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STATEMENT BEFORE THE HOUSE BANKING AND CURRENCY COMMITTEE AUGUST 2, 1948 * serves that may be necessary to combat this inflationary situation. As an emergency measure, however, die bill would be adequate to meet the immediate, need for additional authority to deal with reserves. In thus stating the views of the Board on these two titles of direct concern to the System, I do not want to create the impression that action in the credit field alone will solve our inflationary problems. Other areas, particularly a budgetary surplus, are more important. Chairman Wolcott and Members of the Committee: I deeply appreciate the consideration your Chairman has extended to me in making the time of my appearance here as convenient as possible. Although Congressman Wolcott had asked me to come before you earlier, he kindly consented in deference to my request to wait until this morning. I therefore acceded to the urgent request of Senator Tobey to appear before the Senate Banking and Currency Committee last Thursday morning. Since your Committee has been fully occupied with the testimony of Mr. Porter, I trust that the postponement until this morning has not caused you inconvenience. On the evening before going to the Senate Committee, I canvassed the members of the Board by telephone to ascertain their views on the two titles of the proposed anti-inflation bill which relate to consumer credit and bank reserves. The members of the Board agreed unanimously to the following statement: A N T I - I N F L A T I O N A C T OF Since I presented that statement to the Senate Committee, the Board has this morning had an opportunity to meet and to discuss the proposed legislation at length. The Board is agreed that the inclusion t>f the nonmember bank's is essential to make the proposed legislation fully effective. I have also been in touch with several of the Presidents of the Federal Reserve Banks, and others. There is strong concurrence with the statement that it would be very unfair to single out member banks to carry the additional reserves to combat this inflationary situation. This is particularly true of the Presidents from those districts where there are large numbers of nonmember banks, which would be given a competitive advantage as against roember banks. It njight result in a serious loss of membership in the System and weaken the effectiveness of its policies. As you know, the effective reserve requirements in most states are substantially below those carried by member banks, and thus nonmember banks have greater latitude and earning power. The question of the inclusion of nonmember banks is* very important and we would appreciate it greatly if the Committee would give this problem serious consideration. Unquestionably from the point of view of effectiveness as well as equity the proposed legislation should apply to all commercial banks. Now, I would like to give you some of my personal observations concerning the impact of the inflationary forces on our credit control mechanism. These remarks are substantially the same as those I made last week before the Senate Banking and 1948 The proposed "Anti-Inflation Act of 1948" includes two titles relating to credit controls. Both are, in substance, part of the comprehensive antiinflationary program which the Board of Governors has previously recommended to Congress. Title One relates to regulation of consumer credit and Tide Two relates to bank reserves. As you gentlemen know, the proposed regulation of consumer credit is identical, except for the date, with the bill passed by the Senate, and acceptable to the Board of Governors as one part of an overall program. The proposal with respect to bank reserves is similar to that advanced by the Board in April, except that the increased requirements would be applicable only to member banks, whereas the Board had recommended that they be made applicable to all commercial banks. This is a significant difference. We feel deeply that it is not fair to member banks in their competitive relations to nonmember banks to require that they be singled out to carry the additional re* Presented by Thomas B. McCabe, Chairman, Governors of the Federal Reserve System. Hoard of I STATEMENT BEFORE T H E HOUSE B A N K I N G A N D CURRENCY these forms of money and potential money is now more than three times the prewar total. The productive capacity of the nation was largely devoted to war purposes for almost five years. At the peak more than 50 per cent of our record production was for war use. While millions of people were coming into possession of more money than any people had ever had to spend and save, there was a scarcity of things to spend it for. Consequently two great backlogs rapidly accumulated—a backlog of unfilled wants and a backlog of money savings. With removal of controls this pent-up spending power, plus an unprecedented volume of current income were turned loose in a market characterized by scarcities and shortages. Prices, wages, and profits rose rapidly, and the spiral of inflation was on its way. At present, with a supply of money or potential money readily available to buy the current output of goods and services about three times the prewar