Economic Report of the President

ship among money, interest rates, and economic activity—has showna tendency toward abrupt shifts in recent years. In particular, suchshifts in 1975 and in 1976 led to monetary growth in the narroweraggregates, M-1A and M-1B, that was well below that expected onthe basis of the historical relationship between money, income, andinterest rates. While not fully understood, such shifts have followedrapid increases in interest rates to record levels, which appear toinduce firms and households to adopt cash-economizing financial innovations.(These were discussed in detail in the 1978 Report.)In the second quarter of 1980 another shift in money demand apparentlytook place. Declines in M-1A and M-1B were greater thanwould have been expected even in the face of the sharp fall-off ineconomic activity and high interest rates. But the current episode appearsto differ somewhat from the previous shifts in that this time theshift was largely offset in the subsequent 2 quarters. This offset suggeststhat some special factors may have been at work. Onehypothesis is that the imposition of credit controls may havetemporarily led holders of currency and demand deposits to drawdown these balances in the second quarter. With the end of the controlsprogram in July this temporary depressant disappeared, andhouseholds were able to rebuild their cash balances. Whether this explanationis correct or not, it seems likely that a temporary moneydemandshift contributed to the pattern of a decline in the moneysupply in the second quarter followed by an unusually rapid moneygrowth in the second half of the year.Thrift Institutions. In the first quarter of 1980, deposit flows to thriftinstitutions—mutual savings banks and savings and loan associations—slowedto the lowest rate since the fall of 1974. But aftermarket interest rates peaked in late March and early April thrift depositsonce more began to expand at the healthier pace registered inthe preceding year. From December through April the decline inthrift deposit flows was softened by an inflow of funds attracted tothe variable rate instruments offered to savers—the 6-month moneymarket certificates (MMCs) and the new 2V2-year small saver certificates(SSCs). For the next 5 months, however, there were net withdrawalsof MMCs as depositors shifted funds into the higher yieldingSSCs. From April to July funds were also shifted into money marketmutual funds, where the technical method for calculating return gavethese funds a temporary yield advantage over MMCs. By OctoberMMCs had resumed healthy expansion, and for the first 11 monthsof the year MMCs and SSCs at thrift institutions together grew by$115 billion.The other major sources of funds for thrifts also had interest coststied to market rates. Members of the Federal Home Loan Bank162