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In an e f f o r t to assure a high l e v e l of national income i n the future the Administration has set up two objectives which seem to me of cardinal importance. The f i r s t to which i t i s committed i s the introduction of stable money i n t o our system meaning not that the dollar should necessarily be defined as so many grains of gold and therefore the price of gold i n v n • terms of dollars j^stabilized^ but instead ^stable money i s a money whose purchasing and debt-paying power s h a l l not fluctuate v i o l e n t l y from year to year or undergo a s i g n i f i c a n t variation over a long period of years. As V a corollary to t h i s position i t was recognized that we have undergone a period of disastrous deflation and i n order to establish stable money upon an equitable basis we must have a r i s e i n the general price l e v e l . The second objective i s to obtain a condition of f u l l employment f o r a l l members of our society who are able and w i l l i n g to work.^The President himself has pointed out that our greatest national loss i s the waste of human resources through unemployment and has aptly stated that ff But as f o r t h i s country, I stand or f a l l by my r e f u s a l to accept as a necessary condition of our future a permanent army of unemployed, In t h i s survey I w i l l indicate*-how closely the control of money i s r e lated to the volume of production, employment and national income and to outline the p o l i c i e s which i f adopted would best r e a l i z e the objectives stated above. Obviously i n a short presentation of t h i s type i t w i l l be impossible to support with elaborate demonstration a l l of the statements and claims made. Many of the subjects discussed are highly controversial, but I think the weight of evidence i s accumulating as time proceeds which indicates my approach i s correct and I w i l l be glad to offer more detailed analysis to k u r o r t the proerpn I advocate. The Situation With Regard To Production. In the United States we have tremendous productive f a c i l i t i e s and natural resources which are available to create a greatly increased output of goods/ but our f a c t o r i e s l i e i d l e and unused* supply 9 we have a s k i l l e d Moreover, of labor but the members of t h i s labor force are unemployed although they only welcome the opportunity to work and to receive an income to buy the goods which they have proved themselves so w i l l i n g and anxious to consume. Our society as a whole has solved^ to a remarkable degree^the problem of production and continually the f e r t i l e brains of our technical s t a f f s are i n t r o vWv ducing new methods and bringing out new inventions that would improve our i n d u s t r i a l processes and equipment to that much larger production can be realized with a smaller outlay of e f f o r t . Paradoxically enough ?;hile men are walking the streets i n search of none existant jobs we f i n d many observers who t e l l us that the way out of the depression i s by hard work, abstinence and saving, and who seek to deal with the economic problems of today with an analysis which ±v> applicable only to an economy $rhich l l faiti::e, of the factors production are f u l land y u human t i l i z e dr .e - I f our trouble i n were due atr. war or of scarcity of material 4M W^tsvL sources, then the only way that we could expect to increase our national i n come ^ould he by saving, 1 v herd work and by the development of new techniques of production. But conditions ar they are, we simply need t-orie kind of a device which w i l l bridge the gar and start the economic system i n operation again. After f i v e years of th& most devastating depression we have ever known we should be convinced that recovery cannot be accomplished along the l i n e s which the orthodox end conservatives advocate. Tre Importance Of • ~cne.v » Regardlers of what were the i n i t i a t i n g causes of the depression,' i t is indeed hard to over-rate the part played by money on the down-v swing because^ JJjJaanl U Wis d^CiA^ the destruction of deposits and thqfinQ?0G0eg] ^avii'ig by the holders of "the* 6. deposits which remained are airong the most important factors i n carrying us i n t o the depths which we f i n d ourselves and i t i s only a c o n j e c t u r a l ? to where we might have d r i f t e d i f vigorous action by the Administration i n heading o f f the almost automatic d e f l a t i o n of bank loans and deposits had not been taken i n the period subsequent to Inarch 1955 • This process of d e f l a t i o n as i t operates through the banking system has long been recognized and consented on by the more enlightened monetary writers but business x?en, bankers, and economists generally have never understood i t s importance i n decreasing the volume of business a c t i v i t y , the amount of employment end the l e v e l of national income* This misconception i s probably because money has been thought of merely as a medium of exchange