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Sent to Press 5:15
July 18, 1950.
STATEMENT ISSUED AT SALT LAKE CITY, UTAH,
BY
M. S. ECCLES, MEMBER,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
July 18, 1950*
Because of the Korean crisis a dangerous inflationary situation is
rapidly developing* This is due to the urgent and increasing military needs
and a rapid stepping up of business and civilian demands on top of an economy
that has been showing inflationary pressures for some time, especially in the
durable goods and housing sector* Price inflation is sure to develop when the
demand for goods and services supported by money and credit exceeds the supply.
The available supply of money and credit can be increased only by the banking
system making loans to or buying securities from either the Government or the
public. In the present situation it is, therefore, imperative, if price inflation is to be controlled, to stop the overall growth of loans and investments
by the banking system, including the Federal Reserve. This can be promptly
brought about if the Government will adopt without delay the required monetary
and fiscal program.
Such a program would materially reduce civilian demand and thereby
increase the supply of goods and labor available for the military needs without
the necessity of putting the country under all of the onerous war-time direct
controls, unless the Korean situation develops into World War III. Even then,
it may not be necessary to go all the way because it would likely be an
atomic war that would not last long. In any case, the following program is
an urgent necessity and should be carried out immediately, no matter what
action may be called for later:
Monetary and Credit Program
1. Request every bank to unite in a nation-wide voluntary
agreement to stop bank credit expansion which has been growing
rapidly by limiting new loans made by any bank to the amount of
loans paidj meet the gain or loss in its deposits by buying or
selling Government securities accordingly. Such a bank program
would stabilize the Government securities market, as well as the
general credit situation* If this voluntary program is not carried out, then the Federal Reserve should increase reserve requirements to the legal limit and get additional powers if necessary.
2* Request the insurance companies and the mutual savings
banks not to sell their Government securities for the purpose of
getting money to increase their loans and other investments. This
would avoid putting pressure on the Federal Reserve to support the
Government securities market, thereby creating new deposits and
excess reserves in the banking system.
-23# Require the R»F»C* to stop making loans, except when they
are for military purposes and cannot be gotten elsewhere»
U # Reduce the effective demand for housing by requiring
F.H»A» to rescind its recent reduction in interest rates and reduce its insurance coverage, thereby requiring home owners to
make larger down payments, slowing up the approval of mortgage
guarantees by the Veterans Administration and mortgage insurance
by the F«H»Ao, requiring the Federal National Mortgage Association to limit its purchases of insured and guaranteed mortgages
to the amount sold»
5® Reduce the effective demand for consumers durable goods
by giving to the Federal Reserve control of consumer credit terms,
which should be made sufficiently restrictive as to down payment
and maturity to curb further growth of the huge volume now outstanding*
6 a Require the Treasury to permit short-term interest rates
to rise moderately and thereby take off the pressure for long-term
interest rates to go down« This change of policy would make the
Government securities more attractive to the public» It would reduce the need of the Federal Reserve supporting the market for
Government securities which creates excess money and makes impossible the restrictive monetary policy that is called for»
The above six-*point program has the advantage that it can be
put promptly into effect or rescinded to the extent needed without
requiring legislation, with the exception of consumer credit regulations«
Fiscal Program
1»
Make no reduction in taxes this year»
2. Increase second and third class postal rates enough to
meet large Post Office deficits.
3» Close tax loopholes previously recommended by the Treasury, especially those where the Government is losing large amounts
of revenue*
lu Reimpose a corporation excess profits tax of 7£> per cent
on all net earnings above 10 per cent on the first five million
of invested capital and eight per cent on any balance, allowing a
five thousand exemption of earnings subject to excess profits
tax»
5« Request organized labor to make no demands for wage
increases while excess profits tax is in effect«,
6« The Treasury should offer promptly to non-bank investors
long-term non-marketable bonds, G type, 15-year maturity, interest
rate 2-«l/2 per cent«
The above fiscal program is essential if the Government
deficit is to be held to a minimum so that it can be financed
outside the banking system*
This is also an essential requirement of the monetary and credit
program suggested if it is to be successful* The present situation calls
for the people to save their money and purchase more bonds«» They cannot be
expected to do this unless the Government takes the necessary action to protect the purchasing power of the dollar (their money) from further price
inflation, which has already been permitted to go too far* The vigorous
credit, monetary and fiscal program above outlined will accomplish this
purpose without the need of imposing the objectionable harness of direct
controls«
1
L E A S E D v.".'-: SERVICE"
R E C E I V E D /W W A S H I N G T O N
1950 JUL 18
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BOARD of governors
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BECAUSE QF THE KOREAN CRISIS A DANGEROUS INFLATIONARY
SITUATION IS RAPIDLY DEVELOPING. THIS IS DUE TO THE URGENT
AND INCREASING HllllJllflWt MILITARY NEEDS AND A RAPID
STEPPING UP OF BUSINESS AND CIVILIAN DEMANDS ON TOP OF AN
ECONOMY THAT HAS BEEN SHOWING INFLATIONARY PRESSURES FOR
SOMETIME, ESPECIALLY IN THE DURABLE GOODS AND HOUSING SECTOR.
