Speech

Speech delivered before 1. Ih^Polish Beneficial Association St. John Cantius' Parish Hail Philadelphia, Pennsylvania iggil 3Q, i95Q ECOiJO/iIC STABILITY Ai'iD THE FEDERAL RESERVE SYSTEM For nations, as for individuals, economic well-being is a mat- ter of vital concern. As individuals, ve rely upon our jobs to provide income for meeting our daily needs and savings to sustain us in times of adversity and old age. As a nation, ve depend on the maintenance of high ^vels of employment and production and a sound currency to assure us our ^dividual jobs, to improve our standard of living, to protect the pur- chasing pover of our incomes and the value of our investments, and to strengthen our national security. As a nation, ve are constantly striv- to enlarge our capacity to produce and to consume the goods and serv- 1(;es that comprise our standard of living. As a nation, ve are encieav- to moderate and if possible prevent, recurring short-run fluctua- tions in business activity—the alternating vavos of expansion and trough* ° contraction that frequently result in the all-too-familiar pattern of pcom" and "bust". In a vord, vhat ve are striving for is economic sta- •Uity—stability that permits ample opportunity for continued economic growth, but minimizes the cyclical upswings and dovnswings. This evening J. want to discuss: first, the outlook for economic stability in the short-run or immediate future; second, the role that +?ney and credit play in economic activity; and third, the extent to which he Federal Reserve System can contribute to the achievement of economic stability by influencing the supply, availability and cost of money. The Economic Outlook All things considered, the economic outlook for the immediate f v .is 6eneralj-y reassuring. Having weathered a postwar inflationary xpansion of some three years duration, folloved by a moderate recession arid readjustment during the first half of 194-9, the economy is now operat- Rg at a relatively high level. Though the number of unemployed in- creased from 1.6 million in the latter part of 194-9 to A.7 million in Feb- uary of this year, the following month brought a decline in their number 0 4.1 million. While we are faced vith a longer run problem of provid- ng jobs for each year's new additions to the labor force, the recent r^nd toward greater unemployment appears to have been halted for the time J^ng. To some extent, the decrease in unemployment since February re- 0 "kh® settlement of the coal strike, and to some extent normal sea- sonal increase in manufacturing, trade, and construction lines. The card's index of industrial production rose from 180 in February to 134 # ln ^iarch, and in so doing reached last year's level for the same month. There are a number of positive factors in the present economic situation wnich should sustain employment and production. Among the more ttportant ones are the still unsatisfied demands for residential housing, ntomobiles and other consumer durable goods, the continuing foreign de- 1 and for our agricultural and manufactured products, and continued defi- Cl't spending by the Federal government. Individual incomes are still at 2, near-record levels, and abundant cash and other liquid assets are still held by persons wanting new housing, automobiles and other goods. In-this connection, preliminary findings from the Fifth Annual Survey of Consumer Finances, sponsored by the Board of Governors, and conducted" by the Sur- vey Research Center of the University of Michigan during January and Feb- ruary of this year, reveal that (l) consumers plan to buy about the same number of houses, automobiles, refrigerators and other household items this year as last, and to double their purchases of television sets, (2) approximately 3 out of every 10 families expect their 1950 incomes to be larger than they were in 194-9, while less than 2 in 10 expect their 1950 incomes to be smaller and (3) that the financial position of most famil- ies was about as good at the beginning of the year as they were at the beginning 'of 194-9. , While the favorable factors in the immediate economic outlook ap- pear to outweigh the unfavorable, we should nob lose sight of the fact there are some elements of veaicness in the picture. Part of the expan- sion' in production and consumer incomes that occurred during 1943 was based on business additions to plant and equipment and to inventories. Business expenditures on new plant and equipment, as estimated by the De- partment of Commerce, amounted to 19.2 billion dollars irt 1943 and 18.1 billion in 1949. Present estimates, based on business anticipations, in- dicate that the total of such expenditures: may fall to 16.1 billion dol- lars in' 1950---a' decline of 11 per cent;from--1949 and of 16 per cent from, the 1948 peak. Business inventories,.though expanding moderately at the present time, seem unlikely to grow at anything like the rates attained in earlier postwar years. Not only are we confronted with declines in business capital ex- penditures, but also are much closer to having met the more immediate and . pressing demands.of consumers for housing,, automobiles and other durable goods than we were two years or a year ago. I do not mean