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December B2$ 1936* OUTLIKE OF PKBSBiT STAWS AMP PBOBLMS Of TOK BECOYisEY mothmeht Progress to date. #40 b*- §64 b* - $85-f90 b* The ehawgfe in the character of tbe recovery movement* Prospects for further recovery* (Accumulated deficiencies and nons&l requirement8 j« The problem hoy; is to achieve an orderly upswing, (a) Interest rate policy (b) Monetary policies 1. Ixcoss reserves Retirement of debt 3* Foreign capital 4* Silver 5* foreign axch&n&e value of the dollar (c) banking policy (d) Budget policy (a) Policy wit& reference to security and coxsaodity speculation* (f) Policy witfc reference to excessive price mark-upa* Policy v?itb reference to shortage of key products. (b) Policy «lth reference to adverse developments abroad* Conclusion* December 22, 1956. THE PRESENT STMUS AND mO HUMS OF THE EBCOTfflr MOVMEKT Progress to date We appear to be about midway on the road to full recovery* It lias been estimated that the national income produced will approximate #60 billion in 1956 as contrasted with #40 billion in 1932. If this proves correct the national income is probably running at the present r&te of around $64 billion. It Is a reasonable inference that with a further laoderate rise of prices the attainment of a normal condition of employment by 1939 would correspond with a national income of from #85 to #90 billion* In other words, an expansion of #20 to #25 billion in the national income is to be anticipated in the next three years if we are to achieve normal employment* %he change In tho character of the recovery laovesaent Jrom 193S to 19S6 inclusive$ the main factor responsible for the recovery movement nas the excess of federal expenditures Over tax revenues* This led to an expansion of moneyt an expansion of incones# an increase in the demand for goods* and a secondary expansion of incomes* Business as a whole disbursed less than it received and added to its cash balances* During 1936# however, the movement began to acquire sosie momentum on its o m account* Building construction and plant expansion and equipment have begun to assume significant proportions* It appears that, broadly speaking, 1937 will mark the transition frosi a goverraaentally-supported recovery to a self-generating upswing* Prospects for farther recovery In relation to normal animal requirements an enomous deficiency in housing and In our capitsl equipment has acouaaulated in tlx© pest seven years* With the expansion of l&comas that has occurred, the deficiency is beginning to be felt* The process of remedying this deficiencyf *?hich involves, in turn, an increase in incomes, makes possible and profitable further additions to our housing and capital equivalents The process* in other words, is self-generating* It; is estimated that an average annual nesr production of some 800,000 non~ farm housing units In the next five years isrill be necessary if we are to avoid a housing shortage by 1941* $hia m y be contrasted «ith an estimated output of 250,000-500,000 units in 1936 and with en output of 900,000 unite in the peak year 1925* Hho same general picture la true of many other important industries* It would appear* therefore, th$i -after the recovery has proceeded to a certain point, — and that point see&s to have been reached it has ample material on which to feed for a considerable time* The problem now With a change in the character of the recovery movement comes a change in the character of the problems with which \te have to deal* It appears that henceforth the concern of the Administration and the monetary authorities will be not so xaueh in stimulating a revival as In seeking to make the upswing as steady and as orderly as possible. 9&e more orderly the upswing and the less it la chartori284 fey price advances and speculative inventory buying* the "batter the chanees of avoiding a boom followed by a &ajor slumps The problem ©f making a mooth transition froxa producing an amount of goods sufficient to m k e up the accumulated deficiency nlusranual'noimal requirements, to producing for normal requirements alone, will tax our ingenuity and resources to the limit* The problem ts?111 become alxooBt insuperable if the upswing is aggravated by excessive price rises and inventory buying* 1» Interest r^te policy ie &ccoiapanying chart indicates the rapid fall in interest rate® in the past few years*> We hav<* probably gone as far as is safe is this direction and if the upswing gathers momenttm some firming of interest rates may prove desirable* 2. Monetary policies The deficit-financing program and gold and silver inflows have together not only restored the volume of deposit currency wiped out in the depression but have caused it to exceed pre^depression levels. The volume of checking accounts and currency in the hands of the public now approximates #31 billion, a 55 percent Increase