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8 6 t h C on gress \
2d S e s s io n

qtttvt a t t ?


/ R eport

\No. 1043




S. Con. Res. 13, 86th Congress, 1st Session



26,1960.— Ordered to be printed with illustrations




For sale by the &TD6 rintendent of Documents, U.S. Government Printing Office
Washington 25> D .O . - Price 50 cents

(C reated pu rsu an t to sec. 5(a) of P ublic Law 304, 79th Cong.)
P A U L H . D O U G L A S , Illinois, Chairman
W R IG H T P A T M A N , Texas, Vice Chairman
JO H N S P A R K M A N , A labam a
R IC H A R D B O L L IN G , M issouri
J. W IL L IA M F U L B R IG H T , A rkansas
H A L E B O G G S, L ouisiana
JO S E P H C. O’M A H O N E Y , W yom ing
H E N R Y S. R E U S S , W isconsin
JO H N F . K E N N E D Y , M assachusetts
F R A N K M . C O F F IN , M aine
P R E S C O T T B U SH , C onnecticut
T H O M A S B. C U R T IS , M issouri
JO H N M A R S H A L L B U T L E R , M aryland
C L A R E N C E E . K IL B U R N , N ew Y ork
JA C O B K . JA V IT S , N ew Y ork
W IL L IA M B. W ID N A L L , N ew Jersey
S t u d y o f E m p l o y m e n t , G r o w t h , a n d P r ic e L e v e l s
(P ursu an t to S. Con. Res. 13, 86th Cong., 1st sess.)
O tto E c k ste in , Technical Director
J o h n W . L eh m an , Administrative Officer
Jam es W . K n o w le s, Special Economic Counsel

C O N T E N T S
I. The Nation’s economic objectives_____________________________________
Economic growth___________________________________________ ______
High and stable rate of employment_____________________________
Stability in the general level of prices____________________________
II. Past performance and future potential of the U.S. economy________
The record on growth_____________________________________________
The recent behavior of prices_____________________________________
Our growth potential______________________________________________
III. Fiscal policy_____________________________________________________________
IV . Monetary policy________________________________________________________
The purpose of the Treasury-Federal Reserve accord of 1951. _
Policies since the accord___________________________ _______________
Reasons for the shortcomings_____________________________________
A broader range of monetary tools_______________________________
Expansion of money and credit for longrun growth_____________
Truth in the cost of money_______________________________________
Summary of policy recommendations____________________________
V. Debt management______________________________________________________
Recommendations for improved debt management______________
The interest rate ceiling___________________________________________
V I. Policies to improve the structure of the economy____________________
Reducing the exercise of market power__________________________
Strengthening antitrust policy____________________________________
Reduction of tariffs________________________________________________
Voluntary restraint________________________________________________
Government participation in key price-wage decisions__________
Other changes to improve the structure of the economy________
V II. The farm problem______________________________________________________
Program for commercial agriculture______________________________
V III. America’s changing position in the world economy__________________
The causes of the balance-of-payments deficit___________________
Note by Senator William J. Fulbright_______________________________________
Supplemental views of Representative Wright Patman_____________________
Minority views_________________________________________________________________
Additional views of Senator John Marshall Butler__________________________
Additional views of Senator Jacob K . Javits________________________________
Text of S. Con. Res. 13________________________________________________________
Hearings, study papers, and reports prepared under Study of Employment,
Growth, and Price Levels___________________________________________________
Recommendations of the American Bankers Association Advisory Com­
mittee to the Treasurv, 1952-59.
(Excerpt from Hearings, pp. 12211228.)_________________________________________________________________________




Unemployment rate, seasonally adjusted, January 1948 to date___________





Table 1.— Difference in gross national product in selected years if the Pag®
economy grows at 2.5 percent, 3.5 percent, or 4.5 percent______________
Table 2.— Comparative rates of growth of gross national product in the
United States by varying periods_____________________________________
Table 3.— United States of America compared with other advanced
countries— annual average growth rates______________________________
Table 4.— Selected indicators of economic growth potentials, 1959-75____
Table 5.— U.S. average annual growth rates, 1909-59._______________ Facing 18
Table 6.— Disposition of advice of the American Bankers Association to
the Treasury with respect to new issues, 1952-59_____________________
Table 7.— Reductions in member bank reserve requirements and com­
parisons with equivalent open-market purchases by Federal Reserve
System, July 1, 1953, to December 31, 1959__________________________

8 6 t h C ongress
2 d S essio n


R eport

No. 1043


J a n u a r y 26, 1960.— Ordered to be printed


D o u g la s ,

from the Joint Economic Committee, submitted the

Together with
A high and stable rate of employment, a high rate of growth in our
national output and productive capacity, and a high degree of stabil­
ity in the general level of prices can be simultaneously achieved. Our
history demonstrates that this is true.
In the last 6 years, the economy has failed to realize these objec­
tives.1 There has been more unemployment than usual in so-called
good times.2 Although there has been an appreciable growth of pro­
ductive capacity, we have not made full use of it, and total output
has gone up at only a low rate.3 At the same time, consumer prices
have gone up. Although there has been no serious and deep depres­
sion, sharp recessions have occurred. These have cost us billions of
dollars of output and widespread unemployment.
This performance of the economy in recent years is the occasion for
the “ Study of Employment, Growth, and Price Levels” by the Joint
Economic Committee, begun March 23, 1959, pursuant to Senate
Concurrent Resolution 13, 86th Congress, 1st session. The commit­
tee’s aims have been (1) to obtain a detailed, factual, record and ob­
jective analysis of economic developments in the postwar period, and
principally since the end of the Korean war; (2) on the basis of these
facts and analyses, to determine whether the economy could do better;
and (3) to provide detailed recommendations for improving public
policies in order to achieve a higher and more stable rate of employ­
ment of the labor force, a higher and steadier rate of growth in produc­
tive capacity and in output, and greater stability in the general level
of prices.
In the course of this study the committee conducted extensive hear­
ings on virtually every major aspect of the Nation’s economic develop­
1 See “ Staff Report on Employment, Growth, and Price Levels,” (hereinafter cited “ Staff Report” ),
especially ch. 1, 3, 5, and 6 .
2 Ibid., table 8 - 1 , p. 275.
3 Ibid., table 3-1, p. 70.




ment and economic policies. During these 9 sets of hearings the com­
mittee received testimony from over 100 expert witnesses. It will have
had the benefit of over 20 special study papers prepared by outside
consultants and by the committee's staff.4 In addition, the committee
staff has prepared a comprehensive report setting forth fundamental
data and technical analyses bearing on the problems with which this
study is concerned.5
In general, the fundamental conclusions about our economy to which
we come on the basis of the study are:
(1) It is possible with proper policies to achieve a high and sustained
rate of economic growth, relatively full employment, without creeping
or galloping inflation.
(2) Under the present policies followed by the administration, the
Treasury, the Federal Reserve, and the Congress, we would have to
choose between growth equal to our potential, on the one hand, or
price level stability, on the other.6
(3) Our future growth will depend on what we do now. If we pur­
sue policies which will foster growth, the economy could grow at a
rate of approximately 4.5 percent a year over the next 15 years. This
is in sharp contrast to the rate of 2.3 percent of the last 6 years. These
are amounts large enough to spell the differences between a rapid or
slow increase in our standards of living and between meeting our
public responsibilities at home and abroad fully or stintingly. We do
not desire growth merely for its own sake. We need it to raise our
standards of living, to meet our growing public responsibilities, and
to improve our military position.
In fact, if we grow at 4.5 percent per year between now and 1975
instead of at a rate of 2.5 percent, the gross national product in 1975
would be $971 billion or $258 billion greater than it would be at a
2.5 percent growth rate.
If we grow at 4.5 percent, the gross national product in 1975 would
be $139 billion greater in that year alone than if we grow at only
3.5 percent.
The cumulative amounts which we would gain from a growth rate
of 4.5 percent per year in this period, instead of 2.5 percent or 3.5
percent, are staggering.
In the table below the calculations for gross national products at
different growth rates in future years are given.
4 See appendix.
8 T he chairm an w ishes to th an k the staff, especially O tto E ckstein, the technical director, Jo hn W . L eh­
m an, the adm inistrative officer, and Jam es W . K nowles, the special economic counsel, for the p a rt th ey
played in conducting the stu d y and hearings and in the preparation of the special papers and the “ Staff
R epo rt.” In addition, m y legislative assistant, H ow ard E. Shum an, was the chief liaison betw een m yself
an d the staff throughout the stu d y and had particular responsibility in connection w ith the preparation of
the com m ittee report.
6 M r. P atm an dissents in p art. See his supplem ental views, p t. 1.

T a b le


1 .— D iffe re n c e i n

gross n a t io n a l prod uct i n selected ye a rs i f the econom y
grow s at 2 . 5 percent , 3 .5 percent, or 4 -5 percent
[In billions of 1959 dollars]
Gross national product in billions of 1959
dollars if economy grows at—
2.5 percent
per year

1959...................................................... ...............................................
1965 ____ ____ _____________ ______________ __________ _______
1970 ......... ............................................. ................................ ..............
1975 ........ ............... ........... —.......................................... ...............

1 480

3.5 percent
per year

4.5 percent
per year
i 480

i Preliminary.

(4) In order to get a rate of growth close to our potential, we must
reduce the inflationary bias of the economy so that we will not have to
choose between growth, on the one hand, or stable prices on the other.
We must then pursue programs of growth. To grow at a high rate
without inflation we must do the following:
(а) Make sure that final money demand for goods and services
grows at a rate equal to the increase in the potential supply of
(б) Reduce the instability which still troubles the economy.
There is nothing inevitable about the periodic recessions with
which we have been plagued. While perfect stability will never
be achieved in a dynamic economy, the frequency of recessions
and their severity can be reduced.
(c) Improve the structure of the economy by reducing concen­
trations of market power and by increasing the mobility of
(d) Increase the growth of the productive capability of the
economy by investment in public and private capital, by raising
the productivity of the labor force, and by improving the mobility
of resources.
(5) Our inadequate economic policies have contributed a good deal
to the difficulties of recent years. Since the end of the 1954 recession,
public policy has been concentrated primarily on curbing inflation.
This has been done on the mistaken assumption that such policy will
automatically promote economic growth. The policies used assume
that the inflation of recent years was caused by generally excessive
money demand. Our studies find that the real sources of inflation
primarily lie elsewhere.7 In fact, money demand fell short of the
potential output of the economy during most of the period, and the
general restraints on demand imposed by public policies unduly
retarded the growth in output and in employment without preventing
price increases.
(6) However, we also find that policies designed to promote growth
will not automatically prevent inflation. While high output serves
to raise productivity, a high rate of growth requires high levels of
monetary demand. It is impossible to manage the increase in money
demand, particularly with present policy tools, without having some
i See Study Paper No. 1 , “ Recent Inflation in the United States,” by Charles Schultze; Study Paper
No. 2, “ Steel and the Postwar Inflation,” by Otto Eckstein and Gary Fromm; Study Paper No. 5, “ Trends
in the Supply and Demand of Medical Care,” by Markley Roberts; and “ Staff Report,” ch. 5, especially
pp. 130-136.



of that demand hit industries in which output is pressing upon capa­
city. This would result in inflationary strains. The sheer promotion
of total output without regard to composition may therefore very well
result in strong inflationary pressures.
Concentrations of market power partially contributed to the
inflation of recent years. Antitrust and similar policies designed to
improve the competitiveness of the economy are important in reduc­
ing this source of inflationary strain but cannot be relied on exclu­
sively for preventing increases in the general level of prices. Improved
monetary and fiscal policies must also share in restraining inflation.
In general, the policies that would reduce instability, make our
labor force more productive at full employment levels, increase our
capital and use it more fully, and maintain our scientific advance,
(1) Monetary and fiscal policies that permit money demand to
grow in line with supply.
(2) Measures to reduce the instability of output, especially the
management of our defense orders in such a manner that they do
not cause serious instability in the economy.
(3) Greater reliance on fiscal policy so that monetary policy
will not have to cany so much of the burden to achieve any
desired restraint on total money demand.8 This means that we
should aim for higher budget surpluses during periods of prosperity
and a lower level of interest rates than have been achieved in
recent years.
(4) A comprehensive program for promoting the productivity
of the labor force, for technical progress, and for facilitating the
introduction of new technology. This program should:
Provide Federal aid to education, without Federal
control, particularly for those States with a large school-age
population and poor financial resources.
\b) Provide a national scholarship program.
(c) Strengthen Federal programs of medical research and
of vocational rehabilitation.
(d) Strengthen the private and public apprenticeship
(e) Continue and increase support of scientific research,
especially basic research, even in the event that the strictly
military needs for advancement in science diminish.
(J) Set up national productivity centers for raising productivit}7 in the low-wage, low-productivity industries and
services in the economy.
(g) Encourage those institutions of collective bargaining
that allow for the introduction of new technology and which
promote an equitable sharing of the inevitable social costs
of technological change.
(h) Provide unemployment benefits and retraining for
workers laid off because of technological change, with
benefits related to seniority.
8 M r. P atm an dissents in p art. See his \ iews, p t. 1.



Establish special programs for the rehabilitation of
depressed areas.
In addition, we should:
(5) Reorder the priorities in Federal Government expenditures
to place greater emphasis on those activities which contribute
to growth, such as education, research and health programs, and
reduce subsidies for agriculture and business, and prune wasteful
Government activities.
(6) Reform the Federal tax system to make it fairer, less ob­
structive to economic growth, and more productive of revenue.
(7) Revise monetary policy so that we may have a growth in
the money supply in line with the growth in total output and
increase the effectiveness of monetary action.
(8) Put greater reliance, to the extent possible, on selective
policies which will curb excess demands in certain industries
without causing general unemployment.
(9) Carry out a more vigorous and more effective antitrust
policy and, first, attempt to restrain groups that possess market
power by voluntary methods and, second, take whatever steps
in the way of hearings and fact finding that may prove necessary
(10) Reduce tariffs gradually.
(11) Revise our farm policy, including more research to find
new uses for farm products.
(12) Improve our foreign trade position.
Of these recommendations, Federal aid to education is the most
important for raising the long-term rate of growth.9 This should be
done without Federal control over the content of what is taught, the
salaries or promotion of teachers, tenure, discipline, or any other
feature which historically has been controlled by the local authorities.
Historically, increases in productivity account for two-thirds of our
total increase in output, with only one-third due to increases in the
sheer amounts of labor and capital. The rise in productivity must
be traced back to the improving skills of the labor force, to improve­
ments in technology, and to better organization of production.
Education plays a crucial role in each of these fields.10
The untapped potential of further investment in education remains
great. For example, a recent study11 found that 60 percent of students
in the top quarter of ability in high school do not go to college. Many
cannot afford to go. Religion, race, sex, and place of residence also
keep some from attending college. Lack of motivation and the
inadequacy of the high schools also are factors.
A large fraction of our labor force even today is the product of poor
school systems. Expenditures per pupil vary enormously among
States, and even more among school districts. Average expenditure
9 See “ Staff R epo rt,” p. 55. For testim ony on the contribution of education to long-term grow th, see
“ H earings on E m ploym ent, G row th, and Price L ev els' (hereinafter cited “ H earings” ): T estim ony of
witnesses M usgrave, p. 2757, Baum ol, p. 2792, G ordon, p. 2955, H eller, p. 2988, and Power, p. 2384.
10 For further discussion of the role of education in economic grow th, see T . W . Schultz, “ Investm ent in
M an: An E conom ist’s V iew,” the Social Service Review , June 1959, “ H u m an W ealth and Econom ic
G row th,” the H um anist, 1959, N o. 2: and the Staff R eport, pp. 45-47, 53-56.

u Charles C, Cole, Jr., “ The Identification and Encouragement of Scientific Talent,” a report to the
National Science Foundation, 1957.



per pupil in the top 12 States was $429 in 1958-59, and only $216 in
the bottom 12 States. Yet the poorer States spend a greater fraction
of their income on education. The large differences result both from
the differences in income and from the fact that the poorer States
have a larger fraction of their population of school age.
With the rising demands for skill and training from an ever more
complex technology, we must strengthen our weaker school systems,
and make sure that all of our people have the opportunity and the
encouragement to develop their talents fully. Federal aid to educa­
tion is a necessary step to accomplish this aim.

I. T



a t io n ’s


c o n o m ic

O b j e c t iv e s

We have identified the main objectives of public economic policy
as a high and stable rate of employment, a high rate of growth in our
national output and productive capacity, and a high degree of stability
in the general level of prices. These objectives must be carried out
within the framework of a dynamic, free, competitive, private enter­
prise system. This means that there should be a minimum of re­
straint, from both public and private sources, on the freedom of
entry into competitive business, and on changes in demand and in
our productive activity. It also means that there should be substan­
tial equality in economic opportunity.12
We must have a very clear concept of these objectives and their
importance if we are to improve public policies to achieve them.
Economic growth
Potential economic growth is the expansion of the Nation’s capacity
to produce the goods and services its people need and want. It is by
increasing productive capacity and by then using it fully that wre can
improve our living standards; as individuals, by increasing our levies
of consumption, and as a Nation, by increasing and improving the
public services upon which our well-being depends.
An increase in our productive capacity comes from the expansion
of the labor force, an increase in its quality and productivity, from
increases in the stock and improvements in the efficiency of privately
owned capital, from additions to public assets such as highways and
public utilities, from technological advances, from higher levels of
education and training, from improvements in the health and energies
of the population, from reducing the deterrents to enterprise, and
from a better organization of the processes of production. No single
one of these is enough; indeed, they interact on each other.
The process of economic growth in our Nation is the reflection of
the infinitely varied talents and demands of a vigorous, free, and
enterprising people. So long as the American people possess these
attributes we can obtain a high rate of economic growth.
The critical need for economic growth is found in the tasks placed
upon the Nation, both foreign and domestic. At no time has any free
nation been faced with a greater call upon its resources than the
United States today, as the leader of the free world.
The United States must bear the major responsibility for protecting
the free world from the threat of Communist aggression.13 This threat
lies not only in the possibility of nuclear war but also in limited war
waged without nuclear weapons. The rapid progress of Soviet mili­
tary technology will impose increasing demands upon our own
resources if we are to make sure that our defense abilities keep pace
with the threats to the world peace. In addition, the United States
12 See also “ Staff Report/’ pp. 64-65.
is See forthcoming Study Paper No. 18, “ National Security and the American Economy in the 1960’s,”
by Henry Rowen.




will liave to continue to assume considerable responsibility for pro­
viding economic aid to speed up the economic development of the
underdeveloped countries. The prospects at this point are very
good that our Western allies will be able to increase their efforts in
this regard, but this will not necessarily permit reduction of our
own efforts.
Our domestic public responsibilities will also rise in a growing
and increasingly prosperous economy. A rapidly growing, increas­
ingly prosperous population, devoted to political and economic free­
dom, will necessarily require more of those services and goods which
can only be, or are most effectively, provided by Government. We
must devote both a larger amount and a larger share of our resources
to educate the growing population of young people. As our living
standards rise, our responsibility to reduce poverty also rises; wiiile
economic growth does reduce some poverty as incomes rise, certain
groups, including those out of the labor force for reasons of age or
disability, minorities who suffer from discrimination in their access
to jobs, migrant farmworkers, and American Indians are bypassed
b}^ economic progress. The veiy large increase in our aging and aged
population will create the need to devote more resources to their
problems. As the population in our cities grows, basic public services
must expand if living standards are not to fall. Such programs as
slum clearance and the improvement and expansion of public utilities
become a means to greater well-being. The clearing of our slums
would also increase the tax receipts in the now blighted areas of our
cities. The expansion of the civil functions of Government has been
an important element of economic progress throughout the Nation’s
A high rate of economic growth is essential if these public responsi­
bilities are to be discharged without limiting the advance in living
standards effected through individual efforts. The burden of more
adequate defense efforts, of better and enlarged educational systems,14
and of other public services, requires us to increase our ability to
produce all the goods and services we want. For example, had our
total output since the Korean war grown at a steady rate of 3.5
percent— well below our potential— our total production today would
be $513 billion, instead of the actual level of $479 billion in 1959.
With the present Federal tax structure, Federal revenue would have
been $5 to $8 billion more. In other words, reasonable growth since
the end of the Korean war w^ould have provided us in fiscal 1960 with
a budget surplus of about this amount instead of the budget which
may have at best only a slight surplus. Instead of a partisan fight
over the budget, we could have used a part to retire some debt which
would have eased upward pressures on interest rates, and another part
to provide a larger volume of the public services, including defense,
upon some of which further growth depends.
The decline in the increase of output per person is even more strik­
ing, since population continued to increase at a high rate. Where real
output per person could have risen by at least 1.8 percent a year if
gross national product had risen by 3.5 percent a year, it actually
rose bv only 0.6 percent per year from 1953 to 1959. Thus, small
14 See Study Paper No. 4, “ Analysis of the Rising Costs of Public Education,” by Werner Hirsch.



changes in the rate of increase of gross national product will have a
proportionately larger effect on the output available per person.
High and stable rate of employment
In a free private enterprise economy, the individuaPs attainment of
material well-being depends on his productive efforts. Basic economic
justice requires that no individual who wants to and is able to work
should be deprived of a job. A high and stable rate of employment
is the Employment Act's explicit recognition that a free economy
can meet this standard of economic justice as fully as any other form
of society. It should also do so more efficiently than any other.
Although this is fundamental to a stable social and political struc­
ture, there are even more immediate considerations which make the
employment objectives so important. In the first place, the economic
progress upon which our well-being depends cannot be sustained if
the economy persists^very long in underutilizing its labor force. Pay­
ments for labor services are the major component of national income.
Persistent underemployment or high rates of unemployment reduce
national income below what it could be. Since private investment
depends on a rising demand for final products, a slow growth in labor
income will undermine the basis for rapid increases in productive
capacity. This in turn will further slow the growth in income. Unless
existing plants and factories are fully used, new plants will not be
built at as fast a pace.
Moreover, underemployment is a failure to use our productive
resources. A smaller volume of goods and services is then produced
than is needed to meet actual and potential demands. Over several
years we have had a relatively high rate of unemployment. This
means we are not using our existing productive resources to the full.
This fact is inconsistent with the frequent assertions that we cannot
afford more schools, more research and development activity, higher
levels of and more intensive defense programs, greater commitments
to the development of impoverished and underdeveloped areas at
home and abroad, or improvements in many of the other areas of public
responsibility. This is not to say that those now unemployed can be
immediately or easily transferred into employment directed toward
meeting all of these demands. But persistent unemployment at the
same time that we limit our efforts in these fields means that we are
wasting the resources now at our disposal.
Stability in the general level of prices
In our economic system, changes in the prices of particular products
or services are the mechanism by which resources are allocated to their
most valuable uses. Price flexibility, therefore, is an essential part of
a private enterprise economy. Such individual price changes can
occur while there is stability in the general level of prices. If we are
to have price level stability, any increases in prices which attract
resources to activities for which demand is growing, must be matched
by price decreases where demand is declining or growing less rapidly.
If some individual prices fail to fall, however, the relative price in­
creases necessary to move resources to their best uses will merely bring
higher prices in general. The acceptance of continuing increases,
even though quite modest, in the general level of prices may result
in acceleration of the inflationary pressures and lead to economic



Inflation is unjust. This is true whether it creeps or gallops. It
redistributes income and wealth according to the ability of people to
protect themselves against its effects. Because of this it benefits
the strong at the expense of the weak. The avoidance of inflation,
therefore, is an important goal of economic policy.15
15 See S tu dy P aper N o. 7, “ T he Incidence of Inflation: Or W ho G ets H urt? ” b y Seym our E . H arris
S tu d y P aper N o. 8, “ P rotection A gainst Inflatio n,” by H . S. R o uthak ker, and num erous w itnesses.

II. P ast P erformance and F uture P otential of the U.S.

E conomy
Since the end of the Korean war, the rate of growth of output of the
American economy has fallen considerably below the rate of growth of
the earlier postwar years, and has fallen somewhat below the longrun
historical rates. Unemployment has been higher in recent periods of
prosperity than in preceding ones. At the same time, prices rose.
The record on growth16
T a b l e 2 .—

C o m p a ra tiv e rates of growth o f gross n a t io n a l p ro d u ct i n the U n ite d
States by v a r y in g p e rio d s 1


1890-1959......... .............................. ......................
1890-1919_______ ______ ________ ____________
1919-59__......... ........................................... .........
1919-47______________ ______________ ________
1947-53............. ..................... .........................—
1953-59_____________ ______ _________________

G N P in con­
sta n t 1958

G N P per


* .6

G N P per
person en­
gaged in

G N P per
unw eighted
m an hour

2 1.4
2 1.6

3 2.3
3 2.6
3 2.6

1 Sources: All data for 1890-1919 and gross national product per person engaged in production for all years
are from “ P rodu ctivity T rends in the U nited S tates,” a stu d y by D r. John K endrick for the N ational
B ureau of Econom ic Research, now in process of preparation. D ata used by courtesy of the bureau. Gross
national product and G N P per person, 1919-58, U.S. D epartm en t of Commerce. G N P per unw eighted
m an-hour, F abrican t, “ Basic F acts on P ro d u ctiv ity C hange,” hearings, vol. II, table A. Figures are all
rates oi change betw een annual figures.
2 Series ends w ith 1958.
3 Series ends w ith 1957.
4 1959 dollars. I t w ould be 2.4 in 1954 or in 1958 dollars.

Over the last 60 years, the total output of the American economy
has grown at an average annual rate of 3.2 percent. Total output is
best measured by gross national product in constant dollars, which is
the total value of goods and services produced, adjusted for changes in
prices. This growth has not occurred evenly. From 1890 to 1919,
the rate was 3.5 percent, from 1919 to the present, 2.9 percent. The
great depression held back the growth of output, although World War
II saw enormous gains as we used the great excess capacity that existed
at the end of the thirties.
After the inevitable decline of total output at the end of World War
II, growth resumed in 1947, was interrupted by the recession of 1949,
and then continued at a very high rate during the Korean war. For
the period, 1947-53, the average rate of growth was 4.6 percent.
Since then, growth has been slow, at 2.3 percent from 1953 to 1959.
Even when we allow for the expected further expansion in 1960, the
average rate of growth of output over the previous and the present
business cycle will be below the longrun historical average. It will be
even further below the growth of our potential.
18 See also table 5, “ U .S. A verage A nnual G row th R ates,” p. 18.




Movements in total output per capita show a similar pattern.
However, because population growth continues at a more steady rate
than output, a decline in the growth of total output has a magnified
effect on the growth of output per person. Thus its increase, which
had been 2.5 percent from 1947 to 1953, was only 0.6 percent in the
last 6 years.
Total output per person engaged in production has increased in a
somewhat more even pattern. This is because the total number of
people working rises less in periods of slow growth.
Gross national product per unweighted man-hour, a crude measure
of productivity, has risen at a longrun average rate of 2.3 percent a
year. Since 1919, the average has been 2.6 percent. In the early
postwar period, when the country's capital stock was being modernized
after a long period of deferral, and when demand was very strong, this
figure rose at a rate of 4.1 percent. From 1953 to 1957, the most
recent period for which comparable data are available, it has re­
turned to the average rate since 1919, an annual gain of 2.6 percent.
The recent growth record of the American economy contrasts with
that of most of the advanced economies of the world. As table 2
shows, the rate of increase of output was much larger elsewhere. In
the OEEC countries of Europe as a whole, gross national product rose
at a rate of 4.6 percent for the period 1950-57, the most recent dates
for which comparable figures are available. Industrial production,
which rose at a rate of 4.4 percent in this country from 1950-57, rose
at 6.2 percent in OEEC countries. Economic growth in the Soviet
Union has been at an even higher rate, with total output growing at
approximately 7 percent.17
The slow rate of growth of the last 6 years is a serious matter.
While some slowdown from the very high rates of the early fifties was
to be expected, the severity of tbe slowdown was unnecessary, and
much of the blame rests with the Federal policies that were pursued.
First, Federal policies helped to bring about the two recessions, which
were the main causes of the retarded growth. Sudden changes in
defense orders clearly helped to trigger both of the downturns— as
they also did in the downturn of 1949— because orders were cut clum­
sily and without offsetting fiscal measures which would have let
civilian private and public spending grow.18
Second, when the signs of recession became clear, we did not take
sufficiently prompt action to halt and reverse the declines.
T a b le


— U nited States o f A m erica com pared w ith other advanced countries —

a n n u a l average growth rates

A ll
U nited
States of C anada m em ber France Ger­
m an y
A m erica1
In d u strial production: 1950-57.
Real G N P at m arket price
(1954 prices and exchange
rates): 1950-57.............................


U nited
K ing­ Sweden

















1 F ro m F R B Index, revised, and “ U .S. Incom e and O u tp u t,” U .S. D epartm en t of Com m erce
Sources: In du strial production and G N P figures from O E E C statistical bulletins, except for U nited
States of A m erica figures.
17 See testim ony of A llen W . D ulles, hearings on “ C om parisons of the U nited States and Soviet Econ­
om ies,” S ubcom m ittee on Econom ic Statistics, Jo int Econom ic C om m ittee, N ov. 13, 1959, p. 6.
18 See “ Staff R ep o rt,” ch. 8.



Third, monetary policy, which became progressively more restrictive
over the period, kept the supply of credit too tight. This had its main
effect on residential construction. In much of the period the industry
was capable of building more houses than the supply of credit allowed.
It also had some effect on investment spending by small business,19
State and local governments, public utilities, and private business
generally, and through its effects on personal incomes, on consumption
as well.
The overall effect of these policies was to let total demand grow at
a lower rate than the rate at which capacity was expanding. From
1953 to 1959, industrial capacity grew by approximately 30 percent,
but industrial output by only 15 percent. Thus production remained
below our potential output in most of the period.
The general level of unemployment now appears to be higher both
in good periods and in recession periods than it has been previously
in the postwar years.
In the prosperous periods of 1956 and 1957, average unemployment
was 4.2 and 4.3 percent respectively. This compares with figures of
3.1 and 2.9 percent in 1952 and 1953, and with 3.9 and 3.8 percent in
1947 and in 1948. The figure for 1959 was 5.5 percent. Thus, in
roughly comparable good periods unemployment levels are now higher.
In the recession year of 1958, average unemployment was 6.8
percent. This compares with 5.6 percent in 1954 and 5.9 percent in
1949. While there were individual months in the 1949 recession
when the specific unemployment figure was as high or higher than in
the most recent one, there is no question but that we are now experi­
encing a generally higher level of unemployment in both good and
bad periods than at any time since World War II. (See chart,
P- 14P
With these changes in employment conditions, there has been a
trend toward a lower rate of increase in productivity (see table 2
above). To a substantial extent this can be traced to the changes in
the use of the civilian labor force. A pronounced shift has occurred
from employment of production workers in manufacturing to employ­
ment in services,20 i.e., from relatively high productivity to lower
productivity uses.
To a significant extent, this weakening of the employment situation
is another reflection of public policies pursued since 1953. The slow
growth in total demand after 1955 served to reduce employment
demands in manufacturing industries and to encourage the shift of
labor from these industries to services. Had more expansionary fiscal
and monetary policies been followed in 1956 and 1957, the overall
unemployment rate would have been lower and productivity would
have been greater.21
is M r. P atm an : N ot “ som e" effects on sm all business b u t “ disastrous” effects on sm all business. See
his views, part 1.
20 F or a discussion see S tu dy P aper N o. 6, “ T he E x ten t and N ature of F rictional U nem ploym ent,” by
the B ureau of L abor Statistics, pp. 60-67, and “ Staff R epo rt,” pp. 74-94. Also see forthcom ing S tudy
P aper N o. 23, “ U nem ploym ent in S urplus L abor M arket A reas,” b y the B ureau of L abor Statistics.
21 For a discussion of prod uctivity m ovem ents, see S tu dy P aper No. 15, “ Profits, Profit M arkups, and
Produ ctivity: A n E xam ination of Corporate B ehavior Since 1947,” by E dw in K uh.

50553— 60-------2



January 1 9 4 8 to D ate


U nem ploym ent R ate


So urce: U .S. Bureau of the Census



The recent behavior oj prices
Over the period 1953 to 1959, consumer prices rose at an annual
rate of 1.4 percent, wholesale prices at 1.4 percent, and the gross
national product deflator at 2.2 percent. These increases were largely
concentrated in the period 1955 to 1957. These movements of the
indexes, of course, reflect diverse movements of individual prices.
The decline in agricultural prices served as a partial offset to rising
industrial prices over the entire period.
In order to interpret these movements of the price indexes, their
limitations must be kept in mind. The failure of the indexes to reflect
changes in quality and the methods of introducing new' products give
some upwrard bias to these indexes. These biases are not sufficient to
explain away all of the increase in the index. But it should be stressed
that small changes in the indexes, on the order of 1 percent a year, fall
within the margin of statistical error.22
Three fundamental factors account for the inflation of recent .years:23
1. Inflation has been a byproduct of instability of output. Business
investment has come in rapid surges. This has led to excess demands
and rising prices in the capital goods industries.24 Consumer invest­
ment in durable goods has also come in sudden bursts, particularly in
the first year of recovery after recession. Besides directly leading to
price increases, these surges led to very rapid increases in profits which
formed the basis for relatively large long-term wage settlements.
Business was also encouraged to incur large fixed capital, research,
and administrative costs by the sharp upswing of 1955. When total
demand failed to grow in accordance with the optimistic expectations
established in 1955, business found itself with a higher level of overhead
costs which served to raise unit costs.
2. Concentrations of market power have also contributed to infla­
tion. The history of price increases in steel, the ability of many
industries to pass on higher overhead costs even in the absence of
excess demands, and the failure of prices to fall in the recession periods,
are three clear instances of the influence of market power on the
price level.
3. The prices of services, which loom particularly large among
consumer prices, rose steadily through the postwar period. The rise
in service prices is due partly to the fact that these sectors have lower
productivity increases than the average of the economy. In addition,
in some areas, particularly in the case of medical care, the imbalance
between demand and supply has continued to worsen.
The policies pursued by the Federal Government were on the whole
poorly suited to deal effectively with the specific kinds of inflationary
pressures in recent years. These policies were of a type that is effec­
tive in curbing an inflation stemming from generally excessive demand.
This did not work. The actual increase in demand was low. The
principal inflationary forces were the strong shifts in demand among
industries, the concentration of market power, and the low productiv­
ity and the inadequate supply of services. The attempt to restrain
22 For discussion of upward bias in the price indexes, see especially the testimony of Richard Ruggles,
Hearings, pp. 2270-2272, and that of numerous other witnesses.
23 See Study Paper No. 1, “ Recent Inflation in the United States,” by Charles Schultze; Study Paper
No. 2 , “ Steel and the Postwar Inflation,” by Otto Eckstein and Gary Fromm; Study Paper No. 5, “ Trends
in the Supply and Demand of Medical Care,” by Markley Roberts; forthcoming Study Paper No. 17,
“ Prices arid Costs in Manufacturing Industries,” by Charles L. Schultze and Joseph L. Tryon; and “ Stall
Report,” ch. 5, especially pp. 130-136.
24 See Study Paper No. 3, “ An Analysis of the Inflation in Machinery Prices,” by Thomas A. Wilson.



total demand brought unemployment and a low growth of total
output, while it did not stop the upward movement of prices over the
Our growth 'potential
Our economy can grow at a rate as high as 4.5 percent per year with­
out changing our economic system in any fundamental way. Even
if the economy performs no better than in the past, except that we
avoid stumbling into a serious depression similar to the 1930's, the
rate of growth of the economy may be only as low as 3.5 percent a
year. Thus there is a considerable range of potential growth rates
even within a range of assumptions which exclude a serious and pro­
longed depression on the one hand and a forced draft economy on the
other. Within this range, the rate of growth is subject to our own
control through public and private economic policies.
This conclusion, arrived at by the committee staff in its report to
the committee, presents a range of growth rates in which the lowest
rate is higher than the average rate of increase in real output of about
3 percent per year, which was achieved over the past 50 years. Why
is it that the future possibilities are significantly more optimistic than
actual past achievements?
A large number of factors were considered in the staff analysis 25 of
our past growth, including: the rate and character of scientific prog­
ress; the proportion of output which is plowed back into capital assets;
the average age of our capital assets and, hence, the extent to which
the current capital stock embodies the most up-to-date technology;
rising levels of educational attainment and health; the ratio of labor
force to the population; changes in average number of hours worked
per year per person employed; changes in the average degree of skill
exhibited in managing productive activities; the degree of stimulation
of advancement in efficiency from competition at home and abroad;
a wide variety of considerations concerning the social and political
environment in which the economy operates; and the availability of
natural resources and their average quality. Some of these factors
cannot be measured directly at the present time.
The staff analysis takes explicit quantitative account of available
man-hours (number of persons available for work multiplied by aver­
age hours of work per year), the ratio of the stock of capital to labor,
and time, as a proxy for changes in managerial skill, technological
progress, improvements in the health and education of labor force,
etc., which increase our productive capacity each year even though
they cannot be directly measured. Allowance was also made for the
fact that an increase in the average age of the stock of capital tends
to reduce potential output and a fall in the average age tends to in­
crease potential output because the average age of the capital stock is
an indirect measure of the degree to which the capital stock existing
at any particular time incorporates the latest available technology.
The time trend accounts for between one-half and two-thirds of the
annual increase in the economy's capacity or potential output.
If we look at the future potentials developed by the staff (repro­
duced below in table 4), we find three main reasons for the fact that
23 See the forthcom ing S tu dy P aper N o. 20 “ P oten tial Econom ic G row th in the U nited States,” by Jam es
W . K nowles.



the growth rate in the future can be significantly higher than the
economy has realized in the past:
1. The annual average rate of growth in the total labor force over
the next 15 years is likely to range between 1.5 percent and 1.9 percent
per year as compared to an average over the previous 50 years of about
1.4 percent. The growth of the population of working age, therefore,
will cause a somewhat higher rate of growth in the future than the
past 50-year average.
2. The stock of private plant and equipment in constant prices is
assumed to grow between 2.2 percent and 3.2 percent per year over
the next 15 years compared to an average of about 2.2 percent per
year over the preceding half century. It is notable that the average
rate of increase over the past 50 years has been held down by the
fact that between 1929 and 1939 there was very little growth in the
stock of capital due to the low levels of investment during this decade.
3. The average age of capital stock is assumed to remain constant
or decline slightly over the next 15 years, whereas the average age of
the capital stock actually increased over the preceding 50 years,
reaching a peak during World War II and declining since that time.
The average rate of increase over the entire 50-year period was about
one half of 1 percent a year, but over most of the period (1909-45)
the rate of increase was slightly over 1 percent per year. Since an
increase in the average age of the capital stock tends to retard the
rate of growth, and a decline in the average age tends to stimulate the
rate of growth, this factor will be a modest stimulant to the economy
over the next 15 years, whereas it has been a restrictive influence over
most of the preceding half century.
T able 4.

