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April 15, 1948.
Credit Policy
1, Increased military expenditures and tax reduction have
created a new situation with respect to the coordinated program of credit
restraint and debt aaanagement which we have been pursuing in order to restrain farther expansion of bank credit.
2. There are various estimates of 1948-49 fiscal year results*
Vith the possible exception of Congressional committee estimates the
figures of receipts and expenditures are not very far apart. A great deal
now depend*, of course, on how rapidly increased appropriations for defense
are translated into actual expenditures. President Truman in letter to
Speaker Martin indicated 1*7 billion additional expenditures in fiscal '49.
3* By ateans of the transfer of 3 billions for EHP from the 194$
budget to the 1949 budget a bookkeeping surplus of about 1.5 billion can
be shown in 1949* From the standpoint of credit policy, however, the
important figure is the cash surplus which Is estimated at 1 to 2 billions,
barring business recession (and consequent decline in Treasury receipts),
or greater increase in military expenditures than is now requested,
4* This amount is probably no more than enough to take care of
voluntary redemptions of maturing securities, leaving nothing for redemption of securities held by Federal Reserve Banks. In fact, during the
first half of fiscal year 1949 (second half of calendar year 1948) Treasury
may well be a temporary borrower.
This means that existing program of credit control, based on
Treasury redemption of Federal Reserve held securities, will not be in
working order much longer. Var loan calls of about 450 million (additional)
in April, 1,050 Billion in May, and 1,700 Million in June will not be suf
ficient to


offset Treasury payments to market.

-25* It is uncertain, of course, whether inflationary pressures
will persist strongly during second half of this calendar year, and it is
still debatable what and how such should be done to try to curb sueh pressures by monetary action. It has seemed likely that there would be a
falling off in business capital expenditures during the latter half of 1948
and first half of 1949. If Government expenditures do not pick up rapidly,
it is conceivable that their inflationary effect sight be offset by this
decline in private capital expenditures. There are other elements in our
economy — i.e., supply of some goods overtaking demand and prospect of
better world crops — which will also mean a relaxation of inflationary
pressures. On the other hand, tax reduction will be a sustaining influence
on the demand side, ERP expenditures will help to maintain foreign demand,
and a third round of wage increases is tending to aggravate the situation.
6. In the field of fiscal policy, debt management, and credit
policy, if we are still faced with the necessity of resisting inflationary
pressures, the choice (as put by the President's Council of Economic Advisers) is whether to try to cut down personal consumption, private or
public investment, military expenditures, or other Government services.
Although there should be room for some paring of previously planned
military expenditures now having a lower order of priority, it is unlikely
that much will be accomplished. Similarly, in the field of other Federal
Government expenditures, the prospect for substantial economies is doubtful
and State and municipal investment expenditures are not under control. As
suggested above, a gradual decline in private capital expenditures seems
likely, unless the contemplated effects of increased military spending are
exaggerated and pressure for private capital expenditures again increases,
which might then require allocations of materials rather than credit controls.




-3By means of action in the monetary and credit field we can attempt to preTent or restrain a further expansion of purchasing power based on bank
credit, bat we can't do mueh, if anything, about purchasing power already
in existence, unless we want to take measures so drastic as to risk a
serious over-all decline in production and employment.
7* nevertheless, with fiscal policy inhibited and debt management reduced in scope, monetary policy may be able to play a relatively
more important role than in the recent past when it has been pretty completely dependent upon Treasury surpluses* If there is a decrease in the
demand for private capital funds the pressure on long term rates which
asserted itself last fall will be relieved. Maintenance of the 2 1/2 per
cent long terra rate on Government securities should not than require us
to put large sums into the market. Meanwhile, we could proceed further
with increases in short term rates, so as to encourage the banks to use
whatever reserve funds come into their possession (through gold imports,
return flow of currency, our purchases of long bonds, Treasury expenditures,
or otherwise) to purchase short governments from us, or we might even take
affirmative action by pressing sales of short governments from our portfolio*
8. This program would involve permitting bill rates and rates oa
outstanding certificates to begin to move up in the near future, issuing a
1 X/U per cent 1 year certificate to refund the June maturities, increasing
the discount rate, adjusting the scale of rates on tax savings notes, adjusting support prices on short governments other than bills and certificates
and probably eventually getting rid of the pegs on obligations with maturities up to 5 years* Consideration shou?i.d also again be given to permitting
the 2 l A * s of 59-62 to decline slightly below par, to bring them into line
with the rest of the market and to begin the process of getting rid of the



par bogey which, In any case, was never laeant to apply to all issues of
Government securities but n&inly to the longest terai 2 1/2 per cent bonds,
9* Whether further action (or further powers) will be necessary or desirable during the second half of 1943 depends on the future
course of business, credit, and the budget. Presently the total money
supply is down about #4 billion from the peak of aid-December 1947, and
the experience table for the next three months indicates no considerable
change is to be expected in this quarter.




YIELDS OF TAXABLE TREASURY BONDS
PER CENT

PER CENT

2.80

-

2.80

REST RIC TED

IJNR ESTI=*ICT ED

—
»
m

2.40

.
"""•—\L-—— _———
\——•"

—

'

'

—
—

z\1

2.00

2.00

"'• x
•

—

^—

—
1.60
—

—
—

1.20

2.40

1.60

—

/
r

-

.20

—

.80

.80

-

-

.40

0

.40

-

—

I

2

3




.

(

4

5

6

7

DECEMBER 24,194 7
APRIL 19, 1948
DECEMBER 23, 194
7

_

8 9 10 II 12 13 14 15 16 17 18 19 20 21 22 23
YEARS TO FIRST CALL OR DUE DATE
(