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A p r i l 26, 19U6
MOIETART ASPECTS OF INFLATION
SUMMARY OP NOTES
NOTES
SUPPLEMENTAL MEMORANDA
Recent Progress i n Disposing of Surplus War Property
Sale of Treasury S i l v e r
Government Corporations and Credit Agencies
Soeial Security and I n f l a t i o n
Extract ftiom Address by Chairman Eecles a t the
Ninth Annual Reunion Conference of the Graduate
School of Banking, Mew York C i t y , A p r i l 6, I9I46
Possible Heduotion of Member Bank Reserves through
Transfer of Foreign O f f i c i a l Funds to Deposit with
Federal Reserve Bank of lew York
What Can be Done about Real Estate TaluesT
Residential Real Estate
Farm Land Talues
Extent and Effectiveness of Export Control
A p r i l 26, 19^6
Monetary Aspects of I n f l a t i o n
B r i e f Outline
I t has been said that price controls attack symptoms
of i n f l a t i o n and not causes; t h a t r e a l cause is monetary expansion;
t h a t efcre requires monetary contraction and increased production.
Increase i n available buying power without corresponding
increase i n goods i s basic cause of i n f l a t i o n — an inevitable
r e s u l t of war.
S i t u a t i o n e x i s t s , however, and u n t i l production can be
increased to much higher l e v e l , d i r e c t controls are necessary.
As & result of war finance, the p u b l i c ' s holdings of
deposits and currency are nearly three times prewar l e v e l and i n
addition large holdings of Government s e c u r i t i e s can be r e a d i l y
converted into cash.
E f f o r t s should be made to prevent f u r t h e r expansion; to
obtain some contraction; and to s h i f t holdings into firmer investments,
Various measures can be adopted to accomplish these
purposest
1,
Create a surplus i n the Governments budget.
Do not reduce taxes.
Reduce expenditures as much as possible without
impairing essential functions of Government,
Expedite disposal of surplus property.
2,
Retire public debt from e x i s t i n g balance, as w e l l
as from any surplus that may be obtained.
Program is now i n process. Over 20 b i l l i o n dollars
of debt could be r e t i r e d t h i s y e a r .
W i l l reduce bank deposits because most of maturing
issues are held by banks.
Also reduce bank reserves and, thereby require banks
to s e l l some of t h e i r large holdings of Government
securities.
3.
Push sa^es of securities to genufine investors.
Permit l a r g e r purchases of Series G bonds, which are
redeemable on demand a t lower rate and are not
s h i f t a b l e to banks.
Use proceeds to r e t i r e bank holdings.
- 2 -
U,
Take measures to prevent f u r t h e r monetication of
debt and deoline i n long-term i n t e r e s t r a t e s ,
without increasing short-term r a t e s .
Present d i f f e r e n t i a l s i n rates encourage banks to
s e l l short-term securities to Reserve Banks and
buy longer-term issues.
Creates additional bank reserves, which are expanded
into six times as much c r e d i t *
Possible measures of r e s t r i c t i o n :
a . Debt retirement program i s h e l p f u l , but not
adequate.
b , Discontinuance of purchases of short-term securities
by Federal Reserve would r a i s e i n t e r e s t r a t e s ,
e. Seed to require banks to hold c e r t a i n amounts of
short-term securities or l i m i t t h e i r holdings
of long-term s e c u r i t i e s .
Done by understanding i n England and Canada.
Would require l e g i s l a t i o n here,
5.
Centralisation of foreign funds i n 0 , S, i n Federal
Reserve Banks might be used to withdraw 2 or J b i l l i o n
dollars of reserve funds frommarket.
Other measures may be needed to discourage speculation i n
e x i s t i n g assets — s e c u r i t i e s , r e a l e s t a t e , e t c ,
1,
Capital gains tax would have been best measure.
2,
Some c r e d i t r e s t r i c t i o n s e x i s t , especially i n securities
market•
Others may be necessary.
ji.
Should not make c r e d i t any easier as i s provided i n
Housing B i l l ,
ij..
Exhortation to buyers and lenders — indicating excessive
prices and dangers of future losses.
A p r i l 26, 19U&
Monetary Aspects of
Inflation
Kartlme aonetary expansion
The basic cause of i n f l a t i o n i s war, which neeeesitates
large payments to businesses and individuals f o r producing good*
t h a t ere not a v a i l a b l e f o r purohase.
Since i t i s p r a c t i c a l l y impossible to r a i s e taxes f a s t
enough and f a r enough to cover these expenditures, individuals and
businesses have excess incomes, which correspond to the amount of
Oovernsent borrowing;,
-•.oase of t h i s borrowing absorbs a p a r t of this excess income,
but; isuoh of i t saast be obtained from banks and provides the basis
f o r an expansion I n bank deposits and currency.
Figures are f a s a i l U r —
Government raised 1^0 b i l l i o n i n taxes and borrowed
2^0 b i l l i o n . The banking system provided approximately
100 b i l l i o n * Sot only the 1^0 b i l l i o n borrowed from other
sources but some p a r t of t h a t obtained from banks represents
the laves tsient of genuine savings*
Expansion of t o t a l deposits and currency has been to
nearly three times the prewar l e v e l from 67 b i l l i o n i n June
1<&0 to 175 b i l l i o n . Demand deposits and currency have grown
from 59 b i l l i o n to 126 b i l l i o n (including
b i l l i o n of
temporary 0* 3* Government deposits)* Considerably i n excess
of current needs on the basis of any P&*t standards*
Value of the nation's t o t a l annual product has not
q u i t e doubled — from 97 b i l l i o n i n 19o0 t o about 160 b i l l i o n
a t present. Thus I f turnover of e x i s t i n g stoney should increase
to prewar standards there would need to be a considerable
f u r t h e r increase i s production or a r i s e i n prises*
l a a d d i t i o n there has been an increase of 80 b i l l i o n
dollars i n i n d i v i d u a l and business holdings of government
s e c u r i t i e s , which can be r e a d i l y converted i n t o cash as long
as the Fedaral Reserve stands ready to buy them a t par*
- a -
General Methods of Controlling I n f l a t i o n
A*
Prloe oontrolc and allocations —
I t has been said t h a t these attack symptoms not causes*
This i s true but the basio cause
the increased
supply of l i q u i d assets r e l a t i v e to the l i m i t e d
supply of goods — already e x i s t * •
U n t i l that r e l a t i o n can be changed or we can be
assured that i t w i l l not operate toward i n f l a t i o n ,
d i r e s t controls are e s s e n t i a l *
B.
Increasing production —
'4111 no doubt be eventual s o l u t i o n .
But t h i s i s a tioe-aonauaing process.
Production of sany itesas already olo&e to capacity
but s t i l l f a r short of denand.
Unless properly directed resources could be channeled
i n t o production of goods f o r which demand i s t r a n s i t o r y
and create basis f o r l a t e r reaction*
Increasing production also r e s u l t s i n increased current
Incomes and buying: power.
Does not absorb past accumulations of buying power*
C*
Monetary and f i s c a l measures to reduce s&oney supply or
prevent f u r t h e r expansion*
These measures w i l l be dlsouseod sore f u l l y *
Monetary and f i s c a l measures for control of i n f l a t i o n *
1*
Create budgetary surpluses.
ainoe d e f i c i t s e r e p r i n c i p a l basic cause of i n f l a t i o n ,
surplus can be powerful & n t i ~ i n f l a t i o n a r y f o r c e *
Ocrvernacnt would take more from incomes i n taxes
than i t would pay out*
Could repay borrowings a t banks and reduce deposits*
(Mseussed ore f u l l y l a t e r ) *
- 3 -
a . So f u r t h e r tax reduction.
Some increases i n taxes would be desirable now, but
not l e g i s l a t i v e l y f e a s i b l e .
Good a n t i - i n f l a t i o n a r y taxes a r e :
C a p i t a l gains tax
Excess p r o f i t s tax
b . Government expenditures should be reduced as r a p i d l y
as possible and increased expenditures should
be avoided.
should not c u r t a i l e s s e n t i a l services of Government
needed to expedite production and oontrol i n f l a t i o n ,
as w e l l ae f o r other purpose*.
t a r expenditures a t
of maximum seem to be s t i l l
very large i n view of reduction i n armed forces
to l / 5 o f peek and no more need f o r munitions or
f o r accumulating supplies.
Public works programs should be kept to minimum.
Bulk of r e s t of expenditures are f o r veterans a i d ,
i n t e r e s t costs, social s e c u r i t y , and i n t e r n a t i o n a l
f i n a n c e . Probably not such leeway i n these.
0 . Expedite disposal of surplus property.
Total estimated surplus property of 55 b i l l i o a
(including 10 b i l l i o n of a i r c r a f t not salable
and 15 b i l l i o n overseas).
Only 18 b i l l i o n had been declared surplus and
3 b i l l i o n disposed of by f£areh >1.
Although disposals i n l e s t quarter, e t 1.2 b i l l i o n ,
were e.ore than double those of previous quarter,
progress i s s t i l l slow.
(See attached memorandum)
d . Liquidate c r e d i t and assets of Government lending
agencies and corporations.
Most of these assets are being transferred to &er
Assets Corporation f o r l i q u i d a t i o n .
Kes&einlng credits are mostly long*term obligations
t h a t are bein& l i q u i d a t e d according to contract —
Land Banks, H.G.L.C., some of £ . F . C . e t c .
-
94
-
a , Provide f o r sale of surplus s i l v e r .
f»oulti out funds i n treasury and also supply •
scarce co&aodity.
About 200 a i l l i o n ounces of " f r e e b u l l i o n *
Treasury not otherwise pledged.
in
Various b i l l s i n Congress — probably eost l i k e l y
of passage provides f o r sale of f r e e Treasury
s i l v e r f o r i n d u s t r i a l uses a t 90 o«nts an ounce.
(See attached sesjortnduBv).
f . Possible changes i n social s e c u r i t y .
Present system i s a l r e a d y a n f c i - i n f l a t i o m r y i n that
current receipts exceed benefit payments by about
1 b i l l i o n dollars a year*
Bring i n other groups o f p a r t i c i p a n t s and r a i s e
l i m i t on taxable wuges f n s t #>,000 to
—
would a t f i r s t increase pay r o l l reooipts more
than b e n e f i t payments«
Could bo %&de ore deflationsury by permitting
p a y r o l l taxes f o r Old Age and Survivors Insurance t o
incrc&se to the 4 per cent scheduled f o r
and
postponed. Considered by some as undesirable from
l o n f - n m point of view, a* present 2 per cent
taxes i s s u f f i c i e n t to sustain system f o r 5 to 10
years, and pay-as-you-go basis i s sounder policy
as a general matter*
(See a t t a c h e d memorandum)
Eonet&ry end f i s c a l &e*sur<*g f o r control o f I n f l a t i o n
2*
{continued)
Ketirement of OoYera&ent Debt
Use of any surplus to r e t i r e public debt would be
an t l ~ i n f l a t i o n a r y beoause such a large portion of
statu ring debt is l e l d by banks*
•cold therefore reduce deposits*
Use o f accumulated cash balance by Treasury t o r e t i r e
debt i s also a i l d l y r e s t r i c t i v e *
Treasury has through May 1 r e t i r e d 6 . k b i l l i o n of
marketable debt, i n addition to 1.2 b i l l i o n of excess
p r o f i t s tax refund bonds and over a b i l l i o n of tax
and savings notes*
I t has s u f f i c i e n t cash balance to r e t i r e about 16 b i l l i o n
saore o f aa&rketable Issues during remainder of t h i s year*
D i s t r i b u t i o n of the holdings of issues that have already
been and might be r e t i r e d Is «ho*m i n t a b l e *
D i s t r i b u t i o n of Holdings o f Marketable Leht Maturing i n 1<&6
( I n b i l l i o n s of dollars}
Already
Retired
y&roh I * May 1
Possible
**tiresents*
June - i^ec*
CoBssaeroial banks
1** 0
9.0
Federal Reserve Banks
1*2
2.5
Noabaak investors
1*2
Bolder*
Total
•
6*U
Jt±
16*0
Assumes retirement of about &
o e r t i f l e a t e s and
oeot ot
90 per cent notes and of 100 per cent of other maturing notes
and bonds* Ho change i n Treasury b i l l s *
- 6 2.
