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ADDRESS BEFORE THE
DISTRICT OF COLOMBIA BANKERS ASSOCIATION
AT WASHINGTON, D. C.
MONDAY, MAY 25, 19*42

BY

MARRINER S. ECCLES
CHAIRMAN OF THE BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

FOR RELEASE UPON DELIVERY
MONDAY MORNING, MAY 25, 19*42

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SAFEGUARDING OUR ECONOMY
A great deal has happened since May of last year when we met in
Hot Springs« The danger which we were trying to comprehend as reality and
not merely an evil dream has now come upon us. And the war is on a scale
so much greater than anything ever seen by man that we find ourselves once
more straining our imagination to comprehend the implications to every day
life now and in the future.
In the physical field the struggle means marshaling our vast re­
sources of man power, materials, and equipment to produce ever larger
amounts of'armament* In the sooial and political fields it means preserving
equity and liberty while permitting nothing to interfere with the war effort.
In the financial field it means devising means by which to finance the
staggering amount of war expenditures and at the same time to avoid a run­
away inflation.
TH/hile we are producing and paying for more things than ever be­
fore in history, many of these things — the war materials — are not for
the use of the civilian population; consequently a large part of the money
expended for the unprecedented output tends to bid up the prices of the
limited amount of goods that are for sale to the public. This situation
was well described in a bulletin of the Office of Price Administration dis*
cussing the issuance of the general maximum prioe regulation. To quote
from that bulletin: "A gap has appeared between the supply of goods and
services’which is available and the purchasing power or demand of the
people who wish to bvgr these goods and services. This gap is widening.
Both military and civilian demand have increased vastly in recent months.
’’During 191+2, at the present rate of increase of income pay­
ments, individual income will total 117 billion dollars. Of this amount,
it is estimated 31 billions will be saved or paid to the Government in
personal taxes and 86 billions will be spent.
ttThe supply of goods and services available for civilian use ...
making allowance for the increase in prices which took place prior to
April 1, 19*^2, ... will total 69 billions.
"Thus demand in 19*j2, unless limited, will exceed supply by 1?
billion dollars
These are, of course, general estimates, but even allowing for
a wide margin of error, they forcibly illustrate how vast a stream of money
must be diverted from spending to taxes and savings. You cannot have $86
billions of buying power competing for $69 billions of oivilian goods with­
out inflationary consequences. The Secretary of the Treasury has aptly
likened the situation to that of a steam boiler subjected to pressure far
beyond its capacity.




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These billions must be drawn off the civilian markets, partly
in taxes and partly in purchases of War Bonds, and in repayment of debts*
Now when employment and national income are at all-time high peaks is the
time to get out of debt and to save. If we cannot pay off or pay down
our debts in such times — if we cannot save against the day when war
jobs end — then there never will be a time»
We must school ourselves to refrain from buying what we do not
absolutely need, putting every surplus dollar into paying off debts and
investing in War Savings Bonds. This action must oome from all of us,
inoluding the millions of war workers and those in related lines whose pay
envelopes represent a large part of the increase in national income.
Corporate profits and large incomes must be and are being heavily taxed,
but the medium size and lower income groups must also contribute both to
tax revenue and to War Savings Bonds. Muoh of the excess pressure of buy­
ing power for civilian goods comes from these latter groups. It must be
drawn off to avoid a ruinous upward spiraling of prices.
Taxation, of course, is the principal and most effective means
of drawing it off. As I have said before, I am in full accord with the
principles of tax policy which have been stated from time to time by the
Seoretary of the Treasury* I strongly favor the widening of the income
tax base by lowering the exemptions, preferably to the point where all who
are not below a subsistence level make some contribution based on ability
to pay. This is the most equitable taxing method for dampening maes buy­
ing power. Coupled with a withholding tax, it is an effect j.^3 anti inflationary weapon and an efficient way to collect the taxes-. The money
is collected before it gets into the spending streem. 'i’ba Trer.su-y ¿ e ls
it currently instead of having to wait for it to be colloated or. nest year’s
tax return, lb helps to put the smaller taxpayer on a pay-as-you-go basis.
The general sales tax is not a logical alternative and should not be re­
sorted to until the far more equitable inoome tax has been fully utilized
as a means of dampening mass buying power*
When peace comes to the world, the things we cannot buy now be­
cause of the war can again be purchased without the present dangers of
bidding up prices to ever-higher levels. The buying then will sustain em­
ployment and national income* It is no sacrifice we are asked to make now.
It is just common sense not to trade more and more dollars now for fewer
and fewer goods — but to save the dollars until we can exchange them for
the things we can have then but can't have now while half of our pro­
ductive effort must go into making the instruments of war.
The need for action is urgent, for we have already passed through
the first stages of an inflationary development. Since the Outbreak of the
war in September 1939* the prices of basic raw materials haye risen by 66
per cent. One-half of this increase has occurred during the past twelve
months. Wholesale prices since September 1939 have increased by 31 per cent.




