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M IS C . 1 4 0 A - 4 0 M - 5 -4 9

F e d e r a l R e s e r v e Ba n k

of n ew

(Yl

H on. Paul H . Douglas,
Senate O ffice B uilding ,
W ashington, D . C .

York

August 31, 1953

<3^

D ea r Senator Douglas:
Th ere has been sent to me copies of your Ju ly c o rre s ­
pondence w ith M a rrin e r £ c c le s and of your re m a rk s in the Sttnate,
when you asked and received consent to have, this correspondence
p rin ted in the C ongressional R ecord, I am w ritin g to you because 1
have valued your inform ed support of tlm F e d e ra l R eserve System
so h ighly, and because I think som<M>Ftl$e'>«m:lusions M a r r in e r has
d raw n , and you seam to have d ra ^ a , troa \ the^ovelopm ents o f the
fir s t h a lf of this year m ay be/

i or my
h is to ry of past events,
As usual there is mm
w ith which I would dis
p erio d since January 19
p erio d during which the
AA

tl
th ree im m ediate




(I)

I

isc by M a r r in e r ’s outline
p o licy and debt m anagem ent.
which I would agree and quite a b it
ting about developm ents in the
w hich,\ oddly enough, coincides w ith the
{m in is tra tio n has been a t W ashington.
/statem ent and your re m a rk s ra is e perhaps
o ria n t qua stions •

Was th ere a change to a M
hard and tig h t" m onetary
po licy a fte r the new ad m in istra tio n took office} and
was the reduction in the m oney supply in the fir s t
five months of 1953 an unusual and u n tim ely develop­
m ent resu ltin g from such a change o f policy?
Has th ere been a change since D ecem ber 1932 from
the situation of high production and em ploym ent and
stable p ric e s w hich is attrib u ted to the p erio d fro m
M a rc h 1951 to D ecem ber 1952, as a re s u lt of the
m onetary and debt m anagem ent p o licies th at have been
follow ed ?

2

(3)

Hon. Paul B . Douglas

* /3 l/S 3

Should the m oney supply v a ry d ire c tly and p ro p o rtio n ­
a te ly w ith sh o rt te rm change* in th * volum e o f p ro *
duction and tr a d * , o r should th * grow th In th * m o n *y
supply p a ra lle l th * iM g t* r m grow th in th * econom y,
increasing l« *s than th * physical volum e of p ro ­
ductive a c tiv ity fa In fla tio n a ry p e rio d s , and decreasing
l«ss (o r *v e n continuing to in crease g ra d u a lly ) in
periods when d e fla tio n a ry tendencies predom inate 7

R ecent M o n etary P o lic y and
Changes In th * M oney Supply

\

I
A c tu a lly the m o n etary p o licy in e ffec t during th * fir s t fo ur
m onth* o f 1951 was a continuation o f the p o licy th at had h *cn in a ffe c t
fo r scon* tim e , although it did have m ore p u b lic ly in th * la te r p e rio d ,
f o r a v a rie ty of reasons, ho w ever, in c lu d ia g jh * fa ilu re o f seasonal loan
repaym ents to d *v *lo p on th * s e a l* thaThad been an ticip ated , th * fa ilu re
of ta x rece ip ts to com * up to e x p e d itio n s and the consequent prospcct of
h e a v ie r T re a s u ry b o rro w in g , tlu r continue^! la rg e volum e of c o rp o ra l* and
'‘m u nicipal*' se cu rity flo ta tio n s / and lack o$ c la rity in o r m is in te rp re ta tio n s
of public discussions of F e d e ra l R * * « r v * po licy* th * m oney and s e c u rity
m a rk e ts began to show s ig s u ro fs tra in I m la .April. T h * F e d e ra l R eserve
System was not blind to th is siraaU on, ju&d took actio n e a rly in M a y to give
assurance th at su fficien t r * s * r v « * feoiud be m ad * a v a ila b l* to th * banking
system to m * * t r« a l nej^ts^forTun^is b ^ t^ e G overnm ent and p riv a te b o rro w e rs .
A s fo r the reduction in the m oney supply during the f ir s t
five m onths of 1953, (it Is quite understandable. The fact is th at the m oney
aupply (defined as c & n p ris in g p riv a te ly owned dem and deposits and c u rren cy)
has declined in the ( i » t fiv e m onths/of ev ery y e a r *in ce 1946, even in years
in w hich m any c o n s id *K |h * Increase in the m<m«y supply to have been
e x ces siv e. Th e reasons^b r-ttrti^season al decline in the fir s t few months
of each y e a ra p p a re n tly include heavy ta x rece ip ts and re tire m e n t o f
G overnm ent se c u ritie s b& the T re a s u ry , a seasonal tendency to w ard loan
co ntraction a fte r the fa ll ebtpanaioa, and some reduction in c u rren cy
c irc u la tio n a fte r the Chrisftm as holiday p e rio d . The fig u res fo r th * fir s t
five m antas of each o f th e /la s t seven y e a rs a re as follow s:




V N Q a u tg *' /In

M oney Supply during F ir s t F iv e Months
______________ of Sach Y e a r_____________________ _
D o lla r Am ount
P ercentage
Change
in b illio n s
1947
1948
1950
1951
1952

1953

- 2 .4
- 5 .4
-4 .1
-1 .5
- 3 .3
- 3 .2
- 4 .5

- 2 .2
- 4 .8
- 3 .7
-1 .3
- 2 .8
- 2 .6

-i.5

MJGC. 1 4C D —2 0 M - 7 - 4 7

Hon. Pa u H . Douglas
l

3

8/31/53

You w ill observe th at the percentage reduction during the fir s t Cive m onth*
o f 1953 was less than in the corresponding periods o l 1948 and 1949, and
was only s lig h tly g re a te r than the average fo r the fo u r years 1947*1950
(3 .5 p e r cent com pared w ith 3 .0 p e r c e n t).
Since th ere a re seasonal va ria tio n s la the m oney supply, a
h o tter m easure o f the tre a d is the y e a r-to -y e a r change. In th at re s p e c t,
the lacreaao fro m June 1952 to June 1953, although unquestionably leas than
the Increaae la the physical volum e o f production, was co nsiderab ly g re a te r
in d o lla r am ount, and somewhat g re a te r percentagew ise, than the average
fo r the five y e a rs fro m June 30 , 1946 to June 3$ , 1951 (aU hat th re e months
o f w hich w ere ta the period during w hich m onetary and debt m anagem ent
p o licie s w ere c r itic iced as having bean stro n g ly in fla tio n a ry ). F u rth e rm o re ,
the increase during the past y e a r follow ed a considerab ly g re a te r increase
in the previous y e a r — one which c le a rly outstripped the ris e in physical
production. The fig u res fo r the paat seven y e a rs \a re as follow s:
Change In M oney Supply-duriag Y e a r -Ended June 30

\
D o lla r am ount
la b illio n s
,

P ercentage
Change
►2» 4
-

0.1

-

1.1

*2.9
*•4.1
*5.?
►2.5
Anothe re a c to r to be
e a into account in th is connection,
as M a rrin e r and^you pomCg u t, te c h a n g e * in the v e lo c ity o r ra te of use of
m oney. T h e*ti ehaagea a re not alw ays dow nw ard, how ever, as M a rr in e r* *
discussioa Haight im p ly . The v e lo c ity data have beea under re v is io n in
rece n t m a lth a and have not been published, but th e re ia reason to bellevo
th at the rd te o f tu rn o ver offm oney has increased a p p re c ia b ly , thus
supplem enting the lacreaao in the quantity o f money o ver the paat y e a r.
R ecent Chanfeas la Econtrniic Conditions
"
n*m .........

................................. .

Both M a r r ia e r and you appear to reg a rd the economic situ atio n
fro m M a rc h 1951 to D ecem ber 1952 as em in en tly sound a a i healthy (except fo r
the grow th la consum er and m ortgage c re d it ia th at p erio d and la preceding
y e a ra ). You both profess to see a change in the d ire c tio n o f d e tla tl«*»«»y
tendenciea since the advent of the new a d m in is tra tio n , w hich, la your opinion.