Botlresaont of Government Debt
(continued)
Commercial banks h o l d about t h r e e - f i f t h s o f
total.
Withdrawal of deposit* from banks to pay o f f debt
held by banks has l a r g e l y a bookkeeping, e f f e c t .
reduces bank assets and earnings and Treasury
i n t e r e s t payments*
Retirement of Federal Seserve holdings reduces bank
reserves and puts pressure on b&nka to l i q u i d a t e
credit*
Does not force l i q u i d a t i o n because banks can s e l l
s e c u r i t i e s t o , or borrow from Federal Reserve*
t o replace reserves*
Retirement of holdings by aonbank investors tends to
increase bank deposits, but i t also increases required
reserves and puts a l i t t l e more pressure on banks*
DV''
- r:;
Other investors would be l a isarket f o r replacessents
and might purchase seme of the s e c u r i t i e s that
banks would need to s e l l t o adjust reserve positions*
3.
Push sales o f s e c u r i t i e s t o genuine s a v e r s .
A v a i l a b l e savings should be a t t r a c t e d i n t o f i r m i n v e s t m e n t .
Increase i n amount o f Series G bonds purchasable by one
investor*
Bonds are redeemable a t any t i m e , b u t a t lower
rate of r e t u r n i f before m a t u r i t y .
l o t s a l a b l e on za&rket a t guaranteed h i g h r a t e .
Could n o t be a o l d t o banks.
Proceeds o f sales could be used t o r e t i r e issues h e l d by banks.
jgonetary and f i s c a l measures f o r control of I n f l a t i o n
(continued)
Limit f u r t h e r aonetination of debt und rovers© trend
i f possible*
•Oosae expansion i n b^nk holdings of Government securities
and consequently i n bank deposits was necessary
during ear*
Federal Reserve aup,lied banks w i t h reserves needed
to support t h i s expansion by purchasing Government
s e c u r i t i e s » i established rates*
S t a b i l i t y of market and d i f f e r e n t i a l s i n rates on
long-term and short-term issues encouraged banks
to s e l l short-term low-rate issues to Federal Reserve
and to buy longer-term issues*
These s h i f t s created new reserves, which provided
basis f o r s i x - f o l d expansion i n bank c r e d i t *
P r e f e r e n t i a l discount r a t e also encouraged banks
to borrow a t Reserve Banks to purchase or hold
Government s e c u r i t i e s or t o make loans to
speculators i n such s e c u r i t i e s .
Result of t h i s proeess Has been t o stimulate creation
o f new money a t a time when there is already an excess.
I t has also caused f u r t h e r sharp dealine i n longterm i n t e r e s t r a t e s , reducing returns t o genuine
investors and investment i n s t i t u t i o n s .
This proeess needs t o be stopped* and i f possible
reversed*
•situation discussed i n statement recently presented
to a 4,roup of Hew Terk bankers, (Attached)
Various methods f o r oneeking ssonetisatlon of debt*
a* Debt retirement program, already described,
operates i n that d i r e c t i o n .
Banks ean, however, s t i l l s e l l s h o r t - t e r n securities
t o Federal Eeserve, and buy longer-term issues.
Federal Reserve could s t o p buying s n o r t - t e r n i s s u e s .
This would r e * u l t l a r i s e i n s h o r t - t e n *
rates*
interest
Increase I n t e r e s t c o s t t o Treasury, which h*-s t o
r e f u n d o r r e t i r e JO b i l l i o n o f maturing issues
i n next year*
Increase earnings o f banks, which h o l d l a r g e p<*rt
o f s h o r t - d a t e d debt and whose earnings a r e a l r e a d y
large.
Commercial banks hold 32 b i l l i o n and Federal
Reserve Sank* over 20 b i l l i o n o f issues
tufting
w i t h i n one y e a r .
slight r u n r i s k o f u p s e t t i n g saartcct f o r Soverament s e c u r i t i e s , which w i t h debt o f 275 b i l l i o n .
I s a f a c t o r o f unprecedented importance i n our
financial structure.
Increase member bank r e s e r v e requirements and have
Federal Seserve take over l a r g e p a r t o f debt as
banks a r e f o r c e d t o s e l l . Federal Beeervo c o u l d
h o l d these s e c u r i t i e s a t some low i n t e r e s t r a t e .
Then l e t market r a t e s a d j u s t t o whatever r e l a t i o n s h i p would stop s h i f t i n g o f i s s u e s .
Binder e x i s t i n g law c o u l d o n l y make s m a l l increase
i n reserve requirements f o r l e w Torfc and Chicago
tanks.
Sew l e g i s l a t i v e a u t h o r i t y needed to be able to meet
f u t u r e eontiagencies.
Increase s u f f i c i e n t to accomplish purpose might need
to bo d r a s t i c *
Would moot w i t h opposition from banks, because i t
would decrease t h e i r earnings and also the f l e x i b i l i t y
of t h e i r operations.
Federal reserve could pay some i n t e r e s t on reserve
balances to Ooapensate f o r loss of earnings, i f
neooesary»
- 9 -
d* Ke^uire b*nk» t o h o l d c e r t a i n «mounts o f s h o r t *
t o r n Government s e c u r i t i e s *
l o u l d prevent s h i f t i n g end s t i l l m a i n t a i n s h o r t t e r n r a t e s a t low l e v e l s .
L e g i s l a t i o n necessary*
e * L i m i t amount o f l o n g - t e r m assets banks &ay h o l d ,
Canadians have done t h i s by i n f o r m a l agreement*
L e g i s l a t i o n would be necessary i n t h i s c o u n t r y *
j f
C e n t r a l i s a t i o n o f a l l f o r e i g n o f f i d a l funds i n
ft*
market i n t o Federal Reserve Banks would
withdraw considerable reserves f r o m m a r k e t .
These funds now t o t a l about
6*ith f e d e r a l Reserve Banks , 9
- W i t h commercial banks
1,0
I n Treasury o b l i g a t i o n s
2*0
billion,
billion,
billion
billion.
Deposits w i t h commercial banks may be l a r g e l y
working balances o f o p e r a t i n g agencies*
Amounts i n v e s t e d i n t r e a s u r y s e c u r i t i e s g i v e
f o r e i g n governments and c e n t r a l banks a r e t u r n
on reserve f u n d s .
These reserves c o u l d be withdrawn from o u r market*
I f domestic banks had t o a d j u s t by s e l l i n g s e c u r i t i e s
t o Steservs Banks, then we would r e c e i v e r e t u r n i n s t e a d
of foreigners*
( i c e a t t a c h e d memorandum f o r f u r t h e r d e t a i l s
and d i s c u s s i o n * )
- 10 -
Control of speculation i n assets — s e c u r i t i e s , urban r e a l e s t a t e ,
farm land, e t c .
Rising prices and widespread buying of existing assets i s a
usual aocomp&nimentof i n f l a t i o n *
Especially stimulated a t t h i s time by —
Large volume o f i n t e s t a b l e funds h e l d i n l i q u i d f o r m .
Low l e v e l o f l o n g - t e r m i n t e r e s t r a t e s .
Certain d i r e c t controls might be applied to r e s t r i c t these
tendenciess
1.
Price ceilings — d i f f i c u l t to apply.
2.
Tax on c a p i t a l gains from sale of assets held
short period — to discourage buying f o r
speculative p r o f i t s .
Should have been applied e a r l i e r .
Requires l e g i s l a t i o n .
3*
Control over use of c r e d i t .
May be an important means of control i n some
circumstances.
Has e f f e c t not only of r e s t r i c t i n g buying of p a r t i c u l a r
assets but also of preventing general increase i n
buying power r e s u l t i n g from c r e d i t expansion.
Also l i m i t s disastrous consequences of post-boom
liquidation.
Hot so e f f e c t i v e i n t h i s s i t u a t i o n because of
large volume of l i q u i d assets, permitting cash
purchases w i t h l i t t l e c r e d i t .
Has been applied i n stock market by imposition of
100 per cent margin requirement. Has no doubt
reduced speculation i n t h a t market, although not
eliminating i t .
Has also prevented c r e d i t expansion and caused
some contraction.
Restrictions on c r e d i t i n r e a l estate f i e l d .
May be necessary.
So f a r there has been no great expansion i n use of c r e d i t .
But price and demand s i t u a t i o n is favorable f o r soms expansion.
- 11 i
R e s t r i c t i o n s on c r e d i t i n r e a l e s t a t e f i e l d
(continued)
Special inducements f o r use of c r e d i t should be avoided.
For example, as i n Housing B i l l now before Congress.
For more d e t a i l e d d i s c u s s i o n o f r e a l e s t a t e s i t u a t i o n ,
see a t t a c h e d memorandum.