level, the overall physical volume of production of goods and services, so far as it can be measured, is probably little over a half larger than the prewar maximum. Production, it is important to emphasize, is practically at capacity; there has been little increase in its physical volume during the past year and a half, notwithstanding the great pressure of unsatisfied demands, expanding credit, and rising prices. Prices on the average has risen by nearly threefourths since before the war and two-thirds of this increase has occurred in the past two years. The dollar value of the total national product, at nearly 250 billion dollars' a year, is over two and half times the prewar maximum. On the basis of the present volume of money, the turnover of which is low relative to past periods of high activity and could be greatly increased, prices could rise even further. Further expansion of bank credit, the capacity for which is tremendous, would add to the already excessive moneys supply and could do little to increase output. Currency Committee, except for elaborations on a few points on which questions were asked by the Senators. Consideration of the pressures now at work in our economy must be based on an understanding of the fact that the financial forces generated in a great war are among the most disrupting factors that can affect the economic system. We are now dealing, and for years shall be forced to deal, with the monetary backwash of the greatest and most costly war of all time. We are faced with the problems of liquidating the effects of that war upon our own economy, and indeed upon the economy of the world. *If history is a guide, we must realize that these problems will not be solved in a day. They will extend over a number of years—how many depends upon how wisely and how courageously we devote ourselves to the task. The financial cost of the last war, if all conceivable items of cost were included, perhaps could never be accurately summed up. Suffice it to say that our national debt rose to approximately 280 billion dollars and is still above 250 billion. The solution of our present problems does not require us to determine whether the debt should have risen so high, whether we should have spent so much, whether we should have taxed ourselves more and borrowed less, or whether the pattern of our borrowing was well conceived. What has been done is in the realm of fact and the consequences 'must be dealt with accordingly. One of the important facts is that the creation of our national debt resulted in a tremendous expansion of the money supply. While the Government borrowed vast sums from nonbank lenders, other vast sums were supplied by the commercial banking system. And let me say right here that this nation owes a debt of gratitude to commercial bankers generally for their service in the task of financing the war. The rapid expansion of the money supply which resulted from their contributions must not be permitted to rise and plague them as if they had cunningly contrived it for their own selfish ends. Nevertheless, as a net result of war financing, there were increases in the public's holdings of demand deposits and currency from less than 40 billion in 1940 to 110 billion at present; of time deposits from less than 30 billion to nearly 60 billion; of United States Government securities, which are readily convertible into money, from a few billion to over 90 billion. The total supply of COMMITTEE PUBLIC DEBT HOLDINGS POSTWAR C R E D I T PROVIDE BASIS FOR EXPANSION Capacity for still further credit expansion also grew out of war finance. In helping to finance the Government's large war expenditures and to provide the money supply demanded by the expanding and abnormal war economy, the commercial banks of the country find also the Federal Reserve Banks 2 STATEMENT BEFORE T H E HOUSE B A N K I N G A N D CURRENCY COMMITTEE greatly expanded their holdings of Government regulate the supply of money and credit to the securities. Commercial bank holdings of Govern- justifiable needs of a stable, full-employment ment securities of all types increased from about 16 economy. As long as various holders of Governbillion in 1940 to a peak of 90 billion at the end of ment securities endeavor to sell more of their hold1945 and then were reduced during 1946 to 70 ings than other investors are willing to buy, the billion, largely by Treasury use of its excess bank Federal Reserve Banks must purchase the balance deposits to retire debt. Subsequently, to meet the and these purchases create bank reserves. It is my view that the System is obligated to demands of rapidly expanding private economy in the postwar period, banks have further reduced maintain a market for Government securities and their holdings of Government securities, but they to assure orderly conditions in that market, not still hold 65 billion dollars of them. Other in- primarily because of an implied commitment to vestors have also sold or redeemed some of the wartime investors that their savings would be holdings of Government securities in order to obtain protected, nor to aid the Treasury in refunding maturing debt, but because of the widespread funds for other uses. Sales of U. S. Government ^securities in the