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Material furnished Senator Douglas by the
Board on Feb* 16, 1951.
Used by Senator Douglas in his statement of
February 22 on the Floor of the Senate.

The so-called controversy —> the miscaxlad feud ~ bs'tween the
Treasury and the Federal Reserve System s i t be utterly baffling to the general
public. As a writer in Fart-one liag&sine put it* it aee&s like a battla between
two adding

Tot* next to defense* it is by far the rsost i^ortant

question wo face today* So arssed strength t e can muster trill preserve our ini
stitutions if we allow them to be undefined by inflation*
Hhat do %m m m by inflation? To ever/ housewife who goes to
ket it ib painfull/ apparent in tae rising coat of living. To



teacher* to ever/ Govcmraent -grorker, in th© Federal Ooverruziant, in the States*
in the cities, to millions living on retirement funds and countless aillions
©ore who are counting on their savings, to ©very individual *smo depends for
existence on a fixed income it conjures up a nightsaare of fear that the
dwindling purchasing power of t M dollar will reach a starvation level* To
the churches, tha universities* to the millions investing la insurance, it
is a living'threat to their security. And what about the passions iihich
Congress has voted for our ar&ed forces

for our ftaldiers* sailor© and

saarines «ho have been injured or crippled on the fighting fronts? that about
the pensions for which labor has fought so hard? Aro these pensions going to be
just a mirage?
Every historian and ever/ economist knows that inflation has bmn
the great destroyer of the vast isiddle classes and of Governments*

it has

paved the Kay f or dictatorship and overthrow of deaocratic institutions •
It is a destro/fcr as evil as m r itsalf* la the e/^s of those "Hho nant to
destroy danocrscy and the capitalistic institution, it is the cheap w


acidwing their collapse. It costs the anera/ nothing in lives or treasure.
It is raally the supreme folly for a nation to arm again threat of invasion
from without and yet I c this insidious invader bring ruin from with!n«

The first victims of inflation are those least able to defend
themselves but mm

the shrei*d* the speculator* the initiate who think they

Imov ho^ to hedge against its ravages, can be engulfed to the ultissate
econos&c havoc*

Surely after all these years of debate and exhortation

no one is ignorant about its evils*
Yet the causes of inflation still m m to be but diialy coEpre^
hended, perhaps because economists talk about it in terms uruieratood only
by other economists, or perhaps it is because the t r r s v© use
credit^ bank deposits


seat more ^stii^riag than they are*

If on© visualises a pair of scales on which tbe saount of money
available to buy goods on the one aide is balanced against the amount of
eoods available for sale on the other side* it is perhaps possible to get
a picture of what the economists ^

when they talk about monetary stabil-

ity* Perhaps the picture of vhat is meant by inflation becomes more clear
if we imagine too much money demand on one aide of the scales in relation
to our capacity to produce goods available for sale on the other aide*
In that case the value of the money gees

the price of the goods

goes up* Conversely, if the amount of laoney demand on one side of the
scales is too small in relation to our capacity to produce the goods for
sale on the other aide then the value of the money goes up and the price
of the goods gees dorau That is tahat we call deflation*
All that is simple enough* Obviously* the main purpose of
Government must be to do all in its power to proaaote as araple a supply
of goods as possible and to prevent an unbalance in laoney demand in
either direction* Hhat ve face today iriih production larger than ever
is still too much sioney in relation to the available goods*

What do

do about it? There is qnite tmiversal agreement

that ne should reduce the m o m t of money demand t i o o h taxation, for
one thing* That, of course, is vitally necessary* What is not m w & l
understood is that noney deaaad is not limits to purchasing power arising out of current income* Money demand can cosae frost three other
sources* First, Boney in hand, cash and bank deposits earned in the
past and not spent* If these are too large they nill beaosa® active
and upset the balance* Second* past swings invested in liquid assets*
If those are cashed m d the isoney spent thsgr can ina^wate an alssoat
indefinite spiral of inflation* Third, new money created through bank
credit expansion* When those three additional caasea of isonay dessand go
really bereork the stability of our society ie endangered* Jill of thm
interact on each other and aLl of themtapingeon the functionine of
our banking system*
Basically, the sowoe of our money supply ie the banking
And here again, vhile the econos&sts toon about it and can talk to each
other in terns that are mitually understood, puhlie understanding is
limited^ Koet of us \ x have not had to delve into the subject are
likely to suppose that the banker lends to other people the &oney that
we deposit in his bank* That is not the case if we look at the banking
system as a ^hole* The outstanding fact which is so little comprehended,
m m among bankere iaho are supposed to knot? about oneh things, is that
t i baling system creates *aoney* They donft do it by hswia^ piinilng
presses in their idndow where yon can see one-collar, fire^dollar*
and tan-dollar bills turned out by the bale, bat they do it just as

