ECONOMIC

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MONETARY POLICY AND FINANCIAL MARKETSFor more than a decade, money GNP has tended to grow in a higher proportionthan the narrowly defined money supply (Mi) but in the sameproportion as both the broadly defined money supply (M 2 ) and privatelyheld liquid assets as defined in Table 18. However, even with reasonable allowancesfor lags—with a 2-quarter lag of the growth of GNP behind thegrowth of M 2 and of privately held liquid assets—deviations from theserelationships of proportionality have been large in some years. A reductionin the rate of growth of these aggregates tends to have a moderating effecton the growth of money GNP, even if for some purposes the short-run deviationsfrom long-run relations are uncomfortably large.TABLE 18.—Changes in aggregate monetary measures and gross national product, 1968 to 1973[Percent change; seasonally adjusted annual rates]1968: First halfSecond halfHalf yearMi(currency,plus demanddeposits)6.58.4M 2(Mi plustimedeposits 07.510.4Private liquidassetholdings 28.210.0Adjustedcreditproxy 3 5.412.6GNP10.47.81969: First halfSecond half__6.22.26.3.66.93.03.2-1.57.65.61970: First halfSecond half5.56.04.810.75.38.04.410.74.64.41971: First halfSecond half8.94.314.97.811.99.110.58.511.47.31972: First half _Second half6.98.610.810.912.312.511.711.111.010.21973: First halfSecond half *__._7.44.89.18.513.19.214.48.212.510.01 Time deposits at commercial banks other than large certificates of deposit.2 Holdings of private nonfinancial investors: Currency, demand deposits, time deposits (including CD's) and savingsaccounts in commercial banks and thrift institutions, U.S. Government securities (savings bonds and short-term), andcommercial paper.3 Consists of member bank deposits, bank-related commercial paper, Eurodollar borrowings of U.S. banks, and certainnondeposit items.* Preliminary.Note.—Half year changes are based on data for last quarter in each half year.Using data for the last t month of each half year would yield ild f for the t two halves hl of 1973 7.8 and 3.7 percent, respec-tively, for Mi, and 9.3 and 7.9 79 percent t for f M 2.Sources: Board of Governors of the Federal Reserve System and Department of Commerce (Bureau of EconomicAnalysis).Appraising the effect of a change in the money supply on moneyrates of interest, particularly appraising its effects in the longer run, is amatter of some complexity because money rates depend not only on the"real" yield of the available physical resources, measured as if the generalprice level remained constant, but also on the inflation premium whichlenders insist on receiving and borrowers are willing to pay. The immediateeffect produced by a high rate of increase in the money stock is to increase thesupply of credit; but such a policy also tends to increase the expected rate of82
inflation and thus to raise the demand for credit. However, both the demandand the supply also depend significantly on real factors which wouldmake for positive yields from investment even if these were estimated on thebasis of an unchanging general price level.Because the demand for credit continued to rise rapidly in 1973, upwardpressures on interest rates were strong and rates at year-end were wellabove their levels at the start of the year (Chart 5). From December 1972to December 1973 the Treasury bill rate rose from 5.1 to 7.4 percent, theprime commercial paper rate from 5.5 to 9.1 percent, and the rate on longtermbonds of the Federal Government from about 5.9 to 6.4 percent; theFHA mortgage yield from loans on new homes climbed from about 7.6 to8.9 percent. Until late August the stock market declined, then it rose untilOctober without fully recovering the earlier loss. After October, stock pricesfell again, leaving a substantial net decline for the year as a whole.It is hard to tell to what extent the reduction in the market value of stockequities was caused by rising interest rates and to what extent by the risinguncertainty about profits, an attitude at least partly occasioned by theenergy crisis late in the year.Monetary PolicyMonetary policy in 1973 applied somewhat more restraint than the yearbefore, since it was aiming for a gradual return to a sustainable rate ofgrowth in demand and output. According to preliminary estimates, fromthe fourth quarter of 1972 to that of 1973, Mi grew by 6.1 percent, M 2 by8.8 percent, and the stock of privately held liquid assets by 11.2 percent.For the preceding year these figures had been 7.7, 10.9, and 12.4 percentrespectively. By the last quarter of 1973 the current growth of money GNPwas reduced to about 9 percent at an annual rate from an 11.7 percent ratein the fourth quarter of 1972, a 15.2 percent rate in the first quarter of 1973,and rates of 9.9 and 10.6 percent in the second and third quarters of theyear.As market interest rates rose, deposits at commercial banks became lessattractive than alternative open market assets, a financial market conditionreminiscent of 1969. Contrary to the 1969 practice, however, whenceilings on large certificates of deposit (CD's) were set below open marketinterest rates—a move causing outflows of funds from commercial banks—measures were taken to ensure that commercial banks could compete forfunds in the open market. The ceilings on large CD's ($100,000 and over)maturing in less than 90 days had been removed in 1970, and the restrictionson large CD's maturing in 90 days or more were lifted in May 1973.In addition, the Federal Reserve Board in conjunction with other Federalregulatory agencies increased the maximum interest payable on time andsavings deposits in July. Ceilings on CD's with maturities of at least 4 yearsand minimum denominations of $1,000, but not more than $100,000, wereeliminated at the same time. In November, however, Congress passed legis-83