in a little over three yearst and some billion in excess of 1929* Should this money be turned over at the pre-depression rate, a national income of $93 billion would result* It is, therefore» a reasonable assumption that the volume of money 1b now sufficient to finance full recovery and that* consequently, any further expansion now might lead to excessive spending in the future* Since further increases in the money supply con be sntici~ pated from an expansion of bank credit on the basis of excess reserves and from further gold and silver inflows* the remedy must be sought in action that would prevent or offset these developments* Expansion of private bank credit can be prevented by wiping out the bulk of the excess reserves, and* if need bet by forcing banks to borrow a portion of their required reserves froa the federal Eeserve banks* Action with reference to excess reserves will shortly be considered by the Board of Governors* Expansion of comercial loans can be offset by the Treasury retiring out of surplus revenues a portion of the short-term federal debt held bj banks. should be possible in the latter part of the fiscal year 1938* The most feasible way of preventing the expansion of deposits arising from gold inflows appears to be to check the inflow of foreign capital which is giving rise to gold inflows* This problem is nov? under study* fhe steady access* ion of deposits and reserves arising from silver purchases should be stopped by abandoning the silver purchase program* Finally* it may even prove desirable to have tha dollar rise in teres of foreign currencies* 3* Banking policy A higher degree of unification of banking and coordination of bank examination and chartering policies tinder a central agency is urgently needed* Conflicting examination and chartering policies and the constant threat of defection of membership from the Inderal Bessrve Syet&a impose obstacles to the effective exercise of monetary control* 4, Budget policy Since it would appear th&t the recovery movement is no longer dependent on Government support, the budget should be brought into balance as quickly as possible* In additiont it is desirable that a period of comparatively rapid debt retirement be inaugurated as soon as possible in order that private credit expansion m y be offset, the upsard trend of business activity kept within bounds, and that the Goverment should he in a position to increase its borrowings later when and if the need ©rises* This requires that the present tax base should be retained and, if the upward movement appears to be gather* ing too much momentum, even extended* 5* Policy with reference to security and eosnaodlty speculation, While excessive movements in prices on the security exchanges may arise frosa cash purchases and sales* they are greatly intensified by margin trading. She Board of Governors now has ample authority to control domestic mrgin trading* It would be desirable, however, to diminish foreign trading la our stocks and to devise methods of cheeking the evasion of margin requirements on the psrt of those Americans who are trading In our stocks through tendon. The stock market ts now one of the p&rts of our economy most vulnerable to adverse developments abroad, With reference to the commodity exchanges, consideration \ should be given to the desirability and feasibility of empowering / the Board of Governors to determine margin requirements for trading/ in such exchanges and in this way reduce the fluctuations arising \ frota buying with borrowed money ana from forced selling. J 6» Policy with reference to excessive price markups. It is desirable to restrict price advances to a minimum. Such advances lead in tho short-run to disturbing fluctuations in l-avenfcory buying, and operate over a longer period to restrict employment and production, the aggregate of business inventories is so large that a small fluctuation of five percent amounts to eo&e billion and a half dollars in production. As long as inventories increase in pace ^ith the increase in production there is little to be feared. When, however, speculative inventory buying occurs because of actual or anticipated price advances, business activity is at first unduly stimulated and later, nifoes inventories are being worked off to a more normal levelt unduly depressed* In order to restrain business from excessive price advances, resort might be had to the use of moral suasion. This in turn might be supported by more strict enforcement of the &ntintrust legislation and by the threat, in individual cases, of tariff reductions* It such measures should prove ineffective end unwarranted price advances occur on a witfe scale, consideration should he given to a rise in the foreign exchange value of the dollar* 7* Policy i^lth reference to shortage of k'?y products* It would he helpful if the Government took the lead in ascertain** ing