whole is the labor There are circumstances where cost. So, price freezes lead to wage that is an appropriate method for freezes. dealing with the problem. One feels that solves the prob­ You will recall that in the Sec­ lem ; but does it? Why is it neces­ ond World War our gross national sary to put on a price ceiling? Only output was in, the order of 200 bil­ because not everybody can get all lion dollars a year, 1942-45. The he wants at the existing price, government's take was 100 billion, which means that there are some or about half. So the government unsatisfied people in the market. take was half the total. Even What do unsatisfied people in the though we did not know exactly market do? They say, “Can’t we how long it would last, we were find some substitutes?” That is quite sure we would win the war human ingenuity at work. So they and that we would win it within try to get some substitutes. You a limited number of years. In short, greatly increase the demand for in the Second World War, we had these substitutes, and your problem an enormous effort for a relatively shifts from the first area to the short time, and under those circum­ 183 Robekt M obrjs Associates Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis stances direct controls may be the pone facing the real issue of an ex­ appropriate way of handling the cessive demand. problem. Direct controls, in short, do not themselves ever solve the problem. Is that the kind of situation that They defer it but they do not solve confronts us today? No, so far as it. Ultimately one must get to one is able to determine. What some means by which this exces­ seems now to confront us is that we sive demand can be limited or re­ may get involved in World War III, duced. but that is not the immediate pros­ pect. We are now confronted with Other General Methods of Control the possibility of five, ten, fifteen, That brings us to the other gen­ twenty years—some even say a eral methods of control, the first of couple of generations—of heavy which is that if the government is defense expenditures to defend our going to spend 20 billion dollars way of life. The expenditures will more per year, it should, first of all, be heavy but not anything like one- do what it advises its citizens to do half of our total output. The order and do it in good faith, mainly, re­ of magnitude is fifteen or twenty duce expenditures where it is pos­ sible to reduce them, and that per cent, and does one try to solve ought to be a significant amount. the problem of a fifteen or twenty per cent effort for decades in the Second, to the extent that ex­ same way he tries to solve a fifty penditures are necessary and must per cent problem for half a decade ? be made, we should pay for those I think not. I think not, for the expenditures exactly as we go. I reason that we had some experi­ personally am a little impatient ence with rent controls, not only with those who say we should pay during the war but with what hap­ as much as possible of the costs of pens after the war is over. You defense out of taxes. I think with will remember that when direct the magnitude being 20 per cent of controls were lifted in 1946, we had our income, we ought to pay every an immediate and rapid increase in single penny of it as we go along. prices, and the reason was perfect­ Otherwise, we will have an increase ly obvious. What we had done via in government debt and inflation direct controls was to shove the de­ with us forever. We will never mand from one field to another field solve the problem unless we tackle to a third field, and finally we had it there. Even if we tackle this, practically the entire area covered. there is one thing that needs to be People couldn’t spend their money done, and all history of monetary for virtually anything, and so we systems demonstrate it, the most euphemistically said that they recent illustration being our experi­ saved a lot in the form of govern­ ence since the Second World War. ment securities and we had an in­ That is, we must limit private crease in our money supply. Once credit expansion as well. controls were removed, these so- It seems so long ago now and called savings began to come in and such a unique sort of case that we the demand was still there. All we may forget that the Federal Gov­ did by direct controls was to post­ ernment did operate for two years 184 December 1950 Bulletin Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis at a substantial cash surplus. There goods we have had a third incarna­ were only two, but they were sub­ tion of Regulation W and the ap­ stantial. Yet, this substantial cash pearance of Regulation X. surplus of the Federal Government The point I want to emphasize is did not do much more than tap off that in projecting you can do as a little bit the inflation which con­ good a job of it as I can. I have tinued to develop. Why not? Pri­ tried to give you some of the eco­ marily, for the reason that the pri­ nomic magnitudes involved, but vate sector of the economy was ex­ where we go in a democracy always panding. Consumers were buying depends upon where we, as citizens, durable goods, buying houses on insist