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C O N FL IC T IN G
M O N E T A R Y

O FFIC IA L
PO LICY :

V IE W S

A PR IL

O N

1956

HEARING
BEFORE T H E

SU B C O M M IT T E E ON ECONOM IC S T A B IL IZ A T IO N
OB’ T H E

JO IN T COM M ITTEE O N T H E ECONOM IC E E P O E T
CO NG RESS OF T H E U N I T E D S T A T E S
EIGHTY-FOURTH CONGRESS
SECOND SESSION
PURSUANT TO

S e c . 5 (a ) o f P u b lic L a w 3 0 4
(79th Congress)

JU N E 12, 1956

P rin ted for tlie use of th e Jo in t Com m ittee on th e Economic R eport

UNITED STATES
GOVERNMENT PRINTING OFFICE
TpttS




WASHINGTON :

19 6 6

JO IN T COMMITTEE ON T H E ECONOMIC R EPO R T
(C reated p u rsu an t to sec. 5 (a) of Public Law 304, 79th Cong.)
PAUL H. DOUGLAS, Senator from Illinois, Chairman
W RIGHT PATMAN, R epresentative from Texas, Vice Chairman
SENATE
HOUSE OF REPRESENTATIVES
JOHN SPARKMAN, Alabam a
RICHARD BOLLING, M issouri
J. WILLIAM FULBRIGHT, A rkansas
W ILBUR D. MILLS, A rkansas
AUGUSTINE B. KELLEY, Pennsylvania
JO SE PH C. O'MAHONEY, Wyoming
JE S S E P. WOLCOTT, M ichigan
RALPH E. FLANDERS, Vermont
HENRY O. TALLE, Iowa
ARTHUR V. WATKINS, U tah
BARRY GOLDWATER, Arizona
THOMAS B. CURTIS, M issouri
G ro v e r W. E n s le y , E xecutive D irector
J o h n W. L ehm an, Clerk

S u b c o m m it t e e

on

E

c o n o m ic

S t a b il iz a t io n

W RIGHT PATMAN, Texas, Chairman
JO SE P H C. O’MAHONEY, Wyoming
AUGUSTINE B. KELLEY, Pennsylvania
ARTHUR V. WATKINS, U tah
JE S S E P . WOLCOTT, M ichigan
W illia m H. M oore, Econom ist




C O N T E N T S

Statement of—

P
as®

P a tm a n , R ep rese n ta tiv e W rig h t, c h a irm a n o f subcom m ittee__________
H um phrey, G eorge M., S e c re ta ry of th e T re a s u ry ___________________
M artin , W illiam McC., ch a irm an , B o ard of G overnors of th e F e d e ra l
R eserve S ystem __________________________________________________
O th er m a te r ia l:
T ig h te r M oney: T he B ack stag e D ra m a , N ew sw eek, A p ril 23,1956___
P re s id e n t B acks F e d e ra l R eserve, New Y ork T im es, A p ril 26, 1956_
T he P o litics of T ig h t M oney, B u sin ess W eek, M ay 5, 1956___________
S h a rin g R esponsibility, B u sin ess W eek, M ay 2 6,1956------------------------M o netary C o n tro ls: T h e T h eo ry L ags, B usiness W eek, J u n e 2,1956___
T h e Econom ic S itu a tio n a n d O utlook, M em orandum , Staff, J o in t Com­
m itte e on th e Econom ic R ep o rt, A p ril 18, 1956____________________
In d e x _________________________________________________________________




m

1
7
24
51
55
52
54
54
57
61

C O N F L IC T IN G O F F IC IA L V I E W S O N M O N E T A R Y
P O L IC Y : A P R I L 1 9 5 6

TUESDAY, JUNE 12, 1956
C
S

o ng ress o f t h e

u b c o m m it t e e

J

o in t

C

on

E

U

S tates,
S t a b il iz a t io
E c o n o m ic R

n it e d

c o n o m ic

o m m it t e e o n t h e

n

,

epo rt,

Washington, D. 0.
The subcommittee met, at 10 a. m., in room P-38, United States
Capitol Building, Washington, D. C.
Present: Representative Wright Patman, chairman, presiding.
Also present: Grover W. Ensley, executive director; William H.
Moore, staff economist, and John W. Lehman, clerk.
The C h a ir m a n . The subcommittee will be in order.
The Joint Economic Committee and its Subcommittee on Economic
Stabilization have a continuing responsibility to watch carefully the
workings of monetary policy, since it is one of our chief instruments
for advancing the objectives of stabilization and growth, as called for
by the Employment Act of 1946.
Moreover, as I have said in releasing the correspondence which is
the subject matter of this morning’s hearing, the workings of mone­
tary policy, through its effect upon interest rates and the availability
of credit, intimately affect the lives and fortunes of every business,
every homeowner, every farmer, and every citizen.
As is generally known, the Reserve System authorities on April 18
again took steps to raise the rediscount rate. W ithin a few days there­
after, stories began to appear in the press, with indications that the
step had been taken contrary to the judgment and wishes of various
Cabinet members, specifically Secretaries Humphrey, Mitchell, and
Weeks, and Dr. Arthur Burns, Chairman of the Council of Economic
Advisers.
For the purpose of getting the record clear as to precisely what had
taken place, I wrote to these officials, along with Chairman Martin, of
the Board of Governors. For some reasons which I hope will be
clearer after this morning’s hearing, the replies we received from
Chairman Martin, of the Board of Governors, and from the Secretary
of the Treasury fell short of being wholly responsive to the few simple,
direct questions which we had asked respecting this particular in­
cident.
Had these replies been more responsive, there would have been little
need for this morning’s hearing. The occasion for this hearing is
consequently the desire of the subcommittee to obtain orally the record
which the correspondence failed to achieve.
As I have previously indicated, it is our hope that the hearing this
morning can be confined as far as possible to the several specific ques-




1

2

CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

tions propounded in my letter of May 10. The intention is that this
brief hearing at this time can avoid, so far as possible, going into the
merits and economic consequences of the action taken in raising the dis­
count rate and otherwise pursuing a tight money policy over the past
year or more.
I think it is only fair to say that these substantive aspects and the
pros and cons of the tight money policy, including this April 13
action, are subjects which are clearly within the investigative powers
of the Congress, since the Reserve System itself is an instrument to
which Congress has seen fit to delegate a portion of the powers ex­
plicitly assigned to Congress under the Constitution. The authorities
of the Reserve System must accept the responsibility for their action
under this delegation and, I must say, I have no reason to feel that
they want or try to shirk that responsibility.
That responsibility, however, cannot and ought not to be shared
with others in the executive branch. Nor ought the responsibility of
an agent be allowed to become diffused by the action of a principal too
constantly looking over the agent’s shoulder. This is not to suggest
that in due course an accounting for stewardship is not to be expected
and insisted upon from an agent such as the Reserve Board and Open
Market Committee are. The time and place for that accounting will
come later after we have more evidence as to the wisdom and foresight
demonstrated by the System in continuing the tight money policy by
its April 13 action.
Since the proceedings this morning are directed primarily at pro­
viding a clear public record as to the consultations, views, and differ­
ences of opinion which have been the subject of so much recent press
comment, I would like to include at this point the memorandum which
was sent to members of the Joint Economic Committee on May 23,
transmitting the correspondence in question.
Without objection, that will be included.
(The memorandum and letters referred to follow :)
[Far release morning of May 23, 1956]
C

on gress o f t h e

U

n it e d

States

j o i n t c o m m it t e e o n t h e e c o n o m ic r e p o r t

M

em orandum

T o : M em bers of th e J o in t C om m ittee on th e E conom ic R ep o rt.
F ro m : R ep resen tativ e W rig h t P a tm a n , c h airm an , Subcom m ittee on Econom ic
S tabilization.
S u b je c t: C orrespondence resp ectin g re c e n t m o n e tary developm ents.
T h e w orkings of m o n eta ry policy, th ro u g h its effect upon in te re s t ra te s an d
th e a v a ila b ility of cred it, in tim a te ly affect th e lives a n d fo rtu n e s o f ev ery b u si­
ness, every hom eow ner, every fa rm e r, ev ery citizen.
I t is n o t su rp risin g , th erefo re, th a t m an y people a re d istu rb e d by w id esp read
press sto rie s a n d w h isp erin g s of conflicting opinions a t resp o n sib le a n d official
levels concerning th e w isdom o f th e re ce n t actio n o f th e F e d e ra l R eserv e System
in ra isin g th e red isco u n t ra te .
On M ay 10, I accordingly ad v ised m em bers o f th e Subcom m ittee on Econom ic
S tab ilizatio n th a t I w a s w ritin g th e C h a irm a n o f th e F e d e ra l R eserv e B o a rd
an d v ario u s m em bers o f th e ex ecu tiv e d ep a rtm en t, fo r th e sole p u rp o se o f
g ettin g th e record clea r p recisely a s to w h a t lies b eh in d th ese p re ss sto ries. T h e
in q u iry w as n o t in te n d e d to q u estio n th e ju d g m e n t o f th e a c tio n itse lf, th e
in te rn a l p rocedures o f th e System , n o r th e p ro p rie ty o f o u tsid e co n su ltatio n ,
b u t m erely to le a rn so m eth in g of th e co nditions u n d e r w h ich th e a c tio n w as
tak en . T h e questions w ere specific a n d so u g h t n o th in g m ore th a n sim ple, fa c tu a l
replies.



CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

3

I am disappointed, th e re fo re , an d I m ay say, vexed a t th e unresponsiveness of
th e rep lies w hich h a v e been received fro m th e v e ry agencies w hich should be
m ost in te re ste d in pro v id in g a c le a r pub lic record. T h e g e n eral professions of
m u tu a l resp ect an d b est w ishes fo r each o th e r c o n tain ed in th e le tte rs fro m th e
S e c re ta ry of th e T re a su ry a n d th e C h a irm a n o f th e B o ard o f G overnors a re
only too obviously in te n d e d to avoid an sw erin g th e 3 o r 4 sim ple, easy-toan sw er questions concerning th e specific in c id e n t w h ich h a s aro u sed recen t
public concern. F ro m th e m ark e d sim ila rity in th e tw o rep lies one m ig h t a l­
m ost in fe r th a t th e v a u n te d p a tte rn o f c o n su lta tio n ap p lies to th e problem s of
dealin g w ith congressional m ail, a s w ell as to policy m a tte rs. T h e evasiveness
o f S e c re ta ry H u m p h rey ’s le tte r is a ll th e m ore re m a rk a b le since, w hen ques­
tio n ed 2 d ay s la te r b efo re th e S en ate F in a n c e C om m ittee, h e a d m itte d : “I f i t
h a d been m y resp o n sib ility I w ould n o t h av e m ade th is la s t m ove.”
A re a d in g of th e questio n s a n d th e rep lies is th e b est evidence o f th is avoidance.
F o r t h a t reaso n i t seem s a p p ro p ria te th a t th e fu ll te x t o f th e exchange o f cor­
respondence be released to sp ea k fo r itse lf.
C erta in ly th e hope ex p ressed in th e le tte rs to th e agencies, nam ely, th a t by
th e ir rep lies th e necessity fo r public h e arin g s could be avoided, is given no
encouragem ent o r su p p o rt by th e un resp on siv e an sw ers. A d a te fo r h earin g s
w ill be s e t in due course.
J o in t

C o n g r e s s o f t h e U n it e d S t a t e s ,
C o m m it t e e o n t h e E c o n o m ic R e p o r t ,

May 10, 1956.
Hon.

W il l ia m

M cC . M a r t in ,

J r.,

Chairman , Board of Governors of the Federal Reserve Bystem,
Washington, D. C.
D e a r M r . C h a i r m a n : You a re no d o u b t a w a re o f th e p re ss sto ries w hich have
a p p eared in re c e n t d ay s in d ic a tin g exceptions ta k e n by v a rio u s m em bers of th e
C abinet, specifically S e creta rie s H u m p h rey , M itchell, a n d W eeks, to g eth er w ith
D r . A rth u r F. B u rn s, C h airm an o f th e C ouncil o f E conom ic A dvisers, to th e
recen t actio n of th e R eserv e S ystem in ra isin g th e re d isco u n t ra te .
W hile i t is p erh ap s too e a rly to ju d g e th e m e rits o f th e conflicting view points,
an d it is n o t m y in te n tio n in th is le tte r to p u rsu e th e a rg u m e n ts fo r a n d ag a in st
th e p rev ailin g re s tric tiv e m oney policy, I am deeply concerned ab o u t th e forces,
gov ern m en tal as w ell a s o th er, to w hich th e B o a rd is su b jected in th e p erfo rm ­
ance o f it s duties. T h e re c o rd w h ich h a s given rise to th e se p re ss com m ents
should be m ade acc u ra te a n d clear.
P re p a ra to ry to co n sid eratio n o f th e m a tte r by o u r Subcom m ittee on Economic
S tab ilizatio n , a s ch a irm a n I am w ritin g to th e se v e ra l a d m in istra tio n officials
a n d to yourself. I w ould like to h a v e y o ur a n sw ers som e tim e n e x t w eek to th e
follow ing q u e s tio n s :
1. I s i t a fa c t, to y o u r know ledge, t h a t th e decision o f th e B o a rd of G overnors
w en t a g a in s t th e w ishes o f a d m in is tra tio n a d v isers? I f so, w hom ?
2. W h a t com m unications a n d re p re se n ta tio n s fro m executive d ep artm en t
officials or th e ir su b o rd in a te s d id th e B o ard h av e before i t a t th e tim e o f reaching
its decision?
3. H ow a n d by w hom w ere th ese re p re se n ta tio n s m ade, to you a s C h airm an t to
o th e r m em bers of th e B o ard , o r to th e B o a rd a s a body?
4. H a v e you o r th e B o a rd h a d an y su b seq u en t com m unication, th ro u g h official
o r unofficial channels, fro m m em bers o f th e C ab inet o r th e ir responsible sub­
o rd in a te s criticizin g th e actio n w hich th e B o a rd h a s ta k e n ?
I hope th a t y our an sw er, to g eth er w ith th o se fro m th e sev e ra l ad m in istratio n
officials, w ill sufficiently illu m in a te th e fa c ts so th a t w e can av o id th e necessity
fo r public h earings.
In ask in g you th ese q uestions, I w a n t to a ss u re y ou t h a t w e a re n o t now seeking
to probe in to th e ju d g m e n t o f th e B o ard in th e ex ercise o f its responsibilities.
N or a re w e ask in g fo r in fo rm a tio n a s to th e B o a rd v ote o r discussions w hich led
to th e decision. Since, how ever, th e B o ard does a c t a s a n a g e n t in carry in g ou t
th e pow ers delegated to i t by th e C ongress, I feel t h a t i t is n o t only p ro p er b u t
n ecessary th a t we sh o u ld in q u ire a s to th e n a tu re o f th e influence b ro u g ht to b ear
upon it.
S incerely yours,




W r ig h t

P a tm a n ,

Chairman , Subcommittee on Economic Stabilization.

4

CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

[Same letter to Secretary Sinclair Weeks, Department of Commerce, Secretary James P.
Mitchell, Department of Labor, and Chairman Arthur F. Burns, Council of Economic
Advisers]
Congress op t h e U nited S tates ,
J oint C ommittee on t h e E conomic R eport,

M ay 10, 1956.
Hon. G eorge M. H u m p h r e y ,

Secretary of the Treasury ,
Department of the Treasury , Washington , D. C.
D ear M r. S ecretary : B eyond re fe rrin g to q u estion s a t re c e n t p ress co n fer­
ences by th e P re sid e n t, i t is c e rta in ly n o t n e cessary h e re to c a ll y o u r a tte n tio n
to th e n um ber of p ress com m ents in recen t d a y s w hich h a v e n o ted th e ex isten ce
of differences o f opinion betw een c e rta in a d m in is tra tio n officials, in clu d in g y o u r­
self, a n d th e B o a rd o f G overnors o f th e F e d e ra l R eserve S ystem in resp e ct to th e
B o ard ’s actio n in ra isin g th e d isco u n t ra te . I am su re you a r e also a w a re of th e
w idespread public concern, b o th before a n d since th e so-called acco rd o f 1951, in
th e in dependent role o f th e F e d e ra l R eserve System a s a n agency c a rry in g out
th e delegated p ow ers o f th e C ongress.
I t is p erh ap s too e a rly to ju d g e a t th is tim e th e m e rits of th e conflicting view ­
points as to th e pro sp ects fo r fu r th e r in fla tio n a ry o r d e fla tio n a ry p ressu res, a n d
th e a p p ro p ria te m o n e tary policy in th e circum stances. T h e reco rd w hich h a s
given ris e to th is public discussion should, how ever, be m ad e a c c u ra te a n d clea r.
P re p a ra to ry to co n sid erin g th e m a tte r by o u r Subcom m ittee on Econom ic
S tabilizatio n, a s c h a irm a n I w ould like, th e re fo re , to h av e y o u r a n sw e r som e tim e
n e x t w eek to th e follow ing q u e s tio n s :
1. D id you, a n d fo r w h a t reaso n s, d isag ree w ith th e actio n ta k e n by th e B o a rd
of G overnors?
2. D id you o r y o u r asso ciates, a n d by w h a t ch an n els—telephone conversations,
m em oranda, o r m eetings— com m unicate y o u r view s o r m ak e re p re se n ta tio n to
System officials, e ith e r C h a irm a n M artin , th e B o ard , o th e r m em bers o f th e
B oard, o r sta ff m em bers?
3. Subsequent to th e actio n ta k e n by th e B o ard , h av e you o r y o u r su b o rd in ates
com m unicated y our criticism s to re p re se n ta tiv e s o f th e B o a rd o th e r th a n th ro u g h
th e p ress sto rie s p u rp o rtin g to s ta te y o u r view s, e ith e r pu b licly o r p riv a te ly
expressed?
I hope th a t th e an sw e rs w hich w e receive fro m you, th e o th e r officials, an d th e
B o ard its e lf w ill sufficiently illu m in ate th e fa c ts so t h a t w e ca n avoid th e neces­
sity fo r public hearin g s.
A s I have to ld C h airm an M a rtin in w ritin g to him , we a re n o t now concerned
w ith probing in to th e w isdom o f th e B o a rd ’s decision b u t feel, how ever, t h a t th e
C ongress is e n title d to a n d m u st o f n ecessity know th e fo rces b ro u g h t to b e a r
upon its agency in c a rry in g o u t d elegated pow ers c o n stitu tio n a lly assig n ed to
th e Congress.
Sincerely yours,
W right P a t m a n ,

Chairman , Subcommittee on Economic Stabilization.

of t h e

B oard of G overnors
F ederal R eserve S y st em ,

Washington , May 16, 1956.
H on. W right P a t m a n ,

Chairman , Subcommittee on Economic Stabilization ,
Joint Committee on the Economic Report , Washington , D. (7.
D ear M r . P a tm a n : T h is is to acknow ledge y o u r le tte r of M ay 10, w ith re g a rd
to th e recen t actio n o f th e F e d e ra l R eserv e System in ra isin g red isco u n t ra te s.
T he d irecto rs of each o f th e 12 F e d e ra l R eserv e b an k s w ho in itia te d th is
action, w ith th e su b seq u en t a p p ro v al o f th e B o ard o f G overnors, voted fo r
increased d isco u n t ra te s p rio r to p u b licatio n o f th e p ress sto rie s to w hich
you re fe r. T h e decisions to in cre ase d isco u n t ra te s w e re ta k e n se p a ra te ly
a t each o f th e 12 F e d e ra l R eserv e b an k s by th e ir resp ectiv e boards, co n sistin g
all told of 108 directo rs.
As you know , th e T re a su ry a n d th e F e d e ra l R eserve w o rk a s p a rtn e rs in
disch arg in g th e ir resp o n sib ilities. To th is en d th e re m u st be a n d th e re is
co n stan t co n su ltatio n an d co operative discu ssio n betw een th em w ith resp e c t
to economic a n d re la te d problem s w ith w h ich b oth a re concerned. S im ilarly
th e F e d e ra l R eserve, in keeping a b re a s t o f developm ents in th e economy, nec-




CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

5

e s s a r i l y m a in ta in s c o n tac ts w ith b ran ch es o f th e G overnm ent o th er th a n
th e T re a su ry . Such c o n su ltatio n s do not, how ever, m ean an y loss of independ­
ence by th e F e d e ra l R eserv e in d isch arg in g th e resp o n sib ilities delegated to
i t by th e C ongress.
F ro m tim e to tim e th e re a re bound to be differences of ju dgm ent, of em phasis
a n d tim ing. I t w ould be asto n ish in g in a dem ocracy if th is w ere not so a n d
indeed i t w ould be reaso n fo r g rav e concern if p re c a u tio n a ry actio n h ad to w a it
fo r u n an im ity .
T h e re h a s been no d e p a rtu re now or a t an y tim e d u rin g my ch airm an ­
ship fro m th e pro ced u re of fu ll an d fr a n k discussion betw een m em bers of
th is B o ard an d sta ff a n d officials of o th e r in te re ste d G overnm ent agencies w ith
a view to d isch arg in g public resp o n sib ilities in accordance w ith th e best ob­
ta in a b le ju d g m en t a n d th e in d ep en d e n t exercise of th a t jud g m en t.
Sincerely yours,
W m . M c O . M a r t in , J r .

T h e Secreta ry of t h e T rea su ry,

W a sh in g to n , M a y 15,1 9 5 6 .

Hon.

W r ig h t P a t m a n ,

C h a irm a n , S u b c o m m itte e on E con om ic S ta b iliza tio n ,
J o in t C o m m itte e on th e E con om ic R e p o r t,
C on gress o f th e U n ite d S ta te s , W a sh in g to n 25 , D . C.
D e a r M r. C h a i r m a n : I have y o u r le tte r of M ay 10 a n d am g lad to answ er your
questions.
As I h av e testified before y o u r com m ittee, th e T re a su ry recognizes fu lly th e
in dependent resp o n sib ility of th e F e d e ra l R eserv e System f o r its decisions, an d
as long as I hav e been h ere w e h av e n ev er encroached on its dom ain.
H ow ever, a s I h av e also testified before y o u r com m ittee, I believe it is in th e
best in te re s t of th e people of th is co u n try a n d G overnm ent o p eratio n s a s a w hole
th a t th e re should be th e fu lle st co nsu ltatio n an d cooperation betw een th e T re a s­
u ry a n d th e B oard. T o p rom ote th is, Mr. M a rtin a n d o th e r m em bers of th e
B o ard a n d v ario u s m em bers of th e T re a su ry D ep artm en t, inclu d in g m yself, m ake
it a co ntinuing p rac tic e to keep in th e closest possible to u ch w ith each oth er to
discuss fu lly c u rre n t conditions a n d prospective tre n d s in o rd e r th a t each of u s
m ay be posted a s to th e o th e r’s th in k in g a n d a p p ra isa l o f th e various influences
affecting th e econom y b oth c u rre n tly a n d prospectively.
I t is, of course, only n a tu r a l th a t w e often h av e som e differences of ju d g m en t
a risin g fro m v a ry in g a p p ra isa ls of th e tim in g a n d effect of economic tren d s. W e
both a re glad to h av e th e benefit of th e o th e r’s views, a s w ell a s th e views of
m an y o th e r people in try in g to h elp us re ac h o u r ow n in d ep en d en t judgm ents.
T h ere is n o th in g in th e events to w hich you re fe r th a t is a t varian ce w ith o u r
re g u la r p ractice.
Y ours v ery tru ly ,
G. M. H u m p h r e y ,

S e c r e ta r y o f th e T re a su ry.
T h e

Sec r eta r y of C o m m erce,

W a sh in g to n , M a y 15 , 1956.