effectively by writing on their books a credit to thia brntamt or that
vfolch can be turned into currency OT coin, if one s&shes, but usually
is passed from hand to hand by bank cheeks* Indeed, nearly all of the
business of this nation is carried on through bank checks* The deposits
in our banks constitute the mrer^helming bulk of our money supply*
Still greater obscurity surrounds the subject of bank reserves
and the relation of reserves to the creation of deposit money. And X
do not propose to attempt to elucidate the complexity of this matter
here and no&r* It is of the greatest ii^ortanee, hotter, to know that
the main source of the banking system* e ability to create money id
derived from these reserves* To errorsispliiy the matter, though the
statement is broadly correct* banks can lend, roughly, about six dollars
for ereiy dollar of reserves that are made available to %hm 0 or to put
the matter in reverse, they need obtain only one dollar additional re~
servo for each six dollars that they add to oxw supply of deposit mom^*
this xseans that reserro dollars are not just ordinary dollars* They have aptly boon called "Mgh-potrered dollars**. Why? Because
they can bo multiplied into seem six times their amount* M<m all of
this is entirely right end proper and quite characteristic of banking
systems in all isodsra and civilised nations*
On the other hand* let &© say in passing that I don»t «ant to
be understood as endorsing a lot of things

bankers do* They pass

resolutions against inflation but wheat it comae to snorting aoy
public policy, or action, or law* that 'sill stop thexa fron contributing
to inflation, they say, oh no, they can*t do it* It is socialistic, or

it is unde^ratic, or it is against Sfcatea* rights, or it is something
olse that is &ost abhorrent* I am rather out of patience s&th the
baakers at the mo&ont, not individual ban&@r% but moat organised banking*
But to got back to i y theme* ¥0 have done a great mmsr things
here and iherfc in the name of fighting inflation* W o have frozen prices*
cr attempted to do m by issuing ordara that thay stay put, and ne hav$
frozen wages, or attempted to do m T y the same means* I thank it is
pretty serious
his labor vhat


to the forking m m that ha may not ask for
are able and i&lling to pay* The fact that

have adopted these heroic measures and that the country aeccptsd them
indicates hosr gravely it regards this menace of inflation*
Almost everybody in the country is conscious of aoi^athing affectins his daily life and his pockatbook ifeich he is told is for his o m
good to prevent inflation* Ono raaazfcable and aaast heartening thing
about the &mricm people is that th&y

endure* of coxrsa ulth

accompanying co^laints, v©xy heavy burdens to defend the dollar — and
the heaviest of all burdens

to defend their shores* But they irant to

taosr and they are entitled to tenm why tfaair daily livas are being regu~
lated by price controls, and m g e controls, and rationing and all the
rest of the accouteraents of a regimented State, especially uhen the
end and

of all their efforts is to avoid just that kind of infringe-

ment upon their individual ftmdom and liberties* It is dishonest if
a® ignore the most important factor of all in inflation, i*e*# the sioney
supply, and act as though it had very little or nothing to do nith our

The public has a re&arkabl© understanding a i acceptance and
patience with blundering so long as confidence exists in tb@ country*®

That includes this Congress* And the Congress has done a

good job so far on taxation and in authorising ise&sures, often with
great misgivings, that others sincerely believe will help to figjat
inflation• Nevertheless, I think the country as a nfcola senses the
fact —

certainly they have been told

that m m y of these isa&sures do

not get at the causes of inflation at all, They deal with the effects
and try for a tlas to suppress thesu

