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CHRISTIAN A. 10TH DISTRICT, HERTER SECRETARIES: M R S . MASSACHUSETTS B A R B A R A M A R Y C O M M I T T E E O N FOREIGN AFFAIRS JOINT C O M M I T T E E E C O N O M I C O N T H E R E P O R T D O R O T H Y Congress of tfje ^ntteb S t a t e s 3 | o u i t of B e p r e s e n t a t t o e a BOSTON Honorable M. S. Eccles Board of Governors of the Federal Reserve System Washington 25, D. C. Dear Governor Eccles: I was delighted to get your letter of February 5th. It so happened that I received from Schultz the copy of the statement made by the economists at the University of Chicago, and had occasion to make use of it on the floor of the House, as per the enclosure. My remarks on the floor of the House were not premeditated and were very crude, as you can see. Most sincerely C A D D I G A N OFFICE: 1703 POST OFFICE BUILDING February 9, 1951 With kindest personal regards, NELSON B R I S T O R M R S . A. R U T H jraaa&ington, 3B. C . CAH:c enc. E. M U N D Y February 23, 1951. Honorable Christian A . Herter, House of Representatives, Washington, D. C. Dear Congressman Herter: I greatly appreciate your sending me the record of your recent remarks on the floor of the House and needless to say, I concur wholeheartedly with the views that you expressed. Full and fair debate of the great economic issues at stake is of the utmost importance to the future well-being of our country, I have been most gratified by the serious and thoughtful manner in which these economic issues are being considered in the Congress, in the public press, and by the numerous private citizens who have taken the time and trouble to write to me during the past few weeks. Hoping you will pardon my delay in acknowledging your letter and with my kindest personal regards, I remain Sincerely yours, M . S, Eccles* A650 CONGRESSIONAL RECORD—APPENDIX Mr. PATMAN. They are getting 45 Secretary of the Treasury and the Federal Reserve Board has been settled. I cents a pound for their cotton and $100 a ton for seed. I have never known a think perhaps the most important mattime in the history of this country when ter that the Committee on Banking and they got along better. Does the gentle- Currency could take up this year is a clarification of the respective positions of man know such a time? the Treasury and the Federal Reserve in Mr. RANKIN. Yes; I certainly do. connection with monetary rates and the Mr. PATMAN. When? Mr. RANKIN. When they were not very inflationary activity now being carried on by the Secretary of "the Treasury. mistreated as they are being mistreated I think it is little realized that in supby Mr. Brannan today. porting Government bonds, with their Mr. PATMAN. When was that? cheap interest rates, the Open Market Mr. RANKIN. Any time before. Mr. PATMAN. Do not say "any time," Committee of the Federal Reserve has bought literally billions of these bonds say when. Mr. RANKIN. The farmer gets less and has placed the cash with which it purchased those bonds into general cirfor what he sells than he ever got in culation. That cash then became a part history. of our general demand deposits in the Mr. PATMAN. Say \when. Mr. RANKIN. I am talking about all banks and the basis for further credit. If you take a look at the story from the time. the pre-Korean week to the presMr. PATMAN. Name ^he time. ent you will find that it is not GovernMr. RANKIN. Any tim* any man robs ment spending that has been responsible ycu that way you will be the sufferer. for the inflationary crisis in this counMr. PATMAN. When t$e gentleman try. More than any other single thing makes charges like that, I think he ought it has been the cheap money policy of to name the time. \ the Government which has allowed an Mr. RANKIN. The gentlepian thinks expansion of bank loans to the extent it is a good thing for the farriers to rob of about $10,000,000,000. And, the cuthem of from $1C0 to $140 a bale on their rious thing about that study is that it cotton? \ will show that the price inflation has Mr. PATMAN. I' think thd farmers followed in percentage points almost exshould be helped as they are helped toactly the same amount as the inflation day. They are getting along better than in our currency and credit. they ever did before. \ Mr. RANKIN. It helps a man \ to take One of the great dangers in connecmoney out of hjs pocket and gi^e it to tion with the extension of the life of somebody else? \ series E bonds is that if the holders of Mr. PATMAN. There are mord farm that series hang onto them there will be owners today than ever before. 