Hon.

W r ig h t P a t m a n ,

C h a irm a n , S u b c o m m itte e on E con om ic S ta b iliz a tio n ,
H o u se o f R e p r e s e n ta tiv e s , W a sh in g to n , D . C.
D e a r M r. C o n g r e s s m a n : I h a v e y o urs of M ay 10 a n d follow ing a re m y answ ers
to y o u r q u e s tio n s :
1. I d id d isag ree w ith th e actio n tak en , b u t m y d isag reem en t w as m ore in th e
realm of ‘‘tim in g ” th a n otherw ise.
2. N e ith e r I n o r a n y of m y asso ciate s h av e h a d an y com m unication w ith th e
R eserve B o ard —collectively o r in d iv id u ally —on th is subject.
3. I h av e n o t com m unicated a n y criticism s to re p re se n ta tiv e s of th e B oard.
In fa ct, I a c tu a lly d id n o t criticize th e B o a rd ’s actio n in m y p ress conference
to w hich you h av e m ad e referen ce.
In th is resp ect th e p ress ask ed m e th e follow ing q u e s tio n :
“Do you have a n y in fo rm a tio n on th e re ce n t in crease in th e discount r a te ’s
im p act on h ousing p a rtic u la rly ? ”
79011—56------2




6

CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

My an sw e r follow s a n d I ’m su re you’U a g ree th a t i t w as n o t voiced in a critical
b ut in a fa c tu a l vein.
“Of course, th a t is a field I don’t move in to v ery m uch. I leav e th a t to th e
T re a su ry a n d th e R eserv e B oard. M oney is tig h t to d a y a n d m oney is sh o rt,
and th a t m ay prove to be a h an d ica p a s w e move a lo n g h e re .”
I th in k th is an sw ers y o u r th re e questions.
S incerely yours,
S inc la ir W e e k s .
D epartm ent op L abor,
O f f ic e o f t h e S e c r e ta r y ,

Washington, May 16,1956 .
Hon. W right P a tm a n ,

Chairman , Subcommittee on Economic Stabilization, Joint Committee on the
Economic Report, Congress of the United States, Washington, D . C.
D ear C ongresman P a tm a n : T h is is in rep ly to y o u r le tte r o f M ay 10 in w hich
you req u est m y an sw ers to th e q uestions re g a rd in g th e rec e n t actio n of th e
B oard o f G overnors o f th e F e d e ra l R eserv e System in ra isin g th e red isco u n t
ra te.
I did n o t com m unicate m y view s o r m ak e re p re se n ta tio n to System officials,
eith er C h airm an M a rtin , th e B oard, o th e r m em bers o f th e B o ard , o r sta ff m em ­
bers ; a n d to m y know ledge n e ith e r h av e an y o f m y associates, e ith e r before o r
a fte r th e actio n ta k e n by th e B o ard .
Sincerely yours,
J a m e s P . M itch ell ,

Secretary of Labor .
T h e C h a ir m a n

of t h e

C ouncil

of

E conomic A dvisers ,

Washington, May 18, 1956.
Hon. W right P a t m a n ,

House of Representatives, Washington, D. C.
D ear Congressman P a tm a n : I am w ritin g in rep ly to y o u r in q u iry of M ay 10.

In keeping w ith its d u ties p rescrib ed by law , th e C ouncil of Econom ic A dvisers
keeps co n stan tly in to u ch w ith th e d e p a rtm e n ts a n d agencies of th e F e d e ra l
G overnm ent t h a t a re p rin c ip a lly concerned w ith econom ic m a tte rs. T h e C oun­
cil’s efforts in th is d ire c tio n h av e been d escribed in its a n n u a l re p o rts to th e
P resid en t, w hich hav e been p ublished in re c e n t y e a rs a s ap pendixes to th e
Econom ic R ep o rt of th e P re sid e n t.
I find i t n ecessary a n d im p o rta n t to discuss th e econom ic situ a tio n an d govern­
m en tal economic policies fa irly freq u e n tly w ith C h a irm a n M a rtin , am ong o th ers.
You h av e in q u ire d ab o u t th e F e d e ra l R eserve B o a rd ’s re c e n t actio n w ith
respect to discount ra te s. I n view o f som ew hat conflicting tendencies, p a rtic ­
u la rly th e div erg en t m ovem ents th a t h av e occu rred of la te in r e ta il tr a d e a n d
c a p ita l ex penditures, I do u b t th e tim elin ess of th is actio n . H ow ever, i t m u st be
recognized th a t some u n c e rta in ty in ev itab ly a tta c h e s to ju d g m en ts on a m a tte r
of th is type.
T he conversations th a t m em bers o f th e C ouncil h av e w ith officials o f th e F e d ­
e ra l R eserve B o ard do not, o f course, involve o r ra is e a n y questio n concerning
th e independence of th e B oard. T h is is e n tire ly c le a r a s a m a tte r of b o th la w
a n d policy.
S incerely yours,
A rthur F . B u r n s.

The C h a i r m a n . W ith this background, I should like to turn to my
letter of May 10 to Secretary Humphrey of the Department of the
Treasury, and ask him to respond now to the specific questions which
I asked at that time. Mr. Humphrey, if you will identify yourself for
the record, it would be appreciated, sir.




CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

7

STATEMENT OF HON. GEORGE M. HUMPHREY, SECRETARY OF THE
TREASURY

Secretary H u m p h r e y . George M. Humphrey, Secretary of the
Treasury.
The C h a ir m a n . Would you like to make any preliminary comment
of your own, Mr. Humphrey ?
Secretary H u m p h r e y . N o, Mr. Patman. I wrote you and I thought
that I had answered your questions. I f you did not feel they were
responsive, I am glad to add to them in any way, and try to answer any
questions you may have to suggest.
The C h a ir m a n . That is fine, sir. I would like to ask you, then,
first, did you, and for what reasons, disagree with the action taken by
the Board of Governors on raising this discount rate of April 13,
1956?
Secretary H u m p h r e y . I thought that before it was done, that it
was unnecessary to take that action. I thought that the situation was
sufficiently in balance, and the trend was toward a sufficient balance
without taking that action, and in our discussions, as we have discus­
sions continuously, and we hear what the members of the Federal Re­
serve feel about things, and we tell them how we feel about things,
we go over the situation frequently, very frequently, together, look­
ing forward to trying to balance out how their opinions of things are,
and ours are, and we are very frank in expressing our opinions to each
other in order that each may have the benefit of the other’s feelings in
determining our respective responsibilities and determining what ac­
tion we will each take for which we are responsible.
In those discussions, those conversations that we had, I had the
feeling and expressed it that no further action was required just at
that time.
The C h a ir m a n . Y o u expressed your feeling in advance of the order
being issued, I assume ?
Secretary H u m p h r e y . I did. We talked about it for a number of
times, and over a rather extended period before action was taken, but
it wasn’t just with respect to this. We meet frequently and we talk
about how things are going and get each other’s views as to present
conditions and what future trends are.
The C h a ir m a n . N o w , there were, I believe, four other increases
before this one.
Secretary H u m p h r e y . Yes.
The C h a ir m a n . Over a period of what time, say ?
Secretary H u m p h r e y . Over a period of several months.
The C h a ir m a n . About 12 months, I believe, is that right ?
Secretary H u m p h r e y . About that.
The C h a ir m a n . Did you agree to those increases, the other four
increases ?
Secretary H u m p h r e y . I didn’t agree with them. I mean there is
no such thing as agreeing from the point of view of influencing the
action. I thought their action was wise when they took it.
The C h a ir m a n . Y o u did not obj ect to them ?
Secretary H u m p h r e y . I did not.
The C h a ir m a n . Well, this time, when you did not agree, it some
way got in the press. How did it get to the press? Did you give




8

CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

it out, Mr. Humphrey, that you were not in agreement with this par­
ticular action of the Board ?
Secretary H u m p h r e y . I have forgotten, Mr. Patman, how we did,
what the first word about it was. Of course, it is always news if
there is a disagreement on any subject, and I really have forgotten
j ust how it did arise.
The C h a i r m a n . What caused me to wonder about that, is that
so far as I know you did not advise the press at the time you favored
the other four increases. On those occasions there was no publicity.
Secretary H u m p h r e y . I don’t know as anybody asked me. Strangely
enough, it doesn’t seem to be news if people are in agreement and it
does seem to be news if they are not.
The C h a i r m a n . Well, I agree with you about that, Mr. Humphrey.
Did you or your associates, and by what channels—telephone con­
versations, memorandums, or meetings—communicate your views or
make representation to System officials, either Chairman Martin, the
Board, other members of the Board, or staff members?
I believe you have answered that. You did communicate your
views?
Secretary H u m p h r e y . I d i d .
The C h a i r m a n . T o these different people.
Secretary H u m p h r e y . On a number of occasions, and over a rather
extended period.
The C h a i r m a n . Subsequent to the action taken b y the Board, have
you or your subordinates communicated your criticisms to represen­
tatives of the Board, other than through the press stories purporting
to state your views, either publicly or privately expressed?
Secretary H u m p h r e y . We have continued our discussions fre­
quently, and just as we have always done ever since we have been
here, and as we expect to continue as long as we are here. We have
discussed these matters currently, and we keep doing it currently, and
we expect to continue doing so.
The C h a i r m a n . Y o u feel that you are communicating with them
as to the extent necessary to get your views over ?
Secretary H u m p h r e y . Not to get our views over at all. We ap­
prise them of what we think, and we will have the benefit of their
thinking. We each are entitled to have the benefit of the other fel­
low’s thoughts in this very important field.
The C h a i r m a n . I agree with you.
Secretary H u m p h r e y . We not only have the benefit of each other’s
thoughts, but we seek and we welcome the benefit of any other person’s
thoughts, who is qualified and in whose judgment we have confidence.
The C h a i r m a n . This action raising the discount rate of course
meant an increase in interest rates across-the-board, did it not?
Secretary H u m p h r e y . Well, I don’t know that it was this action or
not. As a matter of fact, I rather think this action followed the pres­
sure toward the increased rates rather than preceding it.
The C h a i r m a n . A s Secretary of the Treasury, Mr. Humphrey, do
you consider it your duty to keep the rate as low as possible on the
national debt?
Secretary H u m p h r e y . No, I don’t think so. I don’t think that it
would be good for the country or good for the people in it if the rate
on the national debt was depressed to an unduly low level.




CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

9

The C h a i r m a n . What factors did you consider in agreeing to an
increase in the discount rate, as you agreed in the four instances pre­
ceding the last one ?
Secretary H u m p h r e y . Y ou keep saying “I agree.”
The C h a i r m a n . Well, you did not object.
Secretary H u m p h r e y . This is not a matter of a deal between us.
The C h a i r m a n . I k n o w that.
Secretary H u m p h r e y . It is a matter of my feeling as to whether it
is wise or not.
The C h a i r m a n . I didn’t intend to leave the impression that I sus­
pected any “deal.” In any case, it is not your responsibility.
Secretary H u m p h r e y . Not my responsibility, and I don’t agree to it.
I f they do it, and I think it is wise, or I think it may be unwise, I feel
perfectly free to express my opinion either way.
The C h a i r m a n . Don’t you think interest rates generally over the
country have gone pretty high, Mr. Humphrey ? Aren’t you concerned
just a little bit about the great increase in interest rates across the
board ?
Secretary H u m p h r e y . I don’t know, Mr. Patman. Interest rates,
of course, fluctuate as they should. And I think properly so, with
demand for money and, after all, you know, I think that to have
interest rates too low and over a long period of time could be a very
serious thing in this country.
We have to have, we have to try to provide in this country, have to
try to have developed—the Government does not provide it, but we
have to have—we hope that it will develop in this country that there
will be opportunities for jobs for about a million more people a year
and that is an increasing amount.
Now, in America today you cannot get a job and earn the kind of pay
that Americans earn unless somebody has saved and invested a matter
of somewhere from $10,000 to $20,000 to buy the things, to buy the
tools, to buy the other things that are required to afford the facilities,
the transportation, and all of the things, the power and all of the
things that are required to make a job to permit an American to earn
the kind of money that he now gets.
I think we went through a period in this country where the emphasis
on saying was entirely wrong, where there wasn’t sufficient emphasis
on saving, and I think that it was time that that emphasis was changed,
as it has been changed, and that there should be and there will have
to be in the future a continuing emphasis on saving.
We have to obtain savings, to have savings, to buy the tools that
make the jobs that give people work in America, and I am talking
about not just factory employees, but everybody. We have to have
capital investment in order to give them the opportunity, in order to
have the facilities in the country available for them to have their jobs.
In order to have that saving, two things have to be pretty well
assured:
First, that the savings, if made, will not be destroyed, will not be
stolen by inflation. And second, that there will be some return on
those savings which induce people to save for that return rather than
to just spend their money currently, because it isn’t worth anything
to save it.




10

CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

So that I think this country requires over a long period of time a
renewed emphasis on the security of savings, and efforts to preclude
inflation, to avoid inflation, and the theft of the savings in that way,
and the incentive to save by having their savings worth something in
interest that will be paid to them if they save it.
The C h a i r m a n . Y o u have mentioned two things which I think are
very important, namely, savings and inflation. The reason you did
not oppose the four increases in the discount rate preceding this last
one, was I assume because you thought there was some evidence of in­
flation that needed to be dealt with.
Secretary H u m p h r e y . Y o u have continually, Mr. Patman, in this
country, and it is good that you do, you have continually changing
conditions with varying pressures—inflationary pressures on the up­
side and deflationary pressures on the downside. The ideal situation
has been, or is, when those pressures are fairly evenly balanced. That
is when you make your most progress in this country, and that is
when conditions are the best.
I f inflationary pressures prevail to too great an extent, and you de­
press the value of your money and you destroy the value of savings,
you set in motion a whole chain of events which are detrimental to
the future of the country. I f you let deflationary pressures prevail to
too great an extent, you set in motion a whole chain of events that are
unfortunate for the country.
So you want to go along as nearly as you can toward a balance of
the two.
The C h a i r m a n . Y ou are just as anxious to prevent deflation as you
are to prevent inflation? You want an even balance and an even keel,
if possible.
Secretary H u m p h r e y . Absolutely.
The C h a i r m a n . Y o u mentioned both savings and inflation in one
of your statements. I think it is important that we explore that just
a little bit, if you please.
I f you want to encourage savings, don’t you think a mighty fine
way would be to allow more interest on time deposits? I f you were to
take off the limitations under existing laws and rules of the Board of
Governors, and permit time deposits to receive as much, say, as four
per cent on savings, don’t you think that would have a tendency to
retard inflation and also to encourage savings ?
Secretary H u m p h r e y . Of course, anything that pays for saving
money, any incentive toward that is a good thing to have; but actually,
what we want to do is to encourage people’s savings in all ways, in all
forms, and to just pick out one, as to whether a relatively minor action
in one field is desirable or not, you have to balance them all out.
The C h a i r m a n . Mr. Secretary, you know more about this in a min­
ute than I do in a week or a year but it really concerns me a great deal
that you don’t feel obligated to keep the interest rate down on the
national debt.
Now, if you do not feel obligated as a representative of the people
and of the United States Government to keep the interest rate down,
who does represent the people in that capacity ? Whose duty is it to
keep interest cost on the Federal debt down?
Secretary H u m p h r e y . I just got through telling you, Mr. Patman,
that I don’t think it is to the advantage of the people to have the
interest on the debt too low.



CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

11

I think it would be disastrous in this country if we could borrow
money for an eighth of 1 percent. I just don’t think we ought to
have it.
The C h a i r m a n . Y o u mean of course for short-term paper, like we
used to.
Secretary H u m p h r e y . Long-term paper at half of 1 percent. I f
that was your interest rate, just let’s illustrate it by an absurdity. I
think it would be just as absurd to get the interest rates too low as
it would to have them too high. You would be in trouble either way.
The C h a i r m a n . Aren’t you now considering factors which are
primarily within the purview and the duties of the Congress and
the Federal Reserve Board. I am not criticizing you for running
your business like you want to, Mr. Humphrey, but it seems to me
like you should keep your eye on the interest rate in the interest of
the taxpayers.
Secretary H u m p h r e y . I am very glad to have this chance to ex­
plain to you, Mr. Patman-----The C h a i r m a n . Let the Federal Reserve and Congress look after
the general economic policies dealing with the whole country.
Secretary H u m p h r e y . ------why I think your views are wrong, and
why I think they are unduly narrow.
It is my job also to raise the money to pay the bills of the country,
and it is my job also to collect in our taxes, and if we don’t have
suitable times in the country, if we don’t have good employment in
this country, and reasonably good times in this country, we won’t
have any money with which to pay our bills.
Now, if I took your attitude and kept my eye solely on one item
of trying to knock the interest rate down on the debt, I might get
the interest rate down on the debt, but even if it was half of 1 per­
cent, if we didn’t get taxes in enough to pay, it wouldn’t do us any
good.
So it is a much broader field here to watch, to be watchful over,
and my responsibilities cover a much wider field than your question
indicates. You have to keep it all in mind, Mr. Patman. You have
to keep it all in mind.
The C h a i r m a n . But the weighing of economic advantages and dis­
advantages, the effect upon the general welfare, the people, and the
general economy are factors that the Federal Reserve Board is ex­
pressly charged w ith ; don’t you agree.
Secretary H u m p h r e y . The Board has certain responsibility, and
the Treasury has certain responsibilities. We both have them, and
it is well that we both try to do the very best we can with respect to
them, and it is particularly good that we cooperate in our thinking
with respect to them.
The C h a i r m a n . A ll right. Now, don’t you think your answer was
rather unrealistic when you suggested that we shouldn’t have a long­
term interest rate of one-eighth of 1 percent? We never had that in
this country.
Secretary H u m p h r e y . I was trying to illustrate the absurdity of
your position.
The C h a i r m a n . But that is using as an illustration a situation that
has never existed in this country.




12

CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

Secretary H u m p h r e y . That is the way to illustrate when the posi­
tion is taken—you can illustrate it better by carrying it to an absurdity
than in any way I ever knew of.
The C h a i r m a n . We had one-eighth of 1 percent on very short-term
securities, 30 or 60 days, but we have never had any long-term rate
less than about 2 percent; have we ?
Secretary H u m p h r e y . I don’t know.
The C h a i r m a n . I do not recall any long-term rates lower than 2
percent.
Secretary H u m p h r e y . But when you say that I should be con­
cerned to try to push it down-----The C h a i r m a n . T o a reasonable level.
Secretary H u m p h r e y . Y o u didn’t say that.
The C h a i r m a n . That is what I mean to imply. Naturally, I
wouldn’t think about a devastatingly low level, or anything like that.
Secretary H u m p h r e y . Perhaps our difference then can be as to what
is a reasonable level, and what is a reasonable level depends very
largely upon times and conditions. What is reasonable today might
not be reasonable tomorrow. So that you and I would move back and
forth and if you stick to a reasonable level, and reasonable under the
conditions existing, we wouldn’t be far apart.
The C h a i r m a n . I have always had the feeling that since the rate
on long-term Government bonds, is more or less the basic, wholesale
rate of interest—the cost of money—that 2y2 percent is a reasonable
rate, and probably should not go beyond that.
Secretary H u m p h r e y . I don’t believe you can pin a figure that is
continuously and always a reasonable rate for money any more than
you can for the price of pork or beefsteak or eggs.
The C h a i r m a n . That is the reason I was shocked when you set the
rate of 3 percent on a bond issue early in your administration. I f you
don’t mind, how did you arrive at that 3 percent rate, Mr. Humphrey ?
Whose counsel and advice did you seek, if you did seek the counsel
and advice of other persons in arriving at that 3 percent rate.
Secretary H u m p h r e y . Y ou mean on our long-term issue?
The C h a i r m a n . On the long-term issue.
Secretary H u m p h r e y . A s I think I have explained to you before,
Mr. Patman, we don’t make interest rates. The market makes the in­
terest rates. We have securities to sell, and we sell our securities.
We sell our securities as nearly as we can at what the prevailing
markets are.
The C h a i r m a n . D o you really believe, Mr. Humphrey, that we have
a free money market in this country ?
Secretary H u m p h r e y . Y o u try to sell something, and you will find
out.
The C h a i r m a n . I wish you would answer my question. Do you be­
lieve that we have a free market ?
Secretary H u m p h r e y . Certainly we have a free market.
The C h a i r m a n . In Government bonds ?
Secretary H u m p h r e y . Certainly. Certainly we do. No question
about it. We went for a long time under Democratic rule, when we
didn’t have.
The C h a i r m a n . Of course, I am not bringing any politics into this
because I think this goes beyond politics. We are looking into the




CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

13

future over a long period of time. But in arriving at this 3 percent
rate, with whom did you confer ?
Secretary H u m p h r e y . Well, when that was—that was a year and
a half ago, or something like that. I can’t tell you exactly. We at­
tempted to get all the information we can, as to market conditions cur­
rently. We have committees that we confer with. We have all sorts
of meetings for learning what is going on in the financial markets, and
we get the very best information that we can as to what the facts are,
and as to what the trends are.
We seek information, as I said before, everywhere that we can get
it, from sources in which we have confidence.
The C h a i r m a n . A ll right. Let me see if I can get more specific in­
formation from you. You confer with representatives of the Ameri­
can Banking Association ?
Secretary H u m p h r e y . Yes.
The C h a i r m a n . Y o u confer with representatives of the Invest­
ment Bankers Association ?
Secretary H u m p h r e y . That’s right.
The C h a i r m a n . Y o u confer with representatives of the life-insur­
ance companies ?
Secretary H u m p h r e y . Yes.
The C h a i r m a n . D o you confer with representatives of the Stock
Exchange ?
Secretary H u m p h r e y . N o.
The C h a i r m a n . Of speculative boards ?
Secretary H u m p h r e y . Oh, we know a number of people. I know
a lot of people, and Burgess does—we all know a lot of people that—
for example, the president of the exchange drops in the office every
once in a while.
The C h a i r m a n . But those three groups are the ones that-----Secretary H u m p h r e y . Oh n o ; we confer with a lot of people. We
know a lot of business people. We confer with a lot of people, and
we confer with everyone we know of in whom we have any confidence
in their judgment with respect to money markets and money-market
conditions.
The C h a i r m a n . Being more specific, Mr. Humphrey, don’t you call
these people in when you are trying to arrive at a rate, like the Ameri­
can Bankers Association, and the Investment Bankers, and the lifeinsurance company representative? You confer with them in your
office?
Secretary H u m p h r e y . That’s right.
The C h a i r m a n . Here in Washington?
Secretary H u m p h r e y . And a lot of others.
The C h a i r m a n . Y o u have a formal meeting for that ?
Secretary H u m p h r e y . They come down here, and we present to
them our situation; we present to them what it is that we propose to
do, the amount of financing that is required at some time in the near
future, and we get their opinion about conditions.
The C h a i r m a n . A t this meeting, do you have any representatives
of the Board of Governors of the Federal Reserve System ?
Secretary H u m p h r e y . N o. These meetings are all separate. We
meet with different groups and groups separately.
The C h a i r m a n . A t different times.
79011—56------3



