View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

(Draft for Chairman's testimony before Senate Small Business Committee)

You have asked me to comment on a number of broad questions regarding
the economic outlook and the dangers of inflation.
of course, a result of war.

The immediate situation is,

In wartime people are paid for producing goods and

services -which are not offered for sale.
goods and services available for purchase.
- • * 0Y

Therefore, incomes exceed supplies of
Excess buying power can be reduced

only by having the Government/(¡borrow it to meet war expenditures.

It can be

prevented from being used by strict rationing and price controls.
We have behind us a period of unheard of economic expansion -expansion in output, income, Federal budget, the money supply, and many other

Serious inflation was arrested during the war by production, price,

wage, and rationing controls, as well as by increased taxes and other measures.
Although the war is over, many of the expansionary factors are still present
and some new ones have been added.

At the same time, some controls have been

taken off or are falling apart from pressures of special interests.

That the

situation is explosive can be seen readily if one watches the action of the
stock market, tries to purchase a home, or walks through stores selling highpriced products.
In global figures the big job of war financing is behind us.

Yet the

implications and the aftermath of war finance are still very much with us and
will remain with us for a long time to come.

During the period from J r t $0,

19Ul* to the end of this calendar year the Federal Government will have spent a
total of 3U5 billion dollars.
1L|5 billion dollars.

The remaining 200 billions or nearly 60 per cent of the

total was the Federal deficit.

During the same time we have raised in taxation

In meeting the deficit (and accumulating a 20-

- 2 billion balance in the Treasury* s general fund for future use), the Federal debt will have been increased from 55 billion to 2J0 billion dollars.
Of this increase, 110 billion dollars was sold to individuals and otBipnaisc (other than comercial banks), either directly to
the owners or indirectly to insurance companies or other savings, institutions«

Of the remaining addition to the debt (which totaled 215 billion

dollars), 87 billions was absorbed by the commercial banking system and
the residual, or 18 billion dollars-, was purchased by various Federal
The sources of war finance were thus of three major kinds -taxes, purchases of securities by the public, and purchases by the c o m ercial banking system«

The first item - the li-5 billions of tax receipts

is a matter of the past and has little direct bearing upon the present

level of purchasing power*

The second item —

the 110 billions of secur-

ities purchased by individuals and savings institutions, together with
20 billions held prior to the war —
large extent fiimly invested«

may be considered as being to a

However, since the Government securities

may be readily converted into cash and since the Gfoverament stands
ready to maintain a stable security market, these securities are closely
equivalent to cash holdings«

They present a serious problem with regard

to future management of the public debt, particularly in an inflationary
period when the holders may wish to sell on balance and thus further increase the funds available for the purchase of scarce supplies«


third item ~

the 87 billions of securities sold to the conmerical bank-

ing system —

has resulted in a corresponding net addition to the countryfs

money supply, since any increase in the bank holdings of securities gives
rise to an equal increase in the volume of deposits and currency in cir-


- 3 Considering the private rather than the public side of the
Nation's war budget, we find that individuals and corporations during
these four and one-half years received a total gross income before taxes
of 822 billion dollars»

About half of this total urns received in pay-

ment for goods and services sold to the Government and the bulk of the
remainder for goods and services sold to the American consumer»

Of the

822 billions of gross income received, only 179 billion dollars was
paid out in taxes, of which I 4 5 billions was to the Federal Government;
I . 3 billion dollars -was spent on consumption and 30 billions on capital

The remainder, or 200 billion dollars, -was saved in the form

of monetary claims -- cash, securities, insurance, etc»

This total of

savings equals the total deficit accrued by the Government»
Of the 200 billion dollars of wartime savings, nearly 120
billions were accumulated by individuals»
corporations and unincorporated businesses»

Most of the remainder went to
This is a -wholly unpreceden-

ted and staggering amount of savings measured either in dollars or in
relation to gross income»

Total holdings of liquid assets by individu-

als, including currency, deposits, and Government securities now amount
to 150 billion dollars, as against 50 billions before the war»


by nonfinancial corporations and by unincorporated businesses now exceed
65 billion dollars, four times as much as in 1 i . »
Thus, the liquidity position of individuals and businesses
has been enormously increased because of the heavy reliance on borrowing
rather than taxation in the financing of war expenditures, and because
the deficit has been financed to such a large extent by borrowing from
banks and large corporations rather than from the average citizen —
process that creates new supplies of money»



h -

It is true, of course, that the entire cost of thw ar could not have
been financed from taxation or without expansion in the public debt.

The f ^ U

liquidity position of the economy wet«, therefore, an inevitable result of war

In my opinion, however, taxes should have been raised earlier and

further in order that they might have contributed a larger share to financing
the war, and more vigorous measures should have been adopted to limit bank
purchases of Government securities*

Had such policies been followed, the public

debt and the interest charges on it would have been smaller and the potentialities
for inflation in the present large volume of cash holdings would be much less
The war resulted in a tronendous destruction of capital equipment,oktat'ioY^irvi
o f living standards, and the power to produce throughout Europe and Asia.
United States, in the economic field, has suffered comparatively little.


have gained in realizing what enormous productive capacity this country possesses
if its manpower and resources are fully utilized.

