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Mr. Chairman and members of the Committee,
I appreciate this opportunity to appear before your
Committee in its hearings on the problems of controlling inflation.

Our defense preparedness program must be designed to prevent war and to prevent inflation,
while at the same time preserving the essential
freedoms of our democratic institutions. It must
also be sustainable for an indefinite peritod of time.
If we fail to make these aims our major goals, the
very system which we are trying to maintain will be
destroyed. This means we must adopt a realistic
foreign policy—one which recognizes the limitations of our resources and manpower, and one
which we can pay for currently.
How can we best, within this framework, protect
ourselves, maintain our essential economic and
democratic strength, and at the same time fulfill
our commitments to help defend and protect the
other free countries of the world? I believe to do
this we must limit our aggregate expenditures on
our defense and foreign aid program to a maximum
of 50 billion dollars annually. This we can pay
for currently, given a total national product of some
300 billion dollars, the estimated amount for the
next fiscal year. This money must be used in
such manner as to assure the maximum military
effectiveness of ourselves and our allies, which
means a program most likely to prevent war.
We must recognize the fact that Russia occupies
or controls the greater part of the tremendous land
mass of Europe and Asia. This land mass has a
population of nearly a billion people, and great
material resources, and is far removed from our
own shores. We can never expect to defeat Russia
on land. We would be bled white and destroyed,
economically as well as militarily, by any attempt
to do so. We cannot hope to be prepared to supply
•Statement of Marriner S. Eccles, Member. Board of
Governors of the Federal Reserve System, before the Joint
Committee on the Economic Report on its hearings on
the President's Economic Program.
January 25, 1951.


or maintain ground forces at every strategic point
around the 20,000 mile periphery of the Communist empire. We cannot be prepared on the ground
to meet attacks at the time and place selected by
There are, however, decisive things we can do
with our superior technology and scientific knowhow, and within the limitations of a budget we can
pay for. We can, with the assistance of the British
Empire and such cooperation as other free nations
are willing and able to give us, rapidly establish
overwhelming control of the air and the sea. From
strategic air and naval bases throughout the world,
protected by adequate ground forces, we can
threaten swift retaliation with atomic and our other
destructive weapons if Russia undertakes aggressive action.
We should recognize the facts that our unrivalled
productive capacity is our strongest line of defense,
that our ability to produce is largely determined
by our available manpower, and that our country
is,the arsenal of the free nations of the world and
must not be weakened by a military program
which we cannot maintain indefinitely without
regimentation or inflation or which leads to war.
We should keep our ground forces as small as
possible so as to maintain our production at full
strength to meet our civilian and military needs
and help the other free nations to arm their available manpower and build up their defenses. Our
manpower can contribute far more to the defense
6f the free world in our production lines, in our
navy and air force than in the front lines of land
armies in Asia or Europe.
We should quickly arrange a peace treaty with
Japan and Western Germany, bringing them into
the United Nations and helping them and other
friendly countries, including Spain, to rearm as
quickly as possible so as to be able to deter, or
resist if necessary, aggression by China, Eastern
Germany, or other Russian satellites. Our present
military forces should be maintained in Germany
and Japan until they have fully rearmed for de]

fense. Neither they nor the other free countries
can be expected to resist successfully direct attacks
by Russia. The addition of such land forces as we
could send, and at the same time maintain our
supremacy on the production line, and in the air,
and on the sea cannot be expected to provide the
balance of power necessary to deter, contain, or defeat the Russians.
Russia should know that direct attack by her
would mean war with the rest of the free world—
war in the air, on the sea and on the land, involving
atomic and all other weapons of destruction. This
threat of world-wide total war will, I believe, deter
the Soviet Union, because it would mean her destruction as well as that of her enemies. A world
war would be an atomic war or worse, a war that
could not be won by any nation or group of nations, a war that might mean the destruction of
civilization. For that reason, we should not think
or talk of war as being inevitable. We can, I believe, by the plan I have outlined, make it so costly
for Russia to start war that she will not dare attempt it.
Under the protection of American and British
air and sea power the free nations on the periphery
of the Soviet empire can rapidly rearm with the
great help we can give them from our production
We should not attempt to rebuild great military
strength in either Germany or Japan for possible
war with Russia. Russia may not be willing to
tolerate the reconstruction of great military forces
of Western powers on her borders, any more than
we would if our positions were reversed. I do not
believe Germany or Japan will be parties to such a
program. It would seem that they do not propose
to be the battleground for the defense of the Western world. I believe we must plan on Germany
and Japan developing as defensively armed neutral
areas, between the Communistic and the Western
War can be avoided, I believe, if we do not attempt to build up international competitive and
threatening military forces in Japan or on the continents of Europe or Asia. Any attempt to do so
is likely to provoke aggression—great standing
armies cannot be mobilized, facing each other for
long periods of time, without war. In any case,
what is the stopping point of expansion and how
do you ever demobilize them?
We should not make any commitment to use


the atomic bomb only if it is used against us first.
Such a commitment offers us no protection. We
must retain the initiative for use of all our weapons,
including the atomic bomb. Any defense preparedness program may mean an uneasy peace, but it
will be as uneasy for the Russians as for us.
I should like now to discuss rather fully the inflationary problems as related to fiscal, monetary,
and direct controls.

