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BOARD DF GOVERNORS OF THE FEDERAL RESERVE SYSTEM August 25, Tot Chairman Eocles From: W. R. Stark Attached is a copy of the statement which you may recall we told Judge Vinson I would prepare in connection with the Credit Control Order which is again under consideration. This draft incorporates the two main points that were developed at our luncheon discussion early in August, It was prepared at that time but I am only now passing it along to you and Judge Vinson because meanwhile the matter seemed to be in abeyance. You will be particularly interested in the "^TTfrft^ paragraphs on pages 3 a n d h* The first deals with the problem presented by the amount of time and negotiation necessary to the development of regulations and presents as a solution the idea that the Board would first strive to secure the cooperation of private agencies in establishing voluntary safeguards against credit abuses. The other paragraphs deal with the importance of past and continuing accumulations of deposits and currency which are the immediate source of the danger of inflation, and with the solution—the tax on capital gains. Attachment August 7, 1943 DEAFT OF PRESIDENT'S STATEMENT fO ACCOMPANY CREDIT CONTROL ORDER Today, I h a w signed an Executive Order which marks another step in the program for stabilising the war economy. This order provides for additional power to control an undue expansion of credit. I have designated the Board of Governors of the Federal Reserve System as th® appropriate agency to assume thin further responsibility in th© credit field, Th© purpose of th© order is to give assurance that the Board will not b© hampered by lack of authority to take appropriate action to prevent excessive or unsowid uses of credit* Such abuses of credit would interfere with the war effort ami would endanger our program of economic stabilization. Vigorous prosecution of total war inevitably cr@at®s mmy economic problems. We all know by now that isany of these problems arise fros the fact that ciTilian incomes have been greatly increased as a result of th© OoTsmment's war expenditures, while th© supply of things for which the®@ incomes can be sp©nt has shrunk. In dealing with these problems the Gov©rnffi®nt is following two main lines. By taxation, the sale of War Savings Bonds, price fixing, wage and hour policies, and credit controls it is making every effort to prevent a rapid rise in the cost of living. By rationing it is seeing to it that existing essentials ar© divid#d fairly among all th© American people• Under wartisa® conditions a rise in th© pric©® of food and clothing does not increase the supply available to the consum®r. It merely takes r&ore and iior© of his money and gives hi® less and less in return. Uncontrolled credit expansion would contribute to this wasteful process. As the need has arisen w® have taken stepa to prevent this, and the present order i® another of these steps. In the annoynceront of the recent "hold the line*1 order it was pointed out that the line timst be held at all points in order to be held at all, The us© of cr@dit is one of these points. Mire <han a yea|) mil'w-t7jft!f ago an Executive Order was issued directing the federal Reserve System to bring about an orderly reduction in the rapidly growing voltune of instalment and other fonas of Gonswmr credit. That the resulting measures h&v© had a substantial degree of sucoeat is indicated by the fact that the outstanding amount of shortterm oooauiBter d©bt has declined frosa t©n billion dollars to five billion dollars. It has been cut in two. The present order amplifies the authority of the Federal Eeserve System so that it will be in a position to take such other steps as mj be needed to keep a tight rein on unsowid and excessive uses of credit that would contribute to spemil&tiw increases in ooamjodity and security prices and in land values. Such price advances would inevitably lead to collapse snd to -untold suffering, and would greatly increase the difficulties of post-war readjustment, this order is issued now at this time and in broad terms in order that w© may be amply forearmed against th© possibility of uneoynd credit developments. It will continue to b© the responsibility of the Federal Reserve System, acting in conj\mction with other agencies when it say b© appropriate to do so, to formulate and bring into operation such ia®a®tires aa say be suitable to accomplish the purposes of the order. the Board of Governors of the Federal Reserve System is / \ / given full authority far timely arid appropriate regulatory action wherever and wh@n®v©r it may become necessary, it is not expected that the Board will apply specific regulations to any c©nsid<tra.bl© extent at this tine. Instead it is understood that the Board will first striv© to secure the cooperation of various private agencies in establishing voluntary safeguard* againat credit abuses. It is to bo hoped that by this m$n$ the n<&mi for specific regulation may be greatly reduced**—©"Ten avoided altogether at saiiy points, Noil© of the action® authorised or oont@mplat®d tinder the order will prevent the banks and other credit institutions from providing the usual credit accommodations n@e@ssary to m#©t the legitimate needs of industry, eaNnerce* mnd agricultur®. Inflation is most cosBaonly identified with apiraling increases in the prices of consumer goods, but it is invariably accompanied by spec* ul&tion in so-callud capital goods in which peopl® sak© long-tens or ©v#n lifetime inves'tosnts. ^«hen this happens the valu#s Q£ things lik@ farms, urban real estate, and seeuritles are t@iapora.rily driven to artificially high levels, l^hsn avsntually th@se values collapse, this brings on foreclosures mil the loaa of savings, spelling disaster to millions of p#opl@» X previous order provided for control of ex*e4it used in the purchase of con^uiser goods. The present ord&r is aimed largely at strengthening the control of the use of credit In financing real estate and security transaction®# Credit regulation alona cannot prevent harmful speculation* Past and continuing accumulations of deposits mud currency in the hand® -4- of the public art, for the present* the more issaedi&t© source of possible danger. As a matter of fact, the volume of private borrowing hm been declining. It is for this reason that 1 have reeosBBanded to the Congress that* in its prassnt study of laxea, ma&t careful consideration be givsn to a war profits tax on sales of capital assets, k tax designed to divert to the Treasury a substantial part of mny profits an purchases of auch assets sadt during the war period would not intarf©r® with legitimate aal©s—that is, with the maintenance of adequate markets for these assets— but it would b© an effective ch#ck on purchase© made chieily for the purpose of reaping speculative profits. Adequate taxation* including th© suggested war profits tax on / ^ sales of capital assets, is the first ©S8#ntisl In t^e GoTernroent's broad program of action to combat inflation. Without it credit control cannot b© effective* The ©ntir© program* including the objectives of this order, is vital for the protection of all of us—every American worker, farmer, busin«®sman, and houawif©. the men and women of our armed forces all over th® world must be assured that their families at hose have that protection mid that the horn® front to whieh they will return is not to be disrupted by a speculative boon and its collapse.
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