/
RECSST PROGRESS I N DISP0&IM3 OP SBRPL1B WAR PROPERTY
Disposals of Government; surplus war p r o p e r t y have increased subs t a n t i a l l y since the beginning o f t h i s y e a r . During the f i r s t q u a r t e r o f 19^6,
sales o f domestic surpluses t o t a l e d over one b i l l i o n d o l l a r s , which was more
t h a n double the sales volume i n the f i n a l q u a r t e r o f 19^5* Sales i n t h e January-March q u a r t e r i n c l u d e d about JOO m i l l i o n d o l l a r s each o f p l a n t s and i n d u s t r i a l p r o p e r t y , p r o d u c t i o n equipment and m a t e r i a l s , and consumer goods* The
g o a l set f o r the second q u a r t e r of 154*6 f o r producers equipment and consumer
goods alone t o t a l s about
b i l l i o n dollars*
Despite recent p r o g r e s s , t o t a l d i s p o s a l s through the middle o f March
amounted t o o n l y s i x per cent o f the e s t i m a t e d aggregate s u r p l u s , and t h e t o t a l
i n v e n t o r y o f p r o p e r t y d e c l a r e d surplus and not y e t disposed o f increased d u r i n g
the f i r s t t h r e e months o f 19U6 *>y n e a r l y k i b i l l i o n d o l l a r s . As shown i n t h e
t a b l e . Government-owned war p r o p e r t y c o s t i n g n e a r l y 55 b i l l i o n d o l l a r s i s e x pected e v e n t u a l l y t o be declared surplus and a v a i l a b l e f o r d i s p o s a l . As o f
Ifarch 31» I9I46, the l a t e s t a v a i l a b l e d a t e , o n l y 18 b i l l i o n o f t h i s amount had
been d e c l a r e d surplus and o n l y 3 b i l l i o n had been s o l d or otherwise disposed o f ,
l e a v i n g n e a r l y 37 b i l l i o n s t i l l t o be d e c l a r e d surplus and over 5* b i l l i o n s t i l l
t o be d e c l a r e d s u r p l u s or disposed o f *
Disposal o f Surplus Propertys Progress t o Date and the Job Ahead
(cm basis o f o r i g i n a l c o s t , i n b i l l i o n s o f d o l l a r s )
Class o f
surplus
Grand t o t a l
Domestic, e x o l . probably nonsalable a i r c r a f t
P l a n t s and i n d u s t r i a l
real property
P r o d u c t i o n equipment & m a t e r i a l s
Consumer goods
Other 2 /
Probably nonsalable a i r c r a f t
Overseas surplus J \ /
Total
Estimated
surplus
Progress t h r o u g h
Mar. 31
19^6 The j o b ahead
DeclarDisDeolaraDisations p o s a l s l / tiona
posals l /
5k* 6
17.7
3.3
36*9
51.3
29*6
10*8
2.3
18.8
27.2
11.2
6*0
5.3
7.X
9*9
15.2
3.6
2*5
2*0
2*8
iu7
2*3
0.U
0*6
0*8
0.6
0*2
0*8
7.6
3.5
3.3
h.3
5.2
12.9
10.8
h.5
6.5
9.7
lh.h
l / Disposals i n c l u d e , i n a d d i t i o n t o p r o p e r t y s o l d , d o n a t i o n s , abandonments,
salvage and t r a n s f e r s w i t h o u t reimbursement •
Z f Includes*
s a l a b l e a i r c r a f t , p a r t s and components, a i r p o r t s , a g r i c u l t u r a l l a n d ,
s u r p l u s i n G#£* t e r r i t o r i e s and possessions, community f a c i l i t i e s , marine e q u i p ment, f o o d s t u f f s and o t h e r a g r i c u l t u r a l p r o d u c t s , m i n e r a l and g r a z i n g l a n d s ,
and housing,
f i g u r e s f o r d e c l a r a t i o n s and d i s p o s a l o f surpluses l o c a t e d overseas are approximate*
Sourcet f i g u r e s f o r t o t a l e s t i m a t e d surplus are t a k e n from t h e l a t e s t q u a r t e r l y
progress r e p o r t o f the Surplus P r o p e r t y A d m i n i s t r a t i o n .
Figures on d e c l a r a t i o n s
and d i s p o s a l t h r o u g h March 31, 191*6 are from r e l e a s e s o f the War Assets A d m i n i s t r a t i o n *
-
2
-
The slowness w i t h which surpluses are being channeled i n t o t h e peacetime economy i s probably i n l a r g e p a r t unavoidable, r e s u l t i n g as i t does from such
f a c t o r s as t h e f o l l o w i n g * the s t a t u t o r y requirement t h a t surpluses be o f f e r e d t o
p r i o r i t y holders before being made a v a i l a b l e t o t h e general p u b l i c } the very l i m i t e d personnel a v a i l a b l e f o r handling such an enormous s e l l i n g j o b j the t i m e - c o n suming p r e l i m i n a r y i n s p e c t i o n and subsequent paper work; the i s o l a t e d or s c a t t e r e d
l o c a t i o n o f much of the p r o p e r t y ; and t h e r e t a r d i n g e f f e c t on b o t h p o l i c y and adm i n i s t r a t i v e d e c i s i o n s o f constant c r i t i c i s m from pressure groups t o which the d i s p o s a l agencies are s u b j e c t . I n a d d i t i o n , d i s p o s a l o f c e r t a i n types o f s u r p l u s p r o p e r t y i s made p a r t i c u l a r l y d i f f i c u l t by s p e c i a l problems p e c u l i a r t o them* among
these types are t h e 11 b i l l i o n d o l l a r s o f Government-owned war p l a n t s , the 15 b i l l i o n of surpluses l o c a t e d i n f o r e i g n c o u n t r i e s , and the n e a r l y 10 b i l l i o n o f p r o b a b l y nonsalable a i r c r a f t . E a r l i e r b o t t l e n e c k s a r i s i n g from the separation o f
r e s p o n s i b i l i t y f o r p o l i c y - m a k i n g and a c t u a l s e l l i n g f u n c t i o n s , t h e l a c k o f s u f f i c i e n t a u t h o r i t y t o s e l l on t h e p a r t o f t h e c h i e f o p e r a t i n g agency's f i e l d o f f i c e s ,
an i n e f f i c i e n t procedure of t a k i n g up surplus items f o r d i s p o s a l , and the time
r e q u i r e d f o r mere establishment of s e l l i n g procedures and a sales o r g a n i s a t i o n ,
are now b e i n g removed. Consequently, as i l l u s t r a t e d i n the t a b l e , d i s p o s a l s are
now b e i n g stepped up. As noted e a r l i e r , however, t o t a l i n v e n t o r i e s continue t o
advanceihster than d i s p o s a l s .
Disposal of Salable Domestic Surpluses, by Quarters
(on b a s i s o f o r i g i n a l c o s t , i n m i l l i o n s o f d o l l a r s )
Volume disposed
Class o f s u r p l u s
T o t a l domestic, e z c l . nons a l a b l e si r o r a f t
P l a n t s and i n d u s t r i a l
r e a l property
P r o d u c t i o n equipment
and m a t e r i a l s
Consumer goods
Other 2 /
through
Jan. 1 Mar. 31, Mareh 31
19i+6
191*6
of
Oct. 1 Dec. 31
1&5
July 1 Sept. 30
19^5
Cumulative
through
June 30*
19U5
2,330
1,168
1*82
1hi
53U
392
267
90
8
27
596
775
567
302
308
291
111
3iU
lliO
36
63
ho
1U7
263
97
l / L a r g e l y by s a l e , b u t i n c l u d e s a l s o donations, abandonments, salvage, and
t r a n s f e r s w i t h o u t reimbursement.
2 j Includess
s a l a b l e a i r c r a f t , p a r t s and components, a i r p o r t s , a g r i c u l t u r a l
l a n d , surplus i n U.S. t e r r i t o r i e s and possessions, community f a c i l i t i e s ,
marine equipment, f o o d s t u f f s and o t h e r a g r i c u l t u r a l p r o d u c t s , m i n e r a l and
g r a z i n g l a n d s , and housing.
Sourcet f i g u r e s through 19^5 are from the most r e c e n t q u a r t e r l y progress r e p o r t
o f t h e Surplus P r o p e r t y A d m i n i s t r a t i o n .
Figures f o r 19^6 are froci releases o f
the Wsr Assets A d m i n i s t r a t i o n and are probably p r e l i m i n a r y .
A p r i l £6, 1946
SALE OF TBffAStEl SILVER
The S i l v e r Purchase Act o f 1954 declared i t t o be t h e p o l i c y
o f t h e United States t h a t the p r o p o r t i o n of s i l v e r t o g o l d i n the monet a r y stocks o f t h e United States should be increased w i t h the u l t i a s t e
o b j e c t i v e o f having and m a i n t a i n i n g o n e - f o u r t h o f t h e monetary value
o f such stocks i n s i l v e r . Whenever t h e p r o p o r t i o n o f s i l v e r i n t h e
stocks o f g o l d and s i l v e r i s l e s s t h a n o n e - f o u r t h , t h e Secretary o f t h e
Treasury i s d i r e c t e d t o purchase s i l v e r a t such times and upon such
terms and c o n d i t i o n s as he may deem reasonable and most advantageous t o
t h e p u b l i c i n t e r e s t , but a t a p r i c e n o t t o exceed i t s monetary v a l u e .
He i s r e q u i r e d t o i s s u e s i l v e r c e r t i f i c a t e s i n face amount not l e s s t h a n
t h e cost o f a l l s i l v e r purchased under t h e A c t . With t h e approval o f
the President, the Secretary i s authorised t o regulate or p r o h i b i t the
a c q u i s i t i o n , i m p o r t a t i o n , e x p o r t a t i o n , o r t r a n s p o r t a t i o n o f s i l v e r and
s i l v e r c o n t r a c t s * The P r e s i d e n t i s a u t h o r i s e d , a t h i s d i s c r e t i o n , t o
r e q u i r e the d e l i v e r y t o t h e United S t a t e s m i n t s o f any o r a l l s i l v e r ,
i n r e t u r n f o r which s h a l l be p a i d t h e monetary v a l u e o f such s i l v e r
i n any form o f United S t a t e s c o i n or currency d e s i r e d ( l e s s mint charges),
p r o v i d e d t h a t such v a l u e i s not l e s s t h s n t h e market p r i c e o f s i l v e r over
a reasonable p e r i o d p r e v i o u s t o t h e date o f t h e o r d e r .
During t h e p e r i o d from t h e enactment o f t h i s l e g i s l a t i o n u n t i l
our e n t r y i n t o t h e war a considerable amount o f s i l v e r was purchased
from t i m e t o t i m e a t v a r y i n g p r i c e s by t h e Treasury Department. During
t h e war p e r i o d , however, very l i t t l e s i l v e r was purchased by t h e T r e a s u r y ,
l e a v i n g most o f t h e a v a i l a b l e s i l v e r f o r use i n e s s e n t i a l war i n d u s t r i e s
w i t h t h e War P r o d u c t i o n Board d i r e c t i n g t h e d i s t r i b u t i o n of the supply.
The use o f s i l v e r f o r e s s e n t i a l war needs was a p p a r e n t l y so l a r g e t h a t
I t was i m p o s s i b l e t o meet t h e requirements from purchases abroad and
from t h e newly mined domestic supply s i n c e the Treasury loaned 873 m i l l i o n
ounces o f i t s stock t o t h e Defense P l a n t s C o r p o r a t i o n of t h e Reconstruct i o n Finance C o r p o r a t i o n . Under t h e Green Act o f J u l y 12, 1945 (which
e x p i r e d December 51, 1945), p a r t o f t h e T r e a s u r y stock o f f r e e s i l v e r was
sold t o essential industry.
On A p r i l
1946, United S t a t e s stocks o f s i l v e r a t t h e
T r e a s u r y Departsent amounted t o 1,989,000,000 ounces. Of t h i s t o t a l ,
1,729,000,000 ounces were h e l d as s e c u r i t y f o r s i l v e r c e r t i f i c a t e s and
t h e balance o f 260 m i l l i o n ounces were i n t h e g e n e r a l f u n d . Of t h e
£60 m i l l i o n ounces i n t h e g e n e r a l f u n d , 227 m i l l i o n were r e p o r t e d as
• f r e e b u l l i o n " and a p o r t i o n o f t h i s f r e e s i l v e r may be on l o a n t o t h e
Defense P l a n t s C o r p o r a t i o n since t h e T r e a s u r y statement f o o t n o t e s t h i s
as one o f t h e items from ivhich t h e s i l v e r l o a n was made, t h e o t h e r i t e m
being t h e b u l l i o n becking t h e s i l v e r c e r t i f i c a t e s .