I think tho country is possibly

ahead of tho Congress in tdllingncses to submit to still heavier taction *
But the o i great gap in general understanding is that this
is not Enough«

Th© great gap in our d^fonso is in the field of credit,

that is, in the banking system itself. Wo hava drained off, or are
planning to drain off, through taxation, surplus noney income, on one
aide of the scales but we have left the credit spigot wide opsn so
that as fast as, or faster than, those taxes drain off the ssoney or
purchasing power, the credit spigot pours more credit dollars — and
they aro the same thing — back onto the scalss*
To put it another way, it doesn't do much good to tax money out
of our pockets —

to bring the scales back in balance

if thoy are going

to be over^weightod again by this open spigot pouring out credit dollars*
Than ?rh&t isust be done to shut this spigot demn

or shut it

off until the scales are in batter balance? And thoy are going to got

more and more out of balance ae the mailable goods on one side dsdndlee
because materials and &anpoiser are being diverted to defence

vx&bss the

spigot is chut off* He donft need mere credit dollars today* We need less*
It is often overlooked that the rdlwm offisoneyalready created is ssore
than ssaple to take care of all of the business both civilian and defense
business, no# in prospect* To create nore end mere creditra>uldbe to
pile inflation on inflation*
But to do ve manage the spigot? We can require that people put
up nore cash for automobiles, household appliances, houses, or, for that
matter, shares of stock — m& all of these things have already been done,
and even tighter terms

be needed* Those so-called selective controls

apply directly to borrowers and only indirectly to the lenders* What
needa to be done at the m m time is to curb the lender so that he «&H
not lend sons one else the dollars that formerly **ent into consumer credit*
¥ell, for one things we can require the banker to carry sore cash in M s
that limits him eaaewhat — and that, too, has bean done


virtually to the limit allotted by present lairs*
There is another, even more direct iray to enrb the banker*©
appetite for more and more loans, m & hence asore and jsore inflationary
creation of dollars* And this brings j * to the core of the argument*
or difference of opinion, or whatever you vish to call it, between the
Treasury rod the Federal Besertre SyBtm#
1 suet digress a i o s n to say thai the federal Reserve Sy&tea
came into being under the m s e gi&danee of WoodroK Wilson and Carter Glass
of Yiiginia* Save for those *ho have had to l a c a etu^jr of it, it seesaa

zsyzU&ims and r w t e tram our daily lives* It Is, in *iords that


equally obscure* t r jtaericia version of & ceair&L
the average Ban, is a central bank? Agate X shtiUL not delve into the
intricacies of ce&iral barMng*

Ceatral basics are* in most CQv®&vlm$

ancient im&it&tions* but wtotb** m m or old t&ey are vital to ih* imaiaess
m & economic life of a modern eoimtey* If the Cmgress* which


creator of iWLs fom of &z&rlC4Bi central banking* decided to abolish it
tosiorresr, mother institution would have to be created to its plaee to
perform the broad functions it perfera&#
Its s&a^or purpose

re&soa forfeei&gis* l s stopla wrds* t i

exert its pewrs and iBflumee to lawp t n sffales


to sea

to it that the country" has enough sso&cy to oarry on all its activities,
in w r a s in peaee* while at the s s d time striving to prevent creation
of too much monej in a tern or too little i * a

It is a sort of

ooncy reservoir to provide s f a w used to call m elastic cvxrmcg
adjusted at all tisses to t&e needs of the ceraxmitgr# And here I irast to
nake it quite plain that whm I spaak of tho imds. of tiie somsmity I da
not m & n the needs of t&e tre&m&y of the ttoited states* £h<sre are soxse
people i?ho get confuted on this poi&t* vho t m & to ide&tiiy the treasury
i&t& the ^feole United States*
It can* s&thin IJMts laid dom V

the la??* Increase or decrease

the bankerls reserves m d tim provide Mis i&th fewer* or
dollars on i^iich to build his loans and