— Selected indicators o f econom ic growth potentials, 1959-75 1
[P ercent increase per y e a r]2

Projected potential grow th rates, 1959-75

T otal labor force_____________________________________________
T otal em ploym ent, including the A rm ed Forces_____________
A verage annual hours of w ork _______________________________
T o tal m an-hours_________ ___________________________________
Stock of private p lan t and equipm ent in constant prices_____
A verage age of capital stock____________________ ______________
Gross national product in constant prices:
From 1959, actual (prelim inary estim ate)_________________
From 1959 potential______________________________________

3 1.9
- .2

4 1.7

* 1. 5

1 Some rates of change in this table vary slightly from those given in the sim ilar table 4-1, p. 101 of the
“ Staff R eport on E m ploym ent G row th and Price Levels” because of the incorporation of later data and
refinem ents of analysis not then available.
2 C om puted by com pound interest form ula, using initial and term inal years.
3 Assum es 97 percent of the labor force em ployed in 1975.
4 Assumes 96 percent of the labor force em ployed in 1975.
5 Assumes 95 percent of the labor force em ployed in 1975.

These factors mean that we can have a rate of growth at least as
good, if not slightly better, than in the past so long as deep or pro­
longed depressions are avoided, such as interrupted our growth in the
past 50 years, namely between 1929 and 1939. On the other hand,
if we take full advantage of the opportunities for growth provided by
an economy which operates with only minor interruptions to its
progress and adopt policies to mend this process of growth without



producing inflation, then our economy would tend to grow at a sig­
nificantly higher rate than in the past. Whether we attain these
higher rates will depend on whether public and private economic poli­
cies are adopted which facilitate growth, and whether we avoid deep
and prolonged interruptions to expansion.
N o t e . — The figures for growth rates in the attached table are based on the real
gross national product expressed in 1954 dollars. This fact explains the minor
difference between the 1953-59 rate of 2.3 in table 2, which is based on 1959 dollars,
and the rate of 2.4 for this period found in this table.


F is c a l P o l ic y

Tlie performance of the economy in recent years was significantly
affected by the kinds of public policies which were carried out. This is
not to say that these policies are the only factors which determine the
essential character of our economy. The vigor and venturesomeness
of the people of this country, their highly varied cultural heritage, their
longstanding preferences about what is the proper economic, political,
and social framework for our activities, are more important, over
the long run, in determining what kind of an economy we have. But
public policies exert strong influences which can and do affect the
strength of the economy and the course of its development.
Of all the major areas of public policies, the greatest opportunities
for improvement lie in fiscal policy. The Federal Government is far
and away the largest economic unit in the Nation. It handles over
one-sixth of the gross national product. It has a very large effect on
economic activity, on economic stability, and on growth.
In the postwar period we have not used the full possibilities of fiscal
policy to achieve the Employment A ct’s objectives. This has been
particularly true since the end of the Korean war. Federal fiscal
polic}^ has been neglected. Indeed, Federal fiscal actions have been a
major cause of economic instability. This, in turn, has been a major
source of the low growth, of the upward trend in unemployment, and of
the rising price level. In addition, the decrease in use of fiscal policy
has imposed too great a burden on monetary policy.26
The Federal Qovernment should use fiscal 'policy 7norejully than it has
in recent years.
Excessive reliance on monetary policy is unsatisfactory because it
acts selectively on a relatively few sections of the economy and be­
cause of inevitable delays before its effects are felt. Fiscal policy,
while more difficult to use, has prompter and larger effects.27
Greater reliance on fiscal policy calls for two things. First, there
should be larger budget surpluses than have been realized in recover}'
and prosperity. This is necessary to achieve the desired amount of
restraint on total demand in these periods.28 Second, there should be
more prompt budget deficits when recession conditions are developing.
If this course is followed, less reliance will have to be placed on mone­
tary restraints against inflation and on monetary expansion to head
off or moderate a recession. Interest rates in general will be lower than
they would otherwise be.29 Moreover, while interest rates would still
be flexible, they would fluctuate within a much more limited range.
Greater reliance on fiscal policy, therefore, w^ill not only be more effec­
tive in promoting stability in the rate of employment and output and
in the price level, but will also contribute to greater stability in the
Nation’s financial markets.
2« Hearings, Chairman Martin, pp. 1763-1764.

27 Hearings, Secretary Anderson, pp. 1719-1720.
38 Hearings, testimony of Walter Heller, pp. 2994-2996.
« Ibid.




In the long run, a more rapid expansion of the Nation’s productive
capacity will probably require a higher rate of national saving. The
surest way to attain this is to have larger budget surpluses during
periods when there is a high level of employment and output.30
A budget surplus in such periods reduces the purchasing power of
the private economy. To the extent that these surpluses reduce con­
sumption, they increase the total amount of resources available for
investment. Of course, this process will only operate successfully if
other policies, particularly monetary, keep the total money demand
high. Otherwise the private investment will not take place. Budget
surpluses in these periods permit debt retirement. This releases
funds for private investment and would lower interest rates.
Since the end of the Korean war, the total of Federal surpluses in
prosperous periods has represented a much smaller proportion of the
gross national product than in the period prior to the Korean war.30a
Federal fiscal activities, therefore, have made a smaller contribution
to total national saving in recent years than in the earlier postwar
Changes in defense orders and purchases have been an important cause
oj economic instability in the postwar period. These changes should be
based upon the Nation1s longrun dejense requirements, and not upon
considerations oj the debt limit or other narrow budgetary concerns.
Changes in dejense demands should be treated as signals that o f setting
changes in taxes or other expenditures may have to be made ij recessionary
or inflationary strains are to be avoided.30c
The materials presented in the committee’s hearings and in the staff
report on “ Employment, Growth, and Price Levels,” and in the com­
mittee’s hearings on the President’s Economic Reports, show that
significant changes in the volume of defense orders have a quick and
large effect on activity in the durable goods manufacturing industries,
on inventories, and on plant and equipment outlays. These in turn
affect activity throughout the economy. Since World War II,
including the recession of 1949, changes in defense orders have been
one of the major causes of economic instability. In 1953-54, for
example, the sharp and large cutback in orders was the principal
cause of the recession of those years. In 1956, the large increase in
these orders came on top of rising civil demands for durable goods
and contributed to the inflationary pressures originating in that
sector. Again, the cutback in the rate of defense orders in 1957,
coming at a time when economic activity was tending down in many
sectors, added substantially to the sharp and deep recession which
developed in the latter part of that year and in early 1958.
We are not saying that defense orders must be maintained when
the opportunity develops for their reduction, nor that they should not
be increased when the Nation’s military requirements so demand.
Both reductions and increases, however, can be managed much more
skillfully than they have been in the past to reduce their effect on
economic stability. Reduction must be offset by public actions,
particularly tax cuts. The economy as a whole could then adjust to
lower levels of defense orders without a recession. Likewise, sharp
increases in defense orders, in periods of recovery or prosperity, would
increase inflationary pressures in durable goods manufacturing and in
so See “ Staff Report,” p. 270.
sea “ staff Report,” table 8-13, p. 307
aob ibid., table 8-17, p. 311.
so* Ibid., pp. 215, 230, 240, 244, 254, and 267.



plant and equipment. Other demands in these sectors may then have
to be cut back if capacity is being fully used.
The Nation’s defense must command top priority. The volume
and character of necessary defense demands cannot be adjusted to
avoid inflationary or recessionary strains. But if such strains will
result from changes in our defense programs, they can be offset or
moderated by other fiscal actions.
Still less should our defense be tailored to a concern over general
budget restraints or the debt ceiling. The desire by the administration
to avoid having to ask for an increase in the debt limit apparently
brought the cut in defense orders in 1957. The result was not only
to increase and speed recession forces but the recession brought a
budget deficit which required a much more substantial increase in the
debt limit than would otherwise have been needed.
The principal weapon which should be used to prevent recession trends
from gaining momentum and to promote recovery from recession is a
reduction in tax rates. Such countercyclical tax cuts should be enacted
on a temporary basis, and should automatically end when the farces oj
recovery become strong}1
Since no two recessions are likely to be the same in all important
respects, no single prescription for tax reduction is likely to fit all
cases. In general, however, the aim should be to reduce individual
income taxes, because they have the widest and quickest impact on
the economy. Moreover, provision should be made for reversing tax
reductions on a timely basis as recovery proceeds, in order to maintain
the Federal Government’s revenue base in the long run.
In addition to vigorous use oj discretionary tax changes, the automatic
fiscal stabilizers should be strengthened. In particular, the unemploy­
ment insurance system should be liberalized to increase the response oj
fiscal policy to changes in employment.
The present Federal fiscal structure contains elements which respond
automatically to offset changes in the national income. Tax liabilities
react to changes in economic activity. They moderate fluctuations in
private incomes and expenditures. On the expenditure side, certain
payments go up and down automatically with changes in economic
conditions. Unemployment compensation benefits rise with increases
in unemployment and fall off as unemployment drops. Public assist­
ance payments and old-age and survivors insurance benefits do the
Automatic stabilizers do not reverse recessions. They slow down
and reduce the size of the decline but they provide no upward stimulus
of their own. However, even if the Government is more willing to
act than in the recent past, there will always be some delay. There­
fore the automatic fiscal stabilizers should be strengthened wherever
possible as a first line of defense against recessions.
Improvements can be made in the Federal tax system. Tax reform
would bring back into the income tax base certain items of income,
for example, capital gains, which are highly sensitive to changes in
economic activity. In addition, increasing the progression at the
lower end of the income scale would improve the response of the tax
system to economic ups and downs. Splitting the first bracket in
the individual income tax would be a major gain in this respect.
31 See Hearings, testimony of Neil Jacoby, p. 67.



Experience in the 1957-58 recession showed that the unemployment
compensation system is a major area in which improvements can be
made. The emergency action by the Federal Government in supple­
menting State employment benefits when these were exhausted was
certainly the most heartening feature of Federal fiscal policy in the
last recession.
The unemployment insurance system should be strengthened. Both
the amount of benefits and their duration should be increased. Of
course there is an upper limit on how much can be done without hurt­
ing incentives, even in good times. At present, however, this limit
has not been reached.
Improvements in the unemployment compensation system should
not wait for the next recession. Work should begin on this program
As we place more emphasis on fiscal policy and larger budget surpluses
to restrain total money demand, reform of the Federal tax structure, par­
ticularly of the income and estate and gift taxes, becomes more urgent?2
If the “ mix” of monetary and fiscal policy is to be changed, as we
propose, we must have the fairest possible tax system. The weak­
nesses of the present Federal tax system, particularly of the income
and estate and gift taxes, are legion. They have been set out in hear­
ings and studies by the Joint Economic Committee and most recently
by the House Committee on Ways and Means. Both the individual
and corporate tax systems are full of preferential provisions which
allow some taxpayers, because of the source of their income or the
use they make of it, to pay lower taxes than others with equal incomes.
The result is that many taxpayers, particularly individuals, pay taxes
on only a fraction of the income they actually receive. This requires
others to pay higher taxes than would otherwise be needed. More­
over, since not all taxpayers can take advantage of the preferential
provisions, these high tax rates have a very uneven impact.
These discriminations cannot be concealed. Widespread knowl­
edge of them has undermined confidence in the fairness of the tax
system. As greater reliance is placed on fiscal policy it is particularly
urgent that these injustices should be done away with. Those with
equal income should pay equal taxes without regard to how the income
is obtained or what use is made of it.
In addition, tax loopholes distort the use of resources. When taxes
are lower on some sources or uses of income than on others, taxpayers
spend or invest for tax reasons rather than because of sound business
judgments or the dictates of the market. Resources then flow into
areas where they get the best tax treatment rather than where they are
most efficient or most needed. This means that our economy is less
efficient than it could be. Tax preferences, therefore, limit the growth
in our real output and in our productive capacity.
We cannot list all of the necessary reforms in the Federal tax
structure. Among the most urgent, however, are the following: 33
Repeal of the dividends-received credit and exclusion.—These pro­
visions primarily benefit a small minority of the largest stockholders.
They do little, if anything at all, to encourage corporations to increase
external equity financing, rather than debt or internal financing.
32 See H earings, testim ony of W alter H eller, pp. 2995 ff.
33 Ib id., pp. 3003-3004.
Congressm en P atm an and Boggs dissent in p a rt from some of these specific recom m endations.
See M r. P a tm a n 's views, p t. 6.



Repeal of these provisions would add $400 million to 3500 million to
Federal revenues.
2. Provide for the withholding on interest and dividend payments.— At
present, between $4 billion and $5 billion of dividends and interest
received by individuals which should be reported on their tax returns
escapes the individual income tax through deliberate evasion, forget­
fulness, or ignorance of the law's requirements. Withholding at the
source on dividend and interest payments at the same rate as for
wages ard salaries is entirely practicable, would involve extremely
small costs of compliance by withholding agents, and would increase
Federal revenues by about $800 million. The argument that this
would involve overwithholding on widows and orphans, upon which
proposals for dividend and interest withholding have foundered in the
past, is without merit. Tax has been withheld on wages and salaries
for years. This withholding system has involved greater overwith­
holding on wage and salary earners than would occur in the case of
dividend and interest withholding. Yet those who oppose the latter
on the grounds that it would be unfair to dividend and interest
recipients seldom mention the far greater overwithholding burdens
which are borne by those who receive wages and salaries.
3. Rigorously limit employee expense accounts.— Business expense
accounts have been carried to such extremes that as much as $5 billion
to $10 billion of personal income now escapes taxation. Moreover,
these practices feed on themselves by setting up pressures for more
generous allowances among competing firms. These practices are
among the most glaring injustices now tolerated by the law. Limiting
deductions to those expenses without which the basic business of the
employer could not be carried out would add as much as $800 million
to Federal receipts.
4. Limit the types of income to which capital gains treatment is given
to true capital grams*.--Under present law, capital gains treatment, with
a maximum tax rate of 25 percent, is given in many circumstances,
where income involves no sale or exchange of capital assets. The
low capital gains rate has been widely used as a tax relief device.
Examples where the capital gain rate is given where no true capital
gain is involved include: coal royalties, the sale of cut timber, and
the gains from the sale by corporations of depreciable assets. Per­
haps the present provisions are not the best wav to treat legitimate
capital gains. But the use of these provisions where no capital asset
is involved and where no sale or exchange occurs is clearly unjustified.
Eliminating these cases would add about $600 million to Federal
revenues from the corporation income tax alone.
5. Progressively reduce the percentage depletion rates allowed on oil
and gas.— Percentage depletion permits the taxpayer to recover his
investment in a property many times over. The cumulative total of
these deductions is limited by the income from the property and not
by the taxpayer's investment in it. These provisions are grossly
unjust. In addition, they encourage a wasteful rate of investment in
these properties and discourage sound conservation practices. The
total elimination of percentage depletion for oil and gas alone, i.e.,
permitting only actual investment to be recovered for tax purposes,
would add between $1 billion and $1.2 billion in Federal receipts.
A more limited approach which would retain the present 27 percent
depletion rate for small oil and gas operators and reduce the rate to



15 percent for the giant firms in this industry would add about $400
million to Federal tax receipts.
6. Improve the enforcement of the income tax laws.— It is estimated
that as much as $25 billion of taxable income is not reported on in­
dividual income tax returns. The revenue gain which could come from
more vigorous enforcement efforts is, therefore, substantial. It has
been shown by Internal Revenue Service studies that each additional
dollar applied to enforcement brings in receipts many times greater.
Even a modest investment in expanding and improving enforcement
techniques would yield an additional $1 billion in Federal revenues.
7. Eliminate the numerous 'preferential provisions in the estate and
gift taxes.—At present, these taxes fail to serve either their social
purpose of preventing great accumulations and concentrations of
wealth or of producing any substantial amounts of revenue. Revision
of the marital deduction, closing the avoidance device of life estates,
and possibly integrating the two taxes into a single wealth transfer
tax with a single system of rates, deductions, and exemptions would
add at least an additional $1 billion to Federal tax receipts annually.
These revisions altogether would bring in an additional $4 billion
to $5 billion in tax income annually. Numerous other revisions can
and should be made to improve the fairness and the revenue potential
of the Federal tax system and to reduce its bad effects on economic
growth. The additional revenues which would result from these
reforms could be used in part to reduce the high marginal income tax
rates, particularly those above, say, 65 percent in the individual in­
come tax, to reduce the Federal debt and thereby ease pressure in the
money markets, and to finance a modest amount of expenditures
aimed at encouraging the Nation’s economic growth.
We should reorder the priorities in the Federal budget. Greater em­
phasis should be placed on those Government programs which are essential
to the Nation’s and the free world’s defense, to promote the well-being of
our people, and to contribute to a higher rate of economic growth. We
should reduce those outlays which support the inefficient use of the Na­
tion’s resources.
To improve Federal expenditure policy, we should put a high priority
on :
(1) better provision for defense, especially for missiles and for
combat troops;
(2) an improved foreign aid program;
(3) Federal aid to education;
(4) continued support for research and development in line
with the growing demands and opportunities that science offers;
(5) An enlarged and improved program of medical care and re­
search and especially for hospitals and medical schools;
(6) a sound program of natural resource conservation and de­
velopment; and
(7) programs for restoring and improving the economic health
of areas which have been bypassed by economic progress or which
are the victims of the adjustments of a dynamic economy.
Until a major change occurs in the relationships among the world's
great powers, and a real and secure peace comes about, the United
States must be prepared to commit whatever proportion of its vast
resources that may be necessary to our defense and to assist in the
defense of the free world and in the economic development of the less



developed nations. The progress of Soviet military technology in­
creases our peril. It requires us to speed our own advances if the
present delicate balance of military strength which keeps the nuclear
peace is not to be lost. If we cannot thereby deter nuclear war, we
must be in a position to strike back. For this purpose, we need better
missiles and space programs.
In addition, we must improve our ability to fight and to win limited
wars without nuclear weapons. All-out nuclear warfare is not the
sole threat and perhaps not the major threat to world peace. The
piecemeal weakening of the free world through limited aggressive
wars is still a threat. In partnership with our allies we must be ready,
if necessary, to fight limited battles wherever they may arise, to protect
the free world. As the destructive power of nuclear weapons becomes
reater, the possible use of them to win limited military objectives
ecomes less. Combat strength for limited war is, therefore, essential
to our safety. Finally, we must provide military aid to our allies so
that they can resist external aggression and internal subversion.
It does not follow that any great increase in total spending for
defense will be needed. Parts of our defense program are wasteful
and inefficient. This involves the inefficient use of both men and
materials. It is also true of procurement practices and the building
up and disposal of huge amounts of surplus property. The stockpiling
of obsolete and redundant materials and supplies, the unnecessary
duplication of facilities and lines of supply now available in the private
sectors of the economy, the failure to centralize purchasing, and
numerous other inefficient procurement practices remain. The sav­
ings in procurement and management could be the major means of
financing more missiles and combat troops.
During its study, the committee was told again and again that we
must improve our education— in both quality and quantity— that we
must increase our efforts in research and development, both basic and
applied.34 This is necessary for a higher rate of economic growth over
the long run. Our industrial technology is more complex and makes
greater demands on the labor force. To develop our people’s talents
to the full, and to increase labor productivity at a rate which can cope
with the new technology, the standards and amount of education will
have to rise rapidly.
Funds for research and development, for which the Federal Govern­
ment now provides at least half, will also rise if a higher rate of eco­
nomic growth is to come about. The productivity of many of these
activities is very great. The civilian byproducts of applied military
research alone provide a dramatic catalog of the high return in such
Funds for improving the quality and quantity of medical care will
also have to increase substantially in the future. Most of these will
come from private sources but the expenses of the Federal, State, and
local governments for medical care will increase. This is true because
the major improvements in medical services depend on research.
Medical research has long since passed from the Bunsen burner stage
to extremely complicated and costly techniques, the financing of which
very often exceeds private means.


34 See, for example, Hearings, testimony of Sumner Slichter, p. 4.



We wish to warn here that while medical and other research is very
costly and therefore requires large sums, it does not follow that such
research should be done by committees or through “ gang research/’
The administrative arrangements through which such funds are chan­
neled, whether they be private or Government agencies, should not
interfere with the job of research which still remains largely an
individual one.
Programs for the development of and the conservation of our natural
resources are of great importance. Such programs with respect to
the development of our natural resources must bear the most critical
analysis in terms of their costs and of their benefits. There are enough
justified claims upon our resources that it is folly to press those which
are inefficient and which will not pay for themselves.
There are numerous depressed economic areas in this country which
are withering on the vine. Even at the peak of prosperity they suffer
from depressed conditions. As there are now huge public invest­
ments in these areas, in terms of the communities, their public utilities
and their human resources, assistance in the form of some public
works, repayable loans, as well as technical assistance and retraining
could revive many of them. It is wasteful to allow these areas and
resources to remain unused and undeveloped.
The specific elements of a Federal program for area assistance
should include: (a) technical assistance to the areas in planning a
redevelopment program with reasonable chances for success; (b) finan­
cial assistance to chronically depressed areas for community facilities
necessary to attract new industry; (c) long-term loans to new indus­
tries locating in the area; and (d) retraining allowances for workers
who can thus be qualified for reemployment.
Poverty in the United States, however, is not merely a matter
of depressed areas. It exists in prosperous cities, and throughout the
agricultural regions of the Nation, particularly among migrant
farmworkers. The programs necessary to raise low incomes therefore
will have to be flexible enough to meet a variety of situations. Slum
clearance and urban renewal are important parts of such a program.
More important is raising educational standards since this is the surest
way to increase productivity and eliminate the basic source of poverty.
Public assistance must continue to play a large role.
Numerous other public services should also be expected to increase
as the Nation grows. The blight in the centers of our cities is not
only bad of itself, but it draws off resources for police, penal and
mental institutions, and wastes the human resources found there,
all of which slows down our growth. Additional public services in
the fields of public utilities and public works, such as roads and
highways, public medical facilities, schools, and libraries, will also be
needed. The failure to meet these demands will limit the increase in
productivity and the Nation's growth.
In citing these increasing demands for public services we are not
unmindful of the fact that they must be paid for. In part they
will pay for themselves. A higher rate of economic growth without
inflation would also help to pay for them. If gross national product in
constant prices had grown without interruption at a rate of 3.5 percent
since 1953, the total output this year would be some $34 billion more
than in fact will be realized. Federal revenues this year would be
some $5 billion to $6 billion more than in fact they will be. These



additional revenues would have made possible modest beginnings in
programs which increase productive capacity and productivity while
at the same time permitting both some reduction in the national debt
and even reduction in some tax rates.
Economic growth in itself, therefore, is a major source for financing
improvements and expansion in necessary Federal programs without
increasing tax rates.
In addition, we can finance a large part of these public programs by
eliminating or reducing subsidies and other resource-wasting Govern­
ment programs. Very substantial savings can be realized in this
way. Finally, the tax reforms suggested above would increase reve­
nues while making the tax system fairer and more just.
We stress that putting greater emphasis 011 these programs is not
a plea for big spending or deficit financing. On the contrary, these
programs can and should occur in the framework of a much tighter
fiscal policy than there has been during the past several years. They
are perfectly consistent with our recommendations that there should
be larger budget surpluses during periods of high output and
These basic improvements in fiscal policy require that we halt the erosion
of the Federal budget and restore to it meaningful accounting integrity.
In the past several years, gimmicks and financing outside the budget
have been used to mask or obscure the effects and costs of a number
of programs. The effect of Government spending on the economy is
also obscured and understated. In terms of the number of dollars
involved, the highway trust fund is certainty the most important
example. Neither the expenditures nor the receipts under the Federal
highway program are shown in the conventional budget. Why this
program should be separated from the budget while most other Fed­
eral public works programs are shown is difficult to explain. Its
purpose appears to be to present the illusion of a balanced budget
and of a lower level of Government outlays and receipts than in fact
exists. In addition, extra-budgetary financing of programs such as
that of the Federal National Mortgage Association can hardly be
justified as sound budget procedure. The exchange of F N M A ’s
holdings of certain mortgages for certain outstanding nonmarketable
Federal debt issues, according to the Treasury’s own testimony, is
aimed at keeping debt operations within the statutory debt ceiling.
The economic impact of FNM A operations on the flow of funds and
demands in the mortgage market is therefore not clear. Selling
off Federal assets as a means of reducing net budget outlays is poor
financial management and makes it difficult to judge the effect of
fiscal operations on the economy. The leasing of facilities, instead of
outright purchases, particularly of post offices, is expensive and ineffi­
cient. Its principal purpose is to conceal the real cost of acquiring
these facilities which are needed for essential public services. Pro­
posals to use the reserves of various Federal Government trust funds
to finance unrelated Federal expenditures must be rejected as only
further compounding the inaccuracy of the conventional budget.
Finally, end-of-the-year adjustments in both revenues and expendi­
tures, made by hastening or delaying disbursements and by speeding



or delaying the processing of tax receipts, should be brought to a halt.
This merely transfers receipts or expenditures from one fiscal year to
another. Its major effect, however, is to obscure the actual budget
results for the year just ending and the estimates of likely results for
the year just beginning.
The ceiling on the national debt could be removed if proper fiscal,
monetary, and debt management reforms were made.— The debt ceiling
is an arbitrary limit which has had little influence on its stated pur­
pose of reducing expenditures. Instead it is either not used— as the
numerous requests for its permanent or temporary increase clearly
show— or it is mischievous in the results of the devices which are
used to get around it.
In 1957 there was an unwise and unwarranted cutback in defense
orders and purchases which was made in part because of the debt
ceiling and which certainly contributed to the recession of 1957-58.
In the end, there was a $12 billion deficit and the ceiling had to be
raised. Many of the gimmicks, such as the selling of FN M A assets
and end-of-the^ear accounting tricks are done for this reason.
A responsible government should be guided in its decisions about
taxes and the budget by the economic gains which the programs will
bring and not by some artificial limit on the debt which in practice
is avoided. Changes in these decisions should also be made on the
basis of what the economy calls for either in offsetting recessions or
inflationary pressures.
The debt ceiling is an anomaly in a representative and responsible
government. It is an arbitrary check on the Government’s budget
decisions and at times makes it difficult or impossible for those who
are responsible to do the right thing. Its contribution to rash fiscal
actions and to economic instability clearly outweighs the effects it
has had, if any, on limiting spending. If the fiscal, monetary, and
debt management reforms which we have advocated were put into
effect, the debt ceiling could be removed.
We need improvements in Government statistics.— Changes in defense
orders for hard goods may be the single most important Government
program which affects the stability of the economy. This is true
because of their impact on durable goods and on plant and equipment
At the moment the facts about hard goods orders are given in a
monthly series which is brought out after about a 3-month timelag.
This lag should be reduced. In addition, a series showing planned
orders for four quarters in advance of the current quarter is of major
importance. Such information, properly qualified, can aid very
greatly the monetary and fiscal authorities in their plans and estimates.
At present, cash receipts from and payments to the public are
shown in the aggregate and on an unadjusted basis. More data are
needed if the Employment Act is to be carried out. Specifically, this
information should show cash receipts from the public by major
sources and payments to the public by major functions. It should
further provide the information on a quarterly basis and with the
seasonal adjustment.
The present unadjusted series is not particularly helpful in showing
the probable impact of fiscal actions on money conditions. While
other information is needed, these two series are mentioned here
because of their special importance.




P o l ic y

The purpose of the Treasury-Federal Reserve accord of 1951
In the report of a subcommittee of this committee in January 1950,
which played a considerable role in bringing about the TreasuryFederal Reserve accord, it was stated:
We recommend that an appropriate, flexible, and vigorous
monetary policy, employed in coordination with fiscal and
other policies, should be one of the principal methods used
to achieve the purposes of the Employment Act. Timely
flexibility toward easy credit at some times and credit re­
striction at other times is an essential characteristic of a
monetary policy that will promote economic stability rather
than instability. (“ Monetary, Credit, and Fiscal Policies/'
report of the Subcommittee on Monetary, Credit, and Fiscal
Policies, 81st Cong., 2d Sess., Sen. Doc. No. 129, pp. 1-2.)
The subcommittee specifically recommended that the practice of the
Federal Reserve Board in pegging the Government bond market be
ended. A majority of the subcommittee believed that the freedom
of the Federal Reserve Board to ease or restrict money and credit to
avoid recessions and inflation was worth the cost in service charges
on the national debt and some increase in the economy's interest
structure. At the same time, the subcommittee said that “ As a longrun matter, we favor interest rates as low as they can be without
inducing inflation, for low interest rates stimulate capital investment."
It was clearly impossible for the Federal Reserve Board to peg the
Government bond market and to do its part to carry out the objec­
tives of the Employment Act at the same time. When the bond
market is pegged at low interest rates by the Federal Reserve System,
it loses control of the money supply and excessive amounts of money
and credit are likely to be fed into the banking system, whether they
are needed or not. While this policy kept interest rates low, it pre­
vented the Federal Reserve System from carrying out its main duty
to regulate credit and the money supply for the purpose of promoting
stability of output and prices and economic growth.35
Clearly the Board's main duty is to fight both inflation and recession
depending upon the needs of the economy. The purpose of the accord,
then, was to give them the flexibility to carry out such a policy. Its
purpose was not primarily to raise interest rates, although some in­
crease was probably a necessary consequence, but to bring a more
competitive interest rate and a more flexible policy.36
Policies since the accord
What can be said in general of the policies of the Federal Reserve
Board since the accord? In general the accord has brought greater
flexibility to monetary policy than would otherwise have been the
case. However, we believe that monetary policy has been unduly
restrictive, not as flexible as it could have been, and has not performed
as well as it might have done in promoting the objectives of the
Employment Act.37
38 M r. P atm an dissents. See his view s, pt. 2.
s« Ibid.
37 T h a t m onetary policy has been excessively restrictive, particu larly during 1956-57, was suggested by
several com m ittee w itnesses. See H earings, pp. 2163, 2166, 2193, 2219, 2439-2440.
50553— 60-------3




Just as the preaccord policy promoted artifically low interest rates,
the policies pursued, particularly since 1953, have brought interest
rates to levels higher than they should or need be. In other words,
while the accord created the conditions under which monetary policy
could do a better job, and while some improvement has been made,
the full potential of monetary policy to promote stability and economic
growth has not been realized.38
Reasons for the shortcomings
There are numerous reasons for the shortcomings in the exercise of
monetary policy in recent years. These fall into two general categories.
First, there are those for which the Federal Reserve Board had little
or no responsibility. Second, there are those for which the Federal
Reserve must bear major responsibility.
Shortcomings over which the Federal Reserve Board has not had
major responsibility
Fiscal policy.— One of the key phrases in the report of the sub­
committee, which led in part to the accord, was that “ appropriate,
flexible, and vigorous monetary policy” must be “ * * * employed
in coordination with fiscal and other policies.”
The Federal Reserve cannot promote growth, full employment, and
general price stability by itself. Monetary policy must operate in a
context of appropriate fiscal and other policies which are pursued by
other agencies of the Government. The failure of fiscal policy is
detailed in chapter III of this report. Here, therefore, we need only
emphasize that fiscal policy should be strengthened so that monetary
policy does not have to shoulder so much of the stabilization burden.39
(ih) Monetary policy and the recent inflation.— The most recent in­
flation was that of the 1955-57 period. Over the last year and a half
prices have risen somewhat but by exceedingly small amounts in
contrast with the 1955-57 experience. Monetary policy in the 1955-57
period was extremely restrictive yet prices rose. Our studies show
that the inflation of this period had numerous causes of which a general
excess of money demand was not the main or major one. Prices rose
because of increases in selected areas—some particularly unstable
areas which are little affected by monetary policy, and some which
were characterized by market power. In addition, the prices of
services increased. In some cases, particularly medical services, this
was due to a shortage of supply rather than to an excess of demand.
Monetary policy is not equipped to deal adequately with the kind
of inflation which we had in this period.40 In fact, the general tighten­
ing of money and credit had its main impact in limited areas, particu­
larly residential construction, and not in those areas where the price
rises were largely taking place.
While we do not say that monetary policy in this period should
have been one of general ease, it was nonetheless excessively restric­
tive without producing the desired results.
as Mr. Patman dissents. See his views, pt. 2.
8* The Federal Reserve and the Treasury support the judgment that monetary policy has had to carry
too much of the burden. The British Radcliffe Report arrives at substantially the same conclusion with
respect to the relative importance of fiscal and monetary weapons. It states, “ But, when all has been said
on the possibility of monetary action and of its likely efficacy, our conclusion is that monetary measures
cannot alone be relied upon to keep in nice balance an economy subject to major strains from both
without and within. Monetary measures can help, but that is all.” And again, “ Themore flexible the fiscal
weapons can be made, the less will it be necessary to rely on monetary measures/’ “ Report of the Com­
mittee on the Working of the Monetary System," London, HM SO, August 1959, pp. 183, 185. See their
answers to the Committee’s questionnaire, Hearings, pp. 1721-1724, and 1796-1798. Also, see footnote 62
on p. 40 for further citations in support for this view.
«o See the testimony of Charles L. Schultze, Hearings, p. 2193, as well as the concluding chapter of his
Study Paper No. 1, “ Recent Inflation in the United States.”



The Board cannot be criticized for the nature of the inflation in this
period and the failure of policies in other areas to deal with it.41 It
must, however, bear some responsibility for its excessively restrictive
policies in view of the kind of inflation which we had. It must also
bear some responsibility for the failure to ease conditions during the
first 6 months of 1957 and, in fact, until October of 1957 after the
recession was 2 months old.
At the present time and for over a year the Federal Reserve System
has again pursued an extremely restrictive policy. Interest rates are
now higher than they have been for some 35 years. While the Board
must be prepared to move quickly when money demand is excessive,
over the last year and even at this moment, unemployment is very
much higher than it should be under conditions of so-called prosperity,
and our economy is not growing at a rate near its potential.
It appears to be true that what price rises we have had in the last
year have been similar in nature to those in the 1955-57 period and
are the result of market power, increases in the price of services, and
shortages in supply, rather than an excess in money demand. While
an excess of demand could occur very quickly in a period of recovery,
and while the Federal Reserve System must be prepared to act, as of
this moment their policies seem unduly restrictive for an economy
which is not fully employed.
(c) The skill of commercial banks, financial intermediaries, and nonfinancial corporations in offsetting restrictive policies.— The effective­
ness of tight money policies, especially in the beginning phases of re­
covery, have been offset somewhat by the ability of commercial banks
to shift out of Treasury securities and into private loans. Further­
more, nonfinancial corporations have shown increasing skill in the
management of their cash balances. Financial intermediaries, other
than commercial banks, have also helped to offset the official policies
by putting idle cash balances to use.42 These are matters over which
the Federal Reserve has only limited control and which have, none­
theless, made their policies less effective than they would otherwise be.
This in turn has caused the System to tighten money further.
2. Shortcomings for which the Federal Reserve has major respon­
(a) The attitude of the Federal Reserve.— At a time when the Federal
Reserve System has been freed to act more vigorously in carrying out
the objectives of the Employment Act, its approach to monetary poli­
cy has become increasingly more classical. Over the years since the
accord, its policies have been reshaped in the image of the 1920’s.
For example, it restored rediscounting in the period of 1953-54.
Similarly, the policies adopted as an expression of the System’s phi­
losophy of “ minimum intervention” are suggestive of an earlier era.
The most important of these is the “ bills only” policy, about which
more will be said, which is a self-imposed limit on its actions.
The accord gave the Board an opportunity to act quickly, to be
more flexible, and to do a better job. The full benefits of the accord
have been limited by the Board’s attitude toward its responsibility.
(b) The bills only policy.— Since 1953 the general policy of the
Board has been to limit its purchases in the open market to short term
41 Mr. Patman dissents. See his views, pt. 1.
*2 See Study Paper No. 14, “ Financial Aspects of Postwar Economic Developments in the United States,”
by John Gurley. See also Hearings, pp. 2219 and 2897.



