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December 1, 19Ul

Mr, Chairmans
Her© are some th ou gh ts. I f you agree
w ith them - you may w ish to use some o f
them in New York t h is week.



December 1 , 19^1

We have ta lk ed about i n f l a t i o n f o r more than a y e a r .

When

we s ta r te d t a lk in g about i t , i t was not y e t g e n e r a lly r e co g n iz e d th at
we are going to have an in f la t io n a r y danger*

The causes o f i n f l a t i o n ,

i t s dangers and consequences are so f a m ilia r th a t I do n ot need t o d is ­
cuss them w ith you .

You a ls o know what needs t o be done to avoid i t .

I t i s cu riou s how c e r t a in words or phrases become the b ea rers
o f a la r g e amount o f th in k in g , plannin g and c o n tr o v e r s y .

In r e c e n t yea rs

in the f i e l d o f econom ics th ose words or phrases more o fte n than n o t have
o r ig in a te d w ith Keynes.
"gap ” .

Just now the word o f the hour in econom ics is

As you know, th e gap is the d iffe r e n c e between the amount o f money

spent f o r d efen se and e n te rin g in to the income stream and the amount o f
goods a v a ila b le f o r c i v i l i a n consum ption.

I r e c o g n iz e the gap, re c o g n iz e

the e v i l s th at may flo w from i t and have done what I can t o p rop ose methods
o f b r id g in g it *
But I want to tak e a day o f f from th a t gap today and c a l l your
a t t e n t io n t o the f a c t th a t th ere i s another gap and one th a t i s v a s t ly
more im portant than th e f in a n c ia l gap.

This gap is the d iff e r e n c e b e ­

tween the amount o f goods th a t we need to produce in ord er to p rosecu te
e f f e c t i v e l y what s t i l l i s known under the a l i a s o f d efen se and th e amount
th a t we are a c t u a lly producing*

I t i s i n f i n i t e l y more im portant to do

everyth in g in the w orld to in cre a s e our output to the n ecessa ry l e v e l than
i t i s to a v oid any f in a n c ia l or economic d i f f i c u l t i e s *




-

2

-

As a r e a l i s t I cannot help knowing th a t in a dem ocratic
cou n try w ith th e kind o f machinery we have f o r ad op tin g tax m easures,
Treasury fin a n c in g methods, p r i c e c o n t r o ls , p r i o r i t i e s and r a t io n in g
we are not goin g to be a b le to f i l l the fin a n c ia l gap th a t Keynes t a lk s
about and th a t we are g oin g to have a c e r t a in amount o f in fla t io n #
We a re n ot going to have a run-away i n f l a t i o n , u n less we are
e x t r a o r d in a r ily s tu p id , but we are going t o have a m oderate amount o f
i n f l a t i o n , u n less we turn out to be more w i l l i n g t o a c t prom ptly, v ig ­
o ro u s ly and even r u t h le s s ly than th ere i s any reason to b e lie v e th a t we
are#

T h e re fo re , I th in k th a t i t i s tim e t o do a l i t t l e th in k in g about

the exten t o f th e i n f l a t i o n th at we are l i k e l y t o have and what we ought
t o do in view o f t h a t fa c t#

I should not want to say what I am saying

t o ev ery group, but you a r e tr a in e d p eop le and you w i l l n o t m isunderstand
me when I say th a t I exp ect some i n f l a t i o n and th a t I am t r y in g to n ig h t to
e x p lo re what our cou rse o f a c t io n should b e in the l i g h t o f the f a c t th a t
we a re goin g t o have it#

This in no way means any r e la x a t io n in our

e f f o r t s to p reven t in fla t io n #

I t on ly means that our th in k in g and ex p lora ­

t i o n must n ot stop a t th at p oint#
In making some guess as to the minimum amount o f i n f l a t i o n th a t
we are goin g to have, we have n o t much t o go on, ex cep t th a t th ere have
been estim ates th a t we need to r a is e between 5 an(i 8 more b i l l i o n s o f
d o lla r s from t a x a t io n in the n ex t year in order to p reven t in f la t io n # I
am a fr a id th a t we are not goin g to r a is e th a t much or the m ajor p a r t o f




-

it.

3

C o n s e q u e n t ly , we a r e l i k e l y

-

to have,

of in fla tio n a r y d o lla r s next y ea r.
b illio n s
fa ta l,

a year,

t h a t many i n f l a t i o n a r y

income o f 100 or 105

d o l l a r s a r e n o t g o in g t o be
g e t out o f hand.

