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November 7, If SI

M r . Winthrop W. Aldrich, Chairman,
The Chase National Bank,

18 Pine Street,
N e * York If, H. Y.
Dear Winthrop;
I have been thinking about your talk on Inflation at Austin,
Texas next week, and particularly about your statement that all that Is
needed Ls the courage to do the job. Perhaps I a m a little sensitive on this
point, having had some responsibility lor monetary and credit policy in the
anti-inflationary struggle. At any rate I thought I would jot down some
notes (or your consideration..
1 Inflation can arise from a variety of causes even
though the end result is too m u c h m o n e y chasing too few goods.
2. Inflation can arise from the push of increased costs
as well as from the pull of increased demand.
(a) I can hardly he avoided i wages often go up but
never c om e down, and i all of the fruits of increased
productivity go to favorably situated workers and
stockholders, none to consumers. Although our goal
is a high level of employment, there must be the
possibility of dismissal for the inefficient worker.
Even full employment can't and shouldn't m e a n
security for everyone in his present job, or preferred
work in the place where the worker prefers to live.
(b) Inflation will gain strength if we try to keep
inefficient management afloat, and in destructive
competition with efficient management, by the use of
Government or Government guaranteed credit. There
must be the possibility of bankruptcy for the inefficient
firm, large or small.

Mr. Winthrop W. Aldrich


3. Inflation can arise from a farm price policy which
matches'every rise in industrial wages and prices, -with increased
supportfor farm prices. That is almost built -in inflation.
4. The principal elements of an anti-inflation program in
a country such a# the United States are not unknown,, They embrace
fiscal policy, debt management, credit policy and, in time of war
or great defense programs, such direct controls as will channel
essential and scarce materials into defease production, and prevent
the development or continuance of a wage-price spiral.
All of these things mast he working la the same direction
and toward the same end if there is to be any chance of success in an
economy in which the maintenance of a high level of production and
employment is necessary to meet our domestic need# and oar inter­
national responsibilities.
5. 1 a m not trying to minimize the importance of credit
policy nor the responsibilities of the monetary authorities. I believe
that credit policy has a big role to play in combatting inflation even
though the doses of credit restraint must be homeopathic. And I
believe that a central banking system, independent alike from narrow
political control (or Treasury domination), and from private pressures
is essential. But if you are going to call for courage yon muat call on
a lot of people - the executive branch of the Government from which
leadership should come, the Congress which preaches economy and
appropriates lavishly, the monetary authorities, and the bankers and
institutional investors, the labor unions, the business m e n who, for
example, sponsor escalator clauses in labor contracts, the farmers
wh o demand *parityHpriees and a lot of other people.
The problem is not merely a lack of courage on the part of
©emocrats, or of monetary authorities working alongside a Democratic
administration, and I hope and expect that you won't present i as such. You
probably had all this in mind but I thought i would do no larm to send you
these notes.

Allan Sproul

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