Treasury obligations, or generally to “ bills only.” In following this
policy the System is in part limiting its means to stabilize the economy.
By limiting its activities to the short end of the market the System is
unable to influence in any precise way the course of long term interest
rates and hence the full interest rate structure. An attempt to in­
fluence long term rates through operations in bills only may lead, as
it did in 1958, to sharp speculative movements in interest rates.
Alternatively, the System may in other circumstances have to pro­
duce large changes in bank reserves in order to affect long-term inter­
est rates.
There is little evidence that the “ bills only” policy has had a sig­
nificant effect on the depth, breadth, or resiliency of the market for
long-term securities. It would appear that an important power was
given up for no appreciable gain.43
It may be that after a long period of pegged interest rates something
like “ bills only” was required to impress upon investors the fact that
the Federal Reserve was no longer going to peg them. But now that
wartime arrangements are a thing of the distant past, this need no
longer remains. Occasional official operations in Treasury securities
other than bills will not now suggest a return to a regime of pegged
interest rates. They will only suggest that the Federal Reserve is
once more assuming its full stabilization responsibility.
(c) Rediscounting.— In recent years the Federal Reserve has tried,
and with considerable success, to revive rediscounting in the pattern
of the 1920’s. This is an unfortunate development. We feel that it
should be reversed.44 Rediscounting should be eliminated as a general
practice.45 It should be allowed only when a member bank encounters
potentially serious difficulties not of its own making.
With a large stock of Treasury bills outstanding, the need for the
kind of safety valve provided by Reserve bank rediscount windows is
less than it once was. Moreover, in the postwar period it has been
demonstrated again that rediscount arrangements are a source of
trouble. They provide a means by which banks can offset monetary
restraint. Any changes in the discount rate can easily affect ex­
pectations in unfortunate ways.
If rediscounting is not eliminated entirely, at least the use of the
rediscount rate as an influence on interest rates should be. The
rediscount rate should be made a penalty rate, and only adjusted for
the purpose of keeping it so.
A broader range oj monetary tools
More monetary tools rather than less are necessary for the simul­
taneous achievement of all of our economic goals. Present general
tools primarily affect residential construction, as well as small business
and State and local governments. Credit for consumers and the
supply of funds for most business investment are very little affected
by monetary policy. Therefore, the effect of the general policies has
in fact been selective, penalizing the investment for housing, for
schools, and for small business while leaving consumer outlays which
are financed by credit and business investment in general, virtually
immune from its effects. Monetary policy, to be more fully effective,
« See Hearings, testimony of Walter Heller, p. 2998.
« Mr. Patman dissents. See his views, pt. 4.
45 Milton Friedman, in testimony before the committee, recommended that rediscounting be abolished.
Hearings, pp. 3022, and 3043-3044.



should influence a broader range of expenditures and affect them more
We recommend that legislation for standby regulation of the down­
payment and of the maturity terms of consumer loans be enacted.46
Consumer credit has made a most important contribution to the
economic growth of the country and has brought many goods within
the means of families with moderate incomes. Furthermore, the long­
term rate of growth of consumer credit has not been excessive. How­
ever, sudden surges of consumer credit have from time to time been
an important source of instability. Particularly in the early stages
of recovery, consumer credit has increased at rates which were clearly
unsustainable. As individuals took on large repayment commitments,
they had to cut back on their other purchases. This reduced the
money demand for these other articles in the succeeding }^ears.
Further, the rapid rate of expansion of consumer loans in some periods
has contributed to inflation through its effect both on prices and
Monetary policy should help to assure that purchases of consumer
durables will be at levels which can be sustained and which are con­
sistent with the broad economic objectives we have outlined. From
time to time the use of standby regulations may be helpful.
We wish to emphasize that such regulations should be administered
flexibly and that they should be applied only when consumer credit is
adding to the instability of output and prices in the economy.
Finally, further studies should be undertaken to determine what can
be done to reduce the instability of plant and equipment investment.47
It may well be that it is impossible to stabilize these outlays, or that
stabilization would lead to a lower average level. Nonetheless, the
problem should be thoroughly explored. It should be kept in mind,
however, that if the rest of the economy becomes more stable, plant
and equipment expenditures will automatically become more stable as
Expansion of money and credit for longrun growth
Over time the money supply should grow at approximately 3 per­
cent per year. Since 1953 the money supply has grown at a rate of
only 1.8 percent per year while the growth in real output has been at
the rate of 2.3 percent. While there was some excess liquidity in the
economy in the early part of this period, due to the war, the increase
in real output and of population probably caught up with and sur­
passed the supply of money and credit in the latter part of the period.
There is a need, therefore, for further secular expansion of the money
supply in line with the growth of the economy.48 The System should
provide, after the effects of the normal increase in velocity are taken
into account, a money supply adequate for the potential growth of
the economy. This would certainly be higher than that which has
occurred in recent times.
An appropriate secular expansion of the money supply can best be
effected by means of open market operations.49 The case for using
« T his recom m endation w as m ade b y num erous w itnesses. See H earings, pp. 2220-2221, 2439, 2766,
2962, 2998, 3070 and 3109-3110.
M r. P atm an dissents. See his views, pt. 3.
u See, for example, testim ony of W alter H eller, H earings, p. 2997.
<8 See testim ony of M ilton F riedm an, H earings, p. 3022.
« See H earings, p. 3029. See testim ony of M ilton F riedm an, pp. 3022, 3043-3044.



open market operations rather than reductions in reserve require­
ments is presented below in the discussion of debt management.
Truth in the cost of money
One of our major problems is that when individuals borrow they
often have no specific knowledge of the cost to them of the financing.
Rates expressed in monthly terms, discounts, service charges, and
interest charges based on the principal instead of the unpaid balance,
grossly underestimate the amount which consumers pay for their
loans. In addition, the terms are often hidden in the small print at the
bottom of the contract.
So that consumers may be more fully aware of the actual costs of
borrowing, we recommend that legislation be passed which would
require that these costs, expressed as an annual average interest rate
on the unpaid balance, should be clearly stipulated in all consumer
loan contracts.
Summary of policy recommendations
(1) The Federal Reserve should abandon its “ bills only” policy.
(2) The Federal Reserve should expand the money supply at a rate
which is sufficient to accommodate a rate of economic growth higher
than the economy has experienced in recent years.
(3) In providing for an adequate secular expansion of the money
supply, the Federal Reserve should rely on open market operations
and not on reductions in reserve requirements.
(4) The Federal Reserve should do away with rediscounting as a
general practice.50 Rediscounting should be allowed only when a
member bank is in potentially serious difficulty.
(5) The Federal Reserve should be given standby power to regu­
late consumer credit.51
(6) A detailed study should be undertaken to determine what can
be done to reduce the instability of plant and equipment investment.
(7) The true cost of money should be provided to consumers by
expressing on the face of the credit instrument the total cost in terms
of the annual interest rate on the unpaid balance.
*° Mr. Patman dissents.

61 Ibid., pt. 3.

See his views, pt. 4.

V. D




Debt management is the set of policies which determines the com­
position of the publicly held Federal debt, that is the Federal debt
held outside the Federal Government and the Federal Reserve Sys­
tem.52 It must be distinguished from fiscal policy, which determines
whether the budget is in surplus or in deficit and, therefore, whether
the total debt is to increase or to decrease. It must also be dis­
tinguished from monetary policy which determines the money supply
and which affects the level of the interest rate structure. Thus, debt
management only affects the composition of the debt, not its total.
Debt management policy can increase the amount of long-term debt
outstanding, but only by decreasing the amount of short-term debt.
Similarly, it can raise or lower long-term interest rates, but only in
conjunction with offsetting changes in short-term interest rates. On
the other hand, the major movements of the interest rate structure are
determined by the supply and demand for funds and by fiscal and
monetary policy. These distinctions are important because they'
make clear the very narrow province of debt management in overall
stabilization policy.
A decade or more ago, high hopes were held out for the stabilization
potential of debt management. It was widely advocated that debt
management should be managed counter cyclically, that long-term
debt should be issued in periods of boom, thereby reducing the
liquidity of the economy, and that short-term debt be issued in reces­
sion, adding to the total stock of near money. These hopes have been
disappointed. In fact, the debt has shortened with few interruptions,
primarily because the Treasury has not found it feasible, throughout
the postwar period, to sell significant amounts of long-term debt in
If we adhere to the above definition of debt management, the
shortrun stabilization potential of debt management is quite small.
Whatever effects are to be achieved, they depend wholly on the
difference which the maturity composition of Treasury securities held
by the public has on spending behavior, and on the net effect which a
combination of somewhat higher long-term rates and somewhat lower
short-term rates might have. Since effects of a higher interest rate
structure on spending are quite moderate, the effect of offsetting
interest rate changes in the long- and short-term sector must be even
The greatest contribution which debt management could make to
the longrun attainment of our economic objectives would be to
reduce its interference with monetary policy. A longer average
maturity of the debt would help to attain this objective.53 The
Treasury would have to come to the market less often, and the
w For a discussion see forthcoming Study Paper No. 19, “ Debt Management in the United States,” by
Warren L. Smith.
m Both the Federal Reserve and the Treasury support this judgment, see Hearings, pp. 1719-1724,19961998. See also Richard Musgrave’s testimony, p. 2767.




switching in and out of government securities over the business cycle
by financial institutions, which reduces the effectiveness of monetary
policy, would at least be somewhat reduced.
In order to promote economic growth, a more equitable distribution
of the national income, and to keep down the interest costs in the
Federal budget, the Treasury should seek to keep the interest costs
as low as possible. Thus, we recommend as the fundamental objec­
tives of debt management today that the debt be lengthened at mini­
mum interest cost. This will mean the sale of long-term securities in
periods when interest rates are low. Should short-run stabilization
policy require other actions in the long-term market over the business
cycle, it is the proper duty of monetary policy, and hence of the
Federal Reserve System, to carry them out.
Recommendations for improved debt management
Because the question of the 4}{ percent interest rate ceiling is of
such importance, most of the recommendations for improved debt
management are discussed in connection with it, in order to avoid
unnecessary repetition. However, there are two points which should
be made here. These deal with advance refunding and the issue
of savings bonds which can be adjusted to the price level.
Advance refunding, which gives holders of existing long-term
maturities a chance to exchange them for new long-term securities
before they reach maturity, can be an important means of lengthening
the debt.54 Through advance refunding the Treasury substantially
reduces the attrition which it ordinarily suffers when long-term issues
are refinanced. Long-term investors who ordinarily might sell a bond
near maturity to individuals interested in short-terms, and who then
might invest the freed funds in non-Government long-term securities,
are thereby encouraged to keep their funds in Governments. Advance
refunding has to be done gradually and in moderation, in order to
prevent the interest costs from being driven up.
Because small investors find it difficult to put their savings into
an investment medium which is protected against inflation and
relatively risk free, the Treasury should issue some savings bonds
which are adjusted to changes in the price level.55 In order to confine
these bonds to individuals of modest means, who do not have other
investment media available to them that are secure against inflation,
such bonds should be issued in limited quantity to any individual.
The interest rate ceiling
It is our recommendation that the 4^-percent ceiling on long-term
Government bonds (those over 5 years) not be removed until major
reforms in fiscal, monetary, and debt management policies are insti­
tuted.56 The total effect of the reforms, however, would be to make
the long-term interest rate more competitive, lower than it is at pres­
ent, and reduce the conflict over the ceiling to largely academic pro­
fitSee Hearings, Richard Musgrave’s testimony, p. 2768 ff.

This recommendation is advanced by H. S. Houthakker in his Study Paper No. 8 , “ Protection Against
Inflation,” and by Richard Musgrave, Hearings, p. 2768.
«« Mr. Coffin and Mr. Bolling: “ We recognize that there is no logical reason for an arbitrary 4K percent
ceiling. We also recognize the looming necessity, between November 1960, and December 1961, for refinanc­
ing some $18.6 billion in long-term bonds. In the absence of a recession, this task, under the current ceiling,
without benefit of other reforms, would be formidable. To focus all efforts, however, on repealing the inter­
est ceiling, without using the period of the next 22 months to initiate basic reforms in monetary, fiscal, and
debt management policy, is to insist on fighting inflation with only one major weapon—which could be
overworked, to the ultimate disadvantage of the taxpayers. We therefore take the position of not objecting
to removal of the 4^-percent ceiling, if accompanied by the initiation of other basic reforms.”



portions. We wish to make absolutely clear that these reforms in no
way include the pegging of the bond market.67
The arguments and policies affecting the interest rate ceiling are
set out in full here. We are aware that they repeat some points
made in the sections on fiscal, monetary, and debt management
policies. Because of the importance of this subject, we believe it
necessary to do this.
1. Imperfect competition in the Government bond market58
(a) The volume of borrowings.— The borrowings of the Federal
Government are of such large volume both in total and in comparison
with the volume of bonds of corporations and of State and local
governments that they help markedly to determine interest rates
instead of merely conforming to the forces of competition and supply
and demand as has so often been asserted by the Treasury.
In economic language, the situation approaches monopsony or a
market in which one buyer purchases such a large proportion of the
supply that imperfect competition results.
The facts are that in 1958, the Federal Government borrowed threequarters of the funds in the long term market (excluding short term
bills, mortgages, and consumer credit). The total of corporate bor­
rowings was $11.4 billion, of which $10.8 billion was new money and
$600 million was refunding. The total of State and local government
borrowings was $7.8 billion, of which $7.7 billion was new money and
$100 million was refunding. The total Federal borrowing was $62.2
billion, of which $11.3 billion was new money and $50.9 billion was
Thus, of a total of $81.4 billion which was borrowed in the market
by these three sources, the Federal Government’s share was $62.2
billion, or 76.4 percent.
The often asserted view that the Government does not make interest
rates but merely conforms to an interest rate which is determined by
other forces in the general money market, is obviously not true. At
the very least, the policies and actions of the Treasury have a con­
siderable influence on the cost of money even if it is granted that they
do not wholly determine the cost of money.
(b) The sources of advice.— While the Treasury’s small and com­
petent debt management staff engages in some market analysis, the
Treasury places too much reliance concerning both the length and
rate of maturities on the advice it seeks from its customers.
Specifically, before any appreciable bond issue is floated, the
Treasury calls in advisory committees from the American Bankers
Association, the Investment Bankers Association, and also from time
to time from mutual savings banks, insurance companies and savings
and loan institutions.
At the request of the Joint Economic Committee, the American
Bankers Association provided a list of its recommendations to the
Treasury and Treasury action with respect to its advice from 1952
to 1959. Some 103 specific recommendations were involved.
In the period 1952-1959, some 83 or 80.6 percent of the recom­
mendations were accepted by the Treasury, while only 20 or 19.4
percent were rejected. In almost 60 percent of the cases the advice
87 M r. P atm an dissents. See his views, pt. 2.
48Mr. Patman believes more needs to be said on this point.

See his views, pt. 7.



was accepted as given, and in another 17.5 percent of the cases it was
accepted with only very minor changes.
In the period 1953-59, the advice of the American Bankers
Association was accepted on 71 occasions, or in 84.5 percent of the
cases, and rejected on only 13 occasions, or 15.5 percent of the time.
It is interesting to note that in 1952 the advice was rejected in 37
percent of the cases as compared with only 15 percent of the cases in
the period 1953-59. The rejection rate, therefore, has been 60 per­
cent less than in 1952. A table giving the results of the American
Bankers Association’s recommendations is given below.59
T a b l e 6 .— D isp o sitio n o f advice o f the A m erica n B ankers A ssociatio n to the T reasury

w ith respect to new issues, 19 5 2 -5 9

A dvice accepted

N u m b e r...................................
P ercent....................................
N u m b er......... ..........................
P ercent__________ ______
N u m b er_________________
P ercent-...............................

T otal


As given


B u t w ith P artially ,
b u t w ith T otal ac­
m inor
changes some major cepted



A dvice re­


If, in a country which we shall call X , there were a labor govern­
ment in power; and if the basic wage was determined periodically by
the Minister or Secretary of Labor; and if he sought his advice in the
main from a committee set up by the counterparts of the heads of the
American Federation of Labor and Congress of Industrial Organiza­
tions; and if in ovrer 60 percent of the cases, their advice was accepted
without any change; and if in another 20 percent of the cases it was
accepted with only minor changes, and if in 5 percent of the cases it
was accepted with some major changes; and if in only 15 percent of the
cases it was rejected, the financial community of country X would cer­
tainly claim that this was a noncompetitive wage rate and one which,
in fact, was set in large part by the labor movement in that country
and the Government Minister or Secretary who was most sympathetic
with its views. One can carry analogies too far, and we do not say
or imply that in this country such rates are set by dictation. Never­
theless, there is an amazing degree of what can be called “ conscious
parallellism” between the recommendations of the customers of the
Treasury and its decisions on the interest rate and maturity of its
issues. It is important that the Treasury set up an adequate market­
ing analysis and research staff upon whose advice it can largely rely
and which is not influenced either in fact or in appearance by the ad­
vice of an organized group of customers.
The absence of auctions.—Except for its bills which are sold at
auction on a discount basis, Treasury practice is to sell securities (cer­
tificates, notes, and bonds) at a fixed price and with a fixed length of
maturity. Once the price and maturity are set by the Treasury.
#• For com plete details, see H earings, pp. 1221-1230. See appendix for tables w ith the com plete recom ­
m endation.



bidding is limited to the volume which is sought to be purchased at
such price and maturity. In practice, most issues are oversubscribed,
When bills are sold by the auction method, the Treasury sells each
block of securities at the highest price its buyer would be willing to
pay. The auction method for bills probably results in a lower inter­
est cost to the Treasury than if this kind of bidding did not take place.
While there are some obstacles in the way of the Treasury immediately
extending the auction method—which it applies to bills, to the sale
of certificates, notes, and bonds— the device seems promising enough
that it should be extended as quickly as possible to these longer-term
issues, beginning initially with the shorter issues and extending the
practice as experience is gained.60 The present system raises very real
doubts that the Treasury is getting the best bargain which it could
in the sale of certificates, notes, and long-term securities.
Sale of long-term bonds when interest rates are low
Even though the Treasury has lengthened its debt structure some­
what during times of recession when interest rates are low, the aver­
age length of the debt has shortened. In 1952, the average length of
the debt was 5 years and 8 months. As of the first of June 1959, it
had fallen to 4 years and 7 months. Thus, the average maturity had
fallen by 1 year and 1 month before the administration requested that
the interest rate ceiling be removed. The average length of maturities
had therefore been greatly shortened before the administration felt
hampered by the rise in the interest rate.
More could be done to lengthen the debt when interest rates are
low. At this time wdien interest rates are extremely high, it is advo­
cating the removal of the long-term interest ceiling in order to refund
as much as $20 billion in long-term bonds. This would raise interest
costs to the taxpayer for many years and increase the general level
of interest rates in the economy.
We believe that the primary purpose of the Treasury with respect
to debt management should be to get the best possible bargain for
the people of the United States in the sale of Government securities.
Consequently, fiscal policy and not debt management should be the
main Treasury countercyclical weapon. We believe that insufficient
effort has been made to use fiscal policy in this way.
If it is necessary for shortrun stabilization purposes to alter the
composition of the publicly held debt, this should be the responsibility
of the Federal Reserve System.
8. Callable bonds
In recent years, the Treasury has issued no callable securities. Yet,
private business finds it profitable to do so regularly. While such a
feature might increase the immediate cost of financing the debt by
some small amount, in the long run such a feature would permit the
Treasury to refinance its structure to take advantage of favorable
movements in the interest rates in future years. Consequently, the
Treasury would not be permanently saddled with long-term issues
sold when interest rates were at their peak. We, therefore, advocate
that such a feature be included in at least some long-term securities.61
Milton Friedman recommended greater use of auctions, but with modification.
See‘ 'Staff Report,” p. 427.

Hearings, p. 3024.



4. Failure of fiscal policy
The most effective means of reducing interest costs in the immedi­
ate future is to run a budget surplus large enough in periods of recov­
ery and prosperity that some of the funds can be used for debt retire­
ment.62 In years when a surplus coincided with periods of prosperity
and upward pressures on interest rates, the Treasury would not need
to borrow new money, and by using some of the surplus to retire a
part of the privately held public debt, it would be placed in a net
creditor rather than a debtor position. This would have the effect of
raising the price of Government bonds and, hence, lowering their yield
or interest rate.
In recent times, the Treasury has failed to produce such a surplus
in periods of recovery and prosperity. They have attempted to meet
the difficulties which such failure has caused by demanding that the
long-term ceiling be removed.
Yet the basic solution lies close at hand. With the present basic
tax structure, revenues could be considerably increased by the tax
measures listed in a preceding section.
In addition, numerous savings could be made in the military pro­
curement and surplus programs. Furthermore, there are numerous
subsidies in the budget, particularly for agriculture and business,
which if reduced, would provide a cut in expenditures.
In our opinion, revenues could be increased by as much as $3 billion
on an annual basis by plugging the most notorious of the tax loopholes.
A further $3 billion could be cut from existing expenditures through
proper military procurement and surplus disposal policies and the re­
duction of both agricultural and business subsidies. While the mili­
tary savings should properly be devoted to missiles and the strength­
ening of our combat forces, such changes could produce an adequate
budget surplus. This could do more than any other single policy to
reduce the long-term interest rates. It would further allow us to make
modest beginnings to increase badly needed public services and in
programs for those individuals and sectors in our economy which are
now starved for funds. Such changes can be made if the Treasury
and the administration would actively support them.
5. Trading in Government bonds 63
Thus far we have been looking at the Government bond market with
respect to new issues and the operations of the Treasury. However,
an important factor is the daily trading in existing or outstanding
Government securities.
The trading is done by only 17 dealers. There has been no increase
in their number in some considerable length of time.
They are to the Government bond market what floor traders or
specialists on the stock exchange are to the stock market. The volume
of their trading is enormous and includes trading in the $62 billion per
year of direct Government issues, the $20 billion held by the Federal
Reserve Board, and private trading in the $120 billion of outstanding
issues. The general volume is in the magnitude of $200 billion.
The facts are that this enormous trading is done by this limited
number of dealers and that it is done with virtually no margin require­
82 T his judgm ent w as w idely supported in testim ony and subm itted statem ents.
H earings, pp. 3067,
3087, 3182, and 3221. See also footnote 39, p. 30, for additional references.
63 T he conclusions in this section are based on hearings w hich were held in N ew Y ork.
M r. P a tm a n believes m ore should be said on this subject. See his views, p t. 7.



ments either on the part of the dealers or their customers. Two of
the 17 dealers are members of the New York Stock Exchange which
requires margins of 5 percent. Five are banks which finance their
bond operations out of general bank assets. The remaining 10 are not
required to provide margins of any amount and, in fact, operate with
only such margins as are demanded by banks or others who loan them
funds to finance their daily operations. Their customers are required
to provide either no or very limited margins, depending upon their
credit standing and the security sought.
Figures produced in our hearings showed that in one month, these
17 dealers did over $18 billion worth of business with average checking
accounts of only $20 million. Thus, they did business of 40 times
their capital on a daily basis, 880 times their capital on a monthly
basis (22 days to the month), and almost 11,000 times their capital on
a yearly basis. Thus, an extremely small amount of capital carries a
large amount of securities.
In the recent past, the lowness of margins on the part of purchas­
ers— particularly short-term speculators— certainly contributed to the
sharp rise and then a sharp fall in the prices of Government securities.
Portions of the Treasury and Federal Reserve Board study (see
pp. 90-91) on the debacle in the Government bond market in 1958
might well have described the behavior of the stock market in the
decline of the late October and November of 1929. In both instances,
there were relatively low margin requirements in comparison with the
price movement of the securities in question. The margins were
wiped out quickly. Then came a wave of distress selling. This,
in turn, caused prices of securities to go down even further and the
speculative situation pyramided on itself. Thus, the low margin re­
quirements were certainly a contributing factor to a cumulative decline.
The regulation of stock exchanges and the imposition of margins
on stocks has largely reduced this source of speculative decline in the
stock market, but the Government bond market is still operating with
little or no margins and little or no regulation. The bonds of the U.S.
Government should be safeguarded against harmful speculation.
Steps should be taken both to expand the number of dealers and the
competitive nature of this market. Furthermore, steps should be
taken immediately by the Federal Reserve System to determine what
public regulation of this market is desirable. Certainly, margins
should be required of customers who trade in Government bonds.
In addition, dealers should be subject to at least such financial re­
quirements as are now demanded of floor traders or specialists on the
exchanges. This is a most serious and neglected situation and demands
immediate attention and action.
Federal Eeserve policy
While Federal Reserve and monetary policy are discussed in detail
elsewhere, there are certain aspects of the policy which have a direct
bearing on the interest rate ceiling and the Government bond market.
Bills-only policy.— The first such Federal Reserve policy is that
which is called bills only.63a
Since 1953, the Federal Reserve, as a matter of self-imposed re­
straint, has generally limited its purchases and sales of Government
63a For a detailed critique of the doctrine of “ bills only,” see forthcom ing S tu d y P aper N o. 19, “ D ebt
M anagem ent in the U nited S tates,” by W arren L. Sm ith.



securities to short-term bills. One effect of the bills-only policy is to
weaken the long-term market by letting harmful disparities develop
between long- and short-term interest rates. There is no reason why
the Federal Reserve, when it deems it advisable to buy and sell
securities, should not buy or sell securities of varied maturities in­
cluding some long-term bonds.
We are not advocating that the Federal Reserve peg the long-term
bond market.64 We are advocating that the Federal Reserve System
assume responsibility for the orderly behavior of our credit markets.
Such improvement in behavior would make Government bonds more
attractive to investors and, hence, would lower interest rates on
Federal securities.
The record does not indicate that the Federal Reserve bills-only
policy has significantly improved the performance of the Govern­
ment securities market or interest rate structure. In its present form,
the policy should be abandoned.
Improving the Federal Reserve portfolio.— A method by which
the interest rate structure can be improved and the long-term bond
market strengthened as a consequence, without, in any way, expanding
the money supply or pegging the bond market or producing inflation­
ary effects, is by changing the mix in the holdings of the Federal
Reserve portfolio.
In 1951, the Federal Reserve held almost $5 billion in long-term
bonds which was 21.5 percent of its total portfolio holdings of $22.7
billion. As of the end of October 1959, the Federal Reserve held
only $1.5 billion in long-term bonds which was only 5.7 percent of its
total portfolio of $26.3 billion. There is no reason why the present
ratio should not be improved.
In a period when no expansion or contraction of the money supply
is desired, the ratio of long- to short-term securities held by the Federal
Reserve could be considerably improved b}^ the purchase of long-term
bonds and the sale of an equivalent amount of short-term securities.
Such exchange operations could be done as a general policy. With
small purchases over time, it would have the effect of strengthening
the long-term market, increasing the price of long-term bonds, and
consequently reducing the long-term interest rate under what it would
otherwise be. Furthermore, when a proper ratio was reached, the
Federal Reserve would be in a position to make its task of responsi­
bility for the orderly behavior of the credit markets and the improve­
ment of the debt structure an easier one.
We are not advocating that the Federal Reserve intervene only to
support the Treasury at the time of an offering.
As an equivalent number of short-term securities would be sold
simultaneous^ with the purchase of long-term bonds, there would be
no expansion of the money supply.
Open market operations instead of lowering reserve require­
ments. 64a—-The Federal Reserve and the banking system operate under
what is known as the fractional reserve system. The Federal Reserve
affects the money supply basically by two major kinds of tools. One
is by fixing the levels of the reserves which banks are required to hold
against their deposits. The other is the buying and selling of Govern­
ment bonds which affect the amount of money and credit which is
*4 Mr. Patman dissents. See his views, pt. 2 .

See testimony of Milton Friedman, Hearings, pp. 3022, 3043-8044.



At the present time, the banking system as a whole can expand
money and credit approximately six times the amount of the reserves
it holds. When an expansion of the money supply is desired, either
for cyclical or for secular purposes, the Federal Reserve Board can
either lower reserve requirements, which would increase the amount
the banking system could expand credit, or it can purchase Govern­
ment bonds which has the effect of putting more money into the system
upon which credit through the banking system can be expanded.
When a coo traction of the money supply is desired, the Federal
Reserve can increase reserve requirements, which decreases the amount
by which the banking system can loan funds, or it can sell Government
bonds which also has the effect of contracting the money supply.
The ultimate effect of either weapon is the same. There is very
little to choose between them on the final effect which will come about.
Furthermore, at best, there are only very minor differences in the
effects of the process. If anything, there is very little that lowering
reserve requirements can accomplish that cannot be done with more
finesse by means of open market operations.
However, the Federal Reserve has not raised member bank reserve
requirements since 1951 and has lowered them several times, particu­
larly in the two periods of recession since 1953. It appears to be
aiming at a general reserve requirement level of about 10 percent
which, in the opinion of this committee is not necessary nor in the
public interest.
We believe that reserve requirements should be kept at their present
general level65 and that the open market operations tool is to be pre­
ferred, for it has the advantage that the Federal Reserve then secularly
absorbs Government securities into the System portfolio.
When the Federal Reserve lowers reserve requirements, the banking
system expands the money supply and receives the interest on such
expansion in terms of bank profits without any cost to the banking
system itself. On the other hand, when the money supply is expanded
by wa}^ of open-market operations, the banking system receives roughly
five-sixths of the profit on such expansion, but the Federal Treasury
receives approximately one-sixth of the profit in the form of the inter­
est on the bonds held by the Federal Reserve, 90 percent of which is
returned to the Treasur}^ at the end of each year.
Under the Constitution, Congress has the power to coin money and
regulate the value thereof. The courts have quite properly held that
this power includes the creation of money. This power has been
delegated to the Federal Reserve Board as the agent of the Congress
and through it to the private banking sj^stem. Since this power lies
with the Congress and is properly a function which the Congress and
the Government should supervise, the Government, when it delegates
tins power to the private banking system, has the right to expect that
it should receive at least a proper share for the public, which in the
case of the creation of demand deposits is at least one-sixth. It is
not unreasonable to expect this when the private banking system re­
ceives five-sixths of the profits from the fractional reserve system.
The public interest is not served when the private system receives 100
percent of these profits which is the case when reserve requirements
are lowered in the interest of expanding the money supply.
** M r. P atm an dissents in p art. See his views, p t. 8,



As at least 90 percent of the Federal Reserve profits are returned to
the Treasury and as they would be cumulative, they would provide a
considerable sum which could be used for such purposes as debt re­
tirement. This, in turn, would tend to strengthen the Government
bond market and lower interest rates. The Federal Reserve, in ex­
tensive hearings and questioning, has been unable to provide us with
an economic or monetary justification for preferring lower reserve re­
quirements instead of the open-market method of expanding the
money supply when necessary.
In fact, if instead of the policy of lowering reserve requirements, the
expansion of credit which was created by this means since 1953 had
instead been created by open-market operations, the net increase of
revenue to the Treasury at the bond rate would have amounted to a
total of almost $500 million and at a present annual rate of some
$112.7 million. (See table 7.)

Reductions in member bank reserve requirements and comparisons with equivalent open market purchases by Federal Reserve System,
July 1, 1953 , to Dec. 31, 1959


Per annum at—

Reserve Reserve Coun­

T otal____ _______________________

“ bills
on ly”

At pre­

rate 1



Percent Percent Percent Percent Millions Millions Millions Millions Millions Millions Millions Millions Millions Millions Millions





u y2


i6 y<l


5 }




130 }









450 |


























Source: Based upon data from Federal Reserve bulletins and announcements.



1 Quarterly average rate for period.
2 First-of-month or midmonth dates are changes at country banks, and other dates (usually Thursday), are the central Reserve or Reserve city banks.



Feb. 27, Mar. 1 2. . _____ ______________
M ar. 30, Apr. 1 2............... ...............
Apr. 17__________ _____________________
Apr. 24______________________ __________



June 16, 24 2_______ ____________________
July 29, Aug. 1 2_______________ __ _

Reserve Reserve Country Tim e


In effect prior to July 1953......... ..............
1953, July 1, 9 2........ .................. ..................

Tim e

Cumulative to
Dec. 31, 1959. at—


Reduction in requirements in—

Estimated added payment U.S.
assuming equivalent
open market purchase and transfer
to Treasury of 90 percent of net in
lieu of franchise tax


Reserve requirements as percent
of deposits in—

Interest per an­
num on open
market purchases
of amount equiv­
alent to Reserve
reduction if



T a b l e 7 .—




Economists agree that the money supply of the country should be
expanded to keep pace with the increase in population and production
of the Nation’s economy. Expansion or contraction of the money
supply should, of course, be used when appropriate as a countercyclical
weapon. Nonetheless, over time, there should be a general secular
expansion of the money supply to keep pace with the growth of the
Such an expansion, when the normal change in the rate of velocity
is taken into account, would ordinarily be at the rate of about 3 per­
cent per year on the average.
The concept or definition of the money supply varies. If it consists
of demand and time deposits plus the currency held outside the banks,
the supply now exceeds $240 billion. An expansion of 3 percent of
this amount through open-market operations would mean the purchase
of $1 to $1.5 billion of securities in the first year.
Another concept, and a more limited one, is that the money supply
consists of net demand deposits plus the currency held outside the
banks. This amounts to about $135 billion. An expansion of 3 per­
cent of this amount would require the Federal Reserve to purchase
about $473 million of Treasury securities in the first year. (See
Hearings, pp. 1252-1254.)
Another concept is that of expanding the Federal Reserve System
portfolio of Government securities, upon which the fractional reserve
system operates, by 3 percent per year. As the Federal Reserve now
holds slightly more than $25 billion in Government securities, such an
expansion would require the purchase of about $750 million of Govern­
ment securities in the first year. As it is this portfolio over which the
Federal Reserve System has direct control, and as it is a figure about
halfwa}^ between the other two, we believe that at this time it would
be proper to use it as the base upon which the expansion of the money
supply could take place.
The potential Federal Reserve profits which could be returned to
the Treasury on this additional increment would then amount to
approximately $22 million in the first year, $44 million in the second
year, and would be cumulative. Over 10 years this would amount
to $1,356 million plus accumulated interest.
The amounts of such profits which could be returned to the Treas­
ury, no matter what concept is used, may seem unimportant to the
Federal Reserve and to the Treasury, but they seem important to us.
There appears to be no reason why the Federal Reserve, as it deter­
mines when it is proper to provide secular expansion, cannot purchase
Federal securities through the open market mechanism to achieve this
purpose. If such secular expansion were to take place under present
conditions, it would appear that the purchase of long-term securities
for this purpose would be warranted. This would help to lengthen
the debt structure, increase the price of bonds, and have the effect of
lowering the long-term interest rate.
7. Conclusion
The present interest-rate structure is higher than it would be under
more competitive conditions. Furthermore, numerous changes in
both the Treasury and Federal Reserve policies could have a consid­



erable effect on the interest-rate structure without recourse either to
pegging the bond market (which we do not advocate) 66 or creating
inflationary pressures. Many of us in Congress, which under the
Constitution has the power to coin money and regulate the value
thereof and which has the legislative authority to affect both debt
management and fiscal policy, would be unwilling to see the long­
term 4^-percent interest rate ceiling removed in the absence of major
and extensive reforms in the areas which we have mentioned. In the
absence of major reform, we recommend against the removal of the
4%-percent ceiling.
By improved Treasury knowledge when pricing new offerings, in
eluding more diverse and disinterested sources of advice, by instituting
the auction method in the sale of long-term securities, and by broaden­
ing and deepening the market for long-term bonds through Treasury
facilities, we believe that the interest rate can be made more com­
petitive and hence lower than it now is.67
In addition, we believe that the Government bond market can be
strengthened, the debt lengthened, and interest rates lowered (1) by
the more extensive use of fiscal policy to provide surpluses in times of
recovery and prosperity, (2) by making the necessary tax and expendi­
ture reforms to provide such a surplus, (3) through the greater sale
of long-term bonds when interest rates are low, and (4) by instituting
callable bonds.
We believe further that major reforms should be made in the market
for trading in outstanding issues, including the imposition of customer
margins, by more adequate supervision and regulation of the dealers
and bv the expansion of their number. The market would be strength­
ened by these steps which would make it less speculative.
With respect to monetary policy, certain changes can strengthen
the market without recourse either to pegging or inflationary devices.
These include (1) the abandonment of the bills-only policy, (2) restor­
ation of the long-term portfolio position of the Federal Reserve by
means of the simultaneous selling of short-term securities as long­
term securities are purchased, and by (3) keeping present reserve
requirement levels and using the open market mechanism for both
cyclical expansion or contractions and secular growth. With respect
to the latter, if such secular expansion were to take place under present
conditions, the purchase of long-term securities for this purpose would
be warranted. By its refusal to consider even modest proposals with
respect to the nonpegging and noninflationary open market operations
proposed in the last session of the Congress, the Federal Reserve and
the Treasury have asked the Congress to disarm itself unilaterally in
a field over which it has both a constitutional and a legislative
It may well be that only by refusing to remove the ceiling can these
major reforms be brought about.
It may be mentioned in passing that in the exercise of its consti­
tutional power to coin money and regulate the value thereof, the
Congress has generally been judged to have been correct in the light
of history when it has opposed the opinions of the dominant interests
M Mr. Patman dissents.

See his views, pt. 2.

