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JOINT COMMITTEE PBINT
GENERAL CREDIT CONTROL,
DEBT MANAGEMENT, AND
ECONOMIC MOBILIZATION
MATERIALS PREPARED
FOR TH E
JOINT COMMITTEE ON THE
ECONOMIC REPORT
BY TH E
COMMITTEE STAFF
Printed for the use of the Joint Committee on the Economic Report
UNITED STATES
GOVERNMENT PRINTING OFFICE
78276
WASHINGTON : 1951
JOINT C O M M ITTEE ON TH E ECONOM IC REPORT
(Created pursuant to sec. 5 (a) of Public Law 304, 79th Cong.)
SENATE
HOUSE OP REPRESENTATIVES
JOSEPH O. O’M AHON EY, Wyoming, Chairman
JOHN SPARKM AN, Alabama
PAUL H. DOUGLAS, Illinois
W ILLIAM BENTON, C o n n e c t i c u t
ROBERT A. T A FT , Ohio
RALPH E. FLAN DERS, Vermont
ARTH U R V. W ATKIN S, Utah
E D W A R D J. H A R T , New Jersey, Vice Chairman
W RIG H T PA TM A N , Texas
FR A N K BUCHANAN, Pennsylvania
-----------------JESSE P. W OLC OTT, Michigan
CHRISTIAN A.1H ERTER, Massachusetts
------------------
T
heodore
Gboyer
W.
Jo h n
a
Staff Director
Associate Staff Director
W . L e h m a n , Clerk
J. K
eeps,
E n sley,
CONTENTS
Pace
I. Introductory------------ -------------------- --------------- --------------- -----------II. Recent monetary and fiscal action_______________________________
Statements by the Federal Reserve System and the Secretary of
the Treasury_____________________________________________
III. Market effect of the August announcements______________________
Acceptance accorded to the exchange offer____________________
Part played by Federal Reserve System in refunding............. .
Effect on member bank reserves_____________________________
Effect on short-term rates of interest_____________ __________ _
Changes in volume of bank loans outstanding_________________
Exchange offering made in November________________________
IV. Role of Government debt in monetary policy------------- ---------- ------Ownership of the Government debt__________________________
Heavy maturities in the near future_________________________
Interest on the public debt__________________________________
Cost of a given rise in interest rates__________________________
Restraining effects of higher short-term rates_________________
Proposed plans for special reserves___________________________
The problem in foreign countries____________________________
1
1
2
4
4
5
6
6
8
9
9
10
11
12
13
15
20
21
LIST OF TEXT TABLES
1. Redemption experience in refundings, selected dates, 1950____________
2. Distribution of United States Government securities held by Federal
Reserve banks______ ___________________________________________
3. Member bank reserve balances and related items, June 21, August 16,
and October 11, 1950, with changes_____________________________
4. Ownership of interest-bearing United States Government securities held
by the public, June 30__________________________________________
5. Marketable public debt outstanding by period to due or first call date,
June 30, 1946-50____________________________________- __________
6. Frequency distribution of explanatory factors for changes in investment
plans 1949-------------------------------------------------------------------------------7. Equivalent bond values and yields—Selected rates and maturities----LIST OF APPENDIXES
Appendix A—Tables:
1. Money rates on United States Government and corporate securities.
2. Weekly reporting member banks—leading cities, selected classes of
loans outstanding---------------------------------------------------------------3. Maturity schedule of interest-bearing public marketable securities
issued by the United States Government and outstanding Octo
ber 31, 1950______________ ______ ___________________________
4. Interest on Federal public debt in relation to national income and
Federal budget receipts, 1870-1950_______<
___________________
5. Computed interest charge and computed annual interest cost on
Federal securities by types of issue, 1946-50__________________
6. Military procurement price trends_____ ______ ________________
Appendix B: Press release of Board of Governors, August 18, 1950_____
Appendix C: Press releases of Secretary of Treasury, August 18, and
21, 1950-------------- ---------- --------------------------------------------------------------
m
5
6
7
10
12
17
19
23
24
25
26
27
27
34
34
IV
CONTENTS
Appendix D:
1. Excerpts from an address by Secretary Snyder before a luncheon
meeting of the New York Board of Trade, January 18, 1951----2. Letter from the general counsel of the Treasury to the acting staff
director of the Joint Committee on the Economic Report sub
mitting additional facts and commenting upon a preliminary
draft of the committee staff report on Monetary Policy and
Economic Mobilization_____________________________________
Appendix E: Letter from the Council of Economic Advisers to the chair
man, Joint Committee on the Economic Report, submitting views and
comments on a preliminary draft of the committee staff report on Mone
tary Policy and Economic Mobilization-------------------------------------------Appendix F: Letter from Mr. Roy Blough, member of the Council of
Economic Advisers, to the acting staff director of the Joint Committee
on the Economic Report, giving supplemental comments and suggestions
regarding a preliminary draft of the committee staff report on Monetary
Policy and Economic Mobilization__________________________________
Appendix G:
1. Excerpt from joint committee hearings, November 25, 1947 (testi
mony of Mr. Marriner Eccles)_______________________________
2. Excerpt from an article The Defense of the Dollar, by Mr. Eccles,
Fortune magazine, November 1950___________________________
Appendix H: Communications from economists-----------------------------------Appendix I: Treasury-central bank relationships in foreign countries—
procedures and techniques, prepared by staff of Board of Governors of
the Federal Reserve System------------------------------------------------------------
Pa*«
36
38
48
51
52
53
54
79
LETTERS OF TRANSMITTAL
J a n u a r y 24, 1951.
To Members of the Joint Committee on the Economic Report:
At the suggestion of Congressman Wright Patman and Senator
Ralph E. Flanders the committee staff was directed to make a study
of general credit controls, debt management, and economic mobiliza
tion. Dr. William H. Moore was in charge of the study. Other
members of the committee staff have subjected it to close scrutiny.
It assembles and gives a purely factual review of available materials
bearing on credit and debt management in recent months. It is
now submitted to members of the committee for consideration and
such suggestions as they may wish to make.
J o s e p h C. O ’ M a h o n e y ,
Chairman, Joint Committee on the Economic Report.
J a n u a r y 24, 1951.
Hon. J o s e p h C . O ’ M a h o n e y ,
Chairman, Joint Committee on the Economic Report,
United States Senate, Washington, D. C.
D e a r S e n a t o r O ’M a h o n e y : In obedience to instructions from the
committee, the staff has assembled and presents herewith basic facts
concerning recent changes in short-term interest rates and their effects
upon business borrowing, commercial credit, cost of Government
borrowing, debt management, and inflation. An exhaustive docu
mentation is included of economic changes that occurred during and
after the small rise in interest rates on short-term funds brought
about in August and September of 1950.
The materials in this study give new information bearing on both
sides of a question which has given rise to a good deal of debate.
On January 12, 1951, there was transmitted to this committee a
statement (reproduced in full in appendix H) representing the con
sensus of more than 400 economists (likewise listed in appendix H).
As they see the situation:
Large expenditures on military programs and foreign aid, with their inflationary
impact, may be needed for a decade or more. Faced with this long-run inflationary
prospect, we recommend that the increase in total spending be continuously
curbed in three principal ways, and that these constitute the first line of defense
against inflation:
1. Scrutinize carefully all Government expenditures and postpone or eliminate
those that are not urgent and essential. * * *
2. Raise tax revenues even faster than defense spending grows so as to achieve
and maintain a cash surplus. Merely to balance the budget is not enough. If the
inflationary pressure is to be removed, taxes must take out of private money
incomes not only as much as Government spending contributes to them but also
a part of the increase of private incomes resulting from increased private spending
of idle balances and newly borrowed money. * * *
3. Restrict the amount of credit availably to businesses and individuals for
purposes not essential to the defense prograrfS. * * *
Selective controls over consumer credit, real estate credit, and loans on securities
are useful for this purpose and should be employed. But we believe that general
VI
LETTERS OF TRANSMITTAL
restriction of the total supply of credit is also necessary. This can be accom
plished only by measures that will involve some rise of interest rates.
If general inflationary pressure is not removed by fiscal and credit measures,
we face two alternatives: (1) Continued price inflation, or (2) a harness of direct
controls over the entire economy which, even if successful in holding down prices
and wages for a while, would build up a huge inflationary potential in the form of
idle cash balances, Government bonds, and other additions to liquidity. Such
accumulated savings would undermine the effectiveness of direct controls and pro
duce open inflation when the direct controls are lifted. * * * Either of these
alternatives is extremely dangerous. A prolonged decline in the purchasing power
of the dollar would undermine the very foundations of our society, and an everspreading system of direct controls could jeopardize our system of free enterprise
and free collective bargaining. * * *
In sum, fiscal and credit measures are the only adequate primary defense
against inflation, and can minimize the extent of direct Government controls
over wages, prices, production, and distribution. * * *
Somewhat in contrast to this point of view is that given classic
expression by the Secretary of the Treasury on January 18, 1951.
In a speech (reproduced in part in appendix D, item 1) delivered before
a meeting of the New York Board of Trade, the Secretary stated:
The Treasury is convinced that there is no tangible evidence that a policy of
credit rationing by means of small increases in the interest rates on Government
borrowed funds has had a real or genuine effect inputting down the volume of
private borrowing and in retarding inflationary pressures. The delusion that
fractional changes in interest rates can be effective in fighting inflation must be
dispelled from our minds.
The 2% percent rate of interest on long-term Government securities is an
integral part of the financial structure of our country. * * * It dominates
the bond markets— Government, corporate, and municipal. * * *
Any increase in the 2^-percent rate would, I am firmly convinced, seriously
upset the existing security markets— Government, corporate, and municipal.
We have not hesitated to draft our youths for service on the battlefront regard
less of the personal sacrifice that might be entailed. Neither can we hesitate to
marshal the financial resources of this country to the support of the mobilization
program on a basis that might, in some instances, require a degree of profit
sacrifices.
The materials herewith presented supplement and expand, in the
light of current developments, information made available in 1950 by
our Subcommittee on Monetary, Credit and Fiscal Policies under the
chairmanship of Senator Paul H. Douglas.
The first draft of this report was reviewed by the staff of the Board
of Governors of the Federal Reserve System, the staff of the Treasury
Department, and by the members of the President’s Council of
Economic Advisers. They made many helpful suggestions and sup
plied additional materials, chief among which is the catalog included
as appendix I of Treasury-central bank relationships in foreign
countries— procedures and techniques. It was prepared by the staff
of the Board of Governors of the Federal Reserve System. Included
are letters received from the General Counsel of the Treasury (as
appendix D) and the Council of Economic Advisers (as appendixes
E and F). The views of various economic technicians are compiled
in appendix H.
The preparation of this study owes much to the able secretarial
services of Mrs. Margaret Miller and Mrs. Eleanor F. Rabbitt and
the statistical assistance of Mrs. Marian T. Tracy. Dr. William H.
Moore was the economist in charge.
Sincerely yours,
T h e o d o r e J. K r e p s ,
Staff Director.
I . I n t r o d u c t io n
If free democracies are to win the present struggle, they must be
strong. They must develop an ever-increasing economic and indus
trial potential. Maximum use must be made of every scrap of know
how and of material resources. The capabilities of every individual
must be developed and utilized to the full.
One of the most important elements making for economic strength
is maintenance of confidence in the value o f the dollar. Inflation,
that is, a steady depreciation in the value of the dollar, is the main
enemy within the gates. If allowed to run its course, it in every
instance brings unrest and has in some instances paved the way for
communism. China and Czarist Russia are but recent examples.
Military measures on the fighting front are bound to fail if not
matched by vigorous anti-inflationary measures on the home front.
The Government’s current monetary and credit policies must be
evaluated not only in terms of their success in curbing the expanding
demands of individuals, businesses and governments to the limits of
available supplies, but must also be measured by their effectiveness in
facilitating the over-all expansion of production, particularly in the
critical defense and defense-related areas of our economy.
In order to see what new light might be cast upon these difficult
problems by recent events, the joint committee seeks at all times to
get the fullest possible measure of facts as they become known. The
rise of short-term interest rates in the third quarter of 1950 seemed to
warrant searching examination and has accordingly been extensively
studied in this assembly of materials.
II.
R
ecent
M
onetary
and
F
is c a l
A
c t io n
Over the week end of August 18, 1950, decisions announced almost
simultaneously by the Federal Reserve and the Treasury were
promptly labeled by newspaper headlines as a “squabble,” “row,” or
“ clash.” Many editorials spoke of conflicting objectives and con
flicting responsibilities. In some instances, the area and extent of
differences were doubtless overdramatized.
What was ignored or underemphasized was the long record of
successful cooperation between the two agencies in the past. This
is not to say that there have been no differences between them, both
with respect to basic philosophy and current policy. There have been.
But they did not come into being over a particular week end. They
have been given widespread discussion for over a decade. By ques
tionnaire and hearings, a subcommittee of the Joint Committee on the
Economic Report considered that matter some months ago.1 The
1 Hearings on Federal Expenditure and Revenue Policies, September 23, 1949, Containing National
Planning Association Reports prepared by Conference of University Economists, 81st Cong., 1st sess.
A Compendium of Materials on Monetary. Credit, and Fiscal Policies (a collection of statements sub
mitted to the Subcommittee on Monetary, Credit, and Fiscal Policies by Government officials, bankers,
economists, and others) S. Doc. No. 132, 81st Cong., 2d sess.
Hearings on monetary, credit, and fiscal policies (September 23, November 16, 17,18, 22,23, and Decem
ber 1, 2, 3, 5, 7,1949), 81st Cong., 1st sess.
Monetary, Credit, and Fiscal Policies (Report of the Subcommittee on Monetary, Credit, and Fiscal
Policies'* a t^oc. 129, 81st Cong., 2d sess.
1
2
CREDIT AND 'DEBT CONTROL AND* ECONOMIC MOBILIZATION
joint committee likewise considered the problem in its annual report
and heard the views of the Council of Economic Advisers.2 From
these past discussions and investigations, in fact in the examination of
the recent money market happenings in almost every major country
, in the world, two things can be taken as beyond question: First, that
ideal debt-management policy and proper management of monetary
controls are both important and difficult to achieve; second, that
coordination, especially when requiring administrative articulation of
the performance of two or more agencies both conscientiously carrying
out their public duties, is bound at times to be something less than
perfect.
STATEMENTS BY THE FEDERAL RESERVE SYSTEM AND THE SECRETARY
OF THE TREASURY
Effective August 21, 1950, the Board of Governors and the Federal
Open Market Committee of the Federal Reserve System approved an
increase from l}{ to 1% percent in the discount rate at the .Federal
Reserve Bank of New York.
On the same day the Secretary of the Treasury invited holders of
$7.2 billions of certificates and bonds maturing on September 15 and
$6.2 billions of certificates maturing on October 1 to accept in exchange
for them 1% percent 13-month notes. These exchange terms were
the same as those which the Treasury had offered in exchange for
obligations maturing a few months before on June 1 and July 1.
It was obvious from their terms that the new notes were not being
offered on any premise that tighter money conditions might or should
prevail at all soon. The 1}{interest rate could hardly be competitively
attractive marketwise if higher short-term rates, which seemed to be
inherent in the announced program of the Federal Reserve System,
could actually be expected.
The change in the discount rate by the Reserve authorities was
immediately recognized as more a symbol than an effective instrument
of control in itself. While the rediscount rate was once a traditional
instrument by which central banks undertook to influence credit
conditions, a number of factors have pushed its importance into the
background in recent years. Member banks, always reluctant
debtors at the Federal Reserve banks, today prefer the easy practice
of adjusting their reserves by buying or selling Government securities,
a practice which has developed in recent years as a result of the
growth in the volume of Government securities held by banks. If
reserves seem excessively beyond prescribed or traditional minimums,
a member bank simply buys Governments for whatever interest they
yield. If, on the other hand, private lending opportunities seem
attractive or reserve balances have been drawn down below customary
levels, added reserves are obtained, not by borrowing but by selling
Governments from the member's portfolio. As long as funds can be
obtained more cheaply this way than by borrowing, banks need not
and will not borrow at the Federal Reserve.
Effectiveness of the discount rate as a monetary instrument depends
largely upon the initiative of the members in borrowing or not bor3 Hearings before the Joint Committee on the Economic Report, January 1950 Economic Report of the
President (January 17,18,19, 20,1950) 81st Cong., 2d sess.
Joint Economic Report (Report of the Joint Committee on the Economic Report on the January 1950
Economic Report of the President), S. Rep. No. 1843,81st Cong., 2d sess.; June 1950.
CREDIT AND DEBT CONTROL AN1> ECONOMIC MOBILIZATION
3
rowing. Open-market operations, as originally conducted, were at the
initiative of the monetary authority and were for the purpose of
making the discount rate effective. On its own initiative the Federal
Reserve System could sell Governments to blot up reserves and buy
Governments to ease reserve positions. When, as in recent years,
the practice followed by the System calls for buying or selling Govern
ment securities at relatively fixed prices, the initiative has come to
rest primarily in hands outside the monetary authority. Openmarket operations cannot force a pattern of behavior but must rely
for their effectiveness on inducing and stimulating member banks
and other investors to buy or sell Government securities in response to
price incentives.
The significant thing about the announced change in discount rate
was, therefore, the accompanying statement by the Reserve System:
* * * to support the Government’s decision to rely in major degree for the
immediate future upon fiscal and credit measures to curb inflation, the Board of
Governors of the Federal Reserve System and the Federal Open Market Committee
are prepared to use all the means at their command to restrain further expansion
of bank credit consistent with the policy of maintaining orderly conditions in the
Government securities market.
The implications of this statement were promptly accepted by the
financial community as going far beyond that suggested by the mere
change in the little-usea rediscount rate.3 In the face of a small
volume of discounts, effect of the rate change on the cost of reserves
was inevitably slight and its significance not seriously restrictive.
What was important was the evidence of a determination on the part
of the Reserve System authorities that they intended to fulfill the
traditional responsibilities of a central bank in the face of strong
inflationary pressures by curtailing access to reserves and restricting
credit expansion. The tool chest available to the System by way of
moral suasion, open-mdrket operations, and, within statutory limits,
changes in reserve requirements, is well enough known to give mean
ing to a statement that the System intended to make full use of it.
It is important that the action of the Board be recognized and
accepted as an attempt to influence the reserve positions of member
banks. It would not be proper to view it as prompted by a desire
for higher interest rates in and of themselves. Believing that re
straint was desirable in the expansion of bank credit, the System
authorities were forced to accept higher interest rates not so much
as a necessary tool but as the inevitable result if restrictive measures
of a broad, general character were to be employed at all.
The philosophy underlying the action is similar to that favored by
the Monetary, Credit, and Fiscal Policies Subcommittee of the Joint
Committee on the Economic Report, when it said:
* * * As a long-run matter, we favor interest rates as low as they can be
without inducing inflation, for low interest rates stimulate capital investment.
But, we believe that the advantages of avoiding inflation are so great and that a
restrictive monetary policy can contribute so much to this end that the freedom
of the Federal Reserve to restrict credit and raise interest rates for general stabili
zation purposes should be restored even if the cost should prove to be a significant
increase in service charges on the Federal debt and a greater inconvenience to the
Treasury in its sale of securities for new financing and refunding purposes.4
* See Appendix B.
* S. Doc. 129,81st Cong., 2d sess., January 23,1950, p. 2.
4
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
On the Treasury side the announcement of the refunding program
in terms which could only suggest continuance of established policies
rather than a shift of policy in the direction of restriction was followed
immediately by a further statement emphasizing the importance of
debt management in the maintenance of a stable and confident situa
tion in the market for Federal securities. This the Secretary declared
is “our first line of defense on the financial front.”
The Board of Governors also urged, in addition to higher taxes,
restraint on “further expansion of bank credit, consistent with the
policy of maintaining orderly conditions in the Government securi
ties market,” which, it stated, was needed “to support the Govern
ment’s decision to rely in major degree for the immediate future
upon fiscal and credit measures to curb inflation.”
The philosophy behind the Treasury policy was well summarized
by the Monetary, Credit, and Fiscal Policies Subcommittee. After
hearing representatives of both agencies the subcommittee made the
following statement:
Treasury and Federal Reserve officials have advanced a number of reasons for
the policy of holding down the yields and supporting the prices of Governments in
the face of inflation. (1) Such a policy holds down service charges on the Federal
debt. * * * (2) The maintenance of relatively stable prices on Governments
helps to maintain confidence in the public credit and facilitates Treasury sales of
securities for both new financing and refunding purposes. * * * (3) The
maintenance of stable security prices protects investors against capital deprecia
tion and prevents any loss of public confidence in financial institutions, including
banks, that might result from a serious decline of these prices. (4) Any marked
decline in the price of Governments would be communicated to other parts of the
credit market and might bring about unemployment and deflation by interfering
with the flotation of new securities. * * * (5) Any feasible rise of the yields
on Governments would be so ineffective as an anti-inflationary measure as not to
be worth its cost. * * * 5
Both points of view have their supporters, both inside and outside
the Government, among economists, and among businessmen. The
top economic agency in the Federal Government, the Council of
Economic Advisers, after citing the summary given above, concluded:
*
* * We think these reasons are valid and so cogent that they require that
debt-management policy must be dominant and that we must look for other ways
to restrain dangerous inflation rather than subordinate the debt-management
policy to traditional central bank operations.8
III. M a r k e t E ffe ct
of th e
A ugust A n n ou n ce m en ts
With this brief survey of the formal statements issued by the two
agencies and of the philosophy behind each of them, we turn to an
examination of their effect on governmental and private credit as
reflected in the money market.
ACCEPTANCE ACCORDED TO THE EXCHANGE OFFER
Since the immediate problem arose from the necessity for refunding
callable and maturing Treasury issues, the acceptance given to the
exchange offer is an important measure of its success. The actual
results are summarized and compared with the results of the two pre
vious refunding operations in table 1. The first of these operations
may be considered as a success in that most of the maturing securities
« S. Doc. 129, op. ctt., p. 26.
•Hearings, January 1960 Economic Report of the President, op. cit., p. 66.
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
5
were exchanged without Federal Reserve support; the second showed
a high proportion of total exchanges but required Federal Reserve
support; while the last offering presented a much different picture.
Of the more than $13.5 billion of called and maturing issues in
September and October, only $800 million, or less than 6 percent, were
exchanged by holders other than the Federal Reserve and $2.4 billion,
or 17 percent, were redeemed for cash. Holders of 59 percent of the
issues sold them to the Federal Reserve. Essentially the same type
of l}i percent notes had been offered in exchange for June and July
maturities. About 17 percent of the holders of the then maturing
issues decided not to accept the Treasury’s exchange offer, with 13
percent selling to the Federal Reserve and 4 percent taking cash pay
ment. The change in the attractiveness of the exchange offering in a
few months was, of course, purely a matter of pricing and appropriate
ness of the new issue to new market conditions. The holders of issues
maturing or called for repayment had preferred to reinvest the pro
ceeds in issues other than the new \}{ percent notes since they could
do better interestwise by buying in the open market rather than
accepting the Treasury’s exchange terms. The unexchanged pro
portion amounting to $2.4 billion was paid off by the Treasury out of
general fund cash augmented as it was at the time by quarterly tax
collections.
T a b l e 1. — Redemption
experience in refundings, selected dates} 1950
[Amounts in millions of dollars]
Refunding
March and
April 1950
June and
July 1950
September
and October
1950
ISSUES BEING EETIRED
Total outstanding__ ______ _______________________________
Federal Reserve holdings:
At time of announcement_____________________________
Purchased after announcement________________________
Exchanged:
By Federal Reserve.__________________________________
By others____________________________________________
Redeemed for cash_______________________________________
9,444
10,620
13,570
1,040
0
2,812
*1,384
2,370
8,030
1,040
7,954
450
*4,196
85,973
451
10,400
794
2,376
11.0
11.0
0
84.2
4.8
39.5
26.5
13.0
56.2
4.3
76.7
17.5
59.2
5.8
17.5
PERCENTAGES OF TOTAL
Exchanged by Federal Reserve—total.......................................
Original holdings_____________________________________
Purchased___________________________________________
Exchanged by others_____________________________________
Redeemed for cash_______________________________________
1 Includes Federal Reserve purchases through June of the new note issued in exchange for the certificates
maturing June 1,1960.
2 Purchases by the Federal Reserve during June of the new notes issued on June 1, 1950, are considered
as exchanged by the Federal Reserve.
Source: Board of Qovemors of the Federal Reserve System.
PART PLAYED BY FEDERAL RESERVE SYSTEM IN REFUNDING
By the time of the exchange the overwhelming bulk of the maturing
issues offered to the Treasury for exchange into the new 1% percent
13-months issue was held by the Federal Reserve banks. The Sys
tem purchased the called and maturing issues at par or higher and
offered them in exchange for the new l}i percent notes, thus keeping
6
CREDIT AND DEBT CONTROL AND’ ECONOMIC MOBILIZATION
cash redemptions within limits easily manageable from the standpoint
of Treasury cash and current receipts. The Reserve banks, while
acquiring maturing issues at a rate which gave them over $10 billion
out of the $13K billion maturing, were able to maintain at the same
time some degree of control over member bank reserves by selling
other issues at higher yields and by allowing bills to rim off without
replacement. The risk taken was that System purchases would ex
ceed sales with a result precisely contrary to that intended—namely,
increasing member bank reserves rather than operating to restrict
them.
A glance at tables 1 and 2 is sufficient to show the magnitude of
these transactions. In the weeks between the announcement of the
new 1% notes and the expiration of the exchange offer, the System
purchased nearly $8 billion of the new issues, but sold nearly $7 billion
of these and other securities on balance (table 2).
T a b l e 2 .—
Distribution of United States Government securities held by Federal
Reserve Banks
[In millions of dollars]
Increase or decrease
June 21,
1950
Issues
Retired on:
Sept. 15,1950..........................................
.............................................
Oct. 1,1950
Aug. 16,
1950
Oct. 11,
1950
June 21 to
Aug. 16
Aug. 16 to
Oct. 11
704
1,481
704
1,666
i 5,181
14,832
+185
+4,477
+3,166
Total_______ ______ ______________
2,185
2,370
110,013
+185
+7,643
Other securities:
Bills........................................................
Certificates_________________________
Notes______________________________
Bonds______________ - ______________
3,983
*3,175
3,149
5,187
4,271
1,127
6,338
4,228
1,347
73
4,151
3,922
+288
-2,048
+3,189
-959
-2,924
-1,054
-2,187
-306
17,679
18,334
19,507
+655
+1,173
Total.......
- - ___
* Holdings of new notes obtained in exchange for issue maturing on dates indicated. The total figure
differs from the total amount exchanged shown in table 1, because of sales between time of exchange and
Oct. 11.
Source: Board of Governors of the Federal Reserve System.
EFFECT ON MEMBER BANK RESERVES
The System managed to keep the net addition to reserve bank credit
in the period from August 16 to October 11 to a figure just under
$1.2 billion. Several other sizable changes in the factors supplying
and using member bank reserves during this 8-week period, as is shown
in table 3, reduced the effect on reserves of these net purchases.
Most important of these were an outward flow of gold of $522 million
and an increase in currency in circulation of about $363 million both
of which absorbed reserves. On balance, member bank reserves were
increased over the period by nearly $500 million, about equally divided
between excess reserves and reserves required to support the increase in
bank deposits which occurred.
EFFECT ON SHORT-TERM RATES OF INTEREST
Accompanying these shifts of Government security holdings between
the Reserve System, the commercial banks, and other nonbank holders
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
were changes in the market price— that is, the yield— of the short-term
issues. The course of certain money rates in recent weeks is given
in appendix A, table 1. To date changes in the rates on longer-term
Governments and in corporate bonds have been slight. The upward
turn in short-term rates after August 18 reflects the market reaction
to the increase in the rediscount rate and the open market operations
of the System.7
T a b l e 3 . — Member
bank reserve balances and related items, June $1, Aug. 16, and
Oct. 11, 1950, with changes
fin millions of dollars]
Increase or decrease
June 21,
1950
Aug. 16,
1950
Oct. 11,
1950
Factors supplying reserves:
Reserve bank credit:
Government securities____________________
17,679
18,334
19,507
655
1,173
Bonds __ ____________________________
Bills, certificates, and notes____________
5,650
12,029
4,691
13,643
3,922
15,585
—959
1,614
—769
1,942
Discounts and advances___________________
All other (including transit items)_________
74
508
106
449
70
469
32
-5 9
—36
19
Reserve bank credit outstanding_______
Gold stock___________________________________
Treasury currency___________________________
18,261
24,231
4,605
18,889
23,954
4,608
20,044
23,432
4,618
628
—277
3
1,155
—522
10
Total supply....................._....................... .
47,097
47,451
48,094
354
643
Factors using reserves:
Money in circulation_________________________
Treasury cash_______________________________
Treasury deposits with Federal Reserve_______
Nonmember deposits and other accounts_______
26,926
1,294
529
2,179
26,976
1,309
717
2,151
27,339
1,316
508
2,142
50
15
188
—28
363
7
—209
—9
June 21, Aug. 16,
to Aug. 16 to Oct. 11
16,169
16,298
16,789
129
491
Required________________________________
Excess___________________________________
15,522
647
115,559
1 739
15,809
1980
37
92
250
241
Total uses_____ _______ _________________
47,097
47,451
48,094
354
643
Member bank reserves_______________________
* Preliminary.
Source: Board of Governors of the Federal Reserve System.
For the first time since 1931 a new Government security was traded
in the market below par immediately upon issuance when the new
Wa percent notes were traded on a 1.34 percent basis. By exchange
of the maturing issues the Reserve System had become far and away
the principal holder of the new 1% percent certificates. Anxious to
blot up member reserves by selling Government holdings to them,
the System authorities made the price concessions which were reflected
in the higher yield rate on all short-term Government securities.
While these things were happening in the Government security
market, the expected rise in rates on private credit was working itself
out. Some banks marked up the rates charged their customers.
Just 5 weeks after the announcement by the Reserve authorities of
their intention to work for restraint in bank credit came the brief
announcement of a leading central Reserve city member:
The National City Bank of New York announced today that effective Friday,
September 22, its prime rate to commercial borrowers has been increased to 2%
percent per annum.
7 For day-to-day changes in rates on selected Government issues, see charts 1,2,3, and 4, appendix D .
8
CREDIT AND DEBT CONTROL AND' ECONOMIC MOBILIZATION
The rate on loans to concerns with highest credit rating had been
2 percent. The following table shows the upward revision in other
quoted rates in the sensitive New York market:
August 18
90-day bankers* acceptances........................................................................................
4 to 6 months’ prime commercial paper.....................................................................
Call loans_________________________________________________________________
m
1H
m
October 11
m
1H
w
The impact of a rise in short-term Government rates on conven
tional rates charged borrowers outside the money centers is less easy
to measure. It is almost certain to take longer to work itself out, if,
indeed, it does at all.
CHANGES IN VOLUME OF BANK LOANS OUTSTANDING
The objective of all these shifts and churnings, it must be repeated,
was not higher interest rates for themselves. The real aim was a
dampening of the enthusiasm on the part of lending banks, and to
some degree of borrowers, for new private loans which would add fuel
to the inflationary pressures. Time is often needed for any monetary
or control program to work itself out. Some would contend that the
time since August 18 has not been long enough to influence the volume
of credit outstanding. On the other hand, those who would defend
monetary medicine as quick acting will find little comfort in the fact
that loan accounts kept rising persistently after the announcement of
the System’s restrictive policy. Appendix A, table 2, shows weekly
changes since June 21 in the aggregate volume of principal loan
categories.
In its August 18 statement, the Federal Reserve System had
pointed out that during the preceding 6 weeks, loans and holdings of
corporate and municipal securities by banks in leading cities had
expanded IK billion to a total of 33 billion. Since loans to brokers had
fallen by some 300 million, the increase in nonstock market loans to
business was even higher. So far as its statement was concerned, the
reference to the increase in loans and holdings of corporate and munici
pal securities was the only item which the Board felt it necessary to
note specifically in its statement in order to justify its action. “Such
an expansion under present conditions,” the Board stated, “is clearly
excessive.” The rate of expansion, however, continued undiminished
in the weeks that followed.
The total loans and holdings of corporate and municipal securities
by banks in leading cities increased $5,000,000,000 between June 21
and November 15. The increase has been continuous by weeks;
about $2,000,000,000 of it fell in the 8-week period between the
Korean attack and the announcement of the System’s desire to restiict
further expansion; an additional $3,000,000,000 increase has occurred
in the 13 weeks between August 16 and November 15. Commercial,
industrial and agricultural loans have shown increases each week,
rising to $16,000,000,000 in the first week of October as compared
with 13.5 billion in the spring of 1950. A similar expansion has taken
place in real estate and other loans which have advanced consistently
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
9
to a total of 11 billion on October 4. As table 2, appendix A, shows,
the increases have occurred not only in the New York financial center,
but in the leading cities outside of New York.
EXCHANGE OFFERING MADE IN NOVEMBER
The management of the public debt requires at intervals the refund
ing or paying off of issues as they mature or become callable. The
maturity schedule recently of publicly held securities is shown in
appendix A, table 3. Each operation will have to be handled as an
individual case. The type and terms of offering will in each instance
have to be carefully judged in the light of market conditions and needs
at the particular time. On the occasion of the September-October
refunding, opinions outside the Treasury Department differed con
cerning the most appropriate type and pricing of a security to be
offered. Such differences were dramatized by the incident which
began August 18. They are almost certain to reappear at intervals
as new refundings are necessary.
In December 1950 and January 1951 securities aggregating more
than $8,000,000,000 mature. The Secretary of the Treasury an
nounced on November 22 that owners of the maturing issues
would be offered a 1% percent 5-year Treasury note in exchange,
financial experts seem generally agreed that the type and rate on the
new offering were not only in accord with market conditions but highly
appropriate in view (1) of the heavy maturities of 1951, (2) the
desirability of intermediate or longer-time financing at this time,
and (3) the desirability at this time particularly of an offering of
assured attractiveness. A few nonfinancial corporations and some
other nonbanking investors were reported to favor a somewhat
shorter term. Others were said to prefer an issue of about 7 years7
maturity.
IV.
R
ole
of
G
overnm ent
D
ebt
in
M
onetary
P
o l ic y
For many years the coordination of policies of central banks and
treasuries was not a serious problem. Central banks were generally
restricted by statute or tradition with respect to their dealings in
Government securities, primarily because of unfortunate results of
excessive reliance by treasuries on central bank credit. Central bank
operations were largely confined to dealings in commercial paper and
rediscounts; monetary policies were governed by traditional rules of
the gold standard.
In recent years, however, the basic relationships between central
banks and treasuries have undergone fundamental changes. On the
one hand the techniques of central bank management have become
increasingly recognized as less automatic and much more dependent
upon the judgment of the responsible authorities than was formerly
believed, especially in the days of the gold standard. More impor
tantly, the tremendous increase in the volume of public debt during
the war has had the effect of increasing the importance of govern
mental treasuries in matters influencing the supply of money and
the volume of credit.
10
CREDIT AND DEBT CONTROL AND' ECONOMIC MOBILIZATION
OWNERSHIP OP THE GOVERNMENT DEBT
The Treasury, faced with the necessity of raising large sums of
money during the period of war finance, had to sell large quantities of
securities, to the commercial banks and must continue to refund a
portion of maturing issues through the banks. Commercial banks,
therefore, now hold large amounts of Government securities. So
long as the price convertibility of these securities is maintained, they
can readily be turned into reserves, which provide the basis for a
further multiple credit expansion. Purchases by the Federal Reserve
from other holders may also add to the supply of bank reserves. Esti
mated distribution of ownership of interest-bearing Federal securities
held by the public is shown in table 4.
T a b l e 4. — Ownership
of interest-bearing TJ. S. Government securities held by the
public June SO1
[In billions of dollars]
1945
1947
1950
1945
1947
1950
Percent Percent Percent
25.2
29.7
32.1
11.2
9.8
9.2*
4.1
5.4
5.3
12.8
9.0
10.9*
2.3
3.2
3.8
Nonbank investors:
Individuals
_
_ ___
Insurance companies___________________________
Mutual savings banks_________________________
Other corporations and associations_____________
State and local governments____________________
58.5
22.7
9.6
29.8
5.3
66.1
25.0
12.1
20.1
7.1
69.7
20.1
11.6
23.8
8.2
Total.......................................................................
125.9
130.5
133.4
54.3
58.6
61.3
Banks:
Commercial___________________________________
Federal Reserve_______________________________
84.2
21.8
70.0
21.9
65.7
18.3
36.3
9.4
31.5
9.8
30.2*
8.4
Total_______________________________________
106.0
91.9
84.0
45.7
41.3
38.6-
Total held by the public1____________________
231.9
222.4
217.4
100.0
100.0
100.0*
i Excludes holdings of Federal Government agencies and trust funds.
Source: Annual Reports of Secretary of Treasury and Treasury Bulletins.
Considerable progress has been made since the war toward placing*
a larger portion of the debt in the hands of nonbank investors. The
total debt held by the public— that is, outside Federal Government
investment accounts— has been reduced in the 5 years ending June 30,.
1950, by 14.5 billion dollars. Portfolios of commercial banks and
Federal Reserve banks have declined 20 billion dollars, while hold
ings of nonbank investors have increased 7.5 billion. Thus com
mercial bank ownership of Government debt held by the public has
been cut from over 36 percent in 1945 to less than 30 percent in 1950.
The amount of savings bonds outstanding has expanded throughout
the postwar period, and the portion of the total debt held by indi
viduals has increased by 11 billion dollars, to nearly 70 billion dollars,,
or one-fifth more than in 1945. Other investors which have increased
their holdings over this period are State and local governments and
mutual savings banks, whose holdings rose by 3 billion and 2 billion
dollars, respectively. Corporations and associations and insurance
companies reduced their holdings, in part to finance postwar capital
expansion.
CREDIT AND DEBT CONTROL AND' ECONOMIC MOBILIZATION
11
HEAVY MATURITIES IN THE NEAR FUTURE
When the public debt is of such a size that its long shadow is cast
over all credit arrangements, so that its management becomes a major
factor in the maintenance of economic stability, its due dates as well
as ownership and cost assume utmost importance. Appendix A, table
3, summarizes the maturity schedule facing the United States Govern
ment on its interest-bearing public marketable securities. A glance
at the list of early maturities shows better than any data on interest
rates or cost data why the Treasury is concerned about the mainte
nance of “a stable and confident situation in the market.”
The Treasury faces the task of refunding 32.3 billion dollars of
publicly held issues maturing in the calendar year 1951. This does
not include 13 billion of 91-day Treasury bills that are ordinarily
rolled over every 3 months. In addition, nearly 12 billion of bonds
with relatively high coupon rates become callable. Whether these
are refunded at their earliest call date will, of course, depend upon
market conditions at the time. If they are called, as now seems
probable, the refunding task for 1951 will involve more than 44 billion
dollars, nearly one-third of the total marketable debt exclusive of
bills.
When and how much more the Treasury may have to raise by new
borrowing is unknown. With defense expenditures increasing rapidly
only a courageous tax policy can save the Treasury from the necessity
of large new issues. Thus, in addition to the enormous refunding
task in forthcoming months there is the probability that the Treasury
may have to raise several billions in net new money.
In the face of the ever-present need to keep the credit of the Gov
ernment on a solid foundation, the Treasury must strive for three
objectives: (1) To place as large a part of the debt as practicable in
nonbank hands, (2) to fund as much as possible into longer-term
maturities, (3) to manage the debt at minimum cost to the Govern
ment.
The last point is so apparent that it often becomes the dominant
consideration. Obviously, the cost of carrying the debt might be
made even lower than it is today, by tipping the scale of maturities
more and more toward lower-rate short-term bills and certificates.
