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- Draft - 2/I8/I46 Statement of Marriner S# Eccles, Chairman of the Board of Governors of the Federal Reserve System, b e f o r e the Banking and Currency Committee o f the House of Representatives, February , 19^6, on Extension of the Emergency Price Control Act of lyLfi* I should l i k e to begin by reading from my statement on the extension of price controls made before the Senate Banking and Currency Committee almost two years ago» At that time, I said: ^'Inflations seldom get out of hand during -wartime, but the danger carries over a f t e r peace comes and a war-weary people, t i r e d of wartime controls ana r e s t r a i n t s , are eager to throw them o f f . That i s j u s t the time when i t may be f a t a l to relax prematurely the controls of war-engendered inflationary f o r c e s . That i s why i t i s so important to extend the l i f e of t h i s l e g i s l a t i o n f o r a s u f f i c i e n t period a f t e r the war to enable the country to convert i t s enormous production capacity to turning out f o r peacetime consumption a supply of goods comparable to what i t has shown i t s e l f capable of turning out f o r war purposes»" I also said then: "Inflationary pressures are s t i l l increasing, and w i l l continue to increase u n t i l reconversion from - 2 - wartime production to peacetime production has been achieved and a balanced budget i s in prospect» If the public i s assured that the Congress i s determined to continue t h i s l e g i s l a t i o n which has been so e f f e c t i v e , the great confidence which now e x i s t s i n the purchasing power of the d o l l a r w i l l be maintained—-without that c o n f i d e n c e , not only would the successful prosecut i o n of the war be jeopardized, but an o r d e r l y t r a n s i t i o n to a peacetime basis would be out of the question» 11 These statements of two years ago s t i l l h o l d , but i n the meantime many of our i n f l a t i o n checks have been discarded while i n f l a t i o n a r y pressures have been augmented g r e a t l y . The danger of i n f l a t i o n , i n f a c t , was never so great during the war as i t i s today. Two years ago i n f l a t i o n pressures were s i z e a b l e but our defenses were strong. We had many checks and influences t o ward o f f t r o u b l e , including d i r e c t controls over the a l l o c a t i o n of materials, rationing, heavy excess p r o f i t s taxes, strong wage c o n t r o l s , and by no means l e a s t , the compelling urge of patriotism, which led the public to accept s a c r i f i c e s and i n e v i t a b l e i n e q u i t i e s without complaint. Today, most of these c o n t r o l s have been abandoned and the unifying f o r c e o f p a r t i c i p a t i o n i n war i s no longer operating. Too many of our defenses against i n f l a t i o n already have been destroyed. Once gone, they are d i f f i c u l t to restore* These l o s t defenses i n c l u d e : the repeal of the excess p r o f i t s t a x ; the abandonment of most a l l o c a t i o n c o n t r o l s and rationing of practically a l l commodities; the f a i l u r e to f o r e s t a l l the development of a ^boom" psychology i n real estate and security markets? and the early r e duction i n average hours o f work b e f o r e we had achieved the mass production of c i v i l i a n peacetime output. In the meantime, i n f l a t i o n pressures have continued to expand. Liquid assets i n the hands of the public now exceed 225 b i l l i o n and Y/ill r i s e f u r t h e r i n the coming year as the remaining budget d e f i c i t w i l l be financed by drawing on the Treasury 1 s general balance. Currency and demand deposits held by businesses and individuals alone are nearly 80 b i l l i o n , or almost 3 times the prewar l e v e l . A l s o , these groups hold 50 b i l l i o n d o l l a r s of de- mand deoosits and nearly 100 b i l l i o n d o l l a r s of Government s e c u r i ties. The potential demand f o r consumers goods, plant and equip- ment, t h e r e f o r e , i s not limited by current income o r by available credit. I t may be greatly augmented at any time by drawing on these b a l a n c e s . This s i t u a t i o n , of course, i s the result of war financing—the r e s u l t o f a p o l i c y which placed excessive reliance on borrowing and inadequate reliance on t a x a t i o n . Thus, during the f i s c a l years from. I9J4-O to I9I4-6 the Treasury w i l l have raised over if.00 b i l l i o n d o l l a r s , and more than I4.O per cent of t h i s w i l l have come from borrowing. Of the t o t a l increase i n the debt, the commercial banking system w i l l have absorbed over I4.O per c e n t . In time, the vast expansion of l i q u i d assets brought about by t h i s p o l i c y may be a healthy f a c t o r i n helping to sustain a high l e v e l of economic a c t i v i t y * But now—-and u n t i l peacetime production has been resumed at a f u l l scale and the brunt of d e layed demand has been met—the vast store of l i q u i d assets p r e sents a serious threat to economic s t a b i l i t y » I t enormously i n - creases the importance of maintaining a vigorous stabilization p o l i c y , including p r i c e controls and a determined e f f o r t to balance the budget» I f these things are not done, i f we permit the m i l - l i o n s of individuals and businesses who hold currency, d e p o s i t s , and s e c u r i t i e s to l o s e f a i t h i n the purchasing power of the d o l l a r , we shall i n v i t e disaster» I am not c a l l i n g attention to these things because I l i k e c o n t r o l s o r -want to see them continued i n d e f i n i t e l y » On the contrary, a l l c o n t r o l s should be dropped as soon as i t can be done safely» They must be retained, however, u n t i l the t r a n - s i t i o n to a stable peacetime economy has been assured and supplies i n most l i n e s have become adequate to meet