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Iter M U i tm aecortia&a* with your %*Xa$feoft« rmiw&t ymtmrd&y I m enclosing h*rwilth & mmmwmim wfeieft I ?mx uill find tsf&efcory i M hel^I'Ml. If ih©re is anythiag fmttom t mm do, p X m m 4® mm&t&tm to m t t m »*• your*, Bisau m U i a » Fulferigtet, United States Seaat«# V&sMm&toa*.ft.0* Sac.-2 August 11, 1950. The way to protect the eonomic system from inflation of prices is to prevent demand from becoming greater than supply. The sound way to carry on the present military effort is to have an amount of purchasing power big enough to buy all the civilian supplies available, hut no bigger. Purchasing power in excess of supply inevitably leads to inflation* In the battle against inflation, we may have to use direct measures such as price controls and rationing as veil as the indirect, but most effective, measures of monetary credit and fiscal restraints. But price controls and rationing in the face of growing credit and monetary inflation can only lead to grayer and grayer markets, with evasive practices widespread* Furthermore, as we have discovered in the past few years, the direct controls do not prevent inflation if credit and monetary expansion is not prevented. Direct controls in these circumstances merely change the form of inflation and the time at which it occurs** Limitation of inflation by monetary, credit, and fiscal means requires the combined and coordinated use of these instruments* It is not possible to rely on consumer credit regulation, on real estate credit regulation, on other credit restraints, or on fiscal measurers separately. They have to be vigorously used together* Housing s tarts end extensions of housing credit are at far the greatest rates in the history of the nation* This construction, so laudable in a time of peace, cannot be continued in a time of rapidly mounting defense effort* It must be in considerable part postponed if we are to have the men and materials necessary for military production. Even the starts which have already been made and those which inevitably will be made in the near future ?&11 provide a great inflationary factor for many months* Mortgage credit will continue to be extended to permit /provide/ their completion. Immense amounts of labor and materials will be involved* Contractors are frantically scraping the bottom of the barrel to accumulate the materials to finish these houses. Until it is clear that the men and materials are available to complete these houses, the inflationary pressures should not be increased by starting further houses. Certainly the government should not postively sponsor the starting of new construction until such policy will not be conducive to inflation. Yet the & Veterans Administration by thcdr policies are still stimulating housing construction. The legislation under consideration would rive the Federal Reserve Bo^rd authority to prescribe regulations with respect to reel estate credit for new construction, in order to contain its inflationary expansion and reduce building during the emergency period, but this authority would apply only to real estate credit for new construction not m^.def insured, or guaranteed by the Federal Government. At the same time, .the legislationttouldleave to Presidential discretion, after consultation with the Federal Reserve Board, the regulation of Government programs in the real estate mortgage field* This approach is faulty because it divides administrative responsibility. The division of responsibility can seriously interfere with achieveing the objectives of tiiis legislation. If the credit tems permitted under the Federal programs are not restricted sufficiently, the Federal Reserve Board has the choice of going along with the Federal programs, or of tightening the terms on private credit severely. If it takes the first course, the purpose of this legislation will be frustrated. If it takes the second, borrowers snd lenders outside the Federal programs are penalised or the business is driven into the Federal programs. If there is to be effective credit regulation in the field of new real estate construction it must b© a single regulation, regardless offchatlenders extend the credit and whether the credit is insured, guaranteed, uninsured, or nongu&ranteed. That the Federal programs are importuit sources of funds for new construction is shorn by the fact that over two-thirds of the rental units started in recent months have been financed with insured mortgages, and over two-fifths of the new houses sold have been financed vdth either F.H.A. or GI mortgages* The terns on these mortgages considerably more liberal than the terns on un- guaranteed mortgages, permitting down payments as low as 5j 10, or 15 per cent of the price, compared vdth 30* 35, or 40 per cent in the case of mortgages made by banks, insurance companies and other lenders• Maturities run ^s long as 20, 25* 30 and even, in a few cases, 0 years, compared vith the more conventional 12, 15$ 16, or 20 year terms. This bill provides power to limit the terms of mortgage credit for new construction. But it would be futile and utterly mischievous to apply more stringent restrictions on uninsured then on insured credit. Such a procedure would simply cause the noninsured credit to dry up, and the insured credit to expand correspondingly. It v«ould create arbitrary and unnecessary discriminations. The essential point I am snaking is that there can be no effective antiinflation regulation of real estage credit unless the terras prescribed cut across the board affecting Government-sponsored as well as other