There are s e v e r a l b i l l s now pending before Congress d i r e c t i n g
t h e Treasury Department t o s e l l i t s h o l d i n g s o f f r e e s i l v e r b u l l i o n t o
t h e i n d u s t r y . The Green B i l l now b e f o r e t h e Banking and Currency Comm i t t e e o f t h e Senate s t i p u l a t e s t h a t t h e Treasury*s f r e e s i l v e r b u l l i o n
be s o l d t o t h e i n d u s t r y a t 71.11 cents per ounce. A s i m i l a r b i l l has
a l r e a d y been passed by t h e House, Senator McCarrsm o f Mevada i n t r o duced a b i l l i n December 1945 which c a l l e d f o r t h e sale o f t h e Treasury
s i l v e r t o the i n d u s t r y a t | 1 . 2 9 an ounce, and a l s o s t i p u l a t e d t h a t t h i s
p r i c e be p a i d f o r d o m e s t i c a l l y mined s i l v e r . A compromise b i l l c a l l i n g
f o r $1.03 an ounce was put b e f o r e the Senate Banking and Currency Comm i t t e e by Senator McCarrsn. I t i s expected, however, t h a t compromise
l e g i s l a t i o n i n t h e form o f an a p p r o p r i a t i o n s r i d e r w i l l a u t h o r i s e t h e
sale o f f r e e Treasury s i l v e r f o r i n d u s t r i a l use a t 90 cents an ounce.
Under t h e terms o f t h i s r i d e r t h e Treasury would be a u t h o r i z e d t o s e l l
s i l v e r f o r two years a t 90 cents an ounce and a t | 1 . 2 9 an ounce t h e r e a f t e r . I n any case, not more t h a n 227 m i l l i o n ounces o f f r e e Treasury
s i l v e r would be a v a i l a b l e f o r sale t o t h e i n d u s t r y .
The sale of t h i s s i l v e r t o t h e i n d u s t r y would, o f course, be
d e f l a t i o n a r y since i t would reduce t h e amount o f funds a v a i l a b l e t o
i n d i v i d u a l s and c o r p o r a t i o n s and would b u i l d up Treasury funds t h a t
might p o s s i b l y be used t o r e t i r e d e b t . I t would a l s o reduce t h e amount
o f s i l v e r a v a i l a b l e t o t h e Treasury as s e c u r i t y f o r a d d i t i o n a l s i l v e r
certificates.
Gormumwr
CORPORATIONS AHD CSHDIT AGENCIES
One p o s s i b i l i t y t o consider i n sn a n t i - i n f l a t i o n a r y program i s
l i q u i d a t i o n of asssta of Government corporations and c r e d i t agencies and the
uss of funds t o r e t i r e public d e b t , A b r i e f surrey of these asssts i n d i c a t e s ,
however, t h a t the problem i s l a r g e l y one of terminating wartime a e t i v i t i e e
and disposing of property acquired f o r war purposes* Loans of Government o r e d i t
ageneiee have g e n e r a l l y deelined during the war p e r i o d , except in a few l i n e s .
Assets of these corporations and ageneiee t o t a l e d 33*9 b i l l i o n
d o l l a r e on December 3 1 , 191+5* according t o the l a t e s t f i g u r e s published by the
Treasury Department shown i n the t a b l e . The tremendous growth during the war
period — 19 b i l l i o n — was l a r g e l y i n corporations w i t h war r e l a t e d a c t i v i t i e s ; henoe the major p o r t i o n of the l i q u i d a t i o n problem w i l l be l i m i t e d t o a
small number of agencies.
P r i n c i p a l Assets and Government Corporations and C r e d i t Agencies
December $ 1 , I 9 k l and 191*5
( I n m i l l i o n s of d o l l a r s )
Cash
Investments
Um S* Government s e c u r i t i e s , d i r e c t and
guaranteed
Other
Loans
Land, s t r u c t u r e s , and equipment
Commodities, supplies, and m a t e r i a l s
Undistributed charges
Other assets
T o t a l a e s e t s , excluding interagency items
l/
2/
92$
h96
1,633
325
5,290
21,017
2,283
i*72
1,3^
999
726
3,iiB7
33* 8U*
}
)
)
)
36.952
li*,660
A l l items are shown on a gross b a s i s , i . e . , before reserves f o r
lossss, and are t h e r e f o r e not e n t i r e l y comparable w i t h f i g u r e s
f o r 19h5* which are shown net of reserves*
S i m i l a r d e t a i l s net a v a i l a b l e *
At the end e f 191*5 about 21 b i l l i o n d o l l a r s , or
of the t o t a l
assets of s l l Government corporations and c r e d i t agencies represented land,
s t r u c t u r e s , and equipment, a s u b s t a n t i a l proportion of whloh may e v e n t u a l l y
be declared surplus war p r o p e r t y . Major owners of t h i s property a r e : D. 3*
Maritime Commission and War Shipping A d m i n i s t r a t i o n , 11*2 b i l l i o n , l a r g e l y
ships, and Reconstruction Kinsnee Corporation ( l a r g e l y war a f f i l i a t e s ) , 6*9
b i l l i o n , p r i n c i p a l l y I n d u s t r i a l p l a n t and equipment. Among peacetime agencies
the l a r g e s t investment was about 3 / U b i l l i o n of the Tenneesee V a l l e y A u t h o r i t y ,
- 2 Government corporation* hold some 2*3 b i l l i o n d o l l a r s of comeiodities, supplies,
and asaterials, which f o r the most part w i l l be offered f o r sale* About h a l f
of t h i s represents holdings o f the Heeonetruotion finance Corporation and
consists o f cofaBoditles acquired f o r s t r a t e g i c and ether war purposes) about
h a l f i s owned by the Commodity Credit Corporation i n connection w i t h i t s
various programs• The l i q u i d a t i o n o f these assets i s a part o f the broad
problem of terminating war a c t i v i t i e s , and declaring and disposing of surplus
property* About 90 per c e n t o f t h e sales of surplus war property are being
handled by the War Assets A d a i r . i s t r a t i o n *
The p r i n c i p a l o t h e r type o f asset o f Government c o r p o r a t i o n s and
c r e d i t agencies i s t h e i r l o a n s . These t o t a l e d 5*3 b i l l i o n d o l l a r s a t t h e
end o f 19L5, compared w i t h 3*5 b i l l i o n a t t h e end o f 19^1.
About 2 / 3 of the outstanding loans a t the beginning of the war, as
shown i n the t a b l e , r e f l e c t e d emergency financing of the depression years,
l a r g e l y f o r f i n a n c i a l i n s t i t u t i o n s and f o r owners of farms and bosses* Liquida t i o n o f such loans had been i;u process f o r soste time before the war; l i q u i d a t i o n continued during the war mainly because o f t h e aapl® funds f o r d ebt
reduction*
Outstanding Loans of government Corporations and Credit Agencies
December 31, 19**1 end 19hb
( I n millions ef dollars)
19l*5i/
iiome Owners* Loan Corporation
852
Other heme mortgage agencies
527
Federal land banks and Federal Farm
Mortgage Corporation
1,330
Other a g r i c u l t u r a l c r e d i t agencies
666
Beecnstruction Finance Corporation
Loan t c the united Kingdom
271
Loans t c i n d u s t r i a l and eo««isreial
businesses
For war purposes
1<)U
Other
A l l ether ( l a r g e l y emergency financing of
the 1930»«)
380
Farm Security Administration
&ko7
Sural E l e c t r i f i c a t i o n Administration
I4O7
Expert import Bank
252
A l l other
237
T o t a l , excluding interagency items
l/
2/
5,/28
i9*a
Dccreaae(-)
or increase ( + ) ,
1 9 U to 19b5
1*777
865
-925
-33®
2,361
837
-1.031
-171
4271
-
106
HO
* 88
• 35
1,217
h&7
323
139
285
-837
0
4 BU
4113
- 1*3
8,1*87
-2,759
Adjusted to a gross basis, i . e . , before reserves f o r losses*
Sot e n t i r e l y comparable w i t h e a r l i e r d a t a .
- 3 L i q u i d a t i o n of tho £os*s mners* Loan Corporation i s proceeding
ahead of eehedule set by law, and by December 31, 1945* outstanding heme
mortgage loans of t h a t agency had declined t o 850 m i l l i o n d o l l a r s , eoiKjpared
w i t h t h e i r peak o f 3 . 1 b i l l i o n d o l l a r s i n 19>6. Recent l e g i s l a t i o n amending
the f a r m c r e d i t system l i b e r a l i s e d the lending a u t h o r i t y of the Federal land
banks, and t h i s i s expected to ssake unnecessary any f u r t h e r lending a c t i v i t y
en the p a r t of the Federal Farm Mortgage Corporation. Far* mortgage loans
made l a r g e l y during the depression years and hold by the Federal land banks
and the Federal Farm Mortgage Corporation declined more than 1 b i l l i o n d o l l a r s
from 19J4I t o 19/45• The Reconstruction Finanee Corporation has also continued
to l i q u i d a t e i t s loans acquired during the e a r l y 1930*8; the volume s t i l l outstanding a t the 1$U5 year-end was about l/*> t h a t a t the beginning of the w a r .
Tho need f o r lending a c t i v i t i e s of c e r t a i n agencies w i l l continue —
and may even Increase — i n the postwar p e r i o d . Some of t h i s w i l l appear among
home mortgage agencies as progress i e made i n meeting the aeute housing shortage,
and so;:* w i l l appear i n such a c t i v i t i e s as development of small business, the
extension of the use of e l e c t r i c i t y i n r u r a l areas, and loans abroad f o r recons t r u c t ion purposes. The Reconstruction Finance Corporation i e encouraging small
business a c t i v i t i e s through a guaranteed loan program. A c t u a l l y , however, the
agency*s loans f o r other than war purposes increased only 110 m i l l i o n d o l l a r s
from August 31# 19^5* t o February 28, 1^46. The war brought t o a h a l t major
extensions of r u r a l e l e c t r i f i c a t i o n , but i n reeent months aural E l e c t r i f i c a t i o n
Administrati055 loans have been increasing! as a d d i t i o n a l m a t e r i a l s f o r f u r t h e r
expansion become a v a i l a b l e , these loans w i l l Increase s t i l l f u r t h e r .
Outstanding loans of the Export-Import Bank had increased to about l / k b i l l i o n d o l l a r s
a t tho end o f 1945*
t h e 3&nk has outstanding commitments f o r a muca l a r g e r
total.
EBSs ew
A p r i l 23* 191*6
SOCIAL SECTJHITT ASP IHFLATIQH
We a r e a t t a c h i n g a memorandum o n t h o c u r r e n t s o c i a l
s e c u r i t y s i t u a t i o n , and a l * o a r e p o r t b y Mr* S t e t t n e r w h i c h
appeared i n l a s t woek*s c u r r e n t comments.
The r e l a t i o n o f s o c i a l s e c u r i t y p o l i c y t o c u r r e n t
f l a t i o n c o n t r o l ® i s as f o l l o w s t
in-
( 1 ) The s o c i a l s e c u r i t y system as i t c u r r e n t l y stands
I s on b a l a n c e a d e f l a t i o n a r y f a c t o r *
Tho o l d - a r e i n s u r a n c e system (OASI) i s f i n a n c e d by a
pay r o l l t a x o f 2 per c e n t on t h o f i r s t 13,000 o f wares o f covered
w o r k e r s . The c o n t r i b u t i o n i s d i v i d e d e < j u a l l y between employers
and employees* The combined r a t e was scheduled t o I n c r e a s e t o i i
p e r cent i n 19h3 end t o 6 p e r c e n t i n 191*9 * h u t t h e scheduled i n creases were postponed* B e n e f i t payments a r e now r u n n i n g a t en
a n n u a l r a t e o f 300 m i l l i o n d o l l a r s , w h i l e t h e r e c e i p t s f r o © t h e
OASI pay r o l l t a x ran a t about 1 . 3 b i l l i o n d o l l a r s , so t h a t under
c u r r e n t c o n d i t i o n s t h e annual a d d i t i o n t o t h e OASI f u n d ( w h i c h
now stands a t 7 * 3 b i l l i o n ) amounts t o about 1 b i l l i o n * To t h i s
e x t e n t , s e c u r i t i e s a r e b e i n g absorbed i n t h e t r u s t f u n d w h i c h
o t h e r w i s e m i r h t be h e l d b y t h e p u b l i c o r t h e b a n k i n g system.