It eaa do tide ty

or less reserves through its dtssos&t aid apm .narkei

operations or by elianges in ss~ealled reserve raquireaents*


Today tha banker* can got reserves, at will, by soiling 00m of
the Government securities he holds• He can soil them with perfect confidence that the Federal Soserve Kill buy the% if necessary, at a pegged
price, possibly at a pm&usa. llhon the Federal Hosorr® buys tlm, however*
they pay for thesa tdth reserve dollars* Tfcsy creato new reservo dollars
that feed the fires of inflation. It is equally true if businesses, or
insurance coqpanios docide to sell Bom of the Govern&ent bonds they hold
and the Federal E&servo buys* the result is that rssorvs dollar© are
created in the banking system

It isn't necessary to follow tho jaechenical

or technical operations involved in e antral reserve banking to grasp th©
all-iBportant fact that the credit spigot that is fueling tiiis inflation
simply cannot bo turned down or turned off as long as this source of new
reserve dollars — high-powered dollars ~ remains wide open*
And what ha© this to do with the Treasury-Federal Reserve differences of opinion? It has everything to do tdth it. For the past doc ado
the Federal Reserve System has stood in the market place — the open m j f a
place — as thoresidualbuyer of Government securities. Residual buy&r?
T/oll, that simply raeans that if there are no other bny©x*$, the Federal
Reserve stands there and buys* It has a portfolio, or what is called an
open market account, in which it puts the socuritias it thus has to buy*
fthen the Federal Reserve Act iras passsd it waa thought that thoy would
only buy for this portfolio during depressions* on occasions ^rhen money
short, and tiiat they w u M soil frost it in ti&es like these, In other
words, that they would act as a balance lahsel to counteract inflation and
deflation, not to augiasnt it* Yet today, after years of nearly continuous

inflation, there are tg^srde of f 20 billion in that portfolio or account,
s&ore thmi the entire national debt m s in the late tmnttea* And t t e r
evexy security the Federal Eeserve Bmk® bay fnrnisJtee reserve dollar*
high-pothered dollars

to the bankers on *Mch thsy c m b&Hd aere and

&ore loans* J o r this i s the royal road to inflation* It is the source
of most of the inflation

the higher cost of living — ishich the comtry

hag already experienced in the past year* Ik fact central bank financing
of this character has been the cause of the &oet disastrous inflatime in
then, one may ask,

m earth do the people

m m this* central

bank etend there and deliberately feed inflation? X can11 give a single or
a simple m m m * to that* For one thing* it has to be mderatood that the
people ^xo rtm the central bank do not imnt m^r mch thine to happen
they don*t like to or nant to tray the securities* the only reason they
do is because nobody else *dll* And iiby nonft a^feo^T olae b ^ thes®
securities iMch the central bank bays? Became possible pm®hm$rn
think they have &ore profitable

of tiding their non^r* The reason

insurance companies, corporations, banke

LI t&s&r holdings of Government

securities is because they hare isore profitable neea for their money* In
an inflationary period such as

are in there are always nore profitable

^sre of using sioney than investing it in bonds tfeat psy only a raall rate
of interest* In a depression it is 5net the opposite* But in the past
year billions of Covemaent soctarilieg have beta* sold* many of which the
central bank hae had to b^r* Bad to buy? Sot exactly*

Federal Beesrro

has not been directed by Congress to buy* there ha® been no important revision of thb Federal Reserve Act since 1935 — *rhen the Federal debt m s
leas than 30 billions*
then why did they think they had to b*jy?
Todayfcitha Federal debt of m r e than $2£0 billions

f ar

the largest segzient of the entire debt of the country — many people feci
it is essential to maintain orderly conditions and a rea^y x a f e 2a
Ciovemmnt securities. Share is a fair consensus m that* The central
bank rightly attends to it as part of ita function of contributing to
healthy credit conditions* The difficulty arises — and the differences
of opinion — frosa the fact that th© Federal Beeerve ha® beai buying and
continues to buy at a fixed price w l l above par for the long-term
Government steciarities and at only namraly changing prices for shorter
term Government securities* If it did not bay at a fixed price* that ie
if it mited rntil prices fell to a point where true investors felt they
had a bargain and wald make the purchases, the obvious result wuld be
that the prices of Government bonds would go dow*