We shall lose the fight against totalitarianism
even though our military and foreign policies are
successful in maintaining peace if we permit inflation to sap the strength of our democratic institutions. Inflation is an insidious thing. In its early
stages it can have a certain exhilarating effect. But
as it proceeds it will operate to destroy our free
economy. Inflation works a grave injustice on
great masses of people. It injures most the aged,
the pensioners, the widows, and the disabled, the
most helpless members of our society. It diminishes
the desire to work, to save, and to plan for the
future. It causes unrest and dissension among people and thereby weakens our productivity and
hence our defense effort. It imperils the existence
of the very system that all of our efforts are designed to protect.
We must recognize that our problem of controling inflation is more complicated now than in
World War II. There is no end in sight for the
necessity of maintaining very large government
expenditures even though nondefense expeditures
are reduced to the very minimum, as they certainly should be. People hold an unparalleled
amount of liquid assets in the form of bank deposits,
Government bonds, equity in insurance policies,
building and loan shares, and other forms. Potentialities for inflation are now tremendous. It would
be impossible to prevent inflation under these conditions without at least balancing the Federal
Everyone will agree that our military and foreign
aid program will divert large supplies of goods
and services from private consumption and investment. This is a physical fact that will not be
changed whether or not we tax ourselves to pay
for it. The production of the goods and services
for this program will provide money income to
those who are engaged in it, but it will not provide


a corresponding volume of goods or services for
which this income may be spent.
Without a pay-as-you-go tax program the Government will have to borrow to make up its deficit,
either from the banks or from the nonbank public.
Although borrowing from the public is less inflationary than from banks, there is no assurance that
such borrowing could succeed in soaking up the
excess funds available for spending. In my judgment, it would be impossible to avoid distructive
inflation and further debasement of the dollar if
the policy of an unbalanced budget, however financed, were long continued. An over-all complete harness of controls would only postpone the
disastrous consequences.
Borrowing from banks creates new money. Borrowing from nonbank sources does not increase the
money supply, but it adds to the total volume of
the public debt and to the liquid assets held by
the public, thus storing up inflationary pressures
for the future under present debt management policies. The money supply is already excessive,
considering the fact that it is being used less actively
than it could be, compared with past experience.
In addition, the tremendous amount of other liquid
assets held by the public is like money in many
respects because it can be turned into money under
the present Federal Reserve policy of supporting
the Government security market at fixed prices
and interest rates.
As inflation proceeds, the desire increases to
convert liquid assets into money and then into
goods and services. This is what is known as the
flight from the dollar. The need to hold money
and other liquid assets is not as great today as it
has been in the past. This is because of improvecf
insurance and pension provisions for old age. Also
the urge to provide for the contingency of depression and unemployment is less compelling. Under
these circumstances the more liquid assets the
public holds the more likely they are to cash them
and spend the proceeds. Thus you can have an inflation even if all Federal deficit financing is done
outside the banks.


There can be no escaping the fact that a pay-asyou-go tax program will increase the tax burden
of all who receive more than a subsistence. We
will have to get the money from those individuals
and businesses who receive it in relationship to the


Government's need and their ability to pay. In
this country income and financial resources are
broadly distributed. Tax increases to raise 16 billion dollars will likewise have to be broadly distributed.
An increase in individual income taxes should
produce about half of the additional revenue required. Since the bulk of the taxable income is
in the first taxable bracket, the increase will have
to begin there, starting say with a rate of 25 per
cent instead of 20, and go all the way up the income scale. There should be an increase in the
regular corporation income tax with some credit allowance on that part of income which is disbursed as dividends, these being subject to individual income taxes. We should also greatly
strengthen the new excess profits tax law. Excise
taxes should be placed on all nonessential goods
now exempt and increased on nonessentials now
subject to tax.
With the proposed increased tax rates on individual and corporate incomes, it is especially essential
that all loopholes in the tax laws be closed. This
source alone might provide as much as 3 billion
dollars in additional revenue. Exempt income of
insurance companies, savings and loan associations,
and farm, labor, educational and religious cooperatives, as well as interest from new securities of
State and local governments, should be taxed. Depletion allowances should be greatly reduced in
accordance with Treasury recommendations, and
unusual expenses and promotional and advertising
outlays made nondeductible for tax purposes. And
there are other loopholes that should be closed. The
present capital gains tax is one of these loopholes
for tax avoidance. It also promotes inflation, particularly in commodities, real estate and stocks*
To maintain the morale of the taxpayer who pays
his honest share of taxes, loopholes must be closed
and tax enforcement intensified. The Treasury
should have sufficient competent personnel to give
the same strict enforcement of tax collection to
farmers, professional people, and the small unincorporated businesses as is now applied to other
types of taxpayers, notably those whose entire income is subject to withholding taxes.

