The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
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— Pas® 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. . , ^ ^ TjC 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. 28 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 In percent: Increase or decrease (—) 195 195 195 195 195 195 0 1 2 3 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 .3 -1.2 0.8 3.0 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 27.0 4.5 0.9 1 .3 5.9 5.8 3.6 ......................... Total, 1950-55____ Annual average— 0.4 1.3 -1.4 Demand deposits adjusted, currency outside banks, and time 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 62 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