4
Tuesday, October 1, 1974
University Daily Kansan
OPINION
Federal Reserve an engine of inflation
Editor's Note: The author of this column is a professor of economics at the University of Alabama and is a professor to the Kansas essay page.
By LELAND J. PRITCHARD
BY LEANDRAND PHOTICAH
The nation consistently has refused to help solve the nation's problems of inflation and high market rates of interest. In fact, it's actually made the problems worse.
Both inflation and high interest are caused by the same thing—an excessive trend rate of expansion of the nation's economy. The nation's accelerated rate of expenditure (velocity) of money. Thus, what is needed to solve both problems are measures to reduce the
velocity of money and to foster a significantly less inflationary rate of growth in the money supply.
Monetary policy, the Federal
The Federal Open Market Committee shouldn't be held responsible. Most members aren't professional economists.
a half years, the Federal Reserve has allowed the rate to increase at the excessive rate of over 6.5 per cent (compounded
Reserve's primary tool, could produce both of these measures. But, instead of adopting the restrictive monetary policy the Fed has been using, Reserve for almost 10 years has chosen to do the exact opposite.
Thus, during the past nine and
annually). During the decade preceding this time period, however, the nation's money was invested in the cent (compounded annually).
To understand what motivated the Federal Reserve to make these apparently wrong
decisions, an examination of the actual techniques now used by the Federal Reserve in executing monetary policy and the rationale underlying these techniques is necessary.
The single most important monetary power possessed by the Federal Reserve is the open market power, the power to expand or contract Federal revenue credit through open market purchases or sales of securities (almost invariably U.S. obligations).
Unfortunately the Federal Reserve doesn't guage the volume and timing of its open market operations in terms of interest rates, but increases of member commercial bank legal reserves, but rather in terms of the levels of the federal funds rates (the interest rates banks charge with the Federal Reserve), with the Federal Reserve.
At any given time the manager of the open market account, presumably acting in accordance with the last updated rules of the Market Committee (FOMC), sets a range of rates as guides for open market policy actions. A recent rate schedule established a rate of 11½ per cent for buying operations and a rate of 8⅓ per cent for operations, down a percentage point from the previous week.
YOU CAN RIP UP THE NOTE...THE 'DROP' WAS MADE
This policy is eupheristically referred to as accomodating the money market. It would be better if the policy were the policy as one that accommodates banks; for it allows banks that have operated with negative excess legal reserves to report week (and profited immensely by so doing) to acquire sufficient legal reserves at the last moment so that their average reserve for short-term work will their legal reserve requirements.
What is the rationale of this approach to monetary policy? A majority of the FOMC apparently thinks that open market purchases and sales of securities be so conducted as to assure that unduly high market interest rates don't choke off growth of output and employment and they assume the federal funds rate is close relationship to market rates on negotiable certificates of deposit, Treasury bills and other short term market rates, and long-term rates in due course by the level of short-term rates.
For most of the last decade the published Record of Policy Actions of the FOMC indicates that the conduct of open market transactions was influenced by the interest rates and by the level of federal funds rates in particular. It also shows that in the last few years the federal funds rate has become virtually the criterion in the formulation and extension of open market policy.
As a consequence, once accelerating inflation started in the mid 1960s, and market rates rose above $3.50, inflation premium, the system purchased government securities in increasing quantities in an attempt to hold prices steady at levels. These purchases are reflected in the rapid expansion of Reserve bank credit, which increased from a level of $39.9 million in the mid-1970s to a billion at the end of July 1974.
By using the wrong criteria (interest rates rather than member bank reserves) in formulating monetary policy the Federal Reserve has thus made it impossible. But the FOMC should not be held entirely responsible. Most members aren't professional economists and, in formulating policy, the FOMC has unfortunately relied on the advice of a non-monetarist group of professional economists.
In the Sept. 16, 1974 issue of Newsweek, Paul Samuelson, professor of economics at Harvard University and one of President Ford's economic leading President Ford's Economic Summit Conference said.
"More than 20 of the experts (i.e., economists) thought the Federal Reserve was overdoing its monetary tightness, that the Fed was increasing off of interest rates and less slowness in money growth."
There are two things wrong with the judgment of these experts: The Fed hasn't been following a tight money policy. On the contrary it has been following an outrageously easy monetary policy, and one half years including the first six months of 1974.
—A more rapid rate of growth of the money supply will promote higher rates of interest rates —no lower —interest rates.
Milton Friedman, professor of economics at the University of Chicago, and the other monetarist economists invited to the summit weren't among the experts cited by Samuelson. If most professional economists don't know the reasons for their growth, inflation and interest rates, there are at least two members of the FOMC who now do.
In his statement made to the House Banking and Currency Committee, Darryl Francis, a member of the Reserve Bank of St. Louis and a member of the FOMC, had this to say about the role of monetary policy in dealing with high interest rates:
"The interests of the whole economy would be best served if they were to be given more money supply were to be gradually, but persistently,
reduced from the high rates experienced in the recent past. I believe that, once we achieved and maintained a 2 to 3 per cent rate of money growth, both the level of interest rates would and the level decline to their levels of the early 1960s."
Alfred Hayes, president of the bank and a permanent member of the FOMC, made this statement:
"The problem for monetary policy in bringing inflation and interest rates down is indeed essentially a single problem.
The solution requires a degree of monetary restraint over a period sufficiently long to wring out the market. This will mean gradually reducing the growth of the monetary aggregates (money credit) to a trend compatible with long-run price stability."
Many will agree that even if a tight money policy is a solution to the problem of two digit inflation and two digit interest rates, its implementation will produce stagnation in the economy and unacceptable levels of unemployment.