to e f f e c t transfers of goods and services between producers without r e a l i z i n g that the operation of the money system has a tremendous causal influence upon t h i s production and upon the d i s t r i b u t i o n of wealth and income among the producers of i t . A curtailment of the supply of money would not be disastrous i f all prices and costs were c u r t a i l e d i n l i k e amount and i f no appreciable time—lag were present. But / to expect t h i s to happen i n our economic system, which has developed so many r i g i d i t i e s i n i t s price structure, i s not to take a very r e a l i s t i c viewpoint. I/.any prices^are fixed by law^siach as r a i l r o a d rates and prices charged by the various public u t i l i t y industries^ and these move upward and downward very slo?*ly. Real estate and certain other taxes i n t r o - duce another cost which i s not amenable to eas;; adjustment. Other prices —4 — are set by monopolies or _uat:i-iLonopolies and show similar immobility, while others, l i k e interest rates, ere set by long tern contract and only a default or receivership can change the amounts paid. There are many prices which become customary and these do not vary readily. resistance to change, Wage rates also show a strong Moreover, prices i n f i e l d s which are dominated by large enterprises,although nominally competitive^ are prone to vary s l i g h t l y i n face of changed conditions of demand. Under these conditions a contraction i n the supply of money and/or a decrease i n i t s velocity of c i r c u l a t i o n exert a very disconcerting influence upon business a c t i v i t y and employment. When contraction has gained momentum i t s influence i s f e l t greatly i n f i e l d s where market forces p e r r i t large and rapid price changes, notably i n highly competitive industries i n which there are a large number of producers engaged. Thus the purchasing power of such producers i s curtailed and tfteir demand for goods and services consequently declines. The industries of r e l a t i v e l y r i g i d prices f e e l the effects of a smaller demand and meet this situation by c u r t a i l i n g production and cutting costs, which means that Ben are thrown out of jobs, repairs and replacements deferred, salaries cut # and a general tightening up ; with a reduction i n their money outlays. The workers thus thrown out of work cannot obtain employment elsewhere when a l l industries are following a similar process. Thus their demand for a l l goods and ser- vices declines, adversely effecting producers of consumers1 goods generally. As prices continue to f a l l and incomes continue to shrink the loans and investments of banks become of dubious value and certain weaker banks i n s t r i v i n g for l i q u i d i t y bring pressure upon the whole banking system and. the deflation of bank loans and deposits i s i n t e n s i f i e d . Some banks f a i l and rims are precipitated upon others as depositors begin to question the a b i l i t y of going i n s t i t u t i o n s to meet t h e i r deposit l i a b i l i t i e s . A l l banks, weak and strong a l i k e , f e e l the effects of this forced liquidation because i n efforts to gain l i q u i d i t y a l l banks are losing cash and therefore must either borrow from the Federal Reserve or c u r t a i l loans. Borrowing at such a time i s con- sidered a sign of weakness end i s only resorted to when the security markets become coirpletely demoralized. Govermr-ent credit i s weakened as the banks which normally consider their Government securities the most l i q u i d of a l l investments start s e l l i n g them i n an e f f o r t to gain funds tc meet adverse clearing house balances and the demands of their depositors for cash. Thus, the process gains momentum as i t proceeds with cumulative adverse effects upon business a c t i v i t y , employment and p r o f i t s . Incidentally business "confidence" p r a c t i c a l l y vanishes i n a period of rapid deflation as business slides through one after another of the so-called "rock bottoms of liquidation". A l l the time that this process i s going on the orthodox are i n s i s t - ing that we are simply undergoing e "healthy" liquidation and this i s necessary although painful before a "sound" recovery can take piece. During the early years of the depression while a disastrous type of deflation was almost, continuously i n evidence we witnessed a Federal Reserve system supposedly entrusted with the responsibility of monetary control watch the wholesale destruction of bank deposits with a complacency that would be ludicrous were not i t s consequences so serious. Beyond a few poorly-tined open-market operations l i t t l e was do^e to relieve the banks or to halt the deflationary process. True the Federal Reserve lowered re- discount rates but these rates are of no significance when there i s no i n centive at a l l for the banks to borrow i n order to increase reserves to permit an expansion of bank deposits through an increase i n bank loans and