to imply that the demand for such goods may not continue for some time to come. We are, however, approaching a situation where greater price concessions, and corresponding reductions in-cost, may have to be made in order to attract the consumer's dollar. Wage and pension agreements and the agricultural price support program have introduced new rigidities into the cost struc- ture which may impede such adjustments. Finally, we must recognize the fact that gradual curtailment and eventual termination of Marshall Plan aid to European countries during the next few years may further reduce foreign demand for American goods. Generally speaking, the present and immediate prospective eco- nomic situation may be described as one of equilibrium at relatively high levels of production and employment, with neither inflationary nor defla- tionary tendencies in the ascendency. At the same time it should be clearly recognized that the maintenance of equilibrium among a complex of economic forces is a delicate and difficult task. Inflationary or deflationary forces once initiated have, unless promptly checKed, a tend- ency to cumulate rapidly and to spread throughout all parts of the eco- nomic system. It is essential, therefore, that the economic system have ways and means of countering such tendencies at an early stage. Among such ways and means is that of regulating the supply, availability and cost of money. Essential Role of Money in the Economy 3. Money plays an essential role in the functioning of any'modern eco- omy. Practically all transactions are conducted in terms of money and a lues of goods, services, and the tools of production are measured in erms of money. Both the volume of money and the rate at which it is •Pent are affected by economic developments, so that the resulting flow money reflects most of our economic activity. More than that, 'the low of money generates economic activity. As the flow of money expands, P ard pressure is exerted on production and employment, if the flow in- eases unduly, however, the result may very likely be an inflationary . Prices and costs. On the other hand, if the flow of money con- acts, downward pressure is exerted on production and employment. If re* ^Crease is t0° sharP or too severe, such downward pressure usually ouits m a deflationary fall in prices and costs and necessarily also, UI incomes. evpm?reSSUreS exerted by changes in the money supply are not, as a rule, diqt -k "StribUted throu£hout the economy. As a result of this uneven ^ribution, some sectors of the economy are affected more than others, times, this may bring about undesirable shifts in the pattern of pro- t on and distribution of goods. Thus, for example, an unrestrained low + e b°°m in luxury apartment property, fed by an abundant flow of cost money, may result in an unwanted diversion of labor and building ruction ^^ fr°m loUer"cost housing Project and individual home con- dor 11 WaS long ag0 observed that money does not manage itself; that it fot automatically adjust its flow (volume and rate at which it is s oth t0 the immediate requirements of the economy. For this, as well as Pal reasons> the Federal Reserve System was established. Its princi- J. purpose is to regulate the supply, availability and cost of money with st*M t0 contributing to the maintenance of a high level of employment. e values and a rising standard of living. .Tools, and Methods for Regulating the Supply of Money reno M?ney> as the terra is used today, refers not only to coin and cur- far Lln circulation but also to demand and time deposits in bamcs. Bv dennc-T greater part of the money supply is represented by demand and time count i &S °f the end 0f Februapy 1950, currency outside of banks ac- of t \f 0r less than 15 per cent of the total money supply. The problem in r Tlating thG supply of money> therefore, is primarily one of regulat- + or volume of banK deposits, especially of deposits (or credit) which cone Clal bankS generate by lending money to individuals and business Jerns. ava'i k8 Federal Reserve System exercises its influence over the supply, inp1 fv11^' and C0St of money in three Principal ways. First, by chang- Gov rediscount rate; second, by open market purchases or sales of memfrnmunt securities^ and third, by changing the ratio of reserves which torn* are required to carry against the deposit balances which cus- vhi w CQrry With them' By increasing or decreasing the interest rate ban* ?ember banks must pay vhen they borrow from the Federal Reserve for 6 rediscount rate), the System makes it more or less expensive member banks to obtain reserve funds. To some extent, if not fully, such costs are passed on, making it more or less expensive for j.ndividua ^ and business concerns to borrow from their local banks. Purchases of kov- ernment securities from nember. banks enlarge their reserve balances and permit them to expand tbsir loans. Conversely, sales of Government se- curities reduce member t ank reserves, either contracting the base for.