There is no one “right” apportionment of debt by maturities or be
tween short- and long-term issues. In the past 3 or 4 years there has.
been a tendency toward increasing concentration of the marketable
debt in the shorter maturities. As the first part of table 5 shows,
the amount of marketable debt outstanding has been reduced 34 billion
dollars since mid-1946 while the amount maturing in over 5 years
declined by 31 billion. As may be seen from the second part of table
5, the proportion of marketable debt due or callable in under 3 years
has increased from a midyear low of 38 percent in June 1947 to 52
percent in mid-1950. The average maturity of the marketable debt
has dropped from about
years in June 1947 to slightly over 6 years
at the present time. The present level, however, approximates the
levels of 1943-44.
7S276— 51------ 2
12
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
T a b l e 5 . — Marketable
public debt outstanding by period to due or first call datet
June 80, 1946-50
[In billions of dollars]
Due or callable—
June 30
1946.....................................................................................
1947....................................................................................
1948....................................................................................
1949....................................................................................
1960.....................................................................................
Within
1 year
1-3
years
3-i5
years
62.1
52.4
49.9
52.3
42.4
17.0
13.4
18.0
29.1
38.5
18.0
29.1
28.1
10.1
13.3
5-10 After 10
years
years
32.8
18.9
10.5
15.1
15.9
Total
59.7
54.8
53.9
48.6
45.2
189.6
168.7
160.4
155.2
155.3
31.4
32.5
33.6
31.3
29.1
100.0
100.0
100.0
100.0
100.0
PERCENTAGE OF TOTAL
1946.....................................................................................
1947.....................................................................................
1948....................................................................................
1949.....................................................................................
1950.....................................................................................
32.8
31.1
31.1
33.7
27.3
9.0
7.9
11.2
18.8
24.8
9.5
17.3
17.5
6.5
8.6
17.3
11.2
6.6
9.7
10.2
Computed from Treasury Bulletin tables.
IN T E R E S T
O N T H E P U B L IC D E B T
The sheer size of the debt is important. The inertia of such a mass
of debt can hardly be ignored as a determinant of economic stabiliza
tion or mobilization. But, the burden of the national debt ought not
only to be measured by the principal amount—now about 257 billion
dollars— but also by its annual carrying charge in relation to current
income. Appendix A, table 4, compares the actual annual expenditures
for interest on the public debt with the national income. Since World
War II, interest has been equivalent to some 2.5 percent of national
income compared with an average of 1.3 percent during the 1930,s.
Though such an increase is considerable, it is always well to remember
that the relative burden of a given debt may be cut not only (1) by
paring the interest cost through debt retirement or otherwise, but,
(2) even more effectively, by the growth of national income.
Another relationship throwing light upon the burden of the debt is
the burden of taxes levied to meet the annual interest charge. Ap
pendix A, table 4, shows also the portion of Federal budget receipts
necessary to pay interest on the Federal outstanding debt. There are
those who contend that the taxes and interest charges on an internally
held debt are of little moment because they represent merely transfer
payments. While it is true that a debt “owed to ourselves” is not to
be measured as are the debts of individual debtors, one cannot regard
lateral transfers of income from one group of the population to another
to be without effect or significance. Taxes constitute eventually not
only offsets but deterrents.
In postwar years about one-eighth of all Federal receipts have gone
for the payment of interest. The percentage is, of course, greatly
affected by the enormously increased expenditures for other govern
mental purposes. That is why it is no higher than and in most cases
is well below that for any peacetime year since before World War I.
Interest payments on the public debt for 1950 and 1951 of nearly
$5,700,000,000 each year are approximately $1,000,000,000 higher than
interest payments were in 1946. These increased interest charges
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
13
added to total Government expenditures are part of the total out
lays which ultimately taxpayers will have to meet. They occurred
in spite of a substantial reduction in the amount outstanding. Dur
ing the fiscal year 1946, the Government debt reached a peak of
$280,000,000,000, from which it has been reduced by nearly 10 per
cent, principally through the application of Treasury cash.
There are several explanations for the increased annual charge.
The $1,000,000,000 increase in interest cost since the fiscal year 1946,
when the debt was at its peak, is largely due to higher interest paid or
accruing on savings bonds. Series E and F savings bonds earn little
interest in the early part of their term. But as the maturity date
approaches interest accumulates at an increasing rate. About
$500,000,000 more interest was accrued on these issues in the fiscal
year 1950 than in fiscal 1946. An increase in the outstanding amount
of series G savings bonds during this period also accounted for a rise
of $200,000,000 in interest cost, while interest on the growing amount
of special issues held by Treasury investment funds accounted for an
additional $300,000,000.
Interest paid on marketable Treasury bonds showed little change.
Market short-term interest rates increased during this period, how
ever, with the average computed rate on Treasury bills rising from
0.381 percent in 1946 to 1.187 percent in 1950, and on Treasury
certificates rising from 0.875 percent to about 1.20 percent. These
changes alone on amounts presently outstanding added about
$160,000,000 to the gross annual cost which taxpayers must pay in
support of the Government debt. The effect on the over-all interest
cost of the marketable debt was partially offset by the retirement of
highrcoupon maturing issues and a reduction in the total amount of
marketable securities outstanding.
COST OF A GIVEN RISE IN INTEREST RATES
Figures on the cost to the Treasury of a given rise in the interest
rate on some particular type of security are not entirely easy to
measure. In the first place, shifts taking place between types of
issues outstanding may result in an actual decrease in the interest cost
even though interest rates per unit were rising. Often these shifts
arise from purely technical or legal limitations; the difference between
a 13-month note and a 12-month certificate, for example, is less
important economically than their segregation in statistics and
reports suggests.
In addition to the computed average interest rates on each class of
security, appendix A, table 5, shows the relative weight in the Govern
ment’s annual interest bill of short-term issues, nonmarketable issues,
and the special issues held by the Government trust funds.
About 15 percent of the annual interest charge on the interestbearing Federal debt is paid over to Government trust funds (appendix
A, table 5, third section). Nearly one-third of the interest cost is
attributable to the nonmarketable issues, chiefly series E bonds.
Finally, chiefly because rates are low, only about 10 percent of the
entire annual cost arises from the marketable securities issued for
short terms— bills, certificates, and notes.
A further caution is necessary respecting the significance attached to
a given rise in the rate of interest on Government securities as it
14
CREiDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
relates to the debt-carrying cost of the Government. A considerable
part of all interest expenditures is recovered through income taxes paid
by the recipients. One should, of course, not press the tax-recovery
argument too far; the same sort of net-cost argument might be
applied to most types of Government expenditures.
The cost of rising interest rates maj be illustrated by examples
particularly appropriate to the current inflationary situation. In the
12 months beginning December 1, 1950, the Treasury Department, as
we have noted, will be called upon to refund maturing and callable
issues aggregating nearly $60,000,000,000 of maturing issues. If
money-market conditions should make it necessary to refund this
staggering sum at rates one-eighth percent above rates on the maturing
issues, the added interest cost would be $75,000,000 annually, allowing
nothing for tax recovery as an offsetting item.
It may be suggested that if rates rise by one-eighth percent for
refunding these early maturities a similar rise will undoubtedly have
to be faced for subsequent maturities. The total marketable interestbearing debt is now about $155,000,000,000. One-eighth percent on*
this amount is approximately $200,000,000. After allowance for tax
recovery the net amount will be substantially less. In making cal
culations based on such an assumption, however, it should be kept in
mind that some of the debt has many years to run before refunding is
necessary, that some of the issues already have relatively high coupon
rates, and that changes in short-term rates might occur without
affecting rates of refunding into longer-term issues. Interest rates
may show considerable fluctuations in the interim. By the time the
refunding must be done rates may be lower again.
Important as added costs by way of interest burden may be, their
significance can be seen in proper perspective only by considering other
costs of Government and the effect of inflation on these costs. The
Congress recently passed a supplemental national defense appropria
tion of $16,000,000,000. In connection with it, the Air Forces
pointed out to a House Armed Services subcommittee that a rise in
costs of 7 to 8 percent more than anticipated had lessened Air Force
purchasing power between April and September 1950 by the equivalent
of 750 F-86 jet fighter planes. As a result the purchase of 4,400 new
planes programed was expected to cost some $300,000,000 over the
original estimates made just a few months previously. No wonder
Senator Lyndon Johnson recently warned the Congress “rising prices
are making our defense cost calculations empty, tentative guesses.”
No wonder the Senate Committee on Appropriations was “pro
foundly disturbed by the untimely increasing prices of commodities
affecting national defense.” The committee, in its report, went on
to say that analysis of information filed with it by the Secretary of
Defense “ carries the startling information that inflation has cut the
value of the dollars of the sums appropriated for defense since preKorea by approximately $3,000,000,000.” Other authorities have
pointed out that price rises resulted in substantially offsetting or
eating up the increased taxes levied on individuals and corporations
by the Revenue Act and the Excess Profits Tax Act of 1950.
In the months since April the purchasing power of the defense*
dollar has been cut inestimably. Direct price comparisons can only
be made on relatively standard type items but the changes in the
CREDIT AND DEBT CONTROL AND' ECONOMIC MOBILIZATION
15
price of representative items are suggestive. The increase in the
price of crude rubber between April and December 1950 amounted
to 210 percent; fuel oil, west coast, 112 percent; tires 38 percent;
beach tractor, 6.4 percent; wire rope, 100 percent; cloth, 40 percent;
and manufactured military communication equipment from 20 to as
much as 240 percent on some items. A table showing military pro
curement price trends on selected raw materials and standard items
prepared by .the Office of the Secretary of Defense is included in
appendix A, table 6. Costs to the Government— the largest purchaser
of goods and services in the country— have thus risen as much as and
in many cases more than costs to housekeepers and citizens.
Suppose by way of illustration that defense or general governmental
costs advance as a result of price rises by $1,000,000,000 over what
they would have been had the price rise not occurred. On the sup
plemental defense appropriation alone, a general rise of all prices
averaging only 6% percent would mean loss of purchasing power of
that magnitude.
This billion dollars, like every other dollar that the Government
must pay in added costs, is effectively added to the Government debt
either by the necessity for increased borrowing or by a diversion of
money otherwise available for debt reduction. The added costs are
thus frozen into the Government debt for all time. No matter what
happens to interest rates the Government must pay interest on those
extra dollars until the time when the debt can be repaid. The average
rate being paid on the interest-bearing debt today is about 2.2 percent
or $22,000,000 each year on each $1,000,000,000 of debt.
Rising prices and rising costs of Government add directly to the
annual burden of interest on the debt. If one could be sure that
moderate credit restriction would stop these rising costs, the resulting
rise in interest rates on the debt would be a small or reasonable price
to pay. Unfortunately one cannot be sure that it may help to keep
prices from rising as much as they would have otherwise. There is,
indeed, a responsible body of opmion in the financial and business
world contending that no moderate rise in interest rates will halt or
retard inflation so long as Federal deficits continue.
RESTRAINING EFFECTS OF HIGHER SHORT-TERM RATES
While the increased cost to the Government resulting from a rise in
the interest rate on the part of the debt may be calculated more or
less precisely, the effectiveness of higher interest rates in dampening
inflationary forces is unmeasurable and hidden. Thus, the case for a
policy of monetary restraint is likely to suffer in discussion from having
to depend on prediction and deduction for its justification. There
are no statistical measures by which to answer conclusively such
questions as: How effective can action be, such as that taken by the
Reserve authorities last August? How is a change in the reserve
status of member banks translated into a decrease in inflationary
demand?
The policy proposed by the Reserve authorities was intended to
tighten up bank reserves by raising their cost to member banks. The
increased cost of reserves would result from the higher discount rate
and from reduced Reserve System purchases of Government securities
16
CREDIT AND DEBT CONTROL AND' ECONOMIC MOBILIZATION
and then only at higher yields. These higher yields, it is argued, not
only induce more nonbank investors to buy Government securities
but also restrain banks from selling them, for they are unable to do so
without incurring some capital losses and a greater sacrifice in terms
of yield. But the amount of reserve balances held by member banks
is not necessarily the final or most important factor determining the
amount which they are willing to lend to their customers. Many
influences, other than the rate, are likely to come into play; while not
all of these considerations are wholly rational in the strict economic
sense, they are still of utmost importance in determining the amount
of credit extended.
A tighter reserve policy on the part of the monetary authorities is
a signal to members calling for a more cautious attitude in credit
expansion. The reaction of the commercial banker to such signs may
take the form not only of higher rates charged to customers, but is;
even more likely to express itself in something akin to actual
“rationing” of credit as well. Would-be borrowers may be “chilled”
in various bankerlike ways. Loans granted may be pared below the
amount sought in the borrowers’ applications.
In due time the short-term rate may be expected to influence long
term rates as well. In various ways and places the two rates are in
competition with each other. There are some lenders, particularly
the banks themselves, that lend in both the long-term and short-term
markets. Portfolios are shifted from one to the other maturity, tend
ing to equalize their over-all attractiveness. Borrowers likewise may
finance their operations by any one of several possible combinations
between long-term and short-term borrowing. This in turn tends to
make factors affecting one rate spread their influence to other rates.
Like the bankers, their industrial and commercial customers are
not necessarily influenced by every change in interest rates. Cheap
money is only one of the factors that encourages private investment.
There are many others of greater importance. In fact, a recent study
published by the Department of Commerce shows that cost of funds
is almost an insignificant item affecting changes in investment plans.
The table below adapted from that study shows that in 1949, despite
the emphasis given in the financial press to availability and cost of
capital, other factors were of immensely greater importance. (See
table 6.) It provides the elements of a quantitative answer to the
questions raised by the Subcommittee on Investment of the Joint
Committee on the Economic Report when it asked:8
What is the relative role played (a) by a persistent flow of orders in excess of
ability to deliver, (b) by inventions, patents, and improvements in technique,
(c) by increases or shifts in the population, (d) by discovery of new sources of
supply, (e) by need or desire to get ahead of, or keep abreast of, competitors,
(/) by changes in governmental tax, tariff, fiscal, or regulatory policies, (g) by
debt-equity ratios or liquidity or ready availability of funds, (h) by interest rates
and costs of financing, if) by cost levels of labor, building materials, and equip
ment, 0) by prices and market prospects for the industry, (k) by stock-market
activity and the general business outlook, and other factors?
8 Volume and Stability of Private Investment, Report of the Subcommittee on Investment, S. Doc. N<v
149,81st Cong., 2d sess., p. 27.
CREDIT AND DEBT CONTROL AND1 ECONOMIC MOBILIZATION
T a b l e 6 .—
17
Frequency distribution of explanatory factors for changes in investment
plans, 1949 1
Changes from expectations
in—
Percentage of firms
designating fac
tor as principal
reason for—
Changes from expectations
in—
Percentage of firms
designating fac
tor as principal
reason for—
Increased Decreased
outlays
outlays
Increased Decreased
outlays
outlays
Profit potentials:
Sales outlook ____ _
Competitive conditions...
New products__________
Net earnings after taxes__
10.4
6.9
6.4
5.2
34.1
Plant and cost factors.—Con.
Current expenses.____ —
1.7
.8
IOI
Total....... ........... ...........
39.2
Total..............................
28.9
47.0
Financial considerations:
Availability and cost of
Hoht finanninf?
Availability and cost of
equity capital................
Total_______________
1.2
1.2
1.5
15.6
15.1
30.7
3.8
9.9
13.7
100.0
100.0
Plant and cost factors:
Plant and equipment
supply situation.......
Plant and equipment
costs_________________
Availability of labor and
materials........................
Working capital requiremont<3
Technology.......................
Time lag in placing order
or contract___________
16.8
9.8
12.7
3.8
1.7
4.0
9.1
3.0
Miscellaneous.
Routine under and over
estimate______________
All other............................
Total_________________
2.3
7.6
All factors____________
4.5
37.8
1.5
» 305 manufacturing firms; changes in actual outlays over those anticipated at beginning of year.
Source: Survey of Current Business, December 1950, grouping of items by staff of joint committee.
Mr. R. G. Hawtrey, in his A Century of Bank Rate, comments on
the connection between the rates of interest and the demand for funds
as follows:
Now a variation even of less than one-eighth percent in the long-term rate of
interest ought, theoretically and in the long run, to have a definite effect for what
it is worth on the volume of capital outlay. That is to say, if the rate of interest
operates as a criterion of all projects for capital outlay, separating those which
promise a sufficient yield to be remunerative from those which do not, then any
rise, however small, in the rate ought to transfer a corresponding slice of projects
from the remunerative to the unremunerative class. But there is in reality no
close adjustment of prospective yield to the rate of interest. Most of the indus
trial projects offered for exploitation at any time promise yields ever so far above
the rate of interest. But they have to wait till promoters combining the necessary
qualifications of technical, commercial and industrial ability and knowledge,
with access to money, become available. The limited number of people composing
this inner ring of specialized promoters will want to be satisfied that the projects
they take up will yield them a commensurate profit, and the rate of interest cal
culated on money raised will probably be no more than a very moderate deduc
tion from this profit. It is not even true that the most profitable projects are
dealt with first. It is a matter of chance which project a promoter will select
from the sphere of his competence. It may easily happen that an exceptionally
profitable project has to wait a long time, while money is being spent by those
qualified to take it up on much less remunerative openings, or even wasted on
enterprises that turn out complete failures.
The idea of the possible openings for investment forming a series in order of
remunerativeness, so that all promising a yield in excess of the rate of interest
prevailing at the moment have already been filled, and a fall in the rate will bring
into exploitation a nicely calculated segment of the remainder, as a slice is cut
off a sausage, is an academic fiction * * *.9
•Hawtrey, R. G., A Century of Bank Rate, Longmans, Green & Co , 1938, pp. 170-171.
18
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
Changes in interest rates may, of course, have an effect on some types
of borrowers. This same Mr. Hawtrey, for example, has elsewhere
stressed the importance of changes in interest rates on the borrowing
of traders, particularly wholesalers.10 Even in such cases, there are
certain to be times when an expected rise in the price of raw materials
or a threatened shortage of some item are far more important de
terminants of inventory policy and short-term borrowing than
changes in the interest rate.
The importance of any given rate of interest may, of course, vary
from time to time, from place to place. There is thus no single
“ rate of interest.” Great error can indeed result from thinking of
the relationship between rates on different maturities as part of a
“ structure” of interest rates. The term “ structure” suggests rigid
relationships and differentials between differing maturities and
qualities. That the differentials are not uniform is sufficiently evi
denced by recalling the fact that short-term rates have not always
been below long-term rates as they have been in the past two decades.
Differences reflect variations in the supply and demand factors in
different segments of the money and capital markets and anticipations
as to future demands and supplies.
The fact that the two rates, long term and short term, tend to
move together establishes no necessary causal connection between
them. It may be that both are influenced by a common outside cause.
This common outside cause is likely to be a reflection of what bankers
and investors expect to happen to interest rates in the future. When a
banker is considering short-term loans it is a sobering thought to
remember that a variation of one-eighth percent in the yield of a
20-year bond means a change in capital values of several points.
With long-term money rates at 2% percent, a rise in the market rate
of interest to 3 percent will, in the case of a 15-year bond, wipe
out all interest income for nearly 3 years.
Examination of table 7 reflecting the capital depreciation involved
in increasing yields for selected rates and maturities will illustrate the
thoughts which must flash through a banker’s mind when contemplat
ing purchase of a long-term investment. Even the change between
a yield of 2 percent and a yield of 2% percent on a 10-year bond
amounts to little less than a full year’s interest lost. If we think of
larger changes in the yield basis, the effect of capital depreciation and
its influence on banking choice between the short-term loans and long
term investments is even greater. Banks generally hold short-term
rather than long-term securities so that they can slnft out of them to
meet demands upon them without loss. If, however, there is assurance
that the long-term rate will not rise, then banks need make no dis
tinction. Under such circumstances the long- and short-term rates
tend to be the same.
While a rise in yield and a fall in the price of bonds are but two sides
of the same coin, the effects are quite different. A fall in the price of
bonds is in the present. It affects immediately the bankers’ viewpoint
in dealing with present-day decisions. While the bank’s solvency and
his returns may not be affected if he holds the bonds to maturity,
liquidity and current profits are reduced because the bond cannot be
sold without a capital loss. The effect is therefore more immediate
10Hawtrey, R . G.» Currency and Credit, Longmans, Green & Co., 1923, p. 25.
CREDIT AND DEBT CONTROL AND* ECONOMIC MOBILIZATION
19
and its impact more striking than is the effect of the rise in rates which
only makes itself felt on assets acquired in the future. The burden
resulting from a rise in interest rates extending into the future im
presses the economist who sees it working out through investment
plans and relative costs. But to the banker the potential loss of
capital value consequent to a rise in interest rates is likely to be more
serious and shocking because it reduces not only his own liquidity
but may destroy present collateral values as well. Where a fall in
yield creates opportunities which must be slowly appraised and recog
nized, the rise in yield is more compelling’ in its certainty and
immediacy.
T a b l e 7. — Equivalent
bond values and yields—Selected rates and maturities
Coupon rate
2 percent.......................................................
2H percent....................................................
2H percent....................................................
2H percent....................................................
Yield basis
Percent
2
2H
2H
2H
3
2H
2H
2H
3
3H
2H
2H
2U
3
3H
2H
2H
2H
3
3H
5 years
100.00
99.40
98.82
97.66
95.39
100.00
98.83
97.68
96.54
95.42
101.18
100.00
98.84
97.68
95.45
102.35
101.17
100.00
98.85
97.71
10 years
100.00
98.90
97.77
95.60
91.42
100.00
97.80
95.65
93.56
91.52
102.23
100.00
97.83
95.71
91.62
104.46
102.20
100.00
97.85
95.76
15 years
100.00
98.40
96.83
93.78
87.99
100.00
96.89
93.89
90.99
88.20
103.17
100.00
96.94
94.00
88.41
106.34
103.11
100.00
97.00
94.10
20 years
100.00
97.97
95.99
92.17
85.04
100.00
96.08
92.35
88.78
85.38
104.01
100.00
96.17
92.52
85.70
108.02
103.92
100.00
96.26
92.69
The difference is important to policy and to would-be monetary
manipulators. Mr. Frederick R. Macaulay of the National Bureau
of Economic Research, suggests that monetary manipulation may be
expected to be more effective in an inflationary situation such as the
country faces today, than at some other times. “An examination of
the historical facts,” Macaulay reports, “strongly supports the thesis
that a rise in the yield of interest-bearing obligations of the highest
grade— whether they be of long or short maturity—has greater power
to terminate a period of prosperity than has a fall in their yields to
initiate such a period.” 11
It is difficult to answer the question posed at the beginning of this
section: What are the restraining effects of action such as that recently
taken by the Reserve authorities? Views of a few leading economists
were sought on this question.12
Economists as a professional group are trained to trace the long-run
consequences of changes in economic data and in the business climate;
their task is to state the probable influence of any given factor intro
duced into the existing economic situation. It is not surprising,
therefore, that the economists from whom comments were received
were agreed that “other things being equal” any rise in interest rates
11 Macaulay, Frederick R., Some Theoretical Problems Suggested by the Movements of Interest Rates,
Bond Yields, and Stock Prices in the United States Since 1856, National Bureau of Economic Research,
New York, 1938, p. 42.
12Their replies are presented in appendix H.
20
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
should theoretically work in the direction of discouraging borrowing.
In spite of general agreement as to theoretical effects, sincere differ
ences exist among the economists as to the practical significance of
rising interest rates when other things are not equal.
Several of those replying were convinced that the effect of small
interest rate increases at this time is likely to be negligible in the face
of the strong inflationary tide. Others point out that the only reason
for paying interest on Government securities is to make the securities
sufficiently attractive so that they may be sold to savers, and buyers
other than the Federal Reserve banks. Interest payments are seen
as the only trustworthy block separating sound currency from the
temptations of a greenback type of inflation. Since variations in
interest rates offer a means of varying the attractiveness of Federal
securities, even small increases in the rate earned thereon are desirable.
But even those who insist upon the theoretical importance of small
changes have had in the present instance to recognize the strong
inductive evidence offered by persistent loan expansion over recent
months.
PROPOSED PLANS FOR SPECIAL RESERVES
We have spoken of the problems of monetary control of inflationary
tendencies, of the role of the Government debt, of the operation* of
interest rate changes, and the problem of capital depreciation. But
the important thing behind all such discussion, in times like the
present, is the maintenance of the Government credit on a stable
basis. All agencies agree on that as the objective, no matter what
sincere differences arise concerning means.
People sometimes speak ominously of the threat to Government
credit implicit in the evidence of a higher interest paid by the Govern
ment. The assumption is that any rise in rates which the Govern
ment must pay is an expression of a lowered market appraisal. Be
cause second-grade bonds bear higher rates of interest than firstgrade bonds, it is assumed that higher yield on Governments at one
time than at another is an indication of greater risk. A second point
sometimes cited as evidence of the deterioration of Government credit
is the decline of a Government bond to a price below par. “Below
par” is taken as symptomatic of a loss of credit standing, or at least
of the fear that it will be so interpreted by the world at large. Neither
of these measures reflect the true threat to Government credit.
The real threat to Government credit comes when people foresee
•a fall in the value of their money invested in Government bonds.
When investors grow reluctant to ouy Government bonds because of
the fear of loss in the purchasing power of the future dollars, Govern
ment credit is endangered far more than any rise in interest rates or
fall below par of any issue can possibly signify. It is then that we
must “ choose between maintaining the price of Government bonds
and maintaining the real value of those bonds.”
Recognition of the dilemma presented inevitably drives us to con
sidering whether or not some ingenious device may not make it possible
to maintain stability in the security market while dampening inflation
ary pressure inherent in bank-held Government debt.13
One proposal, granting additional authority to the Federal Reserve
with respect to special commercial bank reserves, was recommended
*» Compare R . S. Sayers, Central Banking in the Light of Recent British and American Experience,
Quarterly Journal of Economics, M ay 1949.
CREDIT AND 'DEBT CONTROL AND ECONOMTC MOBILIZATION
21
by the Board of Governors for use as an anti-inflationary weapon
under the circumstances which prevailed at the end of World War II.
While the situation today differs materially, the suggestion is worthy
of reexamination. Variations and adaptations have been suggested by
others with a view to perfecting the application and administration of
the device. The Board’s annual report of 1945 outlined the special
reserve plan as follows:
*
* * empower the Board of Governors to require all commercial banks to
hold a specified percentage of Treasury bills and certificates as secondary reserves
against their net demand deposits. To aid banks in meeting this requirement,
they should be permitted to hold vault cash or excess reserves in lieu of Govern
ment securities. This measure would result in stability of interest yields on short
term Government securities and, therefore, of the cost of the public debt. Like
the bond portfolio limitation, it would provide a measure for regulating com
mercial banks’ demands for short-term Government securities relative to their
•demands for longer-term issues. At the same time, it would leave considerable
freedom for movement of interest yields on non-Government paper of short-term
maturity.
On November 25, 1947, the proposal was further explained before
the Joint Committee on the Economic Report by the then Chairman
of the Board of Governors, Mr. Eccles. In seeking an alternative to
restraining further bank credit expansion through the use of higher
interest rates he pointed to the special reserve requirements as being
the only proposal available which would—
not make the Government and the taxpayer bear the added cost of the restraint,
that will impose very little, if any, hardship on the banks, that will, in fact, have
a compensating aspect in that the restraint imposed would increase interest rates
on private borrowings without additional cost to the Government.14
The January 1948 Economic Report of the President, while not
necessarily endorsing the special reserve plan, called for a close study
of the proposal. The report of the staff of the Joint Economic Com
mittee pointed out that it met in part the Treasury objection to
measures of credit restriction which threaten to increase interest rates
and therefore to increase the burden of interest on the public debt as
outstanding securities mature and are refunded; that it would be
possible under such a regulation to increase reserve requirements much
more drastically than would otherwise be possible because in effect it
would give the banks some interest on their reserve balances.
THE PROBLEM IN FOREIGN COUNTRIES
Under diverse political regimes democratic countries of the world
have faced a similar problem of reconciling the dictates of monetary
policy with the problems of debt management. Some have adopted
the supplemental reserve requirements with variants; others have
tried selective credit controls, differential interest rates, bond limitation
plans, and still other devices.
In Mexico, for example, the secondary reserve requirements have
been employed to influence the kinds as well as the aggregate of bank
lending; types of loans which the authorities wish to promote are in
cluded along with Government securities among assets filling the
secondary reserve requirements.
14 Further discussion of the special reserve plan by former Chairman Eccles is given in appendix G: Item
1, excerpt from hearings before the Joint Committee on the Economic Report, Anti-Inflation Program as
Recommended in the President's Message of November 17,1947 (80th Cong., 1st sess., pp. 142-144). Item
•2, excerpt from an article, The Defense of the Dollar, Fortune magazine, November 1950.
22
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
In Australia, commercial banks are required to maintain in special
accounts at the central bank a proportion of new assets as stipulated
by the bank. Virtually all increases in deposits in excess of 1939 levels
were once impounded in these accounts; the percentage of new funds
thus frozen may then be varied as inflationary pressures are intensified
or relaxed.
In France, each bank was required to continue to hold the same
volume of Government securities that it held on October 1, 1948, and
to invest a stated percentage of any increase in deposits in Government
securities. The decision to freeze existing holdings rather than apply
a uniform reserve percentage had the advantage of recognizing great
differences among banks in their existing asset structures. The effect
has been that commercial banks have been prevented from selling
Government securities in order to obtain funds with which to increase
inflationary private lending.
Beside quantitative control on credit expansion, many countries
have employed qualitative controls. In the United Kingdom, the
Capital Issues Committee established during the war with responsi
bility for approving flotations of new industrial issues has been con
tinued and its criteria communicated to commercial banks for their
guidance in approving new business loans. Qualitative criteria govern
ing commercial bank lending have likewise been established in Aus
tralia and elsewhere. In the Netherlands all bank credits in excess of
a stated minimum must be approved by the central bank.
The examples given have been chosen from the more complete dis
cussion of procedures and techniques employed in foreign countries
presented herewith in appendix I. Many of the techniques are
ingenious and new. Their variety suggests that there is no easy
answer to the problem of treasury-central bank relationships in the
postwar world. But the variety of ways in which the problem has
been met points also to the desirability of thorough study of the issues
in this country in the optimistic belief that a democratic American
solution can be found.
APPENDIXES
APPENDIX A
T a b l e 1.—
Money rates on U. 8 . Government and corporate securities {percent per
annum)
U. \3. Government securities
1949—July 2.................................................
Dec. 21...............................................
1950—June 17...............................................
June 24_____ _____ __________ ____
July 1.................................................
July 8.......................... - .....................
July 15................................................
July 22................................................
July 29................................................
Aug. 5................................................
Aug. 12...............................................
Aug. 19...............................................
Aug. 26...............................................
Sept. 2................................................
Sept. 9................................................
Sept. 16..............................................
Sept. 23..............................................
Sept. 30..............................................
Oct. 7..................................................
Oct. 14................................................
Oct. 21................................................
Oct. 28................................................
Nov. 4................................................
Nov. 11...............................................
Nov. 18...............................................
Nov. 25...............................................
Dec. 2...........- ....................................
Dec. 9.................................................
Dec. 16...............................................
Dec. 23...............................................
Dec. 30...............................................
3-month
bills
9- to 12month
certifi
cates
1.052
1.081
1.174
1.172
1.174
1.168
1.173
1.174
1.174
1.174
1.174
1.173
1.247
1.285
1.308
1.311
1.317
1.324
1.324
1.337
1.337
1.316
1.341
1.350
1.366
1.380
1.383
1.366
1.351
1.368
1.382
1.16
1.09
1.23
1.23
1.23
1.23
1.22
1.23
1.23
1.23
1.23
1.23
1.30
1.32
1.33
1.33
1.33
1.34
1.35
1.35
1.40
1.45
1.47
1.47
1.47
1.47
1.46
1.46
1.46
1.47
1.47
7- to 9year
bonds
1.60
1.67
1.82
1.84
1.86
1.85
1.84
1.83
1.82
1.82
1.83
1.82
1.80
1.84
1.87
1.89
1.89
1.90
1.91
1.94
1.96
1.96
1.96
1.95
1.94
1.94
1.96
1.98
1.97
1.96
1.98
Corporate
15 years
or more
bonds
2.34
2.18
2.32
2.34
2.34
2.34
2.34
2.34
2.34
2.34
2.34
2.34
2.32
2.33
2.35
2.37
2.37
2.37
2.37
2.38
2.39
2.38
2.39
2.38
2.37
2.37
2.38
2.39
2.39
2.38
2.39
Aaa
Baa
2.70
2.57
2.62
2.61
2.63
2.65
2.66
2.66
2.65
2.62
2.61
2.61
2.61
2.61
2.62
2.64
2.67
2.66
2.66
2.66
2.67
2.68
2.68
2.67
2.66
2.66
2.67
2.68
2.67
2.67
2.66
3.48
3.27
3.27
3.28
3.32
3.33
3.33
3.33
3.28
3.27
3.24
3.23
3.23
3.22
3.21
3.20
3.22
3.22
3.22
3.22
3.22
3.23
3.23
3.22
3.21
3.21
3.21
3.22
3.21
3.20
3.19
Source: Board of Governors of the Federal Reserve System.
23
24
CREDIT AND 'DEBT CONTROL AND1 ECONOMIC MOBILIZATION
T a b l e 2 . — Weekly
reporting member banks—-leading cities selected classes of loans
outstanding
[In billions of dollars]
Total loans and
securities1
1950—June 21_______________________
June 28_______________________
July 5 ...........................................
July 12_______________________
July 19...........................................
July 26...........................................
Aug. 2________________________
Aug. 9 _______________________
Aug. 16_______________________
Aug. 23_______________________
Aug. 30____ __________________
Sept. 6 _______________________
Sept. 13.........................................
Sept. 20.........................................
Sept. 27.........................................
Oct. 4................. ..........................
Oct. 11...........................................
Oct. 18...........................................
Oct. 26...................... ....................
Nov. 1...........................................
Nov. 8________________________
Nov. 15............................. ...........
Nov. 22_______________________
Nov. 29..........................................
Dec. 6...................... .................. .
Dec. 13..........................................
Dec. 20............... ..........................
Dec. 27...........................................
1951—Jan. 3.............................................
31.0
31.3
31.5
31.3
31.7
32.3
32.4
32.8
33.0
33.3
33.5
33.8
34.0
34.7
34.9
35.0
35.3
35.3
35.5
35.7
36.0
36.1
36.4
38.9
36.9
36.9
37.6
38.1
38.0
Outside
Outside.
Outside
New Leading New Leading
New
York
cities
York
Cities
York
City
City
City
21.8
21.9
22.1
22.0
22.2
22.5
22.5
22.8
23.0
23.2
23.3
23.6
23.7
24.0
24.9
25.0
24.6
24.6
24.8
25.0
25.2
25.3
25.4
25.6
25.6
25.7
26.0
26.3
26.1
i Other than U. S. Government obligations.
Source: Federal Reserve Bulletin, and weekly releases.
Real estate and To bro
kers and
other
dealers
for secu-
13.5
13.6
13.7
13.7
13.8
13.9
14.0
14.2
14.4
14.5
14.7
14.9
15.3
15.5
15.7
15.9
16.1
16.1
16.3
16.5
16.7
16.9
17.0
17.1
17.3
17.5
17.8
17.8
17.9
8.8
8.9
8.9
9.0
9.0
9.1
9.1
9.2
9.3
9.4
9.5
9.6
9.8
10.0
10.1
10.2
10.3
10.1
10.6
10.7
10.8
11.0
11.0
11.1
11.2
11.3
11.5
11.5
11.5
9.5
9.6
9.6
9.7
9.8
9.9
9.9
10.0
10.0
10.3
10.4
10.5
10.5
10.6
10.9
10.7
10.7
10.8
10.8
10.9
10.9
10.9
11.0
11.0
11.0
11.1
11.1
11.2
11.2
8.2
8.2
8.3
8.3
8.4
8.5
8.5
8.6
8.7
8.8
8.8
8.9
8.9
9.0
9.1
9.1
9.1
9.1
9.2
9.2
9.2
9.2
9.3
9.3
9.3
9.4
9.4
9.4
9.4
H
W s
Leading
cities
Commercial,
industrial and
agricultural
1.0
1.1
1.0
.9
.8
.8
.8
.8
.8
.8
.7
.7
.7
.8
.8
.8
.8
.7
.7
.8
.7
.8
.8
.8
.8
.8
.8
.8
.8
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
25
T a b l e 3. — Maturity
schedule of interest-bearing public marketable securities issued
by the U. S< Government and outstanding Oct. SI, 19501
[In millions of dollars]
Amount of maturities
Year and
month
Description of security *
1950—
December.. 13^-percent bond, Dec. 15,1950________________________
1951—
January___ lM-percent certificate, Jan. 1,1951_____________________
234-percent bond, June 15,1951-54______ ____ __________
1^-percent note, July 1,1951..............................................
J u ly __
__do___ __________________________________________
.do______ ______ ____ ____ ________________________
August....... lK-percent note, Aug. 1, 1951_________________________
September. 2-percent bond, Sept. 15, 1951-53___ __________________
3-percent bond, Sept. 15, 1951-55................................ ........
October___ IM-pereent note, Oct. 1,1951__________________________
1^-percent note, Oct. 15,1951_________________________
November. IM-percent note, Nov. 1,1951_________________________
December.. ^-percent bond, Dec. 15, 1951-53.....................................
2-percent bond, Dec. 15, 1951-55_______________________
19522Hrpercent bond, Mar. 15,1952-54___________________ _
March _
June______ 2-percent bond, June 15,1952-54_______________________
2J£percent -bond, June 15, 1952-55___________________ _
December.. 2-percent bond, Dec. 15, 1952-54_____________________
1953
.......... Total________ _____ _________________________________
1954 ................. : ___ do....................................................................................
1955 ................. ....... do......................................................................... .........
1956 ................. ....... do........................................................................... ........
1958
........... ____do________ ____ _________________________________
____do________ ____ _________________________________
1959
1960 ................. ....... do.............................................................................. .....
1961................... ____do...................................................................... .............
1962
............ ____do______________________________________________
1963................... ....... do............... .................................... ...............................
1964 ............... ____do___________________ ___________________________
1965 ............... ____do______________________________________________
1966 ................. ____do__________ ____________________________________
1967................... ....... do............................ ...... ................................................
1968 ................. ____do_____ ______________ __________________________
1969 ................. ____do______________________________________________
1970
....... ____do______________________________________________
1971................... ____do...................................................................................
1972
.......... ____do______________________________________________
Fixed
maturity
issues
Callable issues clas
sified b y year
of—
First
call
Final
maturity
*2,635
*5,373
2,741
886
4,818
5,351
1,918
5,940
5,254
4,675
5,365
50
1,627
7,986
755
1,118
510
1,024
5,825
1,501
8,662
725
681
2,611
6,253
919
8,754
1,485
9,104
17,138
3,491
681
1,449
4,804
2,611
27118“ ........8,"754
919
2,831
7,599
1,485
5,197
3,481
22,372 ....... 2,118
2,831
7,599
5,197
3,481
22,372
1 Excludes from 12 to 15 billion 91-day bills maturing and replaced about one-third each month.
3 It should be noted that callable issues appear twice in this column, once in the year of first call and again
in the year of final maturity.
* Exchange offering announced Nov. 22, 1950.
Source: Treasury Bulletin.
26
CKE.DIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
T a b l e 4 . — Interest
on Federal Public Debt in relation to national income and Federal
budget receipts, 1870-1950
[Billions of dollars]
Total
national
income1
1870.................................................................
1880.................................................................
1890.................................................................
1900.................................................................
1910.................................................................
1920.................................................................
1929.................................................................
1930.................................................................
1931.................................................................
1932.................................................................
1933.................................................................
1934.................................................................
1935.................................................................
1936.................................................................
1937.................................................................
1938.................................................................
1939.................................................................
1940.................................................................
1941.................................................................
1942.................................................................
1943.................................................................
1944.................................................................
1945.................................................................
1946.................................................................
1947................................... .............................
