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BOARD OP GOVERNORS OP THE FEDERAL RESERVE SYSTEM STATEMENT OP GIAIHIAN ECCLES BEFORE 1HE JOINT COMMITTEE ON THE ECONOIJIC REPORT V/EDNESDAY, DECEMBER 10, 1947 FOR RELEASE ON DELI VERT Mr. Chairman and Members of the Committee: I appreciate the opportunity to discuss further the problem of what might be done in the monetary and credit field to deal with infla tionary forces. Since iqy previous appearance before this Committee, there has be'en considerable discussion of the Reserve Board's proposal for a temporary special reserve requirement. There is a good deal of misappre hension fend misunderstanding about it. I should like, as briefly as possible, to put it in what appears, to me to be the correct perspective. In Tty initial testimony before this Committee, I explicitly stated and I want to reemphasise that the proposed special reserve is only a part, though a necessary part, of any effective anti-inflationary program, and that the need for this authority would bo less to tho extent that appropriate action is taken on other fronts* By far the most important action is a oontinuing, vigorous fiscal policy. Because of that policy there is likely to be little need for the special reserve requirement during the next four months. In that period Treasury surplus funds, taken from the market through taxes, will be available to retire a substantial ancjnt of bank-held public debt. Ifcwevar, after that period we may be exrosed to an unbridled expansion of bank credit because tho lieserve System:s existing powers? in the face o? its n * / l y-acquired responsibilities for the Govern r v .. ment security market and in the face of a continued inflow of gold, are in sufficient to restrain further bank credit expansion. Considered in this light, our proposal is a precautionary measure to guard against possible disaster later. Many bankers and certainly the Federal Reserve people are agreed that the Government bond market must be supported and stabilized. There is agreement that the present program of the Federal Open Market Committee und the Treasury should be vigorously prosecuted. There is agreement that supervisory policy and moral suasion on the bankers to avoid loans for non productive purposes should be aggressively pursued. There is agreement on fiscal policy and the need fdr maintaining as large a surplus in the Treasury's cash budget as possible in order to pay off bank-held debt. There is agreement as to the need for strengthening the savings bond program of the Treasury. 'These are important areas of agreement and they ou^ht to be kept in the foreground of any further discussions of the use of monetary and credit policy as a brake upon further inflation. At the same time, v/e should not fail to keep in mind the fundamental issue: Bank credit is still expanding, mainly because of loans, gold is flowing into the country, the money supply is still growing, inflation is continuing. The question is: IVhat is the next step, if any is required, in doing something about it? Banking leaders who have already had some opportunity to study the proposed special reserve plan and have arrived at opinions adverse to its adoption, voice this opposition along t:vo lines of argument. On the . one han'dj they contend that the plan is impractical, socialistic, .and un necessarily drastic. On the other hand, they assert that the plan is not strong enough to accomplish its expressed objectives. The contrast between these two lines of argument is striking. Both cannot be correct. - 2 First, does the proposal mean regimentation of the banks; will it unduly interfere with the ojpera-bion o^ their business, and will i t ^ e a step toward socialisation? ' ' ' In the Board’ judgment, the type of authority proposed is s neither novel nor revolutionary. The authority provided by the Banking Act of 1935 to raise reserve requirements of member banks to twice thethen prevailing statutory level was similar. Except for a small margin applicable only to N e w York find Chicago banks, this Authority to increase member bank required reserves has already been exh&tisted. In*late December I9IO the Reserve Boat’ the presidents of the 4 d, Federal Reserve Banks, and the Federal Advisory Council unanimously joined in a special report to the Congress pointing out the inflationary dangers for the national economy inherent in the defense effort. This special report, recognizing that the authority of the Federal Reserve System was wholly inadequate to deal with the potential excess reserve problem of the banks, recommended that Congress ~ 1 1 (a) Increase the statutory reserve requirements for demand deposits in banks in central reserve cities to 26 pfcr-cent; for demand deposits in banks in reserve cities to 20 per cent; for demand deposits in oountry banks to I 4 per cent; and for time I deposits in all banks to 6 per cent. "(b) Empower the Federal Open Market Committee to make further increases of reserve requirements sufficient to absorb exoess reserves, subject to the limitation that reserve require ments shall not be increased to more th&n double the respective percentages specified