« Mr. Patman believes more needs to be said. See his views, pt. 7.



in the financial community. It was Congress which created the Fed­
eral Eeserve System over the bitter opposition of the financial com­
munity. It was Congress which regulated the securities market when
the financial community asserted that no regulation was necessary.
It was Congress and leading members of this committee who fought
for the independence of the Federal Reserve System, in opposition
to the Treasury, which led to the Treasury-Federal Reserve accord
of 1951.
We hope, therefore, that our views with respect to further reforms
may be read in the light of history by the public and the financial

V I. P

o l ic ie s


I m prove


Structu re




c o n o m y 68

It has already been noted that several factors have caused the
postwar inflation and the slow rate of growth of the past few years.
It is clear that no one type of public policy is enough to deal with
these problems. Our studies have shown, however, that certain
structural aspects of the economy, particularly the presence of large
industrial and labor groups who have market power, have contributed
in some degree to the inflation and growth problems.
Reducing the exercise of market power
Broadly speaking, the term “ market power” refers simply to the
ability of sellers to raise the price of their goods or services in the
absence of excess demand pressures.
The problem of market power should be dealt with directly because
the alternative policies— primarily monetary and fiscal— deal with
the problem of inflation from the demand side of the market, both
in general or specific ways. The very nature of market power, how­
ever, is such that a relatively small reduction in demand will bring
little, if any, changes in prices or wages. If monetary and fiscal
weapons were to be used, therefore, they could be effective only at
the cost of a very high rate of unemployment of both capital and labor.
Market power can have bad effects on the rate of economic growth.69
A free enterprise economy, if it is to operate effectively, depends on
competitive markets. These provide an environment in which new
ideas and better products are encouraged. Efficient production and
lower costs are reflected in reduced prices, greater sales, and a gen­
erally higher standard of living for the entire society. This same
point has often been made in somewhat more technical terms by
economists. They can demonstrate that with given demand and
cost conditions, the equilibrium price under competition will be lower,
and the level of output higher, than will be true under imperfect
competition. Further, the greater the deviation from pure compe­
tition— that is, the greater the degree of monopoly in the industry—
the greater will be the difference between the competitive price and
output and the monopoly price and output.
The critics of more competitive markets sometimes argue that such
an approach would be harmful because monopoly is necessary to
get the advantages of mass production, of private research, and of
economies of large-scale purchasing and distribution, and so forth.
Granted that the best size of a firm for gaining the advantages of
technology and of research may be quite large in some industries, it does
not follow that industrial giantism is necessary. There is no evidence,
to indicate that greater and greater efficiency goes in step with greater
and greater size; rather, most of the huge corporations in industry
enjoy no greater economies of mass production and provide no greater
improvements through research than do firms one-quarter or one68 Mr. Patman believes more should be said. See his views, pt. 5.
69 For a discussion of the effect of market power on the rate of growth and the need for competition, see
Hearings, testimony of Howard Hines, p. 1977; William Martin, p. 2001; Robert Bicks, p. 2100; Jesse Mark­
ham, p. 2120; and James Duesenberry, pp. 2324-2328.




eighth of their size. This point is even stronger in situations where
larger corporations are created merely by the merger of existing,
efficient, profitable, and reasonably large concerns. While there may
be a private gain, there is no gain to the economy or to the society as a
whole. More competition in industry and the economic advantages
of large-scale production are not inconsistent goals.70
On the other hand, the losses to the economy from the continued
existence and future development of giant companies can be sub­
stantial. The presence of one or two huge firms which dominate an
industry is precisely the type of economic condition in which price
leadership and other coordinated action can take place without overt
agreement. These practices are the very core of market power in our
present industrial structure. By the same token, the merger of large
firms into even greater ones typically provides little or no real gains
to society. It makes it easier to exercise more market power and
further limits the forces of competition.
Strengthening antitrust policy
We recommend that the basic approach to the problem of excessive
market power by large business units should be through an expanded
and strengthened antitrust program.71
This approach has the advantage of not only reducing this source of
inflationary pressure, but also of raising the ability of the economy to
grow, of reducing undesirable concentrations of power in private
hands, and of accomplishing this without increasing the amount of
direct Government intervention in the operation of the private pricing
Past antitrust action has had a profound and beneficial effect on the
character of the American economy by preventing legal cartels and has
undoubtedly limited the use of market power. Nevertheless, in our
history the enforcement of the antitrust laws on the whole has been
disappointing. The courts have generally interpreted the Sherman
and Clayton Acts in ways which have made them ineffective in curbing
the exercise of market power in modern industry. This problem has
been particularly important where the courts have insisted upon some
direct evidence of collusion or concerted action to support a finding of
antitrust violations, whereas modern pricing and other practices do
not require and do not usually involve such direct or contractual
collusion. In addition, legal delays have been long, and the resources
of the Antitrust Division and of other agencies responsible for en­
forcement have been inadequate to deal with the responsibility and
importance of the tasks they must perform.
Within the past few years, the courts appear to be more aware of the
broader economic meaning of size as a factor in market power, even
when this is independent of concerted action. The courts have also
become more critical of the role of mergers on the effectiveness of
competition. It is to be hoped that these trends will continue.
In addition, however, the Government should take more specific
steps to strengthen our present antitrust policy. Specifically we
7# The testimony of witnesses Howard Hines and Daniel Hamberg support the thesis that optim um effi­
ciency does not require “ giantism.” See Hearings, pp. 2013-2014, 2343-2347, and 2377-2378.
N This view was supported by numerous witnesses, including: Robert Gordon, p. 2963; Walter Heller,
p. 2993; Martin Segal, p. 2640; Howard Hines, p. 2005-2006; William H. Martin, p. 2016; Jesse M arkham ,
p. 2120; Ewald Grether. p. 2118; John Miller, pp. 2125-2126; and Robert Lanzillotti, p. 2262.
72 For a survey of approaches to this problem see Study Paper No. 10, “ Potential Public Policies T@ Deal
W ith Inflation Caused by Market Power,” by Emmette S. Redford,



1. More effective application of antitrust legislation to industries
in which a high degree of market power is possessed and exercised by
large producers, even where no evidence of direct or overt collusion
can be shown. The problems of establishing appropriate criteria in
this area are difficult; nevertheless, it is in these industries where much
of the market power which concerns us is found.
2. Prenotification of proposed mergers to the Antitrust Division
within some reasonable time before the date when the merger is to
be carried out. In this way, prior judgment can be made and action
taken if it is believed that the proposed merger will substantially
lessen competition in the industry.73
3. Greater power for the Antitrust Division to subpena records in
civil cases.74 The existing limitations on this power limit the ability
of the Division to carry out effective investigations.75
4. Substantial strengthening of the staff and the budget of the
Antitrust Division. Even after recent increases, the funds provided
to the Antitrust Division are less than $4.5 million, an astoundingly
meager amount for the functions it is expected to perform. The
professional staff of the Division should be expanded, and salary levels
should be set high enough to prevent the drain of experienced person­
nel into private industry.
5. That the Congress review the policies of the regulatory agencies
in those industries which are granted exemption from the antitrust
laws. We need more knowledge of the effects of regulatory practices
on competition in these particular industries.76
In particular we believe that the 1950 amendment to section 7 of
the Clayton Act, closing the loophole as to mergers through acquisition
of assets, should be extended to apply to bank mergers and that the
Antitrust Division of the Department of Justice should continue to
have jurisdiction over enforcement of the act as to bank mergers.
Further, we believe that the Bank Holding Company Act of 1956
should be strengthened to encourage the continuation and growth of
our historic system of independent, locally owned banks. Before they
approve a bank holding company’s acquisition of stock in a bank, the
Board of Governors of the Federal Reserve System should be required
to determine whether the laws of the State affirmatively permit such
an acquisition.
The purpose of both of these recommendations is to gain a greater
diffusion of financial power and to reduce any further concentration
of it.
6. This committee will hold further hearings to determine in what
further ways the competitive structure of our economy can be
strengthened by antimonopoly and other measures.
Some have proposed that the antitrust laws should be applied to
labor unions as well as to producers. The exercise of market power
by strong unions has contributed in some degree to the inflation of
recent years. But the characteristics of the labor market are such
that the solution is not to be found in the antitrust laws.77
73 See testimony of Robert Bicks, H e a r in g s , pp. 2089-2090 and 2093.
Mr. Patman dissents. See his views, pt. 5.
See testimony of Robert Bicks, Hearings, p. 2089.
76 For discussion of this issue see Hearings, testimony of Hym an M insky, p. 2208, and A bba Lerner, p.
77 See Hearings, testimony of Robert Gordon, p. 2964, Charles Killingsworth, p. 2628, Martin Segal, p.
2639, John Dunlop, p. 2751, and Robert Bicks, pp. 2112, 2113.



The basic difficulty is that if the antitrust laws are applied to the
labor market this would strike at the existence of unionism itself.
The very reason for the existence of unions and of our public policy
toward them is to limit the forces of competition so that the unre­
strained forces of a free competitive labor market will not place the
individual worker at a grave disadvantage relative to the employer.
Therefore, the phrase “ application of the antitrust laws to labor
unions” cannot be construed literally to mean that any restraints on
competition will be unlawful, since this is equivalent to saying that
unions as such will be unlawful.
But if this is not what is meant, then it is necessary to specify in
some detail those particular aspects of union policy which will be con­
sidered a violation of the antitrust laws. In this area, two specific
suggestions have often been made— (1) to make industrywide bar­
gaining unlawful, and (2) to make national union participation in
bargaining unlawful.
Industrywide bargaining refers to situations in which negotiations
are carried on at one time for all or most of the firms and employees
within an industry. In fact, there are very few industries in the
United States where this type of bargaining actually occurs—railroads,
steel, and coal are the major ones. In the great majority of industries,
bargaining is carried on between one company and representatives of
the local and the national union. There is no evidence to suggest that
this latter type of bargaining results in any lower settlements than
where industry bargaining occurs; in fact, most industrywide bar­
gaining has developed as a device to strengthen the bargaining posi­
tion of the employer rather than of the union. The elimination of
industrywide bargaining, therefore, would have little or no effect on
the problem of market power.78
The restriction or elimination of the role of the national union in
bargaining is much more far reaching.79 This approach is based on
the premise that it is the power of the national union which creates
the upward pressure on wages, that local union bargaining would
result in less inflationary pressure.
There is little evidence to support this premise. In fact, national
union officers are frequently more likely to ask for moderate increases,
since they can take a broader point of view.
We do not believe, therefore, that the antitrust approach is a desir­
able one for dealing with the labor market. It may well be, neverthe­
less, that the establishment of more competitive product markets
would have favorable indirect effects on wage pressures as well.80
Thus, if stronger competitive conditions and lowered profit margins
could be achieved by a stronger antitrust approach, it is not unlikely
that wage increases would also be dampened. In any case, if addi­
tional legislation is felt to be necessary in the labor market, it should
be considered outside the framework of antitrust legislation.
IIeduction oj tariffs
An increase in competition from abroad can be and often has been
a healthy stimulus to American producers to modernize their technolopv, increase their efficiency, and hold down their costs and prices.
i* Numerous witnesses testified aeainst banning industrywide bargaining. For their specific positions
see Hearings, test hr on v of witnesses Slichter, p. 9; Hildebrand, pp. 2531 and 2542; Ornati, p. 2549; Ulman,
pp. 2558-2559 and 2563; Gordon, p. 2964; Seeal, pp. 2642-2643; and Dunlop, pp. 2752-2753.
79 See testimony of John Dunlop, pp. 2739-2740.
80 See testimony of Edward Budd, p. 2517; Lloyd Ulman, pp. 2560, 2563; Martin Segal, pp. 2535-2537; and
Charles Killingsworth, p. 2630.



In recent years, it has probably been the most effective restraint on
the exercise of market power in several industries. We therefore
recommend that as part of a policy of curbing market power in our
economy, we should continue to reduce tariffs.
In so doing, however, we recognize that too rapid reductions may
create serious problems of readjustment for some industries and labor
groups. These problems can be reduced by cutting tariffs gradually.
Where necessary, other devices to ease the shift of resources into more
productive industries should be used.
As the benefits from reduced tariffs and freer trade go to the con­
sumer and society, the burden of adjustment should be borne by
society and not entirely by the individual firm or worker.
Our patent system has provided a great stimulus to private inventors
and to the conduct of research by private companies. At the same
time, it has been used as a means of restricting the introduction of
new products and processes and for arranging the sharing of markets
and for fixing prices.
We recommend that the patent laws be strengthened, to assure that
the patent system becomes a more effective incentive for technological
progress, without being a means for restrictive practices. A system
of leasing patents upon the payment of a royalty, which would protect
the inventor but provide for their freer use, may be an appropriate
method to do this.81
Voluntary restraint
Another way to deal with the inflationary effects of market power is
to try to make large industries and unions exercise their power with
A specific proposal in this area is for the Government to bring to­
gether, in an annual labor-management conference, the leaders of both
of these groups so that they could be given the general economic out­
look and informed of the relation of their actions to the national eco­
nomic welfare. Such a conference could result in a useful exchange
of views between business, labor, and Government officials. Over
the long run, it might have a good effect on prices and wages in im­
portant industries. Because of this, we recommend that such an an­
nual conference be started.
If voluntary restraint is to be effective, it must not only include
restraint in raising prices or wages, but there should be price reduc­
tions when economic conditions are favorable. Experience suggests
that high profit levels which develop during the upswing of the boom
create pressures for substantial wage increases. If at this point in
the cycle, lower unit costs were translated into lower prices, the in­
flationary pressures in both the product and labor markets would be
Government participation in key price-wage decisions
While we recognize the difficulties and dangers of, and share the
presumption against, Government participation in the price-wage
setting process, there is a need, at least on a standby basis, for a fact­
finding procedure in key price, and associated wage, increases which
si M r. Patman believes more needs to be said on this subject. See his views, pt. 5.
82 See Hearings, testimony of John Dunlop, p. 2744, and of Robert Gordon, p. 2961.



seriously threaten economic stability, to be invoked at the discretion
of the President, and to result in the issuance of a report and recom­
mendations regarding the justification and desirability of such pro­
posed increases.83
The problem of national emergency disputes between labor and
management also needs further attention in the future. Whatever
emergency legislation is adopted, it must be clearly specified that
stability of the price level is one criterion to be applied.
Other changes to improve the structure oj the economy
There are several other areas in which more positive government
policies would help in stimulating growth while maintaining a high
level of employment and a stable price level. Among the most im­
portant of these are the following:
1. A program of assistance to chronically depressed areas
should be started. Both technical and long-term financial aid
will be required^to^help these areas to become self-sustaining and
to help themselves. Where necessary, retraining of workers should
be undertaken, particularly where the long-term outlook for an
area is poor.
2. The activities of the various State employment agencies
should be coordinated into an effective national system in which
information about job opportunities and available workers will
be provided to both employers and workers throughout the
country. In addition, the financial burden of unemployment
should be reduced by encouraging a more liberal system of
unemployment insurance, particularly for workers in chronic
labor surplus areas.
3. The introduction of technological change can be eased by
reducing the social costs of any resulting unemployment and by
spreading these costs in a fairer way. The most effective step
is to maintain a high general level of employment, so that dis­
placed workers can find other jobs within a short period of time.
In addition, however, special provision should be made in our
unemployment compensation system for workers laid off by tech­
nological change.
4. Besides general policies designed to strengthen the forces of
competition, special programs to promote small business must be
continued and improved. Small business has brought many
innovations to the American economy. The Federal Government
must see that capital is available to small business, and should
help to protect it against predatory practices.
5. Uneconomic production activities, which are able to con­
tinue only through Federal subsidies, should be gradually cur­
tailed. This would free these resources for more productive uses.
w For a discussion of factfinding procedures, see hearings, testimony of witnesses, Musgrave, p p. 27682770; Heller, p. 2998; Segal, p. 2639; Lanzillotti, p. 2262; and Lerner, p. 2265.

V II. T







During World War II and for 7 years following it, farm prices and
farm income in the United States were generally at high and adequate
levels. There were a variety of reasons for this, including the high
level of postwar demand, the shortages in other parts of the world, as
well as the demand accompanying the Korean conflict. Even with
high parity support prices for the basic crops and somewhat lower
support prices for the nonbasics, neither the expense of the farm
program nor the surpluses were major problems. When farmers
received 100 percent of parity in the marketplace, as they did in every
year through 1952, the Government was not obligated to purchase
large amounts of farm production at the 90 percent support level.
Folio wing the end of the Korean war and the recovery abroad, the
farm problem not only worsened but became a crisis in our economic
affairs. The parity ratio has dropped from 100 to 77, or by 23 percent
since 1952. Net farm income is down from $15.3 billion in 1952 to
$10.3 billior in the third quarter of 1959, or by 32 percent. In
addition, loans and inventories of surplus commodities held by the
CCC have increased from $2.45 billion in December of 1952 to a level
of $9.6 billion as of November 30, 1959, and the outlook is that they
will increase considerably in the near future.
In addition to this, net income per farm has dropped from slightly
over $3,000 in 1952 to a level of $2,220 as of the third quarter of 1959.
Even though there are now some 800,000 fewer farms than in 1952,
the net income per farm of the remaining 4.6 million farms is 26
percent below 1952.
In the meantime, the expenses of the Department of Agriculture,
including CCC payments, have been above $6 billion in this and the
preceding fiscal year.
Perhaps the most telling fact is that of the $10.3 billion of net farm
income in the third quarter of 1959, some $3.4 billion of this amount
are the noncash items, imputed value of on-farm consumption, and
the gross rental value of farm dwellings. This means that only $7
billion of net farm income is in the form of cash income.
The prospects for next year are that farm income will again fall
somewhat and that the surpluses and their cost will increase. We
may be in a position where the budget for the Department of Agricul­
ture will be as great next year as the total amount of cash income
received by farmers in the entire country. This, indeed, is a most
serious situation.
In addition, as has been well documented, the bulk of agricultural
subsidies go to those larger commercial farms which need them least
of all and in smaller part to the average commercial farm family
which needs them most.
m See “ Policy for Commercial Agriculture: Its Relationship to Economic Growth and Stability,” report
of Joint Econom ic Committee's Subcommittee on Agricultural Policy, February 1958.




Program for commercial agriculture
Let us first state some general principles concerning the farm
problem. The farmer suffers from inelastic demand. When all
farmers are taken into account, a decrease in price of, say 10 percent
will bring an increase in demand of only about one-third that amount,
or 3 percent. Another way of saying the same thing is that if total
output of farm products is increased by sa}r 5 percent, the price per
unit will fall by much more than 5 percent— by 10, 15, and in some
cases, by 20 percent. The result is that total farm income will be
reduced as output increases. Thus, as prices decline and supplies
increase, farmers as a group are in the situation where they receive a
smaller total for greater production.
It is for this reason that programs aimed at a completely free
market, or which are designed to increase farm income by lowering
prices, will not work.
Secondly, a farm program should be aimed at both increasing farm
income and reducing the costs of the Government programs. The
public will not long endure the costs of present programs and they give
no appearance of materially aiding most farmers.
Thirdly, poverty on the farm and the noncommercial farms should
be treated as a separate problem.
What then can be done? 85
To begin with, the program which now applies to corn and to feed
grains, and which is being recommended for wheat, cannot be justified.
Under the present corn and feed grain program, the Government agrees
to buy all the production which the farmer wishes to sell at a relatively
low prices. No production or acreage controls of any kind are applied.
The effect has been greater production and greater costs to the
Treasury. Corn and feed grains now held by the CCC are greater in
amount than any other single commodity including wheat. A program
of price supports without production controls of any kind is irrespon­
Second, if the large farmers want no controls or price supports, as
they advocate, then let us have a program where they are allowed to
produce for the market, to sell at the prices which they receive in
the market.
Let us then use a portion of the funds which now go in the main to
the larger farms to promote and protect the full-time family-sized
farm. In doing so, however, let us apply certain principles which
would limit the cost. Among them we believe that the most serious
consideration should be given to the following:
If we are to limit production— and some production limitations
are necessary—let us do so on a bushel or unit basis rather than on a
basis of acreage. Acreage limitations have the defect that farmers
put their best land in production, let their poorer lands lie idle, and by
pouring on more fertilizer and cultivating more intensely, they produce
more on fewer acres.
85 M r. C offin . M y reluctance to endorse the m ajority’s recommendations regarding agricultural policies
is based on the fact that this field has not been subjected to the same kind of intensive and sustained scrutiny
as have the other sectors of the economy. Ch. 7 of the able “ Staff Report” acknowledges frankly (p. 189)
that “ this study engaged in no large-scale primary research on the problems of agriculture.” It further
says that since the 1957 hearings conducted by the Subcommittee on Agricultural Policy of this committee,
“ * * * there have been few new developments.” It is with this gap in our systematic research in mind
that I called for a comprehensive study of agricultural economic data and alternative policies by introducing
H. Res. 291 in June 1959. M y reasons for this resolution and its text are set forth on pp. 9433-9434 of the
Congressional Record for June 10, 1959. Until such a study is made, there is, in m y opinion, little chance
of developing an informed consensus based on authoritative data. A nd, until then, there is small chance
of implementing the required policies.



2. Let us support farm income rather than farm prices through a
system of production payments but with dollar limits on such pay­
ments. The difference between market price and a given percentage of
parity— say, 85 percent— would be met by a direct subsidy. But let
us limit the bushels or amount of such production which can qualify
for payments as well as the total amount of such payments to any one
farm or farmer.
While there should be some variation between regions of the country
and crops involved, a limitation in the amount of $2,000 a year for
any one farm or farmer would have the effect of both decreasing sub­
stantially the total amount which is now paid as a subsidy and of
increasing farm income for those full-time farmers with family-sized
Such a program need not be an incentive to indolence or idleness for
while Government subsidies would be limited the farmer would still
be free to market that part of his production which was in excess of
the bushels or amount supported.
Such a program would have the additional advantage that the
consumer and taxpayer would not be taxed as much as at present for
the farm program and, in addition, make a second payment in terms
of higher prices for his food, as is now the case.
As such a program would not add materially to existing surpluses,
there would be an opportunity to reduce the existing stockpile through
programs to help those in need both home and abroad.
3. To deal with the low income problem in agriculture, a rural
development program should be stepped up to a size equal to the
problem. Other constructive programs are now already embodied in
legislation dealing with depressed areas.
4. The retirement of some land now being farmed in good faith—
under appropriate programs— can contribute to the solution of the
problem of overproduction.
5. Greater emphasis needs to be placed on research for finding new
uses for farm products which would increase the demand for them.



m e r ic a ’s


h a n g in g


o s it io n






conom y


In the last 2 years, the United States has become acutely aware of
a host of new problems about our economic position in relation to the
rest of the world. The very large balance of payments deficits of the
last 2 years and the gold transfer, which became more substantial in
1958, have led this committee to reexamine the American position.
Our major conclusions are the following:
The American position remains very strong, but we must pay more
attention to our balance of payments. We cannot afford to continue
to run deficits of the recent size indefinitely.
The outflow of gold has moderated in 1959. This reflects continued
foreign confidence in the dollar as an international currency. But the
rising claims of foreigners against us, in the form of short-term dollar
balances, are exceeding the levels that they might reasonably desire
to hold for the purpose of international liquidity. These balances, if
they continue to rise, will increasingly limit our freedom of action to
pursue economic policies which promote domestic economic welfare.
Particularly in the event of recession, monetary policy will not be able
to loosen credit to the extent that it has in the past, for fear of with­
drawal of these balances as our interest rates fall. The deterioration
in our own balance of payments corresponds to an improvement of
the balance of payments of Western Europe. An enormous increase
in the international reserves of Western Europe are the counterpart
to our deficits. The rest of the world has gained very little in the
The causes of the balance of payments deficit
The United States has been running a balance of payments deficit
in every year since 1950, except 1957, ranging from a deficit of onehalf billion to 2 billion in 1951, 1952, 1954, 1955 and 1956, and to a
deficit between $3 and $4 billion in 1950, 1958, and 1959. There is
no simple single explanation of our balance of payments deficit.
The competitive position of American exports has deteriorated,
but primarily because of the increasing availability of goods from
other countries. The American price level has risen less than that
of most of our competitors but where a few years ago other industrial
countries were unable to supply large quantities of goods, today they
have resumed their traditional role as exporters. This is partly due
to the success of American foreign aid programs in the years after
World War II which permitted these countries to recover their eco­
nomic strength. Thus, our present balance of payments difficulties in
part represent the success of our foreign aid programs.
In some specific items, particularly steel, rising American prices
have reduced our export competitiveness but these are the exceptions
rather than the rule.
88 See the forthcoming Study Paper N o. 16, “ International Effects of U.S. Econom ic P olicy,” b y Edward
M . Bernstein




2. The American share of industrial exports to third markets out­
side the industrial countries has declined only by a very small amount.
However, the markets in the nonindustrialized countries represented
a declining share of world markets, and have shown no absolute in­
crease since 1956. While our ability to hold our share of the market
in third countries attests to the competitiveness of our exports, our
share in world trade declined because of a decline in our share in the
imports of the industrial nations.
3. The balance of payments decline of the last 2 years is partly a
cyclical phenomenon. The American recession, which occurred some­
what earlier than recession abroad, had some effects both on the
balance of goods and services and on the balance on private capital
4. Outflows of private business capital have risen considerably,
more recently in the form of investment in foreign securities. How­
ever, our earnings on investments abroad have also increased, and the
net effect of private capital movements on our balance of payments
in the long run is not unfavorable. In the short run, particularly in
the last 3 to 4 years when the very large revival of foreign investment
occurred, it did add to the strains on our balance of payments.
5. Rising government expenditures abroad have contributed sub­
stantially to the balance of payments deficit, and explain a consid­
erable part of the large deficit this year. The greater part of these
expenditures were for defense of ourselves and our allies. While these
expenditures go to many countries, including large amounts to the
Far East, 57 percent of the total of about $6 billion in 1958 went to
Western Europe. Economic aid, which was about $2.2 billion in 1958
under the several programs, now goes mostly to underdeveloped coun­
tries. The outlays of other industrial countries for economic aid are
still very small.
In the light of these findings and of the longrun objectives of Ameri­
can foreign economic policy, we make the following recommendations:
1. The present situation does not call for emergency measures.
The United States can continue to make the resources available to
other countries which are deemed appropriate for the accomplishment
of the objectives of foreign policy.
2. The economic position of Western Europe has vastly improved
in recent years. Their output has grown at a high rate and they have
increased their holdings of international reserves to very high levels.
Western Europe must devote more funds to its own defense, and to
aid in the economic development of underdeveloped countries. The
patterns set in 1951 are no longer appropriate in the present circum­
Greater use should be made of existing international institutions and
new institutional arrangements should be devised which will encourage
and coordinate the aid programs of the free industrial countries. The
OEEC could be the appropriate organization for making such an
3. The United States must halt the drift into a position in which
the management of our domestic economic affairs becomes ever more
dependent on balance of payments considerations. To halt this drift,
the United States must promote the measures listed here which would



improve our balance of payments, and which would halt the increase
of foreign claims beyond levels necessary to facilitate world trade.
Also, serious study should be devoted to improved institutional ar­
rangements which would improve the system of world liquidity. It is
in our interest to let the dollar play the role of a world currency. But
the United States cannot be the major source of the necessary addi­
tions to world monetary reserves. An excessive growth in our foreign
dollar liabilities, not offset by an increase in our own gold reserves,
could lead to serious difficulties in times of adverse political and eco­
nomic conditions.
4. Now that most of the continental countries of Western Europe
have more than adequate international reserves, the justification for
discriminations against dollar imports, particularly in the form of
quotas, has disappeared. These discriminations should continue to
be removed at a rapid rate.
5. The United States should maintain its policy of striving for a
system of multilateral world trade, without restrictions and discrimina­
tions. We should reduce our own tariffs in exchange for tariff con­
cessions from other countries. We should also use our influence and
leadership to encourage the newly emerging regional economic blocks
to become means of trade liberalization rather than discrimination.
N o t e . — Senator Fulbright was unable to participate in the hearings or com­
mittee meetings on this report. For that reason, the findings and conclusions
herein set forth are neither approved nor disapproved by him.

50553— 60------ 5


The committee’s report says many things with which I agree so
heartily that it is difficult to refrain from repeating them—just for
emphasis. However, I will not repeat.
On the other hand, the committee’s report reaches several conclu­
sions and recommendations with which I disagree either completely
or so substantially as to warrant supplemental views. My major
points of disagreement are as follow s:

The committee’s report recommends that to achieve the objec­
tives of the Employment Act of 1946, our national public policy will
have to place “ [g]reater reliance on fiscal policies and less reliance on
monetary policies * *
stating that under the Nation’s present
policies we would have to choose between growth equal to our poten­
tial, 011 the one hand, or price level stability, on the other.”
On the facts, I cannot avoid the conclusion that the tight-money
and high-interest policies have been a principle cause both of increas­
ing prices over the past 7 years as wTell as a cause o f the Nation’s
substandard rate of economic growth in these years, and I would place
no reliance whatever on monetary controls. In other words, these poli­
cies do not give us a choice between two evils but an abundance of
both evils.
The effects of the tight-money and high-interest policies are clear
enough. They have retarded economic growth, retarded construction
of schools, homes, roads, and other community facilities, squeezed out
small business, weakened the competitive structure of the economy
and changed the income distribution in favor of the financial elite.
But it is difficult to find anything that these policies have accom­
plished on the constructive side. Certainly they have not stopped in­
flation and there is more evidence that they have been a principal cause
of the price increases of the past several years rather than a deterrent
to price increases.
As I understand it, the official monetary theory is to this effect:
When one economic group increases its income more than it increases
its contribution to the economy, either of two things must happen:
(1) The increased income must come out of the economic hides of
another group or groups; or (2) if the Federal Reserve permits an
increase in the money supply sufficient to pay the increased income, the
result is inflation. It is thus that congressional committees and other
public bodies have labored countless hours examining statistical
minutiae, trying to determine whether wages and other monetary
benefits o f one labor group or another have increased more than the
group’s productivity. Money lenders’ wage rates (interest rates) and
incomes have increased far beyond anything imaginable by labor.
Personal income alone from interest has approximately doubled since




1952, having increased from $12 billion in 1952 to a current rate of
$23.5 billion per year, which is now about 2y2 times the total farm
income of the country. And these figures do not reflect the even greater
increases in interest income of the banks, insurance companies and
other financial corporations, which income finally appears in stock
dividends, increased officer compensation, and increased corporate
This diversion of income through high interest benefits the few at
the expense of the many. To illustrate, United States savings bonds
are doubtless the most widely held of all the interest-paying assets.
Yet a Federal Eeserve survey made early last year indicates that 74
percent of the American families own none of these savings bonds
and only 5 percent of the families own 87 percent of the whole
$42.5 billion outstanding. No one has bothered to try to determine
whether the wealthy families who have money to lend, the commercial
banks that create money, and all of the financial institutions which
manage and lend other people’s money have increased their produc­
tivity in the money creating and lending functions in any way com­
mensurate with their increased incomes. But the answer seems
obvious. The steadily mounting interest incomes have come out of
the economic hides of other groups.
Under more ideal conditions for formulating and administering
money and interest-rate policies, I would agree that these policies
should be used, in a coordinated way, with the Government’s other
policies. But present conditions are far from ideal.
To illustrate, the committee’s report tells us that the greatest impact
of the high-interest and tight-money policies has been on housing.
I f this is true, then manifestly Federal Reserve’s policies have been
at loggerheads with a policy determined by constitutional means.
Congress has passed bills, and the President has signed bills, intended
to increase homebuilding, while the Federal Eeserve has followed
policies which, intended or not, have discouraged homebuilding. The
same point could be made with reference to small business. The Con­
gress has passed and the President has signed bills intended to make
more credit available to small business, wThile the Federal Eeserve has
followed policies which have substantially eliminated the credit avail­
able to small business.86a
The conditions are not ideal in other respects.
While the present Federal Eeserve authorities have been quite de­
termined in their course, it seems to me they are, at the same time, too
remote from the economic system which they try to regulate. They
have been willing to pursue headlong the course of squeezing credit
and raising interest rates with seemingly only the vaguest notions
either about the effect of their actions or about the economic system
they try to regulate.
Coordination of policies would require that Congress at least be
made privy to the Federal Eeserve’s policies as well as to the facts of its
methods of pursuing its policies. On both points Federal Eeserve
spokesmen have been less than candid with Congress and with the gen­
eral public, disclaiming at times that they have anything to do with
matters about which they have all to do. In periods when interest
86a T he F ed era l R eserv e w a s fin a lly p rev a iled U D o n to m ake a su rv ey to see w h a t h a p ­
pened to bank loa n s to busin ess firm s as betw een O ctob er 1955 (a n easy cre d it p e rio d )
and O ctob er 1957 (a very tig h t c r e d it p e r io d ).
S m all firm s w ith less than $ 5 0 ,00 0 o f assets
h a d 3 p ercen t less bank cre d it in the la tte r period, and the co r p o r a te g ia n ts w ith m ore
than $100 m illion o f assets had 66 p ercen t m ore bank cre d it.
A nd in betw een these
extrem es the v a rio u s sizes o f firm s fa r e d d isp ro p o r tio n a te ly a cco r d in g to th e ir size.



rates are being raised, these spokesmen are given to making such state­
ments as the Federal Reserve is “ simply following the market”
and otherwise suggesting that the events of the day are natural phe­
nomena over which the Federal Reserve has no influence or control.
Only in recession periods, when interest rates are being lowered do
these spokesmen take credit for actions which reveal that credit availa­
bility and interest rates are, after all, products of their decisions.
The Federal Reserve’s record of calling the turns in the tides of
business affairs has not been good, though in fairness we cannot blame
them for bad economic forecasting. The forecasting art is uncertain
at best, and the statistics of economic developments arrive long after
the event. Nor can we blame the forecasters for leaning in the direc­
tion of their biases when in doubt. It would be foolhardy to overlook
the nature o f their biases, however, particularly when these biases are
so pronounced as to blind the forecasters to the facts even after the
facts become available.
The persistent and pronounced bias of the present Federal Reserve
authorities has been in favor of the financial elite, in favor of high
interest for the sake of high interest, in favor of the banking business
it is supposed to regulate, and not always equally solicitous of the
small banks at that.
The committee’s report expresses a view that the Federal Reserve
system can not be blamed for the failure of other governmental poli­
cies during the past several years. Yet a realistic appraisal of the
history of these years can leave no doubt, I think, that the Federal
Reserve authorities must, indeed, share a large part of the blame for
the failure of other governmental policies. Never has any patented
nostrum been more oversold than “ monetary controls.” The Federal
Reserve authorities have been part and parcel of the crusade to sell
the idea that monetary controls would provide a magical solution to
all of our problems, and the public has been lulled into the belief that
hard decisions of Government could be avoided. Indeed, these au­
thorities have been part and parcel of a kind of religious warfare to
force mass conversions to the faith, and all who have dared even to
raise questions concerning the specifics of their nostrum have been
branded “ inflationists”—or worse.
Under the present organization and management o f this Nation’s
central bank, I would place no reliance whatever on monetary policies.
The Federal Reserve System should be brought back into the Govern­
ment from whence it has seceded, so that its economic policies may be
coordinated with economic policies arrived at by constitutional means
and so, too, that some branch of the Government—the executive or
the Congress— will have political responsibility for its political deci­
sions. Furthermore, there is a crying need for reform within the
system. The powers and duties for determining this Nation’s credit
and interest-rate policies now reside with the Federal Open Market
Committee, which is made up of a mixture of publicly appointed
members and elected representatives of the private banks. The
powers and duties of the Federal Open Market Committee should be
placed in the hands o f a board of public members.
It is my view that until these fundamental reforms are made, Con­
gress should, at the beginning of each year, pass legislation specifying
the rate at which the Nation’s money supply shall be increased during
the year.





2 . N E E D E D : A C E I L I N G O N G O V E R N M E N T B O N D Y IE L D S

The Committee’s report recommends that the Nation’s money
supply should be permitted to increase at the same rate at which
economic activity (as measured by the gross national product) in­
creases. With this I fully agree. It is a generally accepted proposi­
tion that a lesser rate of growth in the money supply retards economic
growth and a greater rate of expansion results in inflation.
Further, the Committee’s report finds that since the Treasury-Fed­
eral Reserve “ accord” of February 1951, Federal Reserve policies,
“ particularly since 1953, have brought interest rates to levels higher
than they should or need be.” Strangely, however, the Committee’s
report repeatedly recommends against returning to any ceiling on
Government bond yields— a policy called “ bond pegging.” This rec­
ommendation seems to flow from the belief that “ when the bond mar­
ket is pegged at low interest rates by the Federal Reserve, it loses
control of the money supply and excessive amounts of money and
credit are likely to be fed into the banking system . . .
adding what
purports to be an historical fa ct:
“ While this policy kept interest rates low, it prevented the
Federal Reserve System from carrying out its main duty to
regulate credit and the money supply for the purpose of pro­
moting stability in output and the economic growth.”
Undisputed facts in the committee’s record, taken from President
Eisenhower’s economic report, show that in the four post-World War
I I years immediately preceding the so-called “ accord,” the money
supply increased by 5.6 percent while the gross national product in­
creased, in real terms, by 12.6 percent. An increase in the money
supply at less than one-half the rate of the real growth in the econ­
omy hardly accords with the Committee’s theory that the Federal
Reserve lost control of the money supply or with the theory which
the Committee is now recommending for future policy.
Furthermore, in this 4-year period, the Federal Reserve did not
make a net increase in its holdings of Government securities in order
to maintain an “ artificially low interest rate,” It made a net reduc­
tion in its holdings of Government securities amounting to $2.5billion.
In the year immediately preceding the “ accord” of February, 1951,
the money supply was increased by 2.5 percent, while the real increase
in production of goods and services was 8.7 percent, or three and
one-half times the rate of increase in the money supply.
In any case, increases in the money supply in the pre-“ accord”
period were less, relative to real increases in the gross national prod­
uct, than the Federal Reserve System has seen fit to make in the
years since, when it has not been burdened with the alleged restric­
tion on its ability to control the money supply. In the 8 years fo l­
lowing the “ accord” of 1951, the real increase in gross national product
(measured in 1954 dollars) was 25 percent while the growth in the
money supply was 22 percent.8615
Since the inflation of the post-World War II period was manifestly
not a monetary inflation, I would suggest, as an alternative theory,
8613 T h is d oes n o t m ean th a t a d equ ate in crea ses in the m on ey su p p ly h ave been p e rm itte d
in th is p eriod . On th e co n tr a r y , o n ce the p rice level has in creased , a c o r re sp o n d in g in ­
crease in the m oney su p p ly is needed ju s t to p erm it tra n s a ctio n s in the sam e a m o u n t o f
good s and services. T o illu stra te, in 1 95 0 th e a vera g e m on ey su p p ly a m ou n ted to 39 p e r­
cen t o f the gross n a tion a l p r o d u c t ; by th e la s t q u a rter o f 1959, th e m on ey su p p ly ha d
been red u ced , rela tiv ely , to on ly a b ou t 30 p e rce n t o f th e g r o ss n a tio n a l p r o d u c t.