'Why? a continuing depreciation in the purBecause of a good farm program. There chasing power of the dollar. Those who are more people who own their homes bought those bonds 10 years ago will today than ever before in history. That find that the dollars that they get back is your answer to communism and in May when the first bonds mature, socialism. As long as you have home will be worth approximately 60 cents ownership in this country, as long as in purchasing power of what they were people own their automobiles or their worth at that time. What they may be cattle or even their pigs, they are not worth in purchasing power 10 years from going to join some organization where now depends entirely on what is done they will have to divide what they have. to stop the ruinous inflation now encouraged by the Treasury's cheap money The CHAIRMAN. The time of the gentleman from Texas has again expired. policy. Mr. CRAWFORD. Mr. Chairman, will the gentleman yield? Mr. HERTER. I yield to the gentleAutomatic Extension of Series E man from Michigan. Savings Bonds Mr. CRAWFORD. That is why - I think it is so very important that the SPEECH Treasury go just as far as it can to inGF duce me and you and the other bondholders to hold the series E bonds, or HON. CHRISTIAN A. HERTER any other bond, instead of cashing it OP MASSACHUSETTS and taking that cash and going into the IN THE HOUSE OF REPRESENTATIVES market place and bidding against each other for these disappearing goods, and Tuesday, February 6,1951 I do not believe the Treasurer has used The House in Committee of the Whole sound judgment. I think he is entirely House on the State of the Union had under off the beam, in the parlance of the consideration the bill (H. R. 2268) to authorise the payment of interest on series E savstreet, because of this inflationary force ings bonds retained after maturity, and; for that is running. I concur in what the other purposes. gentleman has said. Mr. HERTER. I fully agree with the Mr. REED of New York. Mr. Chairgentleman. man, I yield 5 minutes to the gentleman from Massachusetts [Mr. H e s t e r ] . Mr. Chairman, I now ask unanimous Mr. HERTER. Mr. Chairman, I have consent to insert at this point in my r e risen at this time not to oppose the bill marks a statement by a group of the before us but to express sorrow that this leading economists of this country e n bill should come before us until the vital- titled "The Failure of the Present Monely important relationship between the tary Policy." FEBRUARY 7 The CHAIRMAN. Is there objection to the request of the gentleman from Massachusetts? There was no objection. Mr. HERTER. The article reads as follows: T H E FAILURE OF THE PRESENT MONETARY POLICY Our purpose in preparing this statement is to show that the present monetary policy of the Federal Reserve is highly inflationary, that the monetary actions of the Federal Reserve since Korea have permitted the marked price rise which has already occurred, and that the Federal Reserve, presumably under the influence of the Treasury, is pursuing an ill-conceived policy that will interfere with effective mobilization of our economic strength even though taxes are increased enough to keep the Federal budget in balance". Prices are rising at an alarming rate. This rise is widely attributed to the armament effort, to the efforts of business firms as they get ready for military contracts, and to speculative purchases by businessmen and consumers in anticipation of further price rises. This explanation neglects the critical role being played by a misconceived monetary policy in permitting these armament and private efforts to product a price rise. As a result of the monetary failure, the. Government is now committed to "drastic measures in its attempt to control prices and wages which do not strike at the root causes of inflation and which impair the general effl' ciency of the economy and, also, affect adversely the armament effort. Actually the production of armament is as yet a mere trickle. The recent price rises cannot, therefore, be attributed to expenditures on these. Neither can they be attributed to other expenditures by the Federal Government. During the second 6 months of 1950, the Federal Government took in substantially more than it paid out. The Federal budget was, therefore, if anything, a deflationary rather than an inflationary force during this period. True, as armament expenditures rise, this situation will change unless new taxes are levied to meet the increased expenditures. Such additional taxes should be levied. But the recent price rises cannot be attributed to fail- ure by Congress to enact adequate tales. On the contrary, the willingness of "Congress to impose new taxes has been the brightest spot in our economic policy during the last 6 months. The expectation has been that there would be substantial armament expenditures in the future, that a wide variety of goods would be unavailable, and that there would occur future rises in prices. The expectation has given a strong incentive to businesses and individuals to buy now. The repeated threats by Government of wage and price ceilings have further promoted price rises by serving notice on any groups that can exercise control over prices or wages to increase them before it is too late. But neither force could have produced a price rise together with full employment and a high, level of output unless businesses and individuals had been able to get funds with which to finance additional purchases. A n ticipations of future price rises could have .been prevented from producing a price rise by a vigorous monetary policy designed t o make credit tight, to prevent an increase in the quantity of money, or if necessary, t o decrease the quantity of money in order,to offset a rise in the rate of use at money. Instead of following such a policy, our monetary authorities have done nearly the reverse. They have provided additional reserves to the banking system, thereby making It possible- for banks to extend both their loans and their deposits at an extraordinary Appendix Mr. HOFFMAN of Michigan. Mr. Chairman, will the gentleman yield? Mr. PATMAN. I yield to the gentleman from Michigan. SPEECH Mr. HOFFMAN of Michigan. While o» the gentleman is talking about balancing the budget, will he tell us how to do it? HON. WRIGHT PATMAN I am interested in that. Mr. PATMAN. Well," Mr. Truman IN THE HOUSE OF REPRESENTATIVES made a proposal yesterday. It is pretty rough, but it seems to me when we, vote BALANCE THE BUDGET Tuesday, February 6,1951 The way to stop inflation is to balance for these appropriations we should exThe House in Committee of the Whole House on the State of the Union had udder the budget, and I think the budget should pect to vote for the taxes to pay them. consideration the bill (H. R. 2268) to aube balanced. I would be one humble I think the Members of this great body should keep that in mind when we vote thorize the payment of interest on series EJ - „ Member out of 435 who would not adfor the appropriation bills and should savings bonds retained after maturity, and journ this Congress until we did balance for other purposes. th<? budget, pass the appropriation bills, have the courage to turn right around and vote for taxss. They were very Mr. PATMAN. Mr. Chairman, I move pa^them quickly, find out where we are, hard taxes and we do not like them, but and Eliminate every dollar that is not to strike out the last word. needed.\ Certainly every dollar of waste we voted for. the appropriations and" we INVESTMENT I N E BONDS should vote for the taxes to cover the Mr. Chairman, the point has been or every Hpllar that is not needed should appropriations. made by the distinguished gentleman be eliminated, and then when we find Mr. HOFFMAN of Michigan. Then if from Massachusetts a short time ago out what we nave in the form of a budget, I understand the gentleman correctly that a $100 bond purchased 10 years ago whether we like it or not, say, "We are his proposition is that as we vote approfor $75 will only buy about $60 worth going to balanc&the budget and we will priations we should vote for taxes which of goods, commodities, and services at vote for taxes toSbalance the budget." will raise a like sum. this time according to his statement. I think we should op that. We have a > Mr. PATMAN. I say that when we It should be pointed out, however, that good opportunity n o ^ t o render a great 'vote to appropriate money out of the \ if the $75 had been retained by the in- public service. Treasury we should vote for tax measMr. RANKIN. Mr. Chairman, wijf ures that will bring that money back into dividual instead of investing it in E \ bonds his $75, according to the same the gentleman yield? the Treasury and balance the budget. Mr. PATMAN. I yield ttfvthe gejitlestandard, would be worth only $45. So Mr. HOFFMAN of Michigan. I thank \ he is certainly much better off in invest- man from Mississippi. ing his money in the E bonds if the genMr. RANKIN. The gentlem^ spoke the gentleman. Mr. PATMAN. That is what I betleman is correct about the 60-percent of the Brannan plan. The worst^enemy figure. the cotton farmers ever bad iir^this lieve in. The CHAIRMAN. The time of the country was this man Braphan, the SecSHOULD NOT INCREASE INTEREST BATES retary of Agriculture, from Pikes