in paragraph (a). "(c) Authorize the Federal Open <Karket (Sommittee to change reserve requirements for oentral reserve city banks, or for re serve city banks; or for country Banks, or fbr any combination of these three 0lasses. , (d) Make reserve requirements applicable to- all banks re f ceiving demand deposits regardless of whether or not they are members of the Federal Reserve System. In addition to these major recommendations, the special report urged that the defense program be financed as far as possible from existing deposits and from tax revenues rather than from inflationary borrowing from the banks. I submit for the record a copy of this speoial report, because it called for far more onerous and drastic powers than the special reserve plan. The’ special reserve plan, however, is? identical in purpose with an outright increase in regular reserve requirements** The plan, in fact, 3 is no more than an adaptation of this familiar method of dealing with the volume of bank credit. The pian now proposed by the Board would enable the banks to retain the same volume of earning assets they now have, in place of making them reduce earning assets, as would an increase in regu lar reserve requirements, with adverse effects upon bank earnings. Is the Board's proposal unnecessarily drastic? In pointing out the inflationary dangers that exist when the supply of ,money in the hands of people who seek to spend it greatly ex ceeds the volume of goods and services available, the Board in its Annual Report for 19U5 indicated that there were three alternative methods for dealing with the monetary aspects of the postwar inflationary problem: First, a limitation on the Government bond holdings of banks; second, an increase in their regular reserve requirements; and, third, the holding of short-term Government securities or cash under a special reserve re quirement. Our study of the problem led us to select the special reserve method as the least onerous, the most equitable, and the most practicable method. These specifications for the proposal call for the immobiliza tion, even at the maximum, of only a part of existing large holdings by commercial banks of Government securities. About one-third of the 70 billion dollars of Government securities held by the banks could be im mobilized even if the entire authority were used. The special reserve oould be imposed only gradually,-and if inflationary bank credit ex pansion can be otherwise brought under check, the requirement would not be imposed at all. Under the plan suggested, the individual banker would be left in the same competitive position he is in today. Contraiy to what has been stated by a recent National City Bank Letter, among others, banks would not be under legal compulsion to buy Government bonds; the holding of Government securities in lieu of cash or balances with other banks to meet the special reserve requirement v'ould be entirely optional with the individual bank. The special reserve plan is a middle-of-the-road proposal for helping to deal with the credit and monetary aspects of the difficult and complex inflationary situation. The Board feels, however, that the purpose of restraining further inflationary expansion of bank credit can be adequately accomplished by the specifications it hp.s drawn for the plan, if its use is accompanied by appropriate fiscal and other policies. It would seem that bankers would prefer this proposal to an increase in regular reserve requirements, which they recommended in 19U0 in anticipa tion of inflationary developments. Are existing powers adequate? The argument that the Board's proposal is unnecessarily drastic implies that the suggested special reserve requirement is not needed because - b the System-'s existing powers, are adequate to restrain credit expansion if. thg System would use them* Existing powers are being and will continue to be used to the fullest extent consistent with maintaining the market for Government securities* Under present conditions, however, any further absorption of bank reserves is entirely dependent upon a continued surplus in the Federal budget that can be used to retire public debt held by banks. There will be little or no surplus in 191+8 after March. Any subsequent surplus will depend on appropriations and tax legislation yet to be'adopted. Sales of some of the large volume of Government securities- held by the Federal Reserve System would, of course, absorb bank reserves, but such sales, particularly when banks are selling securities to expand other credit, would demoralize the market and cause a sharp break in Government bond prices. The discount rate should be kept high enough to discourage bor rowing from the Federal Reserve Banks, but its effectiveness is limited afe long as banks can obtain reserves by selling short-term Government securities. The only remaining power we have is to raise regular reserve re quirements at New York City and Chicago banks, as I have indicated. This would be restrictive to. a small degree, but would be met by sales of short term securities by those banks to the Reserve System. These particular banks* moreover, have shqwn, .relatively much