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Two-thirds of this increase 1ms occurred during the past twelve months«
Retail prices of foods* clothing, and house furnishings have risen since
September 1939 by 25 per cent. More than three-fourths of this increase
has taken place during the past twelve months*
This situation ealls for coordinated action on many fronts* It
means firm restraint on increases in wages, salaries, bonuses, and other
such payments. It means that employers in defense and in non-defense in­
dustries must refrain from the competitive bidding up of wages and salaries
which results inevitably from the increasing demands of war production for
additional workers and from the natural reluctance of non-defense industry
to part with its employees.
We have heard overmuch perhaps about union agitation for in­
creased wages, but I venture to say that the competitive situation into
which large- and small employers have been thrust by the very nature of a
war economy is doing more to drive up the general level of wages and in­
come payments than all the oombined efforts of union leaders* This com­
petitive bidding for workers, resulting in a rapid spiraling of wage rates,
has to be stopped.
Employers who see only their immediate horizon have little or no
incentive for stopping it. They figure that with the Government taking
through taxes most of the money they earn, they might as well pay whatever
wages will hold their own workers or hire away a competitor's* The in­
creased wages can be charged up to expenses. On cost plus (fixed fee) con­
tracts there isn’t any incentive for the contractor to put on the brakes.
But the Government loses taxes beoause some of the money escapes from the
high corporate taxes into pockets that the tax collector may fail to tap
at all. Thus it is diverted from investment and non-inflationary channels
into the hands of consumers where it has the greatest inflationary effect.
We all know that wages and salaries comprise fully two-thirds of
the costs of production. It is obvious that price ceilings cannot be held
indefinitely unless these underlying pressures, pressing against the ceil­
ings, are rigidly restrained.
It particularly behooves business leaders at this time to impose
upon themselves the same restraints they recognize as necessary upon others.
I can imagine no more mistaken policy than that expressed in resolutions
adopted by one of the largest organizations of business at a convention in
Chicago rooently, when men who dominated these councils proposed that no
restraint or limit be placed upon their own profits, bonuses, commissions,
and other compensations beoause to do so might dampen their ardor for
winning the war by impairing their incentive. Yet, at the same time, they
did not hesitate to proclaim the necessity for abandonment of the fortyhour week. They did not hesitate to condemn increases in wages. That
sort of leadership is inoredibly blindt It scarcely makes for successful




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•voluntary cooperation* It is not calculated to make for equality of
sacrifice, if you call it a sacrifice to fight for the preservation of
your country.
It is vitally important that all groups of our people share the
burdens and the costs aocording to what they are able to contribute* Jt
is of the highest importance that there be no favoritism, no discrimination,
applying to any olass or group* I think the temper of the American public
has been well demonstrated several times in this connection* The flare-ups
of public indignation over relatively trivial matters reflected a deep*
seated righteous revulsion against what seemed to be favoritism, preference
and speoial privilege.
We are now at the stage in our war effort at which, on the whole,
wages and prices have reached a level that will call forth the maximum of
effort and production. In other words, I do not believe it can be success*
fully shown at this stage that increases in prices, salaries and wages are
necessary to stimulate inoentive and call forth further production. The
time has been reached, therefore, when effective mechanisms are necessary
to prevent prices from passing into a dangerous inflationary spiral. Price
and wage oontrols alone are not enough* Taxes, debt reduction and savings
must play their part in combatting the upward spiraling of prices,
As the President stated in his Special Message to Congress on
April 27, ’’The rise in the cost of living during this war has begun to
parallel the last. The time has definitely come to stop the spiral. And
we can face the fact that there must be a drastic reduction in our standard
of living ***.. We do not intend after this war to present the same
disastrous situation to those brave men who today are fighting our battles
in all parts of the world* Safeguarding our economy at home is the very
least that our soldiers, sailors and marines have a right to expect of vis
civilians in government, in industry, on the farm, and in all other walks
of life.'*
Forewarned by the experiences of the last war, we have been much
more foresighted this time in undertaking to manage affairs on the domestic
front so as to avoid the disastrous economic consequences which we ex­
perienced before* Yet we have much to do, A H the regulations so far
promulgated, all the price oeilings imposed at every level, will be in­
effective unless we put the brakes down hard and to stay on the basic
factors which go to make up the costs of what we are producing for war and
what we have left over for civilian consumption*
At this juncture it is up to all of us to vindicate the democratic
way of achieving results, that is, by universal voluntary action, recog­
nizing clearly, however, that if we are laggard or selfish, or unable to
achieve enough voluntarily, there is no alternative except the imposition
of additional compulsions upon us* We must not only willingly accept




