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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 as 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 every school- 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 of 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« ft 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 sod credit^ bank deposits money* 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 lr-g 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 $o 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 !e 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 s here and iherfc in the name of fighting inflation* W o have frozen prices* t 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 o pretty serious his labor vhat ve 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 problem* The public has a re&arkabl© understanding a i acceptance and rd patience with blundering so long as confidence exists in tb@ country*® leadership* 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 ra 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 reserves 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* b 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 sset 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 ale zsyzU&ims and r w t e tram our daily lives* It Is, in *iords that bs i equally obscure* t r jtaericia version of & ceair&L Jt 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 the 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 i « exert its pewrs and iBflumee to lawp t n sffales is balance 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 sd as of too much monej in a tern or too little i * a i It is a sort of ooncy reservoir to provide s f a w used to call m elastic cvxrmcg set 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 providing It eaa do tide ty or less reserves through its dtssos&t aid apm .narkei operations or by elianges in ss~ealled reserve raquireaents* reserve 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 acet place — as thoresidualbuyer of Government securities. Residual buy&r? T/oll, that simply raeans that if there are no other bny©x*$, the Federal Reserve stands there and buys* It has a portfolio, or what is called an open market account, in which it puts the socuritias it thus has to buy* fthen the Federal Reserve Act iras passsd it waa thought that thoy would only buy for this portfolio during depressions* on occasions ^rhen money short, and tiiat they w u M soil frost it in ti&es like these, In other words, that they would act as a balance lahsel to counteract inflation and deflation, not to augiasnt it* Yet today, after years of nearly continuous inflation, there are tg^srde of f 20 billion in that portfolio or account, s&ore thmi the entire national debt m s in the late tmnttea* And t t e r ofg evexy security the Federal Eeserve Bmk® bay fnrnisJtee reserve dollar* high-pothered dollars to the bankers on *Mch thsy c m b&Hd aere and &ore loans* J o r this i s the royal road to inflation* It is the source fa t of most of the inflation the higher cost of living — ishich the comtry hag already experienced in the past year* Ik fact central bank financing of this character has been the cause of the &oet disastrous inflatime in history* then, one may ask, m earth do the people m m this* central bank etend there and deliberately feed inflation? X can11 give a single or a simple m m m * to that* For one thing* it has to be mderatood that the people ^xo rtm the central bank do not imnt m^r mch thine to happen they don*t like to or nant to tray the securities* the only reason they do is because nobody else *dll* And iiby nonft a^feo^T olae b ^ thes® iy securities iMch the central bank bays? Became possible pm®hm$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 asct 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 ang 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 s 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 i 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 livings I 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 *ac investors throughout the land. Thoy are very different from t a liberty fa 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-* a 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 sct 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; a "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 ?e 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 rr 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 effort* 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<$r money, vhich the public holds i < 3 > idll o&$ 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 g 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* http://fraser.stlouisfed.org/ / Jtit ^fj Federal Reserve Bank of St. Louis I, C