less credit expansion than have other banks. For some months the "Reserve System and the Treasury have been carrying out a program combining monetary, fiscal, and debt-management res-traint on current inflationary bank credit expansion. Some moderate, corrective rise has been permitted in wartime levels of interest rates on short-term Government securities, together with some adjustment in yields on long-term issues from yeiy low levels. In addition, excess funds in Treasury balances arising from current budget surpluses have been applied to the retirement of .maturing bank-held Government securities. The System has also urged all banks to maintain conservative standards in the extension of consumer instalment gredit) and hets joined with other Federal and.State bank Supervisory agencies in recommending that all banks pursue conservative lending policies. This program of restraint has helped to reverse the processes that contributed so strongly to the wartime expansion of bank credit, and will be carried on as the proposed special- reserve plan is not a substitute for this program, but may be necessary to supplement and re inforce it. - 5 Despite the pressures of fiscal policy during September and October, wl\ieh drew upon bank deposits and permitted1 retirement of over one billion dollars of Government securities held by the banking system, deposits of businesses and individuals at commercial banks increased by 2.5 biliion dpllars, reflecting largely extension of bank loans to busi nesses, consumers and owners of real estate. Current reports indicate that the expansion of credit to these gfoup'S of bank customers continues to be at an unduly rapid rate. Will the special reserve plan unduly restrict bank loans for productive purposes, fiand'loap production in catcliing up with demand and'thereby defeat its anti-inflationary purposed The present situation, as the Board emphasized in its Annual Reports for 1945 and 1946 and has been reemphasized time and again in the Federal Reserve Bulletin, is one of effective demand in excess of available supplies of goods, and of effective demand being continuously fed by still farther expansion of bank credit. There can be considerable reduction in the volume of demand without bringing it below available supplies of goods and upsetting production. Suoh a contraction of demand is essential to avoid further price increases, When a situation is finally reached where supply exceeds demand, that will be the proper time to encourage credit expansion. The Board’ proposal is not a one-way s street. It would not prevent banks from making essential loans. It, is designed, rather, to encourage banks to make loans out of the existing supply of loanable funds, replaoing one loan with another or selling securities which the public or other banks will purchase. It would ac cept the present volume of outstanding bank loans, amounting to nearly 37 billion dollars, as a huge revolving credit pool for the financi-ng of necessary production and permit banks to sell off other assets to make loans if this pool proved inadequate. What« it would not do is to permit banks to go on expanding the total volume of their loans by selling securities which only the Federal Reserve will buy, thereby creating additional reserves, which can be expanded' by the banking system into loans and investments amounting to six or more times their amount. Some would argue that bank loans at this time which are ac companied by increased production are not inflationary or are even antiinflationary. This argument -is of dubious validity because the money once created by loans and spent by the borrower finds subsequent uses which are beyond the control, of the banker or the borrower and are highly inflationary in character. In describing the recent loan expansion and its inflationary effects, the November issue of the Federal Reserve Bulletin statest ” . . to the extent that the loans have not facilitated increased • production, loan expansion haa accelerated inflation. In addition, the deposit funds created in the first instance by loans, whether for pro duction, consumption, or speculation purposes, hkve found many inflationary uses in subsequent transfers among holders.” - 6 What the plan cannot do*is to reduce the existing volume of bank deposits. The only way this tbtfil (tt be reduced is by paying off in the sti aggregate the public and private debt held by the banks as assets against these deposits. This is inevitably a sldwprocess at best. Could the special reserve plan be applied without resulting in a violent upset in the> Government'securities market?There is no reason why the transition could not be accomplished in an entirely orderly manner. The introduction of the proposal would be gradual. Any bank that might aot be able to meet th.a proposed special re serve requirement introduced in. this gradual way on the bag.is of their present holdings of short-term Government securities should get into a more liquid position. I should like to submit for the record a tab'le shelving for each major group of insured banks the relation of- Available Special reserve assets oh June 30, 1947, to seleoted