1948.................................................................
1949.................................................................
1950.................................................................
(*)
m
/3)
(3\
(3)
(3)
87.4
75.0
58.9
41.7
39.6
48.6
56.8
64.7
73.6
67.4
72.5
81.3
103.8
137.1
169.7
183.8
182.7
180.3
198.7
223.5
216.8
(*)
Govern
mental
receipts *
Interest
on public
debt*
0.41
.33
.40
.57
.68
6.69
4.03
4.18
3.12
1.92
2.02
3.06
3.73
4.07
4.98
5.80
5.10
5.26
7.23
12.70
22.20
43.90
44.76
40.03
40.04
42.21
38.25
37.05
0.13
.10
.04
.04
.02
1.02
.68
.66
.61
.59
.69
.76
.82
.74
.86
.93
.94
1.04
1.11
1.26
1.81
2.61
3.62
4.72
4.96
5.21
5.34
5.75
Interest on public debt
as percent of—
National
income
0.8
.9
1.0
1.4
1.7
1.6
1.4
1.1
1.2
1.4
1.3
1.3
1.1
.9
1.1
1.4
2.0
2.6
2.5
2.3
2.5
Federal
receipts
31.4
36.0
9.0
7.1
3.2
15.2
16.9
15.8
19.6
30.7
34.2
24.8
22.0
18.2
17.3
16.0
18.4
19.8
15.4
9.9
8.2
5.9
8.1
11.8
12.4
12.3
14.0
15.5
1 For year ending Dec. 31.
* For year ending June 30.
* Not available.
Sources: Treasury Bulletin, September 1950, and the Midyear Economic Report of the President, July
1950.
CREDIT AND DEBT CONTROL AND* ECONOMIC MOBILIZATION.
T a b l e 5. — Computed
27
interest charge and computed annual interest cost on Federal
securities, by types of issue, 1946-50
Marketable issues
End of fiscal year
Bills
Certifi
cates
Notes
Bonds
Total
Nonmarketable
issues
Special
issues
Total
Computed annual interest rate (percentage)
0.381
.382
1.014
1.176
1.187
1946............................
1947............................
1948............................
1949............................
1950............................
0.875
.875
1.042
1.225
1.163
1.289
1.448
1.204
1.375
1.344
2.307
2.307
2.309
2.313
2.322
1.773
1.871
1.941
2.000
1.957
2.567
2.593
2.623
2.629
2.569
2.448
2.510
2.588
2.596
2.589
1.996
2.107
2.182
2.236
2.200
Estimated interest cost, annual basis (millions of dollars)
65
60
139
136
161
1946............................
1947............................
1948...........................
1949............................
1950............................
235
118
137
49
274
305
221
235
360
214
2,757
2,757
2,601
2,558
2,391
3,362
3,156
3,112
3,103
3,040
1,442
1,531
1,561
1,652
1,735
547
687
782
851
838
5,351
5,374
5,455
5,606
5,613
Percentage of total interest cost, annual basis (percentage)
1.21
1.12
2.54
2.43
2.87
1946............................
1947......... ..................
1948............................
1949............................
1950............................
4.4
2.2
2.5
.9
4.9
5.70
4.11
4.31
6.42
3.81
51.5
51.3
47.7
45.6
42.6
62.9
58.7
57.1
55.3
54.2
26.9
28.5
28.6
29.5
30.9
10.2
12.8
14.3
15.2
14.9
100
100
100
100
100
Source: Computed from Treasury Bulletin, September 1960.
N ote.—T he amounts of computed annual interest charges shown here differ from the actual expenditures
for interest for a number of reasons, including (1) interest charges on series E and F savings bonds are com
puted at average rate of return (2.90 percent and 2.63 percent, respectively), whereas expenditures include
additions to redemption values each year, which are smaller in the early years and larger in the latter years
of the life of these bonds, (2) expenditure before fiscal year 1960 for issues other than savings bonds do not
include interest accumulated but not paid, whereas those for 1950 include $226,000,000 accumulated in
previous years; (3) variations during year in amounts of different types of issues outstanding and in coupon
rates.
T a b l e 6. — Military
procurement price trends
Since the spring of 1950, prices have risen markedly, particularly after the
start of the conflict in Korea. The Bureau of Labor Statistics’ wholesale price
index is now at an all-time high, reaching a level of 171.7 on November 28, a
rise of 12.3 percent since April 1950 and an increase of 2.5 percent during the past
2 months. Many basic raw materials have increased in price to an even greater
extent than have finished commodities, including a number of key commodities
used in the manufacture of items required by the armed services, as shown by
the following table:
Price
Commodity
Burlap........................................
Copper........................................
Cotton........................................
Crude rubber.............................
Hides..........................................
Lead___________ ____________
Print cloth, c o tto n ...................
Steel scrap (Philadelphia).........
T in.............. ..............................
Wool tops...................................
Zinc______ _________________
78276— 51------ 3
Unit
Yard___
Pound..
....... do__
....... do__
____do__
Yard.—.
T o n .....
P ound..
____do —
April
1950
$0.172
.184
.320
.21
.242
.105
.14
24.00
.75
1.87
.112
Sept. 8,
1950
$0.242
.234
.407
.55
.33
.16
.21
38.00
.99
3.02
.182
Percent increase
Dec. 4,
1950
$0.302
.244
.412
.65
.365
.17
.225
38.50
1.39
3.135
.182
April to
Septem
ber
40.7
27.2
27.2
161.9
36.4
52.4
50.0
58.3
32.0
61.5
62.5
April to Septem
ber to
Decem
ber
December
75.6
32.6
28.8
209.5
60.8
61.9
60.7
60.4
85.3
67.6
62.5
24.8
4.3
1.2
18.2
10.6
6.2
7.1
1.3
40.4
3.8
28
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
Due to the existence of fixed-price contracts for many items, the rise in basic
commodity prices was not fully and immediately reflected in procurement prices
paid by the armed services. However, the increase in general price level is being
felt more and more by the armed services. With the exception of meats, the price
of which has dropped seasonally during the past 2 months, and a few other scatter
ed items, higher prices are being encountered in an ever-increasing number of
items. These price rises are becoming increasingly wide-spread despite efforts
to reduce costs wherever feasible by simplification of specifications and sub
stitution of materials. The recent steel industry wage and price increases will
undoubtedly lead to further increases in the prices of many military procurement
items.
One of the key commodities affected by the Korean conflict has been aviation
gasoline. Preliminary screening of offers for delivery of aviation gasoline starting
in January 1951 indicates the following price increases per gallon for normal pro
duction:
Grade 115/145 aviation gasoline:
United States Gulf____________________________________
West coast__________________________________________
Grade 100/130 aviation gasoline:
United States Gulf______________ - ____________________
West coast___________ ________________________________
July 1,1950,
average
November
1950 average
quotation
for January
1951 delivery
$0.1675
.1565
$0.1725
.1775
3.0
13.4
.155
.144
.16
.165
3.2
14.6
Percent in
crease
However, normal production is not adequate to meet current armed services
needs for aviation gasoline. Consequently, part of the aviation gasoline supplies
of the armed services are being derived from marginal production, utilizing ma
terials, plant facilities, and transportation practices that are not economical under
normal conditions. As a result, premiums of varying amounts are being paid for
the supply increments furnished from marginal sources, ranging from 5 to 45 per
cent, depending upon the particular circumstances involved.
It must be recognized that it is difficult to compare prices at different times for
much of the materiel procured by the armed services because of changes in quan
tities involved, changes in specifications, changes in manufacturing methods and
processing techniques, resort to marginal producers or methods, existence of price
redetermination clauses in contracts, etc. Direct price comparisons can best be
made on relatively standard-type items that are subject to little change in specifi
cations. Such a list of representative items, indicating procurement prices ap
plicable to each of the services and to the Armed Services Petroleum Purchasing
Agency, is contained in the attached table.
Military procurement prices before and after the attack on Korea {April 1950, August-September 1950, and October-November 1950)
Commodity
Unit
AugustApril to April to September to
August- OctoberSeptem Novem- Octoberber
November
ber
$1.53
1.83
* $2.10
11.92
54.5
7.6
112.1
12.9
37.3
4.9
..d o .. _ .
_. do___
3.90
3.59
4.38
3.82
14.59
14.30
12.3
6.4
17.7
19.8
4.8
12.6
__ do........
__ do........
3.33
2.92
3.28
3.36
*3.65
*3.36
- 1 .5
15.1
9.6
15.1
11.3
3,774.20
1,132.00
952.62
1,471.77
793.17
(*>
1,284.00
(*)
(*)
914.76
4,224.20
(*)
1,014.87
1,697.13
(*)
9.15
12.55
11.21
11.63
14.58
15.84
(*)
(*)
(’ )
26.0
16.2
14.3
16.14
23.99
.79
.0849
3.12
9.15
15.00
.01265
2.95
1.72
1.80
.0135
20.46
28.93
1.38
.12757
4.14
12.75
18.45
.0146
3.43
1.99
1.95
,01533
0)
33.18
(*)
(’ )
(2)
26.8
20.6
74.7
50.3
32.7
39.3
23.0
15.4
16.3
15.7
8.3
13.6
Each_____
do
do
...d o ..........
do
do
.
__d o ___ _
...d o ..........
do
N ut........................................................................ ............................................................
Battery assembly hanger_____________________________ __________________________ __ do..........
Flange transfer brace drum_____________________________________________________ __do_____ i
Filter oil breather.._____ __________ . . __ . . . ___ . . . __ _______________ _____ _ __
Carriage bolts................................................................................................. .....................
(*)
(2)
(a)
<*)
6.5
15.3
15.3
38.3
14.7
29
See footnotes at end of table, p. 33.
(J)
(i)
(J)
11.9
13.4
MOBILIZATION
__do..........
__ do .......
AND1 ECONOMIC
ARM Y
Ambulance, Metropolitan, %-ton, 4 by 2 ...................................................................................................
Automobile, sedan, light....... ......................................... ............................................ ......
Truck, pick-up, \<t ton, 4 by 2............................................................................................
Truck, stake and platform, 1H ton, 4 by 2........................................................................
Water tank trailer, 1 ton....................................................................................................
Battery:
2E.......................................................................................................... ........................
2H...................................................................................................................................
3H............................................................................................................................
Tire:
6.60 by 20,8 ply______________ _____ _____________ _____ _____ ___ ___________
7.60 by 20........................................................................................................................
Bearing bushing.................... ................ ............................................................... ............
Gasket set_____________________________________________________________________
Wiring harness_____________ - __________________________________________________
Fuel tank_____________________________________________________________________
CONTROL
$0.99
1.70
Barrel
DEBT
Fuel oil, f.o.b. tanker:
A*S* *? A
West coast..................................................................................... .............................
Caribbean.......................................................................................................................
Motor gasoline, f. o. b. tanker:
West coast................................................................................................ ....................
United States Gulf...................................................__................................................
Diesel fuel, f. o. b. tanker:
West coast....................................................................................................................
United States Gulf.................................................................... __.......................... .
October-November 1950
AND
April 1950
August-September 1950
CREDIT
Percent increase or decrease (—)
Price
Commodity
Unit
April 1950
October-November 1950
AugustApril to April to SeptemAugust- Octoberberto
Septem- Novem Octoberber
ber
November
DEBT
army—continued
Thousand
board
66.00
97.00
Douglas fir______________ _______________ _______ ___________________________
Bailey bridges....................................................... ..............................................................
Fire hose, cotton, rubber-lined________________________________________________ „„
Astrolabe............................................................................................................... ..............
Beach tractor.......................................................................................................................
Storage battery....................................................................................................................
Wire rope........................... .......... ...... .............................................................................
20-ton trailer_____ ___________________________________________ _____
__ ____
Shop bench___j ................................................................... ..................................... ........
Road roller...........................................................................................................................
Motor lead cable..............................................................................................................
Barbed wire___________________________________________________________________
Sisal rope....................................................................... .............. ......................................
Cable, 3-conductor..............................................................................................................
Chest drafting set No. 8................................................. ....................................................
Wire, magnet:
No. 28 A W G .................................................................................................................
No. 27 A W G .................................................................................................................
No. 25 A W G .................................................................................................................
Fire extinguisher.................................................................................................................
Antenna equipment, RC-292.............................................................................................
Switchbox, BC-658______________ ____ ________ ____ _________________ ___________
Field wire, W D -l/T T ....................................................................................................... .
Communications equipment, AN /GRC-26.......................................................................
J 5 h ..„
Each.........
50 feet.......
Each_____
do..........
...d o ..........
E ach..:__
...d o _____
__ do........
Foot.........
Spool____
Foot.........
__ do_____
Each_____
67.50
37,796.00
20.64
1,200.00
10,188.00
9.07
.1329
3,287.00
215.00
5,345.00
.044
6.39
.03841
.0355
68.50
Pound___
..d o ..........
do..........
Each
...d o ..........
do..........
Mile.........
Each.........
.47
.45
.42
36.86
134.88
10.05
58.02
11,353.91
‘
(2)
(2)
(2)
(2)
$72.00
82.50
51,792.00
23.10
1,311.00
10,840.00
10.74
.164
3.540.00
270.00
5.735.00
.057
7.25
.0456
(2)
(2)
*82.50
*51,792.00
*23.10
*1,311.00
*10,840.00
*10.74
3.164
*3,540.00
*270.00
*5,735.00
*.057
*7.25
*.0456
.063
95.00
(2)
(2
(2)
37.98
144.88
12.04
68.17
(2)
.625
.63
.57
*37.98
(2)
(2)
74.03
12,364.03
V r
7.8
5.0
4.4
6.4
5.9
47.0
9.1
22.2
37.0
11.9
9.2
6.4
18.4
23.4
8.0
25.6
7.3
29.5
13.4
18.7
22.2
37.0
11.9
9.2
6.4
18.4
23.4
8.0
25.6
7.3
29.5
13.4
18.7
77.7
38.7
-2 5.8
—
—
—
--------------
33.0
40.0
35.8
3.0
3.0
7.4
19.8
17.5 ....... 27."6"
............. 0
M OBILIZATION
$19.9368
24.74
.83
12.39
23.7115
8.316
55.75
ECONOMIC
$15.84
22.77
.77
11.80
22.709
7.8178
52.63
AND
Each.........
__do_____
__do_____
do..........
do..........
do..........
__ do_____
CONTROL
Steering knuckle assembly................................................................................ .............—
Shaft (automotive)..............................................................................................................
Hood support......................................................................................................................
Boiler bearing......................................................................................................................
Carburetor assembly...................................................... _...................................................
Steering arm........................................................................................................................
Generator.................................................................................................................... ........
Lumber:
Southern pine, No. 2 common_______________________________________________
AND
August-September 1950
Percent increase or decrease (—)
CREDIT
Price
30
Military procurement prices before and after the attack on Korea (April 1950, August-September 1950, and October-November 1950)— Con.
.740
.588
3.575
4.90
11.80
8.53
1.241
.5246
.860
(2)
.635
382.50
5,901.66
5.66
12.53
.3407
.1235
*.750
*.310
*.756
*1,629.06
*9.65
11.4
21.6
33.4
25.7
35.9
39.6
6.8
29.9
45.0
16.2
13.0
11.4
56.3
37.2
60.4
81.2
81.3
12.0
50.0
28.6
2.8
27.7
33.3
29.8
4.8
15.4
*5.22
*13.88
*9.35
*1.283
*. 555
17.8
6.7
14.5
49.9
23.9
25.5
25.5
25.5
55.0
31.1
6.5
17.6
9.6
3.4
5.8
*.968
.769
.681
16.2
.......io.T
30.8
12.6
30.8
18.6 .......... 7.2
24.2
26.7
22.9
26.2
28.1
28.0
42.9
13.3
10.6
28.3
39.8
39.8
39.8
39.8
39.8
39.8
44.8
31.4
42.4
18.4
20.1
18.8
.1
14.5
12.5
10.3
13.7
10.7
10.0
9.2
1.4
00
(2)
1.6794
1.9791
.4875
*2.307
*5.026
*5.075
2.488
*5.337
*6.850
.0598
4.910
8.148
3.577
3.291
*1.90
41.79
*.4352
13.1
-9 .6
-10.7
.6718
.4741
.5323
.1802
.4738
.5523
.4150
.5163
,1765
*.6209
#.4651
*.4734
*.1581
*.4152
*.4350
#.3942
#.5715
#.1909
4.3
3.0
—.8
35.6
29.8
30.1
8.2
37.8
30.1
-3 .6
1.1
-11.8
19.0
13.8
2.5
2.8
52.6
40.7
-7 .6
-1 .9
-11.1
-12.3
-12.4
-21.2
-5 .0
10.7
8.2
1.65
3.595
3.63
1.78
3.8176
4.90
.0413
3.7364
5.720
3.020
2.740
1.5996
1.7891
.38
2.05
4.555
4.463
2.247
4.890
6.274
.6438
.4602
.5367
.1329
.3650
.4245
.3835
.3746
♦1357
31
5.6
6.8
1.64222
.4697
MOBILIZATION
29.3
20.4
1.555
.44
AND EOONOMTC
22.4
12.8
1.27
.39
CONTROL
4.16
11.06
7.45
.82771
.4233
(I)
(2)
(2)
12.53
.265
.1201
.5875
.2325
.5823
1,554.00
8.36
AND DEBT
See footnotes at end of table, p. 33.
263.88
5,080.92
5.01
11.25
.218
.090
.4675
.1711
.4170
1,454.52
6.435
CREDIT
Radio set:
AN/PRC-10............................................................................................................. __d o ____
SCR-399.................................................................................................................. __ d o ........
Battery, BA-70____________________________________________________________ ...d o .........
Broom, com______________________________________________________________ Dozen___
Steel wool______________________________________ _________________________ Pound___
Soap powder, hand scouring_________________________________________________ . . . d o . ___
Mop, cotton______________________________________________________________ Each____
Burlap, jute, 40 inch_______________________________________________________ Yard........
Sack, burlap, 57 by 50 inches___ ___________________________________________ _ Each____
Dishwashing machine, model 180DA______________________________ ____ ______ ...d o .........
Paper, typewriter, bond_____________________________________________ ______ Ream____
Barrier, waterproof:
Type C -l_____________________________________________________________ R o ll___
Type L-2______________________________________________________ ______ ...d o.........
Type M ______________________________________________________________ - .do
Box, fiber, shipping__________________________ ______________________ _______ Each __ _
Drawers, cotton, shorts, white__________ -___________________________________ Pair_____
Cut, make and trim:
Trousers, cotton, khaki________________ ____ ________ _______________ _____ ...d o.........
Shirt, Stftnd-np pol^ar
...................
Each . . . .
Socks, wool, cushion sole____________________________________________________ Pair........
Cloth:
Cotton:
Twill, 5-ounce__________________________________________-___________ Yard........
Chambray, 3-ounce_________________________________________________ ...d o.........
Wool:
Lining, 12-ounce____________________________________________________ ...d o_____
Serge, 15-ounce___________________________________________________ _ __do..........
Serge, 12-ounce_____________________________________________________ ...'do_____
Lining, 15-ounce____________________________________________________ ...d o _____
Serge, 18-ounce_____________________________________________________ ...d o .........
Pile................................................................................................................... ...d o.........
Webbing, cotton, 1-inch_________________________________________________ __do_____
Shoes, low quarter
____ ____ . _______________________________ ______ ______ Pair........
Boots, service, combat______________________________________________________ __do_____
Drawers, winter, M -4 0_____ ________ ______________ ________________ _______ __ do _____
Undershirts, winter M-50___________________________________________________ Each____
Box and sleeve, shipping, fiber______________________________________________ Set______
Gasoline drum, 5-gallon____________________________________________________ Each........
Bacon, smoked____________________________________________________________ Pound__ _
Beef:
Boneless________________________________________________________ -_____ ...d o.........
Carcass______________ ___________________ _______________________ _____ ...d o.........
Ham, smoked_________________ -__________________________________________ -..do.— __
Lard ___________________________________________________ -______________ ...do_____
Sausage______________________________________ ____________________________ ...do_____
Pork
___
___ __ __________________________________________________ ...d o.........
Chicken, dressed_________________________________________________________— ...do _____
Eggs, shell________________________________________________________________ Dozen
Milk, frozen..................................................................................................... .............
Commodity
...d o _____
...d o _____
Foot_____
Each____
...d o .........
__do..........
...d o .........
...d o .........
Gallon___
Each____
Roll........
Pair __
Pound___
Each____
50 cc_____
Each____
$38.00
2,800.00
2.64
6.25
6.40
244.00
.195
.275
.119
18,380.00
36.41
$45.00
3,200.00
(2)
(2)
(2)
(*)
.2539
.35
(2)
(3)
(2)
.238
21,000.000
58.02
(2)
(*)
(3)
(2)
(2)
*2.42
8.00
1.50
2.75
9,500.00
37.22
.70
2.30
.38
15.00
.30
.22
.75
220.00
<436
<*)
2.30
.125
.50
33
i48
3.87
13.23
2.26
*2.75
9,500.00
37.22
.70
2.30
38
15 . 00
.314
256
*85
210.00
.47
1,284.00
1.7572
.0704
.3360
.1575
.2730
2.42
m
(’)
1.68
5,000.00
23.89
.28
.92
.15
6.00
.26
.178
.35
195.00
.364
1,128.00
October-No*
vember 1950
$53.00
ka.7 on
4.40
9.94
21.80
426*00
9
O, ( r t / . W
AugustApril to April to SeptemAugust- October- ber to
Septem No vem Octoberber
ber
No vem
ber
18.4
X tU O
30.2
27.3
39.5
9 A). 74
M
66.7
59.0
240.6
74.6
100.0
14.3
59.4
30.9
77.6
48.8
109.5
75.8
59.9
63.7
90.0
55.8
150.0
150 0
153.3
150.0
15.4
23.6
114.3
12.8
19.8
17.8
1
A#5
fi
1U
63.7
90.0
55.8
150.0
150.0
153.3
150.0
20.8
43.8
142.9
7.7
29.1
13.8
59.9
65.4
50.7
4.7
16.4
Id * 5
O1
-4 .5
7.8
MOBILIZATION
...d o .........
August-September 1950
AND ECONOMIC
Each
...d o .........
...d o _____
April 1950
AND DEBT CONTROL
NAVY
Space heater, 50,000 B. t. u ............................................................................................
Steam tables, Marine Corps standard...........................................................................
Briggs & Stratton carburetor.........................................................................................
Dorman kit exp. plug....................................................................................................
Grease-fitting kits..........................................................................................................
Crane, T/A-8121.............................................................................................................
Connector, cable 17-C-29865-500....................................................................................
Tester, voltage 17-T-5555...............................................................................................
Rope, wire, 916-inch 22-R-2268-135................................................................................
Crane, truck H-yard, 78-C-33600...................................................................................
Differential shaft, 4-B2007..............................................................................................
Dry battery:
BA-44......................................................................................................................
BA-202/U.................................................................................................................
BA-205/U.................................................................................................................
BA-37.......................................................................................................................
BA-152.....................................................................................................................
Lights, timing 41-L-1440................................................................................................
Mattresses....................................................................................................................
Sheets...........................................................................................................................
Enamel, semigloss.........................................................................................................
Mount, trailer, mult. MG, M55....................................................................................
Shell, smoke, M313, w/f PD, M57.................................................................................
Actuator.........................................................................................................................
Bearing, flash hider........................................................................................................
Screw, forearm............................................................................................................
Sight, rear assembly.............................................................. ........................................
Adhesive tape, 3 Inches by 5 yards.................................................................................
Surgical gloves, rubber...................................................................................................
Glycerin.........................................................................................................................
Instrument and medicine cabinet........ ........................................................... ........ .
Vitamin A in oil.............................................................................................................
Sedan, 5-passenger..........................................................................................................
Unit
Percent increase or decrease (—)
CREDIT
Price
32
Military 'procurement prices before and after the attack on Korea (April 1950, August-September 1950t and October-November 1950)— Con.
15.390.00
16,000.00
19.700.00
17.940.00
32.855.00
15.363.00
139.00
16.884.00
17.529.00
. 22,500.00
18.559.00
42.945.00
15.579.00
219.00
21.392.00
24.500.00
28.250.00
23,000.00
46.345.00
16.500.00
219.00
9.7
9.6
14.2
3.4
30.7
1.4
57.6
43.587.00
77.050.00
*49,822.00
21.5
15.0
39.0
53.1
43.4
28.2
41.1
7.4
57.6
26.7
39.8
25.6
23.9
9.2
5.9
38.9
14.3
CREDIT
Crane:
10 ton, truck mounted................................................. ............................................
15 ton, truck mounted_____________________________________________ _____
do
20 ton, truck mounted.................................................... ........................................ __do..........
% cubic yard, crawler__________________________________________________
do
1H cubic yards, crawler____________________________________________ ___ ..do
Tractors, 130 to 160, DBHP.........................................................................................
do
Oscilloscope OS-8/U............. _............................. ......................................................... . . d o . .___
Am FORCE
G -ll 100-foot cargo chute.._ .........................................................................................
__do..........
__do..........
Gallon - _
..do____
Pound___
Each__. . .
Foot_____
Each ____
__do..........
__d o.
Each____
(2)
0
2.29
(2)
(2)
m
(2)
(2)
(2)
/2\
198.30
1,287.00
(2)
(2)
20.20
Pair
(2)
1.50
1.55
.384
4.75
.080
25.00
40.2
20.2
4.1
48.4
11.1
51.5
14.00
10.00
26.84
47.8
27.6
32.9
3.00
31.0
300.77
1,798.66
39.8
51.7
4 Gasoline, drum, 5-gallon procurement during November 1950 was for large quantity
(1,000,000 units), awarded to a single company.
* October 1950 prices.
Source: Progress Reports and Statistics, Office of Secretary of Defense, Dec. 4,1950.
AND ECONOMIC
1 Represents estimated average of offers received in November for deliveries to start
January 1951.
2 No procurement during this period.
> Estimated.
MOBILIZATION
33
__
35.880.00
67,000.00
1.07
1.29
.369
3.20
.072
16.50
9.47
7.84
AND DEBT CONTROL
Height finder:
AN/TPS-10D..........................................................................................................
AN/MPS-4..............................................................................................................
Compound carbon removal..........................................................................................
Paint remover—.......... . ................................................................................................
Aluminum alloy sheet...................................................................................................
A-5 inspection light—....................................................................................................
Electric cable.................................................................................................................
Jacket, flying, type B-15B.............................................................................................
Suit, flying, nylon, K-2.......................................................................................................
Shirt, flying, wool, type A -l..... ...................................................................................
Protective helmet........................................................j ................................................
Sun glasses......... ..................................................................................................................
Parachutes:
T-7A parachute assembly with reserve canopy.......................................................
34
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
APPENDIX B
Statement for the press. For immediate release, August 18,1950]
B oard of G o vern ors of th e F e d e r a l R e serve System
At meetings today of the Board of Governors and the Federal Open Market
Commmittee, the following statement was approved:
“ The Board of Governors of the Federal Reserve System today approved an
increase in the discount rate of the Federal Reserve Bank of New York from V/%
percent to 1% percent effective at the opening of business Monday, August 21.
“ Within the past 6 weeks loans and holdings of corporate and municipal securi
ties have expanded by $1)4 billion at banks in leading cities alone. Such an ex
pansion under present conditions is clearly excessive. In view of this develop
ment and to support the Government's decision to rely in major degree for the
immediate future upon fiscal and credit measures to curb inflation, the Board of
Governors of the Federal Reserve System and the Federal Open Market Com
mittee are prepared to use all the means at their command to restrain further
expansion of bank credit consistent with the policy of maintaining orderly con
ditions in the Government securities market.
“ Tlie Board is also prepared to request the Congress for additional authority
should that prove necessary.
“ Effective restraint of inflation must depend ultimately on the willingness of
the American people to tax themselves adequately to meet the Government’s
needs on a pay-as-you-go basis. Taxation alone, however, will not do the job.
Parallel and prompt restraint in the area of monetary and credit policy is essen
tial”
APPENDIX C
[S-2423. Immediate release, Friday, August 18,1950]
T r e a s u r y D e p a r t m e n t , I n f o r m a t io n S e r v ic e
Secretary of the Treasury Snyder announced today that he will offer a 1)4 per
cent, 13-month Treasury note, dated September 15, 1950, and maturing on Octo
ber 15, 1951, in exchange for the 2 percent bonds and the 2)4 percent bonds called
for redemption on September 15, 1950, and the iy* percent certificate of indebted
ness maturing on that date; and that he will offer a 13-month, 1)4 percent note
dated October 1, 1950, and maturing on November 1, 1951, in exchange for the
1){ percent certificate of indebtedness maturing on October 1, 1950.
The Secretary also announced that institutional investors of the classes defined
in Department Circular No. 814, dated September 22, 1947, will be permitted to
purchase United States savings bonds of series F and G in amounts in excess of
the existing limitations during the following periods:
(а) From October 2 through October 10, 1950, for bonds dated October 1,
1950;
(б) From November 1 through November 10, 1950, for bonds dated Novem
ber 1, 1950; and
(c) From December 1 through December 11, 1950, for bonds dated Decem
ber 1, 1950.
Purchases in excess of existing limitations will not be permitted at other times
during the remainder of this calendar year.
The Secretary stated that the present offering is designed to attract new money
accruing in the hands of institutional investors during the last quarter of the cal
endar year; and that this offering is in line with his statement of September 5,
1947, when he announced the offering of the Treasury bonds, investment series
A-1965, in which he said that “ further offerings of securities suitable primarily
for institutional investment needs will be made available whenever the situation
warrants such action.”
The special offering of series F and G bonds will be open to institutional in
vestors holding savings, insurance, and pension funds, which were eligible to pur
chase the 2y2 percent Treasury bonds, investment series A-1965, under Depart
ment Circular No. 814, dated September 22, 1947, subject to the following limita
tions:
(a)
Each investor in the following categories will be permitted to purchase
series F and G savings bonds combined up to a total amount of $1,000,000 (issue
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
35
price) for the calendar year 1950 in addition to any bonds which may be pur
chased under the existing limit of $100,000 provided that any bonds in excess of
the existing limit are purchased during the periods from October 2 through Octo
ber 10, 1950, inclusive; November 1 through November 10, 1950, inclusive; and
December 1 through December 11, 1950, inclusive:
1. Insurance companies
2. Savings banks
3. Savings and loan associations and building and loan associations, and co
operative banks
4. Pension and retirement funds, including those of the Federal, State, and
local governments
5. Fraternal benefit associations
6. Endowment funds
7. Credit unions.
(b)
Each commercial and industrial bank holding savings deposits or issuing
time certificates of deposit in the names of (1) individuals and (2) corporations,
associations, and other organizations not operated for profit, will be permitted to
purchase F and G savings bonds combined up to an aggregate of $100,000 (issue
price) during the periods set forth above.
Further details with respect to these offerings will be announced later.
[S-2426. Immediate release, Monday, August 21, 1950]
T r e a s u r y D e p a r t m e n t I n f o r m a t io n Se r v ic e
Statem e n t b y J ohn
W.
Sn y d e r , Se c r e t a r y o f th e T r e a s u r y
Friday’s announcement of the refunding of the September and October ma
turities and the extension of the purchase limitations on series F and G bonds
was one more step in the debt management program which the Treasury has
followed since the first of the year. Developments in the Government bond
market have repercussions which fan out through the entire economy. Both the
present size and the wide distribution of the Federal debt are unprecedented in
comparison with what faced us at other periods of international crisis. We have
an obligation of the highest order not only to maintain the finances of the Govern
ment in the soundest possible condition, but also to fulfill our responsibilities to
the millions of Federal security holders throughout the Nation. A stable and
confident situation in the market for Federal securities is our first line of defense
on the financial front.
The debt management program which the Treasury has followed since the first
of the year has been fashioned to meet the requirements of the cconomy. During
the first 6 months of this year, Government securities held by the commercial
banking system declined $1.7 billion, while the holdings of private nonbank
investors increased $3.4 billion. The decline in bank holdings was accounted for
by a $1.1 billion decline in holdings of commercial banks and a decline of $553
million in the holdings of Federal Reserve banks. From the data now available,
it is apparent that this trend was continued in July. Holdings of weekly reporting
member banks declined by $656 million in the 4 weeks ended August 2 and hold
ings of the Federal Reserve banks declined $362 million from June 30 through
July 31.
The private nonbank investors who have been the primary buyers of market
able Government securities have been principally industrial, commercial, and
mercantile corporations, State and foreign accounts. They have been buying
short-term securities mainly. Another part of the increase in the holdings of
private nonbank investors is due to the purchases of individuals—substantially
in the form of savings bonds. Longer-term institutional investors, such as
insurance companies and savings banks, however, have not been acquiring
Government securities on net balance. Instead they have been buying corporate
bonds and home mortgages. They have been providing the funds necessary for
new housing construction and new plant and equipment for industry. It is now
expected that institutional investors may have some funds available for investment
in Government securities during the last quarter of the year. For this reason,
the Treasury Department has lifted the limits on series F and G savings bonds
to absorb these funds as they accrue.
36
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
APPENDIX D
1. E x c e r p t s f r o m a n A d d r e s s b y S e c r e t a r y S n y d e r B e f o r e a L u n c h e o n
M e e t i n g o f t h e N e w Y o r k B o a r d o f T r a d e , J a n u a r y 18, 1951
FINANCIAL MOBILIZATION
Without question a most effective over-all fiscal measure for avoiding the evils
of deficit financing, and thereby combating an inflationary spiral in prices is a
revenue system which enables the Government to pay its current bills out of
current income. No one welcomes heavy taxes. But in a time of unprecedented
national danger like the present, I am certain that all groups of our population
will soon realize that very much higher taxes—for themselves, as well as for
others—are a necessary defense measure.
While adequate revenues are an essential safeguard against the development
of inflationary tendencies, they cannot do the job alone. Measures for allocating
essential materials have been adopted in orcjer to assure priority for our military
needs without increasing the strain on the price structure. Selective credit
controls such as those embodied in the Defense Production Act passed by the
Congress last July are also of definite help. Other measures of demonstrated
effectiveness in curbing inflationary tendencies, such as price and wage controls,
are under consideration and will assuredly be adopted soon.
You will note that I have not included the use of fractional increases in interest
rates on Government securities as one of the measures of effectively controlling
inflation. The Treasury is convinced that there is no tangible evidence that a
policy of credit rationing by means of small increases in the interest rates on
Government borrowed funds has had a real or genuine effect in cutting down the
volume of private borrowing and in retarding inflationary pressures. The
delusion that fractional changes in interest rates can be effective in fighting
inflation must be dispelled from our minds.
In the absence of new legislation, the Federal deficit will amount to $16.5
billion in the fiscal year 1952,
This deficit is a result largely of our defense requirements. In nondefense
spending, as the President has noted, the only major new public works projects
included in the budget are those directly necessary to the defense effort. Con
struction of many public-works projects now under way has been substantially
curtailed. Many other activities have been abbreviated.
The revenue requirements which the defense situation demands need no
comment. These requirements can be met without damage to the economy if our
citizens have mutual willingness to make the necessary sacrifices.
Along with adequate revenues and specific controls required for curbing price
and wage rises, there is a weapon of great importance available to us for keeping
inflationary forces under control. That is a debt-management program which is
directed toward placing the largest possible proportion of Federal securities in the
hands of nonbank investors—individuals, insurance companies, mutual savings
banks, and other investors outside the banking system—and reducing the propor
tion of Federal securities held by commercial banks and Federal Reserve banks.
This program is a powerful weapon in combating inflation. There seems to be
a lack of sufficient public knowledge or understanding of what the Treasury has
achieved in this area during the postwar period. It should be pointed out,
therefore, that as a result of specific Treasury debt management policies, holdings
of Government securities by private nonbank investors have increased substan
tially since the end of the war, and have reached an all-time peak during the last
half of the calendar year 1950. This activity has been accompanied* by a decline
in the holdings of the commercial banking system, which reached new postwar
lows during the last half of 1950. Three years ago the public debt was the same
as it is now. But the Government security holdings of the commercial banking
system have dropped nearly $10 billion; and approximately $4 billion of this
reduction took place during 1950.
The importance of this anti-inflationary accomplishment cannot be overesti
mated. This reduction in the money supply of the country holds particular
significance at the present time when it is vitally important to the well-being of
the economy that the inflationary potential of commercial bank assets be kept at
a minimum.
There are two other important matters relating to debt-management policy
which hold particular interest at the present time and which have been given
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
37
extensive consideration in the financial community and elsewhere in recent months.
The first is the place of savings bonds in the Government financing picture, and
the actions that will be taken to refund maturing “ E” bonds. The second is
the rate of interest that the Treasury is going to pay on long-term Government
bonds in refunding and new borrowing programs. I want to take up each of
these two questions in turn.
A moment ago, I stated that an important anti-inflationary action could be
accomplished by placing the largest possible proportion of Federal securities in
the hands of nonbank investors. As part of the Treasury Department's endeavor
toward this end, the savings-bond program has been of outstanding value. It
has been both dramatic and effective. It has been dramatic because it is sus
tained on practically a volunteer service basis. It has been effective because
today, the total of outstanding savings bonds represents approximately 25 percent
of the entire Federal debt.
It is really inspiring to know that there are about $10 billion more savings
bonds outstanding today than there were at the end of World War II financing.
The tremendous selling program involved in achieving this remarkable record
is due in the main part to the volunteer efforts of individuals, business groups,
and all organizations who have contributed time, money, and ingenuity to the
promotion and sale of savings bonds.
There are only about 500 paid employees in the Savings Bond Division of the
Treasury. These employees plan and coordinate the program. The real volume
of the work, however, is done through the generous efforts of those volunteers
who have sold savings bonds to over 85,000,000 purchasers.
Of the $58 billion total of outstanding savings bonds, nearly $35 billion is in
“ E” bonds. This is a noteworthy accomplishment—for no one would have been
rash enough to predict at the end of World War II hostilities that 5 years later
there would be a $4 billion increase in the total of outstanding “ E” bonds. Most
of us were sure in 1945 that there would be a heavy cashing of savings bonds as
soon as war scarcities and restrictions were over. On the contrary, however, the
“ E” bond total has gone up every year because of the organized promotion by
volunteers in bringing the merits of the savings-bond investment to the attention
of the public. As a matter of fact, in the calendar year just ended, the volume of
“ E” bonds outstanding rose by three-quarters of a billion dollars, notwithstanding
the fact that there were increases in redemptions as a result of the scare buying
immediately following the outbreak of the Korean crisis. It is interesting to
observe in this connection that the redemption of “ E” bonds—in relation to
the amount outstanding—was less percentagewise than other comparable forms
of savings. So it becomes readily apparent that the savings bond is, in fact, a
very popular form of savings.
It was this last fact that led to the conclusion on our part, after consulting with
many individuals and business groups, that the Treasury should continue the
savings-bond program after World War II as a major effort to encourage the
promotion of thrift. It is this same conclusion that leads us to announce that the
Treasurv will continue to offer the “ E” bond, in its present form, to the public as a
Defense bond during the mobilization period. The aim now is not only to pro
mote thrift, but to act as an anti-inflationary force and to help further distribu
tion of the ownership of the public debt.
As you know, beginning in May of this year, a portion of the savings bonds
bought during the war years will mature. While some of the holders of these
bonds may desire to cash them upon maturity, it is our belief that the majority
will desire to continue their investment in United States savings bonds. There
fore, the Treasury is adopting the following plan for handling the maturing bonds.
The holder may have his choice of (1) accepting cash if he so desires; (2) continuing
to hold the present bond with an automatic interest-bearing extension; and (3)
exchange his bond for a current income savings bond of series G.
Under option 2, the bond would be automatically extended, bearing interest
at the rate of 2% percent for the first 7% years and interest at a rate sufficient there
after so that the aggregate return for the 10-year extension period will be 2.9
percent compounded. The term of the extension would be limited to 10 years
after maturity. The existing option of paying taxes on interest on series E bonds
currently or at maturity would be retained. Necessary congressional legislation
to authorize this option will be requested immediately. Once the plan is placed in
effect, it will apply to all outstanding “ E” bonds as they mature, and will apply by
right of contract to all new series E savings bonds that are issued.