investments. In these depression years, the only time that banks sought I accomodations from the Federal Reserve was when they were losing cash through currency being hoarded by a frightened public, or when gold was being exported from the country i n large volume. Under these circumstances i t would not greatly matter whether rediscount rates were high or low. The Government then i n power took an equally inactive position and outside of a few half-hearted gestures towards stopping the rapid contraction of money and national income l e t the process proceed unchecked. In fact t h i s Government followed, so far as i t could, the philosophy that the orthodox are saying we should adopt today. Every attempt was made to c u r t a i l Government expenditures i n a f u t i l e attempt to balance the budget. The gold standard and "sound11 money were maintained regardless of the cost to the country as a whole. Everything was done to bolster up the confidence of the conservatives by assurances that property rights and freedom of private i n i t i a t i v e and enterprise would be preserved, [fhere was no fear of "regimentation" but yet a f f a i r s d r i f t e d from bad to worse m^J In summary, this deflation of money has placed us i n a situation where deposits are about 50% below the levels of the prosperous years of 1928 and 1929. Even more significant i s the fact that velocity of c i r c u l a t i o n of the reduced deposits i s approximately 50% less than the average rate of turnover i n the years under comparison. Our problem therefore mainly re- solves i t s e l f into adopting p o l i c i e s which w i l l lead to an increase i n both the volume and velocity of our money supplies while avoiding measures which tend to invoke a curtailment of money and to increase the disposition of i t s owners to keep i t i d l e , because increased prices and increased production and employment can be maintained only i f the effective money supplies expand concurrently. What policies should be adopted now? In discussing what action should be taken today I do not wish to minimize the steps already taken by the present Administration. l:ost of them have been j u s t i f i e d by experience and uncruestionably the situation i s rraterially better than i n March 1953. The banks have been strengthened by Government- aid, while deposit insurance has b u i l t up public confidence so there i s no fear of disastrous bank runs i n the immediate future. The devaluation of the dollar with the gold p r o f i t accruing to the Government assures that no concern need be f e l t i n the remote futore that increased volume of business w i l l put pressure against the roney reserves. Pressure of imrediate credit contraction has been forestalled by the building up of large excess reserves as money has returned fro*: circulation, as gold has been imported, and as the Federal Reserve increased i t s holdings of Government securities. Thus the monetary policy has successfully relieved any worries th*t the money system might be prevented from supporting recovery by the d i f f i c u l t i e s presented by -arbitrary l e g a l reserves. Nor, as I w i l l point out l a t e r , do we need seriously fear an uncontrollable i n f l a t i o n or i n the event of too rapid expansion of t.he money supply we have adequate j methods at our command to control the situation provided the^ are i n t e l l i gently applied. Moreover, the Government has provided essential refinancing to a great number of private individuals, business enterprises, and f i n a n c i a l institutions and the accommodations and lower rates thus obtained have been highly b e n e f i c i a l . The Housing Act has provided the beginnings for the development of sound home mortgage financing i n t h i s country® Other reforms such as minimum wages, abolition of child labor, the Securities Act, snd the Stock-exchange l e g i s l a t i o n have been desirable i n providing a sound basis for recovery although i n themselves they do not produce i t . - 8 To promote rapid recovery however, we must strive to increase employvent for i t i s only by greater production of goods and services that nationa l real income can be increased. I do not believe this can be accomplished through any :?eans except those which increase the t o t a l money expenditures of the community as a whole for goods and services. We might have on the one hand a decrease i n saving and an increase i n the proportion of current C income which i s spent for goods anpl services but this i s almost impossible for the great mass of the average individuals who obtain their incoBtes from salaries or wages. On the other hand the available cash funds of corporations or individuals of large reans that are now held in vast amount as s t e r i l i z e d balances i n banks might be used i n such a way as tp provide L employment of labor and thus find i t s way into speeding, or there might be an. increase i n the t o t a l reans of payment through an expansion of bank deposits as the result of increased loans and investments by