levels for the proposed special re serve requirement. The 'table also shows the‘ percentage holdings of short-term Government' boxids which these grou'ps of banks held at mid-year, which were available for sale in the market to obtain eligible assets. This table makes clear the feasibility of the plan from an operating standpoint. Of course, statistics for individual banks would show wider variations in holdings of eligible assets than are indicated by the table for groups of banks, inasmuch as aggregates conceal individual bank varia tions. However, the table should allay fears that the plan" would have disruptive effeots. Would the imposition of the plan perhaps lead to deflation and depression^ A Tear expressed by some bankers who have discussed this Board's plan publicly -- ail’ thd^’ d include thofre who are prepared to renounce the use of monetary ‘ ‘ crefdit. ‘ fend controls ■ anti-inflation purposes — is that for the use of this plah might' upset the present state of high production and over-full emplfeyment and induce severe deflation and depression. The object of the plan is not to bring on deflation, but to minimize the deflation that is inevitable if we follow a let-nature-take-its-course policy. The Board recognizes that the proposal is no panacea and thbt there would be sofae risks in its use. But it would be an important re straint available to be used, and to be used only, in the event of bohtinued inflationary banking developments. Any anti-inflationary program involves some risk of precipitating a downturn and readjustmdttt- in busi ness conditions. It would have been better to have had the power available for use earlier. Had the Reserve System been given the additional power that was recommended in the special report in 1940, it would no doubt have used it in view of developments during and since the war. - 7 There is some feeling within the. Reserve System that it will be held responsible for deflation if even the mildest u.se of this- re quirement should happen to coincide with a deflationary readjustment. It is because of this possibility that the Board is not eager to have the grave responsibility for u&ing the authority. Nevertheless, the Board feels that the System should not shrink from bearing its share of responsibility for restraint on further inflationary developments in the oredit field.Is the special reserve plan strong enough to accomplish its expressed purposes.? We have been at pains to draw a plan that would be moderate and equitable and at the same time capable, when applied in conjunction with other monetary and fiscal policies, of accomplishing the purpose of re straining further inflationary expansion of bank credit. This is the sole objective of the plan, We think the authority would prove adequate for the purpose in view. It would immobilize, at the maximum, about one-half of the war time growth in bank holdings of Government securities which in turn equals about one-half of the total deposits of commercial banks. Since the im mobilization of this volume of Government securities would greatly reduce the banks' available secondary reserves, which they now feel free to draw upon, the plan would certainly make many banks more cautious about seeking or making new loans. It would end aggressive solicitation of new loan business in which a great many banks are actively engaged. Another source of pressure on the banks that would result from the plan is that most of the banks would have to sell higher-rate issues from their holdings of Government securities in order to expand loans and at the same time maintain reserve positions. This would be even more effective, from the standpoint of restraining banks, than would a rise in the discount rate. It would have this effect without causing a rise in interest rates on short-term Government securities. Thus, the proposed measure would be another step in a program of keeping the banks under constant pressure to restrain further credit expansion* It would not force liquidation or reduction in total bank credit outstanding. It would dis courage expansion* Can the plan be effective without permitting or encouraging a rise in interest rates? Somo bankers and others seem to believe that the only effective mechanism for the restraint of inflationary bank credit is a rise in the general level of interest rates. We doubt whether a reasonable rise in short-term interest rates under present conditions of business profitability - 8 - would deter borrowers. We do not believe it would effectively deter lenders. Our plan places the restraint primarily on the lender. However, to the extent that the interest rate mechanism can have some effect, the Board’ plan would not interfere with-it. Any increased cost resulting s from the plan would be borne by private borrowers who are increasing their indebtedness, and not by the Government which is reducing its indebted ness. This is the only reasonable solution to the interest rate problem. A general rise in interest rates high enough to halt the current infla tionary expansion of bank credit would not only entail large added costs to the Government but would have a disastrous effect upon the Government bond market. RATIOS OF AVAH,A3Li SPfiCXU ^ESERTTl ASSETS AND SHORT-TERI' TREASURY BONDS TO GROSS DEIj AND DEPOSITS, ALL INSURED COM1ERCIAL Bi»NKS, JUNE 30, 19U7 of gross d emand depos:its Deficiency or excess of specia1 reserve Treasury oonds due or cal lable¥ assets if re quiremen ts kre 10# Of "25i of demand demand and and ’ /xtnin within 10# of h% of 1 year 1-5 years time time deposits deposits 5ercentage 1 treasury Total ' bills,certifi JjbCCftflW' special cates, cash* .reserve and assets^ assets notes Central reserve city member baiiks New York Chicago 8.9 12.0 6.8 5.9 15.7 17.9 - 9.9 - 8.8 ♦ 5.5 + 7.2 5.7 U.2 27,8 23.U 10.3 9.3 6.7. 