38
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
Now let us go on to the subject of interest rates. It is my view that a 2%percent rate of interest on long-term Treasury bonds is a fair and equitable rate—
-to our Government which is borrowing the money, to the purchaser of Government
■bonds who is lending the money, and to the taxpayer who has to pay the interest on
the money borrowed.
The 2% percent rate of interest on long-term Government securities is an
integral part of the financial structure of our country. During the past 10 years—
a period in which we fought our most costly war and made a most extensive
reconversion to peacetime activities—the 2% percent rate has become a most
important influencing factor in financial policy in the country. It dominates the
bond markets—Government, corporate, and municipal. Moreover, it dominates
the operations of financial institutions. Most of these have already adjusted
themselves to the 2}{ percent rate—and after so doing, have become more prosper
ous than ever before.
Most life-insurance companies, for example, have changed the guaranteed
interest provisions of their new policies during the past decade to conform with the
2% percent rate, so that today about 85 percent of the new life-insurance premiums
received by insurance companies are on policies written at interest rates of 2%
percent or less. Mutual savings banks also have tied their current interest rate on
funds of depositors to the Government rate.
Any increase in the 2% percent rate would, I am firmly convinced, seriously
upset the existing security markets— Government, corporate, and municipal.
We cannot allow this to happen in a time of impending crisis, with the heavy
mobilization program to finance. We cannot afford the questionable luxury of
tinkering with a market as delicately balanced as the Government security market.
Now is no time for experimentation.
We have not hesitated to draft our youths for service on the battle front, regard
less of the personal sacrifice that might be entailed. Neither can we hesitate to
marshal the financial resources of this country to the support of the mobilization
program on a basis that might, in some instances, require a degree of profit sacri
fices.
In the firm belief, after long consideration, that the 2% percent long-term rate is
fair and equitable to the investor, and that market stability is essential, the
Treasury Department has concluded, after a joint conference with President
Truman and Chairman McCabe of the Federal Reserve Board, that the refunding
and new money issues will be financed within the pattern of that rate.
When I came to the Treasury in June 1946, the war had been over less than a
year, and war financing had only recently been completed. I felt at that time
that stability in the Government bond market during the transitionperiod was of
vital importance. As the economy became more stabilized, the Treasury used
more flexibility in its debt management program by allowing short-term rates to
increase gradually.
Later, beginning with the crisis in Korea, however, the considerations calling
for stability in the Government-bond market became tremendously important.
The credit of the United States Government has become the keystone upon which
rests the economic structure of the world. Stability in our Government securities
is essential.
I do not think that we can exaggerate when we emphaisize these matters. I
think they are basic to our national survival.
2.
L e t t e r F rom th e G e n e r a l C o u nsel of th e T re a su r y
N o v e m b e r 22, 1950.
W. E n s l e y ,
Acting Staff Director, Joint Committee on the Economic Report,
United States Senate, Washington, D. C.
D e a r Mr. E n s l e y : This is in reply to your request for Treasury comments
and suggestions on the first draft of the study on Monetary Policy and Economic
Mobilization, prepared for the Joint Committee on the Economic Report by the
committee staff. The study, we note, was prepared in response to Senator 0 JMa
honey’s request that the staff assemble “ basic facts with respect to recent changes
in short-term interest rates and their effects upon business borrowing, commercial
credit, cost of Government borrowing, debt management, and inflation.”
The Treasury is glad to have the opportunity to review and comment upon
this study and I am transmitting to you for your consideration certain basic facts
Mr.
G rover
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
39
which either are omitted from your study or which, in our opinion, have not been
given sufficient weight. We realize that some of the facts have been omitted
because they have not been available to you.
First, it is of utmost importance—and we feel should be brought out more
strongly—that the actions of the Treasury and the Federal Reserve System were
undertaken at a time when the Nation was in the midst of a serious international!
crisis.
Second, actions by the Treasury and the Federal Reserve cannot ignore the?
tremendous changes in the financial structure of the country which have been
brought about by the increase in magnitude and relative importance of the public
debt as a result of financing World War II. At the end of the fiscal year 1940,
the public debt amounted to less than $50 billion and comprised less than onefourth of the total debt of the country—public and private. At the present time
the public debt amounts to over $250 billion and comprises approximately onehalf of the total debt of the country. The public debt is the predominant factor
in the financial structure of our Nation at the present time. It constitutes a large*
portion of the assets of all of the major investor classes of the country, and opera
tions affecting the debt have repercussions which are felt throughout every sector
of the economy. The use of “ traditional” monetary weapons in the “ traditional” ’
manner has to be evaluated in the light of the changed economic and financial
environment.
Third, Secretary Snyder advised the Open Market Committee on June 26 of his
firm conviction that everything possible should be done to maintain a basically
strong position in the Government-bond market during the period of international
disturbance; the Secretary’s position was developed further in a letter to Chairman:
McCabe, dated July 17, a copy of which is enclosed. The position taken by
Secretary Snyder does not mean that he is an advocate of inflexible interest rates*
He has, in the past, recognized the desirability of flexibility in interest rate policies;
and, as you know, short-term interest rates on Government securities have risen
considerably since mid-1947. Before the August 18 financing announcement, the
rate on the longest Treasury bill, for example, had risen from three-eighths of 1
percent to 1.18 percent (bid); while the rate on securities having maturities of
approximately 1 year had risen from seven-eighths of 1 percent to 1.24 percent.
But in the situation which has existed since Korea, the Secretary felt that stability
was definitely called for at the present time.
Fourth, the August 18 offering of 1% percent, 13-month notes by the Secretary
of the Treasury was made with the approval of the President of the United States,
This is in accordance with the provisions of the laws of the United States—which
require that the President approve each issue of United States Government securi
ties maturing in more than 1 year before the offering of such securities can lawfully
be made to the public.
Fifth, throughout the study it is implied that Secretary Snyder has been less
concerned witn controlling inflationary pressures than with the cost to the Treas
ury of a rise in interest rates. Secretary Snyder was among the first to recognize
the inflationary implications of the Korean crisis and has been in the forefront of
the efforts to control inflationary pressures. As early as July 5, in testimony
before the Senate Finance Committee, he warned Congress that if we were con
fronted with a substantial increase in defense expenditures it would be necessary
to gear changes in the revenue laws to the needs of our economy. It was at Secre
tary Snyder’s request that the Senate, on July 12, decided to shelve the tax-reduction bill which had been under consideration, in order to make way for the con
sideration of new tax measures which would bring in the increased revenues made
necessary by the Korean situation. The Defense Production Act of 1950, which,
incorporates the President’s anti-inflation program, has had the wholehearted
support of the Secretary. The implication, therefore, in the study that Secretary
Snyder was more concerned about the cost to the Treasury of a rise in interest ratesthan with controlling inflationary pressures, when he made the August 18 financing
announcement, does not square with the facts. On the other hand, the Secretary
is firmly opposed to the use of ineffectual methods of inflation control—such assmall fractional increases in short-term interest rates—which hold the possibility
of impairing confidence in the credit of the United States Government.
Sixth, the financial policies of the Government have provided a successful
record of debt management, the importance of which must not be overlooked.
Ownership figures indicate that, during the calendar year 1950, private nonbank
investors will add about $5,000,000,000 to their holdings of Government securi
ties—primarily through purchases of short-term marketable securities and savings
notes by corporations. Private nonbank holdings of Government securities at the?
40
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
end of the year will reach an all-time peak. On the other hand, the Government
security holdings of the commercial banking system will decline approximately
$5,000,000,000 during the calendar year 1950, reaching a new postwar low. This
followed on previous declines in bank holdings of Government securities in recent
years. For the 3-year period ending December 31, 1950, the decline will be nearly
$11,000,000,000. This anti-inflationary movement in the ownership of the public
debt has not come about accidentally. It has been one of the important objec
tives of the debt-management policy of the Treasury. It has come about because
the Treasury has studied the investment position of the various investor classes
carefully; and has offered securities designed to meet the needs of the economy.
As you know, the Secretary of the Treasury attends the meetings of the Na
tional Security Council. He has, therefore, an intimate knowledge of the defense
situation and what it might involve in the way of Treasury financing which is not
available to the Federal Reserve. With the possibilities of the serious interna
tional situation in mind, Secretary Snyder felt that it was of paramount impor
tance that no uneasiness about the management of the public debt should occur;
and that actions which would unsettle the Government security market when the
debt amounts to over $250,000,000,000, and when its successful management is no
simple matter, might have serious results in our successful prosecution of the de
fense effort. Secretary Snyder made this clear in his August 21 statement when
he said:
“ * * * Developmehts in the Government-bond market have repercussions
which fan out through the entire economy. Both the present size and the wide
distribution of the Federal debt are unprecedented in comparison with what faced
as at other periods of international crisis. We have an obligation of the highest
order not only to maintain the finances of the Government in the soundest possible
condition but also to fulfill our responsibilities to the millions of Federal security
holders throughout the Nation. A stable and confident situation in the market
for Federal securities is our first line of defense on the financial front.”
The Federal Reserve ignored the Secretary's request for a stable Government
security market. Charts 1, 2, and 3 show how rapidly the operations of the
Federal Reserve System ran up the yields (ran down the prices) of Government
securities, commencing on August 21, and the unsettled state of the market since
that time.
It seems to us that, in the interests of keeping the facts straight, the study
should note that the September-October refunding issues were approved by the
President and announced by the Secretary on Friday, August 18, before the
Board of Governors of the Federal Reserve System made its announcement.
Also, the study should note that the issues which the Secretary offered were priced
in line with the market on the day of the announcement, as shown in chart 4.
Chart 1— previously referred to—shows that it was not until Monday, August 21,
after the Open Market Committee engaged in open-market operations designed
to raise the yields on short-term Government securities, that issues of this type
went to a discount.
Finally, in connection with the material in the study analyzing loans of weekly
reporting member banks, we think you will find chart 5, “ Trend of Bank Loans,”
helpful in clarifying the picture that is presented in the study. It is, for example,
of some significance that the upward trend of bank loans has continued; and that,
in fact, the increase in commercial, industriaJ, and agricultural loans of weekly
reporting member banks since August 18 has been three times as large as in the
comparable period last year. In this connection, there is also enclosed a table
which compares bank loans outstanding and the 1-year market rate on
Government securities from June 28, 1950, to the latest date available.
The above facts will, we believe, add to the factual presentation requested by
Senator O'Mahoney. I am also transmitting to you with this letter some detailed
comments that we have prepared on the study, which you may wish to consider
before presenting the study to the joint committee.
Very truly yours,
T h o m a s J. L y n c h ,
General Counsel.
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
41
T he Secretary of the T reasu ry,
Washington, July 17, 1950.
Hon. T h o m a s B. M c C a b e ,
Chairman, Board of Governors of the Federal Reserve System,
Washington, Z). C.
D e a r T o m : Thank you very much for your letter of July 12, expressing your
thoughts and those of the Executive Committee of the Federal 'Open Market
Committee with respect to new financing and the current situation in the Govern
ment bond market.
As I asked Mr. Bartelt to transmit to the Open Market Committee on July 26,
I feel that everything possible should be done to maintain a basically strong
position in the Government bond market during the present period of inter
national disturbance. The firmness with which the market has withstood the
impact of the events of the past 3 weeks is certainly a testimonial to good man
agement. It is also the best possible evidence of the confidence which has been
built up in our ability and determination to maintain a stable market for Federal
securities.
I know you will agree with me that it is of the utmost importance at the present
time to maintain that confidence and, in addition, to do everything possible to
strengthen it. This involves, first of all, avoiding any course which would give
rise to a belief that significant changes in the pattern of rates were under con
sideration. The operations of the Open Market Committee since the beginning
of the crisis have been well adapted to this end.
As I have studied the situation, I have become convinced that present circum
stances call for one further precaution which is, perhaps, of even greater importance
than maintaining a good balance in current market operations. In my view, we
must take extreme care to avoid introducing any factor which would run the risk
of producing unsettlement in the broad market for Federal securities represented
by investors throughout the Nation. It is my belief, in particular, that no new
financing program should be undertaken at the present time without maximum
assurance that it will be well received and can be carried through to a successful
conclusion.
Our future tasks, whatever they may be, would be made very much more
difficult by anything less than 100-percent success in a program for raising new
money. In my judgment, we cannot attain the maximum assurance of success
until the outlook with respect to both the international and the domestic situa
tions has become considerably more clarified.
At present, the defense needs which may have to be financed in the near future
are not known. Our expectations as to revenues are also subject to considerable
change as the situation develops. For these reasons, as you know, I recommended
that the Congress postpone action on the tax bill now under consideration in the
Senate Finance Committee. The same basic considerations lead to my strong
belief that no new financing program whose reception is to any considerable extent
unpredictable should be introduced into the market at the present time.
There are, of course, occasions which call for quick and bold action. These
occasions have occurred with respect to the Federal security market and they
may occur again. But every appraisal of the present situation indicates that the
maintenance of stability should take priority over all other market considerations.
A stable and confident situation in the market for Federal securities is our first
line of defense on the financial front, no matter what may be ahead of us.
As you know, developments in the Government bond market have repercus
sions which fan out through the entire economy. Both the size and the wide
distribution of the Federal debt are unprecedented in comparison with the
situations which faced us at the start of other periods of crisis. Under these
circumstances, we have an obligation of the highest order not only to maintain
the finances of the Government in the soundest possible condition but also to
fulfill our responsibilities to the millions of Federal security holders throughout
the Nation.
There is one further consideration which confirms my view that the present
situation calls in the highest degree for caution and prudence. During the present
stage of the emergency, it is vital to make use of every opportunity for assuring
our citizens that those at the head of their Government have a strong and steady
hand on the helm. The response of the Nation to the President's courageous
action in the Korean crisis was one of the greatest demonstrations of unity that
42
CREDIT AND DEBT CONTROL AND* ECONOMIC MOBILIZATION
we have ever had in this country. The Nation is now waiting to learn what domes
tic programs may be needed in order to utilize our full strength in the interests
of national defense. When these programs are brought forward, it will take time
for the public to assimilate them. In view of these facts, it is of the utmost im
portance that no action be taken at the present time which could be construed in
any sense as anticipating proposals for defense which may later be outlined by
the President.
In short, every circumstance at the present time calls for steadiness and manifest
strength in the Federal security market as a primary measure of economic prepared
ness. That is the net of the situation as I see it. And, as you will note, I am
sending my thoughts on to you just as they have occurred to me, in order to let
you know the course of my thinking as events unfold.
Sincerely yours,
J o h n W. S n y d e r ,
Secretary of the Treasury.
Comparison of bank loans and the 1-year market rate on governments, June 28 to
Nov. 21, 1950
Bank loans 1-year
outstand market
ing 1
rate
Bank loans 1-year
outstand market
rate
ing 1
Percent
June 28__________________
July 5..................................
12..................................
19..................................
26..................................
Aug. 2__________________
9..................................
16..................................
18..................................
21..................................
23..................................
30..................................
$13,602,000
13.660.000
13.725.000
13.791.000
13.911.000
14.022.000
14,18^ 000
14.359.000
14/512,000
14,739,000
1.24
1.24
1.23
1.24
1.24
1.24
1.24
1.24
1.24
1.32
1.33
1.34
Sept. 6............. ........ ..........
13..................................
20..................................
27..................................
Oct. 4..................................
11..................................
18..................................
25..................................
Nov. 1________________ _
8..................................
15..................................
21..................................
Percent
$14,932,000
15.330.000
15.517.000
15.725.000
15.915.000
16.142.000
16.147.000
16.322.000
16.523.000
16, 710,000
16.947.000
* Commercial, industrial, and agricultural loans of weekly reporting member banks.
1.34
1.33
1.35
1.37
1.37
1.37
1.41
1.4S
1.49
1.49
1.40
1.40
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
THE SHORT-TERM GOVERNMENT SECURITY MARKET
mto.'imM$80 toOote
78276— 51-------4
: ,
43
44
CREDIT AND DEBT CONTROL AND1 ECONOMIC MOBILIZATION
Ytifcte Jufy i 1950 to Dote
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
THE LONG-TERM GOVERNMENT SECURITY MARKET
ri*W $,*M yl»50toDate
45
46
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
COMPARISON OF INTEREST RATE PATTERNS IN THE
GOVERNMENT SECURITY MARKET, AUG.18 AND NOV. 21,1950
CREDIT AND »E'BT CONTROL AND ECONOMIC MOBILIZATION
TREND OP BANK LOANS* -i
47
48
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
APPENDIX E
E x e c u t iv e O f f ic e o f t h e P r e s id e n t ,
C o u n c il o f E c o n o m ic A d v i s e r s ,
November 20, 1950.
Hfon. J o s e p h C . O ’ M a h o n e y ,
Chairman, Joint Committee on the Economic Report,
Senate Office Building, Washington, D. C.
D e a r M r . C h a i r m a n : Through the kind consideration of Mr. Lehman, the*
clerk of the joint committee, we have received the report of its staff entitled'
“ Monetary Policy and Economic Mobilization,” and a request for the comment
and views of the members of the Council of Economic Advisers thereon. Because
he is out of the city, until after the deadline set for our response, Mr. Blough has
not been able to participate in the preparation of this reply.
Our approach to the problem of monetary policy has never been limited to the
consideration of the immediate effects of a specific measure in curbing inflationary
forces or in counteracting a deflationary movement. Under the Employment Act
of 1946, our responsibility, which the joint committee particularly will appreciate,
is to work with others toward the coordination of all of the plans, functions, and
resources of the Federal Government to promote maximum employment, produc
tion, and purchasing power on a sustained basis. The specific mandate of the
Council is to appraise all of the various policies and activities of Government in the
light of this principle of the Employment Act and to make recommendations to the
President.
Monetary policy is one of these policies. It cannot be considered apart from
all others but must be integrated with them in the effort to influence, through.
Government programs, our enormous and complex economy, and to maintain
it on the course leading to the goal of the Employment Act.
Our broader point of view was presented to the joint committee in February
1950, in a special report which you requested for inclusion in the hearings upon the
January 1950 Economic Report of the President. We were then discussing the
monetary policy which might be appropriate if an inflationary movement were to*
develop under peacetime conditions. Accepting the principle that in the long,
run the basic solution to the shortages which initiate or aggravate inflation is to
increase the supply of goods, we made these points:
1. That a vital requirement is that the credit of the Government be preserved
against doubts, and that the confidence of present holders of Government bonds>
and of potential investors must not be shaken by the sight of falling market prices
induced by raises in interest rates through Federal Reserve action. The increase
in the interest burden forced upon the Treasury as it refunds billions of maturing,
securities or as it issues new bonds when deficit finncing is required is not the
principal vice of this kind of monetary policy. We are not even greatly concerned
that the increasing of interest rates increases the profits of bondholders and raisesthe price charged by bankers and investors for what they sell (credit) at a time
when everyone else is being urged to hold down his prices and profits. The
greater damage to our fiscal program lies in the fact that at a time when there would
be no difficulty in supporting the Government bond market at a level permitting
new issues at no change in interest rates, the price of the oustanding securities
is lowered, the Government bond market is shaken, and doubts arise which if not
quieted could impair the Government credit. This kind of monetary policy, at a
time when the existing pattern of interest rates could easily be supported, is not
justified in our opinion if its positive contribution to an anti-inflation program is as
dubious and as imponderable as advocates of the policy say it is, particularly when
other measures are available which act more positively and which have fewer
undesirable consequences.
2. That a plan to dampen inflationary forces by increasing interest rates means
to increase the cost of new capital to most borrowers indiscriminately, and to
jeopardize new investment in basic productive facilities at a rate which should
be encouraged rather than impeded under current conditions. Unlike selective
controls, which may be directed at the very point where restraint should be
imposed, the maneuvers of the central bank to manipulate interest rates affect
the businessman who plans to expand his plant and facilities along lines of national
need as well as the firm which wishes to speculate in large inventories. Indeed,
higher interest rates are more apt to discourage worth-while new investment,
which is conservatively planned, than to dampen the more speculative projects.
This aspect of monetary policy has now assumed major importance, but even
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
49
in the less urgent circumstances of a peacetime inflation, as we said in our February
report, it raises a challenge to the policy of increasing interest rates.
3.
That preferable measures, such as the tightening of credit on a selective basis
need not involve increasing the cost of new capital to businessmen whose projects
should be encouraged. Even though such tighter credit would mean that some
desirable economic expansion would be impeded, the contribution of such a meas
ure to the anti-inflationary program might be substantial enough to make it desir
able during a temporary inflation. This judgment led the Council, as we
mentioned in the February 1950 report, to support the proposal of the Federal
Reserve Board in 1947 for a special bank reserve requirement, and we have con
tinued to recommend legislation for this purpose in order that the Board might
always have this power to use when need arose. For reasons which we present
later, we do not believe that the power, if granted, should be used under present
circumstances.
Such were our general views last February.
However, the inflationary problem has now assumed a very different guise from
that we were considering last February, and this calls for a reconsideration. We
are not dealing with a temporary situation, but with inflationary pressures arising
from a Government program of very large defense expenditures which for years to
come will require the extensive diversion of production from civilian demand to
Government purposes. Economic stabilization under such conditions will never
come until production has been enlarged impressively; and every measure proposed
to curb inflation must be evaluated far more critically than in peacetime in the
light of its effect in impeding the expansion of productive capacity. The process
of evaluation will be but little aided by old formulas and concepts. No policy
has ever been tested in the environment in which we move today.
The staff of the joint committee has done well to emphasize this feature of the
pattern within which the proposed hearings should proceed. Monetary policy
cannot be considered solely from the standpoint of its anti-inflationary effect.
Yet it is very seldom that in any article, statement, or address by an advocate of
traditional anti-inflationary action by the central bank is there any reference to
the need to encourage economic expansion. But when the same experts discuss
anything except monetary policy, they often match the vigor of the Council of
Economic Advisers in asserting that every policy must be devised with expansion
in view. An example is an editorial in Business Week, November 18, 1950, in
which it is said:
“ Production rather than regulation is the solution to our problems. Our na
tional economy is strong because it's active and growing. It won't be made
stronger by putting handcuffs on it. * * * We must convince Washington
that peril lies in reliance on controls and cut-backs. The answer to our problem
still is production and more production. To get that, we need to keep on expand
ing our capacity. For only by industrial expansion to meet all needs fully can
we prevent one control begetting another and another and another until the whole
economy is throttled."
We believe the proposed hearings of the joint committee will be most productive,
if the focus is the role which should be played by the banking system of the country
in the long effort to expand national production until it supplies the goods and
services required by the defense program and at the same time meets the market
demands of industry and consumers. The expansion of bank credit in recent
months is treated as an unmixed evil in the communications from experts which
are attached to the staff report. No one notes the heartening fact that the in
dustrial production index was increasing from 196 in July to 212 in October. If
we want industrial production to expand, we should not bewail without qualifica
tion the financial changes which inevitably accompany the process.
Our banking system is a vital part of the machinery of economic activity, and
only in a temporary emergency should it be prevented from performing its function
as the source of business credit and of new capital for economic expansion. The
tightening of bank credit, as by increasing reserve requirements, has effect as a
curb of inflationary forces only if it causes the banker to refuse loans which he
would otherwise find desirable and prudent. The increasing of interest rates, if
it restricts bank credit, does so by causing the businessman to desist, on account
of capital cost, from a business program which he and his banker would have ap
proved as prudent and desirable. Neither method of limiting bank credit should
now be used. They are not consistent with genuine economic expansion.
Our stress upon economic expansion should not be misconstrued as lack of
recognition that some kinds of expansion, in commercial as well as consumer
activity, must be delayed and retarded on the basis of the defense program*
50
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
Further, even the achievement of necessary basic expansion in some areas will
require materials and manpower which can be made available quickly only through
restrictions elsewhere. Nonetheless, the net objective for the economy as a
whole, and particularly for the industrial sector, must be constant expansion at
the highest feasible rate. There is no other way to meet the tremendous burdens
o f a defense program for an indefinite number of years without disorganization
and ultimate loss of our great economic power.
Selective controls are available which not only apply restraint at the very points
of economic activity which may well be dampened, but which also act more posi
tively and effectively than do general credit controls.
The aggressive use by the Federal Reserve Board of its power to regulate con
sumer credit and to regulate credit for new housing meets the requirements of
what is, in our opinion, a sound policy for the restraint of credit. Monetary
policy should not be expected to carry the full burden of anti-inflationary controls,
but there are other selective controls, such as the restriction of credit for inventory
buying, and the limiting of credit for commodity exchange trading, which can be
added to those already in force. If still further types of selective credit restraints
prove to be needed, legislation to authorize them should be considered.
In 1948 it was shown that the bankers respond to appeals that they adopt con
servative loan policies in a period of inflation. We believe that they will be
influenced by the statement just issued by the Chairman of the Federal Reserve
Board, particularly because they know that the Board has not exhausted all of
the power to control credit selectively which has recently been used effectively in
regulations W and X.
There are many points in the excellent report of the staff of the joint com
mittee and in the interesting communications from experts which require con
sideration, but which we shall not undertake to discuss at this time. The com
mittee will be especially interested, we believe, in two questions which they raise.
1. What reason is there to believe that any important anti-inflationary pressure
will be exerted by an increase in short-term rates, within the very limited range
which is possible if it is the policy of the Federal Reserve Board to support the
'2}i percent long-term rate?
2. Is it a valid assumption that the alternative we actually face is between
permitting destructive inflation or utilizing some power of the central bank to
control inflation by raising interest rates?
In considering these questions the committee should note a shift of position by
some of those who advocate higher short-term interest rates. The original
argument was that higher interest cost discourages the businessman borrower.
Now it is that the banker (to use the phrase of one of the experts) is bought off
from selling Governments if he is paid more interst and that this will tighten his
disposition toward loans if he would have to add to his reserve before he could
^extend more credit.
The new theory runs into many difficulties when it is set up against the actual
financial position and attitudes of bankers. It has now been buttressed by a
collateral proposal which requires continued lifting of short-term rates, because
its effectiveness disappears whenever the rate is stabilized. In a candid state
ment before a trade association on November 14, 1950, Lewis H. Brown, from
his vantage point as a director of the Federal Reserve Bank of New York, described
recent Federal Reserve policy and its rationale. After telling how the banker will
make all attractive loans so long as he can secure funds by selling Governments
without loss and perhaps at a profit, Mr. Brown said:
“ But suppose the Federal Reserve backed away now and then, suppose it said,
4Well, w ell buy the securities, but we won't pay the price you paid for them.
We’ll just pay a little less than we did last week, and maybe next week the price
will be a little lower/ The banker is certainly not going to stop making all
loans, and nobody wants him to stop completely.
“ But, perhaps, he'll begin to ration them a bit. Perhaps he'll cut out some of
the marginal business he's been taking, such as some of the loans to finance
speculative accumulation of inventory. If he does, that's as much as could be
hoped for; and by just that much the operation works to restrain the expansion
o f credit."
If this is the meager performance as an anti-inflationary device which can be
credited to the policy urged, there is little justification for asserting that our choice
is between successfully curbing inflation by increasing interest rates on the one
hand, or on the other hand permitting inflation with its evil effect^ upon defense
expenditures because we stabilize interest rates at a low level. Instead of sanction
ing a policy which would tend to compel the Treasury to find buyers each week
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
51
for a billion dollars of new securities in a financial market which is warned that
the market price will immediately fall, the joint committee should seriously
consider whether it is not far better to train monetary policy upon the rigorous
selective controls of credit, and to look to taxation, allocation powers, and other
measures to complete the program.
Very sincerely yours,
L e o n H. K e y s e r l i n g , Chairman.
J ohn D . C la r k .
APPENDIX F
E x e c u t iv e O f f ic e o f t h e P r e s id e n t ,
C o u n c i l o f E c o n o m ic A d v i s e r s
Washington 25, D. C., November 25, 1950.
W. E n s l e y ,
Associate Staff Director, Joint Committee on the Economic Report,
United States Capitol, Washington 25, D. C.
D e a r M r . E n s l e y : The letter of Mr. Lehman, clerk of the joint committee*
inviting comments and suggestions regarding the study of your staff on Monetary
Policy and Economic Stabilization has been brought to my attention. I con
gratulate you and the staff on this study, which opens up the problem of the
relation of monetary policy to economic mobilization in a very helpful manner.
I am pleased to see the proposals made in the study for early hearings by the joint
committee “ to evaluate the workings of our current monetary and credit programs
and consider the appropriate reconciliation of these and debt management
programs.” Your emphasis on studying extension of selective controls, new public
debt instruments, the possible grant of authority to the Federal Reserve to impose
additional and special reserve requirements, and the relationship of present pricewage-profit patterns and trends to the success or failure of monetary, credit, and
fiscal programs appears to be well placed. These are important subjects on which
a great deal more information and analysis would be desirable.
To arrive at sound policy, it is helpful to discover the sources of controversy.
Differences of opinion over policy may have various roots. For example, there
are undoubtedly differences in the relative importance placed by different persons*
on such objectives as economic stability, economic expansion, amounts of interest
payments in the Federal budget, the credit needs of the banking public, and the
profits of banks. It would be helpful if these objectives of monetary and credit
policy and any inconsistencies among them could be pointed up more clearly*
Perhaps an even more significant contribution would be to throw new light on
questions of fact and economic analysis about which there may be little firm
evidence to support a diversity of firmly held opinions. Following are some of the
questions which seem to be of particular importance in arriving at intelligent
policy decisions in the field of monetary and credit policy. Many of these, of
course, are implicit if not explicitly set forth in your study. Some may have been
adequately covered in previous hearings of the joint committee.
1. How is economic expansion to be achieved at a time when employment is at
a high level? What are the limiting factors determining the rate of such economic*
expansion? Is bank credit a significant limiting factor under prospective condi
tions? What are the effects on such economic expansion of general bank credit
restriction? How do these effects compare with those of tax increases? Are
price increases an inevitable result of such economic expansion? Can inflation
be prevented while expansion proceeds at a rapid rate? If so, how is this to be
achieved?
2. How can credit be restricted in view of the size of the national debt? T o
what extent do Government securities serve as a substitute for credit? To what
extent do changes in the rate of interest affect the demand for different classes of
borrowers for loans? The willingness of banks to make loans? Can credit be
generally restricted without increasing the rate of interest? Are there any loans,
other than those made to finance the purchases of durable consumer goods and
houses, which can be identified and to which specific credit controls can be effec
tively applied? If so, what are they, and how can this control be achieved?
3. Is it possible to tighten credit in the private money market without increas
ing the rate of interest on Government securities? If so, what devices could be
employed to achieve this result? Would an increase in member bank reserve re
quirements, either of the usual type or a secondary reserve of Government securi
Mr.
G rover
52
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
ties, contribute substantially to this result? What other results would it have
which might be undesirable?
It seems likely that much of the controversy over monetary and credit policies
arises because of differences in beliefs regarding the answers to the above ques
tions. While it would be too optimistic to assume that these questions could be
definitively answered by hearings of the joint committee, I believe that such hear
ings could throw considerable light on them.
I appreciate this opportunity to make suggestions regarding the excellent
report of your staff on this important subject.
Sincerely yours,
R o t B lo u g h ,
Member.
APPENDIX G
1. E x c e r p t F r o m J o i n t C o m m i t t e e H e a r i n g s , N o v e m b e r 2 5 , 1 9 47
TESTIMONY OP MR. MARRINER ECCLES
*
* * We recommend for consideration, as the best alternative we have been
able to devise, that all commercial banks be required as a temporary measure to
hold some percentage of their demand and time deposits, in addition to present
reserves, in a special reserve in the form of Treasury bills, certificates and notes, or
cash, cash items, interbank balances, or balances with Federal Reserve banks.
Such a requirement would be far less onerous for the banking system than any
other effective method that has been suggested in the long period in which this
problem has been discussed by bankers, by economists, and public officials.
Manifestly, such a requirement would have to be imposed gradually, if at all,
as an offset, for example, to bank reserves created by gold acquisitions, and by the
purchase of Government securities from nonbank investors, and also to limit the
too-ready availability of reserves, now enabling banks to obtain them at will. A
multiple expansion of credit can be built on these reserves at a ratio of fully $6 of
lending for every dollar of reserves.
We would propose that the special reserve requirement be limited by law to a
maximum of 25 percent on demand, and 10 percent on time deposits.
It should be made applicable to all commercial banks. It would not be effec
tive if applied only to member banks of the Federal Reserve System, and would be
an unjustifiable discrimination.
We recognize that this proposal is no panacea, but it would be an important,
available restraint, now lacking, to be applied equally to all commercial banks so
that the individual banker would be in the same competitive situation he is in
today.
*
sfc
*
*
sfc
*
*
The proposed special reserve requirement has a number of important advan
tages over other methods of dealing with the problem of restricting the banks'
expansion of credit:
1. The plan would have about the same effect in limiting credit expansion as an
increase in primary reserve requirements, which was proposed as the third alterna
tive in the 1945 annual report. It would enable the banks to retain the same
volume of earning assets that they now hold, whereas, an increase in basic reserve
requirements would make it necessary for them to reduce earning assets, with
adverse effects upon the earnings position of banks.
2. The ratio of potential credit expansion on a given increase in reserves would
be narrowed to the extent that the special reserve was required. At the maximum
requirement proposed, it would be lowered from 6 to 1 to nearly 2J4 to 1.
3. It would bring about an increase in interest rates on private debt and would
increase earnings of the banks from this source where rates on loans are com
paratively low. It would accomplish this purpose, moreover, without increasing
the interest cost on the public debt or permitting unstable prices in the Govern
ment securities market. The plan, in effect, would divorce the market for private
debt from the market for Government securities.
4. The plan would not rely on higher interest rates to restrain private borrow
ing, but to the extent higher interest rates restrain such borrowing, the proposal
would make use of the interest rate mechanism. Hence, the cost of restraining
•credit would be borne by private borrowers who are incurring additional debt,
and not by the Government which is reducing its debt.
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
53
5. The main effect of the plan would be to reduce the availability of bank
credit. This would be accomplished by putting the restraint on the lenders, that
is, the banks. They would be less willing to sell Government securities in order
to expand credit because the amount of such liquid assets as they held as secondary
reserves could be greatly reduced by the requirements. Such a possibility, even
without action being taken by the Reserve authorities, would have a very restrain
ing influence.
6. The plan would restore use of the customary instruments of Reserve in
fluence on bank-credit expansion, namely, discount rates and open-market opera
tions. Support of these instruments by the special reserve requirement would
enable the Federal Reserve to make it more difficult and costly for banks to
borrow Federal Reserve funds.
7. No alterations in the banking structure, in the authority of the supervisors,
in customary methods of bank operations, or in established interbank relation
ships would be introduced as a result of imposing the requirement.
8. The banks would be left by the plan with sufficient latitude to meet essential
needs of the economy for credit, and the public would be assured of a high degree
o f liquidity and safety for the banking system.
Many bankers argue that this proposed requirement is unnecessary because the
banks themselves have a vital interest in the conservative extension of credit, and
will prevent excessive credit expansion as a matter of ordinary banking prudence*
The banks, however, are confronted by a situation in which they can readily
meet unlimited private credit demands and in which such demands are vigorously
sustained by inflation while, at the same time, these demands are contributing
to inflation. They are both cause and effect.
The banks are not in a position to refuse legitimate, sound credit demands of
individual customers, and current loans, taken separately, which in the light of
the customer's satisfactory credit risk do appear to represent legitimate credit
needs. But in accommodating these credit demands freely, the banks as a system
are expanding bank deposits and adding to the money supply.
2 . E x c e r p t F ro m a n A r t ic l e T h e D e f e n s e o f t h e D o l l a r , b y M r .
M a r r i n e r E c c l e s , F o r t u n e M a g a z i n e , N o v e m b e r 1950
♦
* * Credit must primarily be controlled at the source of its creation, the
banking system. This cannot be done on a basis of voluntary agreements in a
competitive business involving 15,000 banks. There must be adequate powers
in the Federal Reserve System that will bring about the needed restraint on the
part of banks as well as on the part of the borrowers.
The growth of bank credit could no doubt be stopped if banks could obtain
additional reserves only by borrowing from the Federal Reserve bank at whatever
•discount rate was established by the Reserve System. This was the traditional
instrument of credit control used by the Federal Reserve until it had to take
responsibility during the war for the support of the Government-securities market.
Under this policy the System supplies reserves at the will of the market. If the
Federal Reserve had complete freedom in its open-market operations, it could
refrain from buying securities during inflationary periods and let prices decline
until the market is self-supporting. However, because of the huge size and cost
of carrying the public debt, with its structure consisting of over $65,000,000,000
of demand obligations and $60,000,000,000 of short-term securities, and because of
the difficult refunding problem when there are widely fluctuating interest rates the
Federal Reserve has not felt free to let short-term security prices decline and
rates to rise except within the narrow limits of the pattern set by the 2U percent
rate on long-term Government bonds. Even such minor increases in short-term
rates as have recently taken place have been vigorously opposed by the Treasury.
Thus the Federal Reserve may have to support the Government market although
such action supplies reserves to the banking system and these reserves in turn
become the basis for a sixfold expansion of bank credit. This credit adds a like
amount to our money supply.
Therefore it appears that supplementary powers to control the reserves of the
entire commercial banking system may be needed so that the Federal Reserve
System can, if required, immobilize new bank reserves arising from the system’s
purchases of Government securities in support of the market. Authority is also
needed to require all commercial banks to hold a special reserve of adequate size
in short-term Government securities or (at their option) a like amount in cash.
Such a requirement would greatly deter banks from continuing to sell such securi
ties in order to get reserves for the purpose of expanding private credit. * * *
54
CREDIT AND 'DEBT CONTROL AND ECONOMIC MOBILIZATION
APPENDIX H
C o m m u n i c a t i o n s F r o m E c o n o m is t s
The following comments have been received in response to a request from the
joint committee staff for the views of a few leading economists with respect to
short-term interest rates, and especially their effects upon business borrowing,
commercial credit, costs of Government borrowing, debt management, and upon
inflation generally.1 It was suggested that it might be most useful in connection
with the present study if the statements would, as far as practicable, be limited
to the specific implications and long-run effects on Government finances and on the
stability of the economy in following at this time a policy of allowing interest rates
on short-term Treasury issues to rise.
All of the contributors have been most generous in permitting their comments to
be quoted in full. They make clear, however, that these statements are not to be
identified in any way as being those of the organizations which employ them, but
represent solely the views of the contributors as individuals,
P r in c e t o n U n iv e r s it y ,
D e p a r t m e n t o p E c o n o m ic s a n d S o c ia l I n s t i t u t i o n s ,
Hon.
Princeton, N. J., January 12, 1951.
J o s e p h C . O 'M a h o n e y ,
United States Senate, Washington, D. C.
The enclosed statement, signed by over 4 0 0
first half of December, recommends strong
fiscal and credit policies to prevent further inflation. In view of the developments
since the statement was drafted, it seems more than ever necessary to emphasize
the basic need for such action. I am, therefore, calling the statement to your
attention on behalf of those who prepared and signed it.
Sincerely yours,
R i c h a r d A. L e s t e r ,
Professor of Economics,
M y D e a r Sen ato r O ’ M a h o n e y:
economists at 3 0 institutions in the
AN ECONOMIST'S STATEMENT ON ANTI-INFLATIONARY MEASURES
The undersigned economists believe that prevention of inflation in the situa
tion created by the expanding defense program requires, as the principal line of
defense, a substantial increase in taxation, reductions in expenditures at all
governmental levels wherever this can be done without impairing national defenseor other essential public services, and a more restrictive credit policy. The
basic cause of inflation, an excess of money demand relative to available goods,
must be attacked. Only adequate fiscal and monetary measures can remove
this basic cause.