If this happened the

interest yield on thm vovld go up* Investors instead of getting only
2-1/2 per cent or less might get 3 per cent*
Host I happen to think that there are innumerable investors*
insurance coiapanies* churches, nr&versities* and other institutions* that
would think 3 per cent was a fair return* a living nage sfoich isould enable
them to carry on and pay their i*sy and keep on hiring their ninisters*
and their professors* But i&m the return on their isoney is a good deal

~12loss when prices are rising, and the cost of their operations is incraas-*
iagr, it ia natural for tbea tofcellso&a of their Government securities
in order to pnt their s o e r into higb&r yielding investments that ^ill
give thesa a living nago*
Tmn #iy doesnH the Federal Reserve 1st th© prices go dosm a
little and the interest yield up so that those truo investors will bny
and hold these securities instead of dtasping thm in the market; place
uhere they are like so much gasoline feeding the inflationary fire?
it is true of treasuries all over the world and It is th© n&inr&l and
proper concern of traasurio0 to want to finance the Oovemamt at as loir
a cost as they can* But tho logical end of that policy is to ask*
pay any interest at

^fhy not ^ust have tho central bank create

the money for nothing?*1 Ho sanely managed treasury wmts to go that far*
Certainly car Treasury is not proposing any such course* But they hava
bean insisting* ©ad they are still insisting* on keeping the rates fixed*
They point out that the cost of tho public debt i ? already a largo item
in tbe budget and they* and various others, say that it is mora ixsportant
to prevent that coat from going t p than it is to persait ninor fluctuations
in interest yields tMch, mdar prosont-dsjy conditions* would not deter
either the borrower or the lender*
£0 far m it goes their argtment seems plausible* But it misses
the point. The people t&o ran th© Federal Hoaorve believe, and I think
they are right* that even a relatively small increase in th© yiold of
Covertment securities ^oitld lessen the pressure and attract true investors

faaL, and I agree* that the graseat return to imrastors Mio buy
Gwern&ent bonds is not realistic and tbat avsn if it cost tba Govsnmsxit
a good deal mora to cawy the debt* it should bo tsorth it tea timos war*
or more* because it would hold do*aa the cost of dafsn&e and th$ cost of

to e:splain right here that vbat I m talking about is the

ao-callod narketabla bonds, that is ths kind of securities that are bought
and sold in the opm market* fha S, F* sad G Savings, or Bafmse Bonds,
are not sold in the open narfcet. Xou can cask ttaa at Yaluos mdttaa
into the contract at any time you wish* But unless you keep them until
they ara dus and pliable you tak# a penalty in the for&i of loss of intsiv
est* The £ Bonds ars the ones i f i h are hold by t g r e a t bulk of mall
investors throughout the land. Thoy are very different from t a liberty
Bonds of World War 1 nhich were bought and aold in the open market* ¥hat
I am talkinc about hers are the kinds of present-day GoTrarnnsnt securities
which are bought and sold in the opaa market and are mostly baldfcythe
very large, and for the aost part, sophisticated investors* Sheas
sophisticated investors, if they sell tbo smrketable bonds today* not
only get the full interest tha Treasury originally promised to pay on
these securities but, in the case of lon©~tmm bonds, they can sell thesa
t^ell above par or at vliat the bond brokers call a prss&iam* and the Federal
Reserve stands thore to psy out Mgh->po?*fcrad reserve dollars to ssaintain
that preaaiusu It doss not mko aanse to s o for the Govommant to psnal-*
izs the little investor and pay a prss&um to the big one#

The more o m looks at it* the area of controversy* or difference
of opinion* between the Ifreasury and the Federal Beserve over interest
rates does not s&m to he of epic dimensions except in its broader implications, It wutd