**LET'S SEE! I GOT I 10! SIMMONS... I LOVE YOU DOWN AND YOU PULL NINE UP? I HAVE NOT DINK THIS IS COMWORK WAKE**
By KEN FULTON
Nuclear powers prefer to rule in inferno than to serve peace
The balance of terror has ended; now only the terror remains. The balance was effectively destroyed with India's
Parking limits cause lots of ire
Last week's decision to allocate 440 additional parking spaces in the X-Zone lot to be reserved during football games for contributors to the team was widely well received. (KUAC) was clearly a well-intentioned puskas.
In making this decision, Executive Vice Chancellor Del Shankel believed he would be helping KUAC to improve relations with its students and faculty, and that on this campus disagrees with that decision.
The University has been placed in an awkward public position. Although it claims to be a free and open democratic institution with an outreach program to attract the educationally disadvantaged, it is also the creation of economic elites by providing more special privileges for a wealthy few.
In a more practical sense, the University's image also will be hurt when hundreds of KU football fans, unfortunately not wealthy enough to be major contributors to the athletic program, arrive and find there is no parking near Memorial Stadium.
Shankel also should have consulted the University Council. The importance of football parking arrangements to students and faculty is highlighted by a study that heated discussions by the Council on this subject.
Shankel completely ignored the University's governing structure in making the decision. He certainly should have consulted the Parking and access laws since this matter is within its area of responsibility.
The decision could have serious adverse effects on the parking fund budget. Last year's Parking and Traffic Board report stated that projected parking revenues would barely cover projected costs. Now about $80,00 in revenue ($1 a car times 440 parking spaces five home
He also forgot to consider the plight of people living near the stadium where motorists are already parking on every unoccupied flat surface on some Saturday afternoons.
games times the four-year agreement) will be lost.
This lost revenue may have to be made up through increased parking permit costs and higher parking fines for students and faculty. It is grossly unfair that students and faculty should suffer for the favors granted to the KUAC's chosen people.
What is Shankel's response to all this? He says the parking spaces were given to KUAC as a reimbursement for its expenditure of $27,000 on surfacing the S-Zone parking lot.
No public agreement specifying these terms was ever made. KUAC paid for the surfacing at its own initiative and asked for reimbursement only after the fact. Certainly the University was in no way obligated to make payment on demand.
A disturbing question remains unanswered. What was the source of the $27,000? A brief examination of the minutes of recent athletic board meetings reveals no explicit authorization for the expenditure of these funds by Athletic Director Clyde Walker. Perhaps the University is making a reimbursement for funds spent without authorization.
It is almost immoral to suggest that this new revenue should be used for anything but reducing the exorbitant cost of parking permits on this campus. This was the hope of many researchers concerned about the rising costs. This hope has now been dashed on the rocks of special privilege.
The most galling part of this situation is Shankel's statement that revenues lost to the parking fund will easily be made up through the increased revenues of the new traffic court system, which will compel faculty members to pay fines.
The rich get rich and the poor get poorer thanks to Shankel's decision.
explosion of a nuclear device May 18.
—Richard Paxson Contributing Writer
The Treaty on Nonproliferation of Nuclear
That a six member should enter the nuclear power club—the others are the United States, Russia, China, Great Britain and Germany in itself. But two details prey on anxious minds. First, the explosive was developed through technology extended in a bilateral agreement: an agreement outside United Nations nations was developed by one of the poorest nations on earth.
KANSAN opinion
Weapons of 1968 placed the International Atomic Energy Agency (IAEA) in the position of safeguarding the spread of nuclear weapons. The treaty obliges all signatories to conclude a safeguards agreement directly with the agency.
However, the non-proliferation treaty doesn't alter the fact that most reactors are in the countries are a result of bilateral agreements that are only covered partially—or not at all—by the safeguard powers administered by the IAEA.
Thus, the world must live with the fact that there is no absolute check to prevent the misappropriation of power by these countries.
India now has the capability of producing a nuclear bomb, though three-fourths of her powers are below the poverty level.
American experts have begun admitting recently that it would be relatively easy to steel nuclear reactors for the making of a portable bomb. One can only speculate how much easier it
would be to steal these materials from a country less equipped to protect them.
The world has only to await the day when a terrorist group is able to pirate nuclear materials, construct its own bomb and hold whole cities or nations for ransom.
The possession of even a small and relatively ineffective nuclear weapon by guerrillas would bring even the most powerful government to its knees.
Obviously, a strengthening of the nonproliferation treaty and the network of enforcement agreements is essential if the fault be spared these tests before the solution is never simple.
Pakistani President Zulfikar Ahduh has told his people that Pakistan will go even hungry," to possess the bomb should India transform its weapons.
This grim premotion haunts the structure of the non-adequate sanctions no adequate sanctions yet available to the IAEA should a signatory renge on a compliance its safeguard agreement
The investigative and policing powers necessary to control the use of nuclear energy would come dangerously close to infringing on the sovereignty of nations receiving technical aid.
The specter of a nuclear arms race between smaller nations looms large.
The United States must seize a role of responsibility. Meticulous care must be taken to insure that nuclear materials aren't diverted by countries driving American technical aid.
Special emphasis should be placed on Israel, already in the throes of a conflict with her Arab neighbors. Many experts think israel is next in line to become a nuclear power.
Should Israel come to possess
nuclear weapons, Russia might feel justified in similarly arming the Arab nations. Such a war would have disastrous consequences.
As a leader and molder of world opinion, the United States, in conjunction with the other nuclear powers, should set an example by deemphasizing the need for nuclear weapons. The SALT talks are a beginning; but they
are just that, a beginning. The apocalypse is too near for any nation to shrug off its responsibility. The plot of self-defense shows how one defend against radicals with a nuclear bomb?
The Bulletin of the Atomic Scientists has established an arbitrary dowseday clock. The bulletin takes nine minutes before midnight.
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