The p r e s e n t unemployment compensation program i s f i nanced b y a pay r o l l t a x o f 3 p e r c e n t ( s u b j e c t t o r e d u c t i o n b y
e x p e r i e n c e r a t i n g ) payable b y t h e employer* C o l l e c t i o n s a r e now
s t an annual r a t e o f o v e r 1 b i l l i o n w h i l e disbursements a r e somewhat h i g h e r * The t r u s t f u n d now stands a t 6*8 b i l l i o n *
Whether,
and b y how raueh, i t w i l l d e c l i n e depends o n developments.
( 2 ) The d e f l a t i o n a r y e f f e c t s o f t h e s o c i a l s e c u r i t y
system c o u l d , o f c o u r s e , be i n c r e a s e d g r e a t l y i f pay r o l l t a x e s
were r a i s e d w i t h o u t a c o r r e s p o n d i n g i n c r e a s e I n b e n e f i t s , t h i s
leading- t o g r e a t e r a c c u m u l a t i o n s i n t h e r e s e r v e f u n d s . However,
t h i s would be u n d e s i r a b l e from t h e p o i n t o f v i e w o f l o n g - r u n
The r e s u l t depends on whether t h e s u r p l u s o f pay r o l l t a x r e c e i p t s I s used t o redeem o u t s t a n d i n g debt o r as a s u b s t i t u t e f o r
d e b t a d d i t i o n w h i c h o t h e r w i s e m i j r h t have been needed* I n e i t h e r
case t h e e f f e c t i s d e f l a t i o n a r y *
s o c i a l s e c u r i t y p o l i c y , which should t e n d towards a pay-as-you-go
system, avoid excessive reserve accumulations, and be based on
pay r o l l t a x receipts as w e l l as a o o n t r i l a i t i o n f r o m general r o v e nues* The present OA SI rates are adequate t o s u s t a i n t h e system
f o r 5 o r 10 years, a t which time i t w i l l be p r e f e r a b l e t o r e l y
on some general contribution r a t h e r t h a n t o r a i s e pay r o l l r a t e s *
I f the present s i t u a t i o n c a l l s f o r t a x increases, they should be
undertaken i n an area where they do not handicap the sound longrun development o f social security*
( 5 ) Various amendments i n the social security system
now under consideration are considered b r i e f l y w i t h respect to
t h e i r bearing upon the i n f l a t i o n problem!
( a ) The S o c i a l S e c u r i t y Board does not p r o pose comprehensive expansion o f t h e system a t t h i s mo—
Rent* I t recommends, however, t h a t t h e coverage under
OASI be expanded t o i n c l u d e a l l g a i n f u l w o r k e r s , i n cluding? t h e self-employed• I f we assume t h a t t h i s
would mean an i n c r e a s e I n b o t h pay r o l l r e c e i p t s and
b e n e f i t payments a t about t h e same r a t i o a p p l i c a b l e t o
t h o s e a l r e a d y c o v e r e d , some i n c r e a s e i n t h e r a t e o f f u n d
accumulation would r e s u l t * Under expanded coverage t h e
annual i n c r e a s e i n t h e fund m i g h t reach 1*5 b i l l i o n d o l l a r s as a g a i n s t t h e 1 b i l l i o n d o l l a r s under t h e present
system* The n e t e f f e c t s would t h u s t e n d t o be d e f l a t i o n a r y * A l s o , t h e S o c i a l S e c u r i t y Board reooiwnends
rnisinr
t h e l i m i t on tamable wares f r o m $3,000 t o #3,600
and extending c e r t a i n a d d i t i o n a l b e n e f i t s , such as
somewhat l i b e r a l i s e d o l d - a g e payments and permanent
d i s a b i l i t y , w h i c h p r o b a b l y would t e n d t o balance o u t *
( b ) A h e a l t h insurance progress i s now c o n s i dered b y Conrress* The B i l l , i t s e l f , c o n t a i n s no f i nancing p r o v i s i o n s * The authors o f t h e B i l l chose t h i s
s t r a t e g y because o t h e r w i s e i t would have been necessary
t o submit t h e B i l l t o t h e Ways and Means Committee
where i t would have been t h r o t t l e d * However, i f t h e
h e a l t h insurance b i l l were passed, some f i n a n c i n g p r o v i s i o n would o b v i o u s l y have t o be **ade, p r o b e b l y a 3
per cent pay r o l l t a x as contemplated f o r t h e r a t h e r
s i m i l a r h e a l t h Insurance p r o v i s i o n under t h e WarnerM u r r a y ^ D i n g e l l B i l l * With such e t a x t h e F e a l t h B i l l
I s n o t l i k e l y t o be d e f l a t i o n a r y , except perhaps i n i t i a l l y when f a c i l i t i e s a r e n o t y e t a v a i l a b l e and benef i t payments would l a g .
( e ) The Ways and Means Cerss&ttee i s c u r r e n t l y h o l d i n g hearings on s o c i a l s e c u r i t y amendments
as proposed i n s s t a f f r e p o r t prepared f o r t h e
w i t t e c * The laa.lor change under c o n s i d e r a t i o n i s t h e
e x t e n s i o n o f OASI coverage. H e a l t h insurance i s n o t
h e i n r considered and. the o t h e r p r o v i s i o n s a r e m o s t l y
a d m i n i s t r a t i v e , w i t h l i t t l e b e a r i n g on t h e i n f l a t i o n
problem. B o w r e r , i t i s not expected t h a t t h e Committee
w i l l r ©commend an i n c r e a s e i n present OASI pay
r o l l t a x r a t e s as c u r r e n t r a t e s are s u f f i c i e n t t o f i mnoe t h e OAST f o r a t l e a s t a c - v e a r p e r i o d .
Attachments
A p r i l £6, 1946
At t h e end o f 1945 f o r e i g n o f f i c i a l ftstds i n t h e United States
amounted t o $5,865 m i l l i o n , o f which #860 m i l l i o n were h e l d on d e p o s i t
w i t h t h e Federal Reserve Bank o f Kew Xork. Of t h e remainder
million
was i n v e s t e d i n United States Treasury o b l i g a t i o n s and il,Q£Q m i l l i o n was
h e l d on d e p o s i t a t v a r i o u s commercial banks, m a i n l y i n t h e Mm f o r k market.
The l a r g e s t holders o f Treasury o b l i g a t i o n s end market balances were as
follows*
Accounts w i t h
Country
Canada
Chins
Norway
Braail
Sweden
Netherlands Bast I n d i e s
France
Netherlands
A l l other
Total
Treasury
commercial
Tot s i
obligations
balliC 3
( I n 13i i l l i o n s o f d o l l a r s )
i , m
568
162
184
1S4
102
87
67
2,359
646
5,005
1,115
441
144
4
111
6?
—.
1,882
75
1,955
10
12?
18
ISO
u
$6
87
&7
477
57S
1,050
The e n t i r e #1,955 m i l l i o n o f Treasury o b l i g a t i o n s could be allowed
t o r u n o f f end t h e proceeds put on d e p o s i t w i t h t h e Federal ftesez ve Banks.
I f t h e o b l i g a t i o n s were p a i d o f f by d r a f t s on t h e Treasury accounts w i t h t h e
commercial banks o r w i t h t a x revenues, member bank reserves would be c o r r e spondingly reduced.
The | 1 , 0 9 0 m i l l i o n o f accounts w i t h eoramerel&l banks could n o t be
t r a n s f e r r e d i n t h e i r e n t i r e t y t o t h e Federal Reserve Banks* I t i s necessary
t o bear i n mind t h a t ( l ) some of t h e s e accounts are those o f c e n t r a l banks
which combine commercial w i t h c e n t r a l banking business and some are accounts
ox purchasing missions or other Government agencies. The low York Bank i s
n o t f u l l y equipped t o handle accounts t h a t are u t i l i s e d a c t i v e l y f o r small
t r a n s a c t i o n s , l e t t e r s o f c r e d i t , r e m i t t a n c e s , e t c . ; (<) a masher o f f o r e i g n
c e n t r a l banks and Governments d e s i r e t o m a i n t a i n t h e i r standing as good customers o f commercial banks because t h e y hope, as o p p o r t u n i t y o f f e r s , t o obt a i n c r e d i t s from them. Hence t h e y f e e l i t i s advantageous t o m a i n t a i n as
l & r g e d e p o s i t s w i t h them as t h e y can. I f weight i s g i v e n t o these two cons i d e r a t i o n s i t i s e v i d e n t t h a t s e r i o u s inconvenience would be caused i f some
o
f t h e f 1 , 0 5 0 m i l l i o n o f balances i n t h e market were not r e t a i n e d i n commer
c i a l banks.
I n a d d i t i o n t o T r e a s u r y o b l i g a t i o n s and o f f i c i a l a c c o u n t s i n
t h e m a r k e t , t h e r e was a s u b s t a n t i a l amount o f p r i v a t e s h o r t - t e r m a s s e t s
w h i c h m i g h t be r e q u i s i t i o n e d .
At t h e end o f t h e y e a r p r i v a t e s h o r t t e r m assets amounted t o $ 2 , 7 0 0 m i l l i o n and p r i v & t e h o l d i n g s o f l o n g - t e r s s
s e c u r i t i e s e r e e s t i m a t e d t o have been # 3 , 6 0 0 m i l l i o n .
I n g e n e r a l , howe v e r , i t may be s a i d w i t h r e g a r d t o t h e s e p r i v a t e a s s e t s t h a t t h e c o u n t r i e s w h i c h a r e r e q u i s i t i o n i n g them a r e d o i n g so f o r t h e p u r p o s e o f
m e e t i n g u r g e n t needs and t h a t no c o u n t r y w o u l d r e q u i s i t i o n t h e bank d e p o s i t s end i n v e s t m e n t s o f i t s p r i v a t e c l t i s e n s m e r e l y f o r t h e p u r p o s e o f
h o l d i n g t h e proceeds on o f f i c i a l d e p o s i t w i t h t h e F e d e r a l Reserve Bank.
A p r i l 26, I9I46
WBAT CAH BE DOME AB CUT REAL ESTATE VALUES
B * A * K * h a s coEie t o t h e c o n c l u s i o n t h a t t h e f a r m l a u d v a l u e p r o b l e m
c a n n o t be t r e a t e d s e p a r a t e l y f r o m t h e u r b a n p r o b l e m .
For t h a t r e a s o n , and
b e c a u s e t h e m e a s u r e s r e q u i r e d a r e o f e s s e n t i a l l y t h e same t y p e s , t h e p o s s i b l e
courses o f a c t i o n a r e l i s t e d b e l o w w i t h o u t d i s t i n n t i o n as t o f a r m or u r b a n r e a l
estate.