that there can be* as indeed there must be* a

meeting of sdads and I venture to predict that there ^ill be cm a basis
that will avoid exbrastea* I muld Bay that the ejctre&ists are those
on the one hand notzld suspend all central bank operations in the buying
of Government securities and let the nsaa±et go wherever it *sill* Ideally
t&at is all veiy veil but practically it is out of the question and no one
is seriously proposing it trho holds a responsible job* Her wold those
who run the Federal Reserve favor or perait panic conditions to dsftralop
in the Government bond market or conditions that mrnld throw banks or
other institutions into insolvency* On the other extreme^ are those
advocate a rigid* iron-clad* inflescible pattern of pegged prices
for Government securities* If such pegging vere continued long* there
vould be no sense at all in the Oovenment* s issuing a variety of abort
and long-tera securities srlth different interest payments according to
their saattsrify* Any such rigid pegging *rould logically call for juat
one issue at ishatwer interest rate the Government chose to pay*
But the real significance of the difference of opinion cannot be
correctly stated in terms of interest rates* The Federal Reserve people
have sade it ejsphatically dear that th^y do not care i f a the interest
rate is no long as real investor® xdU buy and hold Government securities*

~15Uhat they urnt is to be freed from support operations srMch continue
in end mzk out, month in and jaonth out* to feed Mgh-pomred reserve doV
lare into the market where inflationary pressures ere rampant and nhere
bank loans alone have gone up by 10 billion dollars since Korea* that
is the ^hole objective of their determination to avoid being caught again
in a harness of rigidly pegged rates. If one~half of one per cent* or
even less* would lead the public to btgr and hold Govermaent securities*
they wuld be &ore than satisfied* Of that I am certain*
Jhere is a point b e t w m these tvo eaetresaes shere a reconciliation
can tod must bo effected* Tto Federal Heserve Is less extreme than either
the treasury on the one side or the critics of the Federal Seserve on the
other* They occupy a sort of middle groimd* Hy am vimm mre expressed
in the Report of the Subeo&g&ttee on Monetary, Credit* and Fiscal Policy
of the Joint Remittee on the Economic Eeport* I had the honor to be
Chairman of that Subcommittee end Senator KLaaderp* together laith ftepresentatives Buchanan and Wolcott* joined vith j e in this statement;
"We recommend that en appropriate, flexible* and vigorous monetary policy* employed in coordination $&th fijscel
and other policies* should be one of the principal is&thods
used to achieve the purposes of t&e E^lcy&ant Act* Timely
flexibility toward easy credit at some tims and credit
restriction at other times is an essential characteristic
of a monetary polity that sill promote economic stability
rather than instability* the vigorous use of a restrictive
jsonetary policy m m anti-inflation jseam*re hae been
inhibited since the imr by considerations relating to holding down the yields and supporting the prices of Ohited
States Governstent securities* As a long-rm matter*
favor interest ratea as low as they can be without inducing
inflation, for low interest rates stimulate capital investment, But m believe that the advantages of avoiding inflation are so great and that a restrictive monetae policy can

~16corrtribute so mxch to this end that the freedom of the
Federal liesenre to restrict credit and raise interest rates
for general stabilisation purposes should bo restored ever*
if the cost should prove to bo a significant increase in
service charges on the Federal debt and & greater inconvenience to the Treasury in its sale of securities for n m
financing and refunding purposes.**
I don't vmt to wersfcress or mderemph&aiae the is^ortance of
making some adjustments in Goveimaiit interest rates, which hare a perss~
suasive effect on ail other rates, that nil! attract and hold the e p r
ings of the public* Within the a&aitted limitations of a so-called
flexible policy, a great deal can be accomplished to shut off this spigot
of too much sjoney bidding for a diMnishing aupply of goods* That is
the essence ef Inflation*

The Mddle course I bare in nind would be for

the benefit of everybody in the United States and not for the benefit of
any group or class*
One Bomthms hears it said that this agitation about interest
rates Just reflects the perpetual pressure of greedy bankers for higher
returns and hence more earnings® Such m allegation hardly squares i&th
the conspicuous silence of the banking ccmunity* as such, in backing up
those of us who favor acre realistic and more flexible rates* It hardly
squares with the frensied resistance of organised banking to any additional or supplemental device for curbing their appetite for more m &
more loans. Perhaps the ultimate in the fury of attack ims reached
recently uhm the head of the African Baakers Association denounced an
socialistic an increase ia bank reserve reqaire&ents*. lad by the m e
token the height of suspicion seesus to harre been reached in sons talk I