mar- repercussions that would ensue throughout the ket by banks and others have not been absorbed by economy if the vast holdings of the public debt purchases on the part of other investors. In order were felt to be of unstable value. to keep the prices of Government securities from P O L I C I E S A D O P T E D TO R E S T R A I N I N F L A T I O N A R Y declining, the Federal Reserve System has conCREDIT EXPANSION tinued to carry out its wartime responsibility of supporting the,market by buying at relatively stable The Federal Reserve System and the Treasury prices securities offered for sale and not purchased have, nevertheless, been able to adopt some policies by others. The result of these purchases by the designed to offset the expansive effect on bank Federal Reserve Banks is to supply additional re- reserves of market purchases of Government seserve funds to banks. Because of the fractional curities by the Federal Reserve System. The first system of reserve requirements, these new reserves and quantitatively more effective of these measures in turn provide the basis for an increase in bank has been the use of the Treasury surplus to retire credit that may be many times the amount of new maturing securities, particularly those held by the reserves obtained. Federal Reserve Banks. The debt retirement proIn the postwar period these reserves supplied the gram was made possible first by a large cash balbasis for an increase in bank credit in response to ance built up by the Treasury in the Victory Loan an active demand for loans to finance the operations drive in 1945 and later by a substantial surplus of and expansion of the business system in an era of cash receipts over expenditures. In paying out a high demand, accelerated activity, rising costs, and large part of the excess cash collected from the pubrising prices. There is ample evidence that bank lic to the Federal Reserve for retirement of debt, credit is also being used for purposes ordinarily that amount of money was eliminated from the served by the capital market. As a result, despite a money supply and also from bank reserves. reduction of 25 billion dollars in the volume of GovAs a second measure of restraint, about a year ernment securities held by commercial banks, de- ago the Federal Reserve and the Treasury empdsits and currency held by the public have in- barked upon a program of permitting yield rates creased by an^additional 15 billion since the end of on short-term Government securities to rise from 1945. This has been largely the result of an in- the very low levels at which they had been pegged crease of 15 billion in bank loans. during the war. The purpose of this action was to The Board of Governors has kept the Congress encourage banks and others to invest available funds and the public informed concerning these results in short-term .securities. This enabled the Federal of supporting the market for Government securities. Reserve to reduce its holdings of short-term secuIt has repeatedly pointed out that the effect has been rities and thus offset the effect on reserves of its to increase significantly, and it may be dangerously, purchases of longer term bonds. The rate on 90the money supply. The need for market support day Treasury bills rose from % of one per cent to of Government securities has greatly increased the about 1 per cent, and that on one-year Treasury problem faced by the System in adopting policies to certificates from % to V/s per cent. The Federal 3 S T A T E M E N T BEFORE T H E HOUSE B A N K I N G A N D CURRENCY COMMITTEE Reserve Banks early in 1948 raised their discount mortgages and investments other than U. S. Government securities during the past year. In the rates from 1 per cent to 1 lA per cent. Late in 1947, market yields on Government bonds aggregate, these assets of selected groups of financial also rose, that is; prices of bonds, which had been institutions increased by 8.6 billion dollars in the selling at large premiums, declined in the market. period, of which 6.4 billion was met by receipts of This adjustment was in large part inaugurated by new savings from the public and 2.2 billion by a sales by financial institutions to obtain funds to reduction in their holdings of Government secuinvest in corporate securities and mortgages, but it rities. Nonbank investors, as a group, sold and rewas accelerated by sales made in fear of further de- deemed bonds, but purchased certificates and bills, clines in prices of bonds from their high levels. In reflecting increased popularity of these issues with order to check this decline, the Federal Reserve the rise in rates. Life insurance companies subSystem adopted a policy of freely purchasing bonds stantially increased their holdings of Government at an established series of prices, which maintained securities during the war and then in the postwar yields in accordance with a pattern ranging from period reduced these holdings while increasing l l / s per cent for one-year issues to 2l/z per cent for their mortgages and other investments. Sales of Treasury bonds by nonbank investors the longest-term bonds. This pattern kept the prices of all except a few very short issues of secu- and by banks in the past year have been