Speech

Excerpts from a Lecture on "WHAT IS MONEY" by Mo So Szymczak Member of the Board'.of Governors of the Federal Reserve System before the U„ S. Naval School of Hospital Administration National Naval Medical Center Bethesda^ Maryland Friday evening^ 8:00 p m 0 0 April 22, 1960o WHAT IS MONEY The role of money Money is the lifeblood of our nation's economy. It is the basis for the daily stream of transactions in which we all participate, whether as businessmen, consumers, or in a governmental capacity„ Too large a money supply is not a good thing, for in periods of expansion this may put too much demand pressure on the supply of goods and services and intensify inflationary tendencies. Too little money may be equally bad, because this may interfere with economic growth and a high rate of utilization of available manpower and industrial capacity. What is needed is a money supply conducive to achievement of sustainable economic growth with a reasonably stable dollar, and this is a major goal of monetary policy„ This is not to say that the money supply must go up by a constant percentage from year to year* Indeed, such a mechanical approach can be a serious destabilizing influence. Within the broad desideratum of adequate growth in the money supply over time, the emphasis at any one point must be on the immediate and emerging situation and on the kind of monetary policy best calculated to deal with that situation. Attention must be given among other considerations, 9 to growth in other forms of liquid assets which the public may desire to hold. &Went developments One of the notable features of the past fifteen years is that our three economic recessions have been moderate and short-lived Since 0 -2- April of 1958 we have been in a recovery-expansion phase of the business cycle and, despite our interruption caused by the prolonged steel strike, the total value of all goods and services has reached a record annual rate of close to $500 billion. This first quarter rate of this year is 11 per cent above the high reached in the preceding cycle in 1957* Alloxdng for the rise in prices that has occurred on balance since 1957s the gain in real terms comes to about 7 per cent* In late winter of this year, however, the economic outlook bec^ clouded and uncertainties emerged* To a large extent the uncertainties generated by the loss of income during the steel strike, by the very rapid accumulation of business inventories early in the year, and by disappoint ment about retail sales. But evaluation of first quarter developments has been complicated not only by distortions arising out of the steel strike but also by the unusually cold and snowy weather that hit much of the nation in February ,and March and adversely affected retail sales, construction, employment, and unemployment. Moreover, many year-end. (1959) predictions were so optimistic that some disappointment in first quarter performance resulted. Most recently, the tone of business sentiment appears to have strengthened. The sharp improvement in automobile and department store sales in late March and early April, as the weather became more seasonal' has undoubtedly contributed. Personal income has been maintained at record levels. Private housing starts which had been declining fairly steadily were unchanged In March. State and local government spending continues to be an expansive influence. Cutbacks in some manufacturing output have led to rates more nearly in line with current activity. The biggest production adjustments have been in steel where operations have declined from 95 to 80 per cent of capacity. Auto production which had been reduced sharply as dealer stocks climbed in excess of one million units appears to have steadied in April at March's seasonally adjusted level. All in all, industrial production has declined 2 per cent from the record January level. Meanwhile, both consumer and industrial prices have remained relatively stable. In early April, wholesale prices were little changed from a year earlier, with changes in prices of farm products and foods mainly of a seasonal nature—a rise this year following a decline in the second half of 1959. An important expansive element, revealed by the most recent Commerce-S.E.C. survey, is the $37 billion nonfarm business plans to spend for new plant and equipment this year. This would be 5 billion, or per cent, more than in 1959 and about equal to 1957 when, however, prices were somewhat lower. Consistent with that survey's findings is the fact that manufacturers new orders for machinery have been maintained at relatively high levels* Selected financial developments. Fluctuations in U. S. Govern- ment security prices have been unusually large this year. Most recently, prices of outstanding securities have decreased sharply, following substantial increases. They are, however, still above the postwar lows reached early this year. Public buying of the Treasury's ^ per cent long-term bond, offered when market prices of securities were relatively high, proved relatively small. Prices of corporate and State and local bonds have been relatively stable recently. Common stock prices have recovered roughly half of their loss earlier this year. Commercial bank credit continued to decline in March as a further reduction in holdings of U S„ Government securities by banks 0 exceeded a rise in their loans. The expansion in total loans was moderate, but loans to business rose substantially. The money supply (demand deposits and currency in circulation), seasonally adjusted, increased $400 million in March after having declined more than $1 billion in the first two months of the year. The money supply was slightly per cent) below a year ago, following an increase of 4.5 per cent from March 1958 to March 1959- The rate of use of money, or its turn- over, has been running substantially above