THE 1969 ECONOMIC REPORT OF THE PRESIDENT

The letter appearing below was sent to the following organizations: American Bankers Association, American Farm Bureau Federation, American Life Convention, Committee for Economic Development, Communications Workers of America, Conference on Economic Progress, Consumers Union of the U.S., Inc., Cooperative League of the U.S.A., CUNA International, Inc., Federal Statistical Users' Conference, Independent Bankers Association, Life Insurance Association of America, Machinery and Allied Products Institute, National Association of Mutual Savings Banks, National Consumers' League, National Farmers Organization, the National Farmers Union, National Federation of Independent Business, Inc., National Federation of Independent Unions, the National Grange, National League of Insured Savings Associations, National Planning Association, Railway Labor Executive Association, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW), United Mine Workers of America, United States Savings and Loan League. These organizations were invited to submit their views or comments on the text and recommendations contained in the 1969 Economic Report of the President. Fourteen organizations submitted statements and their views were considered by the Joint Economic Committee in the preparation of its report on the President's Economic Report. FEBRUARY - 1969.

DEAR Under the Employment Act of 1946 the Joint Economic Committee has the responsibility of filing each year a report containing its findings and conclusions with respect to the recommendations made by the President in his Economic Report. Because of the limited number of days available for hearings, the committee is requesting a number of leaders of banking, business, labor, agriculture, and consumer organizations to submit statements on the economic problems facing the Nation. These statements will be made a part of our hearings on the Economic Report in a printed volume containing such invited statements.

We invite your comments on the economic issues which concern the Nation and your own organization. Under separate cover we are sending you a copy of the 1969 Economic Report of the President, filed January 16 by President Johnson. Also, we will send you the testimony of the Chairman of the Council of Economic Advisers under the new Administration when the Council appears before the Committee later this month.

We would like to distribute copies of your statement to the members of the Committee and the staff, and would therefore appreciate your sending 30 copies, by March 1, 1969, to Mr. Hamilton D. Gewehr, Administrative Clerk, Room G-133, New Senate Office Building, Washington, D.C. 20510.

With kindest regards and best wishes, I am

Sincerely yours,

WRIGHT PATMAN, Chairman.

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AMERICAN BANKERS ASSOCIATION

The American Bankers Association is pleased to submit a statement in connection with the annual hearings of the Joint Economic Committee on the state of the economy. The committee request asked for "comments on the economic issues which concern the Nation and your own organization." We have, therefore, selected for comment a number of specific issues upon which we feel the banking industry has special competence to express itself. Largely these concern either credit matters themselves or public policy that will ultimately affect the demand and supply of credit. The issues raised, however, are of such importance they transcend concern by the banking industry alone.

I

Periods of high employment such prevailed in 1968 and presumably will prevail in 1969 put major strains on all financial institutions. While the real growth of the economy from the previous year as measured by gross national product was only 5 percent in 1968 and price increases added 4 percent to the growth in total GNP, the aggregate volume of credit increased some 20 percent last year. The growth in credit demand is the result of a combination of circumstances; high aggregate demand as a result of strong business and consumer incomes, the fact that rising prices makes future investment and production appear abnormally profitable and attempts by businesses and consumer to anticipate future price and interest rate increases and shortages. That these conditions are occurring is, of course, the consequence of unduly expansionary monetary and fiscal policy in 1967 and 1968.

The strain on financial institutions may take several forms. While the traditional channels utilizing financial institutions under ordinary circumstances are adequate to move a sufficient volume of savings into investment, in periods of high employment demands for credit frequently exceed the amount that can be provided by these institutions. For example, the volume of mortgages or corporate bonds in particular years may substantially exceed the amount normally purchased by institutions buying assets of this type. The increased supply of these instruments pushes their interest rates higher. Some leading institutions may then shift their purchases from types of obligation that they customarily find attractive to the particular asset that happens to be in strong supply, or the borrower, because of the increased cost of funds and the inability to attract sufficient buyers for these particular assets, may switch to other types of instruments. Businesses which would ordinarily finance in the bond market, for instance, may move to bank loans or commercial paper as a source of funds.

The role of commercial banks is complex. In addition to servicing their customers' normal short-term needs, banks tend to be the major residual supplier of funds for the economy in periods when credit

demands and interest rates rise sharply. Such periods of high demand for bank funds, however, are not without concern to commercial banks. Under these circumstances banks frequently must sell securities from their portfolios at substantial losses in order to meet their formal and informal commitments to valued customers. If there are heavy Treasury demands for credit at such times the problem of financial institutions is further compounded. When banks respond within the free market mechanism by rationing credit on the basis of price (interest rate) rather than by arbitrary decisions, they frequently incur unjustified criticism for raising rates charged to customers. Yet when the banks, whose ability to meet expanded borrowing demands of their customers requires them to be able to attract funds, succeed in increasing their time and savings accounts, they are sometimes said to be "obtaining more than their fair share of the savings market."

It should be recognized that the disruptive strains upon our financial system are not caused by commercial banks nor by specialized financial institutions. Rather, they arise from the fact the economy can generate more uses of credit under an outlook for relatively full employment than it is possible to supply at current interest rate levels. The problem is compounded by inflation which both increases the demand for funds and reduces the motives to save. To the extent that monetary policy is successful in holding down price increases, the measure of its success may be the shortage of credit itself. To the extent that price increases occur, credit demands that are satisfied compound inflation. The administration and Congress have often been sympathetic but at times they have added to public misunderstanding of the role commercial banks play in supplying credit by viewing dimly either interest rate increases made necessary by market pressures or by suggesting that banks are obtaining greater than their arbitrarily assumed share of the "market for savings."

The American Bankers Association recommends that the administration and Congress bear in mind the strains placed upon financial institutions in times of excess demand. To this end an active policy should be pursued to cut back Treasury and Federal agency demands for funds when the economy achieves rapid growth of demand and high employment as a result of a strong private sector. Furthermore, recognition is essential that monetary policy should appropriately be concerned with both interest rates and the volume of bank credit. Finally, attention may well be directed toward determining whether the present structure of financial institutions is appropriate to provide the optimal flow of credit needed for a high employment economy in the long run.

II

The statement of the incoming Council of Economic Advisers presented to the Joint Economic Committee on February 17, indicates the priority given to the problem of inflation by the present administration. The statement rejected the economic projection of the retired Council and instead indicated that a greater attempt would be made

1 In 1966 the American Bankers Association published and distributed to all of its members a brochure entitled The Banker's Role in Reinforcing Monetary Policy which pointed out procedures the bankers could use in determining loan priorities. This publication pointed out the beneficial effects that could be produced by responsible bank management decisions which would obviate both the need for Government guidelines and ever higher interest rates. Consideration is now being given to reissuing this publication.