We have found it possible to

produce for war at a scale equal to our prewar civilian output, while at the
same time maintaining our over-all consumption standards.

This was accomplished

even though 10 million of the cream of our labor force were in the armed
Consumer demands in the broad fields of housing and durable consumers1
goods had to go unmet. The cars, houses, household equipment, not to mention
food, clothing, and various services which the people wished to buy at their
high levels of wartime income were not available in adequate quantities,
t'rnmrl f^r -ftm? it^mn hfH t n ba postponed, m* Hi anFwAnA^and l^s a result large
0H» «M
backlogs of consumers' demand have been built up, baoklogo whi-oh aro baokod -by
-an unheard of volume of liquid asset holdings** ot***»UV>W

( u f Amies*


- 5 Much the same situation exists in the field of capital expenditures.
Business is in need of new plant and equipment; replacements and repairs which
were postponed during the war must be made up and inventories need to be rebuilt.

Plant facilities constructed for war production purposes will meet only-

part of the need; in many cases they will not be useable for peacetime production.
In addition to this backlog of domestic demand, there is an enormous
need for American products all over the world. American production must provide
some help in the task of rehabilitation if there is to be a functioning world

Some part of available American supplies, therefore, must be pro-

vided to meet foreign demands, even though this adds to the problems of economic stabilization during the next year or so.
There is no simple key to appraising developments during the twelve
months ahead.

The economic readjustments and shifts now in progress are vast

and defy clear prediction.

It is probable that strong inflationary pressures

will continue for some time, pressures which might indeed become disastrous if
the disintegration of public controls is permitted to continue at its present

The prudent course is to err on the side of protecting the line.
We must distinguish clearly between the inflationary emergency con-

fronting us at the moment and the quite different problems with which we are
likely to be faced later on. As I have stated repeatedly, the long-run dangers
for the American economy lie in the direction of unemployment and insufficient
demand for current production.

Public policy ultimately will be faced with

the problem of preventing contraction and unemployment.

It is of crucial

importance to recognize, however, that this ig not the problem of immediate

The urgent need at this time is to prevent inflation, which could

- 6 only end in a destructive collapse.
The economic outlook for the near-term future has become clearer
since V-J Day.

Prior to V-J Day there was much uncertainty as to how it would

be possible to avoid widespread unemployment in view of a prospective 70~billiondollar cut in Government purchases and a corresponding reduction of war production,
together with the discharge of/\10 million people from the armed forces.
In less than four months the task has been half finished.


over 90
war expenditures have been cut from an annual rate of " s billion dollars to
+ t M 90
about ^Q billions at present and more than
million servicd^ien\ have been dee * hj
mobilized, unemployment figures
are below 2 million, and the economy^ total
output is still above 180 billion dollars on an krmual basis.

The cut of

many expected because the shortening of hours has required more people to pronearly 50 billions in<war vexpenditures has resulted ¿A less unemployment than
A s h « * l fcttricC'VHfe* but» in
icd jo
|*l fo/<$ob9)
duce a given output, some wartime workers have left the labor market,/and there
has been an offsetting rise in production of civilian goods.
No surpluses have yet appeared or are in immediate sight, however.
Thus shortages in most fields are still acute.

The prospects are that the

further 2^-billion-dollar cut in Government purchases, which may be expected
-nou) xkauA H c
during(1946, will be/offset by increased production to meet civilian demand,
domestic and foreign.

The annual rate of consumers1 expenditures, which has

been rising sharply since V-J Day, may wol-1 increase further ?uhen many items
in the durable field again appear on the market/to an annual level of 10 billion
dollars above the wartime peak^.

Similarly, it is reasonable to expect bj/l -fu/W^

increase of as much as 10 billion dollars a year in private capital expenditures,
including construction of plants and commercial building^-«tttd^accumulation of

^oyJi+ai** ( t f S
inventories/ The export balance in the course of the next year may well reach
an annual rate of 5 billion dollax*s#
With the release of an additional 6 million or more from the armed
forces, substantial unemployment may nevertheless develop.

However, this

unemployment for the time being will not be a reflection of an inadequate level
of total demand, but rather the product of inevitable strains involved in the
drastic shifts from war to peace production.

A high and stable level of peace-

time employment will be reached more promptly and more certainly if we are p rene4>H*
pared to tolerate some dapveoo-ing influences during these transition months in
order to avoid intensifying the pressures toward inflation.

There is a serious

danger that an excessive scramble may develop for goods which are still scarce
in supply.

It is important, therefore, that Government policy should assure

the consumer and the businessman that prices are not going to rise and that it
will not be necessary to beat the market by buying early and accumulating large
inventories which will further accentuate supply shortages.
Long ago I sought to emphasize that protective steps were necessary
in the field of capital assets —

the most exposed and least protected sector

in the line we have been trying to hold against inflation.

We have already

seen the effects of inflationary and speculative pressures, particularly on
real estate values, farm and city.
tion in the stock market.

We have seen the reflection of this situa-

The pressures are inherent in the enormous accumu-

lations of cash or its equivalent at the disposal of the general public.


problem is essentially one of cash, rather than of credit.