largely purchased by the Federal Reserve System. The rities at par or higher. It may be of interest to review credit develop- System purchased 5.7 billion dollars of Treasury ments and the effects of these policies during the bonds in the market and also purchased in the marpast twelve months. In the year ending June 30, ket a net amount of about 2.6 billion dollars of notes 1948, commercial banks showed a small increase and certificates, but sold on balance nearly 4 billion in their deposits and their total loans and invest- dollars of bills to banks and other investors. In the ments, although there were some wide fluctuations same period the Treasury redeemed for cash about during the period. In the twelve months, com- 5 billion dollars of maturing issues of various kinds mercial banks increased their total loans and their held by the Federal Reserve Banks. With all of holdings of corporate and State and local Govern- these wide shifts in holdings of different types of ment securities by a total of 7 billion dollars. Most securities, there was only a small net decline in the of this growth occurred in the latter half of 1947 System's aggregate holdings of Government secuand was accompanied by an expansion in bank de- rities, although the total fluctuated considerably posits and reserves. In the early months of 1948, from time to time. The purpose of this detailed survey of figures is ho\vever, deposits were withdrawn to make seasonal heavy tax payments, which were not offset by Treas- to illustrate how shifts in holdings of the public ury expenditures. Banks met these needs largely by debt are being used to finance inflationary spendreducing their holdings of Treasury bonds. Some ing, and how Federal Reserve and Treasury policies maturing bonds were exchanged for certificates and endeavor to offset these tendencies. Treasury use of a part of these issues were sold. At the same time surplus funds to retire securities held by the Fedbanks in general purchased added amounts of eral Reserve drains reserves from banks and makes Treasury bills, an indication of the effect of the it necessary for them to sell securities if they wish higher short-term rates in attracting available funds. to maintain their loans, and even more so if they Banks also continued to increase their loans in the want to expand credit. The higher rate on Treasfirst half of 1948 by about 1.7 billion dollars—a ury bills encourages banks and other holders of somewhat slower rate of growth than in 1947. liquid funds to buy bills rather than invest in other Most of the dollar increase in bank loans during assets. Since most of the bills have been held by 1947, particularly in the last half, was in commercial the Federal Reserve, a reduction in System holdings and industrial loans, but the increases in consumer is made possible and bank reserves are thereby loans and real estate loans showed larger percentage absorbed. Nevertheless, sales of bonds to the Fedincreases in 1947 and have continued to expand in eral Reserve, primarily by nonbank investors, have been so large that the restrictive effect of the other 1948. Savings institutions, particularly insurance com- policies has been fully offset. A third method of restraint used by the Federal panies, also considerably expanded their holdings of 4 STATEMENT BEFORE T H E HOUSE B A N K I N G A N D CURRENCY Reserve authorities during the past year was to increase reserve requirements at central reserve city banks in New York and Chicago by 2 per cent of demand deposits in February and again in June. This added about a billion dollars to member bank required reserves and immobilized that amount of bank assets. The effects of these changes, however, were concentrated on New York City and Chicago banks, where loan expansion has been less than at other banks. Under existing law there is no further power to increase requirements except in central reserve cities. It should be mentioned that bank reserves have been supplied in the past year by an inflow of gold amounting to 2.2 billion dollars and also by a decline of about half a billion in currency in circulation. A temporary increase of 1.3 billion in Treasury deposits at the Federal Reserve offset in part these factors. The total growth in reserves was 1.4 billion, sufficient to cover the increases in reserve requirements at central reserve city banks and also increased requirements resulting from deposit growth. The Federal Reserve System was not able through its policies to prevent some continued expansion of bank credit. by flotation of new securities. Overall demands for funds may continue in excess of the current volume of savings readily available lor lending for such purposes. To help meet the demands for credit and capital, corporations, individuals, and financial institutions will sell some of their holdings of Government securities and also increase their borrowings from banks. If these tendencies continue, sales of Government securities by nonbank investors may exceed 1.5 billion in the last half of 1948 and perhaps be much greater early in 1949. These sales will keep the Government bond market under pressure and require support purchases by the Federal Reserve, if the policy of maintaining the 2 x/i per