8.0. 12 .9 1U.U 20.6 10.3 8.8 17.5 18.7 3lu9 lit.U 20.3 23.2 27.7 16.6 13.3 22.9 7.1 9.U 8.3 6.U 7.U 8.7 7.1 6.3 7.3 6.0 6.1 7.6 + 7.1 + 6.5. + k.h + 3.0 + 9.U. +12.3 +15.5 + 5.9 + 5.U +12 .2. + 8.8 +17.9 5.1 3.5 1.5 7.1 2.5 3.5 5.9 5.1 3.7 lu8 2,2 6.1 18.3 31.7 22.6 33.7 32.5 2O.0 36.9 2U.2 28.0 19.1 18.U 31.3 15.2 7.2 22.h - 8.6 -11.8 -11.3 -rlil.2 * 7.0 3.9 - 2.7 -10.2 -10.7 - 3.7 - 7.1 - 6.1 +11,0 U,9 27.8 12.6 12.7 l&.t i?:a n;o 19.7 21,6 21 .1 23.8 26.1 21.3 17.6 18,8 6.U 9.3 io'.i 18.9 21.9 23.8 28.9 25.5 2U.8 32,1 25.5 3C.2 35,8 32.ii 25.5 27,1 Reserve city member bank? Boston Npw York Philadelphia Cleveland Richmond Atlanta CJucago ££• Louis Minneapolis Kansas City Dallas San Francisco Total 16.8 16,1 22.7 19.it 30.5 _ Country member banks Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St, Louis Minneapolis Kansas City Dallas San Francisco Total 1 1 .1 8.5 5,1 10.5 3.8 6.U 9.6 11.1 7.9 8.6 5.0 -U.l + 6,9 + 8,6 -11,5 U.3 5.0 - u.u +15.5 iu8 +15,9 - 3.5 +13.8 - 3.9 U.3 +13,6 - 3.3 3.9 + .6 +19.5 +1U.0 U.O - 3.2 +18,0 - .3 7.3 +25,2 3.2 + 9.3 +22,1 + 6,6 2.9 . — . J lt?,. -♦13*2-,..-... & . t - 2,8 JU,7 +15.3 (Continued on next page) 37.3 |*5f7; Ul.il U0.2 31.8 25.0 Ul.8 28.7 39.8 18.8 16,7 33.9 3U.3 RATIOS OF AVAILABLE S P D C M L RESERVE AS^TS- AND- -PHORT-TERJ TREASURY BOIJD* TO GTROSS DEMAND DEPOSITS, ALL INSTJRED COMIERCIAL BANKS, JUNE 30, 19U7 PertfStftsge of gross demafia deposiLtS Deficiency or excesg 'fredgory bonds due of specialTr^serve Treasury or callable®/ Assets if r e - r< bxllsj, Total quiremeuts are Excess .specidl certi2$% of 103 of cates, c^sh . reserve demand demand assets®/ assets and Within Within and and notes log'of 1 year 1-5 years h% of time time __ _ deposits deposits. Nonmember insured commercial banks Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St, Louis Minneapolis Kansas City Dallas San^rancisco Total 19.2 15.1 20.9 22.0 20.4 25.2 29.0 25.0 39.6 28.0 16.5 19.6 1.2 1.7 .3 4.8 .2 6.8 5,9 4.7 3.9 7,3 10,4 .6 24,7. 4,4 21.2 26,3 20,6 32,0 34.9 £9.7 (43.5 35,3 27,0 20,1 -15,8 -16,2 -11,1 - 6.3 - 9.2 ♦ 3.8 + 3.1 + 2,7 +12,8 + 8,6 + .8 - 16,6 + 5.9» + 3.6 + 8.3 ♦13.5 + 8.7 +20.7 +22,2 ♦18,9 +31.2 +24,6 +16,5 + 5.5 5.6 4.5 3.8 4.6 5.8 3,0 4.6 2,2 6,4 ?.9 .9 7.7 m s 39.9 3**6 37,6 *9.5 n.9 39.8 22,5 32.5 20,5 18,3 39,3 29.1 - 1.3 +16,9 4.2 31,0 ao,3 16,8 a/ ‘ Total of (1) balances with F&i'erai fteserve Banks', (2) excess of demand,'bal-' ~ ances due from over demand deposits due to bariks JLn United, States* ,(3) coin and currency, and (4) cash items in process of collection, less (5) the sum of <80 per cent of demand deposits and 6 per cent of time’ deposit?^ bf These ratios are based on estimated holdings of dtich Treasury bonds. STATEIIET'T BY CilAIRf-iAN ECCLES AS RESULT OF COHERENCE.. WITH .SECRETARY. SNYDER December 10, 194-7 • In view of the faot that s.ome of the press has emphasized a differ ence in viewpoint between Secretary Snyder and myself in regard ti> the Board’ so-called special peserve proposal, I would like, to take this oppor s tunity to clarify th-e record. I have discussed the matter with the Secretary. The fact is that the firea of agreement between us is much more complete than has been represented* Such difference as.exists is in evaluating the degree of restraint on inflationary expansion of bank credit that would be exerted by the special reserve requirement. He has expressed to this Committee some doubt as to its effectiveness. I am more sanguine about it. Wo both feol that whether the special reserve is needed at all or whether some stronger measure of restraint may bo needed next year depends on factors which cannot be determined in advance with certainty at this time. We aro in full agree ment: 1. That the most effective anti-inflationary measure has been and should continue to be a vigorous fiscal program to insure the largest possible budgetary surplus consistent with the Government’ obligations at home and s abroad. 2. That coupled with an intensified savings bond campaign, the program accomplishes two vital purposes. To the extent that savings of the public are invested in savings 'bonds, spendable funds are taken out of the market place at this time of excessive demand and insufficient supply and can be used to pay off maturing debt held by the banking system. Likewise, a budgetary surplus can be used to reduce bank-held debt. Both measures reverse the process by which the money supply was increased during the war and are effective anti-inflationary influences. 