With the economy already operating at very high levels, further increases m
spending cannot fail to enhance inflationary pressures. Under the influence of
the expected increase in defense spending following the Korean outbreak, business
and consumer spending has already risen markedly, and price and wage increases
are augmenting business and consumer incomes. Yet most of the planned rise
of defense spending is still to come, and this further rise will generate additional
increases in private money incomes. Large expenditures on military programs
and foreign aid, with their inflationary impact, may be needed for a decade or
more. Faced with this long-run inflationary prospect, we recommend that the
increase in total spending be continuously curbed in three principal ways, and
that these constitute the first line of defense against inflation:
1. Scrutinize carefully all Government expenditures and postpone or eliminate
those that are not urgent and essential. Substantial reductions can be achieved
only if some programs are cut.
2. Raise tax revenues even faster than defense spending grows so as to achieve
and maintain a cash surplus. Merely to balance the budget is not enough. If
the inflationary pressure is to be removed, taxes must take out of private money
incomes not only as much as Government spending contributes to them but also
a part of the increase of private incomes resulting from increased private spending
i The following persons were also asked to comment, but were unable to reply within the time available:
Dr. Howard R . Bowen, University of Illinois; Dr. Richard B. Goode, University of Chicago; Dr. Alvin H.
Hansen, Harvard University; Dr. Albert G. Hart, Columbia University; Mr. Everett M . Kassalow, Full
Employment Committee—CIO; Dr. Dexter Keezer, McGraw-Hill Publishing Co., Inc.; Dr. Lloyd Metzler,
University of Chicago; Dr. Marcus Nadler, New York University; Dr. Howard H. Preston, University o f
Washington; M r. Russell Smith, National Farmers Union; and Dr. Arthur Smithies, Harvard University*
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
55
of idle balances and newly borrowed money. Larger taxes must be paid by all of
us. Reliance should be placed primarily on increases of personal income taxes on
all income in excess of present exemptions. Higher corporate profits taxes, in one
form or another, are also imperative. In addition, loopholes in our tax laws
should be closed.
3.
Restrict the amount of credit available to businesses and individuals for
purposes not essential to the defense program. An expanding supply of low-cost
credit which swells private spending cannot fail to stimulate inflation when the
supply of goods available for private use will be difficult to expand and may even
decline.
Selective controls over consumer credit, real-estate credit, and loans on securities
are useful for this purpose and should be employed. But we believe that general
restriction of the total supply of credit is also necessary. This can be accomplished
only by measures that will involve some rise of interest rates.
If general inflationary pressure is not removed by fiscal and credit measures, we
face two alternatives: (1) Continued price inflation, or (2) a harness of direct
controls over the entire economy which, even if successful in holding down prices
and wages for a while, would build up a huge inflationary potential in the form
of idle cash balances, Government bonds, and other additions to liquidity. Such
accumulated savings would undermine the effectiveness of direct controls and
produce open inflation when the direct controls are lifted. Everyone remembers
vividly the sharp inflation of 1946-48 when the wartime accumulation of liquid
assets went to work on prices after the removal of direct price and wage controls.
Either of these alternatives is extremely dangerous. A prolonged decline in the
purchasing power of the dollar would undermine the very foundations of our
society, and an ever-spreading system of direct controls could jeopardize our
system of free enterprise and free collective bargaining. For these reasons we
urge that fiscal and credit policies constitute our primary defense against in
flation.
The best possible fiscal and credit policies, however, will not eliminate altogether
the need for other types of restraints. The first impacts of a defense program are
felt especially in particular commodities. Effective allocation programs and orders
limiting the consumption of short materials to essential uses, and an expansion of
supplies can help stabilization of prices and wages in such specific lines; but they
cannot of themselves insure price and wage stability. Moreover, it is obvious
that stability of the general level of prices in the economy would be impossible
in the face of general wage increases that substantially raise costs and private
spendable incomes. For the above reasons, voluntary restraints by business and
labor are an important ingredient of a successful anti-inflation program, and if
business and labor cannot or will not exercise such restraint some mandatory
Government ceilings may be necessary.
In sum, fiscal and credit measures are the only adequate primary defense
against inflation, and can minimize the extent of direct Government controls over
wages, prices, production, and distribution. If adequate fiscal and credit mea
sures are not employed, the country will face the ominous choice between continu
ous inflation and a prolonged application of widespread |Government price and
wage controls.
N o v e m b e r 30,1950.
Gardner Ackley, University of Michigan Russell S. Bauder, University of
George P. Adams, Jr., Cornell UniverMissouri
sity
William J. Baumol, Princeton University
Leonard W. Adams, Syracuse Univer- Harry P. Bell, Dartmouth College
sity
James Washington Bell, Northwestern
E. E. Agger, Rutgers University
University
H. K. Allen, University of Illinois
Philip W. Bell, Princeton University
Edward Ames, Amherst College
Merrill K. Bennett, Stanford University
Geo. R. Anderson, University of Warren J. Bilkey, University of ConMichigan
necticut
Carl Arlt, Oberlin College
Robert L. Bishop, Massachusetts InstiJames L. Athearn, Ohio State Univertute of Technology
sity
John D. Black, Harvard University
Leonard A. Axe, University of Kansas Perry Bliss, University of Buffalo
G. L. Bach, Carnegie Institute of Tech- Francis M. Boddy, University of Minnenology
sota
Robert E. Baldwin, Harvard University Harold Barger, National Bureau of EcoPaul A. Baran, Stanford University
nomic Research
56
CREDIT AND 'DEBT CONTROL AND ECONOMIC MOBILIZATION
George H. Borts, Brown University
Chelcie C. Bosland, Brown University
K. E. Boulding, University of Michigan
Carol P. Brainerd, University of Penn
sylvania
Elwood J. Braker, University of Penn
sylvania
Elizabeth Brandeis, University of Wis
consin
Alma Bridgman, University of Wiscon
sin
George K. Brinegar, University of Con
necticut
Ayres Brinser, Harvard University
Alexander Brody, City College of New
York
Martin Bronfenbrenner, University of
Wisconsin
Robert R. R. Brooks, Williams College
Douglass V. Brown, Massachusetts
Institute of Technology
E. Cary Brown, Massachusetts Institute
of Technology
Emily C. Brown, Vassar College
Harry G. Brown, University of Missouri
O. H. Brownlee, University of Minne
sota
Yale Brozen, Northwestern University
Kenneth P. Brundage, University of
Connecticut
D. H. Buchanan, University of North
Carolina s
Norman S! Buchanan, University of
California
Edward C. Budd, University of Illinois
Henry T. Buechel, University of Wash
ington
Robert L. Bunting, University of North
Carolina
H. H. Burbank, Harvard University
Arthur Butler, University of Buffalo
John Buttrick, Northwestern University
Carl R. Bye, Syracuse University
James D. Calderwood, Ohio State Uni
versity
Arnold P. Callery, University of Buffalo
Claude A. Campbell, State College of
Washington
Robert Campbell, University of Illinois
Arthur M. Cannon, University of Cali
fornia
Helen G. Canoyer, University of Minne
sota
John P. Carter, University of California
W. Harrison Carter, Jr., University of
Connecticut
William A. Carter, Dartmouth College
P. W. Cartwright, University of Wash
ington
Lester V. Chandler, Princeton Univer
sity
Frank C. Child, Williams College
Jack Chernick, University of Kansas
Carl Christ, Johns Hopkins University
A. Hamilton Chute, University of Texas
Jack Ciaccio, Northwestern University
Carl P. Ciosek, University of Con
necticut
Frank L. Clark, University of Con
necticut
Paul G. Clark, Williams College
G. H. Cochran, Ohio State University
John A. Cochran, University of Illinois
Sanford Cohen, Ohio State University
Joseph D. Conard, Swarthmore College
Michael V. Condoide, Ohio State Uni
versity
Paul W. Cook, Northwestern University
Alvin E. Coons, Ohio State University
Arthur J. Coutu, University of Con
necticut
James A. Cover, Syracuse University
A. B. Cox, University of Texas
John M. Crawford, Carnegie Institute of
Technology
Ira B. Cross, University of California
James A. Crutchfield, University of
Washington
Howard A. Cutler, University of Illi
nois
Stuart Daggett, University of California
C. F. Daily, University of Oklahoma
Clarence H. Danhof, Princeton Univer
sity
Clyde E. Dankert, Dartmouth College
Joseph S. Davis, Stanford University
Robert T. Davis, Dartmouth College
Malcolm M. Davisson, University of
California
Melvin G. de Chazeau, Cornell Uni
versity
Karl de Schweinitz, Jr., Northwestern
University
Emile Despres, Williams College
Arthur W. Dewey, University of Con
necticut
Ralph L. Dewey, Ohio State University
Robert L. Dickens, Duke University
Z. C. Dickinson, University of Michigan
Arthur T. Dietz, Wesleyan University
James C. Dolley, University of Texas
Duane Doolittle, Syracuse University
Boris G. Dressier, City College of New
York
John F. Due, University of Illinois
Acheson J. Duncan, Johns Hopkins
University
Delbert J. Duncan, University of Cali
fornia
Henry L. Duncombe, Dartmouth Col
lege
James S. Dusenberry, Harvard Univer
sity
J. S. Earley, University of Wisconsin
Robert S. Eckley, University of Kansas
Melvin A. Eggers, Syracuse University
Howard S. Ellis, University of California
P. T. Ellsworth, University of Wis
consin
Donald English, Cornell University
Ralph C. Epstein, University of Buffalo
Merton W. Ertell, University of Buffalo
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
George Heberton Evans, Jr., Johns Hop
kins University
Solomon Fabricant, National Bureau of
Economic Research
E. D. Fagan, Stanford University
Paul F. Fagan, University of Con
necticut
Helen C. Farnsworth, Stanford Univer
sity
Martin T. Farris, Ohio State University
Robert Ferber, University of Illinois
D. A. Fergusson, University of Cali
fornia
Frank Whitson Fetter, Northwestern
University
Clyde Olin Fisher, Wesleyan University
J. Anderson Fitzgerald, University of
Texas
Dwight P. Flanders, University of
Illinois
Louis O. Foster, Dartmouth College
Robert R. France, Princeton University
Herbert Fraser, Swarthmore College
R. E. Freeman, Massachusetts Institute
of Technology
Albert W. Frey, Dartmouth College
J. Kenneth Galbraith, Harvard Univer
sity
John O. Gallagher, Wesleyan University
David Gass, Williams College
Arthur D. Gayer, Queens College
Alexander Gerschenkron, Harvard Uni
versity
Roland Gibson, University of Illinois
Max Gideonse, Rutgers University
Burton H. Gildersleeve, University of
Oklahoma
J. B. Gillingham, University of Wash
ington
Morris D. Glickfeld, University of
Washington
Donald F. Gordon, University of Wash
ington
Kermit Gordon, Williams College
R. A. Gordon, University of California
Richard A. Graves, University of Min
nesota
Horace M. Gray, University of Illinois
Albert O. Greef, University of Connecti
cut
John A. Griswold, Dartmouth College
Morton C. Grossman, State College of
Washington
Harold M. Groves, University of Wis
consin
Edward D. Gruen, Dartmouth College
John G. Gurley, Princeton University
John A. Guthrie, State College of Wash
ington
William Haber, University of Michigan
Gottfried Haberler, Harvard University
Everett E. Hagen, University of Illinois
Harold G. Halcrow, University of Con
necticut
Earl C. Hald, University of Washington
Challis A. Hall, Yale University
57
Burton T. Hallowell, Wesleyan Univer
sity
William Hamovitch, University of Buf
falo
Arnold C. Harberger, Johns Hopkins
University
Seymour E. Harris, Harvard University
C. Lowell Harriss, Columbia University
Hudson B. Hastings, Yale University
Everett D. Hawkins, Mount Holyoke
College
Floyd B. Haworth, University of Illinois
H. Gordon Hayes, Ohio State University
Milton S. Heath, University of North
Carolina
Clarence Heer, University of North
Carolina
Richard B. Heflebower, Northwestern
University
Warren W. Heller, University of Minne
sota
William Hellmut, Oberlin College
Orris C. Herfindahl, University of Illi
nois
Kenneth W. Herrick, University of Con
necticut
C. Addison Hickman, University of Illi
nois
Forest G. Hill, University of California
L. Gregory Hines, Dartmouth College
W. Z. Hirsch, University of California
Paul W. Hirseman, Syracuse University
Daniel M. Holland, National Bureau of
Economic Research
William S. Hopkins, University of
Washington
Schuyler Hoslett, Cornell University
Stanley E. Howard, Princeton Univer
sity
J. Richard Huber, University of Wash
ington
H. D. Hudson; University of Illinois
Holland Hunter, Haverford College
John G. B. Hutchins, Cornell University
Walter Isard, Harvard University
John Ise, University of Kansas
David A. Ivry, University of Connecti
cut
Clifford L. James, Ohio State University
Ralph C. Jones, Yale University
William O. Jones, Stanford University
Jules Joskow, City College of New York
Clarence R. Jung, Jr., Ohio State Uni
versity
Alfred E. Kahn, Cornell University
Howard S. Kaltenborn, University of
California
Alice B. Kane, University of Connecti
cut
James R. Kay, University of Texas
Carl Kaysen, Harvard University
Peter M. Keir, Amherst College
Samuel C. Kelley, Jr., Ohio State
University
Donald L. Kemmerer, University of
Illinois
58
CREDIT AND DEBT CONTROL AND- ECONOMIC MOBTLIZATTON
Thomas L. Kibler, Ohio State Uni
versity
E. A. Kincaid, University of Virginia
William N. Kincaid, Jr., Wesleyan Uni
versity
C. P. Kindleberger, Massachusetts Insti
tute of Technology
Richard A. King, University of Con
necticut
Bruce W. Knight, Dartmouth College
Frank J. Kottke, University of North
Carolina
Kenneth K. Kurihara, Rutgers Uni
versity
Robert J. Lampman, University of
Washington
Charles E. Landon, Duke University
Robert F. Lanzillotti, State College of
Washington
Maurice W. Lee, State College of Wash
ington
Wayne A. Leeman, University of Mis
souri
H. Liebenstein, Princeton University
Simeon E. Leland, Northwestern Uni
versity
Ben F. Lemert, Duke University
Richard A. Lester, Princeton University
J. M. Letiche, University of California
Ben W. Lewis, Oberlin College
Martin L. Lindahl, Dartmouth College
D. Philip Locklin, University of Illinois
William W. Lockwood, Princeton Uni
versity
G. S. Logdsdon, University of North
Carolina
Clarence D. Long, Johns Hopkins Uni
versity
Raymond H. Lounsbury, Dartmouth
College
Meno Lovenstein, Ohio State University
Friedrich A. Lutz, Princeton University
Fritz Machlup, Johns Hopkins Uni
versity
Edna C. MacMahon, Vassar College
R. C. Manhart, University of Missouri
Alan S. Manne, Harvard University
Everett J. Many, Duke University
Yves Maroni, University of Buffalo
Howard D. Marshall, Vassar College
William H. Martin, Williams College
Edward S. Mason, Harvard University
Will E. Mason, University of Buffalo
Harry E. McAllister, State College of
Washington
Kenneth M. McCaffree, University of
Washington
Paul McCollum, University of Kansas
J. L. McConnell, University of Illinois
Raymond H. McEvoy, University of
Illinois
Edmund D. McGarry, University of
Buffalo
E. Karl McGinnis, University of Texas
James W. McKie, Harvard University
Samuel C. McMillan, University of
Connecticut
E. B. McNatt, University of Illinois
Robert I. Mehr, University of Illinois
Glenn W. Miller, Ohio State University
John P. Miller, Yale University
Max F. Millikan, Massachusetts Insti
tute of Technology
Hyman P. Minsky, Brown University
Royal E. Montgomery, Cornell Univer
sity
Maurice Moonitz, University of Cali
fornia
Theodore Morgan, University of Wis
consin
Margaret G. Myers, Vassar College
James C. Nelson, State College of
Washington
James R. Nelson, Amherst College
Arthur E. Nilsson, Cornell University
R. M. Nolen, University of Illinois
D. C. North, University of Washington
C. Remold Noyes, Princeton, New
Jersey
G. W. Nutter, Yale University
Paul M. O'Leary, Cornell University
John T. O’Neil, University of North
Carolina
Guy H. Orcutt, Harvard University
Richard C. Osborn, University of Illinois
Donald W. Paden, University of Illinois
Andreas G. Papandreou, Northwestern
University
John B. Parrish, University of Illinois
Carl E. Parry, Ohio State University
James W. Partner, Cornell University
Harold C. Passer, Princeton University
Ernest M. Patterson, University of
Pennsylvania
R. D. Patton, Ohio State University
Edith T. Penrose, Johns Hopkins Uni
versity
Winton Pettibone, University of Wash
ington
Clarence Philbropk, University of North
Carolina
Frank C. Pierson, Swarthmore College
Ann E. Pike, Ohio State University
Henry M. Platt, Dartmouth College
Kenyon E. Poole, Northwestern Uni
versity
A. Neal Potter, State College of Wash
ington
Charles L. Prather, University of Texas
L. J. Pritchard, University of Kansas
Claude E. Puffer, University of Buffalo
P. L. Putnam, University of Connecticut
Albert J. Raebeck, Princeton University
M. W. Reder, Stanford University
Harold L. Reed, Cornell University
Charles B. Reeder, Ohio State Univer
sity
M. G. Reid, University of Illinois
C. F. Remer, University of Michigan
Robert A. Rennie, Johns Hopkins Uni
versity
Lloyd G. Reynolds, Yale University
Lloyd P. Rice, Dartmouth College
Marshall A. Robinson, Ohio State Uni
versity
Earl R. Rolph, University of California
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
Kenneth Roose, Oberlin College
Raymond A. Ross, University of Cali
fornia
Vernon E. Ross, University of Connecti
cut
Eugene V. Rostow, Yale University
Jerome Rothenberg, Amherst College
Eugene Rotwein, University of Wiscon
sin
Arthur Salz, Ohio State University
Arnold W. Sametz, Princeton University
W. Sargent, Dartmouth College
Frederick M. Sass, University of Penn
sylvania
John E. Sawyer, Harvard University
0 . G. Saxon, Yale University
Henry H. Schloss, University of Texas
Joe G. Schoggen, University of Kansas
G. T. Schwenning, University of North
Carolina
Tibor Scitovsky, Stanford University
Ira O. Scott, Jr., Harvard University
Stanley K. Seaver, University of Con
necticut
Alfred L. Seelye, University of Texas
1. Leo Sharfman, University of Michigan
E.S. Shaw, Stanford University
Harry F. R. Shaw, Dartmouth College
Joseph Shister, University of Buffalo
George P. Shultz, Massachusetts Insti
tute of Technology
R. A. Sigsbee, City College of New York
Earl R. Sikes, Dartmouth College
Edward C. Simmons, Duke University
David W. Slater, Stanford University
L. Edwin Smart, Ohio State University
C. Aubrey Smith, University of Texas
Caleb A. Smith, Brown University
D. B Smith, University of Illinois
E. G. Smith, University of Texas
Robert S. Smith, Duke University
Vernon L. Smitn, University of Kansas
Warren L. Smith, University of Michi
gan
Arthur Smithies, Harvard University
William P. Snavely, University of Con
necticut
I. J. Sollenberger, University of Okla
homa
Harold M. Somers, University of Buffalo
Herman M. Somers, Haverford College
Milton H. Spencer, Queens College
W. R. Spriegel, University of Texas
J. Warren Stehman, University of Min
nesota
W. Blair Stewart, Oberlin College
George J. Stigler, National Bureau of
Economic Research
John R. Stockton, University of Texas
Merton P. Stoltz, Brown University
Robert E. Stone, Syracuse University
John A. Stovel, University of Minne
sota
Paul J. Straver, Princeton University
Robert H. Strotz, Northwestern Uni
versity
78276— 51-------5
59
Sidney C. Sufrin, Syracuse University
J. R. Summerfield, University of Cali
fornia
John D. Sumner, University of Buffalo
Boris C. Swerling, Stanford University
Alfred W. Swinyard, Syracuse Uni
versity
Joseph Taffet, City College of New York
Philip Taft, Brown University
Lorie Tarshis, Stanford University
Virginia Galbraith Tauchar, Mount
Holyoke College
George Rogers Taylor, Amherst College
Paul N. Taylor, University of Connecti
cut
Philip E. Taylor, University of Con
necticut
Howard M. Teaf, Jr., Haverford College
Richard B. Tennant, Yale University
Ralph I. Thayer, State College of Wash
ington
Vladimir P. Timoshenko, Stanford 'Uni
versity
R. D. Tousley, State College of Wash
ington
Truman G. Tracy, University of Mis
souri
Donald S. Tucker, Massachusetts Insti
tute of Technology
D. G. Tyndall, Carnegie Institute of
Technology
Arthur R. Upgren, University of Min
nesota
Abbott Payson Usher, University of
Wisconsin
Roland S. Vaile, University of Minne
sota
Jacob Viner, Princeton University
Charles E. Walker, University of Texas
Pinkney C. Walker, University of Mis
souri
Donald H. Wallace, Princeton Univer
sity
Robert F. Wallace, State College of
Washington
Leonard L. Watkins, University of
Michigan
E. T. Weiler, University of Illinois
Paul F. Wendt, University of California
Lawrence L. Werboff, Northwestern
University
R. B. Westerfield, Yale University
William O. Weyforth, Johns Hopkins
University
Arthur M. Whitehill, Jr., University of
North Carolina
C. R. Whittlesey, University of Pennsyl
vania
W. D. Wickizer, Stanford University
Clair Wilcox, Swarthmore College
Harold F. Williamson, Northwestern
University
Kossuth M. Williamson, Wesleyan Universitv
E. E. Witte, University of Wisconsin
Elmer Wood, University of Missouri
60
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION'
G. Walter Woodworth, Dartmouth Col-Edwin Young, University of Wisconsin
lege
Alois L. Zaremba, Ohio State University
D. A. Worcester, Jr., University ofErich W. Zimmerman, University of
Washington
Texas
Holbrook Working, Stanford University
STATEMENT OF G. L. BACH2
These comments are in reply to your letter of September 22, suggesting that I
state briefly my views with respect to recent changes in short-term interest rates
and the current problem of monetary policy. I have tried to arrange my com
ments in a series of consecutive paragraphs, which comprise in effect an analysis
of the current situation and a set of suggested policies.
(1) The evidence seems to me clear that large changes in employment, national
output, and the price level are almost invariably accompanied by large changes
in the same direction in the volume of currency and bank deposits per capita.
Moreover, significant changes in direction in the volume of over-all output arid
employment are almost invariably preceded or immediately accompanied by
changes in the same direction of the per capita money supply. These patterns
have been so consistent, and the analytical reasons for believing that a significant
causal relationship exists between changes in the per capita money supply and the
volume of over-all employment and output are so convincing, that I believe we
must consider the per capita money supply a significant factor among the deter
minants of the level of over-all economic activity.
This proposition holds, although the exact chain of relationships from changing
money supply to economic activity has not been indisputably established. The
major connections appear to be through the interest rate, involving both cost
elements and changes in capital values of assets, and, probably more importantly,
through the direct impact of changing liquidity and availability of loan funds for
the public on individual and business spending. Fortunately, it is not necessary
to weigh these two channels exactly, since most monetary policy measures work
through both in the same direction at the same time. In this connection, it is
important to recognize that, however we assess the evidence on the effectiveness
of easy money in inducing revival, there is clear evidence that tight money has
repeatedly been important in checking inflationary booms.
(2) Since this is true, and since the problem of business fluctuations is still a
very significant one in our economy, it follows that governmental (Treasury and
Federal Reserve) control over the supply of money is an important weapon in our
small and somewhat untried arsenal against economic fluctuations. It also
follows that it is important to have the flexible use of monetary policy against
these fluctuations, in contrast to the present arrangements where monetary
policy is largely hamstrung under the Federal Reserve policy of essentially
guaranteeing maintenance of United States bond prices above par. Current
Federal Reserve policy has essentially negated flexible monetary policy, even
though the stability of interest rates per se may be relatively unimportant com
pared to the general liquidity (availability of funds) factor.
(3) I believe that the evidence points toward moderate to strong inflationary
pressure over the several years ahead. Current inflationary pressures appear to
be strong. I see no reason to expect this situation to cha,nge markedly, short of
a significant change in the over-all international situation or United States
attitudes toward it.
(4) Under these circumstances, I believe that monetary policy should be
reactivated and brought to bear against inflationary pressures much more strongly
than has been true in the recent past. In particular, I believe that two steps
should be taken:
(a)
Short-term interest rates on Government securities, and on private loans
insofar as they are affected, should be permitted to rise, and to rise substantially.
Given the high degree of over-all liquidity of the economy and the easy-money
situation guaranteed by Federal Reserve support of long securities, such a rise
in short rates could not be expected to exert major anti-inflationary pressure.
It would, however, in my judgment have the following important values.
First, it should have a moderate and general tightening effect on bank loan
policies and on general money-market psychology, thus affecting to some extent
the availability of loan funds. Second, higher rates would exercise some effect
2 Dean, School of Industrial Administration, Gamegie Institute of Technology, Pittsburgh, Pa..
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
61
through the cost side. In a very strong inflationary situation this would prob
ably not be a very important factor, but in a more moderate situation such as
appears ahead it may be a significant deterrent in marginal cases. Third, and
perhaps most important, flexible upward adjustment of short rates would serve
as notice to the money market that a gradual reestablishment of effective mone^
tary policy is underway, and that the market should adjust itself to the gradual
removal of rigidity in the price of long-term governments at or above par. Such
notice by the Federal authorities seems essential to avoid the danger of drifting
again into dangerous easy-money policies for the long defense period apparently
ahead, just as we drifted into dangerous easy-money policies without seriously
considering the consequences during the early days of World War II.
(b) Federal Reserve authorities should immediately lower the effective support
price for long-term Government securities to slightly below par, letting the market
know informally but clearly that the Reserve intends to take this action and, for
the current defense crisis, to support long issues moderately below par if such
support becomes necessary. This action would have the important effect of
raising long rates moderately. More important, it would remove the strong
standing invitation to holders of long issues to convert into money on very advan
tageous terms at any time. It would at the same time retain the essential pro
tection of capital of any distress sellers of long securities. This compromise
action would fall considerably short of a completely flexible and strongly antiinflationary monetary policy, but it would mark a real advance in concrete terms*,
and in announcement value, away from the completely easy-money arrangements
which have so far blocked significant monetary policy against the war and postwar
inflation.
(5) The question of the cost of such a policy to the Treasury needs analysis.
Here clear recognition of fundamentals is required, in contrast to acceptance of
the superficial appearance of the problem.
(a)
The Treasury is only an agent of the American public, and interest costs on
the public debt are merely transfer payments from one segment of the public to
another. Thus, “ cost” to the Treasury is fundamentally a meaningless and useless
concept, unless it is used to connote primarily a problem of redistribution of income
among the various groups of the population involved in payments to and from
the Treasury. The problem here is sound congressional distribution of the tax
burden and proper handling of Treasury policy in selling Government securities.
(6) Against this transfer problem arising from an increase of interest payments
must be set the convincing evidence of the importance of a tightening money
supply and liquidity situation in restraining inflationary pressures. In my judg
ment, even a very substantial increase in Treasury interest costs would bulk small
compared to the advantages of restraining inflationary developments in the
present quasi-war economy.
(c) Even from a Treasury viewpoint, there is an important advantage in paying
higher interest rates on the national debt if inflation can be restrained. First,
there is already clear-cut evidence of growing public awareness of the impact of
inflation on holders of fixed-dollar-value Government securities. Over the past
decade, $1,000 invested in the highest-yield Government securities (United States
Savings bonds) would now buy only about $750 worth of consumers' goods
(BLS price index), even after the large interest accumulation is added on to the
principal. This elementary fact is increasingly obvious. Heavy stock-market
investments and recurring upward pressure on prices of inflation-hedge assets
point clearly to Treasury difficulties in peacetime or quasi-war borrowing from
the public on a voluntary basis unless the inflation is checked. Second, with
huge Government expenditures ahead on defense, even a very small restraint on
inflation will save far more in total Government spending than the billion or two
of increased interest charges involved in increases in short and long-term ratesv
In my judgment, under these circumstances excessive concern over nominal savings
in Treasury interest cost is likely to go down in history as a classic example of
fiscal short-sightedness.
(d) Treasury concern lest the market for governments be “ unsettled” is legiti
mate in face of the huge volume of refundings and possible new money issues that
will have to be handled. While it is important to keep the market from a panic?
condition, excessive preoccupation with market “ confidence” and “ stability^ is
short-sighted. The erosion of the value of the dollar under continued inflation
seems to me much more likely to create a huge barrier to Treasury borrowing from
the public than any temporary “ unsettling” involved in moving toward higher
and more flexible rates.
62
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
There seems to me to have been considerable loose talk on this point, involving
confusion between purchases by the public and by the banks. The Treasury,
With the cooperation of the Federal Reserve, can always sell securities to the banks
at any given rate by pumping in enough excess reserves to make the banks highly
liquid. This, however, is a perversion of proper Treasury borrowing policies in
an inflationary period, and main emphasis should be placed in sales to the public.
For such sales on a voluntary basis, continued inflation promises to become a major
barrier. Under these circumstances, an ^informal Reserve support price for long
issues moderately below par for some time, perhaps later giving way to a still
lower support price, seems to^provide a reasonable compromise between keeping
the market “ settled” and trying to freeze at least part of the outstanding issues
into a lower level of liquidity than they now possess.
(6) These monetary steps alone cannot be counted upon to check the current
inflationary pressure. Large increases in taxes, beyond the rises currently being
contemplated, must provide the backbone of any realistic anti-inflation program
when inflationary pressures are strong. Coupled with such an aggressive tax
policy, the monetary restrictions suggested above should constitute an important
supplement, even though they cannot carry a major share of the task as long as
the long rate is held down and liquidity assured by a support policy of the Federal
Reserve, even moderately below par. Reliance on partial direct controls over
individual prices and wages seems to me quite unrealistic under present circum
stances. History demonstrates that, to be effective, partial direct controls need to
be rapidly expanded to complete controls over prices and wages if the inflationary
pressures are strong. I cannot believe that the American public will be prepared
to accept effective over-all direct controls unless we become involved in a largescale, all-out war. To believe that the public will accept even partial direct
controls at points where the controls really bite, also, seems to me to be politically
unrealistic in the defense situation into which we appear headed. My conclusion
is that for the type of period ahead any effective control must come through
fiscal-monetary measures.
(7) Concerning the allocation of monetary-fiscal-debt powers between the
Treasury and Federal Reserve, I strongly support the approach advocated by the
Douglas subcommittee on the following points: (a) Upgrading the status of a
smaller, strengthened Federal Reserve Board of Governors; (b) joint and coequal
consultative status between the Federal Reserve and the Treasury in debtmonetary policy making; (c) clearer allocation of monetary policy responsibility
to the Federal Reserve through congressional directive. I support these steps not
because I believe the Federal Reserve should really be vigorously independent,
since such vigorous independence seems to me to be quite unrealistic in the
current setting. I support them rather as firm steps toward assuring more equal
status for the traditional central-bank anti-easy-money attitude in inflationperiod governmental policy formation. While minor differences between the
Federal Reserve and Treasury, such as those of recent months, do no great harm,
fundamentally the Nation's monetary-fiscal-debt policy must be unified and free
of strong inner conflicts. To be most useful to the Nation, this unification must
come on the basis of careful consideration of the points of view advocated by both
operating Treasury officials and central-bank officials, in a framework where the
parties are considered, and consider each other, as roughly coequal, possibly in a
National Monetary Council.
(8) In handling refundings and new money issues over the period ahead, I
urge reconsideration of current Treasury policy to convert the debt predominantly
to short issues. This policy has the illusory advantage of minimizing interest
charges, but at the very real expense of decreasing the Government's flexibility
in adjusting debt policy to over-all economic conditions. In particular, this inflexi
bility takes the form of guaranteeing the short-term liquidity of the public debt
to the public, regardless of Federal Reserve and Treasury feelings about the
desirability of tight or easy money.
STATEMENT OF LESTER V. CHANDLER8
In accordance with the request in your letter of September 22, this statement
will limit itself to “ the specific implications and long-run effects on Government
finances and on stability of the economy in following at this time a policy of
allowing interest rates on short-term Treasury issues to rise." Though it will not
* Department of Economics and Social Institutions. Princeton University.
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
63
be discussed here, it might also be useful to study the desirability of preventing
yields on the longest-term marketable issues from ever rising above
percent,
especially in periods of inflation.
First, let me deal with the impact of higher rather than lower short-term rates
on Treasury financing. The immediate and obvious effect is, of course, to raise
somewhat the interest costs on the national debt. But this should not be accorded
undue importance simply because it is immediate and obvious. (1) The amount
involved cannot be large if the rise is in fact limited to rates on short-term issues.
This is especially true if one deals with the “ net interest” charges after taxes
collected out of the increased interest income. (2) Somewhat higher short-term
rates may make it possible to borrow larger amounts on short-term securities
so that less will have to be borrowed on long-term issues where the rates are higher.
To the extent that this results, there is not necessarily any increase in the average
interest rate on the total debt. (3) The tax increase necessary to cover any net
rise of interest charges would certainly be only a small part of the total tax bill
and would be a small price to pay for a monetary policy that would inhibit infla
tion. (4) Even if the transfer of higher interest payments to the creditors of the
Government did tend toward a less desirable distribution of income—which does
not necessarily follow—it would be far less undesirable than the widespread and
arbitrary shifts of income brought about by inflation, which is actually encouraged
by a continued easy-money policy in a period like the present one.
In my opinion, the effects of temporarily higher short-term rates during inflation periods like the present one could only benefit the position of Government
credit in the long run. It is certainly no reflection on the national credit to have
to pay higher interest rates when interest rates in general are rising. The real
threat to Government credit is that people will come to lose confidence in the future
purchasing power of the dollars in whicn. the debt is stated. A continued easymoney policy in the face of inflation—a continued willingness of the Federal
Reserve to coin Government securities into money to feed the inflation—is likely
to encourage such a loss of confidence in dollars and also in Government securities
stated in those dollars.
A very generous supply of credit and accompanying low interest rates are
highly desirable in a period of actual or threatened unemployment. They tend
to expand private spendings for investment purposes, especially for highly durable
housing and producers’ durable goods and indirectly to promote consumer spend
ing because of the higher incomes generated in the capital goods industries. The
maintenance of low interest rates and a generous suppiv of credit also stimulate
private spending in the same way during periods of inflation—perhaps even more
than in depressed periods. This is exactly what we want to avoid in this inflation*
ary period when the prospect is for less rather than more goods and services to be
available for private purchase. Yet it is important to note that the maintenance
of inflexibly low rates on Government securities as the Treasury seems to advocate,
would have the effect of assuring that credit for private spending would continue
to be freely available in large quantities and at low cost. This follows from three
facts: (1) Investors, not only banks but many others, hold huge amounts of
Federal securities; in fact, their holdings of these are greater than their total hold
ings of private bonds, mortgages, and other private debts. The interest rates
that they receive on these securities constitute their incentive to hold these securi
ties rather than to spend the monev or to lend to others. And the lower the in
terest rate, the lower the “ cost” of spending the money or of lending to others.
(2) All these investors have complete freedom to hold the securities or to sell
them in order to acquire money to spend or to lend to private borrowers. Thus
the cost of money to private borrowers cannot rise by more than a normal margin
above the yields on private obligations. (3) The only way that interest rates
can be held dowr> in the face of large demands for credit is for the Federal Reserve
to purchase all the governments that others are not willing to hold at the official
levels of yields—that is, to monetize those parts of the debt, thereby adding to
bank reserves and bank lending power as well as directly increasing the private
money supply. In fact, the results of Federal Reserve monetization of debt to
hold down interest rates at an inflexibly low level are almost exactly the same as
those that would follow from the following legislation by the Congress:
1. Authorize the Secretary of the Treasury to issue additional greenbacks
not to exceed the amount of the Federal debt now in the hands of the banks
and the public.
2. Empower the Secretary to issue these greenbacks in whatever quantities
were necessary to prevent any rise in short-term interest rates and to prevent
the price of any Government security from falling below par.
64
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
Such a policy could, at least for a time, hold down interest charges on the n9tional
debt and prevent the prices of Government securities from falling. Its principal
disadvantage would be that it would be a policy of monetizing the debt at the
option of the holders, and the demand for monetization would be greatest when
the private desire to spend and the private demand for credit were highest. In
short, it would encourage inflation. Yet this hypothetical policy, which would
clearly militate strongly against economic stabilization, would in every significant
respect produce the same results as a Federal Reserve policy of creating whatever
additional amounts of money were necessary to prevent any rise of interest rates.
Both would add fuel to the inflationary fire and to about the same degree.
It is impossible to predict with accuracy the degree to which anv given rise of
interest rates would inhibit inflation. All that we can be sure of is that a restrictive
monetary policy that would involve some rise of rates would h?ve some antiinflationary effect, as comparea with a continuous and unabated easy-money policy.
I am inclined to think that the effectiveness of monetary policy as an anti-infla
tionary force has come to be much underrated by many people, both in and out
of Government. Those who argue that it is ineffective usually assume that a
restrictive policy exerts its effects only by raising interest rates, and then go
ahead to argue (1) that interest costs are such a small part of the total cost of
doing business that a moderate rise of rates cannot much affect private decisions
as to the amount of investment expenditures, except possibly in housing and very
durable producers* goods; and (2) that a moderate rise of interest rates has little
effect on the willingness of people to save rather than spend out of any given
level of income. Surely this is an inadequate and far too narrow a view as to the
manner in which a restrictive credit policy inhibits inflation. In their total effect
the following are, in my opinion much more important:
(1)
Credit rationing. Banks limit the amount of their credit far more by
various direct rationing than by raising interest rates to a sufficiently high level to
reduce the effective demand. The Federal Reserve has no effective way of forcing
banks to restrict credit by rationing so long as it must stand ready to supply them
with almost unlimited reserve funds by purchasing low-yield governments from
banks and other holders. But by simultaneously raising yields on short-term
governments, thereby increasing the cost of reserve funds, and accompanying this
with various types of moral suasion, the Federal Reserve could with some success
induce banks to be less liberal with their loans. (2) Effect on private expectations
as to the course of price levels. The maintenance of an inflexible easy-money
policy by the Federal Reserve is, in effect, a clear statement to the public at large
that the inflation will be aided, rather than hindered, by monetary policy. This
tends to increase private spendings. But a restrictive monetary policy, with some
rise of interest rates, would help somewhat to reduce fears of further inflation and
would reduce the private demand for credit and the private tendency to spend.
It would also make lenders less sanguine as to the safety of lending large amounts
to marginal borrowers. (3) The rise of short-term rates would probably reduce
somewhat the availability of long-term private credit. (4) The “ reaching for
yields.” With existing low interest rates many investors, especially financial
institutions, feel “ starved for earnings.” This is especially true of commercial
banks, whose earnings are so low that most of their stocks have a market value
considerably below their asset value, but it is also to some extent true of others.
Thus, they are strongly inclined to “ reach for yields” — to shift out of governments
into private obligations whenever the latter offer any significant increase of yield.
A rise of rates on governments would decrease this shift to private loans, both by
making the institutions more satisfied with their earnings on governments and by
making lenders somewhat less sure that the inflation would be sufficiently large as
to make the private loans safe. (5) The “ multiplier” and other derivative effects
of a restrictive policy. Those who would discard monetary policy and rely solely
on fiscal policy to restrict inflation usually argue for the superior efficacy of their
favorite instrument by pointing not only to the direct effects of taxation on
private income but also to the induced decline of consumption, the induced
decrease of investment spendings, and so on. But it should be noted that a
restrictive monetary policy also operates in these ways. To the extent that
tighter credit has any initial effect in decreasing private spendings it, too, has
reverberating effects; the initial decline of spendings reduces or impedes the rise of
money incomes and has its own cumulative effects similar to those of a restrictive
fiscal policy.