cent yield level on long-term Treasury bonds is continued. Thus additional reserve funds would be made available to banks which, unless otherwise offset, could sustain a further very large inflationary expansion of bank credit. Additional reserves supplied through the gold inflow may be approximately offset by the drain resulting from seasonal currency demands. To avoid an abundance of reserves, an easy shortterm money market, and continued inflationary credit expansion, positive measures to absorb re- , serves will be needed. In view of the pressure of current demands, the continued shortages of many goods, the limited capacity for increased output, and the available accumulations of liquid assets, further credit expansion will add to the pressure for rising prices. Continued credit expansion will store up trouble for the future and make the inevitable adjustment more dangerous for the stability of the economy. This course of economic and monetary developments has been the source of increasing concern to th Federal Reserve authorities. We are convinced that, so long as the present situation lasts, it is important to restrict further credit expansion and to promote a psychology of restraint on the part of both borrowers and lenders. To keep the reserve position of banks under pressure and discourage further inflationary credit expansion will require carefully coordinated operating measures on the part of both the Treasury and the Federal Reser\e System. Of the three sets of measures used to restrain the growth of bank Reserves during the past year— namely (1) use of the Treasury cash surplus to retire Federal Reserve-held securities, (2) reduction PROSPECTIVE D E M A N D S FOR C R L D I T Economic prospects indicate a continuation ot strong inflationary pressures during the next several months and perhaps for a much longer period. Individual incomes have continued at a high level, with a tendency to increase as prices and wages have risen and employment has grown with the labor force. Consumer spending, based on current incomes, the use of past savings, and borrowing, also has continued to expand. Construction volumes seem likely to remain for a while at capacity levels, with possible further rises in prices. Business expenditures are also expected to continue in large volujne. Government expenditures are increasing, while the recent income tax reduction will lower receipts, thereby sharply reducing the Treasury surplus. Continuation of these tendencies will call forth further credit expansion. Borrowing by consumers and home-owners will no doubt continue to expand and thereby add to consumer spending and to demands for housing, which are already excessive. Prospective large outlays by business for expansion of inventories and plants will probably exceed internal funds available and also amounts obtained COMMITTEE 5 STATEMENT BEFORE T H E HOUSE B A N K I N G A N D CURRENCY in Federal Reserve holdings of Treasury bills through a rise in short-term rates, and (3) increases in reserve requirements at central reserve city banks —the first and most important has been greatly reduced in its potency and the third has been almost wholly exhausted. Whereas the Treasury showed an excess of cash income over cash outgo of 9 billion dollars in the fiscal year 1947-48, the prospects for the current year, on the basis of very tentative and unofficial estimates, are for a cash surplus of only about 3 billion, most of which will be concentrated in the first quarter of 1949. This difference in the surplus reduces considerably the most important antiinflationary influence in the situation during the past year. The Treasury cash surplus was a particularly effective device because it exercised a drain on bank reserves. As a result the banks losing reserves had to sell securities in order to maintain their reserve positions. While under these pressures they are less likely to be seeking new loans -and in some cases less willing to meet loan applications. POSSIBLE M K A S U R E S OF may merely enable the borrower to secure parts that otherwise would have been bought by another firm. From the point of view of the economy as a whole, the loan has increased the demand for goods but it may not have increased total supply at all, with a bidding up of prices as the only result. Basically, that is why I believe that self restraint, though important, is inadequate to check a strong inflationary development. Another reason is the force of competition not only among banks but among all lenders. We have in the United States 14,000 commercial banks and many thousands of other lending agencies. If, because of concern for the general interest, a bank should refuse to lend even to a good customer, this does not mean that the customer will not secure the funds. It may merely result in a permanent loss of the customer to some other lender. And unfortunately the new lender may secure the funds from sale of Government securities, with the result that the loan may be just as inflationary as if the bank had made it in the first instance. I want to emphasize that I support strongly the self-restraint program developed by the American Bankers Association and would like to see it pursued aggressively, not only by banks