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STATEMENT ISSUED AT SALT LAKE CITY, UTAH,
BY
M. S. ECCLES, MEMBER,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
J u l y 18, 19$0*
Because of the Korean c r i s i s a dangerous i n f l a t i o n a r y s i t u a t i o n i s
r a p i d l y developing* This i s due t o the urgent and i n c r e a s i n g m i l i t a r y needs
and a r a p i d stepping up of business and c i v i l i a n demands on top of an economy
t h a t has been showing i n f l a t i o n a r y pressures f o r some t i m e , e s p e c i a l l y i n t h e
durable goods and housing s e c t o r * P r i c e i n f l a t i o n i s sure t o develop when the
demand f o r goods and s e r v i c e s supported by money and c r e d i t exceeds the supply.
The a v a i l a b l e supply of money and c r e d i t can be increased o n l y by the banking
system making loans t o or buying s e c u r i t i e s f r o m e i t h e r t h e Government or the
p u b l i c * I n the present s i t u a t i o n i t i s , t h e r e f o r e , i m p e r a t i v e , i f p r i c e i n f l a t i o n i s t o be c o n t r o l l e d , t o stop the o v e r a l l growth of loans and investments
by the banking system, i n c l u d i n g the F e d e r a l Reserve. This can be promptly
brought about i f the Government w i l l adopt w i t h o u t delay the r e q u i r e d monetary
and f i s c a l program*
Such a program would m a t e r i a l l y reduce c i v i l i a n demand and thereby
increase the supply of goods and l a b o r a v a i l a b l e f o r the m i l i t a r y needs w i t h o u t
the n e c e s s i t y of p u t t i n g the c o u n t r y under a l l of the onerous war-time d i r e c t
c o n t r o l s , unless the Korean s i t u a t i o n develops i n t o World War I I I *
Even t h e n ,
i t may not be necessary t o go a l l the way because i t would l i k e l y be an
atomic war t h a t would not l a s t long* I n any case, the f o l l o w i n g program i s
an urgent n e c e s s i t y and should be c a r r i e d out immediately, no matter what
a c t i o n may be c a l l e d f o r l a t e r :
Monetary and C r e d i t Program
1* Request every bank t o u n i t e i n a n a t i o n - w i d e v o l u n t a r y
agreement t o stop bank c r e d i t expansion which has been growing
r a p i d l y by l i m i t i n g new loans made by any bank t o the amount of
loans p a i d j meet t h e g a i n or l o s s i n i t s deposits by buying or
s e l l i n g Government s e c u r i t i e s a c c o r d i n g l y . Such a bank program
would s t a b i l i z e t h e Government s e c u r i t i e s market, as w e l l as the
general c r e d i t s i t u a t i o n * I f t h i s v o l u n t a r y program i s not c a r r i e d o u t , t h e n the F e d e r a l Reserve should increase reserve r e q u i r e ments t o the l e g a l l i m i t and get a d d i t i o n a l powers i f necessary*
2. Request t h e insurance companies and the mutual savings
banks not t o s e l l t h e i r Government s e c u r i t i e s f o r the purpose of
g e t t i n g money t o increase t h e i r loans and other investments*
This
would a v o i d p u t t i n g pressure on the Federal Reserve t o support the
Government s e c u r i t i e s market, t h e r e b y c r e a t i n g new d e p o s i t s and
excess reserves i n the banking system*




-23* Require the R*F*C* t o stop making l o a n s , except when t h e y
are f o r m i l i t a r y purposes and cannot be g o t t e n elsewhere•
i±* Reduce the e f f e c t i v e demand f o r housing by r e q u i r i n g
F«H*A* t o r e s c i n d i t s recent r e d u c t i o n i n i n t e r e s t r a t e s and r e duce i t s insurance coverage, thereby r e q u i r i n g home owners t o
make l a r g e r down payments, slowing up the approval of mortgage
guarantees by t h e Veterans A d m i n i s t r a t i o n and mortgage insurance
by the F«H*A*, r e q u i r i n g t h e Federal N a t i o n a l Mortgage Associat i o n t o l i m i t i t s purchases of i n s u r e d and guaranteed mortgages
t o the amount sold*
5* Reduce the e f f e c t i v e demand f o r consumers durable goods
by g i v i n g t o the F e d e r a l Reserve c o n t r o l of consumer c r e d i t terms,
which should be made s u f f i c i e n t l y r e s t r i c t i v e as t o down payment
and m a t u r i t y t o curb f u r t h e r growth of t h e huge volume now o u t standing*
6* Require t h e Treasury t o permit s h o r t - t e r m i n t e r e s t r a t e s
t o r i s e moderately and thereby take o f f the pressure f o r l o n g - t e r m
i n t e r e s t r a t e s t o go down* T h i s change o f p o l i c y would make the
Government s e c u r i t i e s more a t t r a c t i v e t o the p u b l i c * I t would r e duce t h e need of t h e Federal Reserve s u p p o r t i n g the market f o r
Government s e c u r i t i e s which creates excess money and makes imposs i b l e the r e s t r i c t i v e monetary p o l i c y t h a t i s c a l l e d f o r *
The above s i x - p o i n t program has the advantage t h a t i t can be
put promptly i n t o e f f e c t or rescinded t o the e x t e n t needed w i t h o u t
r e q u i r i n g l e g i s l a t i o n , w i t h the exception of consumer c r e d i t r e g u lationsa
F i s c a l Program
1*

Make no r e d u c t i o n i n taxes t h i s year*

2. Increase second and t h i r d c l a s s p o s t a l r a t e s enough t o
meet l a r g e Post O f f i c e d e f i c i t s .
3* Close t a x loopholes p r e v i o u s l y recommended by the Treasu r y , e s p e c i a l l y those where the Government i s l o s i n g l a r g e amounts
of revenue*
km Reimpose a c o r p o r a t i o n excess p r o f i t s t a x of 75 per cent
on a l l net earnings above 10 per cent on the f i r s t f i v e m i l l i o n
of i n v e s t e d c a p i t a l and e i g h t per cent on any balance, a l l o w i n g a
f i v e thousand exemption of earnings s u b j e c t t o excess p r o f i t s
tax*




-3-

Request organized l a b o r t o make no demands f o r wage
increases w h i l e excess p r o f i t s t a x i s i n e f f e c t .
6* The Treasury should o f f e r p r o m p t l y t o non-bank i n v e s t o r s
l o n g - t e r m non-marketable bonds, G t y p e , lf?-year m a t u r i t y , i n t e r e s t
r a t e 2 - 1 / 2 per cent*
The above f i s c a l program i s e s s e n t i a l i f the Government
d e f i c i t i s t o be h e l d t o a minimum so t h a t i t can be f i n a n c e d
o u t s i d e the banking system*
This i s also an e s s e n t i a l requirement of the monetary and c r e d i t
program suggested i f i t i s t o be s u c c e s s f u l . The present s i t u a t i o n c a l l s
f o r the people t o save t h e i r money and purchase more bonds# They cannot be
expected to do t h i s unless the Government takes the necessary a c t i o n t o p r o t e c t the purchasing power of t h e d o l l a r ( t h e i r money) from f u r t h e r p r i c e
i n f l a t i o n , which has a l r e a d y been p e r m i t t e d t o go too f a r . The vigorous
c r e d i t , monetary and f i s c a l program above o u t l i n e d w i l l accomplish t h i s
purpose w i t h o u t the need of imposing the o b j e c t i o n a b l e harness of d i r e c t
controls.