Pe&k. gentleman from Texas has expired. Mr. Chairman, the question has also He would not know a. Cotton stalk from Mr. PATMAN. Mr. Chairman. I ask arisen as to why we should pay more in- a cocklebur or a boll weevil from a \ unanimous consent to proceed for two >' terest on the Government debt. It has bumblebee. v additional minutes. been brought out here that every time \ The CHAIRMAN. Is there objection Mr. PATMAN,I was discussing only we increase the interest rate 1 percent t6, the request of the gentleman from it means an increase of $2,500,000,000 a the financial part. Tex^s? Mr. RANKIN. I represent cotton year in interest charges. There was no objection. farmers, and I want to say this to the Mr.\^iANKIN. I want to say to the Certainly we should not increase the gentleman gentleman from Texas, while he is braginterest rate unless it is absolutely necM r / ' PATMAN. I think Secretary ging on Mr- Brannan as being a friend essary. Who is demanding an increase? The people are not demanding an in- Braiinan is one of the best friends the of the farmer, that the farmers cannot agree to tha$, since he is robbing us of crease; the individual investors are not fafmers ever had. Mr. RANKIN. The present price of from $100 to $140 a bale on the cotton demanding an increase. They can get investments that will yield 5 percent, WJ cotton in this country is about 43 cents we sell now, anti has been doing so since percent, or even 20 percent. But, it jte a a pound while in Brazil it is 70 cents a last fall. Mr. PATMAN. I think the Secretary risk and they do not want to rut*" that pound. This Brannan plan is destroyrisk. They would rather let the 0overn- ing the cotton farmers of America. You of Agriculture, Mr. Brannan, has been can see that cotton is at least $125 a a very fine Secretary. He is a good, honment have their money at 2.5 percent and know they can get it any time they bale higher in Brazil than it is in the est, courageous man, and I think very sincere. Although I do not agree with want to. They run a riskinvesting their United States. Mr. PATMAN. I am not discussing him on everything—and I am sure the money in these other enterprises. So, gentleman from Mississippi does not there is no reason why we should pay that part. agree with him on everything—he is more than 2.5 percent on long-term Mr. RANKIN. The gentleman ought bound to agree with him on soine things. paper, and if the Federal Reserve Bank- to. ing System cooperates, we will not have * Mr. RANKIN. Yes; I agree that he Mr. PATMAN. I think the Secretary to pay more. If they do not cooperate of Agriculture is About the best friend ought to be back on Pike's Peak, and the and they try to adopt a Brannan plan the farmers ever had. Certainly the cotton farmers agree with me from one for the bankers, like they have proposed, Brannan plan for the farmers would be side of the country to the other. You by subsidizing the bankers, why then justified, because they need it, although will hear from them. the interest rate will be increased. But, it is not in operation now. But a BranMr. PATMAN. The cotton farmers it should not be increased. The main nan plan for the bankers is not needed are getting ^long pretty well. reason for the inflation today, or the because they do not need it, and should Mr. RANKIN. That is what the genprincipal reason, or a major factor in not be invoked. tleman thlnlra Automatic Extension of Series E Savings Bonds the Increase in inflation, is because of the condition of our budget—engaging in deficit financing. If we are going to have increased interest rates and increase the burden on servicing our national debt, why that increase is inflation, because it will be borrowed money to be added to our deficit. It is sort of a double-barreled inflation we would be engaging in. A649 A652 CONGRESSIONAL RECORD—APPENDIX Mr. HERTER. I should like to make this observation. Many people have said that it is our Government spending which has been responsible for the inflation and the rise in the cost of Govern^ mmt.Z&Zf. Mr. HAYS of Arkansas. Yes. Mr. HERTER. Last year on balance the Government of the United States took in $3,500,000,000 more than it paid out. In other words, its own actions were deflationary rather than inflationary. At the same time, due to the monetary policy of the Treasury, the bank loans increased over $10,000,000,000. The percentage almost exactly corresponded with the increase in the cost of living during that period. Mr* HAYS of Arkansas. Many of us are concerned about the effect on the Federal budget ultimately of the higher charges, resulting from inflation, for the goods we buy