No tax program by itself is sufficient to prevent
inflation under the conditions we face. It must be
backed up by restrictive credit and monetary meas-


tires. Many individuals and corporations, when
their expenditures are squeezed by higher taxes,
will try to supplement their incomes by borrowing.
Other credit demands will continue as there is an
increasing effort to borrow to build up inventories,
particularly of scarce goods, to take advantage of
investment opportunities, and to speculate on the
inflationary rise. The harm to our economic stability from such private deficit financing is at least
as great as that from deficit financing by the Government. In fact, the whole postwar inflation, and
particularly since the Korean outbreak, has been
due to private rather than Government deficit
spending. If we impose painful taxes to avoid one
form of deficit financing we must surely seek out
a way to put a check on the other.
To prevent inflation we must stop the over-all
growth in credit and the money supply whether
for financing Government or private deficit spending. The supply of money must be controlled at
the source of its creation, which is the banking
system. Under our present powers, the only way
to do this is by denying banks access to Federal
Reserve funds which provide the basis for a six-fold
expansion in our money supply. The only way to
stop access to Federal Reserve funds is by withdrawing Federal Reserve support from the Government securities market and penalizing borrowing
by the member banks from the Federal Reserve
Banks. As long as the Federal Reserve is required
to buy Government securities at the will of the
market for the purpose of defending a fixed pattern of interest rates established by the Treasury,
it must stand ready to create new bank reserves in
unlimited amount. This policy makes the entire
banking system, through the action of the Federal
Reserve System, an engine of inflation.
If access to Federal Reserve credit were strictly
limited or denied, and if there were more sellers
than buyers of Government securities, then prices
of outstanding Government securities would decline and interest rates would rise until the market
became self-sustaining. More sellers of Government securities than buyers indicates that the public
is not willing to hold at existing rates. The only
way to restore the balance is to let interest rates go
higher to meet public demands. The Government
with the support of the Federal Reserve has the
machinery and the power to decree what prevailing
interest rates are to be. But lacking the power to
require the holding of its securities by the public,


the Government cannot prevent their being offered
for sale if the public is not willing to hold at those
rates. If interest rates are not to be allowed to rise
in response to market forces, then the Government
must create all the money it takes to keep rates
down. This in effect makes interest bearing money
out of all Government securities and adds to the
liquidity of all private debt as well. It is hard to
conceive of a more inflationary monetary policy.
There is another aspect of an interest rate freeze
that under present conditions works to promote
expansion of our money supply. Interest rates on
short-term Government securities are about half
of what rates are on long-term issues. Corporations
and other nonbank investors hold short-term securities, however, because they do not wish to take the
chance of a market loss on long-term issues should
they need their funds. But if the policy as announced by the Secretary of the Treasury is to
prevail, that the existing pattern of interest rates
will not be allowed to rise, then long-term Government bonds in effect become demand obligations.
The lower yielding short-term securities held by
nonbank investors will be shifted to the Federal
Reserve. This process generates demand for longterm Government securities, helps to maintain a
lower long-term rate than would otherwise prevail,
and gives the appearance of tremendous success to
each Government financing effort. It is, however,
a success bought by the creation of tremendous
sums of money, at the cost of progressive decline in
the value of the dollar.
To allow interest rates on Government securities
to respond to the forces of the money and credit
market, I realize,"raises problems of debt management because of the large volume of debt maturing
each year and the demand liabilities in savings
bonds. With large and frequent refundings, the
process of permitting interestfluctuationsinvolves
careful management. If a refunding offering is
not in line with market rates, Federal Reserve
support is necessary to insure its success.
These are important problems which a frozen
pattern of interest rates can avoid. But they are
not nearly as formidable as the problems that we
take on if we accept a frozen interest rate structure.
We cannot prevent increases in the volume of our
money if we arc unwilling to deny Federal Reserve
credit when inflation is taking place, and to allow
interest rates to rise if market forces operate in
this direction. Inflation and debasement of the