year-ago levels in recent months• Corporations' tax payments are falling below expectations but so is Federal spending, particularly for agriculture, so that an approximately balanced budget is still in prospect for fiscal I960, ending next June 3°. A lessening of inflationary expectations« Inflationary psychology may no longer be a dominant force in business sentiment and expectations. This is suggested by continued stability in industrial prices, a slackening in the rise of farm land values, and the reduced level of stock prices. Numerous factors underlie this waning in inflationary expectations, but some of the more important include the feeling that supplies and capacity generally seem adequate for further expansion in output, a continued rapid advance in productivity for this stage of the cycle, more intense competition from abroad, and prospects of a substantial cash surplus in the Federal Budget for fiscal 1961, which ends June 30, 1961. Monetary policy has also made a significant contribution to changed expectations,, -5- International balance of pa^^rients There has been some concern about our balance of payments over the past two years, but the situation improved somewhat in the course of 1959 and appears to be showing further improvement so far this year. During the first half of last year net payments amounted 8 to $2 l billion, excluding the large subscription to the International e Monetary Fund, During the second half, they were about $1 6 billion. 0 The second-half improvement resulted mainly from changes in merchandise foreign trade; exports rose, while imports held steady 0 Recent international developments. Experts rose in January and February to an average seasonally adjusted annual rate of about $18-|- billion, compared to an average rate of $15i billion in the first half of 1959o Imports in January and February averaged about $15 billion. The February rate was somewhat higher than this, but about the same as the level maintained throughout the second half of last year* The main burden of reducing the large balance-of-payments deficit would seem to rest on exports,, Exports to the industrial countries of Europe and to Japan have been increasing and may rise further, as economic activity expands and pressures on their physical resources mount. Gold reserves and dollar holdings of these countries grew rapidly during 1958 and 1959» It is encouraging, too, that foreign countries have recently eliminated some of the direct restrictions formerly applied to dollar imports„ The question of growth Economic growth is a complex subject* It can be measured in many ways* We speak of growth in population, employment, income, output, and of growth in the number of automobiles, telephones, and television -6- sets in the United States. As individuals, the aspect of growth that probably interests us most is improvement in the quality of life itself* We desire increased output and income not for themselves alone but for the rise in living standards they will produce. Moreover, we should not overlook the fact that government provides important functions encompassing such major areas as defense, education, and roads. Determinants of growth» Many factors underly a nation's growth, but some of the more important are intangible and therefore difficult to measure. In this group we find technological change and innovation, quality of the labor force, managerial ability, and education. Other factors may be quantified, such as the extent of natu^ resources, and labor and capital inputs. The United States has been especially favored with vast areas of rich soil, forest lands, mineral wealth, and abundant water. Contributing still further to growth in this country has been a political, social, and economic climate that has fostered progress by the individual to the limits of his ability. Facts on growth in the United States. A commonly-used measure ment of aggregate growth is gross national product, the value of all goods and services produced in a given period. Total real GNP (i.e., aggregate gross national product adjusted for prices) has increased at an annual rate of about 3 per cent from 1899 to date, but with signified deviations—both up and down—from this rate over specific intervals. Largely because of the increase in leisure time, per capita real ONP has increased at a substantially slower rate than GNP per manhour. Per capita growth, at an annual rate of 1.6 or 1.7 per cent, has been more stable over time than growth in aggregate GNP. -7- For the postwar period 19^6-59 the rate of growth in aggregate output has been about 3-1/2 per cent per year; the per capita rate about 1.7 per cent 0 Monetary policy and growth. It is important to recognize that monetary policy cannot guarantee economic growth. It influences mainly bank credit and money, but banks provide only one, though an essential, part of total credit in this country. Generally speaking, monetary policy in a free market economy like ours does not control the allocation of credit among various borrowers? this function is left to the market place. Basically, monetary policy in the short run is directed toward minimizing cyclical instability. And, in the long run, the avoidance of cyclical excesses and the provision of a money supply adequate for the needs of the economy are monetary policy's major contributions to economic growth. In such an environment, our people have confidence in the soundness of the dollar and produce the saving and investment necessary for this country's future growth*

M.S. Szymczak (1960, April 21). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19600422_szymczak

@misc{wtfs_speech_19600422_szymczak,
  author = {M.S. Szymczak},
  title = {Speech},
  year = {1960},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19600422_szymczak},
  note = {Retrieved via When the Fed Speaks corpus}
}