have heard manating trm banking circle thai the Federal Beservs Asia's
advocacy of s&SGwh&t higher interest rates is just a

screen to enabla

thsa to get Congress to clap on stm other kind of curbs that ?&11 shut
off the spigot of credit.
Another argument that pops up is to the effect that because the
Federal B©serve e w since the beginning of World War H has been pegging
Goverment securities eascept for soxae minor changes in short-tmm interest
rates last year* there is no reason for it to change nov* suddenly at t!i±b
late data. Such an argument ignores the economic histoty of our tisses.
* h n we entered World War II the events at Pearl Harbor frosa us into the
very lo*r rates of interest then prevailing. For that w

a time of great

slack in employment and production. We had to mbarlc overnight on a huga
s a expenditure and gigantic daficit. It ^aa thought that w could not
finance huga deficit© onrisinginterest rates for Ckreernssant bonds*
the var ended thera «era idda expectation© of an imediato s1ue$> and
vhm the posttiar boom developed it was generally assusaed that it would w a r
itself out vitMn a reasonably short tim. In retro^pact# it ia unfortunate
that the Federal Ksserve did not break out of its rigid shackles long before
no&. They reported to Congress repeatedly tha dilsma they facade fhey
argued unsuccessfully idth the Treasury for greatar freedom of action. I
think they should hare fought eraa harder than they did*
But that is tmtar m m ? th© das*. Ma are n w in a period, and have
besn in a period for soma years* of a balanced cash budget*

So it Is not

the Federal Government and its running a deficit that is causing inflation.

The inflation is acting ateoat entirely from private deficit financing*
from liquidation of existing assets frequently at a prelum* and from too
easy access to bank credit* Tim whole core and meaning of the argument
for a higher rate now is to reduce a& far as possible this incentive to
dispose of liquid assets and to reduce the too easy access to bank credit
vhich results in the creation of more and more mongy* Interest rates are
a saere reflection of and not the end and aim of r»h a policy* fhat policy
is to defend the dollar* to preserve its buying power* and thus to isaintain
confidence in our dollar and in our securities*
Xou caa*t fool the public long by artificiality* Confidence in
the dollar and in Government securities is founded on public idUJbagpeee to
buy and hold such securities* It can only be underlined by central bank
financing that eats assay the <value of the dollar* I have heard it said
that all of this is old-world ec^nmics and that* in tisae* as there are
f m & and fewer civilian goods available* people *dll not know iahat to do
with their money and they n&H hare to invest it in Cwernisent securities
at present* or even loner* levels*
feat is a weak reed to lean upon **hen bank credit is growing daily
and adding isora and more dollars to the money supply* Moreover* n© are
facing a defense period of indefinite length* We are facing r^idly wonting defense expenditures* Sinless farther taxes are enacted to cover these
costs* vb

be in for another period of deficit financing before long

and again* as happened after Fearl Harbor* ve will be faced with the problem
of hc*r to handle it*

~19That is ^jr this controversy- needs to he settled tod settled
quic&Ly* Even if savings accumulate, they M i l not flow into Govsnment
securities unless basic confidence exists that our finances are in good
order and that the value of the dollar %dll not diminish further* Othert&se, these savings will ferret out hedges against inflation* They s&ll
jo into the black Baskets that are hard enough to control in mrtim m d
far xaore difficult to deal t&th if w are to hsve long yeare of a defense
Too m ^ f of the public think they nere fooled once because the
dollars they invented buy so little today* The fact is that the enormous
store of liquid assets* of rea<$r money, vhich the public holds i < 3 > idll
not be so liquid if Coveimssmt securities are not &ade the equivalent of
cash, as they are under rigidly pegged ratea* She fact is that much can
be done to shut off the spigot t r nore freedom of action for the central
banking authorities in their buying md sailing of Govermnant securities*
This Is a lesson that has been learned in other nations and learned the
hard vajf in all too mmj cases* The fact 1b that there is no sure
to maintain public confidence in Government securities and in the credit
of the United States Cove:mmnt other than to strive for a genuine, not
an artificial, market for the obligations of the Goveiment*
/ Jtit
Federal Reserve Bank of St. Louis