Digitized for



that it resulted from the American people’s postponed demands of
the World War II period, their large holdings of liquid assets with
which to satisfy these demands, and from the premature removal of
price and other controls.
The Federal Reserve was able to maintain yields on long-term
Government bonds at a maximum rate of 2y2 percent in the 4 post­
war years, thus keeping all other interest rates low, while at the same
time making a net reduction of $2.5 billion in its holdings of Federal
Government securities. It should maintain a ceiling of 2% percent on
long-term Government bonds now. It should—to use a dirty word—
“ peg” Government bonds. A maximum rate of 2% percent would
leave it adequate “ flexibility” with which to run interest rates up and

The committee recommends legislation authorizing “ standby”
consumer credit controls, with which I disagree. With these “ stand­
by” controls the Federal Reserve could, at its pleasure, issue regula­
tions setting minimum downpayments and maximum periods of
payment for consumer credit extended by the commercial banks, the
finance companies and others in the consumer credit field.
This recommendation does not go to the needs of the day, the needs
of the recent past, or to the needs of the foreseeable future. Rather,
the recent severe and prolonged periods of tight money and high
interest to which the Federal Reserve has subjected consumers,
farmers, small business, and homebuilders alike, have admittedly
been intended only to restrain business investment, particularly in
new productive capacity. I f tiglit-money and high-interest policies
were to be continued as methods of trying to regulate the economy,
which I oppose, then there would be a crying need for selective credit
controls, but selective controls first and foremost over business credit-—
both for inventory speculations and expansions of productive
The nature of the agitation for “ standby” consumer credit controls
which has been coming from certain sectors of the financial community
since 1955— in recession periods no less than in prosperous periods—
should be ample warning to the committee that once the Federal Re­
serve has the authority to regulate consumer credit, it will be under
tremendous pressure to invoke this authority and most likely will do
so. Indeed, the committee’s report invites the Federal Reserve to
use this authority, once it has been granted, on no particular justi­
fication: “ From time to time the use of standby regulations may be
This drive for consumer credit controls lias all the earmarks of the
drive which ended, in 1935, with the enactment of the law which pro­
hibits the commercial banks from paying depositors interest on de­
mand deposits. What could not be done by private means was done
by law. Competition between and among Ithe commercial banks for
the public’s deposit patronage was stopped.
Competition between and among the commercial banks, the finance
companies, the savings and loan associations, and others in the con­
sumer credit field is largely in the variety of arrangements which these
various types of financial institutions offer the consumer as to down­
payments and periods of payment. And those institutions which can­
not meet the more generous terms as to downpayments and payment



periods usually must try to entice the consumer with lower interest
rates. I f we eliminate competition in these services, then elimination
of competition in interest rates is almost sure to follow.
While the committee’s recommendation would seem to provide a
means o f restraining consumer purchases when consumer demand is
too high, it provides no means for stimulating consumer demand when
it is too low, which is the more usual state of affairs. Consequently,
if the committee’s recommendation is accepted, it should be amended
to require that the Federal Reserve specify the maximum interest rate
consumers may be charged. Such a requirement would also substitute
a consumer safeguard for that which competition now tends to provide.

The committee’s report recommends that the Federal Reserve banks
“ should do away with rediscounting as a general practice” and
that the practice “ should be allowed only when a member bank is in
serious difficulty” . The committee’s criticisms of “ rediscounting” go
not just to “ rediscounting” as such, which has been negligible, but to
all extensions of credit by the regional Federal Reserve banks to the
member banks. In fact, the committee emphasizes that the proper
way for the Federal Reserve System to extend or reduce member bank
credit is through open market operations—that is, by buying or selling
Government securities. While I heartily agree with a related recom­
mendation which the committee makes, namely that the Federal Re­
serve should acquire more Government securities as the way of increas­
ing bank credit, rather than to reduce reserve requirements of the
member banks, I do not agree with the conclusion that direct exten­
sions of credit by the regional banks is improper or undesirable.
On the contrary, there are two reasons why the Federal Reserve
banks should have flexibility in this respect. First, the levels of
economic activity in the various regions of the country are not always
the same as for the country as a whole. Indeed, it frequently happens
that when the national barometers show high economic activity and
high employment, individual regions may be suffering from unem­
ployment and slack demand. Second, the alternative method which
the committee proposes by which the individual bank can obtain
temporary reserves is to sell some of its holdings of Government secu­
rities through the professional “ open market” securities dealers. These
New York “ open market” dealers are few in number and do not serve
particularly well many of the small banks away from the metropolitan
centers. And, as the committee’s report points out, the “ imperfec­
tions” in the so-called market which is made up of these dealers are
There is no apparent reason why the amount of credit extended by
the regional Federal Reserve banks cannot be fully coordinated with
the policies of credit ease or restraint being executed by the New York
Reserve Bank; and there is no evidence that the minor extensions of
credit which have been made by the regional Reserve banks have not
been so coordinated.

The committee’s report recognizes, as it must, that arbitrary price
increases by great corporations having market powers to raise prices,



even in the face of falling demand, have been a principal source of
the so-called inflation. Furthermore, the committee has made a num­
ber of recommendations for strengthening the Nation’s historical anti­
trust policy which condemns control over markets. However, I do not
believe that the steps which the committee recommends go far enough,
and in the case of one recommendation, I disagree.
disagree with the proposal that legislation be enacted giving the
Assistant Attorney General in charge of antitrust subpena powers in
investigations of civil violations of the Sherman Antitrust Act. I
do not believe that such a step is necessary and it proposes a dangerous
principle and a dangerous precedent. To give an officer of the execu­
tive branch of the Government powers to bypass the grand jury would
in effect bypass a fundamental constitutional safeguard.
In addition to the other specific recommendations which the com­
mittee makes, and with which I agree, I urge the adoption of several
other well-known proposals for strengthening the antitrust laws as
follow s:
(1) Legislation to safeguard against abuses in the practice of the
enforcement agencies in settling cases of antitrust law violations by
consent decrees and consent settlements which legislation should
A requirement that the enforcement agencies make public the
terms of any proposed consent decree or settlement for a specific
period of time before it is accepted and give interested parties
who may be injured by the proposed decree or settlement an
opportunity to protest.
That the court in which any consent decree or settlement is
accepted be required to write an opinion setting forth the prac­
tices or conditions which have violated the antitrust law and the
meaning of the consent decree or settlement.
c. That the court be given discretionary power for deter­
mining that the evidence and record of the case may be used as
prima facie evidence of the violation of the antitrust law in dam­
age suits brought by private parties who may have been injured
by the violation.
(2) That the anti-price-discrimination law be strengthened so as
to make competition in the marketplace less a contest of market
power and more a competition of efficiency and thus give small busi­
ness firms a reasonably equal opportunity to compete.
(3) That section 1 of the Clayton Antitrust Act be amended to
encompass within the term “ antitrust laws” section 3 of the RobinsonPatman Act.
(4) Finally, I believe that the committee should make a full study
of the practices being followed by the Federal agencies in distributing
funds to business firms for research, experimentation, and technologi­
cal development, as well as the policies being followed with reference
to the acquisition and control of patents on inventions made at public
The Federal Government is now paying the lion’s share of the bill
for all scientific, industrial, and other research and experimentation
being done in the Nation; and the total of all spending for such
purposes has increased enormously within the past few years.



Last year the Department of Defense alone distributed almost $5
billion of Federal funds for these purposes. O f this huge amount,
92 percent went to only 100 organizations; 96 percent went to the 200
largest recipients of such funds; and 99.4 percent went to only 500
organizations. These funds, which are handed out on a cost-plus-aguaranteed-profit basis, not to be repaid, amounted to 633 times all
the Federal funds which have been lent, with repayment expected,
to small business investment companies during the year and a half
that this latter program has been in operation. Further, the Depart­
ment o f Defense allows private firms making patentable inventions
through Government-paid research to acquire and control the patents
on these inventions. At the rate patents are pyramiding, the time
may not be far away when a few giant corporations will control all
the industrial technology of the day.

The chapter of the committee’s report dealing with Federal taxes
sets out a number of conclusions and recommendations for changes
in the tax laws which are, necessarily I think, based upon an insuffici­
ent study and consideration. Thus the committee’s report recom­
mends repealing the di vidend-received credit and exclusion provision,
and recommends limiting employee expense accounts, but omits any
reference to stock options practices, to the widespread inequities which
these practices are reputed to involve, or to the influence of these
practices on the corporate pricing practices which the committee finds
to have been a principal source of inflation. Similarly, the commit­
tee’s report recommends reductions in depletion allowances for cer­
tain resources and is silent on depletion allowances for other resources.
More particularly the committee should, I feel, make a thorough
study of the impact of Federal taxes on the competitive structure of
American business. The committee has been shown without question,
and fully recognizes, that in many instances giant corporations have
a degree of control over markets which permits them to raise prices
arbitrarily, to cover increased costs or to increase profits. It would
follow then that corporations enjoying such freectom from the re­
straints o f competition may also increase prices to shift the burden
of the corporate income tax onto consumers, their suppliers, or others.
Business firms that are more competitively situated manifestly can­
not do this. The consequence would seem to be, therefore, that those
corporations already enjoying great market powers are able to raise
and accumulate capital for expansion and growth while the smaller
business firms, as a rule, are having their growth capital taxed away.
It could well be that competition, which the committee now finds in­
sufficient to safeguard against arbitrary price increases, will within
a short time disappear completely.





While the committee’s report recognizes that there are serious
competitive “ imperfections” in the Government securities market, its
recommendations for correcting these imperfections fall far short of
the needs.



This “ market” involves only 17 so-called “ open market” dealers,
at New York. The volume of trading carried on by these dealers in
Government securities amounts to an estimated $200 billion a year,
wrhich is several times the volume of trading in all the stock exchanges
and commodity markets of the country. It can hardly be called a
“market.” It is more a private club, and it is under no regulation
whatever except whatever self-imposed regulation these dealers may
The only notable self-imposed regulation which the committee’s in­
vestigation brought out is that these dealers operate a “ put and take”
system such as is prohibited in organized security exchanges by the Se­
curities and Exchange Act. In other words, according to this system,
the dealers have agreed among themselves that one may telephone
another and ask his bid and offer price, in which event the calling
dealer may require his rival either to sell him, or to purchase from him,
a predetermined quantity of the securities in question. The manager
of the Federal Reserve’s open market account was asked about effects
of this system and he replied that it tends to force all the dealers to
have uniform prices.
Another interesting aspect of the so-called “ market” is that all of
these open market dealers have direct telephone lines between and
among themselves. In other words, they are all on a sort of “ party
line.” It is interesting that under these circumstances the Federal
Reserve Bank of New York trades in Government securities with these
dealers—to the extent of $5 to $10 billion per year— it is said, on the
basis of competition between and among them and the “ best prices”
they either bid or offer to the Federal Reserve Bank, as the case may
be. This trading is by telephone and we must presume that when the
bid and offer prices are being made by telephone, each dealer refrains
from listening in on his “party line.”
Perhaps the most remarkable aspect of the so-called Government se­
curities “ market” is that which takes place in the case of new issues of
Government securities purchased directly from the Treasury. These
dealers, plus a few large banks, insurance companies, and other
financial houses which customarily buy substantially all of the
Treasury issues, all know in advance what the total amount of the sub­
scriptions wrill be on any given issue. Treasury issues are typically
oversubscribed anywiiere from 1 to 12 times. In other words, the
total offers to purchase a given quantity of the Treasury issue may
run as high as 12 times the amount of the security that the Treasury
is offering. On each occasion there is a common estimate as to what
the amount of oversubscription will be, and each subscriber bids ac­
cordingly. In other words, if the understanding is that the total
subscription to be made by all investors in the United States is to be
12 times the amount of the security the Treasury is offering, then
each of these dealers, banks, and insurance companies, subscribes 12
times the amount of the security each actually expects to purchase.
Thus the dealer washing to purchase $1 billion of a security will tender
a subscription for $12 billion, and make a downpayment to back up
his subscription. I f the oversubscription turns out to be 12 to 1, then
the Treasury will allot him the $1 billion worth which he expected
to buy in the first place. Testimony of the dealers and others reveals
that each has a striking degree of confidence in these advance esti­



mates of the oversubscription. Testimony indicated that should these
estimates prove wrong and should these big subscribers thus be al­
lotted substantially more of a security than they actually expected to
receive, they would be more than a little financially embarrassed.
The so-called “ Government securities market” should be put under
public regulation.

The committee’s report takes a firm view that reserve require­
ments of member banks should be maintained generally at their
present levels. And as a counterpart to this view, the committee’s
report also recommends that when the Federal Reserve System brings
about expansions of money and credit in the banking system, it
should do so by acquiring Government securities in the open market.
In other words, the committee’s view is that the Government’s
money-creating powers should be divided, beneficially, between the
Federal Reserve System and the private banks as at present. The
advantage to the general public of the Federal Reserve’s acquiring
more Government securities is, of course, that the interest payments
on these securities will be returned to the U.S. Treasury, whereas when
the private banks acquire more Government securities, the interest
payments go into bank profits.
It seems to me, however, that the committee’s recommendation does
not go far enough. It would not restore to the public the Govern­
ment securities which the Federal Reserve System has given away
from the vaults of the Federal Reserve banks in the course of its
successive reductions in reserve requirements since 1951. There should
be a restoration of reserve requirements and a return of these assets
to the Federal Reserve System. This restoration should take place as
rapidly and to the extent that profits of the private banks are not
reduced below an adequate level to encourage the banks to provide
their necessary function.
The committee’s record now makes these points clear: Bank re­
serves which the member banks have to their credit on the books of
the Federal Reserve banks have not been created by deposits of the
banks’ funds or their depositors’ funds. They have been created by
the Federal Reserve System itself, without cost to the private banks.
In the years when the Federal Reserve System was being organized,
1914-17, member banks deposited a maximum of $1.5 billion of their
own funds and their depositors’ funds to their reserve accounts with
the Federal Reserve banks. Since 1917, the Federal Reserve System
has itself created the reserves credited to the member banks’ accounts,
and has created an amount of reserves sufficient to permit the member
banks to draw out $28 billion in currency, at no cost to themselves,
and still have left approximately $18 billion of reserves as of today.
There has been no justification for the enormous increases in bank
profits. In the years when interest rates have been highest, the de­
mand for investment funds has been a lesser percentage of the national
income than in 1952 and 1953, when interest rates were low ; and the
American people have saved no greater percentages of their income
when interest rates were high. The Nation has simply paid a bigger
bill for the same amount of savings and for the same amount of finan­
cial management of the people’s money.


The minority wish they could join in a unanimous report, leaving
it to individuals to file such supplemental views as they might feel
necessary and proper; but the character of the majority report
compels us to make a separate statement to register both dissent and
agreement and to make clear where we differ in approach, philosophy,
and in interpretation of the evidence.
Because of the exceedingly brief time allowed us to study the
majority report and prepare our statement, and because of the short­
comings of the staff report, we are forced to be brief and cannot
attempt to develop a report as affirmative and constructive in tone as
we had hoped. We can only set forth what we think are some of the
chief errors and limitations of the report and what we feel to be more
tenable and reasonable policy positions.
Our remarks will be made under three main heads: (I) The general
character and quality of the majority report; (II) a brief and neces­
sarily selective evaluation of the findings and recommendations of
the main sections of the majority report; and (III) some concluding

In undertaking this study of employment, growth, and price levels,
the Joint Economic Committee had a magnificent opportunity—a
$200,000 opportunity—to define the issues, to identify gaps in our
knowledge, to recommend agreed-on changes in public policy, to focus
attention on the sources of disagreement, and to improve congres­
sional and public understanding of the various goals of economic policy.
On the whole, the study itself was conducted in a competent and
objective manner. The hearings were well balanced, and at a high
level. Many of the top economists of the profession contributed
freely of their time, talents, and wisdom. A literature was assembled,
both in the hearings and in the special studies, which reflects credit
on the committee, on its special staff, and on the economics profession.
In it are found a wealth of useful data, as well as a diversity of views
and policy suggestions on many points. In these rich contributions,
the committee may take pride.
These standards were not, unfortunately, maintained in the com­
mittee's staff report, published last month (“ Staff Report on Employ­
ment, Growth, and Price Levels," 86th Cong., 1st sess., Dec. 24,
1959). We regret to say that, in our opinion, this report does not
meet high professional standards. While there is much valuable
material in it, it is marred by partisanship, by opinions and assertions
not supported by the evidence, and by significant inconsistencies and
serious omissions. We know from working with the special study staff
that the report does not do justice to their individual and collective




As a basis for sound policy recommendations, the committee needed
a good staff report. Such a report would have included an objective,
competent, and scholarly summary and analysis of the many mag­
nificent papers prepared conscientiously for the committee by out­
standing economists from all over the country, from, all branches of
economics, from all shades of political opinion, and from all types of
employment which economists pursue. By summarizing, comparing,
and analyzing this great wealth of material, together with the thought­
ful, generally excellent, and sometimes brilliant testimony of the wit­
nesses, the staff could have discovered areas of agreement, isolated
causes of disagreement, and focused attention on major issues. Then
the majority and minority reports could have made real and lasting
contributions to the great debate on economic policies that should
always characterize our democracy.
Now we come to the last stage of the study, the committee report
itself. In spite of many sound policy recommendations in which we
join, the majority report is distinctly disappointing.
Our differences are not so much differences of objectives, but differ­
ences as to means of attaining objectives, differences in analysis,
differences in priorities, differences in notions of what the facts are,
and differences in interpretation of facts and history. These differ­
ences were reflected in the hearings and special studies and should
have been honestly and explicitly set forth in the final report. To be
of maximum value, the study of employment, growth, and price levels
should culminate in a candid expression of what we know, what we
do not know, and what, in the light of both our knowledge and our
ignorance, we should be doing to improve our knowledge and our
In view of the important responsibilities of the Joint Economic
Committee and its past record of economic statesmanship, and in view
of the high aims and anticipations of the study on employment,
growth, and price levels, we deeply regret that the majority are pre­
senting a report that is partisan, cavalier about simple rules of logic
and evidence, and disrespectful of legitimate differences of values,
opinions, and judgments.
The main deficiencies of the majority report, as we see them, are
as follows:
The majority report is needlessly partisan .— One of the impor­
tant functions of a report like this can be to narrow the range of dis­
agreement on such matters as employment, growth, and price levels.
But by the unmistakably partisan orientation of the analysis the re­
port instead tends to drive us apart. This was unnecessary.
For example, in the discussion of “ performance” with respect to the
three majority-stated goals, the partisanship is particularly marked.
It is perhaps understandable (though basically erroneous, we believe)
that 011 the first two of these goals, employment and growth, the ma­
jority talk about problems since 1953. However, when the majority
then talk about inflation as if it has been a worse problem since 1953
than before, the partisanship reaches an extreme.
Why should the time periods and terminal dates used in both staff
and committee reports be invariably and obviously juggled to put the
worst possible light on the record of the present administration, and
exalt the record of previous Democratic administrations? Why, by
implication, should the report continuously convey the false impres



sion that we have not recently made any progress in stabilization and
other policies and that we were more successful under the previous
administration? The facts show the opposite. Why should congres­
sional responsibility be asserted so righteously on policy formulation,
and then disclaimed so piously on unfavorable policy results? These
are just a few of many similar questions.
(2) The majority report is unbalanced and evasive.— Any report of
this nature, of course, must be somewhat selective; seemingly, how­
ever, this selectivity was not designed to provide a balanced picture
of the views of the various authorities. Dubious assertions are made
on the basis of flimsy or inadequate evidence, while the weight of
other evidence is disregarded. Many real problems are pushed under
the rug, conveying a misleading impression to the reader that there
are no costs or hard choices involved in trying to pursue several policy
goals at the same time. It is not enough to be clever; a report of such
importance should be truthful. To be truthful, it is not enough to tell
nothing but the truth— it is necessary also to tell the whole truth.
(3) The majority report is internally inconsistent.— How can a whole
new set of selective controls, a theme which runs through the report,
be reconciled with recommendations to make the economy more
flexible and responsive to consumer demands? How can the report
find market power to be a cause of inflation, requiring more vigorous
antitrust enforcement for business, and yet fail to meet squarely the
question of market power in the hands of unions? 1 How can the
report speak blithely about our “ capacity to produce goods and serv­
ices consumers want and need” and yet call for growth in terms of
gross national product with apparent disregard for consumers’ pref­
erences as to work or leisure, current or future consumption, services
or durables? Plow can the report find structural shifts in demand
and output to be a major cause of inflation, and yet disregard the
implications of the fact that shifts of such magnitude would create
some serious labor market dislocations and increase structural unem­
ployment? Peaceful coexistence among many of the majority’s ideas
is not possible within the boundaries of one report.
We regret that we must say these things about a report which
nevertheless does contain some commendable and worthwhile policy
recommendations. Fortunately, many of the recommendations are
unrelated to the shaky analysis and extraneous commentary which
accompanies them. But these sound policy observations are placed
at a severe disadvantage, for they have to fight hard for a hearing
against the contradictory babble that swirls around them.
These general comments are supported in the section-by-section
evaluation of the majority report which follows.

In the short space of time available to the minority, and lacking a
sound and objective staff report to rely upon, we could not possibly
prepare a comprehensive constructive report of our own or a thorough
critique of the majority report. By going through their report section
by section, however, we can focus attention on what we believe to be
some of the main issues and highlight some of the major areas of
agreement and disagreement.
i See Senator Javits’ note to sec. 6.



1. The Nation’s economic objectives
The majority reduces our economic goals to three: economic
growth, high and stable employment, and stability in the general
level of prices. Certainly, these are important goals which we all
seek. But, is this an exhaustive list? Surely it is not. There are
other important economic goals, and if these are not also made
explicit, we think it is impossible to establish priorities and resolve
Virtually all countries and economic systems share these three
major goals. The really significant differences among economic
systems arise out of the interactions of these goals with other goals.
Fundamentally, it is our great regard for and our realization of the
goal of economic freedom that distinguishes the structure and per­
formance of the American economy from that of the Soviet Union.
At the minimum a list of major economic goals should include
economic freedom, economic efficiency, economic stability (both price
level and employment), economic growth and economic security.
Some of these additional goals are implicitly adopted by the majority
in discussion, but we cannot have “ the very clear concept” of objec­
tives which they call for if the list is incomplete and the relationships
among the goals— the circumstances under which they conflict with
or complement each other— are never carefully explored.
Economic freedom is an end in itself, one which Americans very
highly prize.
Economic freedom means economic opportunity for the individual
as a seller of his services and output, and also as a buyer in markets
responsive to his wants. It allows individuals with initiative, imagi­
nation, and faith in their own ideas to break out of the rut of tradition
into new and more productive endeavors. Economic freedom, with
its challenging opportunities and its built-in disciplines, is a powerful
instrument for promoting economic growth, efficiency, and welfare.
But, because of risks, frictions, and imperfections in the economic
structure, economic freedom ma}^ at times conflict temporarily with
economic stability and economic security. In view of the majority’s
forthright and correct condemnation of price control and of their
intense interest in economic policy since 1953, it is a striking omission
that they say nothing of the successful abolition of price controls in
1953. Economic freedom, and thus the conditions that promote
economic efficiency, were thereby increased, while significant progress
was made in maintaining price stability.
Economic efficiency means that our productive resources are allo­
cated among competing uses, both private and public, so as to produce
the greatest output of the right things at lowest cost. Maintenance of
economic efficiency requires that the economy be very flexible, capable
of adapting promptly and smoothly to changing consumer, business,
and public demands. It means that public and private consumption
and investment reflect the true preferences of the people in light of
the relative scarcities involved. This important objective is not ex­
plicit in any of the three goals which the majority set forth as allembracing.
We want our economy to be efficient, whether we grow at a slow
rate or a fast one. Economic efficiency complements growth because
as it improves we get more output from a given set of resources and
because meaningful, sustainable growth requires the same kind of



flexibility and resource mobility that promote efficiency. Efficiency
in some ways complements stability; no one would argue that mass
unemployment makes for an efficient economy. In some ways, eco­
nomic efficiency does conflict with stability and with security. The
way to reconcile these objectives is to work toward improving the re­
sponsiveness of the economic system and the enlargement of economic
opportunity for all.
Economic growth, economic freedom, and economic efficiency tend
to reinforce each other. But economic growth typically involves
changes, with effects unevenly distributed. It rarely is to be had for
free— it upsets the status quo, it disrupts and bankrupts, it makes
obsolete existing skills and capital assets. Growth may then conflict
to some degree with stability and security, though in the long run it
enables us to strengthen economic security.
Stability and security go together in many respects. Increased
stability of employment provides those willing and able to work with
an increased security in steady incomes. Society can attempt to
provide security by preventing economic change or adjustment to it,
but this can be and often has been a terribly costly and temporary
route to security, clearly one which is detrimental to the objectives
both of growth and of efficiency. Excessive concern with either sta­
bility or security can jeopardize economic freedom, efficiency, and
growth. To pretend otherwise is to delude ourselves.
Given our present knowledge about economic processes, and assum­
ing no dramatic improvement in the adequacy and timeliness of the
flow of data on which policy must be based, it seems fair to say that
the rate at which we can improve the overall performance of our
economy will depend heavily upon our ability to increase the com­
petitiveness of our markets, raise the mobility of labor, and reduce
price rigidities.
In view of the heavy current concern about growth, we wish that
the majority had made one point unmistakably clear: Growth which
is promoted by means which erode freedom and efficiency is likely to
produce only “ ersatz” growth. Whatever the numbers and rates may
seem to show, force-fed growth will tend to distort the economic struc­
ture and lessen its capacity to satisfy our private and public wants
and needs. Economic growth is meaningful only as it provides us
with more of what we most want, both as individuals and as citizens
vitally concerned with the security of our Nation and of the free world.
It is interesting to speculate about what the Russian economic growth
rate would be if we were able to measure Russian output in terms of
the values put on it by the Russian people. Clearly, the figures would
fare poorly in a comparison with those derived from official sources,
based, of course, on “ administrative” valuations.
Our basic point is that the goals of economic policy are far more
complex than the majority report suggests. Our dissatisfaction is
not primarily with what the majorit}^ says about our national economic
objectives— by and large we agree. Our dissatisfaction is with what
they do not say. The section might more properly be entitled “ All
This and Heaven Too,” for it leaves the ridiculous impression that
perfection is easily and costlessly attainable. This is not a balanced
and nourishing diet for anyone to set before the American people— and
we regret that it was served by the majority of the Joint Economic
50553— 60-------6



2. Performance of the U.S. economy in recent years

Throughout the majority report, figures around 4.5 percent for
annual growth in total production of the U.S. econonw are frequently
mentioned. This
percent figure turns out on examination to be as
phony as a 4^ dollar bill.2
Figures around 4.5 percent are used in two quite different respects,
referring to: what the majority allege the U.S. economy could do over
a long future period; and to what they claim the U.S. economy did do
in the (artificially selected) years 1947-53. The repeated and alter­
nating use of essentially the same figure both for the longrun “ goal"
and for the experience of 1947-53 hardly gives the impression that the
majority want it to be thought of as a mere coincidence. Accordingly,
there ought to be some connection between the policy recommenda­
tions which are proposed to achieve this goal and the policies which
were followed in the 1947-53 period. However, we search in vain for
any such connection. On the contrary, on searching carefully, we
find a set of explanations which clearly show up the period 1947-53 as
totally unrepresentative, and not one we would want to repeat; and
we find that there is no basis in fact for the 4.5 percent figure as an
appropriate goal in the future.
In the words of the majority report:
After the inevitable decline of total output at the end of
World War II, growth resumed in 1947 was interrupted by
the recession of 1949, and then continued at a very high rate
during the Korean loar. [Our italic.]
At other points in the majority report, it is also conceded that the
inflationary boom of 1946-51 had something to do with the pent-up
demands of consumers because of World War II. To make the rate
of increase as large as possible, the majority selected the year of lowest
output in the postwar reconversion period as their base, and calculated
the growth from this point through 1953, the year of peak government
spending in the Korean war boom. Are we seriously expected to use
this period as a guide to the achievement of a high rate of growth— a
period of postwar conversion, forced draft production to break the
bottlenecks in satisfying pent-up consumer demand, wartime re­
mobilization, and rampant inflation? Surely, adoption of this warreconversion-war pattern as our ideal would be tantamount to throw­
ing our policy goals to the winds.
We cannot believe that this combination of policies is what the
majority has in mind when they repeatedly hold up for favorable
comparison the growth achieved in the period 1947-53. Surely the
nature of the two booms in that period— the post-World War II boom
to satisfy pent-up demands, and the Korean war boom-—must have
slipped their minds, or has been blotted out by their hypnotic fascina­
tion with a 4.5 percent growth rate. Actually, the economy may have
done less than it was capable of doing in that period; for the rate of
growth of total production from 1945, when World War II production
was slowing down and reconversion was just beginning, to the peak of
the Korean war boom in 1953, was less than 2 percent per year, which
on the majority’s reckoning is a low growth rate. We believe that we
should, look to other periods for our main guidance as to what our
2 S e n a to r J a v its n o te s h is a ffir m a tiv e r e c o m m e n d a tio n s o n th is it e m as se t fo r th in h is a d d it io n a l v ie w s .



econoxxi}^ can and should accomplish both qualitatively and quantita­
The most important point to remember in this connection is that
growth is desirable only if it consists of goods and services that the
American people want. Artificially stimulated growth producing the
wrong things, or in response to previous shortages, is not the kind of
growth we want to aim for in the long run. Sound sustainable growth
depends mainly on the efficient operation of the forces promoting
growth in the private sector of the economy. This is a point which
the majority recognize well enough when they think about it; they
ought to have kept it in mind when formulating their policy recom­
A somewhat misleading use of statistics is also apparent in their
discussion of unemployment. They assert that unemployment rates
have been rising, and state, “ During the recession of 1949 unemploy­
ment reached a level of 5.9 percent. In the 1957-58 recession,
however, the unemployment rate was 6.8 percent.” Taken at face
value, this is simply false: in both these recessions, the maximum
unemployment rate was over 7 percent. The figures given in the
majority report, as just quoted, are the annual averages for 1949 and
1958, respectively; the difference between these 2 years reflects the
fact that all the peak unemployment months of the 1957-58 recession
occurred in the calendar year 1958, whereas some of the peak months
of the 1949 recession occurred in early 1950. In other words, their
comparison is based on statistical artifice.3
The majority’s comparison of 1956-57 unemployment with that in
earlier boom periods is also inaccurate. Elsewhere they note correctly
that the 1956-57 boom was characterized by major shifts in the com­
position of demand and output, with some sectors growing much more
rapidly than others. Unfortunately, they did not also note that such
a period necessarily involves many people changing jobs, as they
seek better opportunities in the expanding industries. People seeking
work, even though they change employment in response to better
opportunities, are counted in the figures in unemployment; and this
element in the situation was undoubtedly more important in this
period than at most other times. Another factor that is important,
as was pointed out in Study Paper No. 6, is the relatively larger
number of inexperienced persons looking for work in 1956-57 than
in 1948-49. The same study paper shows that in the 1955-57 period,
10 percent of the unemployment was due to voluntary shifting from
one job to another; 20 percent was due the entry of new workers,
nearly all of whom show up among the unemployed before they show
up among the employed; and another 20 percent—bringing the total
to 50 percent—-was due to seasonal fluctuations. Whatever the un­
employment statistics show (and of course it is important to study
them to learn what we can from them), they show no distinct trends
toward higher rates of unemployment.
The majority turn next to discussion of the recent record of inflation.
Here, the preoccupation with the 1953-59 period seems spectacularly
inappropriate, since the greatest difficulties with inflation obviously
occurred in the years preceding 1953. The Consumer Price Index in
A c t u a l l y , th e g a lle y p r o o fs o f th e m a jo r it y r e p o r t, th e o n ly v e rsio n w e h a v e h a d in p r e p a r in g o u r r e p o r t,
re a d “ 1 9 5 3 -5 4 ” w h e r e o u r q u o t a t io n r e a d s “ 1 9 5 7 -5 8 .”
T h e fig u r e 6 .8 is corre ct for 1958.
T h e 1954 figu re is
5 .6 p e rc e n t a n d th e h ig h e s t m o n t h is ju s t o v e r 6 p e r c e n t, b o t h lo w e r th a n 1949.



the past 20 years has risen at an average rate of 3.8 percent per year,
but the rate was 5.0 percent before 1953 and only 1.3 percent from
1953 on; and 90 percent of the total rise occurred before 1953.
Except for the period from early 1956 to early 1958, the Consumer
Price Index has been remarkably stable— since President Eisenhower
took office, if one wants to be as political as the majority report; since
about a year before that, if one wants to tell the whole truth fairly and
without partisanship. Furthermore, as was brought out in the papers
and testimony of witnesses, and as the majority acknowledges at one
point, the Consumer Price Index certainly overstates, perhaps sub­
stantially, the rise in prices.4 We do not want to minimize the
dangers of inflation; indeed it is only as we are alert to these dangers
that we can have success in dealing with them. But we also do not
want to see exaggeration of the amount of inflation that has actually
occurred, or misrepresentation of when it occurred.
Finally, the majority turn to what they estimate our growth
potential to be. It is important to bear in mind, despite the impres­
sion they give to the contrary, that there is no connection whatever
between their discussion of the recent performance of the economy
and their estimates of future growth potential. The latter represent a
self-contained study almost totally unrelated to anything else in their
report, including their policy recommendations. In effect, they
attempt to estimate a range of possible growth rates that the economy
may be expected to achieve without regard to policy actions at the
Federal level.
A key element in the majority’s estimates of potential growth is the
expected growth in total man-hours worked, which in turn depends on
the growth rate of the labor force and on the rate of decline of annual
hours of work.5 Both of these variables are at present a matter for
private decisions and will probably remain so. Since they place such
emphasis on the achievement of a 4.5 percent rate of growth, some
clarification of their attitude on this point would be helpful. We of
the minority definitely favor leaving this matter to private decisions.
The other principal element in the majority’s calculation of the
range of possible future growth rates is the growth and modernization
of the capital stock, through investment in plant, equipment, and
other productive capital. We recognize the importance of this factor,
but their calculations are misguided to the point of foolishness. As
the labor force and total hours worked increase, a corresponding in­
crease of plant and equipment is needed merely to keep the new work­
ers as well equipped as the previous members of the labor force. Thus,
a certain amount of annual investment goes to widen the capital stock.
Any additional investment, beyond that for the necessary widening,
4 I n th is c o n n e c tio n , it m a y b e n o t e d th a t th e th r e e la rg e st m a il o r d e r h o u se s, a ll c a r r y in g c o m p r e h e n s iv e
lin e s o f c o n s u m e r g o o d s, h a v e r e c e n tly r e p o r te d t h a t on th e a v e ra g e th e ir c u rr e n t p rice s are a c t u a lly a tr ifle
l o w e r t h a n t h e y w e re a fe w y e a r s a g o .
A l t h o u g h th e co v e ra g e o f th e se m a il o r d er h o u se s is n o t as b r o a d
as th e in d e x , it is s ig n ific a n t t h a t as th e in d e x is c o m p u t e d n o m a jo r c o m p o n e n t sh o w s su c h b e h a v io r .
W e
r e c o m m e n d t h a t th e B u r e a u o f L a b o r S ta tis tic s u n d e r ta k e , or c o n tr a c t w it h c o m p e t e n t o u ts id e e x p e r ts
t o u n d e r ta k e , s p e cia l s tu d ie s to e s tim a te th e a m o u n t of o v e r s t a te m e n t o f p rice rises in th e to t a l in d e x d u r in g
th e past decad e.
T h i s s h o u ld b e d o n e in a d v a n c e o f th e w o r k a lr e a d y c o m m e n c e d for e v e n t u a l r e v is io n o f
th e in d e x .
5 T h e m a jo r it y m e n tio n s a lso th e le v e l of u n e m p lo y m e n t , a p p a r e n t ly w it h o u t u n d e r s ta n d in g t h a t th is
affe c ts p r im a r i ly th e le v e l o f e c o n o m ic a c t i v it y r a th e r th a n its r a te of g r o w th .
I f u n e m p lo y m e n t a v e ra g e s
a r o u n d , s a y , 4 p e rc e n t r a th e r th a n 5 p e r c e n t, th is w ill i m p l y a b o u t 1 p e rc e n t h ig h e r o u t p u t on th e a v e r a g e ,
a n d g r o w th w ill o p e ra te on a h ig h e r b a se .
O th e r th in g s e q u a l, th is is, of co u rse , d e s ir a b le ; b u t it d o e s n o t
a ffe c t th e r a te o f g r o w th .
A l s o , th e m a jo r it y o v e r lo o k s th e fa ct th a t a h ig h r a te of in crease in th e la b o r force n e c e s s a r ily te n d s to
in c rea se th e u n e m p lo y m e n t fig u r es, m a in ly b e c a u se each n e w e n t r a n t is c o u n t e d as u n e m p lo y e d w h ile h e
lo c a te s h is first j o b , b u t p a r t l y a lso b e c a u s e th e r e are u s u a lly fe w er e m p l o y m e n t o p p o r tu n itie s for in e x ­
p e rie n c e d th a n for e x p e r ie n c e d w o r k e r s.