but by all lenders. It is an important step in the right direction. Primarily for the reasons I have mentioned, however, I do not think it can do the job alone. Another approach to the problem is through control over member bank reserves. Bank credit cannot expand unless banks acquire or have reserves on which to expand. One way in which the System has supplied reserves has been through purchases of long-term Government' securities. A means of restraint would be for the System to limit its purchases of such securities either by refusal to buy or by reducing its prices sufficiently to attract other purchasers. As you know, the System has made a public commitment to support the 21/2 per cent yield level on long-term Government bonds for the foreseeable future. I gave my reasons for subscribing to that commitment when my confirmation was under consideration by the Senate Committee on Banking and Currency. Although that commitment substantially limits our freedom of action, I believe there is a better way, to operate against credit expansion than now to abandon that commitment. Our basic problem is to absorb reserves. Increases in reserves may be anticipated from three principal sources: (1) imports of gold, (2) return RESTRAINT This brings us to the various ways in which restraint may be exercised over credit expansion. The first means is voluntary self restraint on the part of borrowers and lenders. I am convinced that the voluntary program originated and actively developed by the American Bankers Association has had a significant effect in developing a more cautions and critical attitude on the part of bankers toward so-called unproductive or speculative loans. If inflationary pressures were mild, voluntary restraint might be adequate to hold them in check. Continued and intensified voluntary restraint will make our joint task easier. There are a number of reasons, however, why voluntary restraint cannot be relied upon to do the whoje job alone when inflationary pressures are as strong as they are at the present time. Perhaps the most important reason is that a loan which may appear productive when viewed by itself may not add to the total output of the economy as a whole. For example, a customer may increase his production by borrowing funds to purchase needed parts that are in short supply. Such a loan would appear to be productive from the individual point of view of both the borrower and the lender. But will the loan increase the supply of the parts or total output? If all resources are being used to capacity, the loan COMMITTEE 6 STATEMENT BEFORE T H E HOUSE B A N K I N G A N D CURRENCY of currency from circulation, and (3) purchases of Government bonds by the Federal Reserve Hanks to support the long-term yield level. The principal problem before the System is to absorb or offset reserves arising from these sources. The only way it could do this effectively under present authority is to liquidate part of its holdings of Government securities. It would be necessary, of course, to sell them at prices the market would pay. The System has a large portfolio of bills, certificates, and other short maturities that it could use. If the inflationary demand for bank credit is strong, sale of these holdings to absorb reserves would result in a further stiffening of short-term interest rates. The Open Market Committee of the Federal Reserve System feel that a policy of endeavoring to sell short-term securities in order to absorb any additions to reserves is a necessary and desirable step. If an increase in the short rate should result, it would tend to attract funds from other uses to investment in short-term Government securities. As I have pointed out, the policy of allowing short-term rates to rise was begun about a year ago and has had some success. At this point the necessity for teamwork between the Treasury and the Federal Reserve becomes apparent. I am keenly sensitive to the necessities of the Treasury in its task of managing the public debt. I thoroughly understand the Treasury's responsibility to keep the interest cost of the debt as low as possible consistent with all relevant factors. I know that the Treasury Department is equally sensitive to the responsibilities of the Federal Reserve in the field of monetary and credit policy. The problems of mutual concern to the Treasury and the Reserve System in their respective fields are being approached in a continued spirit of cooperation. The rediscount rate is another instrument of policy in the short-term market. It should not be written off. Although its effectiveness is diminished in times like these when the volume of member bank borrowings is small, and when banks can readily obtain needed funds by selling some of their large holdings of Governmnt securities, higher discount rates would have some restrictive effect. If, for example, the yield on short-term Government rises, it would become appropriate under these circumstances to increase the discount rate. This action would discourage the market from reacquiring through the discount window any funds COMMITTEE that had been withdrawn through the disposal by the Reserve System of short-term Governments. An increase in the discount rate has great psychological effect. Each