and supplying Information on the* probable shortages in skilled labor and plant equijsaent* Something mi#ht possibly be done in inducing skilled building trades to relax rules relating to apprenticeship, etc*, since there is reason to believe thet the most serious shortage will occur in this field* Careful consideration mi^ht be given to the isamedlate inauguration of vocational training in the Civilian Conservation Corps, and in connection with the Works Relief Program, in those fields in which shortages are most likely to occur* 8* Policy with reference to adverse developments abroad. Consideration should be given to the possibility of insulating our econoxay froia adverse developments abroad in so far as such insula* tion is compatible with our domestic interests* More specifically* the power to vary the value of the dollar in teime of foreign currencies should he m d e permanent an<3 the volume of foreign capital here fihould he kept as low as possible further inflows be discouraged* Conclusion In general, it trould appear that the program now should be one directed toward an attempt to make the upswing as steady and orderly as possible while at the same time preparing for the threatened recession irhen the accumulated deficiencies in housing and capital equipment are largely overcome. It is better to aim #>t relatively full employment in, say* three years' timet and in the meantime carry the unemployed, than it is to seek to achieve full recovery in a year or sol Otherwise, it may be difficult to avoid a boom and a disastrous slump* The program would be greatly facilitated by full publicity as to its nature and purpose* The prestige tacqtiired through the successful attempt to arrest deflation and bring about recovery will prove a most valuable psychological support for the program briefly outlined above. If business believes we can do what we sot out to do, J*&lf the battle is won* y rf December 88, 1936* A LOKGwRftHGS BUSINESS STABILITY PROGRAM The foregoing suggestions are designed to cope with the problems likely to confront us in the iiasiediate future* The longer range problem of retaining the prosperity we hope shortly to seeure should not be neglected* Shis is the problem of maintaining a gradually increasing flos? of purchasing poorer to the masses of the people* Once the accumulated deficiencies in housing and capital equipment are made up, there will be grave danger that the ever-increasing savings of the corporations and wealthy individuals will lie idle or be directed into unproductive channels, thus diminishing the flo^ of purchasing power to consumers* At a later date I should like to offer a detailed and coordinated monetary and fiscal progrma whereby threatened interruptions to the flow of purchasing power may be prevented! Z shall here merely indicate some of the aspects of that progress* 1* The development of a flexible public forks program to providS work for those who have exhausted their unemployment insurance benefits, This appears to be more socially desirable and a more effective means of maintaining purchasing power than the European development of longer and longer unemployment insurance benefit periods* £. Postponed and reduced taxes for old*age. benefits account. The present scale of. taxes and benefits is such as to aggravate tholong-tera problem of preventing a deficiency in consumer buying power* 3* A flexible tax program designed to facilitate a steady flour of purchasing power* 4* The continuance of )&Qnet;*ry policies of a compensatory nature* I feel strongly that the attfclxaaent of enduring prosperity rests in the final analysis on the development of compensatory controls by tha Federal Go Vermont and the monetary authorities, and cannot be secured through the developaent of direct controls over prices, weges* etc* INTEREST RATES PER CENT SHORT-TERM RATES 12 LONG-TERM RATES 11 10 9 -b 8 1 % r i 7 Cmstomers Rates— Sout hern an<J Westen , Cifie:s 6 n 5 CU!stomers Rates New Yor k City 4 \ V 3 2 1 I1 L M YV w U Call1 Money \ 1/ Accet rtances^ 1i 0 1929 1930 1931 1932 1933 1934 1935 J 1936 " 193? 1929 1930 1931 1932 1933 1934 1935 1936 1937 RESERVES AND CREDIT EXPANSION ( In millions of dollars ) UNDER PRESENT REQUIREMENTS AFTER 33K3% INCREASE IN REQUIREMENTS POTENTIAL EXPANSION R2Z 839,000H mm TOTAL DEPOSITS AND CURRENCY >%vs 'M AAA mm MM 1922 2.360 rV ""2,210" 1929 JUNE 1933 EXCESS RESERVES 6.800 6.800 PRESENT REQUIRED RESERVES TOTAL DEPOSITS AND CURRENCY AND FACTORS AFFECTING THEIR VOLUME ( End of June ) Billions of Dollars 60 50 GOLD STOCK 40 — U.S. GOVT OBLIGATIONS 30 — 20 OTHER FACTORS, PRINCIPALLY OTHER LOANS AND INVESTMENTS 10 0 1929 1933 1936 Height of bars represents total bank deposits and currency outside of banks j segments of bars represent principal factors accounting for total. Excludes gold in Treasury cash
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