is available for deepening of the capital stock; that is, for improving
the quantity and quality of the capital which each worker employs.
The widening is necessary to maintain the level of output per manhour; it is the deepening that increases output per man-hour.
A table presented by the majority purports to show that a 4.5 per­
cent rate of growth is quite possible. Perhaps it is; but we fail to see
the significance of the calculations. The numbers presented might
just as well have been pulled out of the air. There is nothing in either
the staff report or the majority report to tell the independent reader
how those growth potentials were derived. Reference is made to a
forthcoming study' paper, but surely conclusions cannot be drawn
from evidence not yet presented. The majority appear to be present­
ing conclusions from which the evidence will be derived later. A close
comparison of the majority’s alternative computations of growth po­
tentials, however, seems to show that the majority attributes fan­
tastically high rates of return to any extra deepening of our capital
stock that we might achieve. If this is really a valid conclusion to be
drawn from their undisclosed premises, then the majority should
strongly champion public policies that favor investment at the expense
of current consumption. We are still in the dark, however, as to what
these estimates of growth potentials really mean.
We must regretfully conclude that the 4.5 percent growth figure
advanced by the majority is simply slick statistical prestidigitation,
with no discernible relation to the real world or to sound economic
analysis. Perhaps the achievement of this rate of growth is possible
or desirable, or both possible and desirable, but the majority have
failed to provide any grounds for establishing whether it is or not.
It is especially regrettable that the majority has indulged in a
“ numbers racket” with growth rates, for every single witness at our
final integrating or capstone sessions at the end of October warned
against this (except one who did not mention growth at all). It was
indeed remarkable (as the press noted at the time) that with so diverse
a group of experts, selected under the direction of the majority, not
one gave evidence in support of the majority’s position that a target
growth rate should be aimed at. On this point as on others, the
majority might as well have recorded their prejudices before the
$200,000 was spent—indeed, we have no evidence that they did not
do so.
All such estimates are necessarily slippery and complex, as one
expert witness after another pointed out in the committee’s hearings.
The fact that the majority’s calculations depend heavily on the as­
sumed rate of population growth is just one of several reasons why
projections of the rate of growth of total production are not particu­
larly instructive. Many of our witnesses suggested output per capita,
or, even better, output per man-hour. In any case, as several of
them pointed out, our understanding of the economics of growth is
still very primitive. The calculations presented by the majority
amply bear out this proposition.
Still more fundamental, however, is the erroneous and unstated
assumption of the majority that any increase in growth, no matter
what the cost, is desirable. This is an easy error to fall into, par­
ticularly in trying to promise all things to all people in the hope that
no one will check up on possible inconsistencies. When account is
taken of the costs of growth, the right policy for growth at once



becomes apparent. The appropriate goal on growth is that we should
be able to meet our collective needs and responsibilities and to provide
the fullest opportunity for each individual to devote whatever share
of his disposable income he wishes to providing for his future well­
being, and for that of his children and descendants. The outcome of
such choices by individuals will be a certain longrun average rate of
change in total production. There is no basis for saying that either
a higher or a lower rate of growth than this would be superior or
desirable. Our policy toward growth should simply be that these
opportunities should be kept open in such a way that the choices made
can be based on the real facts of our productivity.
3. Fiscal policy
We join the majority in many recommendations of this section:
that Government expenditures programs not be conducted in an unstabilizing manner; that we strengthen our automatic stabilizers, such
as the Federal-State system of unemployment compensation; that we
overhaul our chaotic Federal tax system to eliminate special dispensa­
tions and other features which distort and inhibit growth, create
systemic inefficiencies, erode the tax base, and undermine confidence
in our self-assessment tax system; that proper accounting procedures
be used in the Federal budget.
These recommendations deserve and should receive substantial
bipartisan support (though perhaps they will meet bipartisan oppo­
sition, too).
Much of the majority’s discussion of fiscal policy revolves around
the question of the proper mix between monetary policy and fiscal
policy. The majority believes that in recent years we have relied
insufficiently on fiscal policy and excessively on monetary policy.
The majority criticizes this policy mix on grounds that it is detri­
mental to growth, that monetary policy is discriminatory in impact,
and that fiscal policy has “ prompter and larger effects/’ while mone­
tary policy suffers from “ inevitable delays before its effects are felt.”
We question the validity of such sweeping assertions.
Before raising such questions, however, we heartily welcome the
majority to the side of fiscal responsibility as a powerful anti-inflation
and growth-promoting weapon. In plain language, fiscal responsi­
bility means the development of a healthy budget surplus during
good years. We applaud the majority’s acceptance of the simple
truth that stabilizing policy cannot be a one-way street, its recog­
nition that if we are to have budget deficits in recessions (as is some­
times inevitable and desirable), then we must all work to insure
substantial budget surpluses during boom periods. The majority
report is quite right when it says that we have not taken advantage
of the full possibilities of fiscal policy in the postwar period— though
it ignores the complexity of reasons which were responsible, as well
as the interesting and highly relevant question as to which party has
been typically found on the side of fiscal responsibility. At any rate,
the majority must be delighted that the administration’s budget for
1961 projects a surplus for debt retirement of $4.2 billion, and the
administration will certainly be pleased by this new, if not fully
expected, source of congressional support.
While we fully agree with the proposition that too much of the
stabilization job has been dumped into the lap of monetary policy,



we must question some aspects of the majority’s criticism of this
policy mix.
In the first place, the assertion that monetary policy acts selectively
is no criticism at all. Selectivity is rather one of its salutary features,
since, when restraint is necessary, the consumers through the market
decide the priorities. We will take up this question more fully in
the next section.
In the second place, inevitable delays will plague fiscal policy at
least as much as monetary policy, and probably even more. Once we
recognize need for action, decisions on monetary policy can be made
a good deal more promptly than decisions to invoke ad hoc fiscal
policy. Given our present political institutional arrangements, it is
difficult to see how budget and tax policy could be adjusted smoothly
and promptly to the new requirements. Once action is taken, fiscal
policy might well generate more prompt effects, but this is by no means
as certain as the majority’s categorical assertion implies, and they
offer no evidence to support it.
The maj ority recommends vigorous use of ad hoc tax policy for
stabilization purposes. This may have advantages, but whether tax
cuts really work promptly depends on how people react to tax cuts
when they expect their tax liabilities to be increased sharply in the
near future. When all is said and done— considering the time that
would probably be consumed in congressional wrangling over the kind
and extent of tax cut and considering the uncertainties of taxpayers’
reactions—it is misleading for the majority to make these assertions
without pointing out that there is some basis for questioning whether
we have yet reached that state of perfection of knowledge and political
machinery required to give this recommendation much meaning.
We agree that it would be desirable to improve fiscal flexibility.
But until there have been thoroughgoing budgetary reforms, ad hoc
fiscal stabilizers will be inevitably sub j ect to a host of practical
limitations. Indeed, under present arrangements, adoption of the
majority’s recommendations to make ad hoc tax policy our primary
weapon of stabilization policy might well turn out to be unstabilizing.
We agree that the question of the proper fiscal and m oneta^ policy
mix is important if we are to achieve our policy goals to the extent
possible. In boom periods it may well be highly desirable to develop
substantial budget surpluses, as they would work to ease the burdens
on monetary policy and to promote private capital formation. But
increased private investment requires an increase in the private
savings-consumption ratio. If the majority really wants to use budget
surpluses and easier money to promote such growth, it should declare
itself in favor of higher taxes on consumption. We hope that the
majority will be willing to face up to its own conclusions.
The majority report contains a number of references to needs
for more adequate, accurate, and timely statistical knowledge as a
basic precondition to sound private and public decisionmaking.
Indeed, the committee's study was, itself, seriously handicapped by
an insufficient underpinning of solid data. Certainly, the greater
reliance on fiscal policy recommended by the majority would require
a shortening of information lags and a closure of some information
SaPsMost of the existing deficiencies in our economic intelligence are
long standing. There is a clear need for major governmental statisti­



cal breakthroughs in such fields as prices, wages, costs, savings,
investment (including inventory investment), consumer finances,
productivity, and international trade.
The majority could have been most helpful had they set forth
in some detail a program for statistical progress. In the long run,
the goals of economic policy would thereby have been better served.
We will not comment on the specific reordering of budget priorities
recommended by the majority. These priorities are for the people
and their elected representatives, the whole Congress, to decide. As
everyone has his own catalog of preferences and priorities, the only
right schedule is a consensus arrived at through public discussion
and democratic debate. We point out, however, that unless budge­
tary procedures are substantially improved, the budget will necessarily
remain an imperfect instrument for ordering national priorities in a
rational manner.
4. Monetary policy
To the majority's section on “ The Purpose of the Treasury-Federal
Reserve Accord of 1951” we give our wholehearted agreement and
support. We recognize and commend the role played in 1951 by
the distinguished chairman of this committee in helping to bring about
the return to responsible monetary policy and thus end the rampant
inflation of the years prior to 1951. We are encouraged by the
majority's firm rejection of the “ needs of trade” doctrine of credit and
There is a basis for the assertion that periods of credit stringency
bear more heavily on some sectors, especially that of residential
construction, than on others. It should not be forgotten, however,
that the experience of the American economy indicates that residential
construction has its best years when the economy is pulling out of a
recession, such as the years 1950, 1955, and 1959. In the later phases
of expansion, when heavy capital goods spending reaches extreme pro­
portions, residential construction tends to be crowded out, even if
money is kept artificially cheap (as it was, for example, in early 1951).
Cheapening of money, in the absence of an offsetting fiscal policy,
leads to inflation under such circumstances. It does not make
building materials more plentiful, or increase the other resources for
which residential construction competes with industry ; it just makes
them more expensive.
In view of the extreme positions taken in the staff report on mone­
tary policy, we are somewhat relieved at the moderation, and even
diffidence, with which the majority report toys with the idea of cheap
money. It asks only a moderate increase in the rate of growth of the
money supply, a modest lowering of interest rates, and only occasional
Federal Reserve intervention in the long-term Treasury bond market.
It probably would be unreasonable for us to be too critical of their
position, or to expect too much of them, in this delicate policy area
at this time.
In fact, it may turn out that the post-World War II tendency
toward greater efficiency and speed in the turnover of cash and demand
deposits is about spent, and that the expansion of the money supply
in step with the growth of physical output can be resumed without
inflationary consequences. We would all welcome this, just as we
would welcome any opportunity for a noninflationary lowering of



interest rates. It would hardly be wise to take such a development
for granted, and it would be the height of folly to change present
policies on such a possibility. We believe, therefore, that decisions
as to when and by how much the money supply should be increased
are best made by the monetary authorities, on whom this administra­
tive responsibility has been placed by the Congress. We would
also leave to them the responsibility for making the technical operating
decisions— such as whether to emphasize government bills in open
market operations or to modify rediscounting rules or reserve ratios—
with which the majority seem so concerned.
The question of selective credit controls is too important and too
highly controverted a subject to be embraced without qualification,
as the majority does.6 We seriously question the rationale for the
majority’s recommendation for “ a detailed study * * * to determine
what can be done to reduce the instability of plant and equipment
investment.” We cannot believe that the majority realized the full
implications of this proposal. That all sectors of the economy do not
expand at the same pace in a boom is hardly surprising. The fact
that some sectors are growing rapidly, and sometimes encountering
bottlenecks, means that these sectors, in terms of expressed and
expected consumer desires, have the most valuable contributions to
make to improvements in the standard of living and to basic produc­
tive capacity. It is indeed true that artificially choking off expansion
in these sectors would have an incisively deadening effect on upward
price pressures. It would also have an incisively deadening effect on
growth and welfare.
Thus, the majority are in a paradoxical situation. Making a great
clamor, they charge that growth has been stifled in the name of fighting
inflation. Then they recommend policies which would accomplish
precisely that.
The so-called discriminatory effect of general monetary restraint,
which so exercises the majority, is simply the result of a free expression
of the market choices of individuals, who naturally expend their
limited resources so as to get the greatest benefit from them. Where
they demand more than can be supplied without price increases, the
price increases indicate where they most want growth. These
increases point to areas where the contribution of this growth to con­
sumer welfare will be greatest. This is just the kind of discrimination
that fosters sound, meaningful growth.
5. Debt management
The management of the Federal debt presents man}^ complex and
continuing problems, some of which could be ameliorated or elimi­
nated. We agree with the majority that some revision of both
Treasury and congressional policies is probably in order.
The majority report makes many recommendations on debt man­
agement policy that merit careful study and consideration— bond
auctions, callable bonds, advance funding, etc. We of the minority
simply have not had sufficient time to evaluate these proposals. We
must, therefore, reserve judgment on many such specific matters until
we can give them the attention they require. But we do urge that
Congress and the administration continuously explore new approaches
S e n a to r J a v its n o te s h is v ie w t h a t c r e d it c o n tr o ls a v i t a l a sp e c t o f g o v e r n m e n t a l as w e ll as p r iv a te
e c o n o m ic p o lic y a n d t h a t s t a n d b y a u t h o r i t y in a s it u a t io n o f t h e p r e s e n t n a t u r e m u s t b e g iv e n se rio u s
c o n s id e r a tio n .



to debt management. Clearly, we have not yet learned to live as
comfortably with our large Federal debt as is possible.
The majority recommendation against removing the 4.25 percent
interest rate ceiling is crucial.
At the beginning of this part of the report, the majority promises
to discuss “ the arguments and policies affecting the interest rate
ceiling.” There follows approximately 10 pages on a large number of
highly technical financial and debt matters which bear on the level of
interest rates but not directly on the principles involved in determining
whether an interest rate ceiling is a wise economic policy. In the
seventh and concluding section, the discussion comes back to the
interest rate ceiling but just long enough to conclude—with no dis­
cussion or evaluation of the specific issues involved— that the 4.25percent ceiling should be retained.
Quite apparently the majority position is this: They do not like
many present congressional, Federal Reserve, and Treasury policies
and certain institutional arrangements; therefore, they will not sup­
port removal of the ceiling. This is nothing but political blackmail—
with the public the main loser.
The interest rate ceiling is a current and pressing problem. By
contrast, the reforms the majority desire are, in the main, longrun
changes which will require both administration and congressional
action. Meanwhile, the interest rate ceiling continues to be an imme­
diate and pressing matter. The issue has been studied exhaustively
and, though there is general agreement among economists that its
effects are mischievous, the majority refuses to act. The majority’s
position is all the more difficult to justify, because they know and
admit that the ceiling should be removed.7 They might just as well
refuse to vote any defense expenditures because their views on the
defense mix do not coincide with those of others. The way for men
of good will to resolve differences in opinion as to policy goals and
means is by open discussion and debate, not by blackmail.
It is hard to follow the position of the majority members on debt
management. At one point they say debt management should inter­
fere as little as possible with monetary policy, yet at another point
they want the Federal Reserve System to help neutralize what would
be an essentially procyclical funding policy. They recommend that
the debt ceiling be removed. Yet they do not recommend the elimi­
nation of the 4.25 percent interest rate ceiling now^— even though
they admit it will ultimately have to be done. Nor do they mention
the 4.25 percent ceiling on savings bond rates, which also should be
Actually, refusal to abolish the 4.25 percent interest rate ceiling
provides no ceiling on interest at all. It simply places a ceiling on
maturities (5 years), thus forcing the Treasury to compete with the
multitude of short-term borrowers, sending these rates higher and
higher. This very month the Treasury paid over 5 percent for
money— at a time when a long-term issue might have sold for less
than 5 percent.
We recognize that there are serious limitations in trying to use
debt management for economic stabilization. We are not unsym­
pathetic with the majority position that “ the primary purpose of the
7 S e n a t o r J a v its n o te s h is a ffir m a tiv e r e c o m m e n d a t i o n s o n th is it e m as se t fo r th in h is a d d it io n a l v ie w s .



Treasury with respect to debt management should be to get the best
possible bargain * * *.” However, we could not go along with
them without ironclad assurance that no pegging, long or short run,
is ever to be involved. We certainly would like to keep total interest
payments as low as is consistent with other policy goals. It would
be a costly saving to the taxpayer, however, if attempts to minimize
interest charges were to set in motion pressures leading to less effective
anti-inflation or anti-recession measures.
6. Policies to improve the structure oj the economy
Our future success in improving the performance of the economy
depends in large measure upon the degree to which the economic
structure is adaptable and competitive. We welcome, therefore, the
emphasis placed upon the structure in the majority report. Indeed,
the appraisal of structural problems and the numerous policy pro­
posals for improving defects constitute a valuable and constructive
contribution. Many of the criticisms and proposals advanced are
obviously designed more to stimulate discussion and further ideas
than to be taken at face value, and some say little more than that
something good but unspecified ought to be done. But a number of
the recommendations deserve the serious attention of the American
people and their Government.
We cannot, however, accept the statement that “ our studies have
shown” that “ market power” (no matter which of the majority’s
several arbitrary and inconsistent definitions of market power is used)
has significantly contributed to inflation. The staff report states that
“ There was no generally applicable relationship evident between
union strength and wage changes * *
and Study Paper No. 1
found that “ the degree of price increase in various industries (after
1955) was generally associated with the magnitude of the rise in
demand.” Until an analytically defensible and statistically signifi­
cant relationship is obtained, we shall keep an open mind on the
inflationary implications of business and union market power.
Excessive private market power is incompatible with the goals of
political and economic freedom, renders the economic structure less
responsive to change, and creates economic waste. The minority
endorse, therefore, the majority proposal for expanding and strength­
ening the business antitrust program. We suggest, however, that
there is a solid basis for the caution which led the majority to conclude
that “ the problems of establishing appropriate criteria in this area
[enforcing antitrust legislation against oligopolistic market structures]
are difficult * * *” Market organization and behavior are exceed­
ingly complex in nature and the extent and basis of market power too
diverse to allow easy identification. Much harm, therefore, can be
done by measures which attempt to improve competition by placing
blanket restraints on particular types of business practices or identify
market power with size, concentration ratios, or other superficial
We accept the majority’s recommendations that the Antitrust
Division be given more power to subpoena business records in civil
suits and that “ Congress review the policies of the regulatory agencies
in those industries which are granted exemption from the antitrust
laws.” The principle of prenotification of proposed mergers is sound,
though here we advise caution to prevent needless interference of



government in proper business activities. We also agree that tariff
reduction would make American markets more competitive and should
be continued, where appropriate, with real attention paid to reciproc­
ity; the goal here should be freer world trade, not unilateral reductions
in American tariffs.
The majority assert that “ the exercise of market power by strong
unions has contributed in some degree to the inflation of recent years.”
If the majority believe (1) that strong unions contribute substantially
to inflation and (2) that inflation is to be resisted, then it is reasonable
to expect them to suggest some legal remedies. Instead, we find no
strong call for action to counter union market power, in contrast to
the specific recommendations for action to counter business market
In view of the lack of consistency in the standards and principles
with which the majority report approaches the problems of excessive
business and union market power, the minority cannot but conclude
that this asymmetry in the conclusions of the majority is inspired by
partisan politics.
We join with the majority in recommending measures designed to
improve labor mobility. We strongly dissent from those proposals
designed to reduce the mobility and productive efficiency of labor and
other resources. We congratulate the majority upon their conclusion
that “ uneconomic production activities, which are able to continue
only through Federal subsidies, should be gradually curtailed. This
would free these resources for more productive uses.” We find it
difficult, however, to understand how this eminently sound and con­
structive statement is to be interpreted when accompanied by pleas
for increased subsidies to depressed areas and to small business.
7. The farm problem
The farm problem wall continue to exist as long as we regard the
solution as politically unpalatable. It will end when we develop the
courage to face facts and do what is required. This is nowhere made
more clear than in the majority report. There is a succinct statement
in our staff report:
Since mobility of people and of resources out of agriculture
into other industries is the onl}~ ultimate long-term solution
to the problem, the Federal Government should take all
reasonable measures which facilitate this process * * *
Since the majority report not only fails to deal with, but even refuses
to recognize, the question of transferring resources out of farming,
its recommendations begin and end in sterility.
We agree with the majority that average farm income must be
raised and that we must find a way to accomplish this at reduced
cost to the American taxpayer.
As is stated in the majority report, increased output is likely to
produce less revenue. Yet the majority’s recommendations would
lead to greater production and consequently less dollar volume of
sales than would a free m arket. As the same time, their proposed
new support program would keep people in farming who otherwise
8 S e n a t o r J a v i t s n o te s th e d is c u s s io n
th e a p p lic a tio n o f a n t it r u s t la w s to tr a d e u n io n s
a n d r e g a r d in g m e a s u r e s to p r o te c t thfc p u b l i c in te r e s t In l a d or m a n a g e m e n t r e la tio n s is se t fo r th in h is a d d i ­
tio n a l v ie w s .



would accept other employment. Less sales revenue divided among
more people can only mean lower average earned incomes.
How much would the program proposed by the majority cost the
Government? In neither the staff nor the majority report is there
any estimate whatsoever of the expenditures involved. While we
agree with the principle of limiting payments per farm, whatever the
system of aid to agriculture, neither report seems to recognize that
such a limit would stimulate the legal, though not necessarily the
operational, division of farms, making the cost of the majority’s
recommendations far greater than would appear from the present
number of farms. In fact, their proposal might prove even more
costly than the present program, and it is quite unlikely to produce
the objective of higher average farm income at lower cost to the
Nor would the majority’s suggestions aid those really in need—
the 2.7 million farms which together produce less than 10 percent of
salable output. No plan which bases aid on output, as do both the
present program and that recommended by the majority, can be of
much help to those who have little or nothing to sell. The technical
revolution in farming has made it possible to produce adequate quan­
tities of farm products without the employment of so much labor.
The farm problem will not be solved until many more rural people
have taken the step of seeking their places in other more productive—
and more remunerative— occupations.
We are unclear as to the intent of the vague recommendation: “ To
deal with the low-income problems in agriculture, a rural development
program should be stepped up to a size equal to the problem.” The
rural development program, initiated in 1955 as a cooperative effort
of Federal, State, and local governments and of private agencies,
has made encouraging progress in improving the conditions of lowincome families living in rural areas. The rural development program
includes such activities as improving incomes from farming, providing
more efficient farm marketing, promoting off-farm work, balancing
agriculture with industry, evaluating rural manpower assets, increasing
opportunities through vocational training, attaining better health, and
improving basic education. We welcome the majority’s support for
this administration program, and we count on their support for the
substantial increase in funds which the President has recommended
for this program in his 1961 budget message.
It is unfortunate that the majority was driven to reject the tenor
of the staff report and so many of its excellent recommendations—
the use of the soil bank to retire whole, rather than sections of, farms ;
the halting of wasteful and unnecessary reclamation projects; the
enforcement of cross-compliance provisions; and the improvement of
our overseas disposal programs.
In spite of these criticisms, we find much in this section of the
majority report that we can commend; for example, the criticism of
present acreage controls and the suggestion that Government pur­
chases of farm commodities be ended.
The farm issue confronts this Nation with one of its most serious
economic and social problems. We are distressed that the majority
of this committee felt compelled to dodge altogether the central issue
involved— the transfer of resources out of agriculture. We can and
we must devise a farm program that will bring about these transfers



voluntarily, and will bring them about not in desperation but in
response to opportunities for self-betterment.
8. America’s changing position in the world economy
We congratulate the majority on their statement concerning the
U.S. position in the world economy. At a time when the clamor
associated with the present outflow of gold has stampeded many
observers into careless analysis and hasty suggestions, their sensible
review of the issues and sound recommendations deserve praise.
The report points out what is usual and what novel about the present
balance of payments deficit; we have had deficits in 9 of the last 10
years, but the loss of gold in 1958 and 1959 was at a rate considerably
above the average. This resulted from the improvement in the com­
petitive position of foreign countries, likely to be permanent, and
from certain special features, likely to be reversed. We agree that
the present situation calls for caution and close attention rather than
drastic revisions in policy and we accept the specific recommendations
appearing in the majority report.


We regret that these minority views have necessarily been confined
to comments, many of a negative nature, on the majority report. We
should have preferred to provide some useful guidelines to economic
policy; indeed, as we stated earlier, we would have preferred to join
in a unanimous report of that character. In the light of the short­
comings of both the staff report and the majority report, as well as the
limitations of time, however, our statement had to take the form that
it has.
The American economy has served the American people magnifi­
cently. That statement can be made for the Eisenhower period if one
wants to be as political as the majority report; or it can be made for
the whole postwar period if one wants to tell the whole truth fairly
and objectively. That statement can be based on purely quantitative
considerations if one wants to be as materialistic as the majority re­
port; or it can be based also on the quality of American life: growth
of freedom, tolerance, and nondiscrimination; improvements in edu­
cation and broadening of educational opportunities; elevation in the
tastes of enormous numbers of people for good literature, fine art, and
great music; increasing participation in travel, at home and abroad;
more comfortable and safer working conditions; greater participation
in civic affairs, adult education, and religious organizations; remark­
able breakthroughs in medical research and such broad application
of the results as virtually to eliminate several causes of death that
recently were common; astonishing advances in science and wide­
spread public appreciation of them; growing provisions for the needy
and unfortunate at home, and generous aid to underdeveloped peoples
On the material side, recessions have been mild, the price level is
now more stable, growth has been satisfactory, and poverty has been
diminished. Obviously, Americans have made significant material



Unquestionably we can, we should, and we will do better in the
future. We concur with the general sentiment of the majority that
wise public policy can improve our performance with respect to all
three of the goals they mention: employment, growth, and price levels.
We also feel that further progress can be made toward the equally
important ideals of freedom, of efficiency, and of security.
The hearings and the special studies laid the basis for a thorough
and constructive appraisal of public policies for achieving these goals.
We hope and expect that students and research workers will find this
literature fruitful for years to come. Nevertheless, despite many
sound recommendations which we endorse, the staff and majority
reports fail to supply what the early phases of the study had made
The minority feels that this study will not be complete unless a
good staff report is first put together. Such a report could form the
basis for a more meaningful appraisal of what we know and do not
know, and for a more constructive and far-reaching series of recom­
mendations for public policies.
While the special study on employment, growth, and price levels
concludes on February 1 of this year, the minority will make every
effort to encourage some qualified group to make an independent,
thorough, and objective staff study. Only with such a study to work
from will we realize the full possibilities which the Congress, the
economics profession, and the public have a right to expect. The
opportunities and the challenges of the times make this job imperative.

P rescott B ush
J ohn M arshall B utler
J acob K. J avits


T homas B. C urtis
C larence E. K ilburn
W illiam B. W idnall



In general, I concur with the findings and recommendations
expressed in the minority’s views. Nevertheless, there are so many
basic economic fallacies in the majority’s report that it is incumbent
upon me to submit additional views to emphasize a few of the many
points of disagreement.
For many months, the committee has conducted extensive hearings,
and according to the majority’s report received testimony from over
100 expert witnesses. In addition, 25 study papers were prepared
by outside consultants. Yet, the majority’s report is at variance with
the conclusions and opinions of many of the witnesses and consultants.
It contains a vast array of proposals which have been presented to the
Congress year after year without their ever securing majority accept­
ance. They deal with subjects as varied as Federal aid to education,
the tariff, national defense, depletion allowances, public housing, and
area redevelopment. None of these topics directly affect the rate of
economic growth which is determined primarily by our ability to
further capital investment.
The higher productivity of American workers has been made pos­
sible because their efforts are assisted by a unique accumulation of
capital to provide tools, equipment, and other facilities. Our econ­
omy is intensive in its use of capital. None of the recommendations
or suggestions provided in the majority’s report would encourage
capital formation or stimulate the production of real wealth, which
is the basis of our economic strength. I f all of the many proposals
were ever enacted into law, we would face national bankruptcy and
ruinous inflation.
The Congress, through the passage of Senate Concurrent Resolu­
tion 13 on March 13, 1959, directed the Joint Economic Committee to
conduct a study of employment and price levels. It provided $200,000
for this purpose.1 The principles formulated in the majority’s report
do not justify such an expenditure of the taxpayers’ money.
In fact, the majority’s report is not responsive to the resolution but,
on the contrary, has been developed as a political document which
deals only with the changes wThich have occurred during the past 6
years. After stating the objectives of the Employment Act of 1946,
the fifth line o f the copy of the majority report which was submitted
to the Committee for consideration contains this unsubstantiated
In the last 6 years, the economy has failed to realize these
objectives. There has been more unemployment than usual
in so-called good times.
It is difficult to justify criticisms of our national economic policy in
the face of an admission that this has been a period of “good times.”
1 S. Con. Res. 13, U.S. Senate, 86th Cong., 1st sess., Mar. 5, 1959, p. 3.
50553— 60------ 7




The resolution itself specifically directed the committee to conduct
a full and complete study and investigation into “ Historical and com­
parative rates of unemployment, production, and prices.” 2 Amer­
ica’s economic history did not begin in 1954 as the majority’s report
President Truman in his Economic Eeport to the Congress de­
livered on January 6,1950, said:
There is a vital connection between the objectives which
may be set for 1950 and those that wTe envisage over a some­
what longer span of time. It is only by looking backward
over a number of years that we can truly appraise the
strength and promise of the American economy.3
By failing to take a long look at the history of our economic growth,
the majority’s report has neglected many of the factors which are
responsible for the unparalleled prosperity our country has enjoyed
during the past 6 years measured by almost any indicator one might
care to select. Moreover, we have been able to provide other nations
with $28 billion in foreign aid including an additional contribution
to the International Monetary Fund and the W orld Bank of $4.5
billion.4 Our own defenses have not been neglected during this
period. The Congress has appropriated during the fiscal years start­
ing June 30, 1953 and ending with June 30, I960, the years of the
Eisenhower administration, a total of $242 billion, a staggering
figure for these needs.5
It is difficult to measure the rate of national growth by merely
examining the gross national product during a time when defense
expenditures are necessarily at such a high level. A better perspec­
tive is afforded by reviewing statistical data wThich reflect the well­
being and the living standards of the American people.
The majority’s report speculates on a projection of the perform­
ance of the economy assuming a steady rate of growth of 4y2 per­
cent per year from 1954 through 1975. I f a congressional committee
is to engage in speculation, there is no magic surrounding a 4 ^ per­
cent growth rate. It might as well make its projections using a rate
o f growth of 5, 9, 10, or 100 percent. Xo sincere and qualified econ­
omist would indulge in such speculations. However, in terms of the
real world in which economic activity takes place, such an approach
represents pure fantasy. The political overtones in arbitrarily select­
ing a 4y2 percent rate of growth as appropriate for the past 6 years
can best be appraised by examining the 1950 Economic Eeport to the
Congress by Presiden t Truman when he said:
Over the past six decades, our national output of goods
and services has been multiplied seven- or eight-fold, repre­
senting an average annual rate of increase of nearly Sy2
percent and a virtual doubling of total output every 20
years * * *.
* * ^ is a reasonable estimate that we should be able
by a combination of private and public efforts to continue
Ibid.. p. 1.
8 The Economic Report of the President, January 1950, p. 75.
* Congressional Record, vol. 100, pt. 14, Dec. 2, 1954, pp. D743, D744 ; vol. 102, pt. 13,
July 27, 1956, pp. D643, D644 ; vol. 104, pt. 17, Aug. 23, 1958, pp. D611, D 612; Oct. 5,
1959, p. D933.



to increase productivity per fully employed worker by about
2 to 2y2 percent annually in coming years.6
According to the majority’s report a lower rate of growth is sat­
isfactory when a Democratic administration is in office. But anything
less than a 4% percent rate of growth in a Republican administra­
tion is described as “ an inadequate economic policy.”
The quotation from President Truman’s Economic Report shows
that during the period from 1890 through 1950 the average rate of
growth was less than 3% percent. In fact, this report contained a
chart which stated that:
Our long-run production achievements have been more the
result of increased productivity than of increased employ­
ment. Output per man-hour has more than quadrupled in
the last 60 years.7
This increased output over these six decades represents an increase
of approximately 2y2 percent yearly compounded.
The majority’s report implies that America has not experienced
a rate of growth equal to our potential. “ Potential” is a vague term,
subject to many interpretations. But the accomplishments of the
past 6 years are concrete and measurable.
America’s outstanding authority on the theory of economic growth
is Dr. Simon Kuznets, professor of political economy at Johns H op­
kins University. In his participation during the series of conferences
at Columbia University’s bicentennial, he clearly stated the factors
which must be considered in appraising the growth of an advanced
economy such as our own. He said:
For the more advanced countries, those in which non­
agricultural industries grew to dominate labor force and
product, we should note also some significant trends in the
distribution of the nonagricultural sectors proper. The
shares of mining and manufacturing in total labor force
grew significantly, but the increase has ceased or slowed
down during recent decades in many economically advanced
countries. The shares of the transportation and communi­
cation industries in labor force also g r e w but became stable
after the First World War or even before; yet because of
the extremely high capital intensity and product per worker,
and the remarkably high rate of growth in per worker prod­
uct, the shares of transportation and communication in
total labor force never reached sizable proportions. The
shares of trade and other service industries, a miscellaneous
group including business, personal, professional, and gov­
ernment services, have grown steadily and are continuing
their growth during the recent decades. The distribution
at a recent date in an advanced country like the United
States shows in 1940 less than 20 percent of the labor force
in agriculture; somewhat over 30 percent in mining, manu­
facturing, and construction, primarily in manufacturing;
only 6 percent in transportation and communication; and
about 43 percent in trade and other services. In g e n e r a l,
trends in the shares of the nonagricultural sectors in na«
6 Op. cit., “ The Economic Report of the President,” January 1950, p. 78.
^ Ibid., p. 76.



tional income followed the trends of the shares in labor,
except for the greater rise in productivity per worker in
such technologically advanced sectors as mining, manufac­
turing, and the public utilities. It is of course in dealing
with net product, in constant prices, originating in the serv­
ice industries that the conceptual difficulties in estimation
are at their perplexing worst.
The capsule summary just presented contains little that is
unfamiliar. The shift away from agriculture is perhaps
best known and has led to the widespread identification of
modern economic growth with industrialization, by which
is usually meant the growing absolute and relative volume of
industry as contrasted with agriculture. The causes, impli­
cations, and corollaries of these shifts in industrial struc­
ture are also for the most part familiar. But we mention
them briefly, with primary emphasis on the shift from agri­
culture to nonagricultural sectors and on the interrelations of
the implications and corollaries of the shifts.8
The significance of Dr. Kuznets’ statement lies in the fact that in
a highly industrialized country such as the United States, as its stand­
ard of living improves, more workers will be engaged in the service
industries where productivity increases cannot be expected to occur
at the same rate as in the industrial sector of the economy. Yet, in
looking toward the future, America needs more school teachers,
doctors, nurses, lawyers, librarians, and others whose efforts will not
result in productivity gains as measured by the normal economic in­
dexes. The objective in any society is to reduce the efforts devoted to
the necessities of life so that there may be more amenities for everyone
to enjoy.
The majority’s report is concerned with the fact that “ Since the
1954 recession, public policy has been concentrated primarily on
curbing inflation.” Such a course is not surprising in view of the
fact that the Consumer Price Index rose by 47.6 percent from August
1945 at the end of W orld War I I to the beginning of the Eisenhower
administration in January 1953.
From the end of 1952 until November 1959, the Consumer Price
Index has risen only 10.7 percent. While I deplore the inflation
which has taken place in recent years, its magnitude is far less than
in the preceding 6 years, and the concern of the administration and
the Federal Reserve Board in curbing this insidious threat to the
stability of our economy is more than justified. It is a great disserv­
ice to the American people to suggest any other course of action.
The authors of the majority’s report gloss over the fact that the
problem of inflation had reached major proportions during the pre­
vious administration. President Truman stated that it was incum­
bent upon the Federal Government to take a strong position to com­
bat this evil. In his 1950 Economic Report, transmitted to the Con­
gress on January 6,1950, he said:
Late in 1948 we stood at the peak of the inflationary boom.
It was clear that an eventual adjustment was inevitable be­
fore we would have a firm basis for stability and steady eco­
“ National Policy for Economic Welfare at Home and Abroad.” Doubleday & Co., Inc.,
Garden City. N.Y., 1955, p. 32.



nomic growth. During 1949 we met the test of that adjust­
ment. Despite rough going for a few months, we made
necessary changes with much less distress and difficulty than
ever before. Today we are on firmer ground than we were a
year ago.9
President Truman referred to rough going and the need for ad­
justment. In July of 1949, unemployment was 4,095,000 out of a
total civilian labor force of only 63,815,000, or 6.4 percent of the
total.10 When approximately the same level of unemployment was
experienced in 1958, vast spending proposals were suggested which
would have completely destroyed the stability of our currency, de­
pleted our gold reserves, and made the recovery that we enjoy now
The majority’s report states that in order to insure a high rate of
growth without inflation, wTe must “ Improve the structure of the
economy by reducing concentration of market power and by increas­
ing the mobilization of our resources.” During the past 6 years, the
Department of Justice and the Federal Trade Commission have been
vigilant in curbing the misuse of economic power by business organi­
zations. More antitrust suits have been filed and brought to a succesful conclusion than in any other recent period in our history.
However, the majority’s report is singularly silent on the growing
concentration of power which exists in certain labor unions who not
only have the ability to deprive our country of the goods produced
by certain industries but even to force officials of the U.S. Govern­
ment to make a settlement which is satisfactory to them. An eminent
student of labor law, Dr. Sylvester Petro, in an article which appeared
in Fortune in November 1959, said:
* * The causes of our present insatisfactory conditions
lie in special privileges that have transformed unions from
voluntary associations into coercive associations, and remedies
must be tailored to those causes. Specifically, we must re­
affirm the basic principle of the Taft-ITartley law, which
holds that employees shall have the right to self-organization
and to bargain collectively, and “ shall also have the right to
refrain from any or all of such activities * * *. To imple­
ment this principle of voluntarism we should withdraw from
unions special privileges such as the union shop and the ex­
clusive bargaining status that they obtain through the mapority-rule principle. We should also amend Taft-Hartley
to prohibit not just some forms of stranger picketing and
secondary boycotts, but all forms. Finally, we should cut
through the maze of administrative law that today denies to
those injured in labor disputes direct access to the courts
for injunctive relief. This means, in my judgment, repeal­
ing the Norris-LaGuardia Act, dismantling the National
Labor Relations Board, and reestablishing in labor disputes
due judicial process as it applies elsewhere in our society.11
The real cause for increases in the price level was developed in
Study Paper No. 2 entitled “ Steel and the Postwar Inflation” by Otto
9 “ The Economic Report of the President,” January 1950, p. 1.
10 Ibid., table C-9, p. 157.
11 Petro, Sylvester, “ Can Antitrust Curb Union Power?” , Fortune, November 1959.



