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BOARD OF G O V E R N O R S OF THE FEDERAL RESERVE SYSTEM W A S H IN G T O N June 9, 19h9» Dear Mr# Secretary: Chairman McCabe thought you might be interested in seeing the attached reprint of an article which appeared in last Sunday*s Philadelphia Inquirer. Sincerely, Elliott Thurston, Assistant to the Board* Enclosure Honorable John W* Snyder, Secretary of the Treasury, Washington, D# C* REPRINTED FROM THE PHILADELPH i J W n QUIRER, SUNDAY M O RN IN dJpUN E 5, 1949 Vision Needed to Avoid Recession, McCabe Says U. S. Return To Old Sales Method Urged By JOHN M. McCULLOUGH Inquirer Washington Bureau WASHINGTON, June 4.— What American business needs more than anything else to ease it out of its present decline is an infusion of good, old-fashioned Yankee merchandising vision and ingenuity in the opinion of Thomas B. McCabe, chairman of the Board of Governors of the Federal Reserve System. T hat is not the only factor in the present business decline—or slump, or recession, or readjustment, or whatever you w ish to call it—he con tinued, but it is fundamental. American business could think or talk itself into a serious business slump almost as easily as an Indian Yogi could stop breathing, although th e process would be not nearly so easy as it was just a score of years ago. in d ic e s g e n e r a l l y s l ip p e d Just w hat label is applied to busi ness conditions today—whether re adjustm ent or recession or slump— is not important. The important fact is th at business indices generally— industrial production, employment, business and consumer spending, the wholesale price index—have slipped below their levels of a year ago, or rdnft months ago, by substantial margins. W hat's it all about? That is the Question which was put to McCabe g-nri h is associates, and the answers were gleaned not only from him but from the mass of statements, statis tical analyses and reports which generally have been public property since the economic structure began slipping last October. In other words, th is article attem pts to pull together a variety of information into a pic ture which makes some sense out of th e present uneasy and unclear eco nom ic scene. V. S. ECONOMICALLY SOUND The very first fact, supported by a ll information available to the American business community and reiterated by the Federal Reserve System ’s chairman, is th at the U nited States economically is funda m entally sound, and if that sounds a good bit like the wishful thinking o f 1930 and 1931, it is wholly coinci dence. Economically, the Uhited States IS sound. . Industrial production has slipped 8 percent since November, 1948, but it still is 79, percent above the pre war level, which is a very high plateau of business activity indeed. Unemployment has increased by 1,400,000 since last October, a per centage increase of 87.5 percent but it still is only at 3,000,000 or consider ably less than one-third of the total th e prophets of disaster predicted for th e immediate postwar period. The banks of the Nation are in a stronger position than they have ever been in the histtfry of the coun try, and that is a statement of fact and not one man’s opinion. To quote Federal Reserve System ’s chairman: “The banks are strong—terrifical ly strong.” By contrast with 1929, bank port folios hold relatively little specula tive paper. Loans and investments of all member banks of the Federal. Reserve System are up 253 percent since 1940; loans, 228 percent; Gov ernment securities, 330 percent, es tablishing extraordinary liquidity; total deposits, 204 percent, and capi tal accounts, 156 percent. INFLATION SPIRAL CRACKED “For months,” McCabe pointed out, “the entire business community was practically on its knees praying that the inflationary period would come to an end. Almost no one liked it, outside of a few who get a kick out of a situation such as that, and the people on fixed salaries were really in a log jam. They were being squeezed painfully with no visible way out.” And then the inflationary spiral cracked. Not all at once, but selec tively, more sharply in some indus tries than others. The overall indus trial production index begarf to slip: 3 points, between November and D e cember, 1948; a point in January, 2 in February, 5 in March and another 5 in April. Some people called it “The D e pression,” turned up their collars and headed for the hurricane cel lars. CALLED READJUSTMENT While they flea, economists argued interminably as to whether this was recession depression, readjustment or “disinflation,” Dr. Nourse’s word. By and large, the view of McCabe and his associates is that it is read justment, but emphatically that does not mean th at is a simple and un complicated economic interim in tight with folded hands, awaiting an emergence into greener pastures. "For nine years, American busi ness has been mainly occupied in ap peasing customers,” McCabe pointed out. “There wasn’t enough to go around. But merchandising—all of the techniques involved in selling in a competitive, free-enterprise mar k et-m a d e this country great; and you can’t revamp sales staffs and rebuilt merchandising organizations overnight. After nine years of abso lute and total emphasis upon pro duction—production, production and more production!