PRICE INFLATION IS SURE TO DEVELOPE WHEN THE DEMAND FOR
GOODS AND SERVICES SUPPORTED BY MONEY AND CREDIT EXCEEDS
THE SUPPLY* THE AVAILABLE SUPPLY OF MONEY AND CREDIT CAN BE
INCREASED ONLY BY THE BANKING SYSTEM MAKING LOANS TO OR
BUYING SECURITIES FROM EITHER THE GOVERNMENT OR THE
PUBLIC. IN THE PRESENT SITUATION IT IS, THEREFORE,
IMPERATIVE IF RR ICE INFLATION IS TO BE CONTROLLED, TO STOP
THE OVERALL GROWTH OF LOANS AND INVESTMENTS BY THE BANKING
SYSTEM, INCLUDING THE FEDERAL RESERVE. THIS CAN BE PROMPTLY
BROUGHT ABOUT IF THE GOVERNMENT WILL ADOPT WITHOUT DELAY THE
REQUIRED MONETARY AND FISCAL PROGRAM.
SUCH A PROGRAM WOULD MATERIALLY REDUCE C I V ^ U A N ^ M A N D AND
THEREBY INCREASE THE SUPPLY OF GOODS AVAILABLE FOR THE
MILITARY NEEDS WITHOUT THE NECESSITY OF PUTTING THE COUNTRY
UNDER ALL OF THE ONEROUS WARTIME DIRECT CONTROLS, UNLESS THE
KOREAN SITUATION DEVELOPS INTO WORLD WAR III. EVEN THEN IT
MAY NOT BE NECESSARY TO GO ALL THE WAY BECAUSE IT WOULD
LIKELY BE AN ATOMIC WAR THAT WOULD NOT LAST LONG. IN ANY
CASE, THE FOLLOWING PROGRAM IS AN URGENT NECESSITY AND
SHOULD BE CARRIED OUT IMMEDIATELY, NO MATTER WHAT ACTION
MAY BE CALLED FOR LATER:
SHEET 2
MONETARY AND CREDIT PROGRAM
1 . REQUEST EVERY BANK TO UNITE IN A NATION-WIDE VOLUNTARY
AGREEMENT TO STOP BANK CREDIT EXPENSION WHICH HAS BEEN
GROWING RAPIDLY BY LIMITING NEW LOANS MADE BY ANY BANK TO THE
AMOUNT OF LOANS PAID; MEET THE GAIN OR LOSS IN ITS DEPOSITS
BY BUYING OR SELLING GOVERNMENT SECURITIES ACCORDINGLY.
SUCH A BANK PROGRAM WOULD STABILIZE THE GOVERNMENT
SECURITIES MARKET, AS WELL AS THE GENERAL CREDIT SITUATION.
IF THIS VOLUNTARY PROGRAM IS NOT CARRIED OUT, THEN THE
FEDERAL RESERVE SHOULD INCREASE RESERVE REQUIREMENTS TO THE
LEGAL LIMIT AND GET ADDITIONAL POWERS IF NECESSARY.
2 . REQUEST THE INSURANCE COMPANIES AND THE MUTUAL SAVINGS
BANKS NOT TO SELL THEIR GOVERNMENT SECURITIES FOR THE
PURPOSE OF GETTING MONEY TO INCREASE THEIR LOANS AND
OTHER INVESTMENTS. THIS WOULD AVOID PUTTING PRESSURE
ON THE FEDERAL RESERVE TO SUPPORT THE GOVERNMENT SECURITIES
MARKET, THEREBY CREATING NEW DEPOSITS AND EXCESS RESERVES
IN THE BANKING m m a m m
SYSTEM
3 . REQUIRE THE R . F . C . TO STOP MAKING LOANS, EXCEPT WHEN
THEY ARE FOR MILITARY PURPOSES AND CANNOT BE GOTTEN ELSEWHERE.
