Speech

sr please to morning newspapers ~ 1er 18, 1958 Remarks ^ M. S. Szymczak Member, Board of Governors of the Federal Reserve System before the NATIONAL ASSOCIATION OF ACCOUNTANTS Washington Chapter at the Occidental Restaurant (International Room) lljll Pennsylvania Avenue, N.W. Washington, D, C, Wednesday, 8:00 p.m., E.D.T. September 17, 1958. RECENT ECONOMIC TRENDS AND FEDERAL RESERVE POLICY Recovery in economic activity has been proceeding at a rapid rate. Within a relatively short period, industrial production has recovered more than half the 13 per cent decline from August 1957 to the low in April of this year. The recent increases in activity have been widespread and, it is •^Portant to note, have included advances in industries producing capital eWipment.. This is in contrast to the continued declines experienced in equiPftent industries after the total index of industrial production had eached its low in the two earlier postwar recessions. Significantly, the recently completed survey of prospective dollar outlays for plant and equip- ment indicates outlays for the third quarter of this year will hold level rather than decline as indicated earlier, while in the fourth quarter out- lays show a moderate rise. So far, construction of industrial build- ln6s has continued to decline, but private housing starts have risen sharply— tne highest level in over two years. Altogether, construction activity ha risen about 5 per cent since mid-spring. Meanwhile, output of steel and most other major material for manu- a°turing and construction uses has increased considerably since spring business inventories were being rapidly liquidated. While the increase in employment has been moderate and the rate of erriPloyment has changed little after allowance for the usual seasonal in- •^uences, personal income has reached a new record high. Consumer buying expanded again, and it is close to the record highs of the summer of Expenditures for goods and services other than autos—which currently -2- are undergoing the annual change-over to nev rodels—have reached new highs. On the price fronts where attention focused on advances in prices some sensitive industrial materials last spring and in steel prices last summer, wholesale prices of most finished goods have changed little recently, ar*d the very slight further increase in consumer prices in July, latest ftonth for which figures are available,'has been followed by a period in which retail prices of foods may have declined somewhat. So far, so good. But essential as it is to liave a recovery under carrying with it promise of expanding job opportunities for those seek- work, it is still more essential that it be a recovery that lasts and 3 thus provides jobs that also will prove lasting. It is to this end, the establishment of a basis for a sound pros- perity that will endure, that the Federal Reserve System is devoting its efforts. In those efforts, it is necessary for the System to recognize hat inflation is not merely a phenomenon of rapidly rising prices. Indeed, if we wait until that stage is reached, we will have waited too late to be e£fective against the inflationary pressures that brought about the price Ureases. The System^ therefore^ must be alert to the causes of inflation, m°st particularly those causes of inflation that are monetary in character ^^ hence tend to escape the notice of the millions who have no time, and kittle inclination, to study closely each day the financial pages of their newspapers. For the System must recognize at all times that the first sig- nals f inflation can appear in the monetary field—to which the System's 0 -3- Powers apply exclusively—manifesting themselves in distrust of the dollar and a consequent trend to unhealthy speculative tendencies that may under- line the developing recovery and plunge us into a worse recession than that from which we have recently emerged. No one who gives careful daily attention to the financial pages could have missed the appearance of such danger signals—nor have failed to Notice that the Federal Reserve has been acting to check them, although its actions have been steady and progressive rather than dramatic and drastic. The increase in margin requirements ordered by the Board of Gov- ernors, effective August $ amounted to a restoration of the 70 per cent 9 margin requirement that prevailed before a reduction to $0 per cent last January 16. January reduction was ordered at a time when there had been a decline in the use of credit for purchasing and carrying stocks. Th e August restoration was ordered to prevent the excessive use of credit -P 'or this purpose at a time when the volume of such credit, as measured by market customers' debit balances, had reversed course and risen to he highest level recorded since debit balance figures have been compiled. Increases in discount rates from l-3/li to 2 per cent have been approved by the Board thus far for 10 of the 12 Federal Reserve Banks, Slhce August 15, on recommendation of the Board of Directors of those ^anks. Between last mid-November and early May of this year, the dis- count rates of the 12 Federal Reserve Banks were reduced, in view of the downward course of business and business sentiment over that period, from 3-1/2 to 1-3/lj. per cent, in four stages. The last of those reductions was ^om a 2-l/i| per cent level that had prevailed in April's first half. The -h- ^ncrease in discount rates since the middle of last month has amounted to a rt;o"coration of one-half of the last of those four reductions, in recognition the change in business conditions and recent manifestations of inflationary- sentiment. Federal Keserve Open Market operations, used in combination with reserve requirement reductions during the recessionary phase to help enable an lncrease in the money supply that reached the annual rate of 8 per cent ^ the early months of this year, also have been adapted to the change in economic conditions. Instead of fostering a further rapid increase in the bank lending potential, which might lead to further rapid expansion in the m°ney supply when changed conditions made that no longer appropriate, the federal Reserve Open Market Committee has permitted seasonal demand for Credit to absorb a goodly part of the idle bank reserves that were appro- priate to the conditions prevailing in early 1958 but inappropriate to the different circumstances of the present. There has been no drive to cut back bank credit or the money suPPly, although attention Ms been directed to moderating expansion in tune with the changed times. Interest rates, on the other hand, have risen ^rkedly in recent times—chiefly, perhaps, because lenders and investors suffering from almost psychotic fears of inflation in the future—have been reluctant to lend or to invest in bonds carrying a fixed return because of ^ear "that the dollars they get in repayment eventually will be worth less t'*-' the dollars they lend or invest today. That is something deserving a second thought by those who have advocated "creeping inflation" as an -c°nomic necessity or benefit, and by those who have favored monetary expan- slon as a means of getting interest rates down. Just ask yourself the question, how ready would you be to lend #100 dollars for ten years—or even one year—if you expected the dollars you eventually get back would be Wort-h 2 or 3 per cent less each year before you get them? And would be inclined to accept less interest than you had been getting, or would you want not only the old rate of interest plus an additional 2 or J Per cent to compensate for the deterioration you feared in the buying power of your dollars when you finally got them back? The destabilizing force of expectations of inflation can be a Very serious thing—for the economy, for the unemployed man x^ho needs to get a job to support his family, and for the municipalities and states, as well as for the Federal Government, which have only one means of bor- rowing money—the sale of bonds—to raise funds needed for construction Of c schools, hospitals and like community improvements. The hardest, most tragi way to prove the folly of the notion that there can be any such c 4-1 • as "permanent inflation" is to let a little inflation snowball into a bi-- b one that must in time collapse with consequences heavy in human hardship. The other, more sensible way is to pursue a course that will ke for a sound, stable dollar, and thus overcome expectations of infla- tion by demonstrating they are groundless. It is this latter course that the Federal iieserve, within the limits of its powers over credit condi- is now pursuing. In that course, the Federal Reserve will continue in the future, as ^ the past, its constant practice of adapting its operations to what- evG^ developments occur to help maintain, as fully as its powers permit, the °°undness of the dollar to the end that we may also have sound growth in sihess and in employment.

M.S. Szymczak (1958, September 16). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19580917_szymczak

@misc{wtfs_speech_19580917_szymczak,
  author = {M.S. Szymczak},
  title = {Speech},
  year = {1958},
  month = {Sep},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19580917_szymczak},
  note = {Retrieved via When the Fed Speaks corpus}
}