as a Government. When steel goes up, and there are extreme charges for other materials, we more than wipe out any savings in interest charges. So I think the gentleman is doing well to focuf interest on it. Mr. HERTER. I completely disagree with the gentleman from Texas [Mr. PATMAN] who said that the Treasury is saving $1,200,000,000 by keeping interest rates low, for the resulting inflation in the country as a whole has brought about an increase in the cost of the things the Government has to buy that is many times that amount. Mr. HAYS of Arkansas. It is an economic, not a political, issue. I should like to add, Mr. Chairman, that we first need more information regarding the influence of the Treasury Defrartment debt-service policy on the Nation's fiscal structure. Some time ago' the Joint Committee on the Economic Report explored the apparent divergence of views of the Federal Reserve Board and the Treasury Department and prepared a useful document on the subject. A sincere effort was made apparently to reconcile the conflicting views, but the conflicts were viewed finally as a natural result of the different mandates of these agencies. The Treasury Department quite naturally thinks in terms of a low interest rate on the national debt. If the Department were indifferent to increased costs resulting from a higher interest rate we would doubtless hear criticism of it. There are many factors involved that have to be weighed, and it may be a decision for the Congress to make in the light of inflation threats. I recall, for example, that the Secretary of the Treasury stated once to the Banking Committee that the Treasury Department would be prepared to respond at once to any directives from Congress as to interest rates but that the Department would ask that any such decisions be made in the light of the effect on the Budget and other relationships. This involves highly technical considerations which I am not able to appraise, but I am convinced that much weight must be given to warnings issued by the Federal Reserve Board as to the inflationary effects of maintaining a low interest rate on Government bonds. The gentleman from Massachusetts suggests that the Banking Committee make an effort at clarification. The committee, being charged with legislation dealing with inflation would, of course, have jurisdiction over many aspects of the question. Likewise, the Ways and Means Committee dealing with debt-service problems would also be concerned with over-all policies. The point I am making, Mr. Chairman, is that this is a continuing problem requiring the alert interest of the Congress. It should never be determined on the basis of personal or political preferences. It is a cold, scientific question involving the highest kind of professional service. Thje fight against inflation must continue on all fronts. At some stages in this struggle to prevent ruinous inflation greater insight and courage than we have yet displayed may be required. We must not permit the illusion of a balanced budget based on depreciated dollars to trick us into an easy attitude on this subject. At times the temptation to surrender to the allurements of inflation is very great. It is so easy for everyone to yield when the pressures are applied for higher prices, higher wages and even higher taxes. There are pitfalls ahead, however, even for those who momentarily profit by the readjustments. And for millions of people who do not participate in the increase, severe injustices will result if there is a soft attitude in the face of this threat. Mr. Chairman, I do not know the answer to the questions raised this afternoon. What I say is inspired by a fear that we will be less than rigidly moral in our fiscal arrangements, for we must be fair to those who have placed their faith in the soundness of the dollar. The problem cannot be solved by an aye and no vote of approval upon any specific policy of any specific agency of the Government. It is entirely too complicated for that but we would do the people of the United States a disservice if we permit the impression to be gained that price control and higher taxes alone will solve the problem of inflation. Both are needed, but we could have maximum efficiency in controls and an ideal tax program and still fail if we do not take into account the relationship of bank credit to this over-all effort to maintain the purchasing power of the dollar. Penny-Wise—Pound-Foolish . / EXTENSION OF REMARK^ op / HON. THOMAS J.LANE OF H^SSACHITSETTS / IN T H E HOUSE O f REPRESENTATIVES Tuesday, February J, 1951 Mr. LANE. Mr. Spfeuer, under leave to extend my remarkgf\wish to include