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FOM C 3 /2 7 / 5 6 AS G eneral Com m ents This turn in the outlook, em phasized today, has com e a b o u t very quickly. Just as we have had to rev ise our opinions, the co m m e rcia l banks are now having to consider what adjustm ents they are going to m ake to m eet a situation which they had thought to be tem porary but which now shows signs of being of longer duration* This should m ean that our policy of m ild restra in t, particularly if it is now stepped-up a little , will p re ss harder on the banks than it has been doing. So far as the capital m arket is concerned this change is already taking place; a substantial readjustm ent in rates is going on right now, and there has been some backing up of issu e s p articularly in the revenue bond fie ld . In such circu m sta n ce s, as we know, there is always the p o ssib ility of expectations of difficulty outrunning the fa c ts , and making acute what is alread y a difficult situation. We do not want to precipitate such a developm ent if we can avoid it. An even m ore difficult problem has been referred to - the po ssib ility of our running into a c o st-p r ic e spiral - growing out of increased wages and other costs which producers attempt to pass on to co n su m e r s. This m ight encounter consum er resistan ce which would have a dampening effect on production and em ploym ent, or what se e m s m ore likely in the p resen t state of the econom y it might generate an inflationary sp ir a l. In the fir s t c a s e , question could be raised as to whether it is the resp on sib ility of the central banking system to make credit e a sier and cheaper to obtain in order to try to head off a decline in production -2 - and em ploym ent* The second and m ore difficult case would raise questions as to whether the central banking system should make credit so dear and difficult to obtain as to cause a decline in production and em ploym ent as the le s s e r of two e v ils e We havenH yet had to run head-on into the philosophy of the Employm ent A ct of 1946 to that extent and it wouldn’t be e a sy , so maybe we had better hope that som e degree of econom ic respon sib ility on the part of m anagem ent and la b o r, will avoid presenting us the problem in seriou s form*)