credit. Inflation control cannot be effective in one part of the fieldtthileforces of inflation are permitted to move forward -unchecked, and indeed reinforced, in other parts. August 11, 1950. The way to protect the eonomic system frost inflation of prices is to prevent demand from becoming greater than supply, The sound way to carry on the present military effort is to have an amount of purchasing power big enough to buy all the civilian supplies available, but no bigger. Purchasing povor in excess of supply inevitably leads to inflation* In the battle against inflation, we may have to uee direct measures such as price controls and rationing as veil as the indirect, but most effective, measures of monetary credit and fiscal restraints. But price controls and rationing in the face of growing credit and monetary inflation can only lead to grayer and grayer markets, with evasive practices widespread* Furthermore, as we hsve discovered in the past few years, the direct controls do not prevent inflation if credit and monetary expansion is not prevented* Direct controls in these circumstances merely change the form of inflation and the time at which it occurs.* Limitation of inflation by monetary, credit, and fiscal means requires the combined and coordinated use of these instruments* It is not possible to rely on consumer credit regulation, on real estate credit regulation, on other credit restraints, or on fiscal measurers separately* They have to be vigorously used together* Housing s tarts and extensions of housing credit are at far the greatest rates in the history of the nation* This construction, so laudable in a time of peace, cannot be continued in a time of racily mounting defense effort* It must be in considerable part postponed if we are to have the men and materials necessary for military production* Even the starts which have already been made and those which inevitably will be made in the near future vdll provide a great inflationary factor for many months. Mortgage credit i?ill continue to bo extended to permit /provide/ Sheir completion. Intense amounts of I^bor and materials will be involved. Contractors are frantically scraping the bottom of the barrel to aeemoilote the materials to finish these houses. Until it is clear that the m m and materials are available to complete these houses, tho inflationary pressures should not b© increased by starting further houses. Certainly the government should not po&tively sponsor the starting of now construction until such policy m i l not b© conducive to inflation. Yet the F.H.A* & Veterans Administration by thoir policies are still stimulating housing construction. The legislation under e^rmiaeration would givo the Federal Heserve Bo^rd authority to prescribe regulations with respect to real estate credit for nevi construction, in order to contain its inflationary expansion ^nd reduce building during the emergency period, but this authority would apply only to real estate credit for new construction not made, insured, or guaranteed by the Federal Government. the same time, the legislation v*ould leave to Presidential discretion, after consultation with the Federal lieseive Board, the regulation of Government programs in the real estate mortgage field. This approach is faulty because it divides administrative responsibility# The division of responsibility can seriously interfere with achieveing the objectives of tills legislation. If the ere lit terms permitted under the Federal programs are not retrtricted sufficiently, the Federal Heserve Board has the choice of going along vdth the Federal progrms, or of tightening the terms on private credit severely. If it takes the first course, the purpose of this legislation vdll be frustrated. If it takes the second, borrowers m d lenders outside the Federal programs are penalised or the business is driven into the Federal programs. If there Is to be effective credit regulation in the field of new real e&t&be construction it must be & single regulation, regardless of ^h&t lenders extend the credit and whether the credit is insured, guaranteed, uninsured, or nongu&r&nteed* Si&t the Federal program ere important sources of funds for nm con-* ©traction is shorn by the fact that over tiso-thirde of the rental units started in recent months have been financed with insured mortgages, end ov$r two-fifths of the new houses sold h&ve been financed with either F*H.A* or QI mortgages. The terma on theae mortgages w considerably more liberal than the terms on un- guaranteed mortgages, permitting down payments as low us 5, 10, or 15 per cent of the price, compared vdth 30, 35, or 40 par cent in the case of mortgages made by banks, insurance companies and other lenders. Maturities run aa long && 20, 25, 30 even, in a few cases, 40 years, compared *»ith the rsore conventional 12, 15, 18, or 20 year terms* Hiie bill provide® power to limit the terms of mortgage credit for new construction. But it would be futile and utterly mischievous to apply more stringent restrictions on uninsured than on insured credit* would simply cause the noninsured credit to dry up, pand correspondingly* Such a procedure the insured credit to ex- It would create .arbitrary .and unnecessary discriminations* The essential point I. am making is th^t there can bo no effective antiinflation regulation of real ©stage credit unlese the terns prescribed cut across the board affecting Govenuacirt-sponsorad as sseil other credit* Inflation control cannot be effective in one part of the field ^hile forces of inflation are permitted to move forward unchecked, i<n& indeed reinforced, in other parts*