—American busi ness today and for the past nine months has been faced with the im mediate and fundamental job of re adjusting its merchandising prac tices to pre-war levels.” That American business, up to this point, has failed to make that ad justment is revealed, in the opinion of McCabe and his associates, in the curious imbalance of the various price indices. To quote from a cur rent Federal Reserve System analy sis: “As compared with January (1949), 28 basic commodities are down 15 percent, the wholesale all-commodi ty index 3 percent, and the consumer index about 1 percent.” In other words, between basic commodities and the over-the-coun ter charge te the customer, there is a huge gap. The spread between the two—the basic commodity price on the one hand, the finished product price which the workaday citizen pays on the other—will be self-ad justing, but unless business by its own initiative lends a hand to ciose it, somebody is going to get hurt. Hdw badly “somebody”, is hurt, jn McCabe’s judgment, depends to a very large extent upon how swiftly business wakes up to the situation. NOT GEARED FOR CHANGE “I am convinced,” the Reserve System ’s chairman said, “that only a small proportion o f American business and industry is geared up for the change. I also am convinced that if American business can satis fy the customer—with our tre mendous backlog of savings and em ployment what it is—a very consider able part of our economic problem can be solved, to the extent that purely domestic arrangements can solve it.” For instance, he quoted statistics that today, mid-1349. about 1.8 oercent of the total national income is being spent upon advertising in ail media, a? against 4 percent in 1940, a decrease of 55 percent. “Much of business has not got into the frame of mind.*’ he declared, “where it accepts the fact that it must streamline its shop or its spe cialty to pre-war conditions.. What this country needs is the sales man ager with vision and guts who will tell his board of directors what they’ve got to do to maintain sales volume to order to keep that busi ness going.” EXPENDITURES DECLINE Constricting business and con sumer purchases to some extent at # ’least, and obviously in McGa view to a ‘ Considerable extent, due to this inability or limited abil ity to make adjustment to a changed economic atmosphere which once again has placed a premium upon market research, product design, quality production to meet accepta ble price levels and the other prac tices of alert and forward-looking merchandising. The extent of the construction is shown in a Reserve System analysis. Expenditures for personal consump tion declined late last year by $4.5 billions or 2% percent, a decline part ly explainable by satisfaction of the demand back-log, partly by buyer resistance to high prices. PERSONAL INCOME OFF “In the first quarter of 1949,” the analysis states, “personal income de clined by $3 billion to an annual rate, seasonably adjusted, of $216.6 bil lions. Disposable income declined by only $2 billions, but expenditures for current consumption declined by $4% billions. “The result has been a steady in crease both in the aggregate amount of personal savings and in the pro portion of disposable income (that is, spendable income) accounted for by savings. In the first quarter of 1949, savings amounted to almost 11 percent of disposable income, the highest figure since late 1945 and an exceptionally high figure in compari son with m ost post-war periods. The sustained increase in this ratio in the past two years probably repre sents—at least in its more recent stages—a reduction in the willing ness of consumers to spend on cur ren t consumption at prevailing high prices.” In other words, the money to spend —backed-up purchasing power—ex ists today to an even greater degree than it did a year a£o, but it is not being lured into the market, In Mc Cabe’s judgment, by the kind of mer chandising methods that can trans late potential into actual buyings ROLE FOR CONGRESS He agrees that an indication on the part of Congress to move toward economy in National spending would be a reassurance to the business community, just as a relaxation in the ‘cold war’ would produce an in vigorating change in the entire na tional business psychology. “The American people are un easy, there’s no question about that,” he said. “The whole world’s uneasy. We’re fighting a ‘cold war.’ We are spending one half of our Federal budget, in round numbers, on m ili tary expenditures and ECA—$15,000,000.000 and about $5,250,000,000, respectively. Appropriations to vet erans add another $7,000,000,000. Whether or not it is possible to cut them is one question; the other is whether, a t the same time we are spending this huge amount eacn' year, we can embark upon a fullscale expansion of our domestic so cial welfare program. CITIZENS CONFUSED “I am not arguing one side or the other. All that I am saying is that the average citizen, studying these tremendous expenditures and pro posed expenditures, is confused and uneasy He wonders where it is aU coming from, and his reaction is to retrench in his personal fiscal policy. “What this average citizen needs is some positive expression of the relationship of these tremendous matters, exterior to the domestic econotoy, in terms o f his own eco nomic future. Like it or not, the 'cold war* is a fact, not a figment of someone’s Imagination. Over a period of several decades, the Ameri can people have indicated that they want their government to support a broad policy of social welfare and security, and that too is a fact. “If these two vast programs—the one largely military and interna tional, the other non-military ahd domestic—are to be fitted into an economy in which the average citi zen can repose confidence, positive and not negative approaches must be devised. Mere negative opposition will not serve.
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