In short, a restrictive credit policy operating in all the ways enumerated above,
and not just by increasing the cost of private credit, can exert a quite significant
anti-inflationary effect— an effect that is certainly worth the price of somewhat
higher service charges on the national debt. But it is impossible to achieve those
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
65
effects while the Federal Reserve is chained to the objective of preventing any rise
of interest rates.
I should like to conclude this statement with three observations. (1) I do not
argue that we should rely solely on restrictive monetary policy to fight inflation.
Specifically, it would be foolish to follow an inflationary Government fiscal policy
and expect a restrictive monetary policy to counteract it as well as inflationary
pressures originating in the private sectors. Such a policy would probably fail to
prevent inflation. But at the same time it is equally unwise to expect that in
practice a restrictive fiscal policy will be successful if it is accompanied by a con
tinuous easy-money policy that has the effect of assuring to the private sectors an
almost unlimited supply of money at very low cost. In actual practice, neither
instrument is likely to be employed aggressively enough to accomplish its antiinflationary purpose with the other policy working against it. But if the two poli
cies are properly coordinated and both employed for anti-inflationary purposes
their effectiveness can be greatly enhanced. (2) The great threat to the credit of
the Federal Government and to the health of the economy as a whole is to be found
not in a rise of interest rates in general during periods of inflation but in the threat
of a long and continuous decline in the purchasing power of the dollar. This
danger is increased by a continuously easy-money policy in inflationary periods.
People have already seen the purchasing power of their dollars, bonds, and other
fixed-price assets decline more than 40 percent during the past 10 years. We
cannot be certain that they will continue to be willing to buy and hold Government
bonds if they come to expect this trend to continue. (3) The policy of holding
interest rates at extremely low levels at all times and under even the most inflation
ary conditions—a policy that has evolved only during the past 10 years—is not just
an unimportant small change in our traditional central bank policy; it is revolution
ary in its implications. In effect, it is a policy of standing ready to coin all
Government securities into money at the demand of their holders, and these
demands are likely to be greatest at the very time that inflationary pressures are
already present and people want to spend more. Such a revolutionary change in
our monetary policy should not be made lightly and merely for the purpose of
holding down interest charges on the debt. There is still something to be said for
the more traditional principle that the Treasury should not be permitted to con
trol credit conditions in the market merely to suit its own convenience in selling
securities, but should adapt its terms of financing to those credit conditions in the
market which were determined by the central bank to be in the general national
interest. A healthy economy is surely more important than low interest rates on
the national debt.
STATEMENT OP LLOYD C. HALVORSON 4
This is in reply to your letter of September 22.
It seems to me that more research is needed on some of the presumptions as to
the effect of interest rates on the demand for credit. When I see the terrific
interest rate many people are willing to pay in order to get what they want, as long
as their money holds out, I often wonder if high interest rates materially affect the
demand for consumer credit. The elasticity of demand for consumer credit
probably varies with the economic situation; and when scarcities threaten, the
demand for credit becomes very inelastic as long as the scarce items are available.
The situation, I believe, also exists in the business field. Business concerns,
too, are eager to buy when scarcities threaten. The present nature of our price
structure is one factor tending to make the interest charge of little consequence
when scarcities threaten. For example, if the list price on a new refrigerator is
$200 and if you are able and willing to pay $250 for it on installment, then the
interest rate on installment loans is of little consequence as far as deterring pur
chases. The same is probably true in the business field.
I believe that in the long-term credit field, the interest rate has much more in
fluence, especially if it would appear to individuals and firms that the interest
rate should go down at a later date. But lately it seems that firms are more and
more willing to undertake long-term improvements or investments with short-term
credit and converting to long-term credit when it appears advisable.
I recognize that the interest rate has effect on demand for credit, but I believe
the demand is Very inelastic at times when inflation or scarcities are threatening.
The savings process is becoming so institutionalized that I doubt that higher
interest rates would do much to induce greater savings unless the interest rate
were increased 50 or 100 percent.
* Economist, the National Grange, Washington, D. O.
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CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
This leads me to wonder if the various means of rationing or restricting credit
are so much more effective in combating inflation as to make the practical changes
in interest rates quite unimportant. I am not taking a stand on the effect of
interest rates on the demand for credit, but I am saying that considerable research
is needed before we really know what we are talking about. I am inclined to
believe that higher interest rates would not do much to stop inflation, at least not
nearly as much as the forms of credit restriction.
If a higher short-term interest rate would materially reduce inflationary forces,
then I would say that the Federal Reserve Board should have the power and the
governmental sanction to raise interest rates in spite of the increased cost on the
Federal debt. If it is decided to increase the interest rate on individuals and
firms to deter them from bidding up the price of goods, we should at the same
time try to preserve a low interest charge on the governmental debt. This could
be done by requiring all banks to be members of the Federal Reserve System and
increasing reserve requirements to a very high figure and turning the excess profits
of the Federal Reserve System over to the Treasury. It really would not matter
much whether or not the Federal Reserve banks maintained a special preference
for Federal obligations to keep the interest rate on them down, because the profits
would accrue to the Treasury.
Another method would be along the lines of the Eccles proposal of a few years
ago. The commercial banks could be required to have a supplementary reserve
of Government bonds, and the reserve requirement could be high enough to cause
the banks to be willing to buy them at a low interest rate.
I do not believe that either of the two above proposals would be unfair to banks
as I would not contemplate cutting bank earnings, but I definitely contemplate
preventing the banks from enjoying a windfall out of a public policy designed to
stop inflation by raising interest rates.
Again I want to say that in my opinion it is preferable to restrict credit in
order to combat inflation by increasing the amount, of down payment, by short
ening the period of payment, and by making bankers less willing to lend than by
increasing the interest rate which people have to pay.
As you can see from my approach, I can hardly give an answer to the major
issue apparently before you. In fact, I think it is a gross mistake to be at all
concerned with whether the Treasury or the Federal Reserve System should have
the final control on interest rates and credit matters. It is not who has tht, con
trol that matters as much as what policies are pursued. With a change in per
sonnel of the two agencies, it is possible, though maybe not probable, that the
two agencies would switch sides or be in agreement on one or the other side. I
am not certain whether the Treasury or the Federal Reserve Board would come
closest to agreeing with me. I believe that neither agency iss uited to have para
mount control over credit and interest rates, because both are certain to have
biases and one-sided pressures. For this reason, I favor more specific legislation
by Congress on these matters and a Monetary, Credit, and Fiscal Council, made
up not only of full-time governmental officials but with more than simply advisory
power.
STATEMENT OF WESLEY LINDOW 5
In response to your request, I am writing to give you a very brief statement
on the difference in views between the Treasury and the Federal Reserve regarding
short-term interest rates as I see them.
At the outset, I want to say that I think it is natural for the Treasury and the
Federal Reserve to have differences of opinion on the subject of interest rates.
Both agencies are staffed with able people who are sincere in their views. I
believe that differences of opinion would exist even if the officials of the two
agencies were to exchange jobs. Also, the same fundamental differences would be
present even if the two agencies were merged. In that event, the different points
of view would be held by the respective bureaus in charge of central banking and
public-debt management, respectively.
In my opinion, the Treasury and the Federal Reserve are Siamese twins under
present powers of the two agencies, and neither can move very far without pulling
the other along. On the whole, I think it is a good thing that there are two
agencies involved here. Competition in ideas from two differeD t points of view
is a healthy thing.
* Vice president, Irving Trust Co., New York, N. Y .
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
67
I mention these points because I think it is important to realize that the current
dispute has very deep roots, and it is easy to misinterpret the situation. The
problem, I want to emphasize, is a basic conflict between the functions of central
banking and the functions of public-debt management. The present dispute
is only a symptom of this basic conflict.
The popular view is that the root of the issue is that the Treasury wants to
avoid increases in budgetary interest costs. I doubt that this explanation is
adequate. I think the cost factor is not the real issue.
To get at the public-debt point of view, let us consider the debt as a huge
aggregate of liquid claims possessing characteristics very close to money. The
Federal debt is 10 times the volume of currency outstanding and somewhat over
half the volume of all debt in the United States. Naturally, the Treasury is
inclined to the view that changes in the capital values of the debt are very risky
indeed. Interest-rate fluctuations are highly technical; yet they do bring about
changes in the value of public-debt obligations, which it is hard for the public to
understand. Stability in the debt, it is felt, is of the utmost importance to the
whole financial structure.
Public confidence is a fragile thing. Many people used to say it^ would be
impossible to handle a debt of over $100,000,000,000 and that it would result
in run-away inflation. Now perhaps we are becoming blase about the big debt,
but it is still a great problem to handle; and the Treasury, I am sure, wants to
avoid running any risks of upsetting confidence in the debt. It should be remem
bered, too, that there is a large group of professional portfolio managers on the
scene today who may on occasion be very “ nervous Nellies.”
I don't think this means that the Treasury wants to hamstring the Federal
Reserve or maintain absolute rigidity in interest rates, but the Treasury will
naturally be exceedingly cautious and perhaps excessively so in agreeing to in
creases in rates.
In the present situation, the centrai-bank point of view naturally is that short
term interest rates should be raised. It is argued that this will have some useful
effects in curtailing inflationary pressures with a negligible risk of upsetting con
fidence or of laying too heavy a hand on the economic structure.
In contrast, I believe that the situation looks quite different from the point of
view of public-debt management. Here it is felt that increases in short-term
interest rates are of negligible importance in stemming inflationary pressures,
while they pose a threat to confidence generally since they may upset the equilib
rium in the bond market. Also, it is argued that higher short-term rates lead to
higher costs for carrying the debt with no substantial quid pro quo in holding
down inflationary pressures.
Now this difference between the two points of view is something that cannot
be proven one way or the other by any method that I know of. On the contrary,
it is a question of judgment.
It would be helpful if studies could be undertaken along several lines to provide
some new data on the vital issues here. I would like to see some practical investi
gation of the effects of changes in interest rates on (a) consumers, (b) business, and
(c) lenders. Are consumers motivated to spend less and save more with higher
interest rates? Is business motivated to curtail investments in plant and equip
ment or its inventory holdings because of higher interest rates? Are lenders
motivated to reduce loans by increases in interest rates (perhaps through losses
on their Government bond accounts)? These are fundamental questions which
ought to be investigated to the fullest extent. Monetary theory needs fresh
empirical evidence.
I think that it would also be a very constructive thing to make some studies
on the real place of the public debt in our ecomonic system today. Perhaps the
public debt should be considered as a kind of monetary system of its own outside
the realm of central banking and the private banking system. If so, how can
the public debt be sheltered from the effects of central-bank operations? I have
no panaceas to offer, but I would like to see a series of studies made along these
lines. Some foreign countries have tried various devices in this direction—some
not very attractive perhaps—but I think all of these should be reviewed.
The history of central banking shows a long evolutionary process. I am con
fident that the new problem of circumventing the public debt, without damaging
it, will be solved in the long run by the development of still more new ideas.
68
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION'
STATEMENT OF R. A. MUSGRAVE8
1. Purpose of public interest payments
The Government's interest payments on voluntarily held public debt is the
price paid for enticing investors to hold public obligations in a form which is
compatible with economic stability. Under present conditions of inflation
pressure, this means that such debt should be held in a form which is relatively
illiquid. At other times, and under deflation conditions, more liquidity and
partial cashing of the public debt (i. e., the absorption of non-bank-held debt by
the banking system with the resulting exchange of money for debt holding outside
the banking system) may be desirable. The type of debt policy called for thus
depends upon economic conditions and on the emphasis to be placed upon monetary-debt as against other stabilization policies.
But whatever the particular emphasis on debt management, there is no objec
tion in principle to an increase in the interest bill if such additional payments are
the price which must be paid to secure continued holding of public debt under
inflation conditions. The principle of economy in debt management is not that
budgetary interest cost.should be reduced as much as possible (i. e., to zero by
exchanging debt for money obligations) but rather that the interest dollar should
be spent as effectively as possible; in other words, that it should be made to pur
chase the desired degree of illiquidity.
& Bank credit and short-term rates on Treasury issues
Let us now consider how this relates to the control over commercial credit.
Economists of late have argued correctly that the effectiveness of banking policy
in checking inflation is a matter of reducing the availability rather than of raising
the cost of credit. If the volume of credit available to be borrowed is reduced,
less funds can be borrowed and less will be spent. In short, private borrowers
must be satisfied with less credit, even though they would be willing to pay a
higher rate of return than is demanded.7 Nevertheless, in the process of tighten
ing the volume of available credit, some upward adjustment in commercial rates is
likely to occur. And under conditions where commercial banks hold large
volumes of marketable public debt, this rise in commercial rates inevitably carries
the byproduct of an increase in rates payable on short-term Treasury debt.
The same relationship holds if private demand for bank loans increases, as it did
during recent months. Given such an increase in demand, more attractive
private paper becomes available for purchase by the banks. And the banks will
find it possible to substitute such paper for their holdings of Government securities
which are largely short term. Public policy, in this case, has two options.
If it is desired to maintain the prevailing yield of short-term Treasury issues,
the Federal Reserve must purchase whatever amount of such securities the banks
wish to sell. The banks may then use the funds obtained to extend private loans
and thus add to inflation pressure. And, to make matters worse, Federal Reserve
purchases of short-term debt will add to bank reserves and hence permit multiple
expansion. If, on the other hand, it is desired to avoid a shift of bank holdings
into private paper, public authorities must persuade banks to hold on to their
public debt by making such debt more attractive. This they may do either by
raising the yield on short-term issues or by making higher-yielding longer-term!
issues available to the banks. Either course will raise budgetary interest costs,
and either course might be implemented through appropriate refunding or through
swaps out of the Federal Reserve portfolio. These are points of detail: The
heart of the matter is that if the banks are to be enticed not to shift into private
credit, in view of increased demand, they must be bought off by similarly increas
ing the attractiveness of investments which the Treasury has to offer.
S. Recent developments
Let me now turn to the developments of recent months. As the figures show,
there has been no reduction but a continued increase in bank holdings of private
debt and loans. Such reduction in the availability of credit as might have
resulted from Federal Reserve action, therefore, must have taken the form of
preventing an even greater expansion than did, in fact, occur. Unfortunately,
there is no simple way in which the volume of “ expansion prevented" can be
measured. It stands to reason that some increase in business and consumer
liquidity, and hence some increase in inflation pressure, was prevented by the
Federal Reserve policy of August and September; but no one can say just what the
•Department of Economics, University of Michigan, Ann Arbor, Mich.
7We may therefore accept the fact that the demand for credit is inelastic to interest, but still admit to the
effectiveness of credit restriction.
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
69
precise degree of prevention was, or by how much this gain exceeded or fell short
of the disadvantage of an increased interest bill. However, it must be noted in
all fairness that such a precise measure of pro and con is rarely possible with regard
to any public policy, whether credit or otherwise.
Also, it must be noted in all fairness that it is difficult to say just what degree of
increase in yield (or rates) is needed to bring about a given degree of restriction in
credit availability. This, it seems to me, follows if the case for credit controls is
argued in terms of availability rather than cost considerations. While the willing
ness of commercial banks to hold Treasury issues at prevailing yields was reduced
undoubtedly by a growing private demand for loans, the market's hesitancy to
absorb the new issue may well have been accentuated by the (valid or invalid)
impression that Federal Reserve authorities favored refunding at higher yields.
Thus the creation of expectations of higher yields cuts two ways: On the one side,
it is a means by which central-bank authorities can induce banks to refrain from
extending credit; on the other, it invites banks to hold out for better terms and
may well produce a situation where the competing increase in the yield of Treasury
securities must be higher than otherwise needed to prevent a given expansion of
private credit.
Again it is difficult to say just how much one or the other factor added to the
recent situation. The relationship between restriction of credit availability and
necessary increase in the yield of Treasury issues is a subtle matter, depending on
many factors of market psychology and tactics. The average citizen—who bears
the burden of inflation that might have been avoided, or who pays the cost of the
increased tax dollar which might have been saved— can hardly rejoice in the events
of August and September. He can ill afford that interagency conflict between
Federal Reserve and Treasury authorities should be permitted to interfere with an
efficient operation of public policy in this highly delicate area.
But, whatever the recent record, the more important problem is what shall be
done in the future if the demand for bank credit for inflationary purposes continues
to rise, as it most certainly will unless a more rigorous anti-inflation program is ap
plied on a broad scale. If banks are to be induced not to sell Treasury issues, con
tinuous competition for bank funds may then force much more substantial in
creases in the yield on bank-held Treasury debt than occurred to date. Should
such public competition for bank funds be undertaken by making available more
attractive issues (i. e., by raising the yield of short-term Treasury debt or by sup
plying the banks with longer-term issues) or should the Federal Reserve absorb
short-term holdings, thus permitting a shift into private credit or multiple expan
sion?
. Mandatory bank holding of Treasury debt
Fortunately, I do not think that the problem must be viewed in quite this form.
The entire dilemma, as outlined so far, results from the fact that commercial banks
hold large amounts of short-term Government securities on a voluntary basis.
And this is not an unalterable situation. By transforming such debt into supple
mentary reserves, the holding of which would be mandatory in addition to pre
vailing cash reserve requirements, a setting may be created in which the avail
ability of private credit may be restricted and short-term commercial rates may
be permitted to rise without, at the same time, incurring an increase in interest
payable on the bulk of bank-held Treasury debt. Whether such reserves should
be held in the form of special nonmarketable (but not marketable) issues, or
whether they should be on deposit at the Federal Reserve with some interest paid
thereon, makes little difference. This and other matters of technical detail—e. g.r
the amount of bank-held debt to be thus frozen, the return to be paid on the re
serve securities or the reserve deposits, the volume of marketable short-term debt
to be retained as a money-market medium, and so forth—cannot be considered
here.8
I am aware, of course, that such a proposal meets with strong opposition, in
cluding the contention that the plan is technically not feasible. Since I cannot go
into details in this context, let me merely assert that this is not the case. White
there are difficulties involved, they can be overcome quite adequately if it is de
sired to adopt such a plan. The great merit of such an arrangement, as I see it, is
that by making bank holding of short-term Government securities mandatory,
the banks would be deprived of their ability to circumvent the effectiveness of
general credit restriction by shifting from public to private paper; that thereby
4
• As a more moderate approach a 100-percent reserve requirement might be imposed, applicable to addi
tional deposits. Thereby, the expansion of private credit, made possible by bank sales of Treasury securi
ties, would be limited to a 1:1 basis. However, this is still too much. A basic solution to the problem is
provided only by the secondary reserve plan.
70
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
the problem of controlling the availability of private credit would be disassociated
from the problem of what earnings the commercial banks are entitled to receive
on their holdings of short-term Treasury securities; and that a tightening of bank
credit could be undertaken at substantially less cost to the taxpayer than is the
case now.9
General objections to such an arrangement have been (1) that it would subject
bank earnings to Government control; (2) that it would impose undue public con
trol over bank portfolios, and (3) that it would eliminate a free money market.
I believe that these objections are fallacious. The new arrangement would
create no public responsibilities with regard to bank earnings which do not already
exist, but would make existing responsibilities explicit. And what is more im
portant, it would disassociate this responsibility for bank earnings from the control
over the volume of private credit—a nexus which under present conditions may
easily lead to the tail (earning considerations) wagging the dog (credit control
considerations). I am not arguing here that bank earnings are too high or too
low, or that commercial banks should get along without a public contribution.
I am proposing merely that the latter (in terms of interest payments upon reserve
deposits or reserve securities) should be set as a matter of need and not as a matter
of credit policy.
With regard to the second objection, note that the new arrangement would
imply no interference whatsoever with the composition (as distinct from the total)
of such part of bank portfolios as remains in the form of private obligations; and
it is with regard to the selection of the latter that banks perform their essential
and proper function in the market economy. Nor is the third objection valid.
The holding of a large volume of marketable public debt on a voluntary basis
does not constitute an essential part of the commercial banking function or of the
functioning of the credit market. The ability of commercial banks to unload or
purchase large amounts of public debt, on the contrary, interferes with proper
quantitative control over private credit extended by commercial banks, and
disturbs rather than aids the proper functioning of the private credit market
within the framework provided by such quantitative control.10
The proposed arrangement, in short, would not destroy any desirable functions
of the commercial banking system or of the credit market. It would merely
remedy an anachronistic situation—i. e., optional commercial bank holdings,
in large volume, of marketable short-term public debt—which, in the first place
was permitted to arise only out of a widespread misunderstanding of the nature of
the credit system: Whereas the wartime principles of “ taxing before borrowing”
and of “ borrowing outside the banking system before borrowing from the banks”
were wholly sound, the principle of “ borrowing from the commercial banks before
borrowing from the Federal Reserve” was wholly unsound. As is evident to
anyone understanding the credit mechanism, it would have been no more infla
tionary, dollar for dollar, during the war to borrow from the Federal Reserve than
to borrow from the commercial banks, given concurrent tightening of reserve
requirements. And the resulting postwar debt structure would have been much
superior.11 Indeed, we would then at the outset have obtained the situation
which would now be provided for by transforming bank-held debt into mandatory
holdings.
6. The problem of longer term debt
No such relatively simple solution is available, when we come to consider the
bulk of longer term Treasury debt held outside the banking system. Whereas
the recent discussion has been in terms of tightening short-term rates only, further
and substantial increases in short-term yields (even with a strict supplementary
reserve plan) would sooner or later come to be reflected in a tightening of longer
term rates. While this result might be delayed, for the time being through a
combination of factors, I do not believe that the short-term rate could be pushed
above or anywhere close to the present level of longer rates; rather these rates
• Note our above principle that higher interest payments are justified if needed to avoid excess liquidity.
They are not truly needed here (except under present arrangements), since no desirable economic function
Is served by large voluntary commercial bank holding of short-term Treasury debt.
10The reader will note that the general reasoning underlying this proposal suggests mandatory holding
of longer term as well as of shorter term debt when needed, and this is correct. The immediate issue, how
ever, is with regard to shorter term debt because it is this debt which in the first instance is surrendered in
favor of competing private debt.
u I am aware, of course, of the classical argument that to extend the privilege of direct borrowing is to
discard a safeguard against public abuse of bank credit. But though I believe it nighly desirable to assure a
proper representation in public policy making of the central banking as well as of the Treasury point of
view, I do not think that under contemporary conditions the issue of direct borrowing has any bearing on
this matter. I cannot see why it would be easier for the Federal Reserve to resist Treasury demand for
credit financing by refusing to provide commercial b nks with the necessary reserve funds than by refusing
to lend directly.
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
71
would rise as well. Assuming that we are to look forward to many years of a
high-level military budget—and the probability that sooner or later new financing
will be needed—it is this aspect of the problem which involves the real difficulty,
not the issues raised on the short-term end of the rate structure.
Compulsory holding requirements are less applicable, and on the whole less
in order, in the case of nonbank than in the case of bank holders of debt. More
over, the response to higher interest rates will be less sensitive where the alterna
tive to the holding of public debt is consumption or equity investment rather than
holding of other fixed obligations. Finally, the generally recognized need for
“ maintaining orderly conditions" is more serious in the long- than in the short
term market, due to the greater amplitude of price fluctuation with a given change
in yield. While the expansionary effects of supporting the long-term market could
again be reduced through a ceiling reserve plan, this would still leave the problem
of liquidation on a 1:1 basis. For these and other reasons, I believe that the really
difficult problem relates to public policies for medium and longer term rates; the
problem of short-term rates can be solved and without substantial cost to the tax
payer more or less easily by the application of supplementary reserve require
ments.
Debt management is necessarily a continuous matter, so that policies under
taken now will substantially affect the type of policies which might be available
should larger scale financing become necessary later on. Thus I believe it of great
importance that a longer range debt policy for “ warm" and “ hot" war be formu
lated now, rather than be left to later ad hoc determination.
6. Role of credit restriction
In concluding, I should like to add a few words regarding the role of credit
restriction in the general stabilization program. It appears to me that during
recent months there has been altogether too much emphasis on the credit approach.
In the absence of a more general stabilization program, involving an eouitable
distribution of military costs by stiffer taxation and a direct tackling of wageprofit-farm income stabilization, credit restriction cannot do more than provide
some slight offset to growing inflationary pressures from other sources.
To be sure credit restriction conceivably could be pushed to a point where it
could provide a substantial offset to such other forces, but in the process, it would
tend to do more harm than good. Special credit controls, while having the advan
tage of being linked less closely to the public debt problem, cannot be carried
beyond a certain point without becoming seriously inequitable; and since one of
the main things to be combatted are the inequities of inflation, little would be
gained by such a policy. General credit controls (i. e., general restriction of credit
availability to private borrowers) similarly cannot be pushed too far without
causing disorderly conditions in the public debt market and—basically the more
important factor—without choking off essential as well as unessential private
credit. And the more exceptions are made in the framework of general credit
controls in order to maintain an adequate supply of essential credit, the more does
credit policy, in effect, become a matter of direct control.
Proper credit policy is important, but appeal to the magic of general credit
control will provide no escape from the starker realities of stiffer taxation and of
direct blocks to the wage—farm income—profit and price spiral.
STATEMENT OF JAMES J. O’ LE AR T?2
I
am very happy to have the opportunity to present my views on the recent
open-market operations of the Federal Reserve as you invited me to do in your
letter of September 22.
In the discussion which follows, I shall govern myself as much as possible by
your request that “ any statement you might submit should be limited, so far as
practical, to the specific implications and long-run effects on Government finances
and on stability of the economy in following at this time a policy of allowing
interest rates on short-term Treasury issues to rise."
In appraising the recent open-market operations of the Federal Reserve, it is
important to think first in terms of the general principles involved. I found
myself in virtually complete agreement with the conclusions of the Douglas Sub
committee on Monetary, Credit, and Fiscal Policies. For this reason, and in
view of the serious threat of inflation which we face today, I believe strongly that
Federal Reserve monetary and credit policy should have as its cardinal objective
u Director of investment research, Life Insurance Association of America, New York, N. Y .
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CREDIT AND 'DEBT CONTROL AND1 ECONOMIC MOBILIZATION
the prevention of further inflation and the restoration and maintenance of general
economic stability. This means that the Federal Reserve should be perfectly free
to utilize its open-market operations in the fight against inflation even though
such action may apparently come in conflict with the narrower interests of Treas
ury finance and public debt management Because of its relative freedom from
political influence (notably demonstrated in regulation X), it is imperative that
the Federal Reserve be permitted to use its powers to fight inflation and to play
its role in contributing to general economic stability. I feel that at the present
stage of our military preparedness program, it is desirable and wise to avoid using
direct controls as long as possible, so that we must rely heavily on the Federal
Reserve credit powers.
Turning more specifically to the open-market operations of the Federal Reserve
which have induced a rise in short-term rates, it might be argued that the net effect
of this action has in itself been inflationary. It is true, of course, that in purchas
ing issues to be refunded by the Treasury, Federal Reserve purchases during the
critical period were about $1,000,000,000 in excess of the sale of short-term govern
ments, so that, ignoring offsetting gold outflows and increases in the volume of
money in circulation, about a billion dollars was added to commercial bank re
serves. In spite of this situation, however, there can be no denying that in prin
ciple the sale of securities by the Federal Reserve has an anti-inflationary effect
which was unfortunately nullified by the concomitant need to support the Treasury
refunding.
The higher rates, on short-term Government securities which the FederaReserve has been bringing about are desirable for the following reasons. In the
first place, a more nearly horizontal pattern of rates on Government securities
will reduce the attractiveness for commercial banks to reach out for longer maturi
ties. The pattern of rates which developed in the 1930’s and on which World
War II was financed has created many problems in the postwar period because
it leads periodically to monetization of the debt. Secondly, the rise in rates on
short-term Government securities has brought about a rise in short-term open
market rates which will have at least a mildly anti-inflationary effect. Thirdly,
the open-market policy now being followed has the advantage of increasing the
cost to commercial banks of obtaining additional reserves. In this connection, the
uncertainty on the part of the banks about the cost of additional reserves has
been helpful.
It is easy to exaggerate the anti-inflationary effects of a moderate rise in short
term interest rates. However, to think solely in terms of the effect of higher
interest rates seems to me to miss the real point of the Federal Reserve's openmarket operations. The real effect, or at least the aim of these operations, is to
tighten up on bank credit, which is most desirable at this time. Higher interest
rates are merely the product of tighter credit. I feel strongly that the Federal
Reserve should have freedom to use open-market operations to tighten credit
even though it thereby causes a rise in short-term interest rates with resultant
disadvantages to the Treasury.
It is often argued that there is a danger that the Federal Reserve's open-market
operations may cause a decline of confidence in Government debt at a time in
which the Treasury will have an enormous amount of refunding and possibly new
borrowing to carry out. Frankly, I am not very much impressed by this argument
for the following reasons: A decline in the prices of marketable Government
securities will not affect E, F, and G bonds, except possibly through fear psychosis.
Further inflation is much more likely to cause a lack of confidence in the various
savings bonds. So far as the marketable debt is concerned, the big bulk of it is
held by institutions such as life-insurance companies, savings banks, and com
mercial banks. Falling prices of Government securities will affect these institu
tions only if they are required to liquidate a substantial part of their holdings at
the lower price levels. I believe I am right in saying that all of these institutions
carry Government securities in their annual statements on an amortized-cost
basis so that their statements would not reflect the effect of falling Government
security prices. Also, I doubt very much whether any of the institutions, and in
articular the life-insurance companies, will face a situation where substantial
quidation will be required.
In order to place in perspective what I have said above, I believe that at the
present time primary control over credit by the Federal Reserve should be exerted
through regulation X and regulation W. Beyond that, however, the Federal
Reserve should be free to use its general credit control powers such as open-market
operations, changes in reserve requirements, and changes in the rediscount rate.
These latter powers, I believe, can and should be used effectively along with the
selective group controls to give the Federal Reserve a well-rounded influence
over the volume of credit.
S
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
73
STATEMENT OF LAWRENCE H. SELTZER 18
I am glad to respond to your request that I send you a brief statement of my
views on “ the specific implications and long-run effect on Government finances
and on stability of the economy in following at this time a policy of allowing
interest rates on short-term Treasury issues to rise.”
I
I have been unable to discern any useful effects from the increases in short
term interest rates on Government securities brought about in recent months by
the Board of Governors of the Federal Reserve System and the System's OpenMarket Committee. Other short-term interest rates have naturally risen in
sympathy, but without noticeable restrictive effect upon the demand for bank
credit. Since June of this year the total of commercial bank loans has increased by
more than $5,000,000,000, the greatest expansion on record for such a period.
It is possible to contend, of course, that the demand for bank loans might have
increased even more had interest rates not risen, but it would be difficult to
support this contention. For business borrowers, the rise in short-term rates
has been an insignificant factor as compared with the profits and protection to be
gained, in view of the Korean crisis, by increasing inventories.
Nor do I believe that the increase in yields of short-term Treasury securities
has had a significant influence in restricting the disposition of banks to lend.
Their large holdings of Government securities have remained available as an
easy source of additional reserves, obtainable as and when convenient by selling
Treasury issues to the Reserve banks. The yields of 2}i, 3, and 4 percent or more
obtainable by lending at short term to good customers, and the higher yields
obtainable on Government-insured and other sound mortgages have continued to
be so much larger than those on short-term Treasury securities that the disposition
of banks to expand their credit in these ways, obtaining additional reserves as
needed by selling Treasury issues to Federal, has remained little affected by the
rise in yields on short-term Governments.
In one respect, at least, it can be justly contended that the Reserve System's
actions have had the opposite effect from that intended. By creating heightened
uncertainty and instability in the market for short-term Government securities
(by these I mean 2- to 5-year, rather than shorter maturities), it has reduced the
attractiveness of these securities relative to the higher-yielding customer loans
and mortgages. Price stability is an important element of the liquidity for which
short-term Governments are prized and for which banks have been content to hold
large quantities of them at low yields in the face of the availability of less liquid
but higher-yielding customer obligations.
II
An actual restriction of bank lending power, through a curtailment or limitation
of member bank reserves, would certainly have been capable of preventing an
undesired expansion of bank credit, and it would doubtless have been accom
panied by rising interest rates. The latter, however, would have played a distinctly
subordinate and even negligible role. The primary agent would have been the
reduced availability of bank credit. Under present conditions, the Federal
Reserve System has found it inexpedient—for sound reasons, in my opinion—to
adopt this primary means of restricting credit expansion. A rise in reserve
requirements and an attempt to absorb member bank reserves further by selling
Government securities in the open market from the Federal Reserve portfolio
would leave the member banks free to replenish their reserves by selling Treasury
securities to the Federal Reserve System. Only if the Reserve System were
prepared to allow wide declines in the prices of Governments would this policy
be capable of achieving its objective. But the Reserve System is properly
concerned with the importance of maintaining orderly conditions in the Govern
ment securities market. Wholly apart from the effects of sharply higher interest
rates upon the Government's interest burden, the System is properly concerned
about the effect upon public confidence of wide declines in the prices of Govern
ment securities. Such a concern is unusually acute under present world conditions,
in which the possibility of a third world war is a lively possibility. Prevented by
these and related considerations from acting directly to reduce the lending power
of the member banks, the Reserve System has been trying to employ the feeble
shadow of a curtailment in lending power—higher interest rates—to the same
end, and with feeble and possibly perverse results^
13 Professor of Economies, Wayne University, Detroit, Mich.
74
c r e d i t a n d d e b t c o n t r o l a n j > e cx x n o m ic MOBILIZATION
III
Theories of central banking policy, like all theories of human institutions, tend
to be rationalizations of existing facts and practices, and, even more, of formerly
existing ones. The needs, the problems, and the practices move ahead of the
theories. Our present banking theories are largely derived from an England of
long ago in which short-term foreign bills of exchange occupied such a strategic
position in the financial system that the Bank of England was able to accomplish
much merely by alterations in its discount rates. Today, we find our own central
banking institution reaching to operate through influence over new strategic
areas in our financial system—through qualitative control of bank credit, and
direct regulation of nonbank credit—via control of consumer credit, construction
credit, and margins on securities loans. Government expenditures, taxes, and the
size, terms, and forms of the public debt have also assumed a new importance for
central banking. But a rational integration of appropriate central banking
powers and responsibilities under these new conditions has yet to be made, with
the result that inept, inappropriate, and inadequate measures are adopted.
IV
One step in the direction of a better integrated field for central banking action,
which I advocated before the American Statistical Association in 1940 and before
the American Economic Association in 1944, is to earmark a large part of the
bank-held portion of the public debt as a more or less permanent holding by the
banks. By requiring special reserves in the form of Government securities, in
addition to the existing lawful reserves, a large and sensitive segment of the
public debt can be removed from the fluctuations of the market, and removed
also as a virtually open-end source of member bank reserves. The member banks
are willy-nilly destined to hold the bulk of their present amounts of Government
securities indefinitely. We can continue to keep the banks highly sensitive to
fluctuations in their prices, and to permit them to use them as sources of additional
reserves even when Federal Reserve policy calls for limiting credit expansion, or
we can adopt the more appropriate policy of recognizing these holdings to be more
or less permanent, paying a good interest yield on them, but requiring their
retention in suitable proportions as additional reserves against deposit liabilities.
In one form or another, this method has now been adopted by various other
countries.
It should be emphasized that this is a conservative proposal designed to restore
effective control of member bank reserves, and, through them, of the total volume
of bank credit, to the Federal Reserve Board. Without it I do not see how the
Board can regain such control without complete and impractical disregard of the
market for Government securities. It is to be noted, too, that the proposal would
permit member banks to obtain earnings from additional required reserves that are
likely in any event; that the rate on the securities reserves could be set by statute
or by the Reserve Board to avoid fear of Treasury prejudice in favor of an unduly
low rate; that the proposal could be implemented in any one of various forms to
minimize fears of undue restraint upon the individual member banks or of undue
power or pressure of the Treasury; and that it could be adopted or implemented
gradually, with full allowance for transitional difficulties.
Another step would be to fund a larger fraction of the public debt in the form
of redeemable but nonmarketable securities with effective yields varying directly
with the period of retention, and so arranged as to favor retention.
Even with respect to the remaining parts of the public debt, it would be well
to recognize that in this country, at least, Government securities are regarded as
not far removed from money itself, and that any serious impairment of their market
value, particularly if sudden, is apt to be highly damaging to public confidence
in our money and in the financial condition of the Government.
Even more broadly, it is time that we reexamined the role of fluctuations in
interest rates not only as weapons for combating instability, but as in themselves
powerful sources of instability.
STATEMENT OP HERBERT STEIN 14
The report of the Subcommittee on Monetary, Credit, and Fiscal Policies of
the Joint Committee on the Economic Report contains an analysis of the prob
lem of monetary control and debt management and recommendations for policy*
14Associate Research Director, Committee for Economic Development, Washington, D. C.
CREDIT AND DEBT CONTROL AND1 ECONOMIC MOBILIZATION
75
to be followed in the future. I agree completely with the subcommittee's analysis
and recommendations. Although the problem can be approached from many
directions it seems to me that the conclusions reached by the subcommittee are
inescapable. The heart of the conclusions is in the following sentences from the
report:
“ Timely flexibility toward easy credit at some times and credit restriction at
other times is an essential characteristic of a monetary policy that will promote
economic stability rather than instability. The vigorous use of a restrictive
monetary policy as an anti-inflation measure has been inhibited since the war by
considerations relating to holding down the yields and supporting the prices of
United States Government securities. As a long-run matter, we favor interest
rates as low as they can be without inducing inflation, for low-interest rates
stimulate capital investment. But we believe that the advantages of avoiding
inflation are so great and that a restrictive monetary policy can contribute so
much to this end that the freedom of the Federal Reserve to restrict credit and
raise interest rates for general stabilization purposes should be restored even if
the coso should prove to be a significant increase in service charges on the Federal
debt and a greater inconvenience to the Treasury in its sale of securities for new
financing and refunding purposes.”
Since the report analyzes the problem so well I shall not attempt to reconstruct
the whole argument but shall only list what seem to me the essential propositions:
1. Restricting the supply of money £nd availability of credit is an effective and
appropriate means to help stop inflation.
2. The way to restrict the supply of money and availability of credit is to
restrict the reserve position of commercial banks.
3. In order to restrict the reserve position of commercial banks it is necessary
to restrict—limit or reduce—the amount of Federal securities held by the Federal
Reserve banks.
4. If the amount of Federal securities held by the Federal Reserve banks is to
be restricted there must be some way to induce investors other than the Federal
Reserve banks to hold the remainder of the debt. If the total debt (outside
trust accounts, etc.) is $200 billion and the amount the Federal Reserve banks
can hold without permitting or promoting inflation is $20 billion there must be
some way to induce investors other than the Federal Reserve banks to hold
$180 billion of Federal debt. If conditions change so that the Federal Reserve
banks can hold only $15 billion without inflation there must be some way to
induce other investors to hold $5 billion more (assuming the total debt constant).
5. There are two basic ways to “ induce” investors other than the Federal
Reserve banks to hold Government securities. One is by compulsion. The other
is by making ownership of Federal securities attractive. A system of compulsion,
of forced lending to the Treasury, has serious disadvantages. In any case, such a
system does not exist. Therefore Federal securities must be sufficiently attractive
so that investors other than the Federal Reserve banks will voluntarily hold the
whole Federal debt except for that part which the Federal Reserve banks can
hold without permitting inflation.
6. The attractiveness of holding Federal securities must be variable. The
amount of Federal securities which the Federal Reserve banks can hold without
inflation is variable. The willingness of other investors to hold Federal securities
varies with the attractiveness of other uses of funds. . In times of rising inflation
other uses of funds—notably investment in private equities and debts—become
more attractive. At the same time the amount of Federal securities the Federal
Reserve banks can hold without inflation declines or at least does not rise. Other
investors must be induced to hold more, or at least no less, Federal securities when
their willingness to hold Federal securities is declining. Therefore the ownership
of Federal securities must be made more attractive.