4 . REDUCE THE EFFECTIVE DEMAND FOR HOUSING BY REQUIRING
F . H . A . TO RESCIND ITS RECENT REDUCTION IN INTEREST RATES
AND REDUCE ITS INSURANCE COVERAGE, THEREBY REQUIRING HOME
OWNERS TO MAKE LARGER DOWN PAYMENTS; SLOWING UP THE
APPROVAL OF MORTGAGE GUARANTEES BY THE VETERANS ADMINISTRATION
AND MORTGAGE INSURANCE BY THE F . H . A.;
REQUIRING THE FEDERAL NATIONAL MORTGAGE ASSOCIATION TO LIMIT
ITS PURCHASES OF INSURED AND GUARANTEED MORTGAGES TO THE
AMOUNT SOLD.
x
SHEET 3
^
5• REDUCE THE EFFECTIVE DEMAND FOR CONSUMERS DURABLE GOODS
BY GIVING TO THE FEDERAL RESERVE CONTROL OF CONSUMER CREDIT
TERMS, WHICH SHOULD BE MADE SUFFICIENTLY RESTRICTIVE AS TO
DOWN PAYMENT AND MATURITY TO CURB FURTHER GROWTH OF THE
HUGE VOLUME NOW OUTSTANDING.
6 . REQUIRE THE TREASURY TO PERMIT SHORT-TERM INTEREST RATES
TO RISE MODERATELY AND THEREBY TAKE OFF THE PRESSURE FOR
LONG TERM INTEREST RATES TO GO DOWN* THIS CHANGE OF POLICY
WOULD MAKE THE GOVERNMENT SECURITIES MORE ATTRACTIVE TO THE
PUBLIC. IT WOULD REDUCE THE NEED OF THE FEDERAL RESERVE
SUPPORTING THE MARKET FOR GOVERNMENT SECURITIES WHICH
CREATES EXCESS MONEY AND MAKES IMPOSSIBLE THE RESTRICTIVE
MONETARY POLICY THAT IS CALLED FOR.
, r
,
A
THE ABOVE SIX POINT PROGRAM HAS THE ADVANTAGE Of DfilHO ABLE
BE PUT PROMPTLY INTO EFFECT OR RESCINDED TO THE EXTENT
NEEDED WITHOUT REQUIRING LEGISLATION, WITH THE
EXCEPTION OF CONSUMER CREDIT REGULATIONS.
FISCAL J ^ O g j ^
1 . MAKE NO REDUCTION IN TAXES 17kYEAR.
2 . INCREASE SECOND AND THIRD C U S S POSTAL RATES ENOUGH TO
MEET U R G E POST OFFICE DEFICITS.
3 . CLOSE TAX LOOPHOLES PREVIOUSLY REGOMMENDED BY THE
TREASURY, ESPECIALLY THOSE WHERE THE GOVERNMENT IS LOSING
U R G E AMOUNTS OF REVENUE
4 . REIMPOSE A CORPORATION EXCESS PROFIT TAX OF 75 PERCENT
ON ALL NET EARNINGS ABOVE 10 PERCENT ON FIRST FIVE MILLION
OF INVESTED CAPITOL AND EIGHT PERCENT ON ANY B A U N C E ,
ALLOWING A FIVE THOUSAND EXEMPTION OF EARNINGS SUBJECT TO
EXCESS PROFIT TAX.
5 . REQUEST ORGANIZED LABOR TO MAKE NO DEMANDS FOR WAGE
INCREASES WHILE EXCESS PROFIT TAX IS IN EFFECT.
6 . THE TREASURY TO OFFER PROMPTLY TO NON-BANK INVESTORS LONG
TERM NON-MARKET BOND G TYPE Iß YEAR MATURITY INTEREST RATE
2-1/2 PERCENT.
THE ABOVE FISCAL PROGRAM IS ESSENTIAL IF THE GOVERNMENT
DEFICIT IS TO BE HELD TO A MINIMUM SO THAT IT CAN BE
FINANCED OUTSIDE THE BANKING SYSTEM.
SHEET 4
THIS IS ALSO AH ESSENTIAL REQUIREMENT OF THE MONETARY AND
CREDIT PROGRAM SUGGESTED IF IT IS TO BE SUCCESSFUL.
THE PRESENT SITUATION CALLS FOR THE PEOPLE TO AXX SAVE
THEIR MONEY AND PURCHASE MORE BONDS. THEY CANNOT BE
EXPECTED TO DO THIS UNLESS THE GOVERNMENT TAKES THE
NECESSARY ACTION TO PROTECT THE PURCHASING POWER OF
THE DOLLAR (THEIR MONEY) FROM FURTHER PRICE INFLATION,
WHICH HAS ALREADY BEEN PERMITTED TO GO TOO FAR. THE
VIGOROUS CREDIT MONETARY AND FISCAL PROGRAM ABOVE
OUTLINED WILL ACCOMPLISH THIS PURPOSE WITHOUT THE NEED
OF IMPOSING THE OBJECTIONABLE HARNESS OF DIRECT
CONTROLS. U m u U I L * '
IN SHEET 2 UNDER MONETARY AND CREDIT PROGRAM SECOND LINE
MAKE READ EXPANSION
@FedFRASER