Eckstein, technical director of the Joint Committee study, and Gary
Fromm of Harvard University. They said:
No analysis of steel wages would be complete without con­
sideration of the role of the Federal Government. In three
of the four bargaining crises since W orld War II, there was
extensive intervention. In 1945-46, when wage and price
controls were still in effect, a Presidential factfinding board
recommended an 181^-cent wage increase, a figure that had
earlier been rejected by the companies, but was accepted in
February 1946 when tied to an Executive order raising the
price of steel by $5. The settlement of 1947 and 1948 oc­
curred without Government intervention, though the sub­
sequent price increases were criticized. In 1949, an ad hoc
Presidential factfinding board was appointed, sidestepping
the use of the new Taft-Hartley machinery. The substan­
tial “ package” recommended by this board was rejected by
the companies, but after a 30- to 40-day strike, one of the
companies broke the deadlock, signing for a package which
was not identical but had the same general features and cost
as the factfinding recommendations. Harbeson and Spencer
conclude, “ the gains for the steelworkers would have been
much less” without Presidential intervention, given the re­
cession conditions at that time.
In 1952, wage and price controls were again in effect. The
Wage Stabilization Board recommended a very generous
30-cent package, which was rejected by the companies. After
a long dispute between the WThite House and the companies,
culminating in the seizure of the industry, a court ruling de­
clared the seizure illegal. A 55-day strike was fought, more
about the issue of the union shop than wages. The final
settlement included most of the original package recom­
mended by the board.
The next several settlements occurred without a strike and
without Government intervention. In 1956, after a strike of
36 days, the largest package ever negotiated was accepted.
This package specified a wage increase of 29 cents over the 3
years of the contract, plus 17 cents of fringe benefits, plus a
cost-of-living clause which has cost 17 cents over the period—
or a total of over 60 cents. Officially, the Government main­
tained a hands-off policy during this negotiation, but there
were widespread newspaper stories that the industry was
pressured behind the scenes to settle in an election year.12
Since payments to employees represent 69.6 percent of the national
income, it isnot surprising that prices will rise if wages are increased
in this fashion.13 Their paper provides the basis to explain the in­
flationary pressures which have plagued the American economy ever
since the end of World War II.
Throughout the majority?s report there is a persistent preoccupa­
tion with the suggestion that the levels of employment and production
would be higher if the Federal Reserve Board provided the banking
12 Eckstein, Otto, Fromm, Gary, Study Paper No. 2, “ Steel and the Postwar Inflation,”
Joint Economic Committee, 8 6 th Cong., 1st sess., Nov. 6 , 1959, pp. 19-20.
13 “ The Economic Report of the President,” January 1960, p. 169.



system with more funds and easier credit. Supposedly it could all
be accomplished without inflation. However, in spite of the state­
ments in the majority’s report, our money supply as measured by total
commercial bank deposits and currency in circulation has increased
since 1952 by $51.4 billion.14 In addition, commercial bank loans
increased $47.8 billion,15 mortgage debt outstanding increased $99.8
billion,16 and consumer credit increased $24.7 million 17 in this same
period. This would indicate that the conclusion in the majority’s
report stating that we must “ make sure that final money demand for
goods and services grows at a rate equal to the increase in the potential
supply of them” has been more than fulfilled.
The American way of life has been envied by the citizens of other
lands because of our material wealth which is higher than that of any
other country and is also more equally distributed. More importantly,
however, our entire economy is responsive to the wishes of consumers,
investors, and employees who enjoy the freedom to make their own
decisions. It would be a tragedy if the Federal Government at­
tempted to adopt a master plan, which in essence would be required to
effectuate the programs outlined in the majority's report. Economic
progress does not require the conformity of all citizens to the dictates
of a few self-appointed, handpicked academicians. The recommenda­
tions found in the majority’s report become even more disturbing
when examined in the light of the needs of national defense. It
states that—
Changes in defense orders and purchases have been an
important cause of economic instability in the postwar
period. These changes should be based upon the Nation’s
longrun defense requirements, and not upon considerations of
the debt limit or other narrow budgetary concerns. Changes
in defense demands should be treated as signals that off­
setting changes in taxes or other expenditures may have to
be made if recessionary or inflationary strains are to be
No testimony from any responsible individual who appeared before
this committee supports the view that our defense program has been
keyed to considerations of the debt limit or other budgetary concerns.
On the other hand, there have been frequent changes in program
which, of necessity, have resulted in localized unemployment, the
cancellation of orders, and dislocations to many communities. They
did not occur because of a thoughtless administration, but w7ere re­
quired by the competitive technological race in which our Nation is
presently engaged.
A stable rate of defense orders and purchases which is suggested
by the majority’s report would necessitate our continuing to build B-36
bombers rather than Atlas missiles in order not to inconvenience
anyone. Mr. Khrushchev would applaud this suggestion.
While the majority’s report at one point urges minimizing changes
in defense orders and purchases, at a later point it states:
We are not saying that defense orders must be maintained
when the opportunity develops for their reduction, nor that
14 Ibid.,
15 Ibid.,
10 Ibid.,
17 Ibid.,





they should not be increased when the Nation’s military
requirements so demand.
At still another point it states:
* * * To improve Federal expenditure policy, we should
put a high priority on:
* * * (1) better provision for defense, especially for mis­
siles and for combat troops.
It would be more constructive if the majority’s report explained
how all these objectives were to be simultaneously achieved rather
than merely to state that they were desirable. No Member of the
Congress nor any responsible official in the executive branch of our
Government is unaware of the need for economic stability here at
home. However, our national security and the modernization of our
weapons must always have top priority. There is little justification
for a report which offers pious platitudes accepted by everyone with
no solutions to the difficult problems which confront those who, under
the Constitution, are charged with executing the decisions upon which
our future as a nation rests.
The majority’s report proposes that changes in taxes and spending
programs be timed to coincide with major alterations in our defense
program. This suggestion is completely unrealistic in that only the
Congress can change the tax laws and this usually requires months to
New spending programs should not be adopted merely to make jobs.
Public works projects, once started, continue long after the defense
program has become stabilized at a new level.
It is easy to criticize the actions of any administration, Republican
or Democratic, but it is far more difficult to assume the responsibilities
of providing leadership and maintaining continuing progress through­
out our economy without infringing on the liberties and freedom of
any of our citizens.
Inasmuch as the majority’s report has been written in terms of
the past 6 years with obvious political overtones, it is imperative that
the American people are made aware of some of the salient facts con­
cerning the remarkable progress that has taken place in our country
since 1952, the last year of the previous administration.
A t that time, the total civilian labor force consisted of 63 million
people. Today it has grown to 69 million people.18 In 1952, even
though we were in the midst of the Korean war, unemployment was
1.7 million. In 1959, it is 3.8 million, an increase of 2.1 million
After allowing for the growth in the labor force of 6 million people,
these figures show that new job opportunities have been created for
3.9 million people, a substantial achievement. It must be emphasized
that war and human suffering were not the price America had to pay
to create this additional productive employment.
President Eisenhower’s Economic Report transmitted to the Con­
gress on January 20, shows that unemployment as a percent of the
civilian labor force for the years 1953 through 1959 has averaged 4.8
percent.20 During a period when many of the fiscal and monetary
18 “ The Economic Report of the President,” January 1960, p. 176.
10 Ibid., p. 174.
20 Ibid.



schemes advocated in the majority’s report were in vogue, and prior to
the mobilization of our resources in World War II, unemployment
ranged from a low of 14.3 percent of the civilian labor force in 1937
to a high of 24.9 percent in 1933.21
It is difficult to find any justification for the recommendations con­
tained in the majority’s report based on a long-range historical analy­
sis of employment and unemployment data, which the resolution di­
rected this committee to undertake.
Furthermore, in July of 1949 in President Truman’s Midyear Eco­
nomic Report, he stated that—
Employment is still high, but unemployment has been in­
creasing and veterans and others leaving school are finding
it much harder to obtain work than a year ago. Production
is still high, but it is lower, particularly in some industries,
than it was last year.22
By conveniently considering the period since 1954, the majority’s
report is relieved of reviewing unpleasant facts which occurred dur­
ing previous administrations.
The deficiencies in measuring economic growth have already been
described, but certain fundamental data are available which show
what has been accomplished during the period since 1952.
Our country has been growing at a phenomenal rate. The popula­
tion has risen from 157 million Americans in 1952 to 178 million
today,23 an increase of 21 million people who have been housed, fed,
clothed, and educated.
Per capita disposable personal income, that is, income after the pay­
ment of all taxes and in constant dollars, has risen from $1,520 in
1952 to $1,891 in 1959,24 an increase of 24.4 percent, which is more
than 3 percent compounded annually, a higher rate of growth than
was previously accepted as normal in President Truman’s 1950 Eco­
nomic Report.
In addition, there are other basic data to show that the increase in
our national income w\as largely distributed to wage and salary
In 1952, the national income totaled $292.2 billion. In 1959, it was
$398.3 billion,25 an increase of $106.1 billion. Compensation of em­
ployees increased $82.4 billion, or 77.7 percent of the gain.26
In 1952 corporate profits before taxes were $37.7 billion, and in
1959 they had increased to $47 billion, a rise of $9.3 billion, or only 8.8
percent of the increase in nat ional income.27
These data clearly show that the growth in our industrial activity
has made it possible to employ more people than have ever worked in
America before, who receive higher take-home pay after taxes. Yet,
the investors who supplied the capital for this expansion received
additional profits of only 8.8 percent of the increase in the national
21 “ Economic Report of the President,” January 1960, p. 174.
22 “ Midyear Economic Report of the President,” July 1949, p. 2.
23 “ Economic Report of the President,” January 1960, table D-14, p. 171.


25 Ibid., p. 166.

2a Ibid.
^ Ibid.



An economy which can perform in this manner is meeting all of the
tests of serving the American people and providing a widely diffused
The following table shows the growth in terms of statistical data,
which deal with the material and cultural environment in which
American citizens work and live. This provides the only true measure
o f growth.
It is significant that nearly all of the 12 indicators included in the
table show a rate of growth on a compounded basis equal to or higher
than the magic figure which was selected as appropriate in the major­
ity’s report.
The majority’s report states that “ From 1953 to 1959, industrial
capacity grew by approximately 30 percent, but industrial output by
only 15 percent.” In order that there may be some slack in the
economy so that production may directly reflect consumers’ wants and
that deliveries may be effected without protracted delays resulting
in unemployment, there should be excess capacity in the American
economy. For many years prior to 1953, Government economists were
critical of the steel industry because it did not have this flexibility.
Living standards as depicted in the table which follows immediately
completely refute the charge that the American economy has not
operated at its potential output.
Selected indicators of economic progress

U n its



P ercen t
in crease

In c re a se c o m ­
p o u n d e d fr o m

T h ou san d s

i 29, 058

i 37, 461

2 8 .9

O v e r 4 K p e r c e n t.

______d o _______

2 2 ,1 4 8

i 3 ,2 5 9

5 1 .7

O v e r 8 p e r c e n t.


34 8 ,0 0 0

4 71, 600

4 9 .2

O v e r 6 p e r c e n t.

T h ou san d s.

i 217, 699

i 3 4 0 ,4 7 8

5 6 .4

O v e r 8 p e r c e n t.

M i ll i o n s o f
d o lla r s .
______d o _______

» 276, 591

® 493, 561

7 8 .4

8 1 2 , 842

0 1 8 ,0 4 7

4 0 .5

_____ d o _______
T h ou san d s.
______d o _______
______d o _______
M i ll i o n s of
k il o w a t t h ours.
S te e l c a p a c it y ( 1 9 5 2 -J a n u a r y 1 9 5 9 ). N e t t o n s . . .

7 22, 610
i 4 3 ,8 1 8
17, 700
48, 056
9 7. 232

* 34, 031
i 56, 871
i 4 7 ,0 0 0
66, 630
9 1 3 , 254

5 0 .5
2 9 .8
165. 5
3 8 .7
8 3 .3

108, 5 3 8 ,0 0 0

ii 147, 6 0 0 ,0 0 0

3 5 .9

E s t i m a t e d e le m e n t a r y a n d h ig h
s c h o o l e n r o llm e n t .
E n r o ll m e n t in s t itu tio n s o f h ig h e r
e d u c a t io n ( 1 9 5 3 -5 8 ).
P u b l i c e le m e n t a r y a n d s e c o n d a r y
s c h o o l in s tr u c tio n r o o m s b u il t .
H o s p i t a l iz a t io n , s u rg ica l a n d m e d ­
ic a l in s u r a n c e e s t im a t e d e n r o ll­
m e n t (1 9 5 2 -5 7 ).
L ife in s u r a n c e in fo r c e ________________
N ew
r e s id e n tia l b u ild in g
(n o n fa rm ) .
M u t u a l s a v in g s b a n k d e p o s its ______
M o t o r v e h ic le r e g is tr a tio n ___________
T e le v is i o n se ts in u s e (1 9 5 2 -5 7 ) _____
T e le p h o n e s in u s e ______________________
E le c t r ic p o w e r sa les to r e s id e n tia l
c u s to m e r s .



D o.
O v e r 5 p e r c e n t.
7 p e r c e n t.
O v e r 4 *4 p e r c e n t.
O v e r 8 p e r c e n t.
O v e r 5 p e r c e n t.
O v e r 8 p e r c e n t.

4U p e r c e n t.

1 S ta t is tic a l A b s t r a c t o f th e U n i t e d S ta t e s , 1959, U . S . D e p a r t m e n t o f C o m m e r c e , B u r e a u o f th e C e n s u s ,

86th C o n g ., 1st s e s s ., H . D o c . 7 9, 8 0 th a n n u a l e d itio n
2S ta t is tic a l A b s t r a c t o f th e U n i t e d S ta t e s , 1 955, U . S . D e p a r t m e n t o f C o m m e r c e , B u r e a u o f th e C e n s u s ,
7 6th a n n u a l e d it i o n .
3“ F e d e r a l A i d to S ta te s for S c h o o l C o n s t r u c t i o n ,’ ’ h e a r in g s befo re th e H o u s e E d u c a t i o n a n d L a b o r C o m ­
m it t e e , 8 5 th C o n g ., 1st se ss., p t . 1, F e b . 4, 1957.
4“ F e d e r a l G r a n t s to S ta te s for E l e m e n t a r y a n d S e c o n d a r y S c h o o ls ,” h e a r in g s b e fo re t h e S e n a t e L a b o r
a n d P u b l ic W e l f a r e C o m m i t t e e , 8 6 th C o n g ., 1st se ss., F e b . 4 -6 , 17, 2 0, 2 6 ,2 7 , A p r . 7 -9 , 13, a n d 1 5, 1959.
5L if e I n s u r a n c e F a c t B o o k , 1959, I n s t it u t e of L ife In s u r a n c e , N e w Y o r k .
8 “ E c o n o m ic R e p o r t o f th e P r e s id e n t ,” J a n u a r y 1960.
7 F e d e r a l R e s e r v e B u ll e t in , B o a r d o f G o v e r n o r s o f th e F e d e r a l R e s e r v e S y s t e m , D e c e m b e r 195 9 , W a s h ­
in g to n , D .C .
S ta t is tic a l A b s t r a c t o f th e U n i t e d S ta t e s , 1956, U . S . D e p a r t m e n t o f C o m m e r c e , B u r e a u o f th e C e n s u s ,
8 4 th C o n g ., 2 d s e s s ., H . D o c . 3 34, 7 7 th a n n u a l e d itio n .
B u s in e s s S ta t is tic s 1959 B ie n n i a l E d i t i o n , U .S . D e p a r t m e n t of C o m m e r c e , O ffice o f B u s in e s s E c o n o m ic s ,
W a s h in g to n , D .C .
A n n u a l S ta t is tic a l R e p o r t , A m e r ic a n I r o n & S teel I n s t it u t e , 1957, N e w Y o r k .
n A m e r i c a n I r o n & S te e l I n s t it u t e , w e e k l y p r o d u c t io n rele a se, J a n . 14, 1960.





The majority’s report makes 12 generalized recommendations, one
of which embraces 9 separate Federal programs. It is impossible to
deal with all of these in supplemental views of any reasonable length.
Certain objections to the approach in the majority’s report, however,
are in order. Each of the specific policies recommended are worthy
of at least a brief discussion.
(1) The majority’s report first recommends “ monetary and fiscal
policies that permit money demand to grow in line with supply.” It
has already been demonstrated in the introductory chapter that there
has been no shortage of credit, currency, or demand deposits to permit
the economy to operate in a satisfactory manner. In fact, legislation
was introduced during this Congress, S. 64, to amend the purposes
of the Employment Act by adding to the end of section 2 a new para­
graph. This section now reads:
The Congress declares that it is the continuing policy and
responsibility of the Federal Government to use all practi­
cable means consistent with its needs and obligations and
other essential considerations of national policy, with the
assistance and cooperation of industry, agriculture, labor, and
State and local governments, to coordinate and utilize all its
plans, functions, and resources for the purpose of creating
and maintaining, in a manner calculated to foster and pro­
mote free competitive enterprise and the general welfare,
conditions under which there will be afforded useful employ­
ment opportunities, including self-employment, for those
able, willing, and seeking to work, and to promote maxi­
mum employment, production, and purchasing power.28
The new paragraph provides that :
The Congress further declares that the foregoing objec­
tives must be attained, if they are to be meaningful, in an
economy in which the level of prices remains relatively stable
under free competitive enterprise.29
It would appear that price stability must be accorded the same
position in our national policies as maximum employment. Furthermore, S. 64 makes it clear that in providing purchasing power, it is
to be done in the context of a “ relatively stable price level under free
competitive enterprise.” 30
(2) The majority’s report proposes policies including “manage­
ment of our defense orders in such a manner that they do not cause
serious instability in the economy.” Again, in the introductory chap­
ter it has been clearly shown that our defense program must be re­
sponsive to the military requirements which change with scientific
advances, foreign alliances, and the military programs of those who
might become potential enemies. The defense of our country is not
a proper matter for consideration by the Joint Economic Committee.
28 Bill analysis, 8 6 tli Cong., 1st sess., Kept. No. 14, Apr. 29, 1959, American Enterprise
Association, Inc., Washington, D.C., p. 7.
29 Ibid.
30 S. 64, U.S. Senate, 8 6 th Cong., 1st sess., Jan. 9, 1959, p. 2.



(3) The majority’s report recommends “ greater reliance on fiscal
policy and less reliance on monetary policy for achieving any desired
restraint on total money demand. This means that we should aim for
higher budget surpluses during periods of prosperity and a lower
level of interest rates than have been achieved in recent years.” Fiscal
policy implies changes in taxes to offset budget deficits or too-large
surpluses. This requires legislation which can be enacted only after
extensive hearings. Hence, changes in the tax laws do not provide an
appropriate vehicle to stabilize the economy. Our present tax struc­
ture, however, does provide for a sharp decrease in Government reve­
nues when either personal or corporate incomes fall. It also produces
a much higher yield for the Federal Government when personal and
corporate incomes rise. Likewise, it is difficult to coordinate changes
in appropriations and expenditures with the movement of the econ­
omy. Again, in most cases, authorizing legislation is required, proj­
ects must be planned if new expenditures are to be made. It is difficult
to believe that the majority’s report is recommending the abandon­
ment of worthy and necessary projects in order to reduce the demands
on the economy at a time when inflationary pressures are rising.
(4) The majority’s report, in this policy recommendation, includes
a series of measures ranging from Federal aid to education to the
rehabilitation of depressed areas. There are a total of nine such pro­
grams grouped under the platitude, “A comprehensive program for
promoting the productivity of the labor force, for technical progress,
and for facilitating the introduction of new technology.” It is difficult
to see how this broad group of programs bears any relation to the
major topic.
Before discussing any of these specific items, it must be emphasized
that when a program is undertaken by private industry or one of the
States, it requires either taxes or personal savings to finance it. Only
the Federal Government can create inflationary forces through the
creation of new money when it engages in deficit financing. The pro­
grams enumerated in this section of the majority’s report, if enacted,
would add to our present deficits or increase the tax burden so that
capital formation to provide the basis for our productivity gains
would be lessened.
The first of these nine programs proposes Federal aid to educa­
tion. President Eisenhower in his Economic Report, transmitted to
the Congress on January 20, 1960, reviewed the efforts of all levels
o f government, local, State, and Federal, as well as the work of private
groups in the field of education. The President’s Economic Report
stated that:
* * In the last 10 years, total public and private ex­
penditures for education have almost tripled, reaching $22
billion in 1959; the number of teachers in elementary and
secondary schools has increased by 450,000, and their aver­
age compensation has risen by 71 percent.31
The administration, for several years, has urged the Congress to
enact a program to eliminate such current deficiencies as may exist in
our educational needs. In his state of the Union message, President
Eisenhower in referring to the administration’s program stated that:
31 Op. cit., “ The Economic Report of the President,” January 1960, p. 63.



* * * It is designed to stimulate classroom construction,
not by substitution of Federal dollars for State and local
funds, but by incentives to extend and encourage State and
local efforts.32
The Congress has taken no action on the President’s plans which
have been under consideration since the 84th Congress.
( b) The majority’s report proposes that the Federal Government
“ provide a national scholarship program.” The 85th Congress, in
order to bring new resources and encouragement to our educational
system, enacted the National Defense Education Act which provides
a Federal program to stimulate the development and increase the
number of students in science, engineering, mathematics, and modern
languages. This action also provides additional facilities for teach­
ing, promoting the development of technical skills essential to na­
tional defense, and assisting teachers to increase their knowledge and
improve their effectiveness in these fields. Title I I of the act au­
thorizes a total of $295 million for a 4-year period for scholarship
loans to worthy and needy students.33 The President’s Economic Re­
port states that:
* * * Other programs include graduate and faculty fel­
lowships, institutes for college and high school teachers of
science and mathematics, traineeships, and grants for re­
search and equipment. In the current school year, about
100,000 college students, almost three times as many as last
year, are expected to make use of the loan funds established
under this act.34
Furthermore, he stated that:
* * * Expenditures for education and training o f veterans,
currently requiring nearly $450 million, will amount to a
little more than $300 million in the fiscal year 1961.35
The Congress and the administration in supporting this legislation
have already taken an important forward step in implementing a
scholarship program directed at “technical progress.”
(c) The majority’s report also proposes that the Federal Govern­
ment “ strengthen Federal programs of medical research and of voca­
tional rehabilitation.” Again, President Eisenhower, in his Economic
Report to the Congress, reviewed the progress which has been made in
this important area in the last 10 years. He said:
Public and private expenditures for health and medical
care have almost doubled during this period— from more
than $12 billion to about $24 billion. Annual Federal ex­
penditures for health and medical programs rose from about
$700 million to $1.5 billion, and State and local expenditures
increased from $1.7 billion to well over $2.5 billion.36
32 Congressional Record, House of Representatives, 8 6 tli Cong., 2d sess., vol. 106, No. 2,
Washington, D.C.. Jan. 7. 1960, p. 139.
33 National Defense Education Act of 1958, Public Law 85-864, 85th Cong., 2d sess.,
S e p t. 2, 1958, p. 4.
34 Op. cit., “ The Economic Report of the President,” January 1960, p. 63.
35 Ibid.
36 Op. cit.. “ The Economic Report of the President,” January I960, p. 63.



He also said:
As noted, programs for raising standards of health
throughout the Nation have been given large and increasing
Federal support in recent years. These programs include the
research conducted at the National Institutes of Health, re­
search grants to medical schools and research institutions,
and grants to States for the construction of hospitals and
other health facilities. They will entail Federal expenditures
approaching $600 million in 1961, about double the amount
spent for these purposes in the fiscal year 1953.
Finally, a program involving Federal expenditures of
nearly $1 billion in the fiscal year 1961 serves veterans eligible
for hospitalization and other medical benefits under existing
It wTill appear that the Federal Government is already expending a
substantial share of its budgetary receipts on medical research. In­
sofar as vocational rehabilitation is concerned, this, too, has not been
neglected. Again, the President’s Economic Report shows that a pro­
gram of vocational rehabilitation for ex-servicemen having serviceconnected disabilities will be recommended to the Congress.38
(d) The majority’s report proposes that the Federal Government
“ strengthen the private and public apprenticeship programs.” Again,
it appears to be oblivious of the fact that- Federal assistance for voca­
tional educational programs began in 1917. The 1961 budget recom­
mends new obligational authority for the next fiscal year for vocational
education in the amount of $69 million. Actual budget expenditures
in this fiscal year are estimated at $67 million.39 The budget message
shows, however, that these programs should decrease in future years.
It states:
* * The need for Federal assistance in the vocational
education programs begun in 1917 for the purpose of stim­
ulating training in agriculture, home economics, industrial
trades, and distributive occupations is not as great as for
promotion of training in new science-age skills. Thus as
increased funds for training needs in new skills are provided
under the National Defense Education Act, Federal assist­
ance for the older programs is being reduced by a corre­
sponding amount.40
This appears to be a proper policy.
(e) The majority’s report states that the Federal Government
should “ continue and increase support of scientific research, especially
basic research, even in the event that the strictly military needs for
advancement in science diminish.” Again, the authors of the ma­
jority’s report are apparently unaware of the programs which have
been undertaken over a period of many years by the National Science
Foundation and other Federal agencies to advance our fundamental
knowledge in the pure sciences with no regard to immediate appli­
cation for defense purposes. Apart from any Federal activities to
advance research, however, the private sector of the economy has pro­
Ibid., p. 64.

38 Ibid., p. 63.

^ “ The President’s Budget Message for 1961,” Jan. 18, 1961, p. M56.

40 Ibid., p. M57.



vided an important impetus for our acknowledged technological
superiority in most fields of endeavor. The President in his Economic
Report stated that:
The annual investment of sizable amounts of Federal funds
in research and development programs has served signifi­
cantly to enlarge the scientific and technological potential of
the Nation. These outlays, which have increased rapidly
in recent years, exceed those made by business firms and
nonprofit institutions for the improvement of the technical
base of our society. According to revised compilations re­
cently reported by the National Science Foundation and the
Bureau of the Budget, Federal research and development
obligations for the fiscal year 1960 exceed $8.1 billion; they
were $7.9 billion for the fiscal year 1959 and $5.9 billion for
fiscal 1958. Estimates of expenditures for the same three
periods are somewhat lower—$7.5, $6.6, and $4.5 billion.
The predominant share of the Federal funds for research
and development is devoted to military projects; but, even so,
the benefits obtained from them by the civilian economy have
been, and will remain, impressive. The billions of dollars
spent annually for procurement and construction under pro­
grams of the Department of Defense and the Atomic Energy
Commission likewise have a peacetime value apart from
their immediate contribution to the Nation’s security. Many
areas of defense spending that will continue to influence
civilian technolog}7 may be cited— for example, the develop­
ment and production of aircraft and missiles, data-processing
machines, electronic communication and control equipment,
high-energy fuels, unconventional devices for generating
electrical energy, solar furnaces, and metallic and other mate­
rials meeting strict performance requirements under stress
and at extreme temperatures.41
It would appear that the majority’s report is making no unique
contribution by suggesting that the Government engage in activities
in which it has been a major participant for so long a period of time.
(/) The majority’s report proposes that the Federal Government
“set up national productivity centers for raising productivity in the
low-wage, low-productivity industries and services in the economy.”
Again, these objectives are not defined, and the methods appropriate
to increase productivity in a manufacturing operation would not be
applicable in the service trades, in agriculture, or in the communica­
tions industry. Under our free enterprise system, productivity in­
creases are the result of better methods developed in each individual
firm, by organized labor, or community efforts, as well as colleges and
universities through independent initiative. The development of a
new Federal bureaucracy charged with these functions would entail
additional expense to the taxpayer with no visible accomplishments
in sight.
The majority’s report proposes that the Federal Government
“encourage the institution of collective bargaining in a form that
allows for the introduction of new technology and which promotes
41 Op. cit., “ The Economic Report of the President,” January 1960, p. 61.



an equitable sharing of the inevitable social costs of technological
change.” It has long been our accepted policy that collective bar­
gaining in its very essence involves a meeting of the minds between
the parties directly affected. There is no place in the American free
enterprise economy or in our labor movement for a dictated settlement
of labor disputes and determination of the rightful share of increased
productivity by Government, which implies compulsory arbitration.
Responsible labor leaders as well as management groups have on many
occasions expressed their strong objections to compulsory arbitration
in any form.
and (i) The majority’s report proposes that the Federal Gov­
ernment “provide unemployment benefits and retraining for workers
laid off because of technological change, with benefits related to sen­
iority” and “establish special programs for the rehabilitation of de­
pressed areas.” The majority’s proposals were embodied in the Area
Redevelopment Act, S. 722, which was passed by the Senate on March
23,1959, by a vote of 49-46.42 I voted against this bill, which provides
$389.5 million, which wTould include loans for public facilities in de­
pressed industrial areas, as well as in rural low-income areas; loans for
public facilities; grants for public facilities; as well as $10 million in
weekly payments to workers undergoing retraining in depressed areas,
and $4% million for technical assistance and information.43
The administration has long been aware that there are certain areas
which have suffered from chronic unemployment, and it has proposed
a far more modest program in the amount of less than $60 million
entirely in loans to meet the real needs of these areas. The Senate
bill is now before the House, and it is unlikely that it will be accepta­
ble to the administration. By insisting on this elaborate and expen­
sive program, aid for areas suffering from chronic unemployment
will be indefinitely delayed. Those who insist on grandiose solutions
to modest problems prevent the enactment of needed legislation which
would meet essential requirements without imposing undue burdens
on future taxpayers.
The majority’s report dwells at length on further proposals includ­
ing increasing expenditures for activities such as education, research,
and health programs. As has already been indicated, present expend­
itures are substantial. It is significant that no specific suggestions on
how much they should be increased is provided in the majority’s
(5) The majority’s report proposes “* * * the reduction of sub­
sidies for agriculture and business, and the pruning of wasteful
Government activities.” Certainly, no conscientious citizen favors
supporting wasteful Government activities. The farm problem is one
which has been before the American people for many years. The
Congress has refused to enact the legislation requested by the admin­
istration during the past session which would have made an important
contribution toward reducing the magnitude of these continued farm
subsidies. Other programs which presumably support business are
not defined in the majority’s report, and, hence, it is impossible to
comment intelligently with respect to them.
(6) The majority’s report proposed policies to “reform the Federal
tax system to make it fairer, less obstructive to economic growth, and
42 Congressional Record, U.S. Senate, 86th Cong., 1st sess., vol. 105, No. 47, Washington,
D.C., Mar. 23, 1959, p. 4438.

Ibid., p. 4436.



more productive of revenue.” This generalized statement is accepta­
ble to everyone, but the specific proposals for tax reform which are
enumerated in later sections of the report would obstruct economic
growth and limit employment opportunities. They will be discussed
at an appropriate point in these supplemental views.
(7) The majority’s report proposes that the Federal Government
can “revise monetary policy so that we may have a growth in the
money supply in line with the growth in total output and increase the
effectiveness of monetary action.” As has already been indicated in
the introductory section of these supplemental views, our money sup­
ply has expanded considerably in recent years. In addition, there
has been ample credit available to worthy borrowers. Too much
emphasis is placed in the majority’s report on the need to make loans
available to individuals and business firms. Rather than borrowed
money, they need an opportunity to accumulate savings from their
productive endeavors to finance their personal and business require­
ments adequately. A reduction in Federal expenditures accompanied
by lower taxes would be far more beneficial in advancing the economic
security of all of our citizens than a continuing rise in the money
(8) The majority’s report proposes that the Federal Government
“put greater reliance, to the extent possible, on selective policies which
will curb excess demands in certain industries without causing gen­
eral unemployment.” Such a course necessarily involves that a Fed­
eral agency would decide which industries were to be favored and
which were to be retarded. It is contrary to the philosophy of a
free competitive economy. It is consistent with a system of regimen­
tation and Government planning. The Employment Act of 1946
provides that it is the continuing policy and responsibility of the
Federal Government to promote “a free competitive enonomy.” 44 Any
attempt at selective policies favoring one industry and handicapping
others is completely inconsistent with the mandate of the Congress.
Furthermore, the wages received by the employees and the divi­
dends received by the stockholders of the favored industries in a free
society might be spent for the products of those industries that are
being restrained. Free consumer choice is thus automatically aban­
doned under this suggestion.
(9) The majority’s report proposes that the Federal Government
“carry out a more vigorous and more effective antitrust policy, and,
first, attempt to restrain groups that possess market power by volun­
tary methods and, second, take whatever steps in the way of hearings
and factfinding that may prove necessary.” This particular sugges­
tion lends support to a bill which was considered by a Judiciary Sub­
committee during the last session of the Congress; namely, S. 215,
introduced by Senator O’Mahoney on January 12, 1959. It provides
In any line of commerce in which 50 per centum or more
of the total annual sales in the United States are made by
eight or less corporations, including their respective sub­
sidiaries and affiliates, no corporation included in such group,
and having capital, surplus, and undivided profits in excess
44 Congressional Record, 79th Cong., 2d sess., vol. 92, pt. 13, S. 380.

50553—60---- 8



of $10 million sliall increase the price of its product in such
line of commerce until the expiration of a waiting period of
30 days after delivery of notice of a proposed price increase
to the Federal Trade Commission, the Attorney General,
the Speaker of the House of Representatives and the Presi­
dent of the Senate for publication in the Federal Register
and the Congressional Record.45
Following this procedure, hearings would be held and confidential
cost data would be revealed to competitors, both foreign and domestic.
While at first it appeared that this legislation would only affect a few
major industries, an analysis of the census classification of industries
meeting these criteria contained in a study prepared for the Senate
Antitrust and Monopoly Subcommittee shows that over 600 different
product classifications would fall within the definition of this meas­
ure. The affected products range from pickles and baby foods to
steel and automobiles. Needless to say, no firm with adequate re­
sources while it is still earning any profits whatsoever would volun­
tarily submit its confidential internal data to public scrutiny. Hence,
marginal firms with limited resources would be unable to raise their
prices while their larger and more successful competitors were re­
luctant to do so. If this legislation were enacted into law, it would
undoubtedly result in further concentration through the bankruptcy
of numerous small firms. It is difficult to reconcile such a proposal
with our fundamental antitrust philosophy.
(10) the majority’s report proposes that the Federal Government
“reduce tariffs gradually.” The Trade Agreements Act of 1958 pro­
vides ample authority for the President to take such action through
1962 and until these powers have been exhausted and the economy
has made the necessary adjustments to any further changes in our
tariff structure, this proposal has no real meaning or significance.
(11) The majority’s report proposes that the Federal Government
“revise our farm policy: including more research to find new uses for
farm products.” This generalized statement provides no guidance as
to what is intended. The Congress has consistently supported pro­
grams to reduce surpluses and to further research to find new uses for
farm products. It will take more than pious words, however, to ac­
complish these difficult objectives.
(12) Lastly, the majority’s report proposes that the United States
“improve our foreign trade position.” This statement might mean
almost anything that the reader would care to attribute to it. It is so
vague and subj ect to so many possible interpretations that it would be
futile to attempt to make any specific comments with reference to it.
In short, the proposals contained in the majority’s report either sup­
port existing programs which are already in effect and are function­
ing, or they urge the enactment of measures which have failed to re­
ceive favorable consideration by the Congress or the administration
because they are inconsistent with the concepts that should underlie
any legislative action in conformity with the Employment Act of 1946,
the basic guide for this committee.
One thing is clear: Most of the policies set forth in the majority’s
report would entail additional Federal spending leading to more in­
flation, price instability, and eventually, unemployment.