Th is c a n n o t ,

go on y e a r a f t e r y e a r w i t h o u t d i s a s t r o u s r e s u l t s .
I f p ric e s w ill

we w i l l

p erh ap s i+ or 5 b i l l i o n s

On a n a t i o n a l

p r o v id e d t h e y a r e n o t a l lo w e d t o

however,

say,

not i n c r e a s e by more th a n 10 or 20 p e r c e n t ,

not h ave v e r y s e r i o u s

con sequences t o c o n t e m p l a t e .

I t may even

be s a i d t h a t i f we g e t to t h e p o i n t where t h e consum ption o f t h e lo w e r
income groups must be r e d u c e d ,

a rise

i n p r i c e s may b e a s e a s y a way o f

a c c o m p l is h in g t h i s a s an y o t h e r method t h a t we a r e l i k e l y
h o u s e w if e a lw a y s has t o

s t r u g g l e to make p r i c e s

a l lo w a n c e come t o g e t h e r .

A moderate r i s e

and somewhat m o d ify t h a t s t r u g g l e ,
hands and such resentm ent
or the p r o f i t e e r .

If,

but

a s she w i l l

s till

h ave w i l l

on t h e o t h e r hand,

A

a t th e s t o r e and h er

in p rices w ill

i t w ill

to adopt.

on ly a c cen tu a te

s t a y w i t h i n her

be a g a i n s t the sto rek eep er

h er a l l o w a n c e were r e d u c e d b e ­

c a u s e h er husband needed t h e money t o p a y t a x e s ,

th e n h e r resentm ent would

be a g a i n s t him and a g a i n s t t h e Government, w hich may h ave more s e r i o u s
so cia l

consequences.

Furtherm ore,

p r i c e s would go down or would f a i l
a l lo w a n c e has b een c u t .
So,

I b e lie v e

but a ls o

she would n o t have t h e a s s u r a n c e t h a t
to

And even i f

th at a ce rta in r is e

r i s e b e c a u s e o f t h e f a c t t h a t her
t h e y w e re ,

she would n o t know i t .

i n p r i c e s may b e n o t o n ly th e

in e v ita b le

th e most a c c e p t a b l e way o f r e d u c i n g consum ption i n an economy con­

s t i t u t e d as ours i s .

Of c o u r s e ,

I know t h a t i n f l a t i o n h as t h e e f f e c t o f a

r e g r e s s i v e t a x , and I would n o t be t o l e r a n t o f even a m oderate i n f l a t i o n ,
u n l e s s we had enough p r o g r e s s i v e t a x e s t o make t h e upper income groups

b
http://fraser.stlouisfed.org/ e a r t h e i r f a i r
Federal Reserve Bank of St. Louis

share#

-

h

-

I -want to make i t c le a r th a t I do n o t mean th a t we must be
d e fe a t is t s and g iv e up the stru g gle#

On the c o n tr a r y , I mean th a t we

must see t o i t th a t such i n f l a t i o n as does occu r does n ot g e t out o f
hand, th a t i t remains w ith in the bou n daries o f red u cin g consum ption,
ra th er than making s e r io u s in road s on p e o p le ’ s savings and insurance
p o l i c i e s and w ipin g out the economic sta tu s o f th e m iddle c la s s , as in ­
f l a t i o n has done in oth er cou n tries#

What, then, must we do i f we

d ecid e fo r the sake o f th e argument th at we w i l l have a moderate in f la t io n ?
F ir s t o f a l l , we must prevent i t from becom ing immoderate and
th a t means th a t we must p rev en t the developm ent o f sp ecu la tion #

I t is

through s p e c u la tio n in com m odities and s e c u r it ie s and r e a l e s ta te th a t a
r e a l dangerous i n f l a t i o n g e ts hold o f a country#

To p rev en t s p e c u la tio n

we must, in a d d itio n t o th ose f i s c a l and r e g u la to r y measures which we
have a lr e a d y m entioned, in cre a s e our c o n tr o l over bank c r e d it #
t io n cannot g et v ery f a r i f i t cannot be done on c r e d it#
f o r e , be in a p o s it io n t o c o n t r o l c r e d it expansion#

S p ecu la­

We must, th e r e ­

Whether th a t i s

done through c o n t r o l o f re s e r v e s or oth erw ise i s a sepa ra te p oin t#

I t is

my own o p in io n th a t the r e s e r v e c o n t r o l is not o n ly more d em ocra tic, but
i s a ls o more e f f e c t i v e than a d i r e c t c o n t r o l o f the uses to which c r e d it
i s put#