1*
Exhortation
E f f o r t s m i g h t b e made t o b r i n g b e f o r e e a c h p r o s p e c t i v e p u r c h a s e r
t h e i n f o r m a t i o n concerning p r e s e n t p r i c e s o f r e a l e s t a t e and t h e g r e a t r i s k
i n v o l v e d i n most purchases a t t h e present t i m e .
Ho s u c h p r o g r a m w o u l d b e
w o r t h w h i l e , h o w e v e r , u n l e s s a l l a v a i l a b l e g o v e r n m e n t a l and p r i v a t e r e s o u r c e s
were t o p a r t i c i p a t e e n e r g e t i c a l l y .
The F e d e r a l fieserve S y s t e m s h o u l d b e r e a d y
t o c a r r y s u c h a p r o g r a m t o e a c h member b a n k .
2,
it
3*
Legislative
is
The f o l l o w i n g m e a s u r e * m i g h t b e r e c o m m e n d e d t o t h e C o n g r e s s
n o t b e l i e v e d t h a t t h e n e c e s s a r y l e g i s l a t i o n c o u l d be passed.
but
a)
M o d i f i c a t i o n o f p r e f e r e n t i a l treatment accorded c a p i t a l gains
i n the B&deral income t a x .
At p r e s e n t o n l y 50 p e r c e n t o f t h e
g a i n f r o m t h e s a l e o f c a p i t a l a s s e t s h e l d s i x months or mere i s
t a x a b l e , and t h e t a x c a n n o t e x c e e d 5 0 p e r c e n t o f s u c h t a x a b l e
gain*
C a p i t a l gains might b e t r e a t e d as o r d i n a r y income, or t h e
s i x m o n t h s * pen«Ud i n v h i c h c a p i t a l g a i n s a r e t r e a t e d a s o r d i n a r y
income m i g h t be e x t e n d e d *
b)
A s p e c i a l t a x on p r o f i t s from r e s a l e o f r e a l e s t a t e ,
rate decreasing the longer the property i s held.
Executive
a)
b)
w i t h the
tax
action
the e x t e n s i o n o f c r e d i t m i g h t be r e g u l a t e d under e x e c u t i v e o r d e r .
A h e a v y down p a y m e n t o f c a s h , s a y o f 6 0 p e r c e n t o f t h e v a l u e
o f t h e p r o p e r t y , c o u l d be r e q u i r e d *
The t e r m s o n w h i c h l o a n s
a r e g r a n t e d c o u l d a l s o be madh more s t r i n g e n t ®
to
Veterans .Administration could t i g h t e n t h e i r iwaasurec/protect
v e t e r a n s frcta b o r r o w i n g t o buy houses a t excessive p r i c e s *
A p r i l 26, 19^6
RESIDENTIAL REAL ESTATE
Increase i n p r i c e s
Between the s p r i n g o f 19^0 and February 1 & 6 , the p r i c e o f houses
and o f land f o r b u i l d i n g r o s e , on the average, a l i t t l e over 60 per oent.
Since t h e end o f t h e w a r , t h e r i s e i n p r i c e s has been more r a p i d , averaging,
between September 1S^5 and February 1$M>, about 17 per cent f o r houses and
23 per cent f o r b u i l d i n g l a n d .
I n g e n e r a l , t h e g r e a t e s t increase i n house p r i c e s has been f o r
those houses which were valued b e f o r e t h e war a t under 16,000. There are
a l e o marked r e g i o n a l d i f f e r e n c e s — the g r e a t e s t increases are found i n
those areas w h i c h r a p i d l y gained p o p u l a t i o n d u r i n g the war.
S i g n i f i c a n t d e t a i l s are shown i n Sable I , and f o o t n o t e s t o t h e
t a b l e i n d i c a t e how the survey was conducted. *
Reasons f o r t h e increase i n p r i c e s
The increase i n p r i c e s r e f l e c t s t h e f a c t t h a t d u r i n g the war t h e
amount o f new b u i l d i n g and conversion o f e x i s t i n g s t r u c t u r e s was not s u f f i c i e n t t o meet t h e demand f o r housing. Since September 19^5 "fete r a p i d dem o b i l i s a t i o n o f the armed f o r c e s has r e s u l t e d i n t h e f o r m a t i o n car r e e s t a b l i s h ment o f f a m i l i e s a t a more r a p i d r a t e , and i n the attempt o f many f a m i l i e s
t o a d j u s t t h e i r housing a c c o m o d a t i o n s t o f a m i l y composition. The r a p i d
removal o f c o n t r o l s on b u i l d i n g i n October 19U5 brought many would-be buyers
i n t o t h e market i n a n t i c i p a t i o n o f a n e a s i e r supply, and a l s o encouraged
b u i l d e r s and o t h e r s t o compete f o r land and m a t e r i a l s thus r a i s i n g costs and
p r o v i d i n g a t a l k i n g p o i n t t o j u s t i f y h i g h e r p r i c e s f o r e x i s t i n g houses.
Amendment, a t t h e end o f December 19k5» of Hie S e r v i c e m e n ^ Readjustment
Act o f 19W±» end the presence o f more and more veterans t o t a k e advantage
o f i t , probably a l s o added t o t h e pressure on p r i c e s e a r l y t h i s y e a r . Specul a t i v e buying f o r r e s a l e has been r e p o r t e d i n numerous i n s t a n c e s , b u t i t i e
hard t o t e l l how f a r t h i s has gone as y e t . A l l o f these i n f l u e n c e s have been
added t o the e f f e c t s o f the g r o w t h i n number o f f a m i l i e s , t h e r i s e i n f a m i l y
incases, and the m i g r a t i o n o f p o p u l a t i o n which t o o k place d u r i n g the w a r .
P r i c e s o f houses cannot continue t o i n c r e a s e i n d e f i n i t e l y a t the
r a t e o f between I4. and 5 per cent o f 19i*0 p r i c e s per month. But i t seems
l i k e l y t h a t the advance w i l l continue f o r some months a t l e a s t and f o r a
time w i l l be s t i m u l a t e d by a growing volume o f s p e c u l a t i v e b u y i n g . P r i c e s
are a l r e a d y h i g h . I f incomes continue s t a b i l i s e d a t r e c e n t l e v e l s , f u r t h e r
i n c r e a s e s i n t h e p r i c e o f houses w i l l reduce t h e s i z e o f the market.
Eventual^
a o o l l a p s e i n t h e housing market i s t o be ezpeoted*
*
Hot y e t
available.
- 2 -
SpoolaX problems i n the housing market
Special problems are created i n the housing market by the prioe
d i s p a r i t i e s that have de-reloped* The prices for old houses, which are subj e c t t o no form of control, have advanced 60 per cent on the average since
before the w a r j costs of new houses, which are subject to p a r t i a l but not
wholly e f f e c t i v e control, have increased roughly 50 per cent, including cost
of t h e l o t ; the rent on aid houses, subject t o s t r i c t OPA control, has r i s e n
very l i t t l e s the rent on new houses has been less r i g i d l y controlled and i s
believed t o have been adjusted i n soias measure to the r i s i n g costs of b u i l d ing.
To a considerable extent the inducement t o b u i l d new houses depends
upon the price of cceaparable old houses. I f old houses are high i n price there
i s a strong tendency f o r the costs of new houses t o r i s e t o t h a t l e v e l , the
nature and structure of the b u i l d i n g industry being such t h a t contractors and
others tend t o charge "what the market w i l l bear 1 *.
Under these conditions any advance from current l e v e l s i n the prices
of e x i s t i n g houses, widch ar« not subject to control, w i l l increase the d i f f i c u l t y of holding dcwn the costs and prices of new houses.
I f price s t a b i l i t & t i o n i n r e s i d e n t i a l building i s t o be successful,
t h e r e f o r e , i t i s important that the advance i n the prices of olck houses be
halted* Unless this i s done, an increasing volume o f indebtedness w i l l be
created on the besis of unsound values, prices of new houses w i l l i n e v i t a b l y
r i s e — as they say anyway — t o a l e v e l at which the market for such houses
w i l l "dgjfe up, as i n 1920s and the collapse, when i t oo^es, w i l l be more serious
than i f i t occurred e a r l i e r snd a t a lower price l e v e l *
TABLE I
CHAB6S IK PRICES OF 3INGLE-FAMILY HOUSES
C i t y and value class
i n Spring IS&O
A l l cities
Under #6,000
46,000-112,000
(Index
Spring
19^0
Spring 19U0 - 100
September j February
19k5
I9k6
Increase, September
19^5 - February 19h6
Points i n index) Per cent
100
100
iho
137
165
157
25
20
18
15
100
100
100
100
100
131
ifyt
150
151
165
150
170
177
168
196
19
26
27
17
31
15
19
18
11
19
100
100
100
100
100
129
li*6
31*1
11*6
160
11*9
161
162
162
187
20
15
21
16
27
15
10
15
11
17
i t i e s i n selected regions
Under #6,000
Sew England
South A t l a n t i c
Hest South Central
Mountain
Pacific
#6, 000-112, 000
Sew England
South A t l a n t i c
l e s t South Central
Mountain
Pacifio
Note:
The data shewn i n the t a b l e were obtained by the Hational Housing Agency
i n answer to questions sent i n the l a t t e r h a l f of March to the presidents
of the Federal Home Loan Banks, the regional managers of the Home Owners•
Loan Corporation, the insuring offices of the Federal Housing Administration,
and the regional expediters of the Office of the Administrator of the
Sation&l Housing Agency* The data shown are averages of the replies r e ceived, a f t e r the extremes, whether high or low, were eliminated*
A p r i l 26, 1S*4£
M i * LAW VALUES
Indications o f I n f l a t i o n a r y t cvolopments I n the land Markst*
Farm land prices have r i s e n r a p i d l y during the war period end are
new a% vary high l e v e l s *
1*
Lend values were 69 per cent higher en l a r c h 1 , 19(46 than en
March 1 , l $ 4 0 i a t the peak i n 1920 they were 65 per cent
above 193li*
2m
Xn seven states lend values on llarch 1 # 19^6 were more than
90 per cent above t h e 19M> l e v e l *
3*
I n the Census divisions of the Best South Central states
(Kentucky, Tennessee, Alabama, Mississippi) land values on
and i n the P a c i f i c
March 1 were 89 per cent above
s t a t e 80 per cent*
U»
On March 1 ,
land values were above the 1919 l e v e l and
w i t h i n 16 per cent of tho peak reached I n 19&0*
%
i.and values i n 1$> states on March 1 ,
19S? l e v e l *
6*
I t i s estimated by the Bureau o f A g r i c u l t u r a l Economics and
the i'*rm C r e d i t Adstfnistration t h a t land values I n s*ny
areas are above l e v e l s t h a t can be maintained i n the longer
period*
uoh estimates take i n t o account probable fans
incests and isertgage i n t e r e s t r a t e e *
were above the
The r a t e of advance scene to be increasing*
1*
The 13 per cent increase i n the year j u s t ended was exceeded
only twice i n the 35 years o f record* Free Sferch 191+3 to
March 19Ui the increase was 15 per oentt i n 1919*1920 I t was
21 per cent*
2*
The r a t e of Increase i n the four months ending l a s t Hareh was
greater then I n the preceding e i g h t months*
The volsnas of voluntary sales I s very hlg$u
1*
Voluntary sales ( i * o * # excluding foreclosure and r e l a t e d
typos of sales) i n the 12 months ending March 191*6 were
above those o f the preceding year, although s l i g h t l y below
%9k$ — the highest year on record*
3*
the r r e a t e s t increase i n volume o f sales was i n the East
south Central states*
Reselling a f t e r a l i m i t e d period of ownership i s increasing.