3* That the program which the Treasury and the Open Market Com mittee have been pursuing during the year has been effective and will con tinue to exert restraint during the next few months, when the Treasury will oontinue to have a substantial cash balance that can be used to reduce bankheld public debt. 4. That some additional restraint may be expected as a result of the joint statement of Federal and State bank supervisory authorities cautioning banks against overextension and inflationary lending. 5* That the problem will present a different phase when current debt-payment operations aro no longer available. If it appears that other restrictive steps are needed, increased reserve requirements or possibly some stronger measure may be necessary. 6. That thi3 will depend on the course of events and in part upon self-imposed restraint by the banking community, which has gained a broader understanding of the problem as a result of discussions before Congress and in the press. 7. That the Board’ proposal is not in any sense a substitute for s but a supplement to the fiscal program and direct action on other fronts where inflationary forces are generated l|ut cannot lee corrected by monetary and fiscal policy alone. - 2 - 8, That u n d e r p r esent and prospective conditions it is essential to ma i n t a i n the established 2**l/2 per cent rate on long-term marketable Government securities# 9# That restraints should be reinstated on instalment credit. The area of disagreement, therefore, narrows down to w h e t h e r the special reserve w o u l d be appropriate if additional measures prove necessary to liinitx the n o w unrestricted access of the banking system to reserves upon w h i c h a multiple expansion of ban k credit can be built. December 10, 19A7. In view of the fact that some of the press has emphasized a difference in viewpoint between Secretary Snyder and myself in regard to the Board1s so-called special reserve proposal, I would like to take this opportunity to clarify the record. discussed the matter with the Secretary. I have The fact is that the area of agreement between us is much more complete than has been represented. Such difference as exists is in evaluating the degree of restraint on inflationary expansion of bank credit that would be exerted by the special reserve requirement. Committee some doubt as to its effectiveness. He has expressed to this I am more sanguine about it. We both feel that whether the special reserve is needed at all or whether some stronger measure of restraint may be needed next year depends on factors which cannot be determined in advance with certainty at this time. We are in full agreement: 1* That the most effective anti-inflationary measure has been and should continue to be a vigorous fiscal program to insure the largest possible budgetary surplus consistent with the Governments obligations at home and abroad. 2. That coupled with an intensified savings bond campa the program accomplishes two vital purposes. To the extent that savings of the public are invested in savings bonds, spendable funds are taken out of the market place at this time of excessive demand and insufficient supply and can be used to pay off maturing debt held by banking system. - 2 - Likewise, a budgetary surplus can be used to reduce bank-held debt. Both measures reverse the process by which the money supply was increased during the war and are effective anti-inflationary influences. 3. That the program which the Treasury and the Open Market Committee have been pursuing during the year has been effective and will continue to exert restraint during the next few months, when the Treasury will continue to have a substantial cash balance that can be used to reduce bank-held public debt. 4. That some additional restraint may be expected as a result of the joint statement of Federal and State bank supervisory authorities cautioning banks against overextension and inflationary lending. 5. That the problem will present a different phase when current debt-payment operations are no longer available. If it appears that other restrictive steps are needed, increased reserve requirements or possibly some stronger measure may be necessary. 6. That this will depend on the course of events and in part upon s&lf-imposed restraint by the banking community, which has gained a broader understanding of the problem as a result of discussions before Congress and in the press. - 3 - 7. That the BoardTs proposal is not in any sense a substitute for but a supplement to the fiscal program and direct action on other fronts where inflationary forces are generated but cannot be corrected by monetary and fiscal policy alone. 8. That under present and prospective conditions it is essential to maintain the established 2-1/2 per cent rate on long-term marketable Government securities. 9. That restraints should be reinstated on instalment credit. The area of disagreement, therefore, narrows down to whether the special reserve would be appropriate if additional measures prove necessary to limit the now unrestricted access of the banking system to reserves upon which a multiple expansion of bank credit can be built.