the demand» As y e t , there are very few l i n e s i n which supplies are adequate to s a t i s f y demand o r are l i k e l y to be adequate soon» Offhand, I can hardly think of a single commodity i n which the supply i s adequate» Acute s c a r c i t i e s p e r s i s t f o r most products» Because we have scrapped nearly a l l of our other c o n t r o l s , i t i s double important that we maintain and strengthen our control of prices» I f we had retained the excess p r o f i t s t a x , we could a f f o r d to operate p r i c e c o n t r o l s more l e n i e n t l y since the danger of i n f l a t i o n a r y s p i r a l s would be substantially l e s s because incentives f o r raising prices -would be checked by high taxes« Similarly, i f we had retained more d i r e c t i o n over the a l - l o c a t i o n of m a t e r i a l s , p r i c e controls could have been operated more l o o s e l y since the danger of a serious d i s t o r t i o n of supplies o r diversion of goods into black markets could have been met by d i r e c t means» I f we had continued longer hours of work, the c r i t i - cal issue of sharp advances i n wage rates to maintain take-home pay could have been postponed u n t i l the peak of i n f l a t i o n pressure was passed and the job of p r i c e control would have been made simpler» I t has been argued that adequate supplies w i l l be f o r t h coming only i f p r i c e c o n t r o l s are dropped promptly» dangerous f a l l a c y » This i s a I f u l l y subscribe to the premise that a f l o o d of production i s the only sure way to prevent i n f l a t i o n , but I see no assurance whatsoever that greater production w i l l from generally higher prices and costs» Of course, there are p r o - ducts here and there the supply of which would increase i f p a r t i c u l a r prices were raised» result their These cases can be handled best on an administrative b a s i s and I am confident that under the new arrangement Mr» Bowles and Mr» Porter w i l l make whatever a d j u s t ments are needed» I should, l i k e to urge that the O f f i c e of Price Administration be assured adequate f a c i l i t i e s to handle j u s t i f i e d demands promptly and without delay» The general need, however, i s not f o r a loosening of p r i c e controls» Generaly higher p r i c e s w i l l i n t e n s i f y the scramble f o r scarce m a t e r i a l s , the accumulation - 6 - of i n v e n t o r i e s , the holding of goods o f f the market i n expectation of f u r t h e r p r i c e advances, the disorganization of production, and the f a i l u r e to supply those goods which consumers need most. In the scramble f o r scarce materials and supplies, i t i s the small business i n p a r t i c u l a r which i s l i k e l y to l o s e o u t . As prices r i s e , industrial discontent and s t r i f e w i l l be i n t e n s i f i e d and production may again be s t a l l e d as workers seek higher wages t o meet t h e i r r i s i n g costs o f living. I t i s not t r u e , i n general, that production i s being held back by p r i c e c o n t r o l s » than anyone expected. Hecoversion i s proceeding f a s t e r Instead of the high ^^nemployment widely a n t i c i p a t e d , the number unemployed remains below million. In spite of the large l a y - o f f s i n munitions i n d u s t r i e s , t o t a l nona g r i c u l t u r a l employment by January had regained i t s pre-YJ Day l e v e l and i s s t i l l increasing. The Federal Reserve index of in- d u s t r i a l production was above i t s 1941 l e v e l u n t i l the s t e e l s t r i k e and w i l l soon surpass t h i s l e v e l once the strike i s s e t tled. Income payments have declined only moderately and by sum- mer may exceed the l e v e l reached at the peak of the war. Where •production i s being r e s t r i c t e d , the usual cause i s lack of manpower o r materials and, more r e c e n t l y , industrial disputes which now at>pear in the process of settlement» Only i n exceptional situations are low p r i c e c e i l i n g s t o blame» Although there i s much comolaint about low p r i c e s , p r o f i t s are large and i t i s not u n l i k e l y that p r o f i t s a f t e r tax f o r I9I4.6 w i l l be the highest on record» A l l t h i s points to the necessity f o r maintaining our defenses against i n f l a t i o n . The most e f f e c t i v e thing that can be done i s f o r Congress to extend without amendment the present p r i c e control law f o r at l e a s t one y e a r . The sooner this i s done, the sooner businessmen w i l l know how to plan ahead and the sooner goods w i l l come out of hiding. I t would be unthinkable to l e t p r i c e c o n t r o l s lapse or t o c r i p p l e them with amendments« Doubt- l e s s the Act i s not p e r f e c t and i t might be improved by some amendments. However, once you open the door t o meet the c r i t i - cisms of one group, you cannot without d i f f i c u l t y c l o s e i t to other groups. Every exception adds to the i n f l a t i o n spiral and creates pressure f o r other exceptions. Every p r i c e increase f o s - t e r s expectations of other p r i c e increases« Our primary need and our only sure means of escape from i n f l a t i o n i s production. We must go to work, stop haggling over pennies, and have f a i t h in our economic system. No single measure b e f o r e Congress i n my opinion c a r r i e s with i t the hopes and prayers of the American people as does the extension of p r i c e control legislation. Unless this lav/ i s extended promptly and f o r at l e a s t a y e a r , I am f e a r f u l of the consequences i n l o s t production, i n d u s t r i a l s t r i f e , and i n f l a t i o n . Prompt passage of t h i s measure w i l l do more toward d i r e c t i n g the country into a period of peacetime prosperity and f u l l employment than anything e l s e Congress o r the Administration can do.
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