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230 N. Michigan Avenue, Chicago 1, 111.
4-88 Madison Avenue, New York 22, N. Y.
March 1, 1954
Mr. William McC. Martin, Jr., Chairman
Board of Governors of the Federal Reserve System
Washington, D. C.
Dear Bill:
The Joint Committee on Economic Policy of the American Life
Convention and the Life Insurance Association of America held
a meeting last Friday at which we discussed a number of ques­
tions regarding credit and debt management policies of the
Government. The Committee believes you would like to know our
conclusions. They are along the following lines.
We are greatly concerned about the strong emphasis which is
being placed upon an easy credit policy as a Government instru­
ment to reverse the moderate downturn in business activity
which we have been experiencing. As nearly everyone agrees,
and as was demonstrated so clearly last Spring, a restrictive
credit and debt management policy can be effective in curbing
a boom. On the other hand, there is little evidence that an
easy money policy has much effect as a stimulus to business
activity in a downturn. It is our experience that the level
of interest rates seems to have very little effect upon the
volume of corporate bond financing, and that actually such
financing has expanded in periods of high or rising rates.
Obviously, other factors than the interest rate govern the
volume of bond financing. Similarly, our study of residential
construction and financing indicates that the level of mortgage
interest rates is not an important factor and that actually
increasing residential construction has usually coincided with
rising rates.
As we review monetary policy beginning in the Summer of last
year, we cannot but think that it has gone much too fast. In
early June of last year, at the bottom of the Government securi­
ties market price-wise, the 3-1/4's were selling on a 3.33
yield basis, and today they have fallen in yield to a 2.12%
basis, or a decline in less than a year of 60 basis points.
There has, of course, been a corresponding decline in the
yields on other Government securities and on corporate bonds,
particularly those which were publicly offered and are traded
in the market. It is our view that this pronounced decline
in interest rates has been the direct result of Federal Reserve
credit policy.

Mr. William McC. Martin, Jr.

March 1, 1954
Page 2

From the time the Federal Reserve entered the market last
Spring until the end of the year, between open market opera­
tions and the reduction in reserve requirements the Federal
Reserve has supplied the banking system with over $3.0 bil­
lion in reserves. Moreover, the steps which the Federal
Reserve has taken have exerted a highly magnified effect in
the capital markets because of psychological forces and the
thinness of supply in the long-term portion of the Federal
debt. Basically there has been little change in the over-all
demand for and supply of capital funds arising out of the
savings of the people.
Life insurance companies and other savings institutions are
becoming more and more concerned about the abrupt change
which has occurred in the interest rate picture based upon
Government policy. This abrupt change has been a shock to
company officers because, if continued at the present pace,
it could quickly raise again the question of whether life
insurance companies will be able to earn the rate of return
assumed in policy contracts. The reason for this is that as
rates go lower life insurance companies and other institutional
investors will inevitably be hit with a heavy wave of refunding
of debt which was issued at higher rates. Not only do sharply
falling rates mean that our current investments will yield a
lower return, but we face the danger that much of our port­
folio will be refunded on the new lower rate basis, and thus
the effect of probably rather temporary low interest rates
would, be imposed upon policyholders and other savers for as
long as decades to come. This refunding will affect insti­
tutional investors differently because some have been able to
protect themselves better than others against £he call of
their bonds. That is to say, some investors have been able
to fortify themselves better against an early call of their
bonds or have been able to obtain higher call prices. In view
of comments in the President’s Economic Report about the
importance of thrift in the long-run growth of our economy,
is it in the long-run public interest to create serious prob­
lems of interest return for life insurance companies and other
savings institutions? Is such a policy fair to the millions
of savers throughout the country who save through life insur­
ance, savings bonds, pension funds, and similar channels? The
answer might be in the affirmative if an easy credit policy
held out the prospect of aiding in bringing about an upturn
in business activity at the present time, but there is serious
doubt that this is the case.
Our views about credit policy might be summarized as follows.
First, it is axiomatic that credit policy must be flexible and
that as a result we must have interest rate flexibility on
both the up side and the down side of the business cycle.
However, we think it is a mistake for credit policy to en­
courage abrupt changes in interest rates and also wide swines.

Mr. William McC. Martin, Jr.

March 1, 1954.
Page 3

Secondly, we should recognize that a restrictive credit policy
can do a great deal toward curbing a boom, but once a downturn
has occurred an easy credit policy does little to reverse the
trend of business activity. In this connection it should be
kept carefully in mind that at a time such as the present,
psychological forces in the investment field are rampant and
that markets can be pushed to extremes simply by talk about
But if it is wise at the present time to go slowly toward fur­
ther easing of credit, nevertheless we do not advocate that
the Federal Government stand by without doing anything if
i business conditions continue to decline. We think that the
President *s Economic Report and the President's recent remarks
| in his press conference several days ago indicate the type of
measures which the Government should take at this time if
business conditions continue to trend downward. In such cir­
cumstances the Government should resort to such direct measures
I as a bold reduction in income taxes to stimulate private per! sonal spending, along with the tax revisions which have already
i been proposed to encourage business spending. In addition, we
\\ think the President should have the powers which are proposed
ft to alter various insured and guaranteed mortgage terms because
fmortgages should always carry rates and terms which will
^attract investment funds.
With respect to debt management policy, as you undoubtedly have
recognised, the attempt to use debt management in a counter­
cyclical fashion poses an apparent dilemma. In times of infla­
tionary pressures at which it would seem desirable for the
Treasury to borrow at long term with savings institutions, it
is bound to be true that these institutions will have more
attractive alternative investment outlets in the corporate bond
and mortgage field, and we are highly doubtful that the Treasury
will ever be able to do much in the way of lengthening the
maturity of the debt in such periods. On the other hand, in a
period of economic downturn, in which savings institutions,
because of the lack of alternative investment outlets, might
desire a long-term Government bond offering, many would argue
that the Treasury should be doing its financing on a short or
intermediate-term basis with the commercial banking system.
j. This would seem to mean that the time is never good for longj term Treasury financing. However, we cannot accept this conf elusion. The supply of savings tends to exceed suitable outlets
| in a downturn, and it is of the utmost importance to get these
s savings invested.

Our thinking is that it is highly important for many reasons
for the Treasury to get a larger proportion of its debt in long
maturities. We believe, therefore, that to accomplish this
purpose the Treasury should do its long-term financing when it
I has the opportunity to do so, namely, when savings institutions
| have funds which cannot find an outlet in private investments.

Mr. ?/illiam Me. Martin, Jr.

March 1, 1954Page 4

This letter has been frank, but I know you appreciate frank­
ness. If you would like to have us do so, I am sure that a
delegation from our Committee would be glad to visit with
you in Washington.


Carrol M. Shanks

Carrol M. Shanks, Chairman
Joint Committee on Economic Policy
American Life Convention
Life Insurance Association of America

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102