14

CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

Secretary H u m p h r e y . A t different times. But we also talk to the
Board at the same time.
The C h a i r m a n . A fter you have this meeting with the groups I have
indicated here, the three in particular, did you know that-----Secretary H u m p h r e y . We meet with others right at the same time.
The C h a i r m a n . Do you know that the representatives of the three
groups go out and confer with Mr. Martin of the Federal Reserve
Board, and before they make their recommendations to you as to what
you should-----Secretary H u m p h r e y . I don’t know who they talk to. I don’t know
who they talk to.
The C h a i r m a n . They come back and make their recommendations
later?
Secretary H u m p h r e y . Yes.
The C h a ir m a n . On setting this 3 percent rate, how many of those
3 groups agreed to the 3 percent rate ?
Secretary H u m p h r e y . N o w , Mr. Patman, you have asked us to
come here to talk about a matter between us and the Federal Reserve
Board.
The C h a i r m a n . That’s right.
Secretary H u m p h r e y . N o w you are talking about something a year
and a half ago. Now, let’s get back to what we are talking about.
The C h a i r m a n . I think the committee has a little something to do
with that, Mr. Humphrey.
Secretary H u m p h r e y . We will be perfectly glad to talk about the
other if you will tell me you want to do it, but that isn’t what we are
here for now.
The C h a i r m a n . Y o u are talking about interest and savings. This
goes into it, relates to it.
Secretary H u m p h r e y . That isn’t what we are here for now. You
asked us to come on this specific subject, and that is what we are
here for.
The C h a i r m a n . I want to confine it more or less to that.
We expect to have another investigation later on. We hope to go
into all of this.
Secretary H u m p h r e y . A ll right.
The C h a i r m a n . Including the three and three-quarter-----Secretary H u m p h r e y . I will be glad to refresh my recollection and
tell you specifically who said what a year and a half ago, if you will
tell me ahead of time you want to know it.
The C h a i r m a n . And the 3 % percent, too ?
Secretary H u m p h r e y . Yes. I f you will tell me specifically. I will
get out the files and look them up and-----The C h a i r m a n . I don’t know that I will ask you to name names.
Secretary H u m p h r e y . You just d i d .
The C h a i r m a n . I am talking about the several groups: insurance,
investment bankers, and-----Secretary H u m p h r e y . Well, Mr. Patman, let me say this: I don’t
know ever—it may have occurred some time, but almost never have
any of these groups been unanimous in their feelings. Almost always
there is a difference of opinion among the groups themselves. They
act—they are not acting as groups. They don’t vote as groups. We
get their general expressions of opinion of 20 men, and I, as a rule, ask
every one of the 2 0 , or every one of the 3 0 , his individual opinion, and



CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

15

almost invariably there is a difference of opinion in that 20 or 30 peo­
ple on specific items that we are talking about, and we are glad to have
that difference, and we are glad to have the feeling of the different
people in order to measure them and to have them in mind when we
reach our own decision as to what we will do. When we decide what
we w ill do, it is our decision, and it isn’t anybody else’s.
The C h a i r m a n . Mr. Humphrey, there is some information in the
press to the effect that if this discount rate works out all right, you
won’t say too much about it, and it will be all right. But if it is devas­
tating to the country and slows up business and everything, you will be
in a position to blame the Federal Reserve with it, and that it is a Dem­
ocratic Federal Reserve Board, and Mr. Martin is a Democrat.
Secretary H u m p h r e y . Mr. Patman, I never passed the buck in my
life.
The C h a i r m a n . Beg p a r d o n ?
Secretary H u m p h r e y . I never passed the buck in my life, and I am
not going to start now.
The C h a i r m a n . Y o u recommended the appointment of Mr. Martin ?
Secretary H u m p h r e y . I did.
The C h a i r m a n . H is reappointment.
Secretary H u m p h r e y . Yes, sir.
The C h a i r m a n . Y o u announced it yourself, didn’t you ?
Secretary H u m p h r e y . And I would recommend it again today. Mr.
Martin is the best qualified man, in my opinion, in the United States
for his job.
The C h a i r m a n . D id you have the authority from the President of
the United States to make this designation ?
Secretary H u m p h r e y . Make what designation?
The C h a i r m a n . A s Chairman of the Board of Governors of the
Federal Reserve System ?
Secretary H u m p h r e y . I didn’t designate him. The President o f
the United States did.
The C h a i r m a n . I t is for a 4-year term as Chairman ?
Secretary H u m p h r e y . I don’t remember what it is.
The C h a i r m a n . I believe you said down at the Press Club the other
day that one of the first things you did when you were appointed Sec­
retary of the Treasury was to ask B ill Martin if he would continue.
He had tendered his resignation, but you asked him if he would con­
tinue as Chairman. According to a transcript of your remarks, you
said “I did it for one reason. I did it because I thought then, and I
think now that B ill Martin is the best qualified man in the job. He
consented and took the job.” I shall incorporate the full transcript of
your remarks in this connection at the conclusion of your testimony
this morning.
I f this turns out in a way that is not in the interest of the country,
you are not going to blame the Federal Reserve Board, and you are
not going to blame Mr. Martin ?
Secretary H u m p h r e y . I have never blamed anybody for-----The C h a i r m a n . Y o u are not going to blame the Democrats for hav­
ing the Board composed mostly of Democrats ?
Secretary H u m p h r e y . I f I found a way, I would be glad to.
[Laughter.]
The C h a i r m a n . Are you alarmed just a little bit about the tightness
of the money market now, Mr. Humphrey?



16

CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

Secretary H u m p h r e y . No, I am not.
The C h a i r m a n . Y o u don’t think that the layoffs in the automobile
industry, and the failure of the automobile dealers to sell their cars has
anything to do with the tight money market?
Secretary H u m p h r e y . Well, I think their difficulties arise from a
number of things, and I think perhaps credit had something to do with
it.
On the other hand, I think that as you look at it now, conditions are
proceeding in a very satisfactory way, and I believe that over a rela­
tively short term some of these inventory difficulties will be behind us,
and we can forget them.
The C h a i r m a n . Mr. Humphrey, I would like to have your opinion
on this question: Interest rates have been raised more than 1 percent
the last year, generally. I think you would agree to that?
Secretary H u m p h r e y . Well, I guess that’s right.
The C h a i r m a n . More than 1 percent. I think that is a very safe
estimate. W ell, a 1 percent interest rate across the board in a coun­
try whose aggregate debt, including public and private, is more than
$700 billion, would amount to about $40 per capita each year increase,
so during the last month we have had a $40 per capita increase in the
interest rates.
Now, in a family of five that is the equivalent of $200 increase in
interest rates.
Now, don’t you think that by increasing these interest rates, and
thereby diverting purchasing power, $200 from a family of five, from
buying automobiles and refrigerators and appliances and other needed
comforts and conveniences of life, to the payment of interest, don’t you
think that has something to do with slowing up our economy ?
Secretary H u m p h r e y . Mr. Patman, you are just as wrong as you
can be.
The C h a i r m a n . I hope I a m .
Secretary H u m p h r e y . N o w , just let me show you how ridiculous
that statement is.
The C h a i r m a n . I would like to be proven.
Secretary H u m p h r e y . This debt, the great bulk of this debt is over
a term. It doesn’t all expire today, and a change in interest today
doesn’t change it all today.
The C h a i r m a n . Very true.
Secretary H u m p h r e y . Bonds are out for 20 years and 30 years, and
there are bonds out for 40 years, and bonds that are out for 10 years,
and a change in the interest rate doesn’t affect them a penny.
So you haven’t had anything like what you say in the change of in­
interest, anything like it. And it can’t come that way, and it is very
fortunate that it cannot, because you don’t have these wide swings.
An interest rate change affects only the current borrowing at the
moment. The borrowing next week is at a different rate from this
week, and the week after that is at another rate, and all the debt which
is outstanding in the meantime which is what you are talking about is
not affected a penny because it is out at fixed rates, so you don’t have
anything like what you are indicating. Your premise is completely in
error.
The C h a i r m a n . Let’s bring it down a little closer. You will have to
admit it will affect installment buying immediately, won’t it?




CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

17

Secretary H u m p h r e y . I think that installment buying has slowed
somewhat, and I think it is very good for the country that it has.
The Chairman . N ow, you are going into something else.
Secretary H u m p h r e y . Y ou asked me if I thought it would do it,
and I said it would, and I thought it was good.
The C h a i r m a n . It is slowing up installment buying ?
Secretary H u m p h r e y . I think that is g o o d .
The C h a i r m a n . Of course, I don’t think so, but you have as much
right to your opinion as I have to mine.
Secretary H u m p h r e y . That’s right.
The C h a i r m a n . But on installment buying, that is something where
the increase in interest rates is reflected quickly, isn’t it, right now ?
Secretary H u m p h r e y . Yes.
The C h a i r m a n . Therefore, the poorest people in the country who
represent a large part of the purchasing power, the increase in interest
rates slows them down right quick.
Secretary H u m p h r e y . Only as to new stuff they buy. It doesn’t
change the interest rate on what they bought last week. Certainly
not. So you are not talking about that at all.
The C h a i r m a n . But the installment buying, you see, the terms there
are not so long—12 months, 18 months.
Secretary H u m p h r e y . That’s right. The downpayment may be a
little more, and therefore the new commitment isn’t quite as readily
made as this week, as it was last week.
And I think that is good. I think that it was good that some of
these installment buying, that payments on it should catch up, and
it has been catching up.
The C h a i r m a n . H o w do you determine whether or not installment
buying, the aggregate amount, is too high ?
Secretary H u m p h r e y . That is a very difficult thing, and I don’t
think anybody can tell you whether it is too high, or whether it isn’t
too high. I think that you can get into periods that you can see where
excesses are going on, and it is well to restrain excesses. It is good,
Mr. Patman—one of the things that slows business down and puts
people out of work in this country is the accumulation of inventory.
Now, inventory can accumulate in the hands of the public, just as
well as it can accumulate in the hands of the intermediate manufac­
turer, or somebody else. It is total unpaid inventory, total inventory
not in use.
Now, if inventory gets too great, then people stop and begin to use.
They stop buying new and begin to use that inventory. They begin
to use that inventory, the new manufacture slows down. That means
people are out of work.
So that one of the things we don’t like to see, and that isn’t good for
the country, is an accumulation of unused inventory. That is one of
the things that credit helps to restrain. That is, inventory accumu­
lates. I f credit becomes a little tighter, it helps to restrain your ac­
cumulation of more inventory. I f we just do these things, I think I
told you a couple of years ago, and Senator Douglas, that if we can
just restrain some of these excesses early, the earlier they are re­
strained, the less effect it has, the quicker they are corrected.
I t is when you get to a great excess one way that you are forced into
a great excess the other way.




18

CONFLICTING OFFICIAL V IEW S ON MONETARY POLICY

I f we can have, as we go along, a rolling readjustment, an adjust­
ment here and there, and in the other place, one at a time as we go
along, this country can continue at a high level and with lots of
employment.
I f we get into great excesses in any direction, there w ill be a day
when there w ill be a lot of trouble. That is what we are seeking to
avoid.
It is by restraints, when restraints are required, and by assistance,
when assistance is required, that you try to level out and to keep a
rolling readjustment going, rather than to get into a difficult posi­
tion—you know, the higher you go the harder you fall. I t is just
that simple.
The C h a i r m a n . We should guard against falling down, too, as well
as up; because deflation is just about as destructive as inflation.
Secretary H u m p h r e y . Just exactly. The reason we don’t want to
get too far up is because we don’t want to go too far down.
The C h a i r m a n . I remember a time in this country when automo­
biles were not selling, and people were saying it is overproduction
when, looking back, it was underconsumption. People just didn’t
have the purchasing power.
Secretary H u m p h r e y . I read in the paper the other day that Chevro­
let automobiles were within 1 percent of the same number of cars sold
up to June 1 this year as they were last year.
The C h a i r m a n . I am not keeping up with the exact amount.
Secretary H u m p h r e y . That isn’t very much o f a f a l l- o f f .
The C h a i r m a n . In regard to this interest rate being reflected slow­
ly, in the entire economy, I think you must admit, Mr. Humphrey,
that it is reflected rather quickly among the masses of the people who
are the low-income groups. They are the ones who buy on the in­
stallment plan all the time and charge accounts, and in addition to
that where they have home mortgages they have to refinance them
every now and then, and in refinancing they have to pay this increased
interest charge. I think that you must admit that our economy is
affected more seriously among those groups by an increase in interest
rate than the other groups are, and by reason of that would have a
tendency to slow up the economy quicker.
Secretary H u m p h r e y . Well, increased interest, increased tightening
of credit terms does tend to restrict activity. There isn’t any ques­
tion about it.
The C h a i r m a n . Do you know anything else that unbalances every­
body’s budget except increased interest rates ?
Secretary H u m p h r e y . Yes, a lot of things will unbalance them a
whole lot faster than that. You lose your job----The C h a i r m a n . Y o u are talking about individuals?
Secretary H u m p h r e y . Sure.
The C h a i r m a n . I am talking about throughout the Nation, do you
know of anything else that w ill unbalance everybody’s budget im­
mediately except-----Secretary H u m p h r e y . Interest wouldn’t unbalance the budget im­
mediately.
The C h a i r m a n . When they have to pay more interest-----Secretary H u m p h r e y . They don’t have to pay more interest unless
they make a new-----


CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

19

The C h a i r m a n . They are spending less.
Secretary H u m p h r e y . They don’t pay more unless they make a new
loan. I t only affects the fellows that make new loans.
The C h a i r m a n . They are making new loans all the time, and in­
crease in interest rates, that unbalances the Federal budget, the States,
the counties, cities, political subdivisions.
Secretary H u m p h r e y . Only when they borrow the new money.
The C h a i r m a n . Every corporation, every public utility, every part­
nership, every person? every family budget in the Nation is imme­
diately unbalanced by increase in the interest rates.
Secretary H u m p h r e y . That is where you are just as wrong as you
can be, and if you leave out the word ‘*immeditaely” and put in 20,
30,40 years, I will agree with you.
The C h a i r m a n . But people look into the future.
Take, for instance, in the city where interest rate is going up, they
know that means increased taxes. They begin to plan for it. They
know that the telephone company is going to ask for an increase in
rates because they are paying higher interest. The gas company and
the electric utility, they know that all utilities are going to come in
and ask for an increase in rates because they are having to pay higher
interest.
Secretary H u m p h r e y . Well, Mr. Patman, I think this is about the
same line of talk you gave me 2y2 or 3 years ago, at the time we put out
those 31/4 percents, when you prophesied all these dire things, and we
have had a two-tenths of 1 percent change in the cost of living, so it
hasn’t happened in the last couple of years.
The C h a i r m a n . Let’s analyze that briefly, Mr. Humphrey. Where
has the cost of living gone? The farmer hasn’t received it. While
industrial prices were going up, farm prices had to go down to keep
the cost of living on an even keel.
Secretary H u m p h r e y . Very small adjustment either way.
The C h a i r m a n . I f farm prices had gone up in the same way that
industrial prices went up, you couldn’t say that you would be within
that 2 percent.
Secretary H u m p h r e y . I didn’t say 2 percent. I said two-tenths of
1 percent.
The C h a i r m a n . You can’t say 2 percent, or 5 percent, either. I f
farm prices had gone up in proportion to industrial prices, so, after
all-----Secretary H u m p h r e y . N o w , wait a minute. Have you made those
figures-----The C h a i r m a n . W ait just a minute. After all, this stable price
level, if you want to put it that way, is at the expense of the farmer.
Secretary H u m p h r e y . N o.
The C h a i r m a n . Because as industrial prices went up, farm prices
had to go down, or that cost level would have gone up, too.
Secretary H u m p h r e y . N o, no. I f you made up the figures, Mr.
Patman, you will find it would be a very small difference.
The C h a i r m a n . Concerning interest rates and looking into the fu­
ture, people in our country in the Southwest are not voting bonds for
ublic schools and roads and public improvements like they have been,
ecause of this high interest rate. They are having to pay up to 3y2
and 4 percent interest on securities. Now, that is a pretty high tax-

E




20

CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

exempt interest rate. Doesn’t that disturb you a little bit, Mr.
Humphrey, that people have to pay 3y2 percent on tax-exempt bonds %
Secretary H u m p h r e y . N o.
The C h a ir m a n . H o w much do you think they should p a y ?
Secretary H u m p h r e y . I don’t know. And what they should pay
now may not have anything to do with what they should pay 6 months
from now, or what they paid 6 months ago. It will vary. But I
think this, Mr. Patman, that we are at the highest level of employ­
ment in this country that this country has ever seen. Never have
there been as many people working in America for as high wages
as they are today. We have never had anything like it before. We
have a relatively full employment in America, a very high employ­
ment in America. We have shortages and have had over the past
several months, shortages in a great many commodities. You are
just on a balance, and it is hard to get a great many commodities.
Now, if when you are at that extremely high level, extremely high
level both of manpower and materials, you still keep moving up, what
happens is that you just bid against each other for the same things,
and you don’t make more things; you just raise the prices.
So that when you get up to a very high level, and you have got
your head against the ceiling, it is well to just have it hesitate a little
bit, and not keep pushing forward to a point where all you do is in­
crease the price and not the commodities. And that is what is going
on now, and I think it is very good and very wholesome.
The C h a ir m a n . But we have to expand every year to do what you
said a while ago.
Secretary H u m p h r e y . Sure.
The C h a ir m a n . To just take care o f these million people.
Secretary H u m p h r e y . We are expanding. We are expanding.
The C h a ir m a n . I guess about two-thirds of them each year are new
people coming on the market and about one-third of them just dis­
placed in some way or manner.
Secretary H u m p h r e y . That’s right, Mr. Patman, and real wages in
terms of what money will buy, and real employment in terms of peo­
ple employed are higher today than they have ever been in the history
of this country.
The C h a ir m a n . What I can’t understand is how we can keep on
having this degree of prosperity in expansion if we keep on increasing
the interest burden on the people unnecessarily and get more and
more, taking more and more out of their pay envelope for increases,
thereby making it impossible for them to buy more and more of the
things that they actually need.
In other words, it is diverting purchasing power, and I think there
will be a lim it to it, and I think our whole economy will suffer from
it. I hope it does not.
Secretary H u m p h r e y . That is exactly what you told me 3 years ago,
when you were talking about the 3% percent, and for those 3 years
you have been wrong all the while.
The C h a ir m a n . I don’t know whether I have been or not. Talking
about inflation, the farmers are still suffering: the small-business man
is suffering. The small-business man, I think, is in worse shape than
he has been in for a long time in this country, and I think it is one
thing that is due to the fact there is no credit available for him.




CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

21

Now, for the big man you have got the specialists, those who oper­
ate in other countries; we have the World Bank, where we put up
our part of the money, about a third; with the Export-Import Bank—
it has billions of lending power, and we put up all the money there.
We have the International Finance Corporation that you so ably rep­
resented to us to be such a thing before the Banking and Currency Com­
mittee.
Those three agencies can take care of the big concerns. But we
have no way of helping the little man, and the little man is suffering
more now than he has ever suffered.
H e has had no inflation. There is no inflation among the farmers,
no inflation among the small-business men, no inflation among the
home builders.
Secretary H u m p h r e y . There isn’t any inflation anywhere I know of,
and I hope we don’t get it.
The C h a ir m a n . That is the matter I am talking a b o u t : Why then
all these interest rate increases ?
Secretary H u m p h r e y . They are helping to restrain inflation.
The C h a ir m a n . T o restrain inflation ?
Secretary H u m p h r e y . They are helping t o restrain it; yes, sir.
The C h a ir m a n . Don’t you think we should keep in mind the needs
to restrain deflation, too ?
Secretary H u m p h r e y . I d o; very definitely.
The C h a ir m a n . Well, Mr. Humphrey, you have been very kind to
come up and answer these questions today. I wish you had answered
them more fully in your letter at first. But, of course, that is your
prerogative, and you have a right to do anything you want to about it.
I would like to reserve the right, as I have before, if I have over­
looked some question I would like to ask you, I would like the privilege
of sending it down to you and ask you to answer it for this record be­
fore the record closes, if you please.
Secretary H u m p h r e y . Mr. Patman, I will be glad to try to answer
any questions you want at any time.
The C h a ir m a n . Y o u have always been very cooperative, and I
thank you.
Secretary H u m p h r e y . I thank you very much.
(The excerpts previously referred to follow :)
E xcerpt F rom

the

T ranscript of R em a r k s by
at P ress C lu b L u n c h e o n ,

T reasury S ecretary H um ph rey
M a y 24, 1956

* * * K now ing th e P re s s C lub’s h a b it of th in k in g u p th e m ost em b arrassin g
questions th ey can to p resen t, I th o u g h t m aybe I w ould feel th a t I w ould a sk m y­
self som e questions first, ta k in g m y ow n q u estio n s th a t I w ould a sk a n d p erh ap s by
th e tim e I got th ro u g h an sw e rin g th e m you w ould e ith e r be so tire d listening, or
i t w ould be so la te th e c h a irm a n w ould a d jo u rn th e m eetin g and it w ould be
a ll over.