7. A basic factor in the attractiveness of Federal securities is the interest rate
they pay. There are other factors, but none permits such quick, continuous
variation in the attractiveness of Federal securities over so wide a range as varia
tion in interest yield.
8. The reason for paying interest on Government securities is to make them
sufficiently attractive that the Federal Reserve banks will not have to hold more
of the Federal debt than is consistent with avoiding inflation. If inflation were
no problem, or if the amount of Federal debt held by the Federal Reserve banks
was not a factor in causing or controlling inflation, there would be no reason to
pay interest on Federal securities.
9. Low interest is “ cheaper” for the Treasury than high interest. It is “ cheap
er” in just the same sense as a B-17 bomber is cheaper than a B-36. But if a B-17
78276— 51-------6
76
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
won't reach the target it is a waste to build B-17's, even though they are cheaper.
And if a low inte est rate doesn't serve the purpose of inducing a sufficient part
of the debt to be held outside the Federal Reserve banks it too is a waste—more
expensive to the Nation than a higher rate.
In August and September of 1950 we had as nearly perfect an example as we
are ever likely to find of the circumstances in which the principles expressed by
the Douglas subcommittee called for monetary restriction, even at the cost of an
increase in the service charge on the Federal debt. We were having inflation.
The planned rise of military expenditures provided ample reason to believe that
inflation would continue if strong action was not taken to stop it. The inflation
was being financed by a rapid expansion of bank credit. Any rounded program
of inflation control would have included monetary and credit restriction. As a
matter of fact, in August and early September general monetary restriction was
one of the very few anti-inflationary measures available to the Administration.
A rather small tax increase was being debated in Congress and a second tax in
crease seemed at best months away. Authority to control consumers' credit and
housing credit was not yet enacted. We were not then, and are not now, so well
supplied with anti-inflationary weapons that we could afford to neglect monetary
restriction.
The action taken in August and September did not go so far as would have been
desirable. So far as an outsider can judge, this is the result of division of authority
and difference of opinion between the Federal Reserve and the Treasury. It
would have been desirable to finance the September 15 and October 1 maturities
by offering some long and intermediate bonds as well as by offering higher rates
on whatever certificates or short notes were issued. Given the decision of the
Treasury to issue only l}i percent notes and the apparent desire of the Federal
Reserve to minimize the expansion of bank reserves, the Federal Reserve banks
probably had no choice but to stand ready to lend to the Treasury at 1)4 percent
and try to borrow from the market at higher rates.
It is difficult to appraise the effect of the Federal Reserve’s action. Bank loans
have continued to rise. But no one knows how much more rapidly loans would
have increased if the Federal Reserve had not raised the interest rate at which it
offers to sell short-term Government securities. Interest rates on prime loans
have risen. Probably more important there now seems to be some real uncertainty
about the future of interest rates— some expectation that the Government may
take further steps to restrict credit expansion, which would involve further in
creases in interest rates. This expectation leads to some hesitation in extending
credit at present rates.
The action taken by the Federal Reserve in August and September was in the
direction indicated by the recommendations of the Douglas subcommittee. Yet
this action by itself may be relatively inconsequential unless it is followed up by
other actions in the same direction. The possibility of getting an adequate antiinflationary policy would, in my opinion, be greatly improved if the joint com
mittee as a whole, and hopefully the Congress as a whole, would endorse the recom
mendations of the Douglas subcommittee on this subject.
STATEMENT OF GEORGE TERBORGH 15
I have your letter of September 22 inviting my opinions on the desirability at
the present time of allowing interest rates on short-term Treasury issues to rise.
I take it the issue at present is much narrower than that considered by the
Subcommittee on Monetary, Credit, and Fiscal Policies. We are not concerned
here with the merits and demerits of the basic policy of pegging the Treasury
bond rate; the point is simply whether the pattern of market rates should be
adjusted to the preferences of the market, given the peg on the long-term rate.
Specifically, should short rates that are obviously too low in relation to the long
rate be permitted to find a more natural relationship?
To my way of thinking, the answer is clearly in the affirmative. The net cost
to the Treasury of such an adjustment would be relatively small, and it would
prevent a continuance of what has recently been going on, the dumping of short
Treasury paper into the portfolio of the Federal Reserve System. So long as
the Federal Reserve still has long paper to trade with the market for short, the
het inflationary effect of such dumping may be negligible, but once the System
is out of long paper for trading purposes, it can take additional short paper only
at the cost of increasing its total Government portfolio and expanding member
18 Research Director, Machinery and Allied Products Institute, Washington^!)*. C.
CREDIT AND DEBT CONTROL AND1 ECONOMIC MOBILIZATION
77
bank reserve balances pari passu. This will aggravate what is already a difficult
problem.
I have no illusions that the Federal Reserve System can substantially tighten
the money market, and restrict an inflationary expansion of bank credit, while
shackled by its commitment to peg the long-term yield on Treasury paper. If
bank credit expansion is to be contained it will have to be by other means, such
as “ jaw bone” campaigns, direct restrictions on certain categories of credit (such
as we already have on stock market credit, consumer installment credit, and home
mortgage credit) and similar direct methods. Nevertheless, as I have said, the
probfem confronted by the System should not be complicated and aggravated by
a misguided effort to maintain an artificial rate structure on top of the peg on the
long-term yield.
STATEMENT OP DONALD B. WOODWARD 16
Your letter of September 22, 1950 asks for a statement of what I believe to be
“ the specific implications and long-run effects on Government finances and on
stability of the economy in following at this time a policy of allowing interest
rates on short-term Treasury issues to rise.”
1. The question’s setting.— My response is necessarily conditioned by my concept
of the environment and the relationship the incidents you mention have to it.
My reply may be clearer if those concepts are very briefly made explicit.
The American political economy of our age seems to me to be marked by two
transcending imperatives: First, that freedom must be protected from tremendous
exogenous threats; and second, that the economy must be protected from the
disequilibration, indeed, the disintegration, of major depression and major infla
tion. (At the moment the greater danger seems to be major inflation, but em
phasis on it alone could cause us to go to extremes; the major preoccupation of
analysis with combatting depression between 1929 and 1941 so inhibited balanced
thinking as to produce extensive antidepression policies when inflation was the
problem.) And major depressions and inflations are occurrences involving credit
and money in a great degree, if, indeed, they are not really essentially monetary
phenomena.
These two imperatives are intimately interrelated at various levels. They can,
and have had major consequences upon each other. Both major inflation and
depression have weakened the country's power and consequently its ability to
protect freedom, while the struggle to protect freedom has brought about condi
tions inducing at different times major inflation and depression. In view of these
interrelationships, it is important to avoid myopic and partial views when these
^natters are considered.
During the course of national efforts according with the two great imperatives,
two major developments have occurred during the past two decades which, in
my opinion, bear with great force on your question. First, the public debt has
grown enormously. Second, the value of the dollar as commonly measured by
price indexes has fallen by only a little less than half.
The existence of the two imperatives, and the developments resulting from
them, have greatly broadened the horizons and increased the depth of the question
you ask.
I turn now to your question, which deals both with Government finances and
economic stability. Let me first consider the two parts separately.
2. Government finances.—The purpose of “ following at this time a policy of
allowing interest on short-term Treasury issues to rise” (to use your terminology
and emphasis) is to curb the inflation manifested for some weeks in rising bank
loans, commodity prices, and the like. “ The specific implications and long-run
effects on Government finances” of such a policy depend preponderantly upon
whether inflation is likely to be curbed by the policy followed.
It is traditional central bank and orthodox economic theory that rising interest
rates penalize and dissuade those considering expansion of their businesses and
also result in increasing saving and curtailed consumer demand; all, this is sup
posed to operate in part directly from rising short-term rates, and in part from
the effects of rising short rates on long-term rates (and the opposite effects are
had from declining rates). This inhibiting effect Supposedly is felt on the private
sector of the economy and presumably, though this has been less clearly developed,
on the public sector as well. This view of the functioning of rising (or falling)
rates has long been and still is vigorously challenged as unrealistic and contrary
to much available evidence; on the other hand, it has been supported by argu' 18 Second Vice President, the Mutual Life Insurance Co. of New York.
78
CREDIT AND 'DEBT CONTROL AND ECONOMIC MOBILIZATION
ments of marginal economics and an array of evidence of the association of rising
interest rates and the ending of booms. The evidence does not appear to validate
either point of view conclusively.
But there is another consideration. The policy of raising interest rates to
curtail inflation is now being followed in a new environment: The public debt
has grown large. When Mary’s little lamb grows to a size far surpassing an
elephant, can it appropriately be treated any longer as a little lamb? If Mary
does so, may she not be endangering the house she lives in, the school house, the
lives of her schoolmates, the teacher, and herself? Rising short-term interest
rates produce rising medium-term and longer-term rates, and rising rates mean
declining prices of Government securities. Many holders of Government securities
have been encouraged to believe that no one'could take a loss on these issues;
though, of course, no contract or commitment exists that prices will never go
down. There is a risk that falling Government security prices, with below-par
quotations for a number of issues, may make for dissatisfaction among holders,
with consequent sales (or presentation to the Treasury for redemption of demand
issues) and declining willingness to invest in such issues in the future.
The present is a very unhappy time for such a question to be raised. The
present is just on the eve of a period of years in which the vast amount of 10-year
securities sold to finance World War II must be refinanced, when the volume
of short-term debt is large, and when international conditions might require
new and sizable deficit financing. During the next few years the Treasury must
find buyers for literally many hundred billions of dollars of Government issues.
If prospective buyers question the attractiveness of the paper, then the banking
system including the Federal Reserve, will of necessity become the buyers,
because it is inconceivable that the Treasury would be left without necessary funds.
In that event, the money supply would be substantially increased, and this would
be inflationary. The possibility, therefore, exists that very much of a rise in
interest rates at this time might prove to be inflationary rather than anti-infla
tionary as intended, because of the change in the environment from the times
when traditional central banking and orthodox economic theory were formulated.
But there is another aspect to the matter. Inflation, i. e., loss of purchasing
power by the dollar, may also cause a diminution in willingness to hold promises
to pay dollars in the future. Inflation already has raised questions about the
desirability of holding Government securities, and the further inflation proceeds,
the greater may be the Treasury’s difficulty in doing the refunding and financing it
has to do in the next several years. And in addition, inflation increases the cost
of the goods and labor the Government buys and so increases necessary outlays*
Viewing these various aspects of the matter, I conclude that the most important
consideration to Government finance is that inflation be halted. If it is not,
I judge that the Treasury is likely to experience considerable trouble during the
next several years. This conclusion can be reached with confidence however
one may feel about the efficacy of changing interest rates as an anti-inflationary
technique. I shall return to the question of technique later. But it should also
be noted that serious deflation, which does not now seem likely for a long time
to come, would also be quite harmful to the Treasury, and its prevention as well
as that of inflation, should be part of the continuing objective.
For purposes of completeness, I should add two points to these comments on
Government finances. First, higher interest rates mean that the Treasury will
have to pay a higher interest cost than would otherwise be the case. Second,
rising short-term rates mean that longer term issues are made less attractive to
buyers relatively, so that any refunding of short paper into longer paper by the
Treasury is made more difficult. But these are evidently of subordinate import
ance to the larger question just developed; and the higher interest cost argument
has been tremendously over exaggerated.
3. Economic stability.— The chief “ specific implications and long-run effects
* * * in the stability of the economy in following at this time a policy of
allowing interest rates on short-term Treasury issues to rise” also relate to inflation
control.
The time which has elapsed since the rise in rates was started has been very
short, and the phenomena which have appeared can properly only be noted for
consideration along with subsequent events which will provide greater perspective.
Subject to this treatment are two items: (a) The Federal Reserve, in the weeks
since the interest rate rise was started, has had to buy about $1.2 billion of Gov
ernment securities to maintain orderly market conditions: and during the period
has turned from a seller of long-term issues to a buyer, (b) During this time the
commercial loans of the commercial banks have continued the rise which was
under way prior to the action, and the total of such loans outstanding has reached
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
79
a new high level for many years. These developments do not indicate immediate
success in credit curtailment, and they raise the question whether limited increases
in interest rates in the new environment of the vast public debt have any effect
on the ability or willingness of the banks to accommodate their customers. Is
the availability of credit significantly affected?
Yet such questions should not in any way obscure the fact that the interests
of economic stability just as the interests of Government finance require that
inflation be halted, that if the decade of the 1950’s is marked by any such robbery
of the dollar as was the preceding decade, the United States will be harmed
economically, and as well politically, internationally, socially, morally and
spiritually. And they should not mask the extremely intimate relationship
between inflation (and depression) and monetary and credit developments.
4.
What conclusion?—The territory over which we are now traveling is so new
as to make evidence scanty and dogma dubious. Tentatively, and rather gingerly,
I would advance the following hypotheses for consideration:
(а) Realization of this country s twin objectives of freedom and prosperity in
an environment including the large public debt and an already seriously depre
ciated dollar require careful fiscal policy and operation and more extensive, skillful,
and successful monetary management than ever before; and it is more true perhaps
than at any previous time that “ money will not manage itself.”
(1) To the degree that monetary management and fiscal policy are inadequate
or fail, the country probably will resort to direct price control, allocation and
rationing. These deal only with the results of inflation, which they may suppress
for a time; but they cannot prevent or cure inflation. While they may be neces
sary in great national emergency, they cannot be used over any prolonged period
of strain, and the attempt to do so would be catastrophic.
(б) The necessity for effective monetary management means that every possible
technique and device should be utilized.
(1) A rigorous pay-as-you-go fiscal policy in inflationary periods, with strictest
curtailment of public expenditures not absolutely essential, and a tax policy
designed to stimulate production which is itself a major inflation control, is an
essential procedure to prevent further aggravation of the already serious monetary
problems.
(2) The central bank should be given and encouraged to seek the greatest
possible latitude of operation consistent with the objective of economic stability.
Developments during the weeks since a policy of allowing interest rates on short
term and to a degree, other Treasury securities to rise was adopted, have provided
no conclusive evidence of the efficacy of that policy in halting inflation, which is
its objective, and broader considerations also leave the question subject to con
troversy. This does not mean that the policy should be abandoned, nor even that
it should not be pursued further, but it does mean that the operation carries
sizable risk to Government finance and economic stability and should be very
cautious.
(3) Because monetary management is so vital, and because the traditional
techniques are so inhibited, the development of new techniques and devices is
extremely urgent. Some selective credit controls have been utilized in recent
years, e. g., consumer credit and stock market credit, and now mortgage credit.
And public debt management has been utilized a little for monetary management
purposes. I believe that both these areas could be utilized much more effectively
and extensively for and by monetary management, and so deserve more attention.
The Joint Committee on the Economic Report can most appropriately and
usefully pursue this subject. The committee has a great opportunity to perform
a significant public service.
APPENDIX I
THE
TREASURY-CENTRAL BANK RELATIONSHIP IN FOREIGN
COUNTRIES—PROCEDURES AND TECHNIQUES
The conflict between the public debt and central banking has occurred all over
the Western World. This is a natural outcome of the large growth of public
debts during the war. Officials responsible for public-debt management have been
anxious to maintain stability to maintain confidence in the debt, and to facilitate
refunding. The result has been that central banking techniques have been
severely hampered. Foreign experience shows considerable ingenuity in attempt
ing to solve the problem of permitting central bank functions to operate in spite
of the existence of large public debts. These techniques have obviously been
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CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
evolutionary and many of them are apparently undergoing a further change even
now. This suggests that there is no easy answer to the American problem but
that further efforts should be given to working out methods of reconciling a large
public debt with central bank objectives of influencing private credit.
In the hope that foreign experience would throw some light on the problems in
this country, the committee staff requested of the Federal Reserve Board prepara
tion of the following catalog of relations, procedures, and techniques used in other
countries.1
G e n e r a l I n t r o d u c t io n
This report is prepared in response to a letter from the chairman of the Joint
Committee on the Economic Report requesting a survey of foreign experience in
the field of treasury-central bank relationships.
Almost all countries have central banks, and in all cases these institutions are
separate and distinct from the treasury departments of their governments. The
function performed by central banks in all countries is to regulate the supply of
money in such a way as to serve national interests. Activities of central banks,
designed to influence or control the availability of loan funds, necessarily affect
interest rates paid by private and governmental borrowers. Conversely, actions
designed to affect interest rates have repercussions upon the supply of credit.
Because of the great importance of public debts in the financial structure of most
countries, the need for coordination between monetary and credit policies on the
one hand, and public-debt management and fiscal policies on the other, has been
recognized in almost all countries. Methods of working out a harmoniously
functioning relationship between treasury and central bank have varied widely.
There is wide diversity also in the devices adopted in foreign countries to restrict
the over-all supply of credit within the framework of policies which take account
of large-scale financing needs of treasuries.
This survey of foreign experience is designed to provide background material
for the study of problems of monetary policy in the United States. It will be im
mediately apparent, however, that devices which may have worked well in foreign
countries may not be suitable here. Differences in political, economic, and finan
cial structure between the United States and foreign countries as well as among
the foreign countries themselves are so profound that a comparison of national
monetary policies serves primarily to bring into sharper focus the peculiarities
of national problems.
To illustrate this point, it may be well to review briefly some of the principal
differences in underlying conditions among the countries whose experiences will
be described below and between them and the United States.
Differences in economic structure and development are possibly most important
in accounting for the lack of comparability of treasury-central bank relationships
among various countries. Thus, in countries where there are highly developed
money and capital markets, issues concerning monetary and debt management
policies tend to revolve around questions of the interest rate structure, since the
rate structure affects on the one hand demand, and supply factors in the money
market and on the other the rates at which the treasury can place it obligations
with investors other than the central bank. But in countries where the central
bank is the principal source of funds for financing government deficits, market
rates of interest are of less importance for. debt management; in these countries
agreement must be reached as to the. amounts that can be advanced by the
central bank to the treasury in view of the unstabilizing effect of these advances
on the economy. Again, in a country where hyperinflation or currency reform
has virtually wiped out the public debt, monetary problems are of a different
nature from those characteristic of a country where the public debt is large in
relation to national income and is widely dispersed among both bank and nonbank
holders.
Wide differences among the various types of banking systems must also be
recognized. Credit control techniques that are adequate in a country with a
highly centralized multiple-branch banking system, in which bank policies can
be influenced by direct contact and suasion, may be of little help in a country
whose banks are numbered in the thousands. Also, differences in banking tradi
tions and attitudes, such as the extent to which banks are willing or reluctant to
hold long-term government securities, or to borrow from the central bank, may
mean that policies that are effective in some countries will not work elsewhere.
1 The following report was prepared by the staff of the Board of Governors of the Federal Reserve System.
It does not necessarily represent the views of the Board. It is based on. available information obtained in
part from published documents and in part from personal contacts with foreign central banks developed
over a period of years. The accuracy of the information has not been checked by the officials of the foreign
countries concerned and is not guaranteed by the Board.
CREDIT AND DEBT CONTROL AND1 ECONOMIC MOBILIZATION
81
There are also important differences between countries in the political relation
ship between legislature, treasury, and central bank. The great size and diversity
of the United States and of its economy has led to the establishment of twelve
separate Federal Reserve banks, which are partly autonomous but are placed
under the general supervision of the Board of Governors, appointed by the
President and responsible to Congress. The Federal Reserve banks carry on
the operations ordinarily performed bv central banks while general policy decisions,
which in most countries are also made by central banks, are vested largely with
the Board of Governors and with the Federal Open Market Committee, which is
also established by statute. Thus the central banking system in this country
receives its mandate directly from the Congress and is directly responsible to it.
It does not operate under or report to a member of the Cabinet. The Treasury,
on the other hand, performs its function of debt management as a part of th§
executive branch, which, under our form of government, is separate from the
legislative authority.
Foreign central banks have varying degrees of autonomy or independence from
the government, but the tendency in recent years has been to bring them into the
orbit of governmental responsibility. Effective coordination of treasury and
central bank policies affecting the supply, availability, and cost of money is simpli-*
fied in European and some other countries by the existence of a parliamentary
form of government. Under that form, the government in office is directly re
sponsible to the parliament. Actions and policies of the government (cabinet)
are subject to constant review by the parliament. In turn, the minister of finance,
a member of the cabinet who generally exercises not only the debt management
function but also budgetary and other broad economic powers, has in some coun
tries been given a degree of authority with respect to the central bank. Thus the
central banks in these countries have been made indirectly responsible to parlia
ment through the minister and cabinet.
These differences in political, economic, and banking structure make clear the
need for caution in drawing conclusions for any one country from policies and
techniques which may have proved effective in other countries. Nevertheless, a
review of foreign experience can be valuable in placing national problems in proper
perspective. For instance, one fact brought out by the survey is that, while some
20 years ago the American banking system was considered as among the most
formalized by rules and regulations, this is no longer the case today. Under the
most diverse political regimes, democratic countries have adopted measures such
as cash and supplementary reserve requirements, selective or qualitative credit
controls, differential interest or discount rates, bond limitation plans, etc. While
this experience does not yield any specific lesson as to the controls that ought o*
ought not to be adopted in the United States, it suggests that monetary controls
compatible with democratic institutions may take a variety of forms.
Procedures adopted by foreign countries to coordinate central bank and treasury
(or governmental) policies are summarized in the following paragraphs. Subse
quent sections briefly survey the main issues faced by postwar monetary policies
and the various means recently employed abroad to deal with the specific problem
of restricting the over-all supply of credit under conditions of large-scale financing
needs of treasuries and of large holdings of government securities by different
economic groups.
THE TREASURY-CENTRAfi BANK RELATIONSHIP
At one time, most central banks were chartered by the legislature to operate
independently, within certain limits, not only of the treasury, but of the highest
executive and legislative authority of the nation. As the ultimate guardian bf the
value of the nation’s currency, the central bank was bound by the strict rules of
the gold standard. Its assets were confined largely to commercial paper, and its
holdings of government securities were limited either in practice or by law. At
that time, it was felt that the high public interest served by the central bank;
required that it operate free from government intervention and that this freedom
was best safeguarded by the establishment of the central bank formally as &
specially chartered private institution under the gold standard.
Today, in practically all countries, as in the United States, it is felt that the*
public functions performed by central banks require that they be established
frankly and formally as public institutions. Many countries have worked out
techniques which recognize the separate responsibilities of central banks anc^
treasuries in their respective fields and at the same time facititate the d e v e lo p m e n t
of coordinated fiscal and monetary policies.
82
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
While central banks are practically everywhere considered a part of the govern
mental structure, the position of the central bank within this structure is a special
one. Although ordinarily governmental appointees, present-day central bank
officials are often appointed for relatively long terms of office. It is generally
recognized that the men to be appointed to these posts should be willing to
take a strong position for the maintenance of monetary stability and that the
institutions which they direct must have a measure of independence within the
governmental structure. Distinction is also generally maintained between the
functions and responsibilities of the treasury as budget maker and borrower and
those of the central bank as regulator of the supply of credit.
There is a wide range of variation in types of legislative framework governing
the relation of central banks to their governments. The actual nature of the
relationship depends, in addition to provisions of law, on many factors of custom,
tradition, and personalities.
In a few countries, including the United Kingdom, Australia, and India, the
statutes give the Ministers of Finance the ultimate power to direct the policy
decisions of the central bank. Similar legislation was formerly in effect in New
Zealand. Even where the central bank in its policy-making functions is subor
dinate to the Minister of Finance, the central bank is not considered as a bureau
or office in the Ministry. According to the statutes of these countries, instruc
tions from the Minister of Finance 'must be preceded by full consultation with
the central bank, whose policy-making officials are expected to have independent
views.
There are also many countries where the Minister of Finance is the chairman
or is one of the members of the central bank's board of directors. This arrange
ment has been advocated on the ground that it would provide to the Minister of
Finance and to the central bank an opportunity for a full and mutual presentation
of their views. However, it has been opposed on the ground that it might lead
to undue influence of the treasury on central bank policies.
A number of countries have adopted the device of a national council which
is charged with the formulation of national monetary and credit policy and
includes, among others, the Minister of Finance and the head of the central bank.
Examples are the National Credit Council in France which has advisory functions
and the Interministerial Committee in Italy which is a policy-making body.
A few countries have specific machinery for appeals to an arbiter in order to
resolve treasury-central bank differences. In the Netherlands, while the Minister
of Finance has authority to give directions to the central bank, the governing
board of the bank has the right of appeal to the Crown in case of disagreement.
In New Zealand, while the central bank is no longer subject to direct treasury
instructions, it is specifically subject to directions by resolution of Parliament.
One of the proposals made in 1950 in Germany would provide for a federal
committee to resolve conflicts.
In the many countries where there is no statutory provisions for resolving
differences in viewpoint between fiscal and monetary authorities, it would appear
that in practice disagreements are referred, as a last resort, to the head of the
overnment. As a matter of fact, even where some governmental agency is
esignated by statute as the final authority on monetary policy, the head of
the government of the country can, in practice, assume this authority, par
ticularly when he holds broad powers of appointment and removal. The
finance minister, by virtue of his closer* political and personal ties with the head
of the government and of his attendance at cabinet sessions, may be in a favorable
position to obtain a settlement in favor of the treasury view. But, as previously
explained, in most democratic countries, cabinet decisions are subject to parlia
mentary control.
Determination of monetary policy is bound to be greatly influenced by the
personalities of the officials concerned—as well as by the state of public opinion.
The fact that the head of the central bank is not a member of the cabinet gives
him a certain degree of independence from political pressure and hence a special
position in the eyes of the public, and where the governor is a man of outstanding
personality the central bank may acquire an influence far beyond the actual powers
given to the bank by legislative provisions. Also, in many countries the public
standing of central banks derives largely from the prestige that they may have
acquired over a long period and from their ability to attract qualified personnel.
Therefore, the government currently in power would ordinarily be anxious to
avoid the shock to public confidence which might result from public conflict
between it and the central bank authority.
g
CREDIT AND DEBT CONTROL AND1 ECONOMIC MOBILIZATION
83
Besides formal provisions for coordination of fiscal and monetary policies,
various informal techniques have been developed to insure a cooperative relation
ship between the agencies involved. One technique which has been employed in
a number of countries is that of frequent meetings of technicians from the treasury
and the central bank. Another is that of interchange of technical personnel.
Such practices have contributed to a better understanding of common objectives,
and hence to the development of complementary rather than conflicting measures.
MONETARY POLICIES IN THE POSTWAR PERIOD
The problem facing most foreign countries in the postwar period was, in its
most general form, that of reconciling monetary stability with the requirements
of reconstruction and development. This problem often led ministers of finance
and central banks to adopt similar positions toward programs of the so-called
spending ministries. At the same time, the existence of large public debts and
liquid assets at the end of the war gave rise to a special problem of restoring effec
tiveness to traditional instruments of monetary control. The problem of co
ordination of debt management policy and credit policy took various forms,
depending on the distribution of ownership of long-term and short-term debt
among the banks and other holders, and depending on the rate of expansion or
contraction of the government debt.
An important new factor in the postwar monetary situation of many countries
was the existence of large public debts which had their origin in war and occupation
expenditures. In many countries a large portion of the debt was held by the
central bank and had therefore already become monetized by the end of the war.
In these countries effectiveness of credit restrictions was likely to be limited by
the abundance of liquid funds in the hands of individuals and businesses. Where
direct controls had prevented these funds from exerting their full effect on prices
and incomes, attempts were made to absorb these funds before they would result
in open inflation. This was done in some cases through currency reforms which
involved reducing the value of holdings. Import and budget surpluses also had
important anti-inflationary impacts.
In countries where the liquid funds had “ broken out” and had started open
inflations, instruments of credit control had greater applicability, since in those
countries private credit expansion played an increasingly important role in stimu
lating and supporting the inflationary process fed by budgetary deficits. The
French and Italian postwar inflations were stopped in part by recourse to cash and
supplementary reserve requirements which placed limitations on the availability
of bank credit and thereby reinforced the effect of market interest rates as credit
control instruments. Under the conditions prevailing in these countries, reserve
requirements had a dual purpose of channeling to the Treasury a portion of the
commercial banks' funds so that direct financing by the central bank could be
minimized, and of preventing private credit expansion which might have resulted
from the sale of bank-held securities to the central bank.
In countries where, at the end of the war, the public debt was not primarily
held by the central banks, but was widely diffused among the public and the banks
there arose the problem of preventing its monetization. Many countries at
tempted to deal with this* problem in an indirect way, using price controls and
investment controls to make it difficult for banks and individuals to use the funds
they might have obtained by encashing government securities. Under these con
ditions, the incentives to liquidate securities were considerably weakened. In
addition, through statutory provisions, or by informal agreements, some countries
froze a portion of the short-term government securities held by the commercial
banks. Moreover, while many countries endeavored to stabilize short-term inter
est rates, only a few countries actually increased the money supply through active
support operations in the long-term market. Sweden, one of the few important
countries where long-term rates were pegged until very recently, has now adopted
a policy permitting greater flexibility in the market for long-term securities.
With the new inflationary pressures caused by the Korean developments, many
countries have adopted positive monetary policy measures as their first line of
defense in the new circumstances. In recent months discount rates have been
raised in various countries, frequently for the first time in several years. At the
same time, more countries have adopted reserve requirements, both primary and
supplementary, as a means of combating inflationary credit expansion.
This current reliance on monetary policy is primarily explained by the hostility
of public opinion in most countries against a return to direct controls of raw ma
terial allocations, prices, wages, and of consumer rations. These controls were a
84
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
universal legacy from World War II and many countries are still in the process of
dismantling them. Moreover, it is now widely believed that fiscal and monetary
controls are superior to direct controls in dealing with the dangers of inflation in
the present situation, particularly since the rearmament effort does not at present
involve total mobilization and since it is likely to extend over a protracted period.
SPECIAL MONETARY TECHNIQUES
A technique of monetary control which has been applied in a number of coun
tries has consisted in requiring banks to hold cash and/or government securities
in amounts related to their deposit liabilities. These measures were not substi
tutes for the action of interest rates in influencing the supply of and demand for
funds, but actually served to reinforce this action.
In some cases the permission to count government securities as legal reserves
applies to the standard reserve requirement and in other cases it applies to a
special additional requirement. The purposes and functions of these regulations
have varied from country to country and within any given country their effect
may change over time. In some cases this technique has been used to place a
barrier in the way of banks’ increasing their loanable funds by selling securities
to the central bank. This was in part the immediate purpose of the reserve
requirements introduced in the postwar years in Belgium, Italy, France, and
Sweden. These requirements, however, could also be called upon to serve the
quite different purpose of facilitating deficit financing through automatic absorp
tion by the banks of government securities. Other uses of this general advice
have occurred in the Philippines (to promote development of a local investment
market), in India (as a cushion for a large increase in reserve requirements),
and in Mexico.
In Mexico a system of secondary reserve requirements has been employed for
the purpose of exercising influence over the kinds as well as the aggregate of
bank lending; besides Government securities, other types of loans which the
authorities wish to promote are included among assets fulfilling these reserve
requirements. The percentage of deposits required to be held in these forms is
fairly large.
A related device that has been used in a number of countries is that of imposing
differential reserve requirements which require commercial banks to hold especially
large reserves against increases in deposits. This device permits the imposition
of high reserve requirements on expanding deposits while at the same time allow
ing for the fact that individual banks may vary greatly in their holdings of cash
or acceptable assets at the time when the requirements are introduced. The
Australian “ special accounts” procedure is an outstanding example of this.
Among other countries making use of this principle have been France, Italy,
jand Mexico.
The quantitative controls outlined above have, in general, been applied by
means of general regulations (in terms of ratios) for all banks or groups of banks
tb follow. There have been a few cases, however, where actions of the authorities
have resulted in curtailing directly the amount of reserves available to individual
banks for the purpose of private lending. In the United Kingdom, the treasury
determines every week the total sum (if any) which the banks are called upon
to invest in a nonnegotiable, nontransferable treasury obligation called treasury
deposit receipt. In France, the central bank controls the reserves of the banks
toot only through reserve requirements, but in addition by imposing individual
ceilings on the amounts of commercial paper which each bank can rediscount.
In addition to these various types of quantitative restrictions, a wide variety
of qualitative measures* has been tried in different countries. The system of
reserve requirements in use in Mexico, referred to above, has qualitative as well
as quantitative aspects. Various countries including France and the Netherlands
have tried procedures whereby the making of each loan (above a certain minimum
size) would be subject to the specific approval of the central bank. It was found,
however, especially in France, that it is very difficult to determine and apply
the criteria for the selection of individual loans by a central bank. Thus, although
Such a control could theoretically be extremely effective in limiting private loans,
both France and the Netherlands eventually turned to systems making greater
use of quantitative controls.
A special device consisting of a quantitative limitation on the amount of long
term government bonds that a bank may hold, with special provisions as to the
maturity distribution that may be permitted, was introduced in Canada. This
was used to prevent banks from taking undue advantage of the pegged rate on
long-term government bonds.
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
85
Finally, moral suasion is an instrument to which all central banks resort at
lames. In some countries where acceptance of financial leadership of the central
Irank has become tradition, the instrument of moral suasion has been an important
one; in particular, it has been an instrument well suited to the set of institutions
and circumstances existing in the United Kingdom. In Canada, it may be noted,
the limitation on bond portfolios was contained in agreements with the commercial
Jbanks which resulted from suasion rather than from legal backing.
As has already been indicated and as will be shown in greater detail in the
individual country studies, success of the various monetary control techniques
described above has varied among different countries. For instance, the combined
cash and security reserve requirements appear to have fulfilled their purposes in a
number of European countries but the essentially similar “ special accounts”
procedure adopted in Australia has been unable to stem serious inflationary
•developments in that country. Similarly, qualitative control of bank credit does
not seem to have been an effective tool in countries like France and the Nether
lands whereas it has given satisfactory results in the United Kingdom and Canada.
This difference in effectiveness of similar measures has resulted from differences
in accompanying circumstances and in basic characteristics of the countries
involved; it thus illustrates the importance of careful consideration of differences
in tradition and environment before transposing any specific technique from one
•country to another.
C o u n t r y S t u d ie s
In the following, no attempt is made at an exhaustive description of monetary
policy or of monetary policy formation in all foreign countries. Attention has been
focused on those instances where either institutional devices concerning monetary
policy or the policies themselves appeared to be of general interest. As a result,
for some countries only the institutional relationships are covered, while for
others only the monetary policies and techniques are reviewed.
UNITED KINGDOM AND COMMONWEALTH COUNTRIES
Institutional arrangements
Statutory arrangements for the coordination of monetary policies between the
central banks and the Government have recently been put into effect in several
countries in the Commonwealth, in most instances by labor governments which
wished to insure that the powers of the central bank be so used as to support the
full employment policies of the Government.
United Kingdom.—The Nationalization Act of 1946 formalizes for the first time
in history the relations between the Bank of England and the treasury. The
statute now provides that “ the treasury may from time to time give such directions
to the bank as, after consultation with the governor of the bank, they think neces
sary in the public interest.” The significance of the qualifying clause “ after
^consultation with the governor of the bank” has been emphasized by com
mentators, especially after the governor stated in the House of Lords that the
words “ were inserted at my request and received cordial agreement from the
treasury.” This clause, therefore, is designed to insure that the govenor would
participate in policy discussions with the treasury or, at least, have the right to be
heard before a decision to issue directions to the bank will have been reached.
The new legislation in reality brought about no fundamental change in the
relations between the Bank of England and the treasury. The treasury's power to
.give direction to the bank has not yet been exercised so far as is known. Rather, a
high degree of voluntary cooperation and informal consultation continues to
characterize the relationship among the various segments of the British financial
organization.
India.—Amendments to the Reserve Bank of India Act in 1948 included a
provision almost identical to the one, quoted above, which formalizes the relation
between the Bank of England and the United Kingdom Treasury. The Indian
Government’s power to give direction to the reserve bank has not been exercised
so far as is known. There is some evidence that in 1946-50 the reserve bank
favored an increase in interest rates from the low levels previously reached.
Actually a very gradual rise in long-term rates did occur during these years.
Whether or not there were differences on policy between the reserve bank and the
Government, the close consultative relationship between them was unimpaired.
New Zealand.—The Labor Government of New Zealand in 1936 amended the
Reserve Act to provide that “ it shall be the general function of the reserve
bank * * * to give effect as far as may be to the monetary policy of the
Government.” Reserve bank subordination to the Government was made
86
c r e d it a n d
d e b t c o n t r o l a n d e c o n o m ic m o b il iz a t io n
absolute in an amendment in 1939 which required the bank “ to give effect to any
decision of the Government conveyed to the governor in writing by the Minister
of Finance.” Amendments introduced in July 1950 by the recently elected
Conservative Government, however, restored a substantial measure of autonomy
to the reserve bank. The bank is now “ responsible for taking such steps within
the limit of its powers as the bank deems necessary or desirable” to promote
internal price stability and the highest degree of economic activity that can be
achieved by monetary action. More significant, the bank is no longer required to
carry out written treasury instructions; the amended act provides instead that
“ the bank shall give effect to any resolution of the House of Representatives in
relation to the bank’s functions or business.”
Australia.— The Australian Labor Government in 1945 set up elaborate ma
chinery to resolve differences of opinion on policy questions. The subordination
of the Commonwealth Bank to the Treasury Department provided for in the
Commonwealth Banking Act of 1945 was the product of the Prime Minister’s
expressed view that, during the depression of 1929-33, “ the bank was used by
reactionary interests for a purpose directly opposed to the welfare of the Australian
people and in opposition to the will of the Government of the day.” Under this
act the bank is to inform the treasurer from time to time of its monetary and bank
ing policy; where disagreements develop which cannot be resolved by direct con
versation, the treasurer may “ inform the bank that the Government accepts re
sponsibility for the adoption by the bank” of a Government-approved policy.
The bank must then give effect to that policy.
Consideration is now being given in Australia to new legislation which would
eliminate the subordination of the Commonwealth Bank to the treasury. Under
the terms of the proposed amendments, the management of the bank would be
restored to a board in place of a single goyemor and Parliament would become the
final arbiter of any unresolved differences between the bank and the treasurer.
South Africa.—-The Reserve Bank Act of South Africa makes no formal pro
vision for consultations on questions of monetary policy between the bank and the
treasury. It appears that the bank enjoys a considerable degree of autonomy in
its operations.
Canada.— Arrangements between the Bank of Canada, which was established
in 1935, and the Department of Finance are not formalized in the pattern found
in New Zealand, Australia, and Great Britain. While the Bank of Canada is
Government-owned and under a board of directors which is entirely Governmentappointed, it is not subordinated to the treasury; it appears to occupy a role
within Canada similar to the role of the Reserve Bank within South Africa. The
relations between the bank and treasury appear to be marked by informality in
the British tradition and by cooperation in the formulation of monetary policy.
Monetary policies and techniques
United Kingdom.— The treasury deposit receipt system, introduced during the
war as an emergency financial instrument, has been the principal means used in
the postwar period to supplement more traditional central banking techniques in
bringing about monetary stabilization in Britain. Under this system, the treasury
borrows directly from the commercial banks; the latter receive a deposit receipt
as evidence of a treasury obligation which is neither negotiable nor transferable.
Each Friday the treasury announces the total sum (if any) that is to be called
from the banks against deposit receipts, leaving to the clearing and Scottish banks
responsibility for establishing quotas for individual banks. The commercial
banks meet their weekly quotas; the only discretion left to them is to choose the
day during the following week on which the funds are to be passed over to the
treasury. The effect, therefore, is in some respects similar to that of an extra
reserve requirement which is subject to weekly adjustment; however, only a por
tion of the banks’ holdings of floating debt consists of treasury deposit receipts
since the banks also have continuous maturities of treasury bills in their portfolio.
The deposit receipt system has also facilitated the maintenance of very low
interest rates for short-term treasury borrowing; a freeze on short-term rates has
been effectively maintained since 1946 despite the appreciable rise in long-term
rates during this period.