increase repeats the warning that credit is in need of continued restraint. Changes in the Federal Reserve* discount rate and open market operations supplement each other as necessary parts of an overall credit policy. These two related instruments influence the total volume of reserves ot member banks. The third general instrument—reserve requirements—is designed to influence the amount of bank credit that can be based on a given volume of reserves. An increase in requirements immobilizes reserves and makes them unavailable for further lending and investing. As you know, the Hoard of Governors has on previous occasions presented various ways of dealing with the problem of reserves or immobilizing certain bank assets. The method proposed in the bill before you is simple and direct, and involves no departures from existing principles. The bill would authorize the Board of Governors to increase by 10 and 4 percentage points the reserves that member banks may be required to maintain against their demand and time deposits, respectively. The authorization would be granted for a period of two years. As 1 have already explained, We feel deeply that it is not fair to member banks in their competitive relations with nonmember banks to require that they be singled out to carry the additional reserves that may be necessary to combat this inflationary situation. I earnestly hope that Congress will, during this interval, reconsider the whole structure of reserve requirements, possibly along the lines developed recently before the Joint Committee on the Economic Report. I should like to indicate briefly what can and cannot be accomplished through increases in reserve requirements. Changes in requirements canncx, of course, be considered in isolation. They must be related to other instruments of policy. In practide they are closely related to open market operations. One method that banks use to adjust their positions to the pressure exerted by an increase in requirements is to sell Government securities. To the extent that these are purchased by the Federal Reserve, new reserves are created which meet the higher requirements. This is not the whole story, nor does it happen invariably, but it does illustrate the complexity of our problem. An increase in require7 S T A T E M E N T BEFORE T H E HOUSE B A N K I N G A N D CURRENCY of restraint over credit expansion. The proper handling of this problem requires the most careful management. It can be facilitated by the extension of the System's powers, as proposed in the bill before you, which extension is thoroughly consistent with existing powers and traditional methods. As I have pointed out, there are possibilities and prospects for a continuation of inflationary pressures which will call forth additional demands for credit. I feel confident that the Federal Reserve authorities will use their existing powers to the fullest extent possible to restrain these tendencies without depriving the economy of the credit needed to maintain production and employment at the highest sustainable levels. We would endeavor to use the additional powers proposed in the same way. Finally, it should be emphasized as strongly as possible that action in the monetary field alone cannot readjust the unbalanced relationships within the economic structure which have already been created by inflationary forces, and cannot check further inflationary pressures arising from nonmonetary causes. The additional powers sought would enable the Reserve System to exert a very necessary degree of restraint upon the now unrestrained expansion of credit. For that reason they are urgently needed, even though they are not and should not be regarded by the Congress or by the public generally as a cure-all. ments immobilizes a larger portion of the assets of member banks and makes them unavailable for sale in order to obtain funds to increase loans. It, therefore, reduces the liquidity of banks and lowers the ratio of multiple credit expansion that can occur on the basis of any increase in available reserves. The purpose of increasing authority over reserve requirements is not to obviate the possible need for open market operations and a rise in short-term rates. That problem would still be with us. CONCLUSION In conclusion, I should like to state emphatically the Board's view that the use of its powers over the supply of reserves under present conditions should be directed toward restraining further credit expansion and not toward" forcing liquidation of the outstanding volume of credit. The Federal Reserve System was established to provide for flexibility in our monetary system. It was not designed to make available any amount of money that borrowers might demand without regard to the productive capacity of the economy and the speculative nature of the commitments. The System would be derelict in its duty if it did not exercise a proper measure of restraint. Expansion of the public debt because of war and the necessity of maintaining a degree of stability in the value of the vast holdings of that debt by financial institutions and individuals has confronted the System with formidable difficulties in the exercise COMMITTEE 8
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