commercial banks. However, both of these are impossible to obtain i f we are to rely on them to spontaneously srise from the normal operations of private business enter- prise. v Business i s unlikely to spend or to borrow either on short or longterm u n t i l there appears d e f i n i t e prospects of p r o f i t s and an increased volume of sales. / Only after business activity has started to improve does "confidence" return i n spite of a l l we read in the journals of Wall Street. Under these conditions the Government i s the only agency that can reasonably be expected to make neiw expenditures of funds that w i l l go d i r ectly into the hands of spenders and w i l l move through the economic system through purchases of goods and services, and thereby increase sales, production and national income. In order to augment Federal expenditures i n ways that w i l l most d i r e c t l y increase employment both i n public and private enterprises I suggest the following programs 1. The public works appropriation should be substantially i n - creased by, say 2 or 5 b i l l i o n s of d o l l a r s . These funds should be made available in loans and grants to c i t i e s , counties and States for projects that they would submit for approval, however, I think a larger proportion should be made in grants, say 50$, or i f necessary two-thirds of the t o t a l costs i n order to provide for more rapid spending. The application ap- provals should be made within a limited period of time which might be determined by the President. In order for loans and grants to be approved i t should be stipulated i n the contracts that the projects w i l l be completed and the funds spent within one year after approval. This would insure rapid spending and the l e t t i n g of contracts on a basis which would insure large employment of men. 2. A more intensive program for new housing should be developed. There are two f i e l d s here that should be concentrated upon. construction of new hones. promoted b F i r s t , the A considerable volume of new building ir.ight be a subsidy of sonne percentage of the cost of construction, say not to exceed 20%. This program might be limited to a t o t a l subsidy of 500 m i l l i o n dollars which would be paid by the Federal Government on the new homes constructed under the mortgage insurance section of the Federal Housing Act. This would enable the Government to have a check to determine whether the funds were actually being spent for new construction. Here again i t would be wise to grant the subsidy only for construction that was begun within one year. Second, low cost housing projects on a larger scale should be started with active Governmental support. This night be done by having a Government corporation established which would have capital stock - 10 I s u f f i c i e n t to finance not less than 40 to 50% of the cost of the projects, the rest to be provided from the sale of bonds by the municipalities i n which the projects are located. In order to obtain decentralization i n the management of the housing f a c i l i t i e s the leasing of the units should be handled by l o c a l administration and the income received from rents would be used to pay l o c a l taxes, interest and to provide retirement for the bonds issued by the c i t i e s over a period of, say 20 years. The Government i t s e l f would receive no interest on the part of the cost which i t provides, but there might be some provision under which pprt of the principal would be recovered over a period of years. Or, the Government might handle the con- struction and put up o i l the necessary funds and then lease the buildings to the municipalities who would have the responsibility of receiving payments from the tenants and to i*epay the Federal Government at low rates over s period of 20 years or more. I t should be recognized that certain subsidies must be granted by the Government to enable low cost hoiising projects to proceed rapidly and that they cannot be expected to be f u l l y s e l f - l i q u i d a t i n g i n the sense that the entire coat including interest can be recovered. However, new low cost housing i s a desirable type of Gov- ernmental expenditure and would prove of incalculable value i n solving the s o c i a l problems which arise out o^f large numbers of people l i v i n g i n crowded tenement areas. 3. A comprehensive program for the insurance of the aged and the unemployables, meaning the physically incapable of productive labor, should be introduced on an established basis by the Federal Government. This would not only provide additional income for these classes of individuals but would relieve the friends and relatives who now bear the majority of the cost of supporting them, thereby freeing income for expenditure on other goods and services. 