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heavier taxation than we have ever before known — taxation comparable to
that which the other democracies have imposed — but we must realize that
even after the payment of the taxes now contemplated in pending legis­
lation, the rising tide of national income will still engulf consumer
markets and send prices skyrocketing unless we refrain from buying things
we do not absolutely need — unless we unitedly channel the excess of birr­
ing power into War Savings Bonds«
The spending stream must not be swollen by expansion of consumer
buying on credit. As you are aware, the Federal Reserve System has taken
action on this front to reduce the volume of buying on credit, both on
instalment and on open account. The banks of the country have a real re­
sponsibility and an important part to play in helping to combat infla­
tionary forces, particularly in the credit field. They occupy a place of
leadership in their communities. They oan do much to enlighten and guide
the public. They must exert their influence to prevent extension of
credit for purposes unrelated to the war effort. They must be ready —
and I am confident they are «— to do their full share in financing war
activities and in meeting those requirements of the Government that are
not met by taxation or sales of securities to non-bank investors.
I was much impressed by a recent authoritative survey of opinion
among people employed in all parts of this country both in war work and in
civilian occupations. This survey reflects the universal hope and aspira­
tion for a peace that the great mass of our people know instinctively can
liberate productive forces for good instead of for war, that can make the
world an infinitely better plaoe to live in than it ever has been before.
We need to hold out this vision of a new and better world to all men who
are-engaged, whether on the battle front or on the home front, in this
struggle of free men against enslavement. We need to reaffirm our faith
in our institutions and in our eoonomic system as the best calculated to
produce this better day. For if our system, our democracy, were .incapable
of achieving for the common man a vastly greater well-being than any other
system, it would not deserve to and could not long survive*
We know now — we have a demonstration of it before our own
eyes — that free men living under free institutions can produce a material
welfare undreamed of before. We know that if we can turn our economy so
quiokly and so successfully from relative stagnation to a point of full
production which we are achieving today, though that production be for war,
we can surely and more easily gear it for production in peacetimes with
fewer complications and governmental controls.
The inflation problem, which is immediately before us, is after
all a matter primarily of holding the civilian spending stream in proper
balance with the diminishing supply of civilian goods during the war period.
It calls for definite united efforts and specific controls, properly timed.
But all of these actions are meaningless if we do not keep before us the




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larger vision of why we are doing these things, what it is we are defend­
ing, protecting, preserving, for the future — a vision of the greater
hope and promise that the future holds for mankind when we have emerged
successfully from the black night of universal war. For the victory will
give us the opportunity to turn promise into^reality, to make the fine
words and phrases we use in speeches come alive as practical realities*
We in the United States have an inspiring, a challenging opportunity and
a tremendous responsibility for leadership in the oreation of a modern
world in which the vast productive resources at our command are liberated
for the benefit of all humanity, and the machine that man has invented
is turned from destroying him to providing him with the abundanoe which
we know it can produce
the abundanoe which we must learn to distribute
to all who would share in it*
Let’s not talk of the future as something bleak and foreboding,
but let us talk of winning through to viotory in order to create this
world of abundanoe* It will only be black and hopeless if we lack the
vision, the understanding, and the will to grasp the great opportunity
we will have to utilize for the benefit of humanity the boundless endow­
ment, the productive resources that the world has been striving for
centuries to create and that are now at hand* We are inclined to get
bogged down under the daily pressures and.the grim aspects of war* We are
inclined to lose perspective* We have a tendency to see disaster when we
should see deliverance ahead.
We can make real the right? and opportunities for mankind which
are so well set forth in the report which the President transmitted to
Congress last January on national resources development. To the four great
basio freedoms of the Bill of Rights we must add the new universals of
human life stated in modern terms. They call for the right and opportunity
to work, usefully and creatively through the productive years; the right
to fair pay, adequate to command the necessities and amenities of life in
exchange for work, ideas, thrift, and other socially valuable service;
the right to adequate food, clothing, shelter, and medical care; the right
to security, with freedom from fear of old age, want, dependency, sickness,
unemployment, and accident; the right to live in a system of free enter­
prise, free from compulsory labor, irresponsible private power, arbitrary
public authority, and unregulated monopolies; the right to come and go,
to speak or to be silent, free from the spyings of secret politioal police;
the right to equality before the law, with equal access to justice in fact;
the right to education, for work, for oitizenship, and for personal growth
and happiness; and the right to rest, recreation, and adventure; the
opportunity to enjoy life and take part in an advancing civilization*
I believe it was Mr* Churohill who answered a question as to
what we are fighting for by saying the quickest way to find out would be
to stop fighting.
Most of us have a rather deep feeling about what we are fighting
for. We need to put it into words, and no words that I have seen of promise
and hope for the future better express the aspirations of the common man
than these I have quoted* To make these things come true in our time, to
pass them on to future generations — * that is worth fighting for*