that our government shall go. long-term mortgages, on easy In my judgment, the most import­ credit, fostered and stimulated by ant single factor, particularly in the government, and business went this crucial period, in determining into debt as fast as the government where our economic system is go­ came out. So, the net of that in­ ing, is the matter of public policy. crease in debt replaced the pay­ If we think we can solve the prob­ ments by the government, and we lem with direct controls, I think we went merrily on our way. shall end up in illusion. On the other hand, if we are determined Restriction on Private Credit Needed to see to it that we pay as we go In view of this experience, after and we limit the extension of pri­ the Second World War, with priv­ vate credit, we can do this job ate credit, and, as I say, the ex­ in real terms. It is of managable perience throughout history with proportions, but your guess as to credit, in addition to having a bal­ what Congress will do with respect anced budget, we need a restriction to expenditures and taxation is as in private credit. The Federal Re­ good and, probably in most cases, serve has done something in mov­ better than mine, and that is the ing in that direction. It realizes key to the future. that banks, in order to expand, must have excess reserves or ac­ cess to reserves. The Fed, there­ SUGGESTED READINGS fore, has made the acquisition of HOW TO ORGANIZE AND OPERATE reserves more expensive, not be­ A SMALL BUSINESS by Pearce Kelley cause they want to see them more and Kenneth Lawyer, Prentice-Hall, New expensive as such. That isn’t the York 11, 803 pp., $6.64, covers retail, wholesale, manufacture and service. objective. The quarrel isn’t about Early in 1951 a Work-book and a Teach­ one-eighth of one per cent, but it is er’s Manual will be issued to go along about whether we will control the with this text. volume of reserves and let the mar­ Peaks and Valleys in WHOLESALE ket determine what the amount of PRICES and BUSINESS FAILURES by reserves shall be or not. The Fed Roy A. Foulke, Dun & Bradstreet, 1950, has moved by permitting short­ also includes the ratios for years 1944-48 inclusive. term interest rates to rise. STUDY on INVOICE DATINGS and They are also looking at the DISCOUNTS by the Credit Research areas of private credit which have Foundation, representing the present expanded most; namely, real estate thinking and practices of some 200 rep­ credit, and on consumer durable resentative companies. 185 Robert Morris Associates Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ROBERT MORRIS ASSOCIATES ANNUAL CONFERENCE November 7, 1950 THE GREENBRIER White Sulphur Springs, W. Va. "The Economic and Business Outlook for 1951" by Karl R. Bopp Vice President, Federal Reserve Bank of Philadelphia I. THE ECONOMY IN JUNE 1950 A, Long-tern - relative to pre-war 1« Money supply $60 billion — > $170 = 3 times 2. Government securities - Ind. & Corp. / $100 billion widely distributed 3• Physical production / 3/4 4. Prices / 2/3 5. G.N.P. 2^ times pre-war B. Immediate 1. The 1949 readjustment Industrial production Nov. 1948 = 195 June 1949 = 161 2. Recovery June 1950 = 200 a. Labor market tightening b. Personal income at new high, especially wage payments c. Consumption expenditures at new high especially durables - autos housing Loans expanding d. Prices rising 3. Prospect: moderate over-all inflation strong area inflation e.g. housing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 2 - II. IMPACT OF KOREA - JUNE 25, 1950 1. Initial economic impact was on civilian expenditures 2. Increase in planned Government expenditures III. ORDER OF MAGNITUDES 1. Manpower 2. Real Resources 3. Dollar magnitudes IV. THE METHOD OF DIRECT CONTROLS Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Manpower Projected (Millions of persons) 1950 1951 2nd Quarter 2nd Quarter Change 66.5 / 1.7 Unemployed ....... 1.5 - 1.8 Employed Armed Force . • . 3.0 / 1.5 4.7 / 3.0 57.3 - 1.0 Expansion in Output - Projected (Annual rates in billions of dollars at 3rd quarter 1950 prices) 1950 1951 3rd Quarter 2nd Quarter Change Gross National Product . • • 284.0 301 / 17 Defense................. 14 32/ 18 Civilian Regular Government . . • 29 29 Private....... ........241 240 - 1 Projected Estimated 3rd Quarter 1951 3rd Quarter Model Model 1950 A* B* 284.0 333.1 318.7 Government purchases of goods and services - total ......... 42.5 67.9 65.8 F ederal 23.5 47.7 46.0 19.0 20.2 19.8 Gross Private Domestic Investment . 49.0 55.7 51.1 -3.0 -1.5 1 ow • o Personal Consumption Expenditures • 195.5 211.0 204.0 Durable Goods • . . . . • 31.5 26.0 25.0 Nondurable Goods & Services 164.0 185.0 179.0 224.0 259.1 250.2 204.0 232.7 222.2 Ô.5 21.7 18.2 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Karl R. Bopp (1950, November 6). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19501107_karl_r_bopp

@misc{wtfs_regional_speeche_19501107_karl_r_bopp,
  author = {Karl R. Bopp},
  title = {Regional President Speech},
  year = {1950},
  month = {Nov},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19501107_karl_r_bopp},
  note = {Retrieved via When the Fed Speaks corpus}
}