We have now c e r t a in s e le c t iv e c o n t r o ls in lim it e d f i e l d s th at

can be used e f f e c t i v e l y , i f necessary#
margin requirem ents i f

We have the power to c o n t r o l

s p e c u la tio n should develop in s e c u r i t i e s , and we

have the power to curb instalm ent c r e d i t fu r t h e r , i f necessary#

I think

th a t in a d d it io n to th a t we ought to be in a p o s it io n t o c o n tr o l bank
s p e c u la tio n f o r a v a r ie t y o f th in g s , in clu d in g in v e n to r ie s and commodity



-

c ;

accum ulation, as w e ll as f o r unnecessary n on -d efen se purposes in g e n e ra l.
I f we do th a t, we w i l l be rea son a b ly sure o f k eepin g our i n f l a t i o n in a
tame c o n d it io n and n ot perm it i t to become a w ild and unruly elem ent.
In th e second p la c e , we must n ot perm it such i n f l a t i o n as we
have consented to t o le r a t e to in t e r f e r e in any way w ith the con sta n t
flo w o f funds in to the Treasury f o r purposes o f fin a n c in g the war.

We

must not a llo w the lo n g -tim e r a te o f in t e r e s t to r i s e m a t e r ia lly and we
must see t o i t th a t an emple amount o f funds i s always a v a ila b le to meet
the G overnm ents requirem ents#

That i s a jo b which in v o lv e s the use o f

our b e s t judgment about the nature o f the s e c u r i t i e s to be is su e d and the
methods o f s e llin g them, and i t in v o lv e s alon g w ith th a t c lo s e coop era ­
t io n between th e Treasury and c e n tr a l banking a u t h o r it ie s in th e m ainte­
nance o f a l e v e l o f r a te s th a t msy be determ ined upon as the p roper b a s is
f o r fin a n c in g the d efen se e f f o r t .
unduly d i f f i c u l t one.

Our problem o f fin a n c e is not an

The n a tio n * s income is so la r g e , the re so u rce s o f

the country are so g re a t th a t th e re v d l l be no s e rio u s o b s t a c le to r a is in g
a l l the funds th at the Government needs, but i t is c l e a r l y to the advantage
o f the country to see to i t th at t h is i s done as smoothly and on as good
terms as w i l l be c o n s is t e n t w ith the maintenance o f our c r e d it o r - d e b t o r
economy.
In th e t h ir d p la c e , and that i s perhaps the most im portant and
th e most d i f f i c u l t phase about i n f l a t i o n , i s th a t we must p la n ahead to
see what we w i l l do when the war is over and Government ou tla y s f o r arma­
ments d im in ish .




The q u e stio n w i l l be whether we should perm it the p r ic e

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6 -

level then to fall back to some pre-war basis, or shall endeavor to
maintain it at the point that it will have reached.

I say that, if

price advances are kept within moderate bounds, our best post-war policy
would be to keep prices at the point they have reached rather than to
let them decline#

Price declines are very hard on an economy, they

accumulate distress on the way down and make it more difficult to meet
the other problems with which we will be confronted.
It is not possible to over-emphasize the importance for America
to be prosperous after the war#

It is crucial for this country not to

permit the development of unemployment or under-employment.

It will be

poor consolation to the people who have gone through the hardships of
defense and war to face after it is over the same depression and dis­
couragement which was upon them for nearly a decade in the Thirties. We
must plan to keep activity at a level that will provide employment sub­
stantially to all our workers.

Failure to do that may lead to more

serious consequences than we like to contemplate.
It is important for us to be prosperous not merely because of
our domestic needs, but also because of the indirect effects that a de­
pression in this country would have on the chances of world reconstruction.
The only hope for a reasonably successful reconstruction lies in the main­
tenance of ability for America to buy a large amount of goods abroad and
to spend a lot of money both in traveling and in remittances abroad.

The

rest of the world will be in an exhausted condition; it will be in need of
everything we have to sell,




^he only way we can hope to keep it afloat is

- 7 by being prepared to buy large amounts of raw materials, luxuries and
other things that will provide dollar exchange for the purchase of the
goods that will be needed.
We cannot finance a stable recovery of the world on credit,
although some of that may be necessary in the early stages.
international loans develop into trouble —

Beyond that

they cannot be repaid and

they cause a lot of hard feelings as well as a lot of distress to in­
vestors or to tax payers, as the case may be.
We must make it our business to keep our economy going full
tilt after the war because that is the only way that we will really
preserve those institutions for -which the war is being fought and the
only hope for the reestablishment of anything like stable economic
conditions and, therefore, stable political conditions throughout the
world.