215, 86th Cong., 1st sess., Jan. 12, 1959, pp. 2-3.




The majority’s report has failed to confine its scope to the prob­
lems entrusted to the Joint Economic Committee in Senate Concur­
rent Resolution 13, but instead has made recommendations on numer­
ous subjects which fall within the jurisdiction of other congressional
committees. 1n many cases, extensive hearings concerning these mat­
ters have been held at great expense to the taxpayer. Reports have
been filed, and legislative action has taken place in either the House
of Representatives or the Senate. These subjects include housing,
Federal aid to education, area redevelopment, national defense, labor
policy, as well as problems of racial discrimination, migrant farm­
workers, and American Indians, to mention but a few. A lack of
specific comments concerning these subjects does not indicate an ac­
ceptance of the views contained in the majority’s report, but rather a
complete disapproval of the infringement on the jurisdiction of other
congressional committees by the staff of the Joint Economic Commit­
tee in its preparation of the majority’s report.
Since the committee was charged with a study of economic growth,
monetary and fiscal policies, even though they fall within the juris­
diction of the Senate Finance Committee, are proper subjects for re­
view by this committee. This approach is also justified in connection
with antitrust and pricing problems which have traditionally been
of concern to the Joint Economic Committee. An effort will be made
to reveal some of the inconsistencies and errors presented in the ma­
jority’s report relating to the following specific areas:
1. The recent behavior of prices.
2. Fiscal policy.
3. Monetary policy.
4. Debt management.
5. Federal reserve policy.
6. Antitrust and price prenotification.
7. Tariffs.
8. The farm problem.
9. International affairs.
IV .





A review of the nine areas appropriate for this study follows:
1. The recent behavior of prices
The majority’s report states that consumer prices “rose at an
annual rate of 1.6 percent, wholesale prices at 1.3 percent, and the
gross national product deflator at 2.2 percent. These increases were
largely concentrated in the period 1955 to 1957.” It also suggests that
these relatively small movements in the indexes fall within the marign
of statistical error. The majority’s report states:
In order to interpret these movements of the price indexes,
their limitations must be kept in mind. The failure of the
indexes to reflect changes in quality and the methods of in­
troducing new products give some upward bias to these
indexes. These biases are not sufficient to explain away all of



the increase in the index. But it should be stressed that
small changes in the indexes, on the order of 1 percent a
year, fall within the margin of statistical error.
In attempting to appraise the impact of inflation, the Congress and
professional economists have relied primarily on the two series of
prices prepared by the Bureau of Labor Statistics—the Consumer
Price Index and the Wholesale Price Index. They are carefully as­
sembled, and these criticisms are not directed at the integrity of the
dedicated personnel of the Bureau of Labor Statistics who long have
endeavored to develop useful and accurate measures of price changes.
However, particularly in the case of the Consumer Price Index,
a grave doubt arises as to whether it actually reflects increased prices
or in influenced by changes in the quality of the articles and services
which are priced. The index not only includes many standardized
articles with detailed specifications, but other products such as auto­
mobiles, tires, television sets, and radios characterized by rapid tech­
nical improvements which enhance value and quality. In many
instances a price increase accompanied by an even larger improvement
in quality may actually represent a price decrease for the consumer.
The index as presently constructed does not reflect quality changes.
There are many conceptual difficulties in meeting this problem, but
before blindly accepting that a rise in either index is indicative of
new inflationary pressures, these qualifications must be raised.
Among many services, medical care is included in the Consumer
Price Index. The value of this service to patients has changed dras­
tically during recent years through the development of new tech­
niques. The availability of pharmaceutical products which were
unknown but a fewTyears ago as well as expensive and elaborate diag­
nostic procedures have lengthened our lifespan. Many people are at
work today who would have died years ago if the quality of medical
care had not improved. Yet the Consumer Price Index does not
reflect this fact.
There are still other statistical procedures which have not received
adequate consideration. The introduction of new models poses a
problem in properly reflecting prices. The Bureau of Labor Sta­
tistics on Tuesday, December 23, 1958, announced that the Consumer
Price Index for November 1958, had increased because “Price tags on
new model autos were 4.2 percent above a year ago.” In the months
immediately preceding, the Bureau was pricing 1958 models, some of
which were undoubtedly still available in dealer’s stocks. The ques­
tion may fairly be asked as to whether the index rose when new models
were announced or whether, if prices had continued to be collected
on the remaining 1958 cars still in stock, it might not have declined.
This question is justified by the fact that the Commissioner of Labor
Statistics, Mr. Ewan Clague, on that date stated: “Automobile prices
should go down in the months ahead because of dealer discounts.”
It is perhaps also not generally understood that excise taxes are in­
cluded in the Consumer Price Index, so that whenever the Congress
decides to finance a needed program such as highway construction,
through the imposition of an excise tax on gasoline or some similar
product, the Consumer Price Index will rise.
These statements are made not to criticize the procedures of the
Bureau of Labor Statistics, as no acceptable alternatives have been



offered, but merely to place the relatively minor price increases dur­
ing the past 6 years in their proper perspectives.
The majority’s report is concerned that business investment as well
as consumer investment in durable goods “has also come in sudden
Investment in durable goods, particularly the establishment of a
new plant, requires integrated facilities, and by their very nature the
entire investment must be made at one time. In the case of consumer
durable goods, because their purchases can be deferred until indi­
viduals believe that they have a margin of savings, it has always been
characteristic for these purchases to be made in periods of recovery
unless rationing and Government planning of facilities is to be sub­
stituted for a free market. These instabilities in demand are a price
most of us are more than willing to pay to insure freedom.
The majority’s report curiously states that “Business was also
encouraged to incur large fixed capital, research, and administrative
costs by the sharp upswing of 1955.” Yet, these very expenditures
for research have provided the technology for today’s new products.
It is impossible to reconcile this criticism with the policy recommen­
dation that we should “Continue and increase suport of scientific
research, especally basic research, even in the event that the strictly
military needs for advancement in science diminish.”
If this research is conducted privately, there will be more competi­
tion and probably better results. But regardless of whether it repre­
sents a direct expense to business firms or is paid by the taxpayers, it
must ultimately be reflected in prices.
2. Fiscal policy
The majority’s report implies that a greater reliance should be
placed on fiscal policy rather than on monetary policy. This is
unrealistic, since fiscal policy cannot be rapidly responsive to chang­
ing economic conditions as is the case with monetary action insti­
gated by the Federal Eeserve Board. Fiscal policy must require
either changes in our tax laws or in Government appropriations. In
either case congressional action is required, and this necessarily is
The majority’s report stresses the need for tax reform. The first
substantial effort to remove some of the inequities which developed
during wartime were embodied in the Eevenue Act of 1954, passed by
the 83d Congress. In spite of a substantial reduction in the tax rates
and additional incentives for capital formation, Budget receipts have
risen from $60 billion in the 1955 fiscal year to an estimated $84 billion
during the 1961 fiscal year, an increase of $24 billion.46
Economic growth requires prompt tax reform so as to insure a
continued growth of equity capital and to provide adequate rewards
and incentives for venturesome undertakings. These are not present
under today’s almost punitive tax rates. While tax reform must
necessarily await a halt in unnecessary Government spending pro­
grams and a start at debt retirement, the objectives which should
underlie our future tax policies were clearly set forth by the chairman
of the House Ways and Means Committee, Eepresentative Wilbur
D. Mills. Under the Constitution all revenue measures must first
46 1961 Federal Budget in Brief, Bureau of the Budget, Executive Office of the President,
Jan. 18, 1960, p. 43.



be reported from this committee. Mr. Mills outlined the objectives
that should guide the Congress, as follows:
1. A tax climate more favorable to economic growth.
2. An income tax under which the fundamental maxim
that people with the same income should pay the same tax
will be more fully observed in practice.
3. An income tax which interferes as little as possible
with the operation of the market in deciding how our na­
tional resources—human and material—can best be employed.
4. Assurance that tax burdens will be as fair as possible.
5. An income tax which will respond promptly and
vigorously to changes in economic conditions in order to re­
strain both inflation and recession.
6. An income-tax law with which taxpayers can readily
and inexpensively comply and which can be efficiently and
fairly enforced.47
Furthermore, it is generally agreed that a more realistic policy
must be adopted with respect to depreciating long-lived capital
On January 7, 1960, the Select Committee on Small Business of
the U.S. Senate in Report No. 1017 stated the conclusions and rec­
ommendations it had developed as a result of its hearings devoted
to this problem. They are set forth as follows:
1. Present depreciation policies do not sufficiently encour­
age the expansion of the national economy. Indeed, those
policies have, in all probability, stifled economic growth.
2. The twin problems of inflation and technological obsolescene have become increasingly significant in recent years.
In combination, they have made our depreciation policies
completely out of date, though these policies may have been
reasonable and perhaps necessary in the 1930’s.
3. Small firms, particularly, suffer from current deprecia­
tion policies in spite of recent congressional efforts to over­
come several of the tax features that discriminate against
them. Because of their limited capital resources and the
difficulties and expense of obtaining further capital from
new sources, they feel the greatest impact from under­
4. Rapid amortization of “defense facilities” in periods
of emergency is an inadequate substitute for a realistic longrange depreciation policy. Such amortization encourages
cyclical rather than orderly growth of industrial capacity.
Furthermore, rapid amortization certificates have been much
more difficult for small manufactures to obtain than for the
industrial giants. A liberalization of depreciation policies
applicable to all firms—in “normal” and “emergency” pe­
riods alike—would a far more equitable approach to the
preparedness for defense capacity problem.
5. Substantial liberalization of depreciation policies
should be coupled with elimination of capital gains treat­
47 Mills, Wilbur D., “ How Your Income Taxes Can Be Cut,” Nation’ s Business, vol. 47,
No. 11, November 1959, p. 71.



ment for machinery and equipment used in a trade or busi­
ness. New depreciation policies should be directed toward
the stimulation of economic growth and should not be per­
mitted to foster early disposal of assets for capital-gains
It is clear that these conclusions are directed toward economic growth
which is the subject to which the Joint Economic Committee study
should have been directed.
The specific proposals set forth in the majority’s report have all
been rejected by the Congress within the past year. They include the
following items:
1. Repeal of the dividends-received credit and exclu­
sion. * * *
2. Provide for the withholding on interest and dividend
payments. * * *
B. Rigorously limit employee expense accounts. * * *
4. Limit the types of income to which capital-gains treat­
ment is given to true capital gains. * * *
5. Progressively reduce the percentage depletion rates
allowed on oil and gas. * * *
6. Improve the enforcement of the income tax laws. * * *
These proposals were presented to the Secretary of the Treasury by
the chairman of this committee on September 2, 1959. The Under
Secretary of the Treasury, the Honorable Fred C. Scribner, Jr.,
analyzed the reasons why new laws would not be in the public interest.
The position of the Treasury on these points should be available to
readers of the majority’s report and, accordingly, Mr. Scribner’s
letter to the chairman of this committee follows.
U nder S ecretary of t h e T r e a s u r y ,

Washington, B.C.
Hon. P a u l H. D ouglas ,

U.S. Senate,
Washington, D.C.
M y D e a r S e n a t o r D o u g la s : This letter is in further reply to your
leter of September 2 to the Secretary and signed by you and Senators
McCarthy, Clark, and Proxmire. Your letter addressed itself to the
possibility of increasing tax collections by Revenue Code changes
and by a step-up in enforcement to allow a more intensified search for
unreported income. Your stated objective of finding means and meth­
ods to improve the enforcement of the Federal tax laws is one which
we most certainly share.
The Treasury Department has under constant review a multitude of
proposals for revision of our tax structure to remove inequities, to
increase the revenue yield and to enhance incentives for all Americans
to work, save, and invest. Last January, for example, the President
asked that the rules for computing percentage depletion be revised
to prevent the unintended extension of percentage depletion allow­
ances to the sales price of finished products. Corrective legislation in
this area has not been enacted although substantial revenues are in­
48 “Tax Depreciation Allowances on Capital Equipment,” report of the Select Committee
on Small Business, U.S. Senate, 86th Cong., 2d sess., No. 1017, Jan. 7, 1960, p. 10.



volved, and the Treasury believes that the need for legislation is
readily apparent.
Specific proposals for corrective revision of the law on taxation of
cooperatives and their patrons were also submitted to Congress last
January, but no action has resulted.
In the expenditure areas, Budget Director Stans has cited to us the
fact that the President made 18 specific proposals to adapt Federal
spending programs to changed situations and has pointed out that
these, too, received little attention from the Congress.
We believe that these changes could contribute measurably toward
sound budgetary objectives, and we trust that they will have your
active support during the 2d session of the 86th Congress,
Your letter contained seven specific proposals. One of these would
require second-class users of the U.S. mails to pay for the full cost of
their use of the mails. The position of the administration on this pro­
posal was set forth in a letter to you and your associates from Budget
Director Stans under date of September 24. We associate ourselves
with the Budget Director in his reply to this item.
The five items which you have discussed calling for changes in the
tax laws or in regulations issued thereunder all deal with matters
which are to be covered in detail by the Ways and Means Committee
in hearings to begin in November. Many experts and students in the
tax field have been asked to submit detailed studies covering the items
which you have discussed. Helpful information will be produced at
these hearings and these studies will give us a sounder basis for meas­
uring the worth of the matters which }7ou have submitted.
However, we do wish to reply to each of your suggestions, based on
our position at this time but subject to changes in our views which
may result from the information made available by the Ways and
Means Committee studies.
Requiring that income taxes on dividend and interest pay­
ments be withheld at source.— Studies made in the past both by the
Treasury Department and by outside sources indicate that a substan­
tial gap does exist between dividends and interest paid to individuals
and dividends and interest reported by individuals on personal income
tax returns. While there is some dispute as to the exact amount of
the gap, there is, we believe, agreement that it is substantial. How­
ever, there is much uncertainty as to how much of the unreported
dividends and interest would be taxable if reported.
For example, individuals are now entitled to a dividend exclusion
of $50. It is known that some individuals who receive less than $50
in dividends do not report such dividends on the assumption that
since they are less than the amount of the exemption it is not necessary
to report the dividends on the tax returns. While such dividends
should be reported, a correct reporting would not result in additional
In the interest field it is believed that a large portion of the non­
reported interest is paid to those who because of the additional per­
sonal exemption allowed for all over 65, retirement income credits or
other exemptions or credits, are either in a nontax bracket or in a
very low tax bracket. Further studies are being made at this time
to attempt to arrive at proper estimates of the amount of additional
tax which would be collected if all dividends and interest paid were
properly reported.



It appears that some of the nonreporting in the interest field is due
to an erroneous assumption that interest credited but not withdrawn
is not taxable. We are working with various interest paying associa­
tions to develop educational programs which will remove any mis­
understanding which may exist. Changes have also been made in
the tax forms and taxpayer instructions for the year 1959, and we
believe these steps will be helpful in reducing the nonreporting gap.
A special study is now being made of the tax forms directed to pos­
sible additional changes in the forms for 1960.
We also are engaged in joint studies concerning voluntary action
which may be taken by those paying dividends and interest to assure
proper reporting of amounts paid and the proper payment of taxes
Proposals to extend the withholding at source program to interest
and dividends have been considered by the Congress and the Depart­
ment on various occasions in the past. Each time that the subject
has received consideration, it has been recognized that withholding
on dividends and interest would create hardship due to withholding
in the case of tax-exempt institutions, and nontaxable individuals
and overwithholding in the case of elderly and retired persons, many
of whom would be in low-income brackets. Hardships would arise if
individuals were deprived of overwithheld funds until such time as
claims were filed and processed and refunds were paid. Legislation
designed to avoid overwithholding by setting a realistic ceiling under
which amounts distributed would not be subject to withholding might
well render the legislation ineffective.
To summarize, withholding legislation can be enacted. However,
it will further complicate our tax structure, will add to the expenses
incurred by dividend and interest-paying organizations and, because
of the delays and necessary technicalities of refund procedures, may
tend to discourage savings. We believe that every effort should be
made to work out effective voluntary means of eliminating the gap
between dividends and interest paid and dividends and interest re­
ported before legislation is enacted which would provide for man­
datory withholding at the source of income taxes on dividend and
interest payments.
Tightening the rules concerning the deduction of “ordinary
and necessary” business expenses, especially in the luxury expense
account and business gift areas.—Under existing statutes, “ordinary
and necessary” business expenses may be deducted for the purpose of
determining the net income of business taxpayers. Difficulties have
been created for the Revenue Service by a number of judicial decisions
holding expenses disallowed by the Service to be “ordinary and neces­
sary,” and therefore deductible. Many of the cases frequently cited
as glaring examples of the improper allowance of business deductions
involve court decisions and not rulings by the Revenue Service.
We are here concerned with business morals. Our experience is
that the great bulk of business organizations have strict, equitable
rules concerning business expenses and do play fair with the Govern­
ment. The trouble is caused by a small minority of business organi­
zations which do allow items to be deducted as business expenses
which clearly do not qualify as such. The problem is to make rules
which will be effective in preventing abuse by a few without imposing



expensive and time consuming burdens on the great majority who
have been consistent in properly operating their companies and prop­
erly reporting their expenses and profits.
In the 1958 tax returns the burden for properly auditing employees’
expense accounts was placed on the employers by a proviso that if an
employee does not receive from his employer payments for expense
in excess of expenses incurred and the employee is required to report
fully to the employer, the employee is not required in his tax return
to duplicate the accounting which he gives to his employer. The
checking here is then done through the employers’ records. This
procedure is intended to relieve the burden on employees while still
making certain that full auditing takes place. It will only be effective
if employers do, in fact, insist on accurate and complete expense ac­
counts and carefully check the same. The Revenue Service is now
engaged in studying the results of this approach as disclosed by the
1958 tax returns. Following the auditing of the 1958 returns the Serv­
ice will be in a position to evaluate the effectiveness of this method of
You are, of course, familiar with S. 2040 which, if enacted, would
have disallowed certain entertainment expenses specified therein.
Under this bill no deduction would have been permitted for the ex­
pense of entertainment at night clubs, theaters, sporting events, or
other places of public amusement. The bill would also have disallowed
expenditures for the maintenance or operation of yachts, or vacation
lodges, for gifts, for dues and initiation fees in country clubs or other
social organizations and for traveling expenses to conventions outside
the United States.
The denial of a tax deduction for expenditures which the taxpayer
can prove were incurred as a necessary business expense rather than as
a personal expense is contrary to the existing concept of an income
tax on net income. Moreover, to impose such a rule on certain types
of business expenses and with respect to certain classes of taxpayers
would justify a charge of discrimination.
Such a major change in the tax law should be undertaken only after
full consideration of all of the problems involved. We believe that
the hearings before the Ways and Means Committee which will be
concerned with these problems will provide helpful material on this
very subject. You can be sure that we welcome the opportunity to
work cooperatively with the Ways and Means Committee and with
you and others to develop solutions in this area and, if it is ultimately
concluded that legislation is necessary, to work out appropriate legisla­
tion which would be effective.
As Commissioner Latham has already told you, the Revenue Service
is making every effort to make certain that only proper and reasonable
deductions are allowed. The Commissioner tells us that he believes
he is making progress, and for the present we believe the matter
should continue to be handled by the Commissioner through regula­
tions, rulings, and auditing procedures.
Narrowing the types of income accorded favored capital gains
treatment.—We believe that there is validity in the criticism directed
by many at weaknesses in the provisions of the law taxing capital
gains. Several months ago the Treasury suggested that considera­
tion be given to a change in the law which would treat gain from the
sale of depreciable personal property used in business as ordinary



income to the extent of the depreciation previously taken on the
A comprehensive review of the whole capital gains structure, in­
cluding the rate and percentage of gain recognized, the holding period,
the offset of capital losses, and the general definition of capital gain
would be helpful. The many special provisions in the code giving
capital gains treatment to income from particular assets and trans­
actions could be reviewed to advantage in order to determine their
validity in the light of equity, fairness, and economic needs. Any
review should give careful study to the wisdom of continuing to
accord capital gains treatment to special areas, such as the abovementioned depreciable property used in business, unharvested crops,
certain lump sum pension settlements, patents, timber and coal, stock
options, and the like.
We assume that your proposal to narrow" the type of income afforded
favorable capital gains treatment has reference to some or all of
these items. We believe a comprehensive review of the tax on capital
gains would be in order at this time. Legislation in this area should
not be proposed without a careful consideration of the economic
impact of proposed changes and the effect of such changes on the
whole capital gains structure.
(4) Elimination of the percent dividend credit.—The Treasury
Department does not favor repeal of the 4-percent dividend credit.
This credit, authorized in the first instance bv the Internal Revenue
Code of 1954, deals with a longstanding feature of our tax laws wThich
has resulted in double taxation of dividend income. Under existing
law the earnings of a corporation are taxed twice—once as corporate
income and again as income to the individual shareholder when paid
cut as dividends. This is due to the fact that dividends, unlike in­
terest, do not constitute a deduction to the corporation which pays
the dividends. The resulting double taxation imposes a higher com­
bined tax burden on distributed corporation earnings than on any
other form of income. The 4-percent dividend credit affords partial
relief from this double taxation.
A dividend credit is desirable not only for reasons of fairness and
equity but also because it encourages more widespread stock owner­
ship. Further, it tends to encourage equity financing in lieu of
It is encouraging to note that in the last 5 years the number of in­
dividuals owning shares of stock has increased by more than 4 million.
Most of these own very few shares of stock and are truly small tax­
payers. We believe that enactment of the 4 percent dividend credit
wTas a step in the right direction. We know of no developments which
have occurred since the adoption of the 1954 code which lead us to
believe that a change in our position on this particular credit is
(5) Reduction of the rate for oil, gas, and other mineral depletion
allowance for oil, gas, and other minerals.—This is one of the im­
portant subjects which will be considered by the Ways and Means
Committee in its fall inquiry.
The Congress established the rate of percentage depletion for oil
and gas at 27% percent in 1926. Percentage depletion was extended
by Congress to coal, sulfur, and metal mines in 1932 and made ap­



plicable to additional groups of nonmetallics in 1942 and 1943.
Again in 1951 and 1954, percentage depletion was extended to addi­
tional minerals.
An appraisal of percentage depletion must include an examination
into the whole fabric of percentage depletion allowances which cover
not only oil and gas but practically all other minerals, metallics and
nonmetallics alike, to which over the years Congress has made the
percentage depletion allowances applicable,
An examination of the legislative history of percentage depletion
establishes that the allowance for depletion was authorized by the
Congress not only to permit recovery of the investment in wasting
assets but also to provide incentives for exploration necessary for re­
plenishment of wasting assets by the discovery and development of
additional deposits.
Sound national policy must of necessity provide for the develop­
ment and replenishment of vital mineral resources as a part of our
economic arsenal to insure our security and to provide for growth
and expansion.
Any review of the philosophy of percentage depletion must consider
not only our overall tax structure but the national considerations
which have led the Congress in the past to establish the existing rates
for percentage depletion.
Increasing the number of enforcement personnel in the In­
ternal Revenue Service to permit more auditing and intensified search
for unreported income.—During the fiscal year 1959, 92.9 million tax
returns were filed with the Revenue Service. Taxes collected
amounted to $79.8 billion. Of the total returns, 60 million were filed
under the individual income ta x and represented almost 100 million
taxpayers, since joint returns reflect the income of two persons. At
the end of the fiscal year the Service had 50,200 employees.
It is obvious from these statistics that the tax collecting system of
the United States is a voluntary system. We depend on the prepara­
tion and filing by taxpayers of their returns. We depend on the tax­
payer for the original computation of his liability and for the pay­
ment, without billing, of the amount due. We believe that at all times
emphasis must be placed on the voluntary nature of our system.
It is obvious also, in view of the volume of returns handled and the
number of taxpayers, that the Revenue Service must depend in large
part on machine operations and procedures which will allow a maxi­
mum of checking through office audits and mathematical calculations.
During recent years many steps have been taken to facilitate the
enforcement of our tax laws by the Service. In 1954 the Service
adopted a simplified card return, form 1040A. For 1958 the use of
this form was extended to include salary and wage income up to
$10,000 and the number of returns filed on this simplified form was
increased to over 17 million.
Centralized machine processing of returns at the three Service cen­
ters was expanded during 1959 to cover all districts except Honolulu.
Machine processing is now used to assist in the assessment of taxes
reported, verification of tax credits, computation of tax liability, issu­
ance of bills for unpaid accounts, and the scheduling of tax refunds.
Machine processing of individual income tax returns enabled the
Service to act promptly on the refund claims of taxpayers who over­



paid their tax for 1958. A total of nearly $4 billion in excess pay­
ments was refunded to more than 35 million taxpayers with the bulk
of the refunds scheduled by the end of May—just 6 weeks after the
April 15 filing deadline. Over 52 million individual income tax re­
turns were verified by machine operations.
The volume of returns examined increased during 1959 for the
fourth consecutive year. The total of income tax examinations rose
to 2,595,000.
Additional tax, interest and penalties resulting from audit totaled
$1,619 million for fiscal year 1959—a gain of nearly 12 percent over
the previous year and marking the highest total reached since the re­
organization of 1952.
Approximately 1 million investigations were completed in fiscal
1959, involving persons or firms on which preliminary information
indicated a failure to file required returns.
The number of past due accounts on hand was reduced in 1959 to
the lowest level in nearly 7 years. Dollar amounts outstanding also
showed a substantial reduction with the year-end figure dropping
below that of any year since 1954.
In spite of the gains that have been made, increased emphasis is
being given to mechanization. The Service has initiated studies of
large scale electronic data processing equipment to determine the
feasibility of adopting and modifying Service operations to utilize
such equipment. Research will continue to be pressed in this area.
The Service also has continued to emphasize training programs for
its employees and its policies for improving the morale of its em­
ployees. This has resulted in a substantial drop in the turnover of
employees and an increase in the average number of years of service
of Internal Revenue personnel. As I am sure you will agree, the
question is not the number of employees on the payroll, but the num­
ber of effective employees on the payroll, the experience and abilities
possessed by such employees and the tools and equipment available
for their use. Numbers do Lave importance, but are only one of the
indexes which must be checked in determining the direction in which
the Internal Revenue Service is proceeding.
The Service’s program to encourage better qualified applicants to
enter the Service and to stay with the Service has produced results
but it lias cost quite a large amount of money. Specific cost accounts
for the program are not maintained, but you can infer something of
the cost when you note that the Revenue Service had 51,400 employees
at the end of fiscal year 1957 with a salary cost of approximately
$271 million, and 50,200 employees at the end of fiscal year 1959 with
a salary cost of $301 million. Even after allowance for the 1958
governmentwide pay increase, salary costs have gone up appreciably
over the 3-year period.
As you know, the Congress for fiscal year 1960 failed to appropriate
for the expenses of the Internal Revenue Service the amount of money
requested for the Service in the budget submitted by the President to
the Congress. In addition, the Internal Revenue Service requested
a supplemental appropriation earlier this year—the supplemental
appropriation containing only amounts made necessary by wage and
salary increases authorized by Congress and postal increases. The
amount of this supplemental was cut.



This information is not submitted to be critical. The Appropria­
tions Committees carefully studied the submissions of the Internal
Revenue Service. The committees and the Congress decided after
such studies that efficient and satisfactory operation of the Internal
Revenue Service could take place with the spending of less money
than the Internal Revenue Service itself thought necessary and which
the President requested. The Revenue Service has adapted its pro­
gram to the money made available to it by the Congress.
We shall for fiscal 1961 submit budget requests which will allow for
the employment of additional enforcement personnel keyed to the
orderly development of the Revenue Service program and the effec­
tive use of the materials and equipment available to the Service. We
hope to be effective in persuading the Congress to grant us the amount
requested and will most certainly appreciate your assistance in sup­
porting the program submitted by the President.
As indicated earlier, we have a common purpose of collecting all of
the taxes due the United States and doing it as efficiently as possible.
Certainly, the Revenue Service has a duty to the taxpayers of the
country to make certain that careless or dishonest taxpayers do not
escape the payment of all amounts due. Every taxpayer who pays
less than the amount he is required to pay by statute places an added
burden on all taxpayers.
The Treasury Department welcomes a study and review of the In­
ternal Revenue Code. To this end we are working, as you know, in
full cooperation with the Ways and Means Committee in the review
which they will begin in November. It has seemed to us that this is
the orderly way to proceed in this field and we believe you will agree
with this viewpoint.
Thank you for the interest which you have shown in the difficult and
complicated t a x problems with which we are confronted and in the
formulation of the administration’s program for fiscal 1961. We ap­
preciate the opportunity which you have given to us to write to you
concerning these matters.
Very truly yours,
F r e d C. S c r i b n e r , Jr.,
Under Secretary of the Treasury.
Following the transmittal of Under Secretary Scribner’s letter to
the Chairman of the Joint Economic Committee, the Commissioner
of Internal Revenue, Dana Latham, issued a Technical Information
Release, No. 198, on December 29, 1959, which deals specifically with
abuses of business expenditures for travel and entertainment, particu­
larly in the case of expenditures to cover “the ownership, operation,
or utilization of automobiles, yachts, hunting lodges, beach homes.”
In addition to these six proposals, the majority’s report suggests the
elimination of numerous preferential provisions in the estate and gift
taxes. Its entire discussion is confined to seven lines, although the
code covering these taxes is a very complex and difficult legal docu­
ment. It is a disservice to the Congress to make gratuitous sug­
gestions, unsubstantiated by documentation and specific legislative
proposals which can serve no useful purpose.
In spite of the fact that no accurate data has been assembled upon
which to appraise the economic effect of these proposed changes in the
revenue code, none of which are endorsed by the Treasury Depart­



ment, the committee makes the unqualified statement that they “would
bring in an additional $4 to $5 billion in tax income annually.”
It appears more than likely that if legislation to implement these
recommendations were enacted, it would stifle the growth of the econ­
omy, reduce the tax base, and ultimately result in a lowered level of
tax receipts.
S. Monetary policy
In his state of the Union message delivered to the Congress on
January 10, 1957, President Eisenhower proposed that the Congress
establish a Monetary Commission. The last complete and impartial
investigation of the Nation’s money and banking system was made
under the Aldrich-Vreeland Act adopted May 30, 1908, which laid
the foundations for the establishment of the Federal Reserve System.
President Eisenhower said:
Essential to the stable economic growth we seek is a system
of well adapted and efficient financial institutions, I believe
the time has come to conduct a broad national inquiry into the
nature, performance, and adequacy of our financial system.
This inquiry should be in terms of its direct service to the
whole economy and in terms of its function as the mecha­
nism through which monetary and credit policy takes effect.
I believe the Congress should authorize the creation of a com­
mission of able and qualified citizens to undertake this vital
inquiry. Out of their findings and recommendations the
administration would develop and present to the Congress
any legislative proposals that might be indicated for the pur­
pose of improving our financial machinery.49
In his Economic Report to the Congress of January 23, 1957, he
reiterated this proposal as follows:
^The exceptionally heavy demands which economic expan­
sion is placing on credit and capital markets have directed
attention increasingly to questions concerning the adequacy
of our financial facilities, and of the laws and regulations
which govern their operation. Alert to these problems, the
Senate Committee on Banking and Currency during the past
year made an extensive and constructive investigation of
Federal laws affecting financial institutions. The impact on
the economy of monetary policies designed to restrain infla­
tionary pressures has also become increasingly a matter of
public concern. There is need at this time of a thorough
study of recent changes in our financial structure and prac­
tices, covering the activities of public as well as pri vate agen­
cies, and of the legislative and administrative steps needed to
improve our facilities for meeting credit and capital require­
ments and for exercising appropriate controls over credit.
The state of the Union message recommended that the Con­
gress authorize a National Monetary and Financial Com­
mission to perform this important task. The Commission
should be composed of distinguished citizens of outstanding
49 Congressional Record, 85th Cong., 1st sess., vol. 103, pt. 1, Jan. 10, 1957, p. 410.



competence and experience in the range of questions to be

Because monetary policy has been the subject of emotional, politi­
cal discussions since our earliest history, President Eisenhower be­
lieved that a review of our entire monetary mechanism by an impartial
and independent group of financial experts would provide a better
understanding of the proper role of monetary policy in promoting
the growth of the American economy. Unfortunately, this Commis­
sion was never established by the Congress. However, the Senate
Finance Committee during the 85th Congress conducted extensive
hearings on the financial condition of the United States.
The present review of recent monetary actions duplicates much of
the work of the Senate Finance Committee and adds little to our
understanding of our present problems.
Again, it is easy for those without direct responsibility to criticize
the actions of the Federal Reserve Board, but the fact of the matter
is that an unusually fine job was done during the past 6 years by
those who maintained the delicate balance between ample credit to
meet the Nation’s proper needs and yet avoided stoking the fires of
The majority’s report proposes that the money supply be increased
and interest rates be lowered. Yet, it realizes the fallacy of its own
position by advocating selective controls on consumer credit as well
as proposing:
* * further studies should be undertaken to determine
what can be done to reduce the instability of plant and
equipment investment. It may well be that it is impos­
sible to stabilize these outlays, or that stabilization would
lead to a lower average level. Nonetheless, the problem
should be thoroughly explored. It should be kept in mind,
however, that if the rest of the economy becomes more stable,
plant and equipment expenditures will automatically become
more stable as well.
Government stabilization of investment in effect determines which
firms should be allowed to expand their operations or engage in newT
ventures. It is impossible to control this most dynamic factor in our
economy without completely regimenting our society. This is but
another instance among many where the majority’s report is ready
to abandon the freedoms which have made our country great and
empower Federal bureaucrats with additional authority.
It is strange that the majority’s report proposes that further
powers be granted to those who are responsible for our monetary
affairs while at the same time it is so ready to find fault with the
manner in which the Federal Reserve Board has discharged its
existing responsibilities.

If,. Debt management
The majority’s report is critical of policies adopted by the Treasury
and the Federal Reserve System in managing our Federal debt. How­
ever, it would be more helpful if the Congress took the necessary
action to reduce unnecessary spending programs so that the budget
“Economic Report of the President,” January 1957, p. 49.



could be balanced and a start could be made toward reducing this
Although the budget for this fiscal year shows a slight surplus, it
is largely due to the fact that President Eisenhower’s vetoes were
sustained in connection with so many unnecessary spending programs
during the 1st session of the 86th Congress.
The principal problem in debt management arises from the fact
that in addition to providing for a budget deficit of $7.9 billion in
the 1959 calendar year, the Treasury was required to finance $52.3
billion of maturing marketable issues exclusive of $24 billion of
weekly bills. This was accomplished by refunding $37.9 billion and
paying off $14.4 billion.51
If we are to prevent inflation, funds to finance the Federal Gov­
ernment, like any other revenues, must be derived from savings. The
demand for funds and the incentives to save in the long run determine
the prevailing rate of interest in the Nation’s money markets.
President Eisenhower urged the Congress to remove the interest
ceiling on long-term Federal obligations, but no action was taken. In
fact, the majority’s report proposes that this impossible situation
should be continued indefinitely. It states:
Because the question of the 414 percent interest-rate ceiling
is of such importance, most of the recommendations for im­
proved debt management are discussed in connection with it,
in order to avoid unnecessary repetition. * * *
It is our recommendation that the 414 percent ceiling on
long-term Government bonds (those over 5 years) not be re­
moved until major reforms in fiscal, monetary, and debtmanagement policies are instituted. * * *
The effect of this artificial and arbitrary ceiling is to force the
Treasury to finance its requirements through the sale of short-term
securities. The Federal Government is competing with those who
would normally be seeking commercial loans, installment loans, and
other credit necessary for the business community. Such a course
leads to unnecessary and unwarranted hardship, and it also encourages
monetization of the debt.
A sound policy of debt management would permit the Treasury to
set interest rates in such a manner that its obligations would be
sought by institutional investors who would retain the bonds to ma­
turity. Such a course would enable the Treasury to convert more
of the debt into long-term obligations rather than to continue with the
existing program of continually refinancing through short-term issues
which disturbs the orderly functioning of the Nation’s banking1system.
5. Federal Reserve policy
The Federal Reserve System is largely the work of former Senator
Carter Glass, of Virginia. It was established on December 23, 1913,
during the administration of President Woodrow Wilson, as an inde­
pendent agency.
The functions of the Federal Reserve System are set forth in a
publication of the Board of Governors which states that—

51 “Economic Report of the President,” Jan.

20, 1960, p. 42.



* * Its original purposes, as expressed by its founders,
were to give the country an elastic currency, to provide fa­
cilities for discounting commercial paper, and to improve
the supervision of banking. From the outset there was rec­
ognition that these original purposes were in fact integral
parts of a broader objective, namely, to help counteract infla­
tionary and deflationary movements, and to share in creating
conditions favorable to sustained high employment, stable
values, growth of the country, and a rising level of consump­
tion. Acceptance of this broader objective widened over the
years and today it is generally understood to be the primary
purpose of the System.
How is the Federal Reserve System related to production,