The most effective

single remedy would have been a stiff capital gains tax —

but Congress was not

willing to take that step.

Much of the inevitable damage has already been done.

- 8 Farm land values as of November 1 were approximately 60 per cent
above the prewar average for 1935~39*

This upward trend has continued since

Y-J Day and if it follows the pattern following the last war, the situation
will be even more acute during 19U6.
market is especially alarraing.

The inflationary situation in the housing

Prices and costs of buildings have risen

sharply, and this trend, which has already gone too far, must be curbed.
Fortunately, the President has approved the program recommended to him by Mr.
Snyder for putting back controls over allocation of scarce materials, and for
instituting a system of price ceilings on new as well as old houses.

That is

all to the good. The dangers could be further averted, however, by enacting a
-fa «A** CjorvikxC iXkh**?
M»UUU ItfoUd ticu*
high enough capital gains tax/^l take the speculative fever out of
estatejuiai'lgct aa well Q S the stock market^


Stock prices have risen about 20

per cent since last August and are now I O per cent above 1939 levels, with
many stocks at new highs since 1930*

Share trading recently has been more

active than at any time during the past eight years, notwithstanding the fact
that due to the tightening of margin requirements the voL-une of stock market
credit has been declining.
recognizechow strong the pressuresvfrom q q i oootiono m of mthe4o
4 t * 1H*
KHa^o-^iy of
«it h h q
^ ^ U ^ public 9*'YVV| .
have been in favor of taking off controls and cutting taxes. pfivon do^ prudent
policy demands that these pressure/^ be resisted to the utmost in the protection
of this Nation.

It does not make economic sense to cut taxes deeply whiTej^re"

are still running a heavy deficit.

The Ways and Means Committee, in my judgment,

was right in recommending that the excess profits tax be cut to 60 per cent, but
no further.

Its complete repeal at this time was bound to delay reconversion,

to intensify labor problems and to increase the deficit.

All the reasons for

- 9 instituting that tax in the first instance apply with equal or greater force
today than ever before.

By and large, repeal of this tax gave the biggest tax

benefits to those best able to pay taxes —

and it gave it to those -whose
i * bttv,

iiomodi-atoly prnriperyfriv*» profits/4*»e as much war profits as if they were reaped
while the guns were still firing.
I don't like these wartime controls.

They should be dropped as soon

as it can be done safely, that is, when the transition to a stable postwar
economy has been assured and supplies in most lines have become adequate to
meet the demand. Increased^roduction of civilian goods
the ultimate answer
S f M bft*«.
to the problem of inflation. Jt hao boon argued that adoquato supplioo will be
^ i u a Je
Vojl f
forthcoming only if all stabilization controls a d r o p p e d promptly
a dangerous fallacy.

That is

If all controls are discarded prematurely, the result^

will be a mad competition for scarce materials, the bidding up of prices, the
hoarding of goods —

a train of evils that can only end in economic disaster.

In such a competition for scarce materials and supplies, small business would be the greatest victim.

Small business organizations which are

complaining that price controls should cease at once are doing themselves a
great disservice.
In summary, the policies which I think should be pursued at this
time are brieflyi
1. Assurance to the country that effective price controls will be
continued beyond the present cut-off date of June 30# 19^6.

If the future of

price control beyond June 30 is permitted to remain uncertain up to the summer
months, it will encourage advance buying and excessive inventory accumulation
in anticipation of higher prices.
controls are actually discarded.

The ill effects will be felt long before

- 10 2.

Every effort should be made to use, where needed, allocation

and inventory controls.

The wartime depletion of inventories and the

prospective high level of civilian production make it necessary that some
inventory re-stocking should occur, but the danger is that this re-stocking
will be concentrated in too brief a period and in too few hands, thereby
increasing the demand for goods while reducing supplies to the consumer.

The basic consideration in the present struggle about increased

wages is the need for more production.

The rapid decline in working hours

which has occurred during the past six months has again been much ahead of
the needs of the situation.

The vast total of domestic and world demand for

the output of the American workers would have required the continuation of a
II. or ^8-hour week for some time.

Had this approach been taken, it would

have been possible to postpone most of the current wage-price debate to a more
appropriate time«
After the period of inflationary pressures is over, higher basic
wages will be needed to sustain mass purchasing power for the goods that can
be produced by American industry.

Advances in the productivity of labor should

ultimately be passed on to the worker in higher wages and shorter hours, or to
the consumer in lower prices.

The wartime level of profits, allowing for the

repeal of the excess profits tax, is tremendous and cannot be expected to continue.

Price reductions or wage increases will in many cases be called for«

Above all, it is vitally necessary not to confuse the policy requirements of
the present period with those of the long rim«
Finally, permit me to say that the coming year affords a better
opportunity to balance the Federal budget than this country has seen for the

- 11 last seventeen years and may see again for a long time.

If we do not stop

the deficits and the creation of a bigger and bigger money supply now, when
can we expect to stop?

We owe it to every citizen, to every war veteran, to

hold this line against inflation if the victory on the war fronts is not to
be lost in the end on the home front«