Hon. Paul H. Douglas

4

I

1

$/3l/5i

m ad* the x m c U r y and debt m anagem ent p o licies of the e a rly m onth* of
1953 quite in a p p ro p ria te .
So fa r as the actual data go. th e re is little to support th at
conclusion, although we m ay a ll hav« our Ideas as to th« fu tu re . It is tru e
that some o f tha haste com m odities (notably fa rm products because o f
la rg e production sad reduced export dem and) hairs hssa w eak la r« c « a t
m onths, hut a num ber o f thsm w ere w eak als o la tha p erio d fro m M a rc h 1951
to D ecem ber 1952. Th« general w holesale p rie s ta d s* ehanged by ea iy
one -ten th of a percentage point fro m D ecem ber i f 52 to June 1953, w hile
during the p erio d fro m M a rc h 1951 to O ta v s b ir 1952 it fe ll by s ix percestege
points, as you s ta te d . The consum er p ric e index also has been alm o st
unchanged (s lig h tly h ig h e r, in fa c t). The production index lev ele d o ff in
the second q u a rte r o f th is ye ar (perhaps p a rtly because o f the d iffic u lty of
m aking p ro p er seasonal ad ju stm en ts),h u t the June index was s t ill s ix points
above D ecem ber and 15 points higher than a y e a r ago. The gross n atio n al
product, incom e paym ents to b 4 i v i 4 a * h r n ^ m ^ p i f i i i l continued to r is e .
In sh o rt, the g en eral econom ic iitu a tio Q tn the fir s t bfclf o f 1953 was about
as near the id e a l one o f high prodttiction, l^ o m e , and em ploym ent, w ithout
in fla tio n , as we e v e r it a ia .
F u frth erm o rel th e re is a t le a s t a p o s s ib ility
th a t, but fo r the tig h t m oney p o lic y , new in fla tio n a ry p ressu res m ig h t have
developed so th at th is highly 4 s ir able eop&ition would not have been m a in ­
*e
ta in ed , and the danger and d e p th o f a recessio n m ight have been in creased .
G row th in the M oney Supply— 's .
R equired fo r iic o n o m iy lfta b illty

X .
\

M a rr p ie r's statem ent o f w hat he thinks should be the objective
of debt m anagem ent and m onetary po&ey seem s to m e to have been the
objective during i9 5 3 \ Opinions m a y /d iffe r, of co urse, as to the action which
is ca lled fo r a t any givroi tim e to achieve th is o b je c tiv e . 1 would h e s ita te ,
how ever, to ad.19 l.ih e shnale £qrc6
p
ula th at ehanges in the m oney supply should
p a ra lle l changes in production and em ploym ent on a short te rm b a sis . D is ­
regard ing jthm elem en t of seasonal flu ctu ation in the money supply , th ere
rem ain s a s question of w hether a p o licy of prom oting ehanges in the m oney
supply d ire c tly proportionate to changes in production and em ploym ent,
even on a \y e a r-to ~ y e a r b a il* , is lik e ly to be m ost conducive to the m aintenance
of stab iU tyJn the econom y * t high le v e ls . I f th at w ere tru e , th ere m ig h t have
been no b a s iK fo r th e ^ fs te m 's fig ht fo r g re a te r freedom of action beginning in
August 1950 andTc«SkInuing up to the "accord*' in M a rc h 1951, a fig ht in which
| you aided so g re a tly . The m oney supply then had been increasing ra p id ly , but
I not so fast as production and em ploym ent.

1 would say th *t m t*r
fo r the guidance of c e n tra l
b an kers, in seeking to m ake th e ir co ntrib utio n to aconomic s ta b ility , la that




Ken* Paul H. Douglas

5

8/31/53

grow th in the m oney supply should p t r t U t l the long te rm grow th la
productive a c tiv ity . T h at c a lls fo r a p o licy o f re s is tin g toe rap id
expansion of bank c re d it and the m oney supply In boom periods (w hich
m ay m e re ly valid ate higher coats aad p r ic e t) aad re s is tin g c re d it
co ntraction in periods o f rece ssio n .
I hope th at you w ill fo rg ive th is long le tte r . The im portance
o f the subject, to m e* made it aeem w o rth w ritin g . The problem we faced
a t the beginning o f the y e a r, aa I aaw it* was how to help prem int, by
m on etary m eans, the developm ent o f a bubble on top o f a boom without
adopting a d e fla tio n a ry p o lic y . The danger w aa th e re , and it haa been
avoid ed. As soon aa our p o licy seem ed to be becom ing too re s tric tiv e
it was m o d ified , and assurance waa given th a t re s e rv e s would be av aila b le
to m eet the seasonal and grow th needs of c re d it <furtng the remainder of
the y e a r. Up to th is m om ent the economy has continued its broad vigorous
developm ent, a t high le v e ls o f produc tio n , incom e, and em ploym ent, and
in fla tio n a ry and d e fla tio n a ry forces have~stayed in balance. Balance at
high lev els is alw ays p re c a rio u s , h irtfe^ e r. I f we should be heading into a
read justm ent o r recession as Mar'rlner, and maybe you, seem to believe,
I should hope it would not be blam ed on the fe d e r a l R eserve System - a t
le a s t not because o f a fa u lty u n ly s ta of ou */p ast ac tio n s. We tr y to follow
the economic ta c ts o f lif e , nots$he electio n re tu rn s .




Yqxirs fa ith fu lly ,

\

ALLAN SPRCUl.
I A lla n S proul,
/ P re s id e n t.
I

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