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ECONOMICTRANSMITTEDTO THE CONGRESSF
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CONTENTSPageECONOMIC REPORT OF THE
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ECONOMIC REPORT OF THE PRESIDENTTo
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of the inflation rate of 1973, and
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or permit incentives—including hi
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people of an easy time. Like our pa
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THE PRESIDENT:LETTER OF TRANSMITTAL
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CHAPTER 3. INFLATION CONTROL UNDER
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Page7. Unemployment Rates by Sex an
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Page53. Maximum Percent Change in E
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We have specific problems, too, asi
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This curtailment of supply does, of
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consumption we would not have chose
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outside the food and fuel sectors a
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about $14 billion from deficit to s
Page 38 and 39: 8 percent, at annual rates. Continu
Page 40 and 41: A third method, which seems to have
Page 42 and 43: DEVELOPMENT OF LOW-COST ENERGY FOR
Page 44 and 45: would otherwise have been invested
Page 46 and 47: TRANSPORTATION REFORMLast year the
Page 48 and 49: constraints. Restrictions on entry
Page 50 and 51: In early 1974 the Commerce Departme
Page 52 and 53: Consumer SpendingConsumer expenditu
Page 54 and 55: Chart 1Changes in GNP, Real GNP, GN
Page 56 and 57: During the fourth quarter the downt
Page 58 and 59: A number of points may be noted abo
Page 60 and 61: income do not appear to have played
Page 62 and 63: Chart 2Changes in Real GNPPERCENTUN
Page 64 and 65: of essentially declining participat
Page 66 and 67: The unemployment rate for adult mal
Page 68 and 69: from job losers, the remainder of t
Page 70 and 71: to maintain a somewhat larger work
Page 72 and 73: Chart 3Changes in Selected Price Me
Page 74 and 75: TABLE 12.—Changes in selected pri
Page 76 and 77: production workers, and it is sensi
Page 78 and 79: the profits that companies report a
Page 80 and 81: Two measures of changes in income t
Page 82 and 83: About $8 billion of the growth in e
Page 84 and 85: effect of covered wage and employme
Page 86 and 87: Since these apparent stabilization
Page 90 and 91: lation requiring ceilings on all CD
Page 92 and 93: TABLE 19.—Offerings of new securi
Page 94 and 95: CHAPTER 3Inflation Control Under th
Page 96 and 97: (A more detailed presentation of th
Page 98 and 99: ate of advance in grocery store foo
Page 100 and 101: to the economy but also in the sens
Page 102 and 103: were imposed, limiting prices to th
Page 104 and 105: spurring of domestic inflation by e
Page 106 and 107: was more than twice as high in 1973
Page 108 and 109: wage increases in many cases, const
Page 110 and 111: TABLE 26.—Behavior of items in co
Page 112 and 113: Chart 6Changes in RelatedWholesale
Page 114 and 115: and natural gas. A complex set of f
Page 116 and 117: CHAPTER 4Energy and AgricultureFOR
Page 118 and 119: al gas have contributed to the low
Page 120 and 121: TABLE 30*—Wholesale prices, all i
Page 122 and 123: tion sector, which in 1972 accounte
Page 124 and 125: United States on oil imports, OPEC
Page 126 and 127: of old oil and prices of imported a
Page 128 and 129: LONG-TERM PROSPECTSThe price of imp
Page 130 and 131: important that the higher costs be
Page 132 and 133: improving the environment. The fund
Page 134 and 135: pollutants into the atmosphere will
Page 136 and 137: of research and rapid mechanization
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lion in fiscal 1972. Actually the a
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a minimum income. Unless prices fal
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The Administration supports the exa
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and estimates of some of these effe
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Since families typically pool their
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ability were not perfectly correlat
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Farm wages and farm income received
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TABLE 37.—Average usual weekly ea
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Chart 9Real Incomes for Men in Diff
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ecause they have acquired more expe
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whose owners or white workers have
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Several factors can be mentioned to
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y social pressures, however, which
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TABLE 42.—Relation of wage and sa
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ferences in their mix of occupation
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for public housing may be valued by
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8 to 20 percent for black females.