4. The a c t i v i t i e s of the C i v i l i a n Conservation Corps should be extended so that more people would be employed and supported i n doing this very useful type of work. 5. The R. F. C. might make loans of a certain percentage upon the delinquent taxes of l o c a l bodies. This would relieve the pressure which such taxes have caused towards the closing of schools and the curtailment of necessary public services. Thus municipal credit and municipal spending would tend to be increased and this i n d i r e c t l y would be beneficial to business generally. 6. The expenditures through the Federal Emergency Relief Adminis- tration should be maintained to take care of individuals who cannot be provided for under the above programs. I am not i n favor of simply providing a dole for the i d l e and we should make sure that the individuals who apply here are incapable of work or cannot be employed either through public works or private enterprise. In other words, the operations of the Federal Emergency Relief Administration would be merely the c a t c h - a l l for i n d i v i duals who cannot be taken care of i n other ways. In t h i s connection, bow- ever, we should not demand that individual States and municipalities pay an appreciable share i n taking care of the r e l i e f burdens. There i s no j u s t i f i c a t i o n for the contention that r e l i e f burdens should be borne l o c a l l y in a country where l o c a l income i s so dependent upon the general l e v e l of economic prosperity' for the country as a whole. When we have regional specialization of industry and national interdependence to the extent we do the deep depression that one l o c a l i t y finds i t s e l f i n has nothing to do with the industry and frugality of the l o c a l population. This philosophy of r e l i e f would only be applicable i f l o c a l comrunities were essentially s e l f - s u f f i c i e n t i n their economic l i f e . There are those who point to the record of the l a s t two years and say that i t has proven impossible for a Government to spend i t s way into prosperity and therefore would condemn a further spending program* Such an attitude seems to me to have entirely misread the facts i n the situation The country was faced with t e r r i f i c deflationary pressure and the spending while i t turned the tide of deflation was offset by other factors to such an extent that l i t t l e real expansion of money has taken place. For example from December 1932 to December 1933 there was an actual decline i n the amount of demand deposits available to individuals and corporations for expenditure, which indicates that bank closings and contraction of loans by benks had more than offset the increase of deposits resulting from the purchases of Government securities by the Federal Reserve and the banks. Moreover during t h i s period the expenditures of l o c a l Governments were severely curtailed so that there was actually a decrease in the public debt of municipalities and States i n the calendar year 1933, further offsetting the effects of federal expenditures. The r i s e i n business a c t i v i t y during the summer of 1933 i s to be explained mainly by the increased purchases of inventories by corporations instead of by the development of new primary consumer purchasing power. Only i n 1934 was there any noticable expansion of deposits and even then the increase was not of such a volume that would merit giving serious consideration to the "inflationary fears11 which have gained wide p u b l i c i t y i n the conservative press. I cannot emphasize too strongly the importance of getting these funds out rapidly because i t i s only i f there i s a considerable increase i n the volume of new expenditure that business as a whole feels the impetus and enters the picture by increasing production and employment. These large expenditures should not cause anxiety when we consider the probably effects which they w i l l have. As men are employed they w i l l receive purchasing power that would not otherwise be spent and hence there would be an increased demand for goods which would be met at f i r s t by drawing down of stocks on the shelves of r e t a i l e r s but as business i n the United States har> adjusted i t s e l f to carrying small inventories the r e t a i l e r s would soon reorder from wholesalers and jobbers and they i n turn from manufacturers and so on back to producers of raw materials. With increasing business there would be the ,necessity of rehiring workers who had been l a i d off and this reemployment would swell the volume of purchasing power which would be spent, increasing the demand for goods and services and consequently for labor. When business showed signs of sustained improvement there would develop a need for working c a p i t a l and corporations would"either start borrowing from banks who would be glad under these circumstances to make loans, or would draw against their i d l e cash balances and make increased payments for supplies and labor thus giving velocity to existing deposits. Only later as productive f a c i l i t i e s become more completely u t i l i z e d would there develop a need for capital equipment that should be financed by true saving. I f t h i s process continues and we realize a higher l e v e l of business a c t i v i t y many of the problems which the National Recovery Administration, the Agriculturtural Adjustment Administration, the Farm Credit Administration, and the Home Owners1 Loan Corporation are attempting to deal with would be solved, likewise many of our railroad and banking problems would, be materi- a l l y improved.