value of the dollar is the price we pay for the luxury
of a booming Government securities market. Any
tax program we are likely to adopt can hardly be
adequate to stop inflation in the long run as long
as the money and credit floodgates are left open.
If the Federal Reserve is to be required to maintain a fixed pattern of interest rates established by
the Treasury, then the System should either be discharged of its responsibility for controlling the volume of credit and money or be given new powers
as partial substitutes for those that it is not permitted to use. The limited selective controls which
the System now has over certain consumer, real
estate, and stock market credit may be useful and
desirable, although their effectiveness is certainly
much more limited than is generally believed.
Authority to increase reserve requirements of all
commercial banks would be a partial substitute for
traditional credit control powers to" enable the System to immobilize new bank reserves arising from
its purchases of Government securities in support
of the market. Authority would also be needed to
require all commercial banks to hold an adequate
percentage of their deposits in a special reserve
in Government securities, or at their option a like
amount in cash. It would likely be essential for
the Federal Reserve to have authority to require
savings institutions such as life insurance companies, savings banks, and savings and loan associations to hold a certain proportion of their assets
in Government securities in order to prevent them
from selling in a market supported at pegged prices
by the Federal Reserve.
All of these substitute powers would be necessary to compensate for the control over expansion in
our money supply that we give up when the interest
pattern on Government securities is frozen.

Fiscal and credit action will have to be buttressed
for the present with some rationing and allocations.
They will be required to control the use of certain
essential goods in short supply and of scarce or
critical materials andfinishedproducts. To prevent
the bidding-up of prices on these items, price controls will be needed. Such controls should be selective, however, and applied only in those limited
cases where materials or goods are both essential
and in short supply, and removed as soon as they
are no longer in short supply or deemed essential.
Over-all price controls are unnecessary and should


not be imposed upon the economy. Price controls
cannot be successfully applied unless simultaneously
accompanied by allocation and rationing. Price
controls alone merely lead to black markets and
racketeering, profiteering, and tax evasion. We
know from past experience that even during war
a comprehensive harness of direct controls unsupported by adequatefiscaland monetary policies did
riot prevent inflation, but only concealed and postponed the inflationary results. They deal with the
effects rather than the causes—they sugar-coat the
inflation, so that the public's will to accept the required taxes and credit restraints is weakened and
destroyed. There is no substitute for adequate
fiscal and Kionetary measures; with them, the need
for direct controls is reduced to a minimum;
One of the worst features of trying to enforce a
comprehensive harness of direct controls is that it
so regiments the entire economy as to destroy our
essential freedoms. It requires the establishment
of a huge bureaucracy for policy making, administration, and policing—a most uneconomic utilization of an already short supply of manpower. This
cannot be justified. Worst o£ all, such regulation
and regimentation, undertaken for any extended period of time, will prove so intolerable that public
revulsion will lead to withdrawal of essential support for a program necessary to defend the free
world, prevent war, and assure the preservation of
the value of the dollar.
Even though I have strongly opposed a general
price freeze for the reasons stated, I still feel that
it is essential that wage and salary ceilings be put
into effect promptly, [allowing up to 10 per cent
increase for those who have not had an increase
by that amount since 1948]. On an over-all basis,
prices are made up largely of wages and salaries,
and prices cannot be kept down with continuing
increases in wages and salaries. Labor should not
object to wage and salary ceilings, so long as any
excess profits of corporations are drained off through
Another reason for a wage freeze is that higher
personal income taxes required to balance the
budget will reduce the hourly take-home pay of
labor, as they must do if they are to be effective.
Union leaders are likely to press demands for
higher wages to offset this reduction in take-home
pay and to maintain labor's standard of living. To
grant such wage increases would entirely defeat one


of the major purposes of increased taxes, viz., the
curtailment of purchasing power at a time when
there is a scarcity of many civilian goods. Finally,
due to the shortage of labor, employers, especially
those subject to high excess profits taxes, will bid
employees away from each other.
Not only should wage and salary ceilings be imposed, but all fringe benefits, including bonuses
and pensions, should be rigidly curtailed. Escalator
clauses should be excluded from all future wage
contracts—they are built-in inflationary devices.
A 44-hour week, without overtime rates of pay,
should, I believe, be generally adopted for the purpose of increasing total production and helping to
maintain the standard of living without increasing
costs. Increased production is, in the end, the primary solution to the inflation problem, provided it
can be brought about without increasing costs and
purchasing power more rapidly than the supply
of goods.


Labor should be willing to accept wage ceilings
and a longer work week at a time when both are
so essential to the prevention of further inflation.
After all, the defense of the dollar is more vital to
labor than to almost anyone else.

In conclusion, let me repeat that a successful
preparedness defense program must prevent war
and must not lead to destructive inflation. Total
war, with atomic weapons, would mean victory for
none and destruction for all. Regimentation or
further inflation, even if war is avoided, will ultimately lead to the destruction of our capitalistic
demdcracy. Therefore, our foreign policy must be
designed on the basis of what we can pay for currently, and our fiscal program must be supported
by restrictive monetary and credit policies, together with only such limited direct controls as
the situation may require.