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sufficiently high to cover the addi
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TABLE 45.—Federal Government tran
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given to the problems of poverty du
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TABLE 47.—Trends in the employmen
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enefit increases greater than the i
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(Table 45). Medicare is chiefly des
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Public assistance is specifically d
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Then, subtracting equation (4) from
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policies, and the tensions among co
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In the fourth quarter the dollar ro
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which include trade, grants and oth
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tarily by foreign central banks, ev
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ply of oil, and by domestic price c
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in the United States. In view of th
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TABLE 52.—U.S. balances on intern
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esult from changes in market value
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TABLE 54.—Major changes in capita
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attempt was made to agree on a code
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The official price of gold was rais
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system, these demand changes were a
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What Pressures Should Be Exerted on
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The composition of reserves among d
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prices of approximately the same or
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tained, they would probably be felt
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Reducing Nontariff BarriersIn order
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Structural problems. Agreements on
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arrangements which are designed to
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capital and the means of putting th
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Canada and four smaller countries u
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currencies have appreciated relativ
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Effective Changes in Other Currenci
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Activities of the Advisory Committe
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Appendix BREPORT TO THE PRESIDENT O
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Report to the President on the Acti
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govern the exploitation of the reso
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Manpower and Social Affairs Committ
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Junior Staff EconomistsJames S. Fac
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Appendix CSTATISTICAL TABLES RELATI
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PRODUCTION AND BUSINESS ACTIVITY:Pa
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NATIONAL INCOME OR EXPENDITURETABLE
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TABLE C-2.—Gross national product
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TABLE C-3.—Implicit price deflato
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Page 263 and 264:
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TABLE C—8.—Gross national produ
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TABLE C-10.—Gross national produc
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TABLE C-12.—Personal consumption
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TABLE C-14.—Relation of gross nat
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TABLE C—16.—Relation of nationa
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TABLE C-18.— Total and per capita
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TABLE C-19.—Sources of personal i
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TABLE C-21.—Saving by individuals
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POPULATION, EMPLOYMENT, WAGES, ANDP
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TABLE C-24.—Noninstitutional popu
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TABLE C-26.— Selected unemploymen
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TABLE C—28.—Unemployment insura
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TABLE C-29.—Wage and salary worke
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TABLE C-31.—.•Average weekly ea
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TABLE C-33.—Changes in output per
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TABLE C—35.—Industrial producti
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TABLE C-37.—Capacity utilization
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TABLE C—38.—New construction ac
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TABLE C-39.—New housing starts an
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TABLE C-41.—Sales and inventories
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TABLE C-43.—Manvjacturers* new an
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TABLE O45.—Consumer price indexes
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TABLE C—47.—Consumer price inde
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TABLE C~49.—Wholesale price index
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TABLE C-50.—Wholesale price index
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194819491950.,1951195219531954Yearo
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TABLE C-53.—Commercial bank loans
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TABLE G-54.—Total funds raised in
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TABLE C-56.—Federal Reserve Bank
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TABLE C-58.—Bond yields and inter
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TABLE C-59.—Short- and intermedia
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TABLE C-61.—Mortgage debt outstan
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TABLE C-63.—Net public and privat
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TABLE C-65.—Federal budget receip
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TABLE C-66.—Relation of the Feder
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TABLE C-68.—Receipts and expendit
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TABLE C-10.—State and local gover
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TABLE C-72.—Estimated ownership o
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CORPORATE PROFITS AND FINANCETABLE
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TABLE C-76.—Relation of profits a
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TABLE C-77.—Sources and uses of f
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TABLE C-79.—State and municipal a
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TABLE C-81.—Business formation an
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Year1929...1933...1939...1940...194
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TABLE C-85.—Indexes of prices rec
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TABLE G-87.—Comparative balance s
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TABLE G-88.— U.S. balance of paym
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TABLE C-90.— U.S. merchandise exp
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TABLE C-92.—International reserve
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TABLE G-94.—International investm
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TABLE C-96.—Consumer price indexe
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ECONOMIC

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