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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*