*

*

*

*

*

*

*

T h is is m y la s t q u e s tio n : I s th e re a co n tro v ersy betw een th e F e d e ra l R eserve
S ystem a n d th e T re a su ry ?
Y ou m u st a d m it t h a t I h av e trie d to a sk q u estio n s th a t a re a t le a s t subjects
of discussion.
T h e F e d e ra l R eserv e System a s a w hole sp re a d s o u t a ll over th e U nited S tates.
I t is m ade up of b o ard s of o u r b est citizens, a m a jo rity of w hom a re businessm en
in th e v a rio u s com m unities, a n d th e s e com m unities cover th e e n tire U n ited S tates.
W hen you a re ta lk in g ab o u t th e actio n o f th e F ed eral R eserve System, you
79011—56------ 4




22

CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

a re ta lk in g ab o u t a w id esp read sy stem of in fo rm atio n , of opinion, of e x a m in a tio n
of w h a t is going on, a n d o f know ledge o f conditions in th is co u n try .
T he F e d e ra l R eserve System , u n d e r o u r law s, is a n in d ep en d e n t system a n d is
responsible fo r c e rta in a re a s o f action. A t som e p revious tim es in o u r h isto ry
th e question of its independence h a s come in to discussion. T h e re h av e been
tim es w hen p erh ap s i t h a s been su b se rv ie n t to o th e r jud g m en t.
B efore w e cam e h e re th e re w a s such a situ a tio n . I t w as resolved before we
cam e h e re in th e re e sta b lish m e n t of th e independence of th e F e d e ra l R eserve
System in its field. M a rk you, in its field.
W hen I assum ed th e resp o n sib ility o f m y office, I re alized th e close asso ciatio n
th a t w ould h av e to e x is t betw een th e F e d e ra l R eserv e System a n d th e T re a su ry ,
because o u r fields a re so interlo ck ed . B ill M a rtin w as th e n th e C h a irm an o f th e
F e d e ra l R eserve B oard. O ne o f th e v e ry first th in g s th a t I d id w as to a sk B ill
M artin if he w ould continue. H e h a d te n d ere d a resig n atio n . I ask ed h im if he
w ould continue a s th e C h airm an . I d id it fo r one reason. I d id i t because I
th o u g h t th en , a n d I th in k now, th a t B ill M a rtin is th e b est qualified m an in th e
U nited S ta te s fo r h is job. [A pplause.]
H e consented an d took th e job. W e a rra n g e d a t th a t tim e t h a t w e w ould h av e
th e closest cooperation betw een th e F e d e ra l R eserv e B o ard a n d th e T re a su ry ,
each recognizing th e o th e r’s field o f o p era tio n an d th e o th e r’s independence in h is
p a rtic u la r field.
W e s e t u p a lo t o f m echanics, su ch a s m eetin g s back a n d fo rth , w eekly m eet­
ings, biw eekly o r triw e e k ly m eetings. W e h av e gone along in a v ery close asso cia­
tion, each p resen tin g to th e o th e r h is view s, h e a rin g h is view s, giving co n sid era­
tio n to th e o th e r’s view s, a n d finally deciding w h a t h e w a s going to do in th e
field of w hich he w a s responsible a n d going a h e a d w ith h is job. W e h av e h a d
th a t close association, a s I th in k you m u st in a n y situ a tio n w h ere you a re try in g
to balance.
T he m ost difficult situ a tio n is w h ere you a re try in g to b alan c e th e effect of
p ressures, both in fla tio n a ry a n d d eflatio n ary p ressu res, n o t only a s to w h a t th e
effects o f those p re ssu re s a re to d a y b u t w h a t th e effect o f th o se p re ssu re s is
going to be 3 m onths, 6 m onths, o r even some longer p erio d hence.
You a re in a field of trem en d o u s difficulty. You a re in a field w h ere nobody
can re a lly be very su re th a t he is rig h t. W orse th a n th a t, you n ev er can know
a fte rw a rd s w ho is rig h t because th is is a m oving business. W hen you ta k e ac­
tion one w ay you n ev er w ill know , a n d nobody else w ill ev er know , w h a t w ould
have h app ened if you h a d ta k e n th e actio n th e o th e r w ay. T h e re is no w ay to
ever check up.
All d u rin g th is p erio d w e h a d c o n tin u al discussions, c o n tin u al questio n s back
an d fo r th am ongst o u r staffs, a s to w h a t a ctio n should be ta k e n to re s is t both
in flatio n ary a n d d eflatio n ary p ressu res.
B y a n d la rg e w e h a v e been fa irly lucky in h a v in g a p re tty close b alan c e d u rin g
m ost o f th e p eriod betw een th ese p ressu res. T h a t is th e finest positio n th a t th e
people of th e U n ited S ta te s can be in. A nd it is th e m ost difficult p o sitio n fo r
th e people w ho a re try in g to b alan ce th e p re ssu re s in an y w a y th a t th e y can.
I w ill ju s t cite fo r a m om ent w h a t th e p re ssu re s are.
W e have fo r a p erio d o f a good m an y m o n th s h a d th e h ig h est em ploym ent
in th e h is to ry of th is co u n try , th e h ig h e st e a rn in g s in th e h is to ry of th e co u n try ,
th e g re a te st volum e o f b u sin ess in th e h is to ry o f th e co u n try . W e h a v e been
going along a t th is e x trem ely h ig h level a la rg e p a r t o f th is period, a n d p re tty
w ell b alan ced w ith v ery little change, e ith e r d eflatio n ary o r in flatio n ary , d u rin g
th is period. V ery, v e ry little change.
W hen you a re in a p erio d o f v ery h ig h em ploym ent, v ery h ig h b u sin ess ac tiv ity ,
if you tr y to move u p to a n y g re a t e x te n t fro m t h a t e x trem ely h ig h level, you
soon re a c h th e place w h ere th e re a r e n o t enough m ore m a te ria ls, a n d th e re
a re n o t enough m ore people, to m ak e m an y m o re goods. I f th e p re s su re is
pushed too hig h u n d e r th o se circu m stan ces, you g e t a scram b le fo r m a te ria ls
and a scram ble fo r people a n d you ra ise costs to th e g en eral public, th e cost
th a t th e public h a s to pay, w ith o u t giving th e public a n y th in g m ore o r b e tte r
fo r it.
T h a t is a n in fla tio n a ry p re s su re th a t should a n d m u st, be avoided, if i t can be,
because you a re n o t g e ttin g b e tte r goods a n d you a re n o t g e ttin g m ore goods.
You a re sim ply p ay in g m o re fo r th em because you a lre a d y a re a t a b o u t a s h ig h
a s you can go.
I f d u rin g such a p erio d th e re a re p re ssu re s a n d scram bles to in crea se inven­
tories, o r to b u ild in v en to ries, o r to gam ble w ith goods a g a in s t p rice rises, o r
a g a in st m a te ria l sh o rtag es, you v e ry soon g e t y o urselves in to a p o sitio n w h ere




CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

23

you h av e m ore th a n y o u r n o rm a l re q u irem en ts need. U n d er th o se circum stances
a s in v en to ries accu m u la te they, in a n d of them selves, soon become a b u rd en
a n d h av e to be liq u id ated . A s you liq u id a te th e in v e n to ry you c u rta il y o u r
p u rc h a se o f new p ro d u cts. T h en you begin to h a v e d efla tio n a ry p re ssu res a n d
you begin to lose em ploym ent a n d begin to g e t in tro u b le on th e dow n side.
T h e F e d e ra l R eserv e System , w ith its com bined ju d g m en t of a ll of th ese
people, h a s been lean in g , a s th e y say, a g a in s t th e w in d d u rin g th is h ig h period,
to p re v e n t in fla tio n a ry p ressu re s. W e h a v e h a d discu ssio n s a s to w hen th ey
should move, o r how th e y sh o u ld move. W e v ery fra n k ly alw ay s s ta te d o u r
opinions to them , a n d th e y to us. W e ta lk e d a b o u t i t a t length. In clu d ed in
th o se discussions a re th e P re s id e n t’s econom ic a d v ise rs w ho w orked w ith u s
co n tinually, A rth u r B u rn s a n d h is people, a n d w e a ll ex p ressed ourselves, a n d
a g re a t d eal o f th e tim e th e re is a difference of opinion in sh a d e s of tim in g a n d
in sh ad es of w h a t th e p re ssu re s w ill be.
W e w ork th is o u t to a p o in t w h e re th e F e d e ra l R eserve System exercises its
final ju d g m en t in its field a n d th e T re a su ry ex ercises it s final ju d g m en t in its
field.
T h is la s t tim e w h en th e d iscu ssio n w as u p a s to w h e th e r w e w ould m ake
th is a d d itio n a l move, w e h a d to b alan c e n o t on ly th e conditions th a t o b tain ed
a t th e tim e, b u t th e q u estio n of w h a t those co nditions a re going to be som etim e
hence. V ery fra n k ly I d iffered w ith B ill [M a rtin ], a n d o u r people differed w ith
h is people, a s to th e fo rce of th e p re ssu re s som e tim e hence. N ot a s to th e
conditions o f to d ay , b u t a s to th e fo rce of p re ssu re s some tim e hence.
I t seem ed to u s th a t w e could a lre a d y see som e n a tu r a l conditions th a t w ere
com ing. W e could see som e excessive in v en to ry in th e autom obile business.
W e could see som e excessive in v e n to ry h e re a n d th ere . W e could see a steel
w age n eg o tiatio n com ing up. W e could see som e accu m u latio n in th a t field.
W e fe lt t h a t th e n a tu r a l co nditions w ould e x e rt som e d o w n w ard p ressu res th a t
w ould offset th e se p re ssu re s u p w ard , a n d th a t th e re w as no fu r th e r a ctio n re ­
q u ired a t th a t tim e, t h a t i t w a s b e tte r to go w ith o u t it.
M y g en eral feeling ab o u t o u r econom y is t h a t th e b est in te re sts o f A m erica
a re served w hen th e g re a t m a jo rity of people in A m erica h a v e confidence in th e
situ a tio n , w hen th e y believe th a t th in g s a re sound a n d stro n g , th a t th e ir jobs
a re reaso n ab ly secu re a n d th a t good tim es, w h ich w e a re in, a re going to con­
tin u e. N ot n ecessarily p e ak tim es. I th in k w e m u st d is tin g u ish th a t.
I th in k w e a re o fte n a p t to e x a g g e ra te w hen in som e p a rtic u la r place th e re is
som e re la tiv e ly sm all re a d ju stm e n t, a n d th in k t h a t is b a d tim es, o r th a t w hen
som ebody is n o t b re ak in g reco rd s a ll th e tim e, th a t t h a t is b ad tim es. I t is not.
W hen you h av e very h ig h levels, you h a v e to ex p ect sm all a d ju stm e n ts in th e
economy, a n d you th a n k th e L o rd t h a t th e y a re sm all an d come h e re th e re an d
th e o th e r place. W hen th e y a re com ing h e re a n d th e re a n d th e o th e r place, i t
m eans th e y a re n o t a ll going to come a t once. W hen th e y do n o t a ll come a t
once th e y c o rrect th em selv es re la tiv e ly soon a n d w ith re la tiv e ly little dam age.
W hen you h av e a h ig h degree o f confidence th a t t h a t is th e situ atio n , you can
feel t h a t you h av e p re tty sound g ro u n d u n d e r y o u r feet.
T he reaso n I p u t so m uch stre ss on confidence is t h i s : T h e m a jo rity o f people
in A m erica hav e m ore m oney to spend th a n ju s t w h a t th e y h av e to spend every
d a y to live on—fo r clothes a n d food a n d sh elter. T hey can spend a little m ore,
o r a little less, depending on how th e y feel, depending on how secure th e y feel—
depending on th e ir confidence.
T hey can buy a w a sh in g m ach in e or n o t buy. T hey can tr a d e autom obiles,
o r go along w ith th e one th ey have. T hey can b u y a house o r th ey can still p ay
re n t. W ith confidence you h a v e th e people going along on a n even keel an d
buy ing n o t ju s t th e th in g s th e y need, b u t o th e r th in g s th e y w an t, th e th in g s
t h a t a re a v ailab le fo r th em to have, to keep in c re a sin g th e ir scale of liv in g a n d
to keep a stro n g econom y a n d w id esp read activ ity .
I f people begin to lose t h a t confidence an d th e y begin to c u rta il th e ir a c tiv i­
ties, w hy you c a n v e ry soon find y o u rself in a positio n w here, w hen th a t fellow
decides n o t to buy t h a t w ash in g m achine, i t is only a little w h ile b efo re e ith e r
th e re is a n o th e r w a sh in g m ach in e in th e in v en to ry , a n d la te r th e re is a m an
o u t of a job.
. ,
^
^
T
jC
T h e m ost im p o rta n t th in g in A m erica is a 3 0 b. D on’t ev er fo rg e t it. I f you
do n o t h av e th e jobs, you do n o t h a v e a n y A m erica. T h e problem fo r a ll o f us
is to see, in every w ay t h a t w e can, t h a t w e do h av e jobs in A m erica. I t is jobs
in A m erica th a t m ak es ev ery th in g th a t w e h av e. I t m ak es a ll th e goods w e
have. I t m akes a ll th e m a te ria l th in g s. I am n o t ta lk in g sp iritu a lly . I am
ta lk in g m ate ria lly . Jo b s m ak e a ll th e m a te ria l th in g s t h a t we have. Jo b s
a re th e m o st im p o rta n t th in g in th is co u n try .



24

CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

Confidence in o u r fin an cial situ a tio n a n d o u r fin an cial m an agem en t, in o u r
prudence, in o u r fin an cial in te g rity , is e sse n tia l to th e m a in ten a n c e of jo b s a n d
lots of jobs. T h erefo re, I th in k th a t w h a t w e w a n t to do is so conduct ourselves
in every w ay so w e do n o t sh ak e th a t confidence, so th a t th e people fe e l th a t
w e a re w ork in g in th e b est in te re s ts of lean in g a g a in s t b o th in flatio n a n d defla­
tion, b u t le ttin g th e ju d g m e n t of 160 m illion people d eterm in e w h a t th e y w ill
buy, w hen th ey w ill buy it, an d w h a t th ey w ill p ay fo r i t a n d h av e th e confi­
dence to go ah e a d an d do it.

STATEMENT 0E CHAIRMAN WILLIAM MeCHESNEY MARTIN, JR.,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

The C h a ir m a n . Mr. Martin, we are delighted to have you here.
W ill you identify yourself for the record, please, sir ?
Mr. M a r t i n . Mr. William M. Martin, Jr., Chairman of the Board
of Governors of the Federal Reserve System.
The C h a ir m a n . Would you like to make a statement of your own,
preceding the questions to be asked ?
Mr. M a r t i n . I would like to, Mr. Patman. I would also like to an­
swer the 3 or 4 questions in the letter.
The C h a ir m a n . I wish you would do that first.
M r . M a r t i n . I would like to explain first that I regret very much
that you feel that our answers were unresponsive in the first instance.
There was no intention to be unresponsive. It was entirely a matter
of endeavoring to describe the modus operandi of an informal work­
ing arrangement, which is nonstatutory, for consultation and contin­
uous conversations and cooperation with the Treasury Department
and other interested agencies.
It was in that light that we made the original answers, and you state
in your statement that you suggest there is similarity between Secre­
tary Humphrey’s answers and my answers.
The C h a ir m a n . Yes.
M r . M a r t i n . I would like to say that I consulted with Secretary
Humphrey about this answer, because I thought it was important to
know whether he had a different concept about the Federal Reserve
System than I had.
The C h a ir m a n . Preceding your reply.
Mr. M a r t i n . Preceding my reply. I f he had a different concept of
the independence of the Federal Reserve System than I had, it didn’t
seem to me to make any difference particularly whether I answered
these specific questions or not. So I would like you to know that I
had that consultation. We did not exchange drafts in that sense, but
I went over this matter with him to be sure that there was no conflict
whatever.
Now, there has been no feuding between the Treasury and the Fed­
eral Reserve System, and we are continuing to work on a weekly, daily
basis, and the nature of these conversations that we have are those
where we get the benefit of being able to converse weekly, daily, over
the telephone, and at any -time that we feel like it, about any aspect
of monetary and credit policy, and about other operations of the finan­
cial end of the Government.
Now, it is in that light and in the fact that we have certain statutory
responsibilities given us in the Federal Reserve Act, that the Con­
gress has given us the Federal Reserve Act, which, as I frequently
say, is our trust indenture, whereby we act in a trustee capacity for the



CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

25

Congress and the people of the United States, and the Congress can
change the Federal Reserve Act.
The C h a i r m a n . May I interrupt you there just to remind you of a
statement that went out from Washington last week by a famous
weekly publication? I will just read it to you, and see if you agree
with it, on that particular point.
I s th e re politics in it? —

speaking about the discount rate—
I s i t due to a d m in is tra tiv e p re ssu re s fo r easy feeling before election? F ed e ra l
R eserve m en em p h atically say “No.” T hey say th ey a re independent of any p a rty
o r a n y G overnm ent a d m in istra tio n .

Would you consider that a correct statement ?
M r . M a r t i n . I would say that the Federal Reserve System, as set
up and as presently administered, is as close to a nonpolitical agency
as it is possible to have in this world. A definition of politics” coula
become very difficult at times but we are trying to do what is right in
a completely nonpolitical sense.
The C h a ir m a n . I know, but you have not answered the question.
Mr. M a r t i n . I would say that the gentleman who wrote that is
wrong. That is his judgment.
The C h a ir m a n . But you are not independent of any Government
administration. You are independent of any political party. I
would agree with you on that, but you are not independent of any
Government administration. Of course, I assume Government ad­
ministration would mean either one of the branches of the Govern­
ment, like the executive or the legislative. You are not independent
of the legislative branch of the Government, because you are an agent
of Congress.
M r . M a r t i n . We are an agent of the Congress.
Vice Chairman P a t m a n . Agent of the Congress.
M r . M a r t i n . 1 would like to stress that in my prepared statement
that the Federal Reserve Act, as we read it-----The C h a ir m a n . Before we get away from it, if you please, Mr.
Martin, pardon the interruption. In consulting all these different
people and in arriving at your conclusions, and making these farreaching decisions, do you confer with anybody in connection with the
Congress that is connected with the Congress ?
Mr. M a r t i n . From time to time I have conferred with the chair­
men of the Banking and Currency Committees, in the Senate and the
House. I do not, as a regular practice.
The C h a ir m a n . D o you do that in regard to raising discount rates
and similar things ?
M r . M a r t i n . No; I have not done that.
The C h a ir m a n . I t occurs to me that you are in a position—I am
not trying to subordinate you or anything like that—but you yourself
nave said at one time that you are in the position of a servant. The
relationship as between the Congress and the Federal Reserve Board,
is more like that of a master and servant, and having that relationship,
or a similar one, wouldn’t you feel that you should confer with the Con­
gress now and then about things which involve so much ?
Mr. M a r t i n . I am open to suggestions. I have had great question
about it, because ours is a delegated authority. We are fully respon­
sible, and accept responsibility. I f something goes wrong, we expect



26

CONFLICTING OFFICIAL VIEW S ON MONETARY POLICY

to take the blame. We stand before the body politic. I t could be that
you would want to have a watchdog committee, or to have a representa­
tive of the Congress attend all of our meetings, but in that event it
seems to me that since this is a continuous process that changes from
day to day, and week to week, that that representative ought to be a
full-time representative, and ought to share in the responsibility
for the decision, as well as serve on a consultative basis. The re­
sponsibility for the decision in this instance, or in other instances,
in terms of the Federal Reserve Act, lies with the Federal Reserve
Board, and we stand at the bar of public opinion and congressional
behest on that at any time.
The C h a ir m a n . May I comment briefly on that suggestion of yours,
namely, that whoever you confer with should assume some of the re­
sponsibility, if it is a representative of the Congress? You do not
expect the people with whom you confer outside of Congress to share
your responsibility, do you ? You do not expect the Federal Advisory
Committee of the Federal Reserve System, for instance, to share in
your responsibility. You don’t expect any of these 108 directors of the
12 Federal Reserve banks to share any of the Board’s responsibility.
You take the responsibility yourself, do you not ?
Mr. M a r t i n . Oh, n o ; I expect the directors of the Federal Reserve
banks, in accord with the Federal Reserve Act, to act to accept their
share of the responsibility. As to the Federal Advisory Council, that
is a statutory body-----The C h a ir m a n . That’s right.
Mr. M a r t i n . And where it is written into the statute that we should
confer with anybody, why, of course, we are going to do it. I am talk­
ing about statutory responsibility now.
The C h a ir m a n . O f course, you know why the Federal Advisory
Council was written in there. You know that President Wilson was
determined that bankers should not be on a policy-making board and
finally they agreed on having the bankers represented through that
Council. After Mr. Wilson died and we were in the depths of the
depression, the bankers who wanted representation on important money
management boards got it during the depression and they still have
it. That is right, isn’t it ?
Mr. M a r t i n . The Federal Advisory Council is a part of the statute.
The C h a ir m a n . They have got not only the Federal Advisory Coun­
cil, but they have got banker representation, too, on the Open Market
Committee.
Mr. M a r t i n . Not banker representation on the Open Market Com­
mittee unless—this is a favorite discussion between you and me—your
reference is to the fact that the original recommendation comes from
the board of directors of a given bank that includes certain directors
who are bankers.
The C h a ir m a n . I once asked you to find out how many of the class
B directors own interests in banks. Didn’t your questionnaire dis­
close that a majority of them were bankers ?
M r. M a r t i n . I d o n ’t t h i n k a m a j o r it y .
The C h a ir m a n . That is the impression I go from the information
from your Board.
Mr. M a r t i n . I think I could resubmit for the record that state­
ment. I would be very glad to do it, but there were a few that do have
interest in banks, though there are very few.



CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

27

The C h a i r m a n . The information I got was majority.
Mr. M a r t i n . I will put that statement in the record of this hearing,
if that is desired.
(The statement referred to is as follows:)
Information with respect to the ownership of bank stock by class B directors
of Federal Reserve bainks was furnished at the request of Mr. Patman for the
record at the hearings before the Committee on Banking and Currency of the
House of Representatives on H. R. 9285—Direct Purchases of United States Obli­
gations by Federal Reserve Banks—on February 27 and 29,1956. The following
is taken from page 25 of those hearings:
“The law does not prohibit class B directors of Federal Reserve Banks from
being stockholders of banks. In order to respond to the request of Mr. Patman
and Mr. Multer, therefore, it was necessary to ask each Federal Reserve bank
to obtain a statement from each of its class B directors of the amount of bank
stock now owned and whether there had been any change in ownership during
the past 3 years or since their election as directors, whichever is the shorter
period.
“Under the law, there are 36 class B directors of Federal Reserve banks (3 for
each of the 12 banks). At the time of this inquiry there was 1 vacancy, and it
was not possible to obtain the information from 2 of such directors who were
on extended trips and could not be reached.1
The remaining 33 class B directors own stock of banks as follows:
“Sixteen own no bank stock and have owned no bank stock since their elec­
tion as directors.
“Eleven own less than one-half of 1 percent of the stock of any 1 bank.
“Three own less than 2 percent of the stock of any 1 bank.
“One owns 2% percent of the stock of 1 bank (130 of 6,000 shares).
“One owns 13 percent of the stock of 1 bank (3,900 of 30,000 shares).
“One owns 15%o percent of the stock of 1 bank (312 of 2,000 shares).
“Four of the directors had increased their holdings of bank stock within their
term of office for the past 3 years. The increased holdings of three resulted
from stock dividends or the exercise of rights in connection with an increase
in capital. Only one represented an increase in proportionate ownership. None
of the 17 owning bank stock has decreased his holdings since his election as
director.”

The C h a i r m a n . They are elected by bankers. Out of the board of
directors in New York-—and it is the same in each Federal Reserve
district—6 of the 9 directors are elected by the banks. Now, whoever
they select, of course, I consider that banker representation has selected
them. You think that because some of them are not bankers that----Mr. M a r t i n . I think because they are insulated—and I am glad to
have an opportunity to put this statement in the record, because I
think if there is anything not in consonance with the Federal Reserve
Act, nobody wants to know it quicker than we do.
The C h a i r m a n . All right, sir. Pardon the interruption, Mr. Mar­
tin. You may proceed.
Mr. M a r t i n . Would you like me to read this statement ?
The C h a i r m a n . If you prefer.
Mr. M a r t i n . Then I will answer these questions very briefly at the
end.
Your letter of June 4, advising me of the time for this public hear­
ing, and the subcommittee’s statement of June 7 for the press, state
1 S in c e th a t tim e th e v ac a n c y h as been filled an d th e in fo rm atio n fro m the tw o d irectors
re fe rre d to h a s been obtained asi fo llo w s :
One d irecto r ow ns eigh ty-tw o h u n d red ths o f 1 p ercen t o f th e stock o f one bank.
One ow n s 1 % p ercen t o f th e stock o f one bank (30 0 o f 20,000 sh ares, w hich h as been
reduced fro m 3 5 0 sh a re s w ith in the p a s t 3 y e a r s ) .
One ow n s 3 % p ercen t o f th e stock o f one bank (20 0 o f 6,000 sh a re s) an d 1 0 percent
( 1 0 0 o f 1,0 0 0 sh a re s) o f an o th er bank. T h ere h a s been no change in h is holdings d u rin g
the p a s t 3 y e a rs.