-' Many of the emergency agencies are dealing with symptoms of depression, and these would disappear i f the depression i t s e l f was allayed. - 14 I Measures to be Avoided There i s d e f i n i t e l y a danger that the effects to be expected from a spending policy of the type described above would be offset by the inauguration of certain unwise measures which have been gaining considerable support i n some quarters. For example, a shortening of hours and r a i s i n g of wages by l e g i s l a t i v e or administrative action would be unwise i f they lead to increased costs and a curtailment of p r o f i t s before a s u f f i c i e n t volume of business had been realized to bring with i t lower unit costs. Thus we might f i n d a contraction of business and a decrease i n employment that would mean lower national income. Also higher wages might lead to a more rapid introduction of labor-saving equipment which would lead to an uneconomic displacement of existing c a p i t a l and increase our problem of unemployment r e l i e f . Another type of development would be the paying of too / high wages on public construction which would tend to draw people out of private employment where they would not be replaced. Also certain types of r e l i e f programs which set up competitive production with private enterprise are not of enough importance to offset the b i t t e r feeling that w i l l be engendered on the part of the people engaged i n these l i n e s . We must think i n terms of greater production, employment and consumption rather than solely i n terms of higher prices as the detriment of good business. Lower prices i n some l i n e s i f combined with largely increased pro- duction mean profitable operations. Also lower hourly wages should not be distasteful to labor i f higher labor income were insured. Thus, the giving of power to certain groups to raise prices at the cost of restricted production might be f a t a l to rapid recovery. - 15 I Sources of Funds. The question naturally arises as to where the funds are coming from for this spending program that must of necessity be of large volume at least for a certain length of time. In view of the present banking situa- tion I see no reason why the banks should not take more Government securities. They hold large excess reserves and therefore could have quite an appreciable expansion of investments i n Governments without jeopardizing their position. I t doesn f t make a great deal of difference whether these Government securities are sold on a short-term or a long-term basis and i f the banks are more w i l l i n g to take short-term obligations I think we should s e l l them t h i s type. After a l l , the banks are being paid for simply creating new money and considering the .scarcity of suitable bank investments there i s no reason why bankers should not be w i l l i n g to furnish i t . In case there were d i f f i c u l t i e s , I would suggest that the Federal Reserve be \ - lfc- ( "encouraged11 to support the Government market and to make purchases i n as large amounts as necessary i n order to assure the Government of the funds to carry out i t s announced program. There might be an objection to the Federal Reserve increasing i t s holdings of Governments because this would increase the member bank reserves i n l i k e amount which would give the p o s s i b i l i t y of a multiple credit expansion by the commercial banks. In addition, excess reserves are now very large and apparently there i s no good reason to increase them further at the moment. However, these factors do not seem to me to necessarily e n t a i l a serious objection to further Federal Reserve purchases because the Federal would have them to s e l l i n the future thereby decreasing member bank reserve balances by that amount and placing a severe r e s t r i c t i o n upon an unwarranted credit expansion. However, i f the b o r r o w i n g operations were handled properly I see no need to use any additional powers other than the normal operations for supporting the Government market while issues are being floated. Of course i f present holders of deposit accounts that are now s t e r i l i s e d with no checking against them were purchasing Government bonds this would be desirable for thi^Government would make the accounts active. A The Budget Program So far as I am concerned I believe that any attempt to balance the budget at this time could only exert a deflationary effect upon a l l business and industry and would be a disastrous policy to pursue. Naturally i t i s essential to balance the budget over a long period of time but I think we must use a great deal of care i n determining the periods when the Government s h a