the following editonal from the Lawrence Evening Tribune, Lawrence, Mass., Monday, February 5, 1951: WarCLOSE VA OITBSV Since, b y jQ»e looks of things, there will be m a n y rare veterans before there are lees, i t seems hardly practiaal at this t i m e t o d o s e t h e Veterans' Administration regional office FEBRUARY 7 in this city. As a matter of fact, it's rather difficult to understand why curtailment of t h e important service the V A renders to veterans and their families should be contemplated at a time when the world situation points 'up the debt of gratitude we owe veterans. I t stands to reason that cessation of this service locally will impose some considerable hardship on Greater Lawrence citizens who have occasion to consult the VA about problems relating to their rights and privileges as veterans. / If it is the Intention of Jthe Government to serve the interests of ecoftomy in the m a t ter, it's our feeling t h a / the interests of economy would be bettafr served by leaving the situation undisturbed. Maintenance of the local VA office certainly involves no such great sum of money that its expenditure reflects painfully upon the tax rate. Nor does it add a fraction of an inch to our m o u n tainous national debt. Zeal for economy is laudable, but it misses the mark when i t attacks so basic a function as the Veterans' Administration. Men who have served their country to the best of their ability—and m a y soon be called upon to do it again— have a right to expect that their country will serve them to the best of its ability. Academy of Foreign Service EXTENSION OF REMARKS or HON. RUSSELL V . MACK OF WASHINGTON IN T H E HOUSE O F REPRESENTATIVES Wednesday, February 7, 1951 Mr. MACK of Washington. Mf. Speaker, on Tuesday I appeared before' the Foreign Affairs Committee and presented arguments in behalf of my tool, H. R. 235, which proposes to authqnze the establishment of an Academ? of Foreign Service to provide specialized training and specialized education for young men and women who desire to make lifetime careers of servirtg in the State Department of the United States. It is my conviction that such an academy will result in a substantial improvement in the personnel of tlie State Department. By obtaining improved personnel in the State Department, our chances of having betted diplomacy will be improved and the cjlance of our becoming involved in future wars thereby (\ decreased. The cost of maintaining and operating such an academy J estimate at about $3,000,000 a year. / Since the State Department now spends billions of dollars annually the cost of maintaining such a school would be/only a fraction of 1 percent on the amount of money now being expended by the State Department each year. Better qualified men of sounder judgment in the State Department easily might result in a saving many times greater than the cost of operating and maintaining an Academy ef Foreign Service. I hope that further hearings will be granted by the committee and that all those in favor or npposed to the establishment of an AcMemy <JT Foreign Service, Including witnesses from the State Department, will be heard. It is my belief that the obtaining of improved Stat* Department personnel is of paramount impartasA. I am confident that out of 1951 rapid rate. T h e loans have provided the financial means for speculative purchases; t h e deposits have provided t h e circulating m e d i u m for t h e larger money volume of transactions. T h e consequences are written clearly a n d dramatically in t h e statistical record since Korea. From May 31 to t h e e n d of 1950t b a n k loans rose by nearly $10,.000,000,000 ok nearly 20 percent. Adjusted d e m a n d deposits, the most active component of t h e m o n e y supply, rose by over $7,000,000,000, or over 8 percent. Currency outside b a n k s rose only sllgtatly, by about $500,000,000, so t h a t the t o t U circulating m e d i u m rose b y 7 percent, "frtjis increase in t h e m o n e y supply was madefvposslble primarily b y Federal Reserve p u r c h a s e of Government securities. Federal Reserve aplding of G o v e r n m e n t securities rose by a l m t e t $3,500,000,000, or 20 percent. Almost h a l t of this in* crease was offset by a gold outflow/trat nearly 2,000,000,000 was added t o member $>ank reserve balances by the security purchases a n d other Federal Reserve operations. T h e r e s u l t a n t 12 percent increase In reserves w a s m o r e t h a n enough t o support the 8 percent Increase i n d e m a n d deposits so that excesft reserves were actually more t h a n twice as large at t h e end of 1950 as they had been 