- their credit operations :>r causing them to borrow from the Federal Re- serve banks the reserves needed to maintain these operations. Finally by changing the required ratio of reserve balances to deposit accounts the System'can enlarge o'* contract the basis of credit expansion with- out increasing or decrea jing the total volume of reserve, balances, Thcug separate and distinct in form, these methods of influencing the supply* availability and cost of money are complementary and oftentimes used in ^ combination to encourage or inhibit the expansion or contraction.of cr,eci The order and extent to which one or more of these instruments oi Fed eral Reserve policy may }>e employed depends largely upon the c Lrcumstance surrounding a particular situation. In some cases, the psychological iifl~ pact upon business men ai d bankers of a change in the rediscount rate may be all that is necessary to affect some increase or decrease in interest^ rates and, correspondingly, in the availability of money. In other cuse*>* changes in the rediscount rate, and open market purchases or sales of g°-v" ernment securities may be used together, and in cases of extremity, com- bined with changes in reserve requirements. The former instruments discount rate and open market policy) may be likened to throttle and ch^- in regulating the Speed of an automobile, the latter instrument (changes in reserve requirements) to the gear shift. By shifting from second to high (lowering reserve requirements) you permit greater speed (more r&Pj- expansion of credit) but still are able to vary the speed by means of { choke and throttle. Just as,the'throttle is used in preference to the Uer- shift in effecting normal variation in speed, so are rediscount rate.-,and open market policies used in preference to changes in reserve requirenien • In addition to the three principal instruments of Federal Reserve P° icy, which affect the total quantity but not.the specific type of credit ^ outstanding, there are the more recently developed selective credit ins* ments. The latter, exemplified by margin requirements on listed stock P chases and by the wartime-and early postwar regulation of consumer credi ; are directed toward influencing the demand for specific types of credit (money under certain conditions). Such instruments are more limited in ^ e scope than'those used to influence the over-all supply of money, but ma?\ y, 1 employed to.advantage if certain types of credit tend to expand too< rapi At the present time, the regulation of margin requirements is the only selective credit instrument available to the Federal Reserve System. ^ 5 e function is to prevent undue use "of credit to.finance speculative purcha? of stocks, thereby precluding a repetition of the great stoc.c market orgi- which have plagued this country in the past. Adaptation of 'Monetary Policy to Changing Economic Conditions. The problem of regulating the money supply in an effort to contribute^ to economic stability, is not an easy one. In some situations the choice an appropriate policy may be fairly obvious, but. the effectiveness of the policy may be impaired by other economic forces. In other situations, tn complexity and rapidity of.economic changes ma*ce it difficult to select a appropriate policy, and to time its implementation most effectively. 5. Curing the Thirties the major economic problem was one of recovering from, severe depression followed by frustrating stagnation. All efforts of the Federal Reserve System were directed toward this goal, and there yas little fear that too much pressure might suddenly upset the balance of economic force. Luring the Forties, Federal Reserve policy was sub- ordinated to financing the needs, first of national defense, then of par- ticipation in total war, and finally of transition from war to peace, included in the latter phase was the critical problem of learning how to manage a war-inherited debt amounting, to 250 billion dollars and substan- tially greater than the total of all private debt. •During the postwar period up to the latter part of 1949 the Federal Reserve followed a policy of rigidly supporting the price of long-term Government bonds. The purpose of this policy was to assure an orderly market for Government securities, thereby preventing the development of market obstacles to the management of the public debt. Such a policy, it should be noted, represented a marked departure from the traditional requirement of flexibility in monetary management—flexibility which in- volves constant attention to changes in the economic situation and prompt action to influence the supply, availability and cost of money in keeping w-i-th the objectives of economic stability. At some point, return to a policy of greater flexibility in monetary management was inevitable. However, in view of the uncertainties sur- rounding the management of such a large public debt, it was felt to be in e common interest to delay the return until such time as the risks in- volved in the public debt management had been definitely determined. Economic developments during 1949 removed two major fears which up o then had largely influenced the form and substance of monetary policy— -irst, the fear of uncontrolled postwar inflation and, second, the fear a disastrous collapse to follow. It became increasingly evident in ne early part of 1949 that inflationary pressures were lessening. Busi- ness inventories, which had been