l l have an excess of receipts over expenditures. If this program works and no r e a l l y conclusive argument has been presented to the contrary there w i l l be no d i f f i c u l t y i n balancing the budget i n the future. As business revives the necessity of Governmental expenditure w i l l decrease, while Government revenues w i l l increase even without anys i g n i f i c a n t change i n the tax rates as increased national income i s b u i l t up. Thus we can be assured of a balanced budget r e l a t i v e l y soon i n the future and the debt incurred to revive business could be r a p i d l y cut down i n a period of r e l a t i v e l y f u l l employment and more complete u t i l i z a t i o n of our productive f a c i l i t i e s . Even i f i t were necessary to keep a more or less permanent public works program i n operation which would mean a larger normal federal budget, t h i s would not be serious provided we had a much enlarged national income. A budget which c a l l e d for, 8 b i l l i o n d o l l a r s a year would not be p a r t i c u l a r l y burdensome i f our national income were at a l e v e l of-, l e t us say, 100 m i l l i o n d o l l a r s a year with a price l e v e l approximating that which existed i n 1928. 1 The Prospects of Deflation There i s a great volume of comment to the e f f e c t that we are menaced with the p o s s i b i l i t y of an uncontrollable i n f l a t i o n developing i n the future. These fears seem to me to be l a r g e l y u n j u s t i f i e d . The only way that such an i n f l a t i o n can take place i s f o r the volume and use of monetary supplies, including currency and bank deposits, to be increasing at a faster rate than goods are being brought on the market and t h i s p o s s i b i l i t y i s one which i s f a r remote i n the United States. As was pointed out before, we have a large amount of u n u t i l i z e d capacity which can be brought i n t o use to greatly increase the supply of goods. Also, we have a great volume of unemployed which would have to be absorbed i n trade and industry before a dangerous i n f l a t i o n could take place. In f a c t they would be brought i n t o production without an appreciable r i s e i n prices i n many l i n e s of production because of the proportion of f i x e d costs to t o t a l costs. Thus, -1* as the volume of sales increased unit costs would tend to decrease for some time and therefore at the present l e v e l of prices or at a s l i g h t l y increased l e v e l most industries would enjoy greatly increased p r o f i t s . There i s l i t t l e danger that we would see a development of hoarding of goods as business a c t i v i t y increased and some prices rose. Also, as business improved there would probably be nd f l i g h t of c a p i t a l from the country, but i f there was i t could be e f f e c t i v e l y controlled. We have a balance of payments situation which does not demand large outward payments which were so very important i n promoting the disastrous currency i n f l a t i o n s i n post-war Europe. Eforeover, our tax system i s , s o arranged that we could easily b a l - ance the budget with an increase i n business a c t i v i t y and hence there would be no need for Government financing and a continued unbalanced budget and printing press currency. The individuals who profess fear of i n f l a t i o n have simply not analyzed the situation arid are not aware of the circumstances that must be present i n order for an i n f l a t i o n to get out of hand. Finally i t should be pointed out that h i s t o r i c a l evidence i s far from conclusive, that "inflation 1 1 i s uncontrollable. Granted, because of the large excess reserves which are held by the Federal Reserve banks there exists the p o s s i b i l i t y of an unwise expansion of loans and investments and hence deposits provided certain conditions arose i n the future. However, we have methods for control of t h i s . The Federal Reserve system has always been much more effective i n r e s t r i c t i n g money expansions than i n replacing contractions. The System now has U approximately b i l l i o n dollars worth of Government securities which could be sold and these would wipe out completely the excess reserves which are now present. I f the banks of the country were w i l l i n g to borrow from the Federal Reserve to make further credit advances to customers the r i s i n g - 19I rediscoi;nt rates of the Federal Reserve banks would have their e f f e c t upon c u r t a i l i n g bank loans, to say nothing of the effect caused by our t r a d i t i o n against bank borrowing. Also, the Federal Reserve has the power under emergency conditions to increase the required reserves for member bank deposits and t h i s power i f used certainly would be effective i n bringing about the curtailment of an excess expansion. My fear a l l along has been that we could not effectively control and offset deflation rather than that of our danger of running into a period of uncontrollable i n f l a t i o n . r
@FedFRASER