7 m o n t h s earlier. W i t h a rise of over 8 percent In d e m a n d deposits it is little wonder that personal i n c o m e rose about 10 percent, wholesale prices about 11 percent, cost of living by nearly 6 percent. I t is n o accident t h a t these figures are so nearly of the same magnitude. This Is a b o u t as clear a case of purely monetary Inflation as one can find. These are admittedly highly technical m a t ters which is one of the m a i n reasons why, as professional economists, we feel it i n c u m b s n t on us t o call t h e m t o t h e attention of t h e public. T h e y clearly are technical m a t t e r * of t h e gravest Importance. The price rise of t h e last 6 m o n t h s could a l m o s t certainly have been largely or wholly -avoided by effective monetary action. Indeed, prices would probably today be little above their level in May if the Federal R e serve System h a d kept its holdings of G o v e r n m e n t securities unchanged instead of adding t o t h e m by $3,500,000,000. T h e Federal Reserve System has had ample legal power t o prevent t h e recent Inflation. I t s Eoard of Governors are an able and public spirited body of men. Their failure to stop t h e inflation can be charged neither to i m potsnce nor t o ignorance nor to malice. W h y t h e n have they failed to use the means at their disposal? T h e failure t o tighten bank reserves since Korea is a consistent part of t h e financial history of t h e last decade. One cost of e f fective use of monetary measures to s t e m Inflation is a rise in the interest rate on t h e G o v e r n m e n t debt. T h e major weapon available t o the Federal Reserve System is c o n trol over its holdings of Government s e curities. Sales of securities produce a flow/" of m o n e y Into the Federal Reserve Systeat a n d out of currency in circulation and o u t bf b a n k reserves. T h i s action reduces t h e availability of credit t o the public. This weapon has not been used effectively t h r o u g h o u t t h e last 10 years because t h e Treasury and t h e Federal Reserve System between t h e m have been unwilling t o let o n e particular price, the Interest yield o n G o v e r n m e n t bonds, rise more t h a n f r a c tionally. T h e y have preferred t o hold this o n e price d o w n even at the cost of facilitating a rise i n all other prices. I t is long past t i m e t h a t this short-sighted policy was abandoned. These remarks are clearly of more t h a n historical interest* T h e p r o b l e m s we have b e e n facing during t h e TOSt 6 m o n t h s are u n f o r t u n a t e l y likely t o plague u s for a long time. A s o u n d economic policy f o r t h i s period s h o u l d rest o n two pillars: Monetary policy a n d fiscal policy. I t s h o u l d use m o n e - A651 CONGRESSIONAL RECORD—APPENDIX tary policy t o prevent the civilian sphere from adding fuel to inflation; it should use fiscal policy t o ofrset the inflationary pressure of Government spending. T h e need for fiscal policy, specifically, heavier taxation t o match heavier expenditures, is fortunately by now widely recognized. T h e need for, or even the possibility of, using monetary policy Is hardly recognized at all. Nor can we a c cept the dictum of the Council of Economic Advisers that "because of the needs of debt management, » • • general credit policy cannot be expected t o be a major anti-inflationary instrument during the coming period of intensive mobilization." T h e prices at which t h e citizens of this country can buy goods and services are m u c h more important t h a n the price at which the Government can borrow money. T h e so-called needs of debt management have been magnified out of all proportion t o their actual importance in economic policy. A determined policy to stop inflation will have numerous consequences, one of the least important of which would be a rise in t h e interest rate on Government debt, a rise that would probably be moderate. B u t even f r o m the narrow point of view of • debt management, the policy being followed Iky the Treasury is, to say the least, shortsighted. T h e nearly $35,000,000,000 of series E b t a d s outstanding can be redeemed at the will Of their holders. Further price rises t h a t continue to reduce the real value of these bdtjds are almost certain t o produce sooner or later a flood of redemptions of o u t standing b t a d s , t o say nothing about t h e effect of further price rises on the willingness of the jAjiblic to purchase additional savings bonds. .This outcome would raise far greater difficulties for debt m a n a g e m e n t t h a n a rise in interest