In unofficial quarters, a proposal has been made which would permit a return
to flexibility in the short-term market without an undesirable rise in the interest
charges on the large floating debt.8 Under this proposal, the bulk of existing
treasury bills would continue to be held at the present low rates while rates on
* F. W. Paish, “ Prospects for lnterest Rates/’ Loudon and Cambridge EconomicService, February 1950,
p. 14.
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
87
net new treasury borrowing and on all commercial paper could be allowed to
fluctuate and to rise. There has been no indication, however, that official support
has been forthcoming for this proposal.
Neither during the cheaper money drive between 1945 and 1947 nor during the
period of disinflation from 1947 to date has the maintenance of monetary control
by the Bank of England been threatened by monetization of the debt through
commercial bank sales of marketable debt to replenish reserve funds. Until the
middle of 1949, the bulk of the clearing banks’ holdings of floating debt was held
as deposit receipts which are not marketable.
The commercial banks were restrained from switching into long-term bonds
both by strong tradition against long-term holdings and, after 1947, by the possi
bility of fluctuations in money rates and bond prices. The risk factors inherent
in holding long-term securities were clearly demonstrated by the decline in bond
prices during the second half of 1949 during which yields rose by over one-half
percent. In addition, moral suasion has been a peculiarly effective central banking
technique in Britain, due to the combination of the traditional prestige of the
Bank of England, the concentration of resources in the British banking system,
and the desire on all sides to avoid more stringent control measure. Through the
treasury deposit receipt system, open market operations, and through moral
suasion the British monetary authorities have been able to retain the initiative
in controlling the credit base of the clearing banks throughout the postwar period.
Although Britain underwent a sharp expansion in credit between 1945 and 1947,
this was attributable directly to the budget deficit and to the monetary policy
pursued by the authorities in support of the cheaper money drive, and not to the
lack of appropriate instruments of monetary control.' From the middle of 1947,
there has been fundamental agreement between the treasury and the Bank of
England on the desirability of avoiding either expansion or contraction of bank
credit, and this policy has been effectively implemented by a close coordination
of treasury and Bank of England operations in the money market.
A further technique for control of bank lending has been the use of qualitative
standards to insure that banking resources are used only for appropriate purposes.
The Capital Issues Committee, established during the war and continued during
the postwar period, had responsibility for approving flotations of new issues for
industrial expansion. The criteria enunciated for guidance of this group are
communicated to the commercial banks for guidance in approving new business
loans. In addition, an amendment introduced in 1946 provided specifically
that all bank loans in excess of £50,000 must be approved by the Capital Issues
Committee.
Australia.— The Commonwealth Bank has used both quantitative and qualita
tive controls in carrying out the responsibility to determine the lending policies
of the commercial banks delegated to it under the Banking Act of 1945. The
special accounts procedure, introduced as a wartime expedient in 1941 and incor
porated into permanent legislation in 1945, has been the principal quantitative
technique used by the Australian authorities to replace the more traditional central
banking devices of monetary control. Under this arrangement, the commercial
banks are required to maintain in special accounts at the Commonwealth Bank
the proportion of new assets in Australia stipulated by the bank. During the
war, virtually all increases in deposits of each commercial bank in excess of
deposits in August 1939 were impounded in these accounts. From mid-1945 to
mid-1948, only 45 percent of new funds was called up by the authorities; the
proportion was increased somewhat after July 1948, however, as the large balanceof-payments surpluses in 1948-49 and 1949-50 intensified internal inflationary
pressures.
The Commonwealth Bank stated that the growth requirements of the economy
would be financed by releases from the special accounts and that the authorized
volume of such releases would be such as to support a level of bank lending
deemed appropriate by the authorities. It was also made clear that the banks
were expected to adjust their operations so as to conform to this general level,
although short-term loans from the Commonwealth Bank could be obtained by
those commercial banks urgently requiring cash.
The Commonwealth Bank has also established qualitative criteria to govern
commercial bank lending. These criteria, which are issued in the form of
enforceable directives to the banks from time to time, are generally designed to
insure that available bank lending will be used for essential purposes and that
bank lending will not add unnecessarily to the existing inflationary pressures on
resources. In addition, the banks have been requested to refrain from financing
capital expansion.
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CREDIT AND DEBT CONTROL AND1 ECONOMIC MOBILIZATION
Neither the radical character of the special accounts procedure nor the qualita
tive control over types of bank lending has been able to prevent the appreciable
monetary expansion and sustained inflation of prices and incomes which Australia
has undergone in the postwar period; these developments, however, should not
be traced to domestic private credit expansion, but to the large-scale immigration
and investment programs, to the booming world prices for certain major export
commodities, ana to the massive inflow of foreign funds for both investment and
speculation which have characterized the Australian economy over the past
few years.
Canada.— In 1945-46, the Canadian monetary authorities continued their
wartime policy of supporting the prices of long-term Government bonds. Al
though the price of Government bonds was not rigidly pegged, commercial banka
moved into long-term Government securities in an attempt to expand earnings;
however, as a result of the Government's debt retirement operations, the Bank
of Canada apparently has not been compelled to acquire Government securities
on a significant scale. A novel system to restrict the demands of the commercial
banks for long-term bonds was introduced through an agreement between the
banks and the Minister of Finance in March 1946. Under its terms, the com
mercial banks limited their holdings of Government obligations (other than very
short-term issues) to a maximum of 90 percent of savings deposits. To supplement
this limitation, it was stipulated that the maturity distribution of the long-term
portfolio was to be such that income from it would not be more than the interest
payable on the corresponding savings deposits, other expenses connected with
these deposits, and a moderate profit.
It is difficult to assess the effectiveness of the scheme, because lending to the
private sector revived and tended to reduce the proportion of assets invested in
Government issues. To moderate credit expansion, the Bank of Canada then
suggested to the commercial banks that it would be preferable for borrowers to
obtain funds for capital expenditure by the sale of securities to the public, and
that the banks should stop expanding their holdings of private long-term obliga
tions. In compliance with this suggestion, which was made early in 1948, the
banks slowed down their purchases. In 1949, with a reduction in the volume of
capital investment in prospect, the suggestion was withdrawn.
The reliance on informal understandings and other forms of moral suasion as a
method of credit control in Canada is in part the result of the concentration of
banking—four banks hold three-quarters of the assets of the banking system—
and in part a reflection of the general desire of the banking community to main
tain, in the British banking tradition, a system with a minimum of statutory
controls.
In addition to these special measures a change in the discount rate from 1%
to 2 percent has recently been decided upon. This is the first change since
February 1944 when the rate was reduced by a full percentage point. In 1944,
the bank expressed the view that it did not foresee any economic situation in the
postwar period which would call for a policy of raising interest rates. The bank
has now stated that current conditions of “ pressure on the country's resources
at a time of virtually full employment" have led it to withdraw its earlier view.
India.— By 1948, prices in India had risen to 4 times their prewar level. After
the war, there was relatively little monetary expansion, occurring chiefly in 1948.
Government expenditures, including outlays for economic development, were in
excess of revenues in 1946-50, but the additions to the money supply and to bank
reserves from this source were to a great extent absorbed by the deficit in the
external balance of payments, which was particularly large in the first half of 1949.
By the end of the war, interest rates on high-grade loans or investments had been
brought down to unusually low levels. A very gradual rise of long-term rates
occurred in 1946-50. A major feature of monetary policy in this period was the
financing of excess Government expenditures mainly from large cash balances
which the Government had built up through wartime borrowing. The Govern
ment thus avoided heavy new borrowings which would have involved a choice
between an active policy of credit expansion or a substantial rise in interest rates.
Continuing concern in India over the problem of maintaining monetary stability
led to the passage of new banking legislation in 1949 which gave the reserve bank
of India broad powers of qualitative and direct quantitative control over the
lending operations of banks. These powers have not been exercised to date.
The same legislation raised the requirement for reserves against demand liabilities,
effective March 1951, from 5 to 20 percent. Reserve requirements had previously
applied only to the larger (scheduled) banks, but will now apply to all banks in
India. The banks were given 2 years in which to adjust their position to the new
requirement. Further to ease the adjustment, banks will be permitted to satisfy
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
89?
the new requirement with Government securities and other trustee investments
as well as with cash or balances at the reserve bank.
FRANCE
The Bank of France and the state
The nationalization of the Bank of France on January 1, 1946, completed a
process begun 10 years earlier but already foreshadowed by Napoleon shortly
after the creation of the bank in 1800, when he said, “ I wish that the bank be
sufficiently under the control of the Government, but not too much.,,
From 1806 the governor and two vice governors were appointed by the Govern
ment. Nevertheless a majority of the 15 members of the bank’s council were for
many years representatives of “ high finance” who at times disagreed sharply with
the fiscal and monetary policies of the Government. On more than one occasion
the bank’s refusal of credit to the treasury led to the Government’s downfall.
Public resentment at this power and at the consistently deflationary policies
pursued by the bank during the early thirties was largely responsible for the
reorganization of the Bank of France in 1936. By this reorganization the mem
bership of the council was changed and henceforth it consisted almost entirely of
public officials or of representatives of various economic interests appointed by the
Minister of Finance.
The act of nationalization did little to change the relationship of the bank to
the Government from what it had been since 1936. The governor and the 2
vice governors are appointed by the Prime Minister and 7 of the 12 counselors
are appointed by the Minister of Finance; 1 of the counselors is elected by the
bank employees and the other 4 hold office by virtue of their positions as heads of
public credit institutions.
The National Credit Council
From the viewpoint of monetary policy, the creation of a National Credit
Council was perhaps more important than the nationalization of the Bank of
France. This council, which was established by the same law which nationalized
the central bank and the four largest commercial banks, is charged with general
advisory responsibility for credit control; furthermore, it is authorized to study
and advise the Government on matters pertaining to its financial transactions and
monetary policy.
The council is presided over by a Cabinet minister, with the governor of the
Bank of France acting as vice president, ex officio. In addition, there are 38
members representing various Government departments, public and private
financial institutions, and business, agricultural, labor, and consumer groups.
The monthly meetings of the council provide a forum for discussion and resolu
tion of issues in the field of monetary policy. Indeed, with its responsibility for
formulating a consistent and general monetary policy, the council, whether its role
is active or passive, provides an arena for the coordination of the views and ob
jectives of the monetary and fiscal authorities. The council also furnishes one
kind of answer to the need for some method of bringing together the many diverse
agencies engaged in granting credit or in exercising control over some segment of
the credit-granting process.
The large and varied membership of the council necessarily places much power
in the hands of its secretariat, which is supplied by the Bank of France. In
fact, it has been said that the council serves mainly to enhance the prestige of
the Bank of France and is of great value to the bank in gaining acceptance for
new measures of banking and monetary control which, in general, originate
within the bank. On the other hand, the necessity of going through the council
with its representation of all economic interests has certainly influenced the
formulation of central bank policy.
Monetary policy
During the early postwar period, the National Credit Council attempted to
reconcile the needs for rapid reconstruction with the avoidance of inflationary
credit expansion by a policy of qualitative credit controls. Thus the banks
were directed to scrutinize credit requests for urgency and lack of alternative
sources of financing. In addition Bank of France approval was required for
credits above 30 million francs (later 50 million francs, equivalent to around
$150,000).
These measures, however, proved generally inadequate to curb credit expansion,
first because of the exemption of commercial bills from the supervision and
second because of the intrinsic difficulties facing qualitative controls unaided
by quantitative devices.
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CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
In the fall of 1948, with reconstruction largely accomplished, a comprehensive
anti-inflation program was adopted cooperatively and simultaneously by both
the monetary authorities represented by the council and the fiscal authorities.
This program involved, on the fiscal side, increased taxes and ceilings on Govern
ment expenditures. On the monetary side, it involved the systematic application
of quantitative credit controls.
In the first place, rediscount ceilings were established at the Bank of France
for each commercial bank at a level slightly higher than that prevailing as of
October 1. The effect of these ceilings was to limit access by the commercial
banks to the central bank in order to obtain reserves with which to expand lending
to the private economy. This measure was of considerable real and psychological
importance because of the widespread use of the commercial bill and of its
traditional reputation as a near-liquid asset.
In addition, a form of supplementary reserve requirement was established.
Each bank was required to continue to hold the volume of Government securities
it held on October 1, 1948, and to invest 20 percent of any increase in deposits
in Government securities. It was decided to freeze the existing holdings of
such securities rather than to apply a uniform percentage to deposits as the
required holding because of the great differences among banks in asset structure.
For any increases in deposits, however, a uniform fraction (20 percent) must be
put into Government securities. In part this requirement merely formalized
prior “ gentlemen’s agreements” between the Bank of France and the principal
commercial banks whereby the latter undertook not to reduce their holdings of
Government securities unless they suffered a net reduction in deposits. Thus,
the commercial banks have been prevented from selling Government securities
to increase private lending. In addition, of course, these measures prevented
any financial embarrassment to the treasury which might have resulted from
the failure of banks to renew their holdings of securities at maturity.
The end of 1948 marked the end of the French postwar inflation which had
repeatedly and seriously threatened French political and social stability. Since
the end of 1948, French price levels have been largely stabilized and there has
been a remarkable improvement in the French balance-of-payments position.
The measures of credit control which were adopted in October 1948 and were
vigorously resisted in some quarters can no doubt claim a share in the credit for
these developments. It should also be noted that credit policy since 1948 has
shown a high degree of flexibility. Several restrictions have been eased when
it appeared that changes in the general monetary situation made such action
advisable.
BELGIUM
Monetary 'policy
Monetary policy has played a more important role in economic developments
in postwar Belgium than in most other European countries. Any explanation
for this fact must take into account two crucial decisions taken by the monetary
authorities after the war. The first was the famous monetary reform carried out
by Finance Minister Gutt upon liberation under which the excess liquid assets
of the public were drastically reduced by a system of blocking of deposits and their
partial transformation into long-term obligations of the state. As a result of this
action, economic activity became strongly dependent on the availability of bank
credit.
Given this dependence, the monetary authorities strengthened the creditcontrol functions of the central bank by instituting, early in 1946, a system of
supplementary reserve requirements under which the commercial banks are re
quired to maintain, in addition to cash reserves, a reserve of Government securities
equal to 50 to 65 percent (depending on the size of the bank) of their deposit
liabilities. This requirement limited severely the ability of the commercial banks
to sell Government securities in order to increase private credit. This left re
discount of commercial paper at the National Bank of Belgium as the principal
means by which the banks could expand credit, and, as a result, rendered the
rediscount policy of the central bank an effective method of credit control. Thus
supplementary reserve requirements have been a principal means of restraining
excessive lending by the banks to the private sector of the economy.
The National Bank of Belgium and the state
The national bank was “ seminationalized” in July 1948 when its capital stock
was doubled and 50 percent was acquired by the state. In addition the powers
of the private shareholders to choose the directors and regents were narrowly
limited. Speaking broadly, this change in the status of the bank does not appear
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
91
to have greatly affected the position of the bank or the relationship of monetary
to fiscal policy in Belgium. The bank, even when it was a private institution,
was not completely independent of the Government. The governor has always
been chosen by the Government, and a Government commissioner supervised the
operations of the bank to insure that they were conducted in the public interest.
The extent to which the bank maintains its independent viewpoint is perhaps
best illustrated by the open controversy, during the spring and summer of 1950,
between the governor of the bank and the Minister of Finance concerning the use
of the “ profit” on the revaluation of the gold reserve. The bank argued that the
state, to whom the “ profit” would accrue, should use it to reduce its consolidated
debt to the bank. The Government, on the other hand, wanted to utilize the sum
to finance extraordinary public works expenditures. The significance of the
bank's willingness to take a public stand against the Government is in no way
weakened by the fact that the issue was finally decided in favor of the Govern
ment's view, since this decision was taken at a time of political and economic crisis
when the treasury's receipts were temporarily reduced sharply.
In appraising the position of the Belgian National Bank with respect to the
Government, one must take account of the strong and respected position of its
governor, M. Fr&re. Moreover, despite the public controversy described above*
it should be stressed that, on the whole, Belgian monetary policy in the postwar
period has not only been fully approved by the Government, but fitted well into
the Government's general economic policy which aimed at maintaining stability
with a minimum of direct controls.
The Banking Commission
Matters of general monetary policy are decided directly between the national
bank and the Government without specific machinery for coordination of policies.
The Banking Commission, which in 1946 issued regulations concerning secondary
reserve requirements, is primarily a technical regulatory rather than a policy
making agency. Its power to impose reserve requirements was originally intended
essentially as a means of insuring liquidity of banks rather than as a credit control
mechanism.
The commission was created by royal decree and the commissioners are ap
pointed on the nomination of the Ministers of Justice, of Finance, and of Economic
Affairs. It consists of a chairman and six members, two of whom are nominated
from a list submitted by the central bank and two others from a list submitted by
the commercial banks.
In general the commission works in close cooperation with the central bank; the
latter supplies its secretariat and performs other services for it. An illustration
of the coordination between the commission and the bank is provided by the
commission's decision in October 1949 to ease slightly the secondary reserve
requirements simultaiieously with the bank's decision to lower the rediscount rate.
THE NETHERLANDS
The nationalization of the Netherlands Bank in 1948 appears so far to have
had little effect on its functions or on the independence of monetary policy in the
Netherlands. As will be shown below, traditional monetary policy has played a
very small role in the Dutch economy during the whole postwar period and, in
fact, began only quite recently to assume a more prominent place among economic
policies in the Netherlands.
The Netherlands Bank and the state
Perhaps the most significant change brought about by the banking legislation
of 1948 was a provision that the Minister of Finance is empowered to give direc
tions, whenever necessary, to the governing board of the bank in order to coordi
nate the Government's monetary and financial policies and those of the bank.
On the other hand, the governing board is entitled to appeal to the Crown in case
of disagreement with these directions. Such an appeal would lead to further
careful consideration of the issue by the Government. In addition, the members
of the governing board are now appointed by the Crown rather than elected by
the shareholders; however, the president of the bank was so appointed even before
nationalization. In the words of the bank in its report for the year 1948: “ Only
practice will prove how the relation between the bank and Government may
develop under the new status. We feel it is a task of great responsibility to cooper
ate in forming a tradition which, next to the legal provisions, will in the long run
be decisive in determining this relationship.”
78276— 51-------7
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CREDIT AND DEBT CONTROL AND* ECONOMTC MOBILIZATION
Postwar policies
Traditional monetary and credit controls have, until very recently, played
practically no part in the postwar policies of the Government. Immediately after
the war a thorough currency reform, similar to that of Belgium, was undertaken
in the Netherlands. While its immediate effect was to decrease drastically the
liquidity of consumers and producers in the Netherlands, subsequent policies led
again to relatively large cash holdings by the public, especially business firms.
This situation compelled the extensive use of price controls, rationing, and sub
sidies to repress the inflationary tendencies arising from the high level of invest
ment.
During the postwar period the only measure of credit control was a qualitative
one: All bank credits exceeding 50,000 guilders required the approval of the
central bank. It is difficult to appraise the effects of this measure. Except for a
sizable increase in 1946, private credit has expanded relatively slowly. But it is
quite possible that direct controls on various types of investment expenditure
may have weeded out most of the potential requests for bank credit. Further
more, many business firms were enabled by their liquidity to expand production
without recourse to bank credit.
As recovery proceeded, the Government undertook to eliminate direct controls
bn consumers, to reduce subsidies, and to liberalize import restrictions. By
September 1949 when the currency was devalued by 30 percent, most price and
rationing controls had been eliminated.
Recent changes in monetary policy
With the outbreak of hostilities in Korea and the rising world price level,
Dutch prices began to rise again. In order to combat inflationary pressures and
to discourage speculative accumulation of inventories the Dutch authorities now
turned to traditional monetary policies. The Netherlands Bank raised its redis
count rate from
to 3 percent, this being the first change in the rate since 1941.
At the same time it was announced that, for the first time in Dutch history, a
system of cash reserve requirements would be instituted for the commercial banks.
The reserve requirements will compel each bank to maintain the same ratio
of cash reserves to deposit liabilities as existed in some base period. Because of
the wide differences in customary reserve ratios among the banks, it was appar
ently decided to “ freeze in” existing reserve ratios rather than to impose uniform
percentage requirements for all banks, or all banks in a given size class.
The Netherlands thus provides an especially direct example of the adaptation
of monetary policy to a changing economic pattern. In the earlier postwar
period, while an extremely high rate of investment was being encouraged, open
inflation was prevented by rationing and other direct controls; relatively little
use was made of monetary and credit controls. Subsequently, however, with the
resurgence of inflationary pressures in 1950 after the direct controls had largely
been abolished, the authorities have decided to attack this situation by traditional
monetary means, and are therefore adopting monetary measures more vigorous
than any that were used in the 1946-49 period.
SWEDEN
Postwar monetary policy
Differences of opinion as to the appropriate monetary policy led in December
1948 to the resignation of Ivar Rooth who had been Governor of Sweden’s central
bank (the Riksbank) for 19 years. Mr. Rooth resigned in protest against the
Government’s policy of pegging the long-term interest rate at 3 percent, a policy
that led between 1946 ana 1948 to large bond purchases by the central bank.
At a time of general inflationary developments, Mr. Rooth favored greater
flexibility in interest rates and, in general, greater reliance on monetary policy
in combating inflation.
Mr. Rootn’s views were opposed not only by the Cabinet, but also by a majority
of the Riksbank’s directors, who are elected by the Swedish Parliament for 3-year
terms. The Swedish Government’s position was that a stable interest rate was
essential to the general policy of stabilizing prices and wages through a series of
dirfect controls and subsidies. As an alternative to limiting Riksbank purchases
of Government securities and to permitting a rise in the rate of interest, it was
felt that excessive investment should be checked by physical controls such as
building permits. Higher interest rates were thought to be undesirable because
they would eventually lead to higher rents and thereby to demands for higher
wages. Mr. Rooth believed, on the contrary, that the creation of new bank
reserves necessitated by the Government’s policy led in itself to inflationary
pressures which direct controls would be more and more unable to check.
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
93
Mr. Rooth’s resignation, after a long period of smoldering conflict, came at a
time when the first postwar inflationary process had largely run its course. In
early 1949 investment pressures relaxed, and the banks found it no longer neces
sary to continue their sales of Government securities to the Riksbank.
Recent changes in monetary policy
Renewed inflationary pressures made themselves felt in the Swedish economy
early in 1950, and were then intensified by the repercussions of the Korean conflict.
In this situation the Riksbank, in full agreement with the Government, has acted
quickly to utilize the previously neglected instruments of monetary policy for antiinflationary purposes. The bank in July 1950 withdrew its support from the
bond market for the first time since the war, permitting bond prices to fall slightly
below par. It also obtained Government approval for the imposition of an
entirely new set of reserve requirements which combine the cash and the supple**
mentary reserve principle in the following way:
(а) Cash and supplementary reserve assets (primarily Government securities)
are set for the five big banks at 10 percent of total liabilities exclusive of savings
deposits and contingent liabilities. Lower percentages apply to the smaller
banks.
(б) Forty percent of these reserves must be held in cash (till money and sight
deposits with the Riksbank) and 25 out of this 40 percent must be held on deposit
with the Riksbank.
These reserve requirements which were applied as of October 1, 1950, will not
require any considerable reshuffling of assets on the part of the banks, but they
will tie down assets that might otherwise have been used for further credit expan
sion. Moreover, the authorities hold the power to increase reserve requirements
up to 25 percent of liabilities and to vary the proportion of these reserves to be
held in cash.
Finally, the Riksbank has conducted active negotiations with the various credit
institutions with the aim of inducing a more cautious attitude to lending in general
and of discouraging in particular credits for nonessential production, for specula
tive purposes, or for consumption.
GERMANY
The Bank deutscher Laender and the Government
the government o/ea ch land (state) appoints the president of its Land Central
Bank; the presidents of the 11 banks are the members of the board of directors of
the Bank deutscher Laender—which coordinates central banking for the whole
territory of the Federal Republic of Germany—and appoint the management of
that bank. The Federal Government has no legal connection with the bank
whatsoever. The occupation authorities supervise the Bank through the Allied
Bank Commission; however, since the promulgation of the Occupation Statute of
1949 the powers of the Allied authorites have been virtually restricted to matters
directly or indirectly pertaining to Germany’s international economic relations.
Proposed central banking act
Under the proposed German central banking act, the Federal Government will
appoint two delegates to attend the meetings of the board of directors in an
advisory capacity and these delegates will have the right to protest decisions of the
board which they consider illegal or against the best interests of the country. As
to the effect of such a protest, there is some difference between the drafts submitted
to the German legislature by the German Cabinet and by the bank management.
According to the Cabinet draft, a conflict between the directors and the delegates
would be decided by a Federal committee, the composition of which would make
it likely that the Cabinet point of view would as a rule be sustained; according to
the bank draft, a veto would merely force the board of directors, enlarged by a
number of Government-appointed experts, to reconsider the question at its next
meeting.
In practice, there has been steady and intimate consultation between the bank
management and the Federal Government on all questions of bank policy, and
this situation is not likely to be substantially affected by the proposed changes.
Monetary policy and debt management
In contrast to the experience of many other countries, German postwar mone
tary policy has not been concerned with the problem of managing a large public
debt. The domestic debt of the former Reich Government has, for practical
purposes, been wiped out by the currency reform of 1948; the debt of the new
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CREDIT AND DEBT CONTROL AND1 ECONOMIC MOBILIZATION
Federal and land governments consists almost exclusively of practically non
marketable “ equalization claims” allocated to the central banking system and to
private credit institutions under the currency-reform legislation and of a much
smaller amount of short-term advances, mainly by the central banking system.
The central banking system may purchase or discount equalization claims held
by private credit institutions insofar as necessary to assure the liqudity of these
institutions. The land central banks may also grant credits to their respective
land governments for the purpose of covering temporary cash deficits, up to onefifth of their total deposits; and the Bank deutscher Laender may grant short
term advances to the Federal Government within a statutory limit.
Monetary policy has relied mainly on changes in the discount rate and in cash
reserve requirements. In addition, the central banking system has issued direc
tives to the private credit institutions setting limits for the aggregate amount of
bank lending as well as for special types of credit. In spite of the absence of
Government bonds from the market, the central banking system has also con
ducted some open-market operations affecting mainly municipal and mortgage
bonds. The purpose of these operations is to maintain the price of these bonds so
as to prevent their yield from rising substantially above 5 percent. In this way
the central bank hopes to lay the foundation for a revival of a capital market and,
in particular, for the flotation of bond issues by the Federal Government.
ITALY
The Interministerial Committee and the Bank of Italy
The formulation of Italian monetary and banking policy was the object of
detailed legislation adopted during the Fascist period (1936). An interministerial
committee presided over by Mussolini was to determine credit policy and a
specially constituted “ supervisorv agency (Ispettorato) for the defense of savings
and for the exercise of credit” was to carry it out. The Bank of Italy provided
the technical organization for both the committee and the “ Ispettorato” and
carried out their functions through its regional branches. Nevertheless, the
system was criticized because of some duplications to which it gave rise, especially
because of the newly created Ispettarato. In 1944, a decree of Italy's new pro
visional government abolished the Ispettorato and the interministerial committee
and transferred the policy-making functions to the Minister of the Treasury and
the executive functions to the Bank of Italy. The very simplicity of this arrange
ment recommended it in a period of complete economic disruption. It was
replaced in 1947 by a new decree which is currently in force.
This decree reestablished an Interministerial Committee for Credit and Savings
composed of the Minister of the Treasury as chairman, and of the Ministers of
Finance, of Agriculture, of Industry, and of Foreign Trade. The Governor of
the Bank of Italy, although not a formal member, attends the sessions of the
committee, and perhaps more important, the bank is entrusted with carrying out
the decisions of the committee as well as with the analysis of the problems which
are within the committee's competence. This covers not only broad problems of
monetary policy but also a great number of purely banking matters such as the
chartering of new banks or branches, the fixing of charges for banking services,
the publication of periodic statements by banks, etc.
The influence of the Bank of Italy on the actions of the Interministerial Com
mittee appears to be substantial. Thus, to give but one example, the first session
of the newly created committee in August 1947 decided upon the now famous
Einaudi credit restrictions which were to break the backbone of the Italian
inflation; but the Bank of Italy, in its annual report for 1946 issued in March
1947, had discussed and advocated measures very similar to the ones that were
adopted by the committee.
The bank's influence is in fact much greater than could be deduced from a mere
knowledge of the institutional framework. This arises in part from the excep
tional qualities of its two postwar governors, Einaudi and Menichella, and in part
from the high caliber of its operational and research staff. The fact that Einaudi
was appointed as Minister of the Treasury at the moment of greatest danger for
the lira in 1947, was of course in large measure responsible for the adoption by the
Interministerial Committee of credit policies which had long been advocated by
the Bank of Italy. The success of Einaudi’s credit policies in saving the lira
contributed powerfully to his elevation to the Presidency of the Italian Republic
in 1948.
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
95
Monetary policy
Italy provided an outstanding postwar example of the effective use of monetarybanking policy in the fight against inflation. In the summer of 1947 inflation
seemed triumphant; prices had risen to 60 times their prewar level and had doubled
within a year. Then in October, prices suddenly started falling and leveled off
in March 1948 at 15 to 20 percent below their peak levels. Although a number of
other factors favored this drastic reversal, it is commonly agreed that the major
credit for having saved the Italian currency from ruin is due to the measures
which were decided upon by the Interministerial Credit Committee in August
1947 and which became effective in October.
These measures required all banks to set aside an amount equal to 20 percent
of their deposits in excess of 10 times their capital or an amount equal to 15 percent
of their total deposits, whichever was smaller. These amounts were either to be
invested in government or government-guaranteed securities for deposit at the
Bank of Italy, or to be held in an interest-bearing blocked account at the Bank of
Italy or the Treasury. Furthermore, 40 percent of any increase in a bank’s
deposits after October 1 was to be set aside in a similar fashion until the bank’s
total reserves reached 25 percent of its total deposits. At the same time the
discount rate of the Bank of Italy was raised from 4 to 5% percent.
These new reserve requirements had been advocated by the Bank of Italy on
the ground that it needed “ a more efficient instrument of maneuver than that
provided by the mere variation of the official discount rate which today has lost
almost all of its influence on the market.” 8 The new regulations did not neces
sitate any massive calling in of loans; nevertheless, the change in atmosphere was
complete. Whereas previously the banks had not hesitated to draw on funds
held in interest-bearing accounts with the Bank of Italy or the Treasury so as to
expand their loans, they now became reluctant to increase lending since addi
tional lending would have involved borrowing from the Bank of Italy.
Since a good deal of economic activity, particularly in reconstruction and
investment, was premised on further credit expansion, a general shortage of funds
was felt in the months following the adoption of the credit restrictions. After so
violent an inflation as had been experienced in Italy, it was impossible to stop
the inflation without incurring some deflationary developments. From the middle
of 1948 on, however, Italian monetary policy has been attacked from various
quarters on the ground that a more active policy of encouraging investment would
be desirable and would not be incompatible with monetary stability.
LATIN-AMERICAN COUNTRIES
In Latin-American countries, the central bank has been virtually the only
source of domestic finance for government deficits since the public and the com
mercial banks have not generally held any sizable portion of their assets in the
form of government securities. The interest rate charged the government is
usually negotiated directly by the treasury and central bank, with little reference
to the supply-and-demand forces and terms existing in the private credit market.
The treasury therefore has more concern over direct access to central bank
credit than over general credit conditions. On the other hand, the existence of
government deficits requiring financing by the central bank has often been a
source of concern to the latter.
Given increasing governmental responsibilities for developmental investments
and for the extension of social services, coupled with problems in raising taxes,
it is often difficult to accommodate the government’s need for credit without
endangering the country’s economic stability. In the last analysis, the central
bank cannot deny any insistent request for credit by the treasury if the treasury
has the support of the highest executive authority. The central bank can attempt
to impress upon the treasury, as well as upon high authorities and even the
public, the monetary implications of proposed fiscal policies. After a decision is
taken, all that it can do is to minimize any undesirable repercussions of the
treasury’s operations by regulating the availability and cost of credit to the private
sectors of the economy.
Central banks and the state
The central bank’s place in the government’s organizational structure, and its
relationship with the treasury, vary widely from one Latin American country to
s Banca d’ltalia, Adunanza Qenerale Ordinaria (Annual Report for 1946), Rome 1947, p. 169.
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CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
another. A summary classification might separate those countries which have
made formal statutory provision for the coordination of treasury and central bank
policies from those which have not done so. In those countries where such
provision has been made, legislative regulations provide (1) that the central bank
has the power to make final decisions affecting monetary policy, (2) that the
treasury hold this power, or (3) that a third agency resolve any conflict that
may arise between the two agencies.
Recent legislation in a few countries (e. g., Dominican Republic, Guatemala,
Honduras) explicitly grants to the central banks responsibility to make final
decisions in the field of monetary policy. Whether the central banks would,
in fact, exercise such responsibility in the face of conflict with the treasury in
these countries has not been tested as yet. The legislative grant of authority
goes even further in Costa Rica, where other government institutions are obliged
to cooperate with the central bank officials in making the central bank’s policies
effective. On the other hand, legislation in Bolivia, Colombia, and Mexico
requires that certain specified central bank monetary policies and actions be
submitted to the minister of finance for his approval or prior review. In eight
Latin American countries, the minister of finance is a member of the board of
directors of the central bank. In general, the prestige t)f the position of the
minister of finance may give him an influence on monetary decisions far beyond
the formal powers of approval or veto with which he may be endowed.
A few countries have statutory limitations on central bank operations, partic
ularly on the bank’s ability to extend credit to the government. These limitations
have taken the form of absolute ceilings upon government borrowing from the
central bank (Peru), of ratios between central bank holdings of government
securities and average fiscal revenues of the government over a number of pre
ceding years (Cuba, Paraguay), or of ratios between the central bank’s credit to
the government and the bank’s capital and reserves (Chile, Colombia). When
further credit to the treasury would result in exceeding certain established limita
tions, the potential conflict between the treasury and the central bank is some
times resolved either by the cabinet (Paraguay) or by the legislature (Chile,
Colombia). In effect, the responsibility for reconciling a treasury-central bank
conflict is shifted to a higher governmental authority.
Monetary policies
Given the dependence of the government on central bank credit, the control
of private credit expansion is made difficult. Government borrowing from the
central bank leads to an increase in the free reserves of the commercial banks
and, under the system of fractional reserve requirements existing in Latin America,
makes possible a multiple expansion of bank credit. Because of the absence of
active security markets, open-market operations by central banks are generally
not feasible.
Various special measures have therefore been devised by Latin American central
banks to restrict the over-all volume of bank credit expansion. In a few instances,
selective controls have been applied to obtain some channeling of credit into
officially desired fields.
Mexico.— Mexico serves as the best example in Latin America of a country
which has employed both traditional and novel techniques of quantitative and
selective credit controls. With respect to reserve requirements, banks in Mexico
are divided into three classes, the classification being somewhat analogous to
that in the United States. Required reserves in Mexico City banks against peso
demand liabilities were raised from 7 percent in the prewar years to 50 percent
in 1944 and later years.
During the war years, there had been an intermittent “ gentlemen’s agreement”
by the larger commercial banks with the Bank of Mexico to maintain portfolio
ceilings. This informal arrangement was dropped in December 1946. There
after, a shift was made to force formal controls and increasing emphasis was
placed upon influencing the composition of commercial banks’ credit portfolios.
In September 1948 the Bank of Mexico abandoned its uniform rediscount rate
of 4% percent and established multiple rediscount rates. These rates range from
a low of 3^ percent for credit documents representing loans to increase agricul
tural production to a high of 8 percent for so-called commercial or nonproductive
loan paper. At the same time, the Bank of Mexico adopted a severely selective
rediscount policy; outside of hardship cases rediscount privileges are restricted
to private commercial banks which maintain at least 60 percent of their credit
portfolio in productive loans.
CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
97
The regulation of commercial bank credit portfolios became much more formal
in September 1949 when a new and elaborate system of reserve requirements was
established. Banks are now required to hold an additional reserve of 100 percent
against peso demand liabilities in excess of the level existing on September 30,
1949; the basic 50 percent reserve applies only to the peso demand liabilities up
to this level.
Both the basic and the additional requirements may be satisfied in part by
holdings of Government or Government-guaranteed securities. In addition, as
much as one-half of the additional 100 percent reserve may be in the form of
private paper described under six categories which set forth the various types,
terms, purposes, and amounts of loans which may serve as reserves.
Although no comprehensive appraisal of the effectiveness of these various
techniques is yet available, the Mexican authorities are reported to have confi
dence in the new structure of credit controls.
FAB EASTERN COUNTRIES
In most of the countries of the Far East, commercial banks hold relatively little
government debt. In those countries, therefore, as in most Latin-American
countries, the treasury has relatively little direct concern over the general structure
of interest rates or availability of commercial bank credit. The most important
exception has been Japan, where there is a substantial market for Government
securities among the commercial banks and other financial institutions.
Japan
The Bank of Japan and the Japanese Ministry of Finance have a long history
of close collaboration, in which the Bank of Japan has had the responsibility for
the underwriting and distribution of Government debt. Decisions of credit
policy during the prewar and war periods were made in the light of the Govern
ment's financial requirements and with a view to minimizing their inflationary
impact.
Under conditions of occupation it is more difficult than usual to judge the rela
tive weight of the two institutions in policy making. It was not until 1949 that
inflation was halted in Japan by bringing Government revenues in line with
expenditures. It is not clear to what extent the Bank of Japan effectively
restrained the expansion of private credit which occurred while the inflation was
continuing nor to what extent its policies have shifted since the rise in prices and
monetary circulation was halted.
New legislation in 1949 set up a policy board of the Bank of Japan, including
as voting members the governor of the Bank and four members appointed by the
cabinet with approval of the legislature. Representatives of the Ministry of
Finance and of the economic stabilization board sit on the policy board without
voting powers. It is generally considered in Japan that the governor continues
to provide active leadership in formulating Bank of Japan policy, although the
Minister of Finance still has legal power to “ order the Bank to undertake any
necessary business.”
Philippines
In the Philippines where the central bank came into existence at the beginning
of 1949, most of the commercial banks hold relatively little Government paper.
Moreover, the power of thie central bank to make direct budgetary advances to
the treasury is rigidly circumscribed, but the central bank has been called on to
extend credit to the Philippine National Bank, a Government-owned commercial
bank, which has become heavily involved in financing the treasury. Thus, as a
result of the Government's failure to maintain a balance of revenues and expendi
tures, difficulties have been created for the achievement of the central bank's
objectives.
The Philippine Monetary Board, the directing board of the central bank, in
cludes the Secretary of Finance, the governor of the bank, the president of the
Philippine National Bank, the chairman of the governing board of the rehabili
tation finance corporation, and three appointed members. This arrangement
was intended to be of assistance in obtaining coordination of policy among the
various agencies and institutions.
The powers of the central bank include the power to change the reserve require
ments within specified limits and “ to permit the maintenance of part of the
required reserves in the form of assets other than peso deposits with the central
bank.” At present the commercial banks are permitted to hold Government
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CREDIT AND DEBT CONTROL AND ECONOMIC MOBILIZATION
securities as reserves up to 5 percent of their demand deposits, the total require
ment being 18 percent, unchanged from before the establishment of the central
bank. The central bank also has authority to fix limits on the expansion of total
loans and investments of each commercial bank or of loans and investments of
particular classes. This authority has not been used.
Indonesia
The Bank of Java, which also does a large commercial-banking business,
functions as the central bank of Indonesia. During 1949 it pursued a policy of
contracting private credit to offset, in part, the inflationary consequences of its
large advances to the Government. To insure that the bank of issue will continue
to have a degree of independence, the economic agreement between Indonesia
and the Netherlands of November 2, 1949, provided that Indonesia will consult
the Netherlands regarding proposed changes in the monetary laws, the appoint
ment or discharge of directors, and credits to be provided to the Government by
the bank of issue.
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@FedFRASER