expanding raoidly since the early part 1946, reached a peak late in 194£ and then started to decline. Com- modity prices, having passed their peak in August 1948, continued to fall, production and employment both showed some decrease, and the pressure for ^ome types of goods diminished. In recognition of this relaxation of in- lationary pressure and in keeping with the tenets of flexibility in monetary policy, the Federal Reserve shifted from a policy of restraint o one of ease, first by easing the terms of consumer instalment and vtock market credit and later through successive reductions in reserve Requirements and the exercise of greater freedom in open market opera- tions . Reduction in reserve requirements improved the liquidity position of commercial banks, while open market policies lowered the yields on snort- erm government securities in which banKS invested the excess reserve unds arising out of the reduction in reserve requirements. The net ef- of these monetary policies was to make bank credit more readily r ^valiable to private borrowers. Accordingly, with an improvement during . e late summer in the general economic outlook and the usual seasonal J-ncrease in credit requirements, business concerns had no difficulty in Arrowing whatever funds they needed from their banks. Without going into further detail, it may be said that the monetary Policies pursued by the Federal Reserve System during 1949 are a good 6. example of (1) the need for flexible monetary policy and (2) of the way which monetary policy may contribute to the achievement of economic sta- bility. Ability of Monetary Policy to Promote Economic Stability How effective monetary policy alone .can be in combatting deflationary tendencies or curbing inflation depends partly on the powers of tho Fed- • eral Reserve System and partly on the .character and duration of particular economic forces and tendencies. It is obviously more difficult to combat inflationary or deflationary tendencies if one's resources are limited, or to rescue an economy from the advanced stages of inflation or deflation by monetary means alone. In these respects we are indeed fortunate, the Fed- eral Reserve System is in an excellent position to cope with such develop- ments as are likely to occur, and the economy is not in a position of hav- ing to be rescued from degenerative inflation or deflation. One of the major deficiencies of the Federal Reserve in past period3 of business contraction—inability to provide adequate funds when needed by the market--no longer exists. Today, the System has virtually unli^i^ means of supplying commercial banks with additional reserves through pur- chase of Government securities in the open market. On the basis of its present gold certificate reserves the System could more than double the amount of its outstanding note and deposit liabilities. These—together with the System's liberalized authority to lend to commercial bamcs, to make direct loans to business under certain conditions, and to further reduce reserve requirements—assure an adequate supply of money at all times. While it would probably be somewhat more difficult through monetary action alone to create a situation favorable to recovery from ,ronouncod inflation than of deflation, the System has demonstrated its capacity to act .in that direction during the past few years. Increases in reserve requirements and rediscount rates, sales of Government securities, and such selective credit instruments as margin requirements are powerful tools. Although we have been discussing the capabilities of the Federal Re- serve System for dealing with situations of pronounced inflation or de- flation, the real virtue of monetary policy as a stabilizing influence is its ability to act continuously and quickly to checK undesirable tenden- cies in their earliest stages. Monetary policy as an instrument for achieving economic stability is not meant for dramatic rescues of the economy from the abyss of deflation or the pinnacle of inflation; in fact, long before the economy has moved very far up or down the slope it has.departed from the pathway of stability. Fundamentally, it is the job of monetary policy to Keep the economy on the pathway, and to that end the Federal Reserve System has a vital role to play. Conclusion Having achieved a degree of economic stability at relatively high levels of employment and production, our problem as a nation is to pre- vent the development of inflationary or deflationary tendencies which might upset this stability. Many factors contribute to the maintenance 7. of economic stability, one of the most important being the supply, avail- ability and cost of money. By careful exercise of its monetary instru- ments the Federal Reserve System can modify the supply, availability and cost of money in accordance with the needs of the economy and the objec- tives of economic stability.

M.S. Szymczak (1950, April 29). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19500430_szymczak

@misc{wtfs_speech_19500430_szymczak,
  author = {M.S. Szymczak},
  title = {Speech},
  year = {1950},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19500430_szymczak},
  note = {Retrieved via When the Fed Speaks corpus}
}