1*
I n 19^5 about l / 7 of a l l fans* sold had boon held under too
years, compared with 1 / 8 I n 19U*«
a*
I n the Western Region ( P a d Tie and Mountain s t a t e s ) resale*
o f forms held unaer too years made up l / 5 o f a l l sales*
the f i n a n c i a l s i t u a t i o n i n a g r i c u l t u r e i s lose favorable than tho
war-time decline i n aggregate farm indebtedness suggests.
1*
the t o t a l farm mortgage debt decreased from about o*5
b i l l i o n dollars i n 1<&0 to
b i l l i o n i n 19L£* This was a
r e s u l t of large repayments r a t h e r than a curtailment i n mm
n o r t r a ^ s , since farm aortgage recordings increased f r o a
about 3 A b i l l i o n i n 1<&Q to s l i g h t l y over 1 b i l l i o n i n 19U5.
tho r a t e of decline i n farm s»rtga f .o debt has leveled o f f and
tho figures f o r tho beginning o f 1$&6 way show an increase*
I t should bo reaerabored t h a t usually a d i f f e r e n t group of
farmers m k o new debts than repay o l d ones*
2m
I t i s ee timated t h a t sane k& per cent o f tho farms sold as
complete units were paid for e n t i r e l y i n cash i n 19k5» compared
w i t h about iito per cent i n 19Ui and IJ4 per cent i n 19li3*
l i m i t e d data i n tho f i r s t world war indicate only 10 per cost
cash sales i n Iowa and about 20 per cent i n Kentucky.
3*
-,®e~third of a l l credit~financed sales o f fans properties i n
1$L5 wore encumbered to 75 per oont or store o f tho s e l l i n g
prices three-fourths wore encumbered t o $0 per cent*
jU*
The average encumfcerance was 36 per oont o f the s o i l i n g p r i c e .
On the average, t h i s would approximate the f u l l value o f tho
property i n 19^0*
5*
Coraraeroial banks and individuals have boon of increasing
importance i n financing; farm sales*
IMW&M F U M E IBS m m SALES
Percent o f sales fins mod
1&5
Individuals
Coomerolal banks
Insurance companies
land basucs
Others
l6
13
13
lU
21
12
12
10
2J
10
10
10
The period of greatest danger l a i n the months ahead*
1*
The period ef greatest a c t i v i t y i n the land market is from
„ovetsber to Maroiu The November to Narsh period i n 191*6-1*7
may correspond to the November to "wareh. period of 1919*20
when prices rose the greatest amount*
2*
lo&g as the general i n f l a t i o n a r y s i t u a t i o n continues a
high level of fnrm income w i l l be maintained and optimism w i l l
p r e v a i l * This seems l i k e l y to l a s t through the coming winter
a t least*
3*
yashinsry and labor are becoming more a v a i l a b l e , increasing
the incentive to expand holdings, and Baking i t possible f o r
new operators to become farmers i f they can secure land*
4*
Farmer* and others have large amounts o f savings and the
p a t r i o t i c urge to purchase bonds I s not as strong as i t was
during the war* There i s a^ple c r e d i t available*
$*
Veterans are returning to farms w i t h large supplies ef
c r e d i t available f o r farm purchases* F^arm loans under the
guarantee p r i v i l e g e totaled about 110 m i l l i o n from January 1 ,
to A p r i l 12, 19i«6, w i t h nearly the vn»Tl»im o f 50 per cent
being guaranteed* About J 3 / h m i l l i o n (estimated) of theee
loans were made from Harsh 16 to A p r i l 12, 1
this compares
w i t h so»» $90 * $110 m i l l i o n of farm Mortgages recorded by
a l l lenders i n t h a t period* Hot a l l of the veterans loans
were ussd to purchase land, however.
A p r i l £6, 1346
iijcrjsji
Wimiv&i^
UJ? LXtoti
OOHTEUL
Control of United States exports i s authorised by Section 6 of
the Act of July 2, 1940 (54 S t a t , 714), "An Act t o expedite the strength*
• c i u g of the n a t i o n s ! d e f e n s e , * S e c t i o n 6 ha* been continued i n e f f e c t
by snbse^uent Acts u n t i l June SO, 1946, On A p r i l 12, t h e Senate passed
S, 1330 t o extend o p e r a t i o n o f t h e S e c t i o n u&tiX Juu* 50, 1947. This
l e g i s l a t i o n has been r e f e r r e d by t h e House t o t h e K i l i t s r y i f f a i r s Committee.
Administration- 7 of export control no* r e s t s with the Requirements snr! Supply Branch of the Commerce Departments O f f i c e of I n t e r national Trade, Ur» John C. Borton, Director of t b « t Brtach, described
an important chaise l i i export c o r t r o l procedure I n the following words*
"September 1 0 t h sew a complete reversal i n the
general procedures for export control. The system of
l i s t i n g those cosi'icoditles ^hich Eight be f r e e l y exported was replaced by the P o s i t i v e L i f t v.hicb enumerates those eofricoditiefc f o r «hieh s p e c i f i c export l i cense i s r e r u i r e d , a l l others being f r e e o f controls,
•The Positive L i s t includes only about £0$ of t&€
Items formerly under export control, Thi? l i s t was;
agreed t o by CPA end & few of the i t e ^ s were included
at the instance of 0P£. Sirce September 1 0 t h , the l i s t
he£ been revised several tiases, The o r i g i n a l assumption
that i t would be progressively shortened has not proved
altogether correct. Some cogr.odities i n i t i a l l y l i s t e d
hf ve been dropped, but a good use By others have been
added. There i s a c e r t a i n amount of pressure at a l l
ti&es t o add commodities t o the l i s t . Congress has from
t i i i e to time shown & l i v e l y i n t e r e s t i n such additions.*
While t h e number o f i t e m s c o n t r o l l e d i s a somewhat u n s a t i s f a c t o r y
i n d i c a t o r o f the e x t e n t and e f f e c t i v e n e s s of c u r r e n t export c o n t r o l operat i o n s , i t i s a p p a r e n t l y the only a v a i l a b l e weasuresaont.
John G a r r e t t ,
Chief of the Programs C o o r d i n a t i o n S t a f f o f the Eecuiresieirts and Supply
Branch, states t h a t the o r g a n i s a t i o n has no estimate of the comparative
values o f c o n t r o l l e d rad u n c o n t r o l l e d e x p o r t s j he expressed the o p i n i o n
t h a t the p r o p o r t i o n of c o n t r o l l e d exports to f r e e experts might be r o u g h l y
I T For an account o f t h e p o l i c y - m a k i n g h i e r a r c h y i n t h i s f i e l d , see
attached memorandum o f March 7 , 1946,
-
£
-
t h e same as t h a t o f t h e number o f i t e m s on t h e P o s i t i v e L i s t t o t h e t o t a l
number o f e x p o r t i t e m s — r o u g h l y 20 p e r Gent, Lack o f more a c c u r a t e i n f o r m a t i o n was e x p l a i n e d by t h e fact, t.hfit t h e f o c u s o f a t t e n t i o n was a c r e
f r e q u e n t l y on t o w a g e d s t r t h e r on v a l u e f i g u r e s 1 .
Mr. G a r r e t t e x p l a i n e d t h e o p e r a t i n g procedure o f t h e Breach i n
t h e g r a n t i n g o f e x p o r t l i c e n s e s . For p r a c t i c a l l y e v e r y I t s ® on t h e P o s i t i v e L i s t t h e r e i s * more o r l e e s f o r m a l " q u o t e " o f e x p o r t s t o be p e r m i t t e d i n a f i v e n p e r i o d . These quotas a r e o f f o u r t y p e e . Group " A "
i n c l u d e s f o r m a l quotas assigned by t h e Department o f A g r i c u l t u r e ( f o r
a g r i c u l t u r a l n r o ^ u e t e ) ew! t h e C i v i l i a n P r o d u c t i o n A d m i n i s t r a t i o n ,
In
thin? g r o u p , c a r e f u l r e c o r d s o f l i c e n s e s g r a n t e d ere kept f o r comparison
w i t h t h e assigned r n o t e s . Group *B" quotas a r e ©et by i n d u s t r y grouos
o f t h e C . P . A , , but o p e r a t i o n s under t h e s e ouotas e r e l e s s f o r m a l end no
r e c o r d s a r e k e p t . H r . G a r r e t t e s t i m a t e d t h a t perhaps H5 per cent o f t h e
l i c e n s e s c u r r e n t l y g r a n t e d were f o r i t e ^ s e x p o r t e d t d t h i n t h e s e q u o t a s .
Group •C" cuotes are s t i l l l e s s f o r m a l ; t h e agency l i c e n s e s e x o o r t s i n a
g i v e n q u a r t e r t o a v a l u e o r volume r e l a t e d , t o e x p o r t s i n t h e p r e v i o u s
q u a r t e r . Group "D" euotas are u n d o u b t e d l y laisnased; e x p o r t s o f ites>s i n
t h i s group are p e r m i t t e d o r c u r t a i l e d on t h e b a s i s o f t h e judgment o f
commodity e x p e r t s as t o t h e reasonableness o f t h e r e l a t i o n s h i p being
maintained between domestic and f o r e i g n s a l e s .
I n a d d i t i o n , i t should be p o i n t e d oufc, t h e l i c e n s i n g o p e r a t i o n
p r o v i d e s an o p p o r t u n i t y f o r checking s e l l i n g p r i c e s o f exported commodit i e s against Q.P.J, c e i l i n g s .
Attachment
March
FUULCI FOHL&UIQM
7 , 1946
M B MMLSLBF&MIOK UE SIPO*? GOFTTNQLK
A d m i n i s t r a t i o n x o f export c o n t r o l now r e s t s w i t h t h e "Requirement and Supply Branch"-^ 7 o f t h e O f f i c e o f I n t e r n a t i o n a l Trade o f t h e
Department o f Commerce. T h i s f u n c t i o n waa t r a n s f e r r e d t o Commerce by
Executive Order Ho. 9630 o f September 27, 1S45.
Minor aspects o f p o l i c y f o r m a t i o n t a k e place ^ n t h e same o f f i c e . A d d i t i o n o f commodities t o t h e " P o s i t i v e L i s t ^ ' are made by t h e
R.and S. Branch w i t h o u t f o r m a l o u t s i d e c o n s u l t a t i o n . S u b t r a c t i o n s from
t h e l i s t , however, are made o n l y a f t e r c o n s u l t a t i o n w i t h i n t e r e s t e d
agencies and approval by t h e J o i n t Committee on Export C o n t r o l s , an i n t e r departmental committee t h e J o i n t chairmanship o f which i s shared by Commerce and t h e C i v i l i a n P r o d u c t i o n A d m i n i s t r a t i o n . Other members i n c l u d e
t h e O.P.A. and t h e Department o f S t a t e . Since t h i s J o i n t Committee i s
not concerned w i t h a g r i c u l t u r a l p r o d u c t s , i n f o r m a l c o n s u l t a t i o n s are
h e l d w i t h t h e Department o f A g r i c u l t u r e i n r e f e r e n c e t o removal o f a g r i c u l t u r a l p r o d u c t s from t h e P o s i t i v e L i s t .