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CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

that you are interested at this time in procedural matters surrounding
the recent increases of the discount rate at Federal Reserve banks, and
that you wish to leave for a later date questions as to the merits and
wisdom of the action itself.
Your decision not to go immediately into the merits or demerits of
this particular action seems to me a wise one. As you know, the Fed­
eral Reserve Act specifies a procedure for reporting annually to the
Congress, whose agent we are, on the policy actions of the Reserve
Board, and of the Federal Open Market Committee.
A wider understanding of these procedures is very desirable. Ac­
cordingly, this statement will set forth an elementary outline of organ­
ization and procedure and will include a statement relative to the 108
directors of the 12 Federal Reserve banks, who, under the Federal
Reserve Act, have initial responsibility for determining discount rates
at their respective institutions.
I list the name and the directors at the back of the statement.
The Chairman. Y ou list those that were class 3 directors that owned
the stock in banks ?
Mr. Martin. N o, but I will supplement this statement with other
material to meet the request which has just come up.
Discussion and full disclosure of monetary policy and action are,
of course, essential. The effects of a given step in the development of
monetary policy, however, are difficult, if not impossible, to gage in
the short run.
Montetary policy is a fluid, not a static, process. Each separate
action is usually a supplemental or complementary step in develop­
ment of an overall pattern of policy.
Policies are shaped from day to day by a connected series of separate
actions, with constant adaptations to the ever-changing factors and
forces in the vast economic fabric of the country.
Therefore, it would be illogical and misleading to lift out of context
a given step in the process. Debate close to the time of action does
not afford a broad enough perspective, particularly when judgments
as to timing or as to the economic outlook differ.
Under circumstances of diverse trends, hesitancy and delay in taking
monetary action might result if those responsible for action were ex­
pected to explain publicly and defend any given step of a continuing
or changing pattern, before the economic indicators were so unmistak­
ably clear as to support a unanimity of judgment.
The annual reports to Congress required by law are sufficiently re­
moved from the time the various actions are taken to afford a broader
perspective as to their wisdom or lack of it. Thus, a better, calmer
appraisal is probable than is apt to be the case if jimgments are made
around the time action is taken.
The Chairman. May I ask you a question on that one ?
Mr. Martin. Certainly, sir.
The Chairman. I know that your reports are invariably delayed.
Instead of making a report right at the end of December, you usually
make the report about—when ?
Mr. Martin. We have been usually doing it around March or early
April, because----The Chairman. We don’t, usually get them, or at least I haven’t
been getting them early. I had this in mind, about the first of June
or first of July.



CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

29

Mr. Martin. We have done better than that, and I am making every
effort administratively to get them up earlier. I hope next year to
get it in in early March.
The Chairman. Since you mentioned that here, it was wise to have
the decision, the announcement of the decision delayed, I thought
maybe it was deliberately done.
Mr. Martin. No, sir; absolutely not.
A wider understanding of these procedural processes which you are
studying today should lead to a better public understanding of policy
action, what they aim to accomplish, and what they can and cannot
do. There is, of course, no magic in Federal Reserve, monetary, or
other governmental measures that will assure perpetual and evenly
distributed economic health. Maladjustments, imbalances, excesses in
some sectors and shortages in others are inevitable; but partial read­
justment should not be postponed, at the risk of increasing the general
ailments.
Monetary policy is a standard, though limited, remedy for some
ills.
The discount rate particularly can be greatly overrated as a cause
or cure. Open market operations, discount rate changes, and re­
serve requirement changes are the closely interrelated parts of Federal
Reserve monetary mechanism. Confusion often arises because we are
apt to talk about the three parts of this mechanism as if we were
offered a choice among three separate means of easing or tightening
credit.
All three must operate together—in a continuing pattern, the sup­
ply of reserves always being basic. Open market operations and re­
serve requirements affect that base. Discount rates do not affect
the volume of that base, but only the cost of reserves. It is therefore
misleading to think of the three components as if they were alterna­
tives to be used independently of each other. They must be used to­
gether.
The use of one component rather than another at a particular mo­
ment is explained by the fact that, by its nature, each has a different
impact. Reserve requirements are the bluntest of the three, having
the heaviest impact because they directly affect all member banks in
varying degree and release or absorb very large sums. Changes in
reserve requirements are best suited to broad basic adjustments, and
the impact of such changes is often modified by subsequent Federal
open market operations.
Open market operations are best suited to day-to-day adjustments,
for they can be used to release or impound small or large sums of re­
serves in accordance with current conditions. In this way, what have
aptly been called “high-powered dollars” are added to or taken out
of the reserves of the banking system.
It is most important to note here that contrary to a widespread mis­
understanding, the Federal Reserve System does not use the reserves
deposited with it by the member banks to buy Government securities.
The C h a i r m a n . On that point, Mr. Martin, you remember that
a representative of the American Bankers Association insisted one
time in answering my question before the Banking and Currency
Committee of the House that these deposits were used to buy Gov­
ernment securities. Every year I questioned them, and the American
79011—56------5



30

CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

Bankers Association representatives adhered to their former insist­
ence. Finally, last year they wrote me a letter and stated I was right
and they were wrong. I have never published that letter, but I think
I should. I am glad you brought it out.
Mr. Martin. I think that was very helpful, your bringing out that
error.
For this purpose the Reserve System creates money, and additional
reserves are thus put at the disposal of member banks on which loans
and investments can be pyramided at a ratio of about 6 to 1. That
is why the money created to make such purchases is spoken of as “highpowered dollars.”
Discount rate changes, in respect to frequency of use, are less fre­
quent than open market sales and purchases, but more frequent than
reserve requirement changes. For example, the rates of discount
were revised downward twice in 1954, during a comparatively short
and mild business downturn, and have been revised upward 5 times
over the last 12 or 13 months as the economy rose toward its pro­
duction capacity, and demand for credit strained the limits of supply.
The initiative as to discount rates rests with the directors at each
of the 12 banks. They meet regularly, different Reserve banks hav­
ing different days, in some instances, for directors’ meetings; but each
bank acts every 14 days, either to reestablish or change its existing
discount rate. The action taken, whether to continue the same or to
change the rates, is immediately reported to the Board of Governors,
and acted upon at a regular or special Board meeting.
Since System procedure is based on organization, it seems relevant
and appropriate to outline briefly the way in which the Reserve Sys­
tem is organized. It is essentially a regional system, made up of 12
Reserve banks with 24 branches, and having a total of 260 directors.
The Board of Governors has responsibility for coordinating policy
of the 12 banks, and in some instances supervises operations as well.
The Federal Reserve Act spells out, in detail, how the directors
of the banks and branches are to be chosen. At the head offices, there
are 9 directors, 6 elected by member banks. You are correct in that.
Three—class A, in the law—are chosen from local member banks, so
grouped as to provide representation for the larger, medium-sized,
and smaller banks in each district. And the bulk of the member banks
are, in fact, small businesses, engaged in serving small businesses in
their communities. Three—class B—are required to “be actively en­
gaged in their district in commerce, agriculture, or some other indus­
trial pursuit.” The first 3 may be considered as lenders, the second
3 may be looked upon as representatives of borrowers. The remaining
three—class C—are chosen by the Board of Governors with a view
to providing a still broader representation, and they cannot be bankers.
Of the class C directors, the Board of Governors designates one as the
chairman and another as the deputy chairman for each Reserve bank.
The Chairman. May I interrupt you there? You state here that
class C directors cannot be bankers, but I believe the law requires them
to be men of tested banking experience.
Mr. Martin. That’s correct, as to the chairmen.
The Chairman. They must have been bankers recently ?
Mr. Martin. Oh, no.
The Chairman. They must be of tested banking experience.
Mr. Martin. It is banking in the broad sense.



CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

31

The Chairman. I am not making any point, except to say that the
whole board is topheavy with bankers.
Mr. Martin. Well, we have for example, Mr. James R. Killian, Jr.,
who is the president of the Massachusetts Institute of Technology,
one of those selected as a class C director. He has been very faithful,
and a fine director.
The Chairman. I am not saying anything against any of them.
Mr. Martin. I know that. I just wanted to point that out.
In this blending of public and private participation, the act vests
the regional banks with as large a degree of autonomy as is feasible
in an organized system. While each president and first vice president
of a Reserve bank is initially selected by the local directors for a term
of 5 years, the selections are subject to approval by the Board of Gov­
ernors, a procedure that, in my judgment, gives these officers a very
desirable freedom from domination by the Governors, the directors, or
by others.
*The Chairman. May I ask you about the Open Market Committee
on this particular action, Mr. Martin ? The Open Market Committee
manager is selected by the 9 directors of the New York Bank, 6 of
whom were selected by the banks in that Federal Reserve District. Is
that correct?
Mr. Martin. New York Federal Reserve Bank ?
The Chairman. That is the only one, of course, that has a manager.
Mr. Martin. That’s right.
The Chairman. The Board of Governors approved him?
Mr. Martin. That’s right.
The Chairman. That person who has that very important place
handling the operation, open market operations, is not directly re­
sponsible to you, is he? When I say “you,” I mean of course the
Board of Governors. He is responsible to the New York Federal Re­
serve Bank?
Mr. Martin. He is responsible to the bank, but the bank is acting
as an agent of the Open Market Committee.
Now, on this point, in our ad hoc subcommittee report, which we
have discussed frequently, it has been my feeling that the selection of
the manager should be by the Open Market Committee, and then the
directors of the New York bank should approve the selection rather
than having it in reverse. That is the wiser approach, in my judg­
ment.
The Chairman. Wouldn’t you go further, Mr. Martin, and say that
the bankers should be off the Open Market Committee, and that the
Open Market Committee should be composed of the Board of Gover­
nors here in Washington and the whole open market operation moved
to Washington?
Mr. Martin. No; I wouldn’t go that far.
The Chairman. You wouldn’t go that far? All right.
Mr. Martin. Similarly, the functions of the System are distributed.
Thus reserve requirements are the sole responsibility of the Federal
Reserve Board. Open market operations are the responsibility of
the Federal Open Market Committee, a statutory body consisting of
the 7 members of the Reserve Board and the 5 Reserve bank presi­
dents. And the law specifies that all the presidents shall serve on the
Committee at intervals. Discount rates are a joint responsibility of
the Reserve Board and the Reserve bank directors.



32

CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

The Chairman. May I interrupt you there, and you say the law
specifically says that these are at intervals? Isn’t there an exception,
a very important one, that the president of the Federal Reserve Bank
of New York is always a member ?
Mr. Martin. That’s correct.
The Chairman. This is incorrect to that extent.
Mr. Martin. Well, not so far as my comment here is concerned with
the fact that all the presidents serve on the Committee at some time.
The Chairman. At intervals, but indicating that they skip, 1 year
on, 2 years off, which of course is true.
Mr. Martin. Not true in the case of New York.
The Chairman. In New York they are permanent members.
Mr. Martin. They are permanent members under the law.
These provisions have been carefully thought out in the legislative
process and have worked reasonably well in practice. I do not mean
to say that the System is perfect—it is not—but I am confident that
the Congress would not wish to make important changes in it without
thorough study and deliberation.
Although the discount rate is fixed periodically by each bank sub­
ject to the Board of Governors’ approval, in the actual granting of
discount accommodation to individual member banks, the Federal
Reserve bank directors act on their own initiative and responsibility,
free from intervention or pressures by the Board of Governors or by
other Reserve banks. These directors are always in close touch with
conditions in their districts, and the discount operations, including the
rates, take account of local economic needs and trends. At the same
time, through the constant stream of intercommunication among gov­
ernors, directors, presidents, and their staffs, all who have respon­
sibilities in the System, are in touch with and advised of the economic
picture nationally and the needs of the overall economy.
The Chairman. May I interrupt you there, too, Mr. Martin?
Although these directors have all this power and the responsibility
of fixing these rates, you can veto any rate you want to, can’t you?
Mr. Martin. The law gives us that authority.
The Chairman. Gives you that power. In other words, they can
talk about it and decide on it, but if you want to change it, you can
do it.
Mr. Martin. The final authority rests with us.
The Chairman. In the Board right here in Washington.
Mr. Martin. In the Board right here.
The Chairman. That’s right.
Mr. Martin. Through the medium of frequent meetings of the Fed­
eral Open Market Committee—meetings are held every 3 weeks
or oftener as circumstances require—there is an interchange of eco­
nomic information and operational experience that keeps Board mem­
bers and the Reserve bank presidents and directors informed on the
course of the economy, both regional and national.
I would like to point out here that the airplane has been a very great
help to us.
The Chairman. What has?
Mr. Martin. The airplane has been a very great help to us, in that
the president of the San Francisco Reserve Bank hasn’t missed a
meeting in months—since February, I think, although I didn’t check
this exactly. That wouldn’t have been possible 10 years ago, or at least



CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

33

it would have been very difficult, so swift transportation has been help­
ful to the operation of this Committee.
As discount policy is closely interwoven with open market policy, it
is among the important subjects discussed at the frequent meetings of
the Federal Open Market Committee, and the presidents of the Re­
serve banks generally express their individual views as to whether
they feel they should recommend to their boards of directors changes
in discount rates. A consensus may emerge from the round table dis­
cussion, but—and this is important to bear in mind—there is no effort
on the part of any member of the committee to dictate to any individual
Reserve bank, its president or directors what those rates should be.
The Chairman. On that point, I think it is germane to ask you
about this last increase in the discount rate which was passed on, I be­
lieve, by 10 or 11 of the banks, the same day.
Mr. Martin. That Board approval was given 11 banks on the same
day. The reason for that was that we held up to give—but let me give
you the sequence: The first bank to come in with a recommendation
was the Atlanta Reserve Bank. The second bank to come in was the
Philadelphia bank. We knew that the following Thursday—April
12, the day, as it happened, that the discount action was announced
—there would be some meetings of quite a number of banks. On
Wednesday, April 11, preceding the Thursday date—as I pointed out,
these banks have different meeting dates, and no effort was made to
pressure anybody to go along and do anything—and the San Fran­
cisco bank came in.
The Chairman. You don’t mean to say you were not conferring
with them at different times ?
Mr. Martin. On this discount rate change ?
The Chairman. Yes, sir.
Mr. Martin. We conferred in the Open Market meeting, which
preceded it, but we did not confer with them individually as they
went along.
The Chairman. In the Open Market Committee preceding the
actions of the different boards you had discussed it, and you had agreed
it might be a good thing ?
Mr. Martin. No; we didn’t come to any agrement. We had a full
discussion of it in which it was indicated that several of the banks
might go up.
The Chairman. It was not wholly unexpected ?
Mr. Martin. Not wholly unexpected, but I was by no means cer­
tain. I did know that two banks were coming in with different rates,
that they would come in at rates different from the others.
The Chairman. Were they justified, or authorized in reaching that
conclusion, that it would meet with the approval of the Board, if
they did raise these rates ?
Mr. Martin. They knew that it would be considered by the Board
promptly, and having participated in the Open Market Committee
meeting, they had reason to believe that there was gradually crystal­
lizing m the System a view that a higher rate might be desirable.
That there should be differences—as evidenced at the moment by
different rates in two of the districts—reflects not only different judg­
ments, but also the absence of dictation or undue influence. This, I
believe, is the way in which this function was expected to be performed,
based primarily on the judgments of directors familiar with local



34

CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

conditions, and with coordination effected through the Board of Gov­
ernors.
Finally, let me point out that discount rates are the interest rates
paid by member banks, when they borrow from their district Federal
Eeserve bank. It should be emphasized that such borrowing is in­
tended to meet only temporary needs of member banks for reserve
funds, and not long-term needs geared to the normal growth of the
economy, or to the annually recurring seasonal requirements of com­
merce, industry and agriculture in the 12 districts. Reserves neces­
sary for such general and repetitive purposes are predetermined as
closely as possible by the Federal Open Market Committee and ordi­
narily supplied by Federal open market operations or occasionally
by the Board of Governors through changes in reserve requirements.
In arriving at policy decisions, great care is taken to obtain and
evaluate all relevant views, including, of course, the views of officials
of the Government who have responsibilities in the economic field.
These consultations frequently develop differences of view. That is to
be expected. Our final decision, however, under the law, must be our
own and represent, as closely as human relations can, our judgment
on the direction of action that will contribute most to the public
welfare.
Following is a list of the Federal Reserve bank directors and their business
affiliations:
DISTRICT 1— BOSTON

Class A :
Lloyd D. Brace, president, the First National Bank of Boston, Boston, Mass.
Harold I. Chandler, president, the Keene National Bank, Keene, N. H.
Oliver B. Ellsworth, president and trust officer, Riverside Trust Co., H art­
ford, Conn.
Class B :
Milton P. Higgins, president, Norton Co., Worcester, Mass.
Frederick S. Blackall, Jr., president and treasurer, the Taft-Peirce Manufac­
turing Co., Woonsocket, R. I.
H arry E. Umphrey, president, Aroostook Potato Growers, Inc., Presque Isle,
Maine.
Class C :
James R. Killian, Jr., president, Massachusetts Institute of Technology,
Cambridge, Mass.
Robert C. Sprague, chairman and treasurer, Sprague Electric Co., North
Adams, Mass.
Harvey P. Hood, president, H. P. Hood & Sons, Inc., Boston, Mass.
DISTRICT 2— N EW YORK

Class A. *
John R. Evans, president, the First National Bank of Poughkeepsie, Pough­
keepsie, N. "Y
.
Ferd I. Collins, president and trust officer, Bound Brook Trust Co., Bound
Brook, N. J.
Howard C. Sheperd, chairman of the board, the First National City Bank
of New York, New York, N. Y.
Class B :
Lansing P. Shield, president, the Grand Union Co., East Paterson, N. J.
John E. Bierwirth, president, National Distillers Products Corp., New York,
N. Y.
Clarence Francis, director, General Foods Corp., New York, N. Y.
Class C :
_ ,
Jay E. Crane, vice president, Standard Oil Co. (New Jersey), New York,
N. Y.
Forrest F. Hill, vice president, the Ford Foundation, New York, N. Y.
Franz Schneider, consultant to Newmont Mining Corp., New York, N. Y.




CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

35

DISTRICT 3 — P H IL A D E L P H IA

Class A :
Wm, Fulton Kurtz, chairman of the executive committee, the F irst Pennsyl­
vania Banking & Trust Co., Philadelphia, Pa.
W. Elbridge Brown, president and tru st officer, Clearfield T rust Co., Clear­
field, Pa.
Lindley S. Hurff, president and tru st officer, the F irst National Bank of
Milton, Milton, Pa.
Class B :
W arren C. Newton, president, O. A. Newton & Son Co., Bridgeville, Del.
Bayard L. England, president, A tlantic City Electric Co., Atlantic City,
N. J.
Charles E. Oakes, president, Pennsylvania Power & Light Co., Allentown,
Pa.
Class C :
Lester V. Chandler, professor of economics, Princeton University, Prince­
ton, N. J.
William J. Meinel, chairman of the board, Heintz Manufacturing Co., Phil­
adelphia, Pa.
Henderson Supplee, Jr., president, the Atlantic Refining Co., Philadelphia,
Pa.
DISTRICT 4 — CLEVELAND

Class A :
J. Brenner Root, president, the H arter Bank & T rust Co., Canton, Ohio.
Edison Hobstetter, president and chairman of the board, the Pomeroy Na­
tional Bank, Pomeroy, Ohio.
King E. Fauver, director, the Savings Deposit Bank & Trust Co., Elyria,
Ohio.
Class B :
Alexander E. Walker, chairman of the board, the National Supply Co.,
Pittsburgh, Pa.
Joseph B. Hall, president, the Kroger Co., Cincinnati, Ohio.
Charles Z. Hardwick, executive vice president, the Ohio Oil Co., Findlay,
Ohio.
Class C :
John C. Yirden, chairman of the board, John C. Virden Co., Cleveland,
Ohio.
Frank J. Welch, dean and director, College of Agriculture and Home Eco­
nomics, University of Kentucky, Lexington, Ky.
A rthur B. Van Buskirk, vice president and governor, T. Mellon & Sons,
Pittsburgh, Pa.
DISTRICT 5— R IC HM ON D

Class A :
J. K. Palmer, executive vice president and cashier, Greenbrier Valley Bank,
Lewisburg, W. Va.
Daniel W. Bell, president and chairman of the board, American Security &
T rust Co., Washington, D. C.
Joseph E. Healy, president, the Citizens National Bank of Hampton, Hamp­
ton, Va.
Class B :
W. A. L. Sibley, vice president and treasurer, Monarch Mills, Union, S. C.
Robert O. Huffman, president, Drexel Furniture Co., Drexel, N. C.
L. Vinton Hershey, president, Hagerstown Shoe Co., Hagerstown, Md.
Class C :
Alonzo G. Decker, Jr., executive vice president, the Black & Decker Manu­
facturing Co., Towson, Md.
D. W. Colvard, dean of agriculture, North Carolina State College of Agri­
culture and Engineering, Raleigh, N. C.
John B. Woodward, Jr., chairman of the board, Newport News Shipbuilding
& Dry Dock Co., Newport News, Va.
DISTRICT 6— A TLA N TA

Class A :
Roland L. Adams, president, Bank of York, York, Ala.
W. C. Bowman, chairman of the board, the F irst National Bank of Mont­
gomery, Montgomery, Ala.




36

CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

William 0. Carter, chairman and president, Gulf National Bank, Gulfport,
Miss.
Class B :
A. B. Freeman, chairman of the board, Louisiana Coca-Cola Bottling Co.,
Ltd., New Orleans, La.
Pollard Turman, president, J. M. Tull Metal & Supply Co., Inc., Atlanta,
Ga.
Donald Comer, chairman of the board, Avondale Mills, Birmingham, Ala.
Class C :
Harllee Branch, Jr., president, Georgia Power Co., Atlanta, Ga.
Henry G. Chalkey, Jr., president, the Sweet Lake Land & Oil Co., Lake
Charles, La.
W alter M. Mitchell, vice president, the Draper Corp., Atlanta, Ga.
DISTRICT 7— CHICAGO

Class A :
Vivian W. Johnson, president, First National Bank, Cedar Falls, Iowa.
W alter J. Cummings, chairman, Continental Illinois National Bank & Trust
Company of Chicago, Chicago, 111.
Nugent R. Oberwortmann, president, the North Shore National Bank of
Chicago, Chicago, 111.
Class B :
William A. Hanley, director, Eli Lilly & Co., Indianapolis, Ind.
W alter E. Hawkinson, vice president in charge of finance, and secretary,
Allis-Chalmers M anufacturing Co., Milwaukee, Wis.
William J. Grede, president, Grede Foundries, Inc., Milwaukee, Wis.
Class C :
J. S tuart Russell, farm editor, the Des Moines Register and Tribune, Des
Moines, Iowa.
Bert R. Prail, 558 Ridge Road, Winnetka, 111.
Carl E. Allen, Jr., president, Campbell, Wyant & Cannon Foundry Co.,
Muskegon, Mich.
DISTRICT 8— ST. LOUIS

Class A :
William A. McDonnell, president, First National Bank in St. Louis, St.
Louis, Mo.
Phil E. Chappell, president, Planters Bank & Trust Co., Hopkinsville, Ky.
J. E. Etherton, president, the Carbondale National Bank, Carbondale, 111.
Class B :
Louis Ruthenburg, chairman of the board, Servel, Inc., Evansville, Ind.
Leo J. Wieck, vice president and treasurer, the May Department Stores
Co., St. Louis, Mo.
S. J. Beauchamp, Jr., president, Terminal Warehouse Co., Little Rock, Ark.
Class C :
M. Moss Alexander, president, Missouri Portland Cement Co., St. Louis, Mo.
Joseph H. Moore, farmer, Charleston, Mo.
Caffey Robertson, president, Caffey Robertson Co., Memphis, Tenn.
DISTRICT 9— M IN NEA PO LIS

Class A :
Harold N. Thomson, vice president, Farmers & Merchants Bank, Presho,
S. Dak.
Harold C. Refling, cashier, First National Bank in Bottineau, Bottineau,
N. Dak.
Joseph F. Ringland, president and chairman of the board, Northwestern
National Bank of Minneapolis, Minneapolis, Minn.
Class B :
John E. Corette, president and general manager, Montana Power Co., Butte,
Mont.
Ray C. Lange, president, Chippewa Canning Co., Inc., Chippewa Falls, Wis.
Thomas G. Harrison, president, Super Valu Stores, Inc., Hopkins, Minn.
Class C :
Leslie N. Perrin, director, General Mills, Inc., Minneapolis, Minn.
O. B. Jesness, head, department of agricultural economics, University of
Minnesota Institute of Agriculture, St. Paul, Minn.
F. Albee Flodin, president and general manager, Lake Shore, Inc., Iron
Mountain, Mich.



CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

37

DISTRICT 1 0 — K A N S A S C ITY

Class A :
W. L. Bunten, president, Goodland State Bank, Goodland, Kans.
Harold Kountze, chairman of the board, the Colorado National Bank of
Denver, Denver, Colo.
W. S. Kennedy, president and chairman of the board, the F irst National
Bank of Junction City, Junction City, Kans.
Class B :
K. S. Adams, chairman of the board, Phillips Petroleum Co., Bartlesville,
Okla.
Max A. Miller, livestock rancher, Omaha, Nebr.
E. M. Dodds, chairman of the board, United States Cold Storage Corp.,
Kansas City, Mo.
Class C :
Oliver S. Willham, president, Oklahoma Agricultural and Mechanical Col­
lege, Stillwater, Okla.
Joe W. Seacrest, president, State Journal Co., Lincoln, Nebr.
Raymond W. Hall, vice president and director, Hallmark Cards, Inc.,
Kansas City, Mo.
DISTRICT 1 1 — DALLAS

Class A :
W. L. Peterson, president, the State National Bank of Denison, Denison,
Tex.
Sam D. Young, president, El Paso National Bank, El Paso, Tex.
J. Edd McLaughlin, president, Security State Bank & T rust Company, Ralls,
Tex.
Class B :
John R. Alford, industrialist and farm er, Henderson, Tex.
D. A. Hulcy, chairman of the board and president, Lone Star Gas Co., Dallas,
Tex.
J. B. Thomas, president and general manager and director, Texas Electric
Service Co., Fort Worth, Tex.
Class C :
Hal Bogle, rancher and feeder, Dexter, N. Mex.
Robert J. Smith, chairman of the board and president, Pioneer Aeronau­
tical Services, Inc., Dallas, Tex.
Henry P. Drought, attorney a t law, San Antonio, Tex.
DISTRICT 1 2 — S A N FRANCISCO

Class A :
M. Vilas Hubbard, president and chairman of the Board, Citizens Com­
mercial Trust & Savings Bank of Pasadena, Pasadena, Calif.
Carroll F. Byrd, president, the F irst National Bank of Willows, Willows,
Calif.
John A. Schoonover, president, the Idaho F irst National Bank, Boise, Idaho.
Class B :
Alden G. Roach, president, Columbia-Geneva steel division, United States
Steel Corp., San Francisco, Calif.
Reese H. Taylor, president, Union Oil Company of California, Los Angeles,
Calif.
W alter S. Johnson, chairman of the board, American Forest Products Corp.,
San Francisco, Calif.
Class C :
A. H. Brawner, chairman of the board, W. P. Fuller & Co., San Francisco,
Calif.
Philip I. Welk, president, Preston-Shaffer Milling Co., W alla Walla, Wash.
Y. Frank Freeman, vice president, Param ount Pictures Corp., Hollywood,
Calif.

Now, I would like to supplement, if I might, Mr. Patman, turning
to your letter, a comment on why I made the answer I did to your first
letter, which I am sorry was not clear to you.
I would like to point out that since I have been in the System,
we have tried to operate in the most effective way possible consistent
with the act.



38

CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

Now, in 1935 the Comptroller of the Currency, and the Secretary
of the Treasury, were removed by statute from the Board of Gov­
ernors. They were on it up to that time, and they were voting
members.
Now, since that time there has been no formal statutory provision
outlining consultation or conversation. When we had President Tru­
man and Secretary Snyder we had a working relationship where I
conferred with Secretary Snyder every single day of the week. After
Secretary Humphrey came in, with the administration of President
Eisenhower, Secretary Humphrey and I have conferred every Mon­
day. And on Wednesday, the lunches which were started at the time
that you are familiar with—from our hearings, the time of the Treassury-Federal Reserve accord, those lunches have been continued. The
only difference in this administration has been that where Assistant
Secretary Bartelt was the ranking Treasury official at most of the
lunches during the Truman-Snyder regime, Under Secretary Burgess
has been ranking luncheon guest during the Eisenhower-Humphrey
regime.
The Chairman. I think it is appropriate to ask you here, Mr. Mar­
tin : Do you feel like that Mr. Humphrey is the delegated person by
the President of the United States for you to confer with ?
Mr. Martin. N o.
The Chairman. You don’t refer to him or think of him then as one
designated by the President. You don’t confer with him by reason
of any designation by the President?
Mr. Martin. The President has never mentioned any delegation of
that sort to me, but I confer with Secretary Humphrey quite naturally
because debt management and monetary policy are very closely inter­
related. Senator Douglas, who I am sorry isn’t here today, used to
say, “Good fences make good neighbors.” Now, we have tried to work
out a relationship on monetary and credit policies and debt manage­
ment. I have insisted that in addition to the Senator’s comment, and
you have heard me a number of times, that we need a revolving door
to go through to make it effective. That is the type of relationship
that we tried to work out.
These conversations that we have frequently over the telephone on
a regular weekly basis, and sometimes on a daily basis, as I have indi­
cated to you, have no agenda, no memorandum of what the conversa­
tions are at the time, and they are completely informal. I change my
mind from time to time; the Secretary changes his mind from time
to time.
I have discussed matters with Chairman Burns of the Council of
Economic Advisers on exactly the same basis.
In other words, we have tried to get the maximum benefit of an in­
formal working relationship, which is continuous.
The Chairman. I want to ask you a question, following up what I
have just asked you.
Who asked you to serve, continue on as Chairman, Mr. Humphrey or
President Eisenhower?
Mr. Martin. Well, let me put it this way: The reputed tender of
resignation is not quite accurate. It was known to some people that I
had received an offer that was attractive to me near the end of the




CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

39

which changed the Reserve Board Governor and Vice Governor to
Chairman and Vice Chairman, designated by the President, that I was
inclined to believe, if you will recall that testimony, that the desig­
nation of Chairman on a 4-year basis was intended to make it possible
for an incoming President to designate or appoint his Chairman.
The Chairman. That’s right.
Mr. Martin. As it has worked out, it hasn’t happened that way be­
cause I was serving the unexpired portion of Mr. McCabe’s term, and
he was serving an unexpired portion of another term, so that the time
aspect hasn’t quite fitted in with that position.
When I had indicated privately to several people who knew of this
that I was perfectly agreeable to act in accord with the position I had
taken, if I were a persona non grata—now, I did not know at the time
who the new Secretary of the Treasury would be. In the course of
time, several advisers of the President-elect—later to be advisers of the
President—informed me that they hoped I would not be precipitous
in tendering a resignation.
I never tendered a resignation. Secretary Humphrey came in. He
urged me, as he testified, to stay, and I told him I would stay, and sub­
sequently I met with the President, President Eisenhower, and ex­
pressed to President Eisenhower the same position that I am express­
ing to you, and the President asked me to remain.
The Chairman. N ow, do you consider that you have a 4-year term,
commencing when ?
Mr. Martin. Well, you see, my term changed. My term as a mem­
ber of the Board of Governors expired on January 31,1956.
My designation as Chairman of the Board expired April 1, 1955.
President Eisenhower sent for me in early March of 1955, and in­
formed me that he would like to redesignate me as Chairman. I was
very flattered and pleased, and said I would serve. He indicated to
me that it was possible that my term would end January 31,1956, and
I said, Well, I wouldn’t want you to be obligated to me, or me to be
obligated to you, Mr. President.
Now, subsequently, I was reappointed, as you know.
The Chairman. At the same time, if you had*not been reappointed,
you could not have served on as Chairman, that is obvious.
Mr. Martin. I would have dropped out automaticaly.
The Chairman. So your term will expire 4 years from March 1955 ?
Mr. Martin. That’s correct.
The Chairman. You did not resign, because it was not necessary for
you to resign?
Mr. Martin. That’s correct.
Well now, I just wanted to point out that there is no agenda or rec­
ord kept of these conversations.
The Chairman. If you will go back now to answer the questions in
my letter just briefly:
(1)
Is it a fact, to your knowledge, th a t the decision of the Board of Governors
“went against the wishes” of the administration advisers? If so, whom?
Mr. Martin. If you mean were there differences of opinion, the

answer is “yes.” As to the further inquiry. “If so, whom”—the con­
versations that I had over a period of some 3 weeks previous to the
action were with Secretary Humphrey and with Chairman Burns of
the Council of Economic Advisers and Under Secretary Burgess par­
ticipated in a good many of them and on one occasion Dr. Hauge, of
the White House staff, was present.



40

CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

Now, “what communications and representations”—Question No.
2—
what communications and representations from executive department officials, or
their subordinates, did the Board have before it at the time of reaching its
decision?

The answer is, “None.” I informed the Board, as is my practice,
of the conversations which had been carried on and of the tact that
Secretary Humphrey and Chairman Burns questioned the wisdom of
the action, but there were no formal representations. That was con­
vened to the Board. They knew that at the time they took their
action.
“How and by whom were those representations made, to you as
Chairman”—I have already answered that in the preceding question.
(4) Have you or the Board had any subsequent communications, through offi­
cial or unofficial channels, from members of the Cabinet or their responsible
subordinates criticizing the action which the Board has taken?

The answer is, “None” ; although we have, and I have, continued the
same procedure, and the same considerations, with Secretary Hum­
phrey and with Chairman Burns.
The Chairman. But you received no criticism ?
Mr. Martin. None whatever.
The Chairman. The only criticism you have seen, then, was in the
papers?
Mr. Martin. What was in the papers, that’s right.
The Chairman. Y ou mentioned “the accord” a while ago. I want
you to comment on a statement that Mr. Burgess has recently made
before a congressional committee in referring to the accord, that is,
the agreement or accord, or whatever you want to call it which was
entered into about March 4,1951 ?
Mr. Martin. Right, sir.
The Chairman. All right. This is Mr. Burgess’ testimony:
Now, the agreement had a lot of codicils and strings and things to it that
made it fa r from perfect, but it was a great step forward. I t did not go all
the way. I t did not completely free the market from Federal Reserve support.
The Treasury, I think, continued to try to put out its securities at artificially low
rates. When we came in, at the end of 1952 and the beginning of 1953, we recog­
nized those principles. We felt we carried them to their logical conclusion in
giving the Federal Reserve the freedom it needed to fulfill its lawful function
of influencing the credit situation in the public interest.

Would you like to comment on that statement ?
Mr. Martin. Well, I couldn’t make any comment on it, except that
is Under Secretary Burgess’ judgment. Insofar as I am concerned, I
have worked just as faithfully and conscientiously with the previous
Treasury setup as I have with the current setup.
The Chairman. Yes, sir; but about changing the accord, he said it
had a lot of codicils.
Mr. Martin. That is a technical document which expired at the end
of 9 months. You see, in my understanding—I have worked on that,
and I was in the Treasury at the time----The Chairman. Just for the particular administration ?
Mr. Martin. Not for that particular administration, but the terms
of the accord, insofar as it applied to----The Chairman. T o an effective document.
Mr. Martin. T o what we could do, and, I think I so testified on one
occasion, ended up doing.



CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

41

For example, in the accord—and this has come out in previous hear­
ings—in the accord we had an agreement to maintain the discount rate,
no matter what circumstances might occur until the end of the year.
That is, from March 4,1951 until January 1,1952.
The Chairman. You mentioned a moment ago about the terms.
Was it a written document ?
Mr. Martin. Well, there were some aspects of it that were.
The Chairman. Have you filed everything before the committee
that we had at one time that looked into that ? Did you file everything
that you had in connection with the accord that was in writing ?
Mr. Marttn. I did.
The Chairman. Everything that was in writing.
Mr. Martin. Everything that we had.
The Chairman. I don’t recall anything in that that indicated it
would expire in 9 months.
Mr. Martin. I am talking about this one aspect of it, because I am
saying this was a specific provision that at the end of 1951 there was
no obligation to maintain the discount rate beyond that time.
The Chairman. The rest of it did not expire ?
Mr. Martin. The lunches have gone on just the same.
The Chairman. I am not talking about the lunches.
Was that one of the major things in the accord; the lunches ?
Mr. Martin. Y ou so stated on one occasion. [Laughter.]
The Chairman. I am asking you the question: Do you consider it
one of the major functions ?
Mr. Martin. I think it was a major thing, because I think it is im­
portant to have a regular date at which the staffs of the Treasury and
the Federal Reserve Board, at the working level, get together, visit.
You don’t do it regularly. You have a tendency to go away on vaca­
tions, or something, and have a time lapse where you don’t confer.
The Chairman. Well, Mr. Martin, have you finished your statement
there now ?
Mr. Martin. I think so, unless there is anything you would like to
ask me on those four questions.
The Chairman.. Your testimony has been quite revealing to me
about why your letters were so similar, the fact that you gentlemen
conferred together, and you didn’t have any understanding and you
couldn’t call it unofficial understanding, but did not have any meeting
of the minds. Since each one of you knew what the other one was
going to say in reply to the letter, they naturally would be somewhat
similar.
Mr. Martin. Which I thought was very important.
The Chairman. That explains why the letters were so much alike.
That is the part I couldn’t understand.
I didn’t charge any conspiracy, or anything like that, but it did
look like they had gotten together.
Mr. Martin. I want to put the facts out on the table.
The Chairman. Y ou put it right out on the table. You have ad­
mitted it, and it is all right. I won’t say you have broken down and
confessed, because it is not one of those things. [Laughter.] But
that does explain it.
Now then, about the discount rate increase. I can’t understand,
Mr. Martin, why you always use an increase in discount rates instead
of a change in reserve requirements as a retarding influence on infla­



42

CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

tion. The effect is to compel interest-rate increases all over the coun­
try, although the reasons may be largely psychological since the dis­
count rate doesn’t amount to much in a substantial way unless banks
actually borrow.
Instead of an increase in reserve requirements which would not
necessarily increase interest rates all across the board, why is it that
you invariably use the discount rate ? Having the two methods—you
have others also—why do you choose the discount rate which auto­
matically causes interest rate increases clear across the board, and
unbalances everybody’s budget in America ?
The other vehicle or instrument is raising reserve requirements
which would do, I think, the same thing, but not force an increase in
interest rates. Why is it you always use the former, and never use the
latter? At this point I would like to insert two tables based upon the
Federal Reserve Bulletin, May 1956, which show the relative use of
the two instruments since 1948 and especially since 1954.
(The tables are as follows:)
F edera l R eserve B an k of N ew YorJc discount r a t e 1
[P e rc e n t per annum ]

D ate effective:
1948—Jan.
Aug.
1950—Aug.
1953—Jan.
1954—Feb.
Apr.

Bate Date effective—Continued

12___------------------ 1%
13 __-------------------m
21 -------------------1%
16
__
______ 2
5
-----------------1%
16 . ------------------ 1%

1955—Apr. 15___
_
Aug. 5--------Sept. 9___
Nov. 18
1956—Apr. 1 3 ___
In effect May 1, 1956

Rate

_----- 1%
2
2%
2 y2
2%

----- 2%

1 U n d er secs. 1 3 an d 1 3 a , a s d escrib ed in tab le above.

M em ber "bank reserve requirem ents
[Percent of deposits]
N et demand d ep osits1

Effective date o f change

1948— Feb. 27..........................................................................................
June 11_________________________________________________
Sept. 16, 2 4 2................................................................................
1949—M a y 1, 5 2..................... ..............................................................
June 30, July l 2________________________________________
A ug. 1 ,1 1 2- ___________________________________________
A ug. 1 6,1 8 2.................................................................................
A ug. 25_______________________________ ____ ___ _____ _
_
Sept. 1
____________________________________ ____ ________
1951—Jan. 11,16 2..................................................................................
Jan. 25, Feb. 1 2....... ...................................................................
1953—July 1, 9 2.............................................................. ......................
1954—June 16, 24 2.................................................................................
July 29, Aug. 1 2___________________________ _________ _
_
In effect M a y 1,1956............................................................................
Present statutory requirements:
M inim um ____________________________________ ____ ______
Ma.Ylmiim_________ ______________________________________

Tim e deposits

Central
Central Reserve C oun­ reserve Coun­
try
city
and
reserve
try
city
banks banks reserve banks
banks
city
banks
22
24
26
24
23

22H
22
23
24
22
21
20
20
13
26

22
21
20
19K
19
18^
18
19
20
19

16
15
14
13
12
13
14
13

18
18

12
12

5

5

10
20

7
14

3
6

3
6

6
5

r*

6

5
6

6

5

5

1 Dem and deposits subject to reserve requirements, which beginning Aug. 23, 1935, have been total de­
m and deposits minus cash items in process of collection and demand balances due from domestic banks
(also minus war loan and series E bond accounts during the period Apr. 1 3 ,1943-June 30,1947).
2 lst-of-m onth or m idm onth dates are changes at country banks, and other dates (usually Thursdays)
are at central reserve city or reserve city banks.




CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

43

Mr. Martin. We don’t always. This is a relatively short period
we have been discussing.
The Chairman. Well, the last five times.
Mr. Martin. That is because we have been in an expanding and
prosperous economy in this period. Our whole approach to this is,
ultimately, to fight, as you and I are both doing, fight deflation.
It is our conviction that employment which is created out of bor­
rowed money, which cannot be ultimately repaid with ease, is going to
be temporary employment.
The Chairman. Mr. Martin, you say “borrowed money.” Under
our capitalistic system, you cannot have any prosperous economy un­
less people do borrow money. Our economy is based on debt: no debt,
no money.
Mr. Martin. I want them to borrow money in accord with their
position, the sensible relationship. We are talking about reserve
requirements now.
The Chairman. Y ou are talking about excess borrowing?
Mr. Martin. N o w , reserves, and our gold stock, are at the heart of
a sound banking system, and we want them to expand in a proper way.
We used the reserve requirement method twice, and I was glad we
could use it, when we were having a mild business decline. I am not
at all certain that reserve requirements may not be too high in relation
to permissible limits. That is something we will have to consider
over a long period of time.
During the war they got up to pretty high levels, because we wanted
to have adequate reserves from a national standpoint in a war emer­
gency—that is, we wanted to be able to use our gold stock adequately.
But when you see demand and supply in this market, which you don’t
think is as free as I do, but nevertheless----The Chairman. Y ou think it is free market?
Mr. Martin. I think it is a free market. I think one of the great
blessings of our economy today is that neither the Federal Reserve
nor the Treasury is strong enough to override the forces at the grass­
roots that are there in this economy. Some of my good friends think
I am a little bit hipped on this, but I think that is the strength of our
economy.
Now, you can vitiate the forces of supply and demand, but you pay a
price for it, and when the Treasury does its financing, neither the Fed­
eral Reserve nor the Treasury can afford to ignore the forces of the
market unless they want to have unbridled inflation.
I want interest rates to be as low as we can have them without pro­
ducing inflation, because I think that will contribute to capital forma­
tion. But when we artificially interfere with the forces of supply and
demand to create low interest rates, then we are paying a price for it,
which is too great, in my judgment.
The Chairman. That is the only way, I will agree, if you just have
ot to raise interest to fight inflation, I would agree with you, but I
o not agree that you have got to raise interest rates to fight inflation.
There are other ways to do it. You take, for instance, the suggestion
I made to Mr. Humphrey that you could increase interest on savings
and people, instead of spending their money, would deposit their
money in savings banks. That is one way you could do it.
That would encourage savings and prevent inflation, too, but your
Board has held it down. You have the power under existing law.

f




44

CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

I of course don’t think you should ever have been given that power,
but you were; you have OPA powers to fix interest rates. You fixed
them low, very low. Did you ever consider raising the interest rates
on time deposits in the fight against inflation ?
Mr. Martin. We have thought about that. I heard you raise that
question before—but that is something that we have been considering
from time to time.
The Chairman. H ow long have you been considering it ?
Mr. Martin. Within the last year. We have constant discussions
of this. The point I am trying to make is that interrelated parts of
the monetary mechanism all have to be synthesized to be used effec­
tively and it isn’t possible to isolate any one of the monetary instru­
ments at a given time. We don’t start with a clean sheet of paper, in
terms of what we are all working for, which is as high a level m em­
ployment as it is possible to have.
It is my conviction, that if you pursue an inflationary policy and let.
natural forces generate a boom and bust, then when the inevitable re­
adjustment comes, you will have two people unemployed, whereas you
would have only one person unemployed if you had followed a sounder
policy. That is what we are both struggling so hard to achieve.
The Chairman. Yes, an even keel, of course, is preferable, but don’t
you see some reason for alarm in the present situation where there are
so many people unemployed in the automobile industry, the farmers
are suffering, and small-ousiness fellows are suffering, homebuilders
are suffering.
Mr. Martin. I don’t want to see anybody unemployed any more
than you do, but now let’s take this question of availability of credit.
There are more questions, of course. Business doesn’t live on credit
alone.
The Chairman. It lives on debt.
Mr. Martin. Not on debt alone.
The Chairman. Couldn’t do business without debt.
Mr. Martin. It would be possible, but difficult. You would have
to change the system. You would have to change the markets, and
at some point the sources of supply and demand which determine
through the market mechanism how those various needs will be met.
Now, so far as the little man is concerned, we have heard a lot of
talk recently that a restrictive policy is making it a little more difficult
for the little man and it doesn’t weigh quite as heavily on the big man.
Now, I would merely like to point out here that in this question of
bigness, a good big man is probably better than a good little man, but
most good little men in business are trying to get larger. From having
been a little man in a very small way, I think that the greatest blessing
you can give the little man of this country is price stability. If prices
get out of hand with him—and this means far more to him than the
difficulty of getting credit—he is just cut to ribbons by it. Whereas
the big entrepreneur, the big merchant, can handle a price advance in
one way or another, the little fellow, if he has to struggle with price
instability and it gets out of hand, is literally wrecked by it.
Administratively—if he has more difficulty in the early stages of a
period such as we have been going through, getting credit accommoda­
tion, and I regret that as much as anyone—we can administratively
help just with a little bank service the little customers; but you can’t
do anything about the price level that gets away from you.



CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

45

Now, we saw sometime back an indication that prices might start
booming and getting out of hand, with a boost from borrowed money.
No objection whatever could be raised to plant equipment expansion
being financed out of savings or retained earnings. But as to coming
to the market and going to the banking system for a long-term credit
under the guise that a few years from now maybe it will be cheaper-—
well if you really want to make a difficult situation ultimately, in terms
of a bust, just let all of this wonderful plant and equipment expansion
which we all want, go on being financed out of bank credit—particu­
larly if it is short-term credit, when it should be long-term credit and
when it is in excess of the savings.
The Chairman. Y ou say about price stability. I agree with you
that that is a big factor in business, but don’t you think instability in
interest rates enters into it, too ?
Mr. Martin. I would like to see interest rates stabilized within
bounds, but on the other hand, though business has been so good,
the law of supply and demand has been the big factor with respect
to rates and we have not been trying to fix interest rates—I think that
the Secretary was quite correct in his answer this morning, making a
judgment there, but the Federal Reserve probably followed interest
rates in the discount rate action rather than leading them.
The Chairman. A booklet we get out here, Economic Indicators—
I guess you see it around—I think it indicates that the people are pay­
ing now much more than $4 billion a year in interest rates in excess of
what they were paying, say, 3 years ago. Don’t you think, Mr. Martin,
that it is damaging to our economy to divert more and more from
people more of their purchasing power, from their ability to buy goods
and services to the payment of interest ? Don’t you consider that a fac­
tor that should be carefully considered ?
Mr. Martin. Interest is one of the costs of doing business.
The Chairman. I know it is one of the costs.
Mr. Martin. A s you have pointed out, I think flexibility in interest
rates is an important ingredient of a strong vigorous economy.
Now, I think that by and large we want to have as much flexibility
as we can have within reason, and that the greatest single blessing
that we can give, particularly for the little people, the pensioners, and
the people with small savings accounts, is to prevent inflation of their
currency. I think that this money we have is something that ought to
be really removed from politics, as it is in the Federal Reserve, with
due respect to that writer you quoted earlier today; it ought to be
removed from politics because this money belongs to Democrats and
Republicans alike, and it is a very important thing, particularly for
the little man, that he has a currency that he can depend upon.
The Chairman. Well, I think that the interest rates have gone too
high. I think we should be concerned about them. I think they are
affecting our economy. I think they are to blame for this drop in cars.
I don’t think installment buying is too high. As long as people pay
debts—and no one complains that people are not paying their debts
today. I think installment payments are as good or better than they
have ever been, aren’t they, Mr. Martin?
Mr. Martin. I think they are very good.
The Chairman. That does not indicate that installment credit is
too high if people pay their bills and their debts. It looks to me like
that is getting along pretty good. Why should we jump on them and



46

CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

say we should cut it down? Don’t you think it is interfering with
their ability to buy cars ?
Mr. Martin. I question very much whether it had any influence.
I would like to make a comment here, purely an aside, about an auto­
mobile dealer, who wouldn’t mind my saying this. He called me not
long ago and told me he wanted to congratulate us on raising the dis­
count rates. He won’t be identified. I thought at first he was kidding
me. Then he said, “You know, we didn’t have anybody to blame for
our poor sales, until you raised the rate.”
I said, “I am very glad to oblige you in that fact, but,” I said, “I
really would like your advice. I am seeking advice all the time. I
am worried all the time.” I am a professional worrier, as I have testi­
fied to your committee. That is what I am paid for. I try to get a
good night’s sleep so I can worry effectively. [Laughter.]
The Chairman. When was this time? Was that recently?
Mr. Martin. Within the last 3 weeks.
The Chairman. I think he might have had in mind the other four
raises before the last one.
Mr. Martin. He didn’t specify, but pursuing this, I said, “I would
really like to know, because I am deeply interested in this.”
He said, “I think when you make tight money, and when people talk
about bad times, or the possibility of bad times coming, that that
does have some influence on our sales.”
“But,” he said, “I would just like you to know that as far as our par­
ticular business is concerned, the customer we have lost is the cash
customer and not the credit customer.”
I just thought that was an interesting comment from a man who
has been in the business for a good many years.
The Chairman. D o you expect interest rates to go higher, Mr.
Martin?
Mr. Martin. I don’t know, Mr. Patman.
The Chairman. Y ou would not resist further increases then, if
there should be a reason, in your opinion, for stopping inflation ? You
feel that raising the interest rate is the best way to do it?
Mr. Martin. I want to assure you that the Federal Reserve Board
is going to do everything within its power to resist both inflation and
deflation. We are going to lean against the wind just as hard as we
can in both directions.
The Chairman. I hear talk of 7 percent interest, and 10 percent.
Mr. Martin. I have no idea about whether there is anything in
that. I would not make any future predictions.
The Chairman. I heard one man say the other day that the concern
in which he is a very large stockholder had put in orders for about
$60 million worth of modern, I will call it machinery, and they are
seriously thinking about canceling that order and taking a loss of $5
or $6 million, or whatever is necessary, because this interest rate is
going on up.
People won’t have any money to buy things. You divert it to money
lenders and take it away from the bloodstream of business and com­
merce. I guess that is rather a far-fetched conclusion that he drew,
but he is a mighty sensible businessman. He is greatly concerned
about the high interest rates. If they were to cancel that contract—it
involves the employment of lots of people—that would mean that



CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

47

these people couldn’t pay the installments on cars and purchases and
debts and rents and taxes, and thing like that.
It would become distressing and alarming.
Mr. Martin. I hope your friend will study the situation more care­
fully and come to a different conclusion.
The Chairman. But he has a lot to think about when in the last
five times that you have dealt in inflation, you have dealt with it by
raising interest rates every time. You didn’t deal with it by reserve
requirements, which you had the power to do.
Mr. Martin. Well, we have tried to use all of these instruments, and
I wouldn’t forecast what use we would make of any one of these in­
struments, because I couldn’t say. After all, I am only one member
of a group.
The Chairman. A rather powerful member, I would say, Mr.
Martin.
Would you like to comment on the significance of Mr. Sproul’s resig­
nation, and the choice of this relatively obscure successor of his ?
Mr. Martin. The choice of Mr. Sproul’s successor was made by the
directors of the Federal Reserve Bank of New York. It has never
been my pleasure to work with a more dedicated and conscientious
group.
They canvassed the field for a long time. They had a choice as to
whether they would take a young man or an older man. They de­
cided that the nature of this jobber and the problems were such that
they would like to have a younger man, and they chose Mr. Alfred
Hayes, who has a marvelous background. He was well known to two
of the directors of the Federal Reserve Bank of New York. Two of
them have worked with him, and he came down and met with the Board
of Governors, and we were very much impressed with him, and we look
forward to a very successful year.
The Chairman. In other words, you left it up to the directors of the
Federal Reserve Bank of New York?
Mr. Martin. That’s right.
The Chairman. Although you had veto power, you didn’t feel like
you should exercise the veto power ? I am not saying you should in
this case. I don’t know. But I thought it was unusual.
Mr. Martin. We have used the veto power on a number of occa­
sions.
The Chairman. More than once?
Mr. Martin. Yes.
The Chairman. Outside of Chicago?
Mr. Martin. Yes.
The Chairman. This person who has charge of the Open Market
Committee, successor to Mr. Sproul, has lots of power, as you know.
Now, that is an unregulated bond market that they are dealing with.
Don’t you think that the Government bond market should be regu­
lated, Mr. Martin, or do you think you should turn those fellows loose
with the Government’s credit, unlimited as to billions of dollars, in
an unregulated Government bond market ?
Mr. Martin. I think that the Government bond market is by no
means perfect, any more than the stock exchange or----The Chairman. But the stock exchange is subject to regulation and
some restrictions.




48

CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

Mr. Martin. I think we need a lot of study about the Government
bond market. I have never held it out as perfect. It is a negotiated
market, as distinct from an auction market, and right at the present
time New York clearance banks have agreed to make a study about the
money aspect of it.
The Chairman. S o you think the question should be studied as to
whether they should be regulated?
Mr. Martin. I think that they have adequate supervision at the
present time. As to whether you need a separate regulatory authority,
I don’t think you need anything; I think the Federal Reserve System is
going to take care of it.
The Chairman. Would you like to comment further on anything
we have brought up?
Mr. Martin. I don’t think so.
The Chairman. If I, or any member of the committee, should want
to ask you a question for this record, you would be willing to answer it
for the record?
Mr. Martin. At your service.
The Chairman. Mr. Ensley.
Mr. E nsley. Mr. Martin, Business Week for the 5th of May car­
ried an editorial on monetary policy, and I would like to read a couple
of sentences, and get your reaction to it.
The editorial states:
The Federal Reserve is afraid of inflation. Yet, to some of its friends it ap­
pears to be acting as though it is afraid of growth. How is it possible to set
a goal of a $500 billion economy by 1965, as the President has done, if the money
supply is to be frozen at a level inadequate to support a gross national product
of less than $400 billion?

That is the question raised by Business Week. You have testified
on questions of this type in the past, but I wonder if you would again
comment on this particular point?
Mr. Martin. I think we should provide the resources for growth.
I don’t agree with the judgment that is expressed in this editorial, and
we are trying very hard to see that growth is there. It just happens—I
had no idea, as you can testify, that you were going to make this
comment—but it just happens I have here a table which I would be
very glad to put in the record: “Changes in deposits and currency at
all banks.”
The Chairman. We would like to have that.




CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

49

(The material referred to is as follows:)
Changes in deposits and currency at all hanks— selected dates
Demand
deposits
adjusted
and
currency
outside
b an k s 1

Date

Demand
deposits
adjusted,
currency
outside
banks, and
time

Demand
deposits
adjusted
and
currency
outside
banks 1

Date

2

In billions of dollars:
Increase or decrease (—)
195
195
195
195
195
195

6.5
6.9
4.5
1.5
3.9

0
1
2
3
4
5

7 .1
9 .1

8.8
6.1
8.8

6.9

Demand
deposits
adjusted,
currency
outside
banks, and
time

In percent: Increase or
decrease (—)
195
195
195
195
195
195

3.0

0
1
2
3
4
5

5.9
5.8
3.6

4.2
5 .1
4.7
3 .1
4.4

24.3
4 .1

27.6
4.6

(«5 .4
)
-

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

0)-1.1

1.2
2.8

Total, 1950-55____
Annual average—

27.0
4.5

46.8
7.8

Total, 19 50 -55-Annual average .

1956—Jan u ary...................
February................
M arch.....................
A pril............... .........
M a y *...................... .

(3
)
-0.6

(3-0.2
)

ANNUAL BATES OP
GROWTH

Total, January to
M a y ................ .

0.4
1.3
-1.4
- 0 .3

0.9
1 .3

-1.2
0.8

1956—Jan u ary...............
F ebruary.............
M arch..................
A p ril.....................
M a y 4....................

3.6
1 1.7
- 12 .5

5 .1
7.3
- 6 .7

1 Demand deposits adjusted exclude interbank and XJ. S. Government deposits and items in process of
collection. Currency excludes bank vault cash. M onthly data are adjusted for seasonal variation.
2 Time deposits include those at commercial and mutual savings banks and in the Postal Savings System.
* Less than $50 million.
* Estimated.
8 Less than 0.05 percent.

Changes in loans and investm ents at all commercial banks
[In billions of dollars]
Increase or decrease (—)

Item

Loans, total_______________________________________
Business____ ______ ___________ ________________
A ll other_____ _____________ ____________________
U . S. Government securities____ ____ - ____ __________
Other securities____________________________________
Loans and investments, total________________________

1953

1954

1955
1 1 .6

6.4
5.5
- 7 .4
.4
4.6

2.9
- .3
3.4
5.6

1. 6
10.2

January-M arch
1956
Loans, total_______________________________________
Business___ __________ ____________ ____________
A ll other_______ _____ _________________________
U . S. Government securities________________________
Other securities________________________;___________
Loans and investments, total________________________

.1

- 3 .1
-.1

- 1.8

6.4

3.4
- .7
4 .1

4.5

.5
4 .1

9.0

2.0

.1

1 .8
.8

A p r il-M a y 1
1956

1955

1 .3
1 .3

1952

.8

.5
.4
- 4 .8
.7
- 3 .3

1.1
.2
.8
- 1.0

- .3
- .3

1955
1.6
.6
1.0
.8

- .3

2.1

* D ata for M ay 1956 are estimated.
N ote .—D ata exclude interbank loans. Total loans are after and types of loans before, deductions for
valuation reserves. Details m ay not add to totals because of rounding.




50

CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

Mr. Martin. In terms o f averages, the annual average growth in
demand deposits and currency from 1950 to 1955 shows here in per­
centage terms as 4.1 percent, which is a bit in excess o f the 3 percent
that we have talked about.
Now, when you study the money supply, and keep it in mind as a
moving stream or flow, it seems to me it is the average over time, and
not any given month, that is very important. I would be glad to put
that table in the record.
The Chairman. Y ou keep saying, “ money supplied.” You make
the money supply ?
Mr. Martin. W e have power to create money within the limits o f
the Federal Reserve Act, so long as our liabilities and-----The Chairman. Y ou have unlimited power for all practical pur­
poses, to manufacture it on the books o f the bank.
Mr. Martin. No ; I do not-----The Chairman. In fact, banks are the biggest manufacturers in the
Nation. I am not saying it is wrong. I think we have to have a fine
commercial banking system; but the truth is they manufacture money,
and you allow them to manufacture money. I f they haven’t got
enough, you put it in the market through the Open Market Commit­
tee ; you buy bonds.
Oi
course, through reserve requirements you can change it. In­
stead o f being able to lend $6 to every $1 they have, you can enable
them to lend $10 for every $1 they have, and if there is tightness of
money you can supply that market with money to loosen it up. That
is your purpose, is it not ?
Mr. Martin. The relationship o f cost and availability o f money
to the stability o f your currency is one o f the important factors, also.
You mentioned earlier several communities that might not want to
borrow money at the present time because they might have to pay more
than they thought they ought.

The Chairman. That’s right.
Mr. Martin. I think if you reduce that to nontechnical terms, I am
not holding this out as a technically perfect thing—if you reduce it
into nontechnical terms, then if the money is available under conditions
o f relatively full employment and prosperous conditions but people
wont’ borrow the money because they want to get money cheaper,
they’re exercising a choice. The choice that people have, that business­
men have, is whether they would rather, for example, see this munici­
pality have a sewer issue at 2% percent instead of 2% percent, or see
money pumped out to provide an artificially low rate until it thereby
depreciates their currency by a small amount.
It seems to me that that is a price that the majority of the people in
this country wouldn’t want to pay.
The Chairman. Don’t you see a dangerous trend there, Mr. Martin,
in tax-exempt securities being so high; I mean interestwise ?
In other words, to a person in the 50 percent bracket 3y 2 percent
is equal to nearly 7 percent, and in some instances up to 35 percent,
depending upon the income.
Mr. Martin. This is purely an aside. A lot of people don’t like my
views on this, but I personally don’t like tax-exempt securities. I
have so testified. To me, it is unfortunate to have them.




CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

51

Mr. E nsley. Mr. Chairman, I ask consent to insert in the record
the complete editorial of May 5, referred to above and a memorandum
of the committee staff of April 18 with respect to the economic situa­
tion and outlook.
The Chairman. Mr. Martin, we want to thank you. You are al­
ways very cooperative, and we appreciate your testimony very 3nuch.
Before closing the record and for the sake of completeness, I think it
is appropriate to include several other items which bear directly upon
the subject of this morning’s proceedings.
First of all is an article from Newsweek of April 23,1956, entitled
“Tighter Money: The Backstage Drama.” So far as I know, this
was one ofthe first public indications of conflicting official opinion over
the wisdom of the April 13 action of the Reserve System in raising
the discount rate.
Along with the editorial from Business Week of May 5, which has
just been referred to, I think it appropriate also to include two other
editorials which appeared in the same journal on May 26 and June 2
respectively.
A news article which appeared in the New York Times of April 26,
1956, reporting on a press conference with President Eisenhower and
entitled “President Backs Federal Reserve,” is quite significant.
An excerpt from the testimony of Secretary of the Treasury Hum­
phrey at hearings before the Committee on Finance, United States
Senate, May 17, entitled “Highway Revenue Act,” pages 86-88, should
also be included.
The Joint Committee staff memorandum entitled “The Economic
Situation and Outlook,” which Mr. Ensley has referred to and which
came out about this time, should likewise be placed in the record.
(The documents referred to follow:)
[N ew sw eek, A p r il 2 3 , 19 5 6 ]
T ig h t e r M o n e y : T h e B a c k s t a g e D r a m a

In one swift stroke last week, the Federal Reserve Board made
money more expensive than it has been a t any time since 1933.
The announcement was simple and unemotional: FRB hiked the
discount rate, which determines bank-loan rates in general, by a
fraction of a percent.
But the cold percentages obscured a behind-the-scenes conflict of
dramatic proportions.
In essence, the issue was whether the move was nicely timed to
head off a serious inflation or whether it might hobble the boom.
Involved were men of the caliber of Federal Reserve Chairman
William McC. Martin, Jr., on the one hand, and Treasury Secretary
George M. Humphrey on the other.
In the following report, Hobart Rowen of Newsweek’s Washington
bureau and Associate Editor Olem Morgello tell w hat went on be­
hind the closed doors, what the arguments were, and w hat the upshot
may be.
For nearly 2 weeks, Federal Reserve officials huddled in conferences with
Treasury people and other top administration aides, arguing whether it was
time to tighten up on credit. Booming business across the country supplied the
backdrop for these Washington sessions. W ith few exceptions (autos, textiles,
farming, farm equipment), the economy was moving a t top speed—so fast, in
fact, that some feared it might blow a gasket.
A rgum ents pro .—The signs of boom—and threatening inflation—were not hard
to find. First-quarter steel production broke all records as the industry poured
out 31.9 million tons of ingots—and stUl customers clamored for more. Con­
struction outlays rose 10 percent in March, to $3 billion, equaling the record
set last year. Capital spending h it a record annual rate of $33.2 billion in the
first three months and was due to go higher in the April-June period.



52

CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

Money was needed to oil these furiously turning wheels. Businessmen and
consumers, Federal, State, and local governments rushed to their banks or to
Wall Street creating the tightest money market in almost 3 years. In February
alone, commercial bank loans increased $1.3 billion, or 5 percent.
Chairman Bill M artin and other FEB officials feared all this new money
would do more to kick up prices than to boost production, since business was al­
ready a t peak levels. And the price picture already looked dangerous.
Rail freight rates recently rose 6 percent. Some crude-oil producers were
clamoring for a 60-cent-a-barrel hike. Steelmakers had long insisted they needed
more for their product, and last week Pittsburgh Steel president Avery Adams put
a price tage on th at increase: $12 to $15 a ton. This estimate, Adams emphasized,
didn’t cover any wage hike th at may soon be won by steelworkers. There was
talk th a t their demands added up to a 40-cent-an-hour package, and it didn’t
take too much imagination for some to see that this might be the sta rt of a
vicious new wage-price spiral.
A rgu m en ts con .—But a number of top administration officials, including
Treasury Secretary George Humphrey, believed that talk of inflation was being
exaggerated. Key economic barometers weren’t all pointing up, these advisers
noted, and the economy had only been holding its own so fa r in 1956.
First-quarter figures, for instance, will show a gross national product of
roughly $398 billion (annual rate), only a fractional increase over the previous
quarter’s $397.2 billion. After allowing for price increases, that means there was
hardly any real gain a t all.
W hite House insiders also contended that consumer buying was not creating
a real inflationary push. True, said Humphrey et al., retail trade rose from
$15.3 billion in February to a record $15.7 billion in March. But the gain did not
seem great enough to them to force prices up.
As a m atter of fact, Newsweek learned, the President’s top economic adviser
A rthur F. Burns believes the increases have been surprisingly small, considering
the current worldwide boom. Burns thinks the economy could absorb the pres­
sure even if prices edged up a bit.
Humphrey’s views dovetailed with these, and he argued his point in conversa­
tions with the Federal Reserve’s Martin. The Treasury boss—who well remem­
bers the complaints th a t rolled in 3 years ago when money was tightened
sharply—wanted to w ait a few months to see if loans continued to expand rather
than to act now and risk knocking the economy into a skid.
M an of decision .—But in the end it was Martin’s decision to make, and he
made it. The decision: Boost the discount rate from 2% percent to 2% percent
(and to 3 percent in 2 districts). By approving this increase—the fifth such
boost in a year—M artin hoped to dry up some demand by making it more ex­
pensive for banks to borrow from the Federal Reserve, which in turn would make
it more expensive for businessmen and consumers to borrow from their local
banks. So strongly did Humphrey disagree th at he drafted a public statement of
his views. He killed it a t the last minute to avoid an open controversy.
Meanwhile, the cost of borrowing money has already gone up. Major banks
raised their prime rate—w hat they charge their best customers—from 3% percent
to 3% percent. Other rate hikes quickly followed. Possible effects: Less bor­
rowing by business to build inventories; delay of expansion plans which are not
essential this y e a r; a slight tightening in consumer credit.
G u ideposts .—In the coming weeks, Washington experts will keep especially
close watch on the economic barometers. Among the things to watch will be
consumer spending. If it goes up in the face of tighter credit, the FRB will be
vindicated.
B ut if, for example, the FRB industrial-production index stays where it is (at
143 percent of the 1947-49 average) or falls off, worries about inflation will
quickly die. In th a t case, the Federal Reserve may well decide to reverse last
week’s action.
[ B u sin e s s W eek, M ay 5, 19 5 6 ]
T h e P o l it ic s o f T ig h t M o n e y

The prestige of the Federal Reserve System, which had fallen to a low estate
during the first postwar years, has had a remarkable recovery. Under the
chairmanship of William McC. Martin, the Federal Reserve Board has met
skillfully and courageously the problems of a turbulent economy. At home and
abroad, there is an almost alarming degree of confidence in its ability to steer
our economy between the dangers of boom and bust.



CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

53

The renaissance of the Fed reached a high point last week when President
Eisenhower reaffirmed the complete independence of our central banking or­
ganization. He acknowledged that the policy of credit stringency now being
pursued by the Federal Reserve was one th at raised grave doubts on the part of
his own advisers. Nevertheless, with his usual patience and breadth of view,
the President defended the right of the Federal Reserve to pursue an independent
course. No other President has ever spoken thus.
Yet a t this moment of triumph, the Federal Reserve System, it seems to us,
stands in considerable peril. No m atter how secure their independence, Martin
and his fellow members of the Federal Reserve System are up to their armpits
in politics.
I t is impossible to influence the basic trend of a nation’s economy without
at the same time influencing its politics. Economic intervention, if it is effec­
tive, is bound to be political action. And a t this moment, the Federal Reserve
is subjecting the country to the most drastic credit squeeze since early 1953.
I t is not simply a m atter of increasing interest rates, although the general
level of interest charges has been raised to the highest point in 23 years. I t
is a question of the actual availability of money. Day after day, business enter­
prises are turned away as they seek to obtain credit to carry out their plans.
The Federal Reserve is afraid of inflation. Yet to some of its friends it ap­
pears to be acting as though it is afraid of growth. How is it possible to set a
goal of a $500 billion economy by 1965, as the President has done, if the money
supply is to be frozen at a level inadequate to support a gross national product
of less than $400 billion?
W H E N T H E SQUEEZE I S ON

Unless the Federal Reserve relaxes its stringent policy, and th at promptly,
we shall have to revise considerably these widely accepted goals of an expanding
economy. American industry has planned this year to invest $35 billion in new
plant. The Federal Reserve’s policy is designed to prevent any capital expan­
sion program of this size.
If the Federal Reserve persists in this course, we may expect the current
hesitation in business to develop into a downtrend. Such a downtrend in the
normal course of events ought to be plainly evident in terms of falling sales
and rising unemployment by September and October next.
Without in any way impugning the purity of the Federal Reserve Board, we
may assume th at this timing will cause no sadness in the Democratic National
Committee.
The credit squeeze strikes most directly a t smaller business. The giants,
like General Motors and General Electric, will get the money for their capital
expansion programs, but the smaller enterprises are already having to lay aside
or cut their capital expansion plans. Thus the political charge th at the Eisen­
hower administration favors big business will be strengthened if the Federal
Reserve keeps the credit screw turned tight enough long enough.
W H E N TH E SQUEEZE COMES OFF

Nor is th at all. In 1953. when the Federal Reserve finally reversed its tight
money policy, it slashed member bank reserve requirements and bought nearly
$1 billion of Government securities in the open market. I t thus increased bank
reserves by over $2 billion. The inevitable consequence was th at Government
and other gilt-edged bonds, having been depressed unduly, rebounded sharply.
Any financier of average intelligence was offered a guaranteed profit. All th at
was necessary was to sell enough Government bonds at the lower prices to wipe
out the year’s tax liability, switch the funds into comparable issues, and sit back
for the free ride.
If the Federal Reserve has to make a similar abrupt reversal this year, the
same thing will happen. It will take no very skillful demogog to point out th at
all this does no good to the farm er or to the worker—but it richly lines the
coffers of the Wall Street banks, insurance companies, etc.
The Federal Reserve System ought to be above politics. I t ought not to use
its great powers for political purposes, and we are quite sure th at no responsible
official of the System would, under any circumstances, knowingly consent to
such a course. Yet the System will not survive if it attempts to close its eyes
to the political consequences of its actions. If the Federal Reserve System, by
overdoing its policy of credit restraint, brings on a business recession this year,




54

CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

we may be certain th a t a new administration of another party would not wait
long to take away powers th at can be used, however correct the motives, to
accomplish such drastic political consequences.
[B u sin e s s W eek, M ay 26, 19 5 6 ]
S h a r in g R e s p o n s ib il it y

Misgivings about the current phase of the Federal Reserve’s tight money
policy have spread so widely th at at this point the Fed seems to stand almost
alone in its conviction th at any relaxation of the squeeze on credit would invite
inflation.
Almost every member of the administration with an interest in this area—
from President Eisenhower on down—has voiced his concern, formally or in­
formally, over the repressive effects of the last hike in the discount rate.
In all their statements about credit, administration officials have been scrupu­
lously careful to respect the independence of the Federal Reserve. That is a$ it
should be.
But in Government there is an important difference between an independent
responsibility and an exclusive one. The Fed is not the only agency with the
duty of guiding the United States economy and promoting its welfare. The
Fed can preserve its cherished independence only as long as it realizes that
it shares responsibility with other Government agencies and that its policies
must harmonize with the policies of these agencies.
I t is a good thing to be independent, but there is always a danger of carrying
independence to the point of being just stubborn. Sometimes the line between
the two is a little hard to define, but the line exists. It would be a tragedy for
the country if the Fed let itself slide over that line without realizing it.
[B u sin e s s W eek, Ju n e 2, 19 5 6 ]
M o n e t a r y C ontrols : T h e T h eo r y L ag s

The current dispute over the Federal Reserve System’s credit policy has given
rise to two separate proposals that merit serious attention.
One was made by Representative Wright Patman, of Texas, who is Congress’
self-appointed watchdog on Federal Reserve matters. He has demanded that
officials state their views in public hearings.
The other came from Allan Sproul, retiring president of New York’s Fed­
eral Reserve Bank, who, in a valedictory address, proposed th at the President
appoint a commission to make a broad national inquiry into our financial in­
stitutions.
W hat these two proposals have in common is a desire to throw more light
on the effect of monetary policy. Patman’s plan is aimed a t clarifying the
present situation—the pros and cons of the Fed’s most recent tightening moves.
Sproul, on the other hand, seeks to study the entire history of our monetary
system in order to improve its functioning.
We think both proposals should be acted on. Although we have not agreed
with Patm an’s position on most m atters of Fed policy, his plan to hold hearings
could serve a constructive purpose in revealing how the Fed and the adminis­
tration came to differ over policy.
Such an inquiry should not attempt to censure anyone but to define and clarify
the areas of responsibility and independence held by the Fed.
A thorough examination of our financial system is long overdue. There was
once a time when more was known about central banking then almost any other
field of economic theory. In fact, the use of indirect monetary controls by a
central bank was the first real attempt at Government intervention in free
enterprise economics.
B ut over the past 2 decades, other economic weapons have been developed and
have gained widespread acceptance. In the 1930’s and 1940’s, the central bank
lost its pivotal role. Moreover, the function of monetary policy, and what it can
or cannot do under changing conditions, was never examined. Today the study
of monetary theory seriously lags behind other fields of economics.




CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

55

Now th at the Fed has regained its independence, this lack of knowledge is a
great handicap. The Fed has done its best to reshape itself to meet new con­
ditions, but it has been a piecemeal and pragmatic adjustment. As Allen Sproul
himself said, “We cannot afford much longer * * * to go ahead not really know­
ing what to expect of our central banking system, of our commercial banking
system, of our savings banks and building and loan associations, of our in­
surance companies and pension trusts, and of all the other bits and pieces which
we are using to try to keep our production facilities and our credit facilities in
balance.”
This is a remarkable admission from the dean of America’s central bankers.
Our reliance on monetary controls makes it imperative th a t we know more about
their limits and their powers. Both Patm an’s and SprouTs proposals would
help increase our understanding and our knowledge.
[N ew Y o rk T im es, A p r il 26, 19 5 6 ]
P r e s i d e n t B a c k s F e d e r a l R e s e r v e — A f f i r m s I t s R i g h t T o A d j u s t C r e d it
I ndepen dently
of
the
E x e c u t iv e
B r a n c h — D is p u t e
A cknow ledged—
“ C e r t a in
I n d iv id u a l s ” O p p o s e d L o a n
R ate R is e — B u r n s , H u m p h r e y
M e n t io n e d

By Edwin L. Dale, Jr.
April 26.-— President Eisenhower affirmed without qualification
today the authority of the Federal Reserve Board to handle money and credit as
an agency independent of the executive branch of the Government.
The affirmation came after his own top advisers, according to authoritative
report, had opposed the latest increase by the Federal Reserve in the interest
rate charged to member banks. The President indirectly conceded a t his news
conference today that his own people had had reservations about the move.
Two weeks ago this interest rate, called the discount rate, was raised from 2%
to 2% percent at 9 of the 12 Federal Reserve banks and to 3 percent a t 2 others.
The 12th went to 2% percent a week later. The raises were approved by the
Reserve Board in an effort to curb what it felt were inflationary tendencies in
the economy.
The President said he was confident the Federal Reserve would not let money
get “too tight.” But his central point was th is :
“The Federal Reserve Board is set up as a separate agency of Government. I t
is not under the authority of the President, and I really personally believe it
would be a mistake to make it definitely and directly responsible to the political
head of state.”
W a s h in g t o n ,

h is t o r ic

is s u e

r a is e d

The history of conflict between central banks and elected governments is a long
one, both here and abroad. Up until 1951, the Federal Reserve bowed to the
wishes of the Treasury, and President Truman wanted it th at way.
Thus today’s statement, coming in an election year and at a time when there
is a genuine fear in some quarters th at the Federal Reserve may be going too
far, may m ark an important milestone in the history of monetary policy.
The President was asked to comment on the widespread reports th a t his Secre­
tary of the Treasury, George M. Humphrey, and his chief economic adviser,
Arthur F. Burns, had “serious reservations” about the increase in the discount
rates. He made plain that he had kept fully informed on the subject and on the
controversy.
The President said the Reserve Board “had the unanimous conclusions of their
11 district boards that this rediscount rate ought to be raised, and after studying
the whole situation they decided to go ahead and do it.” The 12th district was
Chicago, which acted later.
General Eisenhower went on to say th a t the m atter was “argued for a long
time” and th at “certain individuals had viewpoints on the opposite side of the
fence.”
c o n f id e n c e e x p r e s s e d

The President sa id : “There are two things about money: one, it gets a little
dearer in its cost to the borrower; the other is th at it is just not there to borrow.”
But he said he had “this confidence” in the Federal Reserve Board—th at “if
money gets to what is normally referred to as tight, they will move in the other
direction in some way or other as soon as they can.”



56

CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

The historic conflict over money has had two related aspects:
(1) The politically elected government is inclined to lean toward easier
money, even a t the risk of a little inflation, because that policy takes the least
risk of recession and unemployment. Thus governments tend to have a “bias
toward inflation.”
(2) But if control over money and credit is removed from the politically
elected executive, th a t does not remove from the executive the responsibility, as
fa r as the public is concerned, for the state of the economy. If an independent
central bank goes wrong, and tips a booming economy over into even a short
recession by making money too scarce, the elected executive gets the blame.
In March 1951, the Federal Reserve asserted its independent authority, though
the new policy was termed an “accord” with the Treasury. It has been operat­
ing independently ever since.
President Eisenhower pledged during his campaign to preserve that inde­
pendence, Recent weeks have provided the first severe test of that pledge. To­
day he reaffirmed it.
E x c e r p t of T e s t im o n y , S e c r e t a r y H u m p h r e y , Co m m it t e e o n F i n a n c e , U n it e d
S t a t e s S e n a t e , H e a r i n g s , M a y 17, 1956

Senator L o n g . * * *
I would like to ask this question, though:
Are you really in sympathy with this last increase in interest rate that the
Federal Reserve Board has passed on?
Secretary H u m p h r e y . T hat is a long story. I don’t know whether you want
to take the time to go into it in detail at this meeting or not. I would be
glad to do it.
Senator L o n g . I would like to hear your views on it. I wouldn’t want you
to testify all day here.
Secretary H u m p h r e y . Let me put it just as simply as I c a n .
Under the law, the Federal Reserve Board is an independent agency. There
is a great school of thought in the world, based on long experience, that central
banks should be independent of current administrative processes, that it works
better for the finances of the country over a long period of time.
Because of that, Senator Glass proposed in the original Federal Reserve Act
th at there be an independence in action of the Board, and it has obtained ever
since, and it is still the law.
Now, I believe th at a close cooperation, and an interchange of ideas and
thoughts, as between the different departments of the Government, the different
branches of the Government, is a very desirable thing, in order that, when a
department is independent—and most of them are independent in certain fields—
th a t before they take independent action they should have the benefit of con­
sultation w ith the other departments of the Government and the varying views
of the other people.
Fortunately, the present members of the Federal Reserve Board have that
same feeling. The result is that, since we have been here, we had a period, as
you will well recall, before we came, when the Federal Reserve Board and the
Treasury were a t outs, and there was such a battle th at it finally got to the
W hite House for decision, and it disturbed a lot of conditions.
We have attempted not to have that happen again, because it isn’t good for
the country.
So that, we have been very careful, and we both believe that we should consult
with each other and have the benefit of each other’s views in all the actions th a t
either of us take th a t will affect the economy.
We visit right along, M artin comes over for lunch every Monday to the
T reasu ry ; I go to the Federal Reserve Board quite frequently, and one of us.
either Randolph Burgess or I, go over there every week, and we meet several
times between.
Now, in looking ahead, and in trying to gage what economic conditions are
going to be, and w hat the demands of the economy for money and credit are going
to be, and w hat the demands for people and employment are going to be, to keep
jobs going, to keep plenty of jobs, as many jobs as we can have, and to keep
things on an even keel as well as we can, and to keep prices from running away
and getting into an inflationary period which robs the people of their money, we
meet together and discuss all sorts of things th at bear on those conditions in
the future.




CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

57

Now, Senator Kerr has just brought out how difficult it is for anybody to gage
the future, and in these discussions th at we have, we very often differ in our
views as to the weight to be given to certain inflationary forces or certain defla­
tionary forces or acts here, or acts later.
W hat we do—what we try to do is, we give them the very best estimates we
can make of the effective weights and the time of the events in the future, the
pressures th at will be forthcoming in a few weeks, months, a year hence, infla­
tionary pressures or deflationary pressures, so th a t we can have our views in
their minds when they come to take their action. And they, in turn, give us the
benefits of their views.
Senator L o n g . All I wanted to know was whether you agree with their deci­
sion or not, is what I really wanted to know.
Secretary H u m p h r e y . I felt this last time, if it had been my responsibility,
I would not have made this last move—all the others, but this last one might
have been postponed, and natural conditions might have taken care of it.
Whether I am right or wrong, I don’t know.

C o n g r e ss of t h e U n it e d S t a t e s ,
J o in t C o m m it t e e o n t h e E c o n o m ic R epo r t,

A pril 18, 1956.
M em orandum

T o : Members of the Joint Committee on the Economic Report.
F rom : Grover W. Ensley, executive director.
Subject: The economic situation and outlook.
Attached is a summary of the economic situation and outlook prepared by
the committee staff on the basis of information contained in Economic Indicators
for April, released today, and other information received by the staff.
We have also ventured to suggest the implications of this outlook for Federal
economic policy.
T h e E c o n o m ic S i t u a t i o n a n d O u t l o o k
I. ANOTHER LOOK AT 1 9 5 6

The first quarter has been marked by continued indications of economic
strength. Other trends indicate instabiilty.
A . T otal output and em ploym ent
W ith output pressing against capacity in many industries and unemployment
close to a minimum, changes in production and employment have been small in
the first q u arter:
(1) Gross national product, according to preliminary estimates, rose $1.7
billion from the fourth quarter level to $399 billion. Much of this increase repre­
sented higher prices
(2) The Index of Industrial Production averaged slightly under the fourth
quarter.
(3) Changes in employment and unemployment since last October have repre­
sented mainly the usual seasonal movements.
B. B usiness investm en t

Business expenditures for new plant and equipment, according to the recent
Commerce-SEC survey, are scheduled to reach about $35 billion in 1956, some $2
billion more than plans for this year reported in the MGcraw-Hill survey of last
November, and 22 percent or $6.2 billion more than in 1955. Considered together
the annual and quarterly statistics imply a further, though slower rise in the
second half. About half of the $2 billion increase over earlier plans may be
offset by less construction expenditures than previously expected, principally
for housing.
C. Sales, inventories , and new orders
(1) Total business sales have fluctuated within a narrow range since late 1955.
(2) Business inventories reached $83.5 billion in February, some 8.6 percent
above the low of January 1955. With sales leveling out, ratios of inventories
to sales have risen in recent months though, in some lines, are still below those
prevailing in early 1953. Much of the rise in the value of inventories recently re­
flects price increases. Trade reports indicate rising steel inventories in anticipa­



58

CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

tion of price increases or work stoppages. Some further rise in total business
inventories seems probable although the automobile industry in March, according
to press reports, brought its inventories down slightly by holding output below
sales.
(3) New orders received by manufacturers have continued to exceed ship­
ments, although the trend from December through February was somewhat
lower (February about 5 percent below December), reducing the excess of new
orders over shipments each month from about 7 percent to about 2 percent.
D. Incom es and prices
(1) Wages continue to rise. Average hourly earnings in manufacturing rose
sharply in March, especially in the industries affected by the new minimum wage.
The new high of $1.95 per hour was 5.4 percent above a year ago. Therefore,
in spite of a slight decline in the hours of work, average weekly earnings were
4.7 percent above a year ago.* Provisions in existing contracts plus the trend of
recent collective bargaining agreements point to further wage increases.
(2) Agricultural income in the first quarter was $10.4 billion (seasonally ad­
justed annual rate), in line with the expected decline this year of $1 billion or
less from 1955 levels. However, action by the Department of Agriculture, under
existing law, could add $500 million to farm incomes this year.
(3) Prices continued to increase during early months of 1956 at about the rate
prevailing since June 1955. Overall price indexes show less rise than many
components since lower prices of crude foods and raw materials have been off­
setting increases in finished goods and services. The recent 6 percent increase
in railroad freight rates and steel price rises now in prospect are among the
harbingers of continued price rises during the year.
E. C onsum ption

(1) Prelim inary results of the annual Federal Reserve Board survey of con­
sumer finances reaffirm consumer optimism.
(2) Personal consumption expenditures increased in the first quarter more
than did disposable income, resulting in a reduction in the rate of savings from
the fourth quarter. This trend seems to confirm earlier expectations that rising
total consumer spending will be a strong factor this year in spite of lower auto
sales.
F. In tern a tio n a l situ a tio n

Economic activity abroad continues strong, particularly in Europe and Canada.
Both Great B ritain and Canada are taking steps to curb excessive inflationary
tendencies.
O. F ederal fiscal developm en ts

(1) Reports through mid-April indicate that* the Federal budget will show an
administrative surplus of about $2 billion and a cash surplus of perhaps $4 billion
for this fiscal year ending June 30,1956. These committee staff estimates repre­
sent increases in receipts of about $3 billion over estimates in the January budget,
which were reaffirmed in February by the Secretary of the Treasury. Expendi­
tures may be about $1 billion higher (due mainly to handling CCC payments
inside the budget rath er than by sale of notes to commercial banks).
(2) For the fiscal year 1957, the surplus will probably be larger than estimated
in the January budget unless: (a ) business conditions deteriorate, or (&) legis­
lation increases expenditures significantly more than estimated.
H. M on etary developm en ts

(1) Apart from meeting week-to-week seasonal needs, the Federal Reserve
System during the past half year has supplied no added reserves to the banking
system. Government security holdings of the Reserve banks are substantially
the same as a year ago.
(2) Member banks have doubled their borrowing from the System in the past
year. This increased borrowing to support added loans to customers has occurred
in spite of successive increases in the discount rate from 1% to 2% percent and
to 3 percent in the San Francisco and Minneapolis districts. (The latest action
was taken on April 12.)
(3) Since mid-1955, member bank borrowings have been greater than esti­
mated excess reserves, with a resultant deficiency in the overall reserve position
of member banks taken collectively of between $300 and $500 million.
(4) For the year ended March 30, 1956, weekly reporting banks reduced Gov­
ernm ent securities by about $5 billion, while increasing commercial, industrial,




CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

59

real estate, and other loans approximately $8 billion. In spite of restraint, loans
to business increased $1.25 billion in March, or nearly 5 percent in one month.
(5)
The trend in interest rates is illustrated by behavior of Treasury bond
prices. This decline has meant an increase since mid-February of about % per­
cent in the yield of Treasury securities with a m aturity of 2 y2 years. The 3
percent’s of 1955 have fallen to about 97%.
I I . IMPLICATION FOR FEDERAL ECONOMIC PO LICY

On balance, the changes in economic indicators in recent months reinforce
the view th at overall restrictive governmental pojicy continues to be warranted.
As always, there are factors which may be pointed to on the deflationary side.
These seem to be outweighed, however, by other considerations.
Some of the present inflationary forces do not appear to be sustainable, and
if not now restrained, give prospect of creating maladjustments. The recent
rises in industrial prices, stock m arket prices, inventory accumulation, and
bank credit expansion are cases in point. The force of these upward pres­
sures, coupled with foreseeable further increases in steel and other prices,
freight rates, and wage rates tend to fan the inflationary forces into a speculative
overexuberance which increases the risks of reversal if allowed to run undamp­
ened.
Given this preponderance of inflationary influences a t the moment, w hat are
the implications for public policy in the monetary and fiscal fields?
The committee’s recommendation of March 1, 1956, against a Federal tax
reduction continues at the present time to represent the best fiscal policy. A
major guide to fiscal policy should be the state of the national economy, as the
Subcommittee on Tax Policy has pointed out (S. Rept. No. 1310). Although
long-run projections indicate the possibilities of tax reductions, the emergence
at this time of a surplus, either anticipated or greater than originally antici­
pated, is not persuasive as to the wisdom of tax reduction in the face of a
booming economy already pressing the limit of immediate resources and fanned
by a variety of upward drafts. The fact is th a t the emerging Federal surplus
of itself is but another indication of the strength of the booming forces present
in the economy.
As pointed out above, the Federal Reserve System has been pursuing, and
continues to pursue, a monetary policy consistent with this restrictive fiscal
policy. A restrictive monetary policy necessarily involves some hazards. The
principal of these is th at too much or too long restraint can turn the economic
situation toward caution or liquidation. A part from judgments as to specific
instruments to be used and their timing, it has been suggested th at restriction
may fall unequally upon small and large business, th at it may unduly enhance
bank profits, and th at if long persisted in, it may have serious implications for
the distribution of income. Continual alertness is necessary in carrying out
monetary policy to insure th at emphasis is shifted toward encouraging more
liberality by lenders as soon as inflationary forces subside.
It is clear that the costs of a monetary policy sufficiently restrictive to main­
tain stability in the face of a tax cut now would be too great to risk. When in­
flationary forces slacken, a policy of progressive credit ease can be, and should
be, initiated, with changes in fiscal policy reserved until more persistent de­
pressing forces are apparent.

(Whereupon, at 12:15 p. m., the committee adjourned, subject to
the call of the Chair.)







I N D E X

Page
Automobile industry____________________________________________ 16,18, 46
American Bankers Association______________________________________13,29
Burns, Arthur F., letter to Chairman Patm an_________________________
6
Business Week, editorials__________________________________________ 52-54
Congress, United States:
Federal Reserve System as agent of--------------------------------------------25
Federal Reserve System, reports to______________________________
28
Consultations preceding Federal debt issues---------------------------------------12
Debt management_________________________________________________ 8,10
Deposits and currency, selected dates, table---------------------------------------49
Directors of Federal Reserve banks:
Discount rates, determination of------------------------------------------------- 30,32
List of, and business affiliation___________________________________ 34, ff
Ownership of bank stock_______________________________________
27
Responsibilities-----------------------------------------------------------------------26
Selection____________________________________________________
30
Discount ra te s:
Federal Reserve Bank of New York--------------------------------------------42
Official views on recent changes____________________________ 7, 29, 39, 40
Procedures establishing-------------------------------------------------------------30
Role of regional bank directors_________________________________ 30,32
Eisenhower, President, views referred to in New York Times___________
55
Ensley, Grover, memorandum to Joint Committee on the Economic Report57
Federal Reserve System:
Agent of Congress_____________________________________________
25
Directors and affiliations of, regional banks____ ___________________ 34 ff
Directors of Reserve banks_______________________________ 26, 27, 30, 32
Relations to Treasury Department____ ________________________ 7, 24, 38
Federal Reserve-Treasury accord____________________________________
40
Humphrey, George M .:
Appointment of Martin, William McC., as Chairman, Board of
Governors__________________________________________________15,38
Current economic situation___________________________________7,16,20
Debt management and the interest rate__________________________ 8,11
Free money market___________________________________________ 12,43
Interest rates and savings---------------------------------------------------------9
Letter to Chairman Patman_____________________________________
5
Procedures in establishing coupon rates__________________________
13
Testimony, Committee on Finance, United States Senate____________
56
Transcript of remarks at Press Club luncheon____________________ 15,21
Views on actions increasing discount rates_______________________
7
Interest ra te s :
Cost of changes in--------------------------------------------------------------------- 16 ff.
And debt management________________________________________
8,10
Flexibility o f _________________________________________ _______ 44-45
And savings______________________________^___________________
43
Views of Humphrey, George M__________________________________
9
Installment buying________________________________________________
17
Investment Bankers Association_____________________________________
13
Loans and investment, changes in, table______________________________
49
Member bank reserve requirements__________________________________ 41,42
Martin, William McC.:
Humphrey, George M., on appointment as Chairman_______________ 15,38
Independence of Federal Reserve System_________________________
24
Letter to Chairman Patman_____________________________________
4
Relations with Treasury Department------------------------------------------24
Resignation, reputed tender-------------------------------------------------------- 38-39




61

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CONFLICTING OFFICIAL VIEWS ON MONETARY POLICY

Page
Mitchell, James P., letter to Chairman Patman-----------------------------------6
Money m arket___________________________________________________ 12,43
Newsweek, article________________________________________________
51
New York Federal Reserve Bank_______________________________ 31,32,47
Discount rate table___________________________________________
42
New York Stock Exchange_________________________________________
13
New York Times, views of President Eisenhower______________________
55
Open Market Committee--------------------- --------------------------------------- 31,32,33
Patm an, W right:
Letter to Burns, A rthur F _____________________________________
4
Letter to Humphrey, George M--------------------------------------*_______
4
Letter to Martin, William McC_________________________________
3
Letter to Mitchell, James P ------------------------------------------------------4
Letter to Weeks, Sinclair______________________________________
4
Memorandum to members of Joint Committee on the Economic Report2
Opening statement___________________________________________
1
Press Club, excerpt from luncheon remarks by Humphrey, George M_____
21
Price®__________ ________________________________________________
19
Reserve requirements-------------------------------------------------------------------- 41,42
Savings:
And interest rates___________________________________________
43
10
Interest on time deposits----------------------------------------------------------Need for____________________________________________________
9
Senate Finance Committee, excerpt, testimony, Humphrey, George M-----56
57
Staff, Joint Committee on the Economic Report memorandum___________
Tax-exempt securities____________________________________________
50
Time deposits, interest on_________________________________________
10
Weeks, Sinclair, letter to Chairman Patman-------------------------- -----------5