Our directors report that business continues to be good, although off somewhat from the peak. There is widespread concern about inflation, but the concern has only led to doubts about the economy, not to fear about its viability. According to oar directors, employment is holding steady. In New England, the unemployment rate in May was 6.8 percent, seasonally adjusted, up a point from a year ago, with Massachusetts continuing to have the highest unemployment rate in the area at 7.6 percent.

Business is reported as generally doing pretty well. The recreational vehicle industry is picking up as the gasoline scare fades, and the motor boat industry is expecting a similar revival soon. Carbon black shipments, although off from their peak rates in June, and now only at year ago levels, have held up very well considering that carbon black's major use is in the manufacture of tires. The speciality chemicals area is reported as operating at capacity. Silicone output is at capacity because users are switching from the now more expensive petrochemicals to silicone.

The recreation areas in New England had a lackluster June, with the number of tourists generally below year ago levels. However, this may well have been caused by the cool and rainy weather.

Our directors report a general concern about inflation, but the doom and gloom articles which have appeared in the financial press and the Franklin National episode have only planted a few seeds of doubt about the viability of the economy; decisions have not yet been affected. There was the feeling, however, that a few more incidents could make the difference. Actual nervousness is very slight, although manufacturers have revised down their expectations of growth for the rest of this year.

Professors Eckstein and Samuelson were available for comment this month. Eckstein points out that nonborrowed reserves have not increased so far this year; money and RPD growth have come entirely from increased bank borrowings. In this inflationary setting, money growth of 6 to 7 percent is producing a money crunch which will damage the financial system, and ultimately the economy. Continuation of recent policies would, Eckstein says, cause a financial collapse. There has already been substantial disintermediation and a few bank collapses (here and in Europe) which have been explained away as localized; "but this is just the Government's great capacity for self-deception-it is really playing with fire." The policymakers' objective should be control and regulation of the financial system, the channel between savings and investment, not just control of the narrow money stock. The heart of the matter, Eckstein argues, is that the policy will not succeed in stopping inflation. That could be done only if the unemployment rate were raised to 8 percent and left there for several years with the severe damage to the economy. If the Federal Reserve insists on further credit restraint, it must adopt a system of credit control-limits to the amounts and uses of banks' business loans. Disintermediation has taken place through the big banks, and that is where the restraint should be applied. In order to achieve an orderly unwinding of inflation, some attention must be paid to interest rates in the current context. Eckstein's short-term policy target is a Federal funds rate of 11 percent in the third quarter.

Samuelson is more concerned that tight money will be overdone than that it will be underdone. He notes the deterioration in the economic forecasts in recent months. In light of the very high projected rates of inflation, nominal GNP would need to grow at a 10 to 12 percent rate over the next year in order to achieve even a modest recovery in real growth. In this situation, "tight money" would have to be defined as anything below 8 percent. "If money growth is below that, the money shortage is going to be eating into the real strength of the economy. Those who seek a stagnant rate of real growth as their objective will reassess their objective when we start to experience the cost/benefit ratio of a stagnant economy. The money supply numbers ought to take into account the concern for the quality of
credit-loanable funds have been funneled to the large banks. As a result of that concern and high bond rates here and abroad, much borrowing has been rechanneled through large New York banks. In the current situation, Samuelson would not be alarmed by money growth of 8 to 9 percent for a few months. He sees a real danger to the S&Ls and feels it is advisable to raise the maximum amounts they can pay on their deposits.