Mr. Robert T u r n e r , Head of t h e Bureau o f I n t e r n a t i o n a l Supply
o f t h e C . P . A . , stressed t h e Importance o f t h e l a t t e r agency i n t h e export
c o n t r o l set-up* For a l l commodities t h a t are i n t i g h t supply, exports
ere p e r m i t t e d a g a i n s t e x p o r t quotas set up by t h e C.P.A. T r u c k s , passenger c a r s , b u i l d i n g m a t e r i a l s , lumber, e t c . , are i n c l u d e d i n t h i s category,
and C.P.A. t a k e s f u l l r e s p o n s i b i l i t y f o r t h e amount o f e x p o r t s p e r m i t t e d .
The next h i g h e s t l e v e l o f p o l i c y f o r m a t i o n presents s somewhat
confused p i c t u r e . The I n t e r n a t i o n a l Adjustments Committee, i n r e a l i t y a
sub-committee o f t h e Reconversion Working Committee, r e c e i v e s r e p o r t s on
problems o f e x p o r t c o n t r o l , but a l l t h e persons t o whc» I t a l k e d concurred
i n t h e o p i n i o n t h a t t h i s Committee has not g i v e n p o l i c y d i r e c t i o n . Howe v e r , t h e minutes o f a meeting h e l d by t h a t group on January 15 and 10,
1946, g i v e u s e f u l i n f o r m a t i o n r e g a r d i n g t h e e x p o r t c o n t r o l o r g a n i z a t i o n
and I am c a l l i n g them t o your a t t e n t i o n .
Several o f my i n f o r m a n t s mentioned t h e Wartime Trade C o n t r o l s
Committee ~ as a p o l i c y - f o r m i n g group w i t h s u p e r v i s i o n over broad quest i o n s o f e x p o r t c o n t r o l . T h i s Committee was e s t a b l i s h e d about V - J Day
as a sub-committee o f t h e Executive Committee on Economic F o r e i g n P o l i c y ,
1 / D i r e c t o r , Mr. John C. B o r t o n .
2 / L i s t o f commodities f o r which i n d i v i d u a l e x p o r t l i c e n s e s are
r e q u i r e d f o r shipments t o Country *K" d e s t i n a t i o n s .
Z j See membership l i s t a t t h e end o f t h i s memorandum.
- 2 a Cabinet l e v e l committee headed by Mr. C l a y t o n . I have not been able i n
t h e time a v a i l a b l e t o f i n d out much about t h i s sub-committee except t h a t
i t framed a statement on United States p o l i c y d u r i n g the t r a n s i t i o n w i t h
respect t o short supply items which was approved by t h e President i n September.—
I t might i n t e r e s t you t o know t h a t w i t h t h e a b o l i t i o n o f t h e
Combined Raw M a t e r i a l s Board end t h e Combined P r o d u c t i o n and Resources
Board on December 51, 1945, f i v e commodity committees were formed t o determine a l l o c a t i o n o f c e r t a i n scarce commodities i n t e r n a t i o n a l l y . These
were f o r c o t t o n t e x t i l e s ; c o a l ; h i d e s , l e a t h e r , s k i n s ; r u b b e r ; end t i n .
These committees c o n t a i n i n t e r n a t i o n a l r e p r e s e n t a t i o n but I em informed
t h a t a l l o c a t i o n s are s t r i c t l y on a n a t i o n a l b a s i s — i . e . , our own people
determine f o r themselves t h e amount o f t h e commodities which we can spare
and t h i s independent d e t e r m i n a t i o n t h e n forms the basis f o r i n t e r n a t i o n a l
a l l o c a t i o n on a c o n s u l t s t i v e b a s i s .
Wartime Trade C o n t r o l s Subcommittee
S t a t e - Donald Kennedy, Chairmen
A g r i c u l t u r e - D, A. F i t z g e r a l d
Commerce - P e r r y Stevenson and Mr. Bradermsn
(both alternates)
T a r i f f - Louis B a l l i f
C.P.A, - Robert Turner
War Shipping - Thomas J". White
O.P.A. - Benjamin Caplan
Budget-O.W.M.R. - A r t h u r Smithies and
Howard S. P i q u e t
1 / E.C.E.F.P.
D 119/45 Dated Sept. 1 , 1945.
April
26,
E x t r a c t f r o m Address by Chairman Eoolea a t
t h e H i n t h Annual Reunion Conference o f the
G r a d u a t e S o h o o l o f B a n k i n g , New Y o r k C i t y , A p r i l 6 ,
I9I46
19i+6
So f a r a s t h e p r e a e n t i n f l a t i o n a r y d a n g e r s a r e c o n c e r n e d ,
i t a h o u l d be o f d e e p c o n c e r n t o t h e b a n k i n g c o m m u n i t y t o h e l p i n
s t o p p i n g a n d r e v e r s i n g t h e p r o c e a s by w h i c h t h e c o m m e r c i a l b a n k i n g
s y a t e m c r e a t e s m o r e a n d m o r e money t h r o u g h p u r c h a s e o f G o v e r n m e n t s e c u r i t i e s , t h a t i s , the process of f u r t h e r monetisation of the p u b l i c
debt.
To h a l t a n d r e v e r s e t h i s t r e n d r e q u i r e s n o t o n l y a b a l a n c e d
b u d g e t , b u t a b a d g e t a r y s u r p l u s and c o n t i n u e d a a l e o f s a v i n g s bonds
t o t h e g e n e r a l p u b l i c , u s i n g t h e proceeds b o t h f r o m t h e s u r p l u s and
t h e s a v i n g s t o pay o f f Government o b l i g a t i o n s h e l d by t h e commercial
banking system.
I t w o u l d a l a o be h e l p f u l i f ways c o u l d be f o u n d t o
b r i n g a b o u t t h e s a l e t o n o n b a n k i n v e s t o r s o f some o f t h e l o n g e r t e r m
Government s e c u r i t i e s h e l d by t h e c o m m e r c i a l b & n k s .
T o o much o f t h e p u b l i c d e b t h a s a l r e a d y b e e n f i n a n o e d b y
the commercial banking system.
The e x c e s s i v e l y l o w y i e l d s o n G o v e r n m e n t s e c u r i t i e s i s due t o t h e i n t e n s e c o m p e t i t i o n b y t h e b a n k s t o a d d
to t h e i r holdings of longer-term, higher-coupon s e c u r i t i e s .
They
o o n t i n u e t o s e l l t h e i r s h o r t e r - t e r m a e o u r i t i e s t o t h e F e d e r a l Reserve
Banks and w i t h t h e r e s e r v e s t h u s o r e a t e d , t h e b a n k i n g s y s t e m as a
whole i s enabled to purchase s i x times t h a t amount.
I n a word, the
m a r k e t t o d a y i s l a r g e l y made b y t h e c o m m e r c i a l b a n k s .
This process of s h i f t i n g from the s h o r t e r to the l o n g e r t e r m s e c u r i t i e s cannot be s t o p p e d u n l e s s t h e s h o r t e r - t e r m r a t e s a r e
p e r m i t t e d t o i n c r e a s e u n t i l t h e s h i f t i n g i s no l o n g e r p r o f i t a b l e , o r
u n l e s s Congress i s w i l l i n g t o g i v e t h e F e d e r a l Reserve adequate
a u t h o r i t y t o deal w i t h the s i t u a t i o n .
The f i r s t m e t h o d , t h a t o f
i n c r e a s i n g t h e s h o r t e r - t e r m M i t e s , w o u l d b e i l l - a d v i s e d as i t w o u l d
i n c r e a s e t h e c o s t to the Treasury o f c a r r y i n g the d e b t , thus adding
to bank earnings which are a l r e a d y v e r y l a r g e .
The w a y b a n k s i n t h i s c o u n t r y h a v e b e e n p e r m i t t e d t o b u y
G o v e r n m e n t s e c u r i t i e s o f t h e i r own c h o o s i n g i s i n s h a r p c o n t r a s t t o
B r i t i s h and Canadian methods o f d e b t management.
Those c o u n t r i e s
have d e t e r m i n e d t h e amount o f bank c r e d i t t h e y w o u l d use and t h e r a t e
they would pay.
They have c o n f i n e d t h e i r bank b o r r o w i n g s t o s h o r t t e r m paper a t wh$t, I u n d e r s t a n d , i s a 5 / 8 t h s r a t e , and p r o h i b i t e d
b a n k s 1 owning o t h e r Government s e c u r i t i e s e x c e p t as r e l a t e d t o s a v i n g s
funds•
- 2 -
U n t i l some a d e q u a t e c o n t r o l o a n be e x e r c i s e d o v e r t h e a m o u n t
and k i n d o f G o v e r n m e n t s e c u r i t i e s o u r c o m m e r c i a l b a n k i n g s y s t e m c a n
h o l d , i t w o u l d bo i n a d v i s a b l e t o make a v a i l a b l e t o t h e m a r k e t f o r
t h e p u r p o s e o f a b s o r b i n g s u r p l u s money a d d i t i o n a l l o n g - t e r m s e c u r i t i e s ,
even t h o u g h t h e y a r e n o t e l i g i b l e f o r banks t o b u y , because t h e
e l i g i b l e s e c u r i t i e s h e l d o u t s i d e o f the banks w o u l d i n a l l p r o b a b i l i t y
be s o l d t o t h e b a n k s a n d t h e p r o c e e d s u s e d t o p u r c h a s e t h e h i g h e r y i e l d i n g
new i s s u e s f r o m t h e T r e a s u r y .
Even t h o u g h t h e f u n d s t h u s o b t a i n e d
by t h e Government were used t o pay o f f s h o r t - t e r m m a t u r i n g d e b t
l a r g e l y h e l d by t h e b a n k s , the banks w o u l d be l i k e l y t o r e p l a c e t h r o u g h
m a r k e t p u r c h a s e s t h e a m o u n t t h a t was p a i d o f f .
Hence, n o t h i n g w o u l d be
a c c o m p l i s h e d t o w a r d s h a l t i n g t h e m o n e t i s a t i o n o f t h e d e b t and r e d u c i n g
t h e money s u p p l y .
We m u s t n o t s h u t o u r e y e s t o t h e r e a l i t i e s o f t h e s i t u a t i o n
as I h a v e o u t l i n e d i t i f we e x p e c t t o s t o p a f u r t h e r d e c l i n e i n t h e
l o n g - t e r m i n t e r e s t r a t e , o r t o b r i n g a b o u t an improvement i n the r a t e
more i n l i n e w i t h t h e l o n g e s t t e r m 2 - l / 2 p e r c e n t r a t e b e i n g p a i d by
the Government on t h e l a s t m a r k e t i s s u e .
A serious by-product of the
i n c r e a s i n g l y low l o n g - t e r m r a t e i s to i n t e n s i f y i n f l a t i o n a r y f o r c e s ,
p a r t i c u l a r l y i n t h e f i e l d o f c a p i t a l a s s e t s s u c h as i n t h e s t o c k
m a r k e t as w e l l
as i n t h e e n t i r e r e a l e s t a t e f i e l d , i n c l u d i n g h o m e s ,
farms and business p r o p e r t i e s .
The l o w r a t e a l s o d i s c o u r a g e s s a v i n g s
a n d has a s e r i o u s i m p a c t o n a l l i n s u r a n c e , p e n s i o n a n d s a v i n g s f u n d s .
@FedFRASER