rates. Monetary measured to keep down the sflpy of money have thd ereat advantage t h a t S iey operate impersonaHy and generally, a f fecting all alike. They dd not interi^re with t h e details of day-to-day bperatioff, require no great administrative staff t o enforce t h e m , do not interfere with, but r a t i y r add to, the incentives to produce efficiently and economically. By preventing dn expansion of credit, they assure t h a t credit obtained t o finance armament production is at-.the expense of credit for ojlier purposes Instead of in addition to sugfi credit. I n this,, way, they make the financial operations consistent with the physical operations. T h e physical resources foe/armament production m u ^ largely be obtained by diversion f r o m other uses; they cafi more easily be so obtained if t h e financial resources are diverted as well. Monetaiy policy cannot serve two masters at onceS It cannot at one and the same t i m e buttrgfts a strong fiscal policy in preventing inflation and be dominated by the present ntfirconceived cheap money policy of the ?Tea£ury. T h e necessity of making a clean/ c u t choice between these two objectives has been obscured by brave talk and rear-guard actions by the Federal Reserve—the raising of reserve requirements, moral suasion of the banking fraternity, selective controls on i n stallment and stock-market credit, and the like. These are all doomed t o failure so long as the Federal Reserve System stands ready t o buy unlimited amounts of Government bonds at essentially fixed prices. Our national security demands a major a r m a m e n t effort. This armament effort is bound t o create inflationary pressure. We cannot afford t o add t o this inflationary pressure by an i n inflationary monetary policy. T h e Federal Reserve System should at once announce t h a t it will conduct its operations with an eye single t o their effects on t h e supply of money and credit and o n t h e level of prices. I t should at once begin t o sell Government securities t o whatever a m o u n t Is necessary t o bring about a contraction In the currently swollen credit base. A n d it should perservere In this policy to the point that the inflation Is checked even t h o u g h one of its incidental effects is a rise in the interest rate on Government securities. M I L T O N FRIEDMAN, LLOYD A . METZLER, FREDERICK H . HARBISON, LLOYD W . M I N T S , D . GALE J O H N S O N , THEODORE W . SCHULTZ, H . G . LEWIS, Department of Economics, sity of Chicago. Statistics and Vniver- sources 1 . FEDERAL GOVERNMENT CASH afTDGET 1950, Second half <Jh billions .vO/ dollars) J. 21.9 19.95 Cash receipts Cash payments Total 1.95 Source: One-half the annual rates given In table 9, Annual BConomic Review by the Council of Economic Advisers i n t h e Economic Report of the President, January 1951, page 160 (hereinafter referred t o as Annual Economic Review). S. M O N E Y AND CREDIT DATA, B A N K S OTHER T H A N 7EDERAL RESERVE 13ANKS [In billions of dollars] End of— May 1950 Demand deposits adjusted Currency outside banks Total circulating medium... Time deposits Total privately held money Loans (all banks) December 1950 85.0 24.7 92.1 25.2 109.7 59.5 117.3 58.9 169.2 CI. 2 176.2 60.8 Source: Annual Economic Review, table A - ^ p . 198, for all items except loans. May loans. Federal Reserve Bulletin, December 1950, p. 1641; December loans, increase to Nov. 29, from Federal Reserve Bulletin, January 1951, p. 55; increase from Nov. 29 to Dec. 31 estimated on basis of increase for commercial banks shown to Annual Economic Review, p. 197. 3. OPERATIONS OF FEDERAL RESERVE SYSTEM [In millions of dollars] May 31, 1950 T7..S. Government securities Total credit outstanding Gold stock Member bank-reserve balances, total.... Source: Federal pp. 43-44. Reserve Dec. 31, 1950 17,389 17,935 24,231 20,778 22,216 22,706 15,814 526 17,681 .1,174 Bulletin, January 1951, Mr. HAYS of Arkansas. Mr. Chairman, will the gentleman yield? Mr. HERTER. I yield. Mr. HAYS of Arkansas. I agree with the observation of the gentleman from Massachusetts regarding the wisdom of the Committee on Banking and Currency's taking a look at this controversy, if it is that. I think there is a tendency sometimes to oversimplify, to look at it as a war between the Federal Reserve Board and the Secretary of the Treasury, and to feel that it is an irreconcilable conflict. There are conflicts, of course, but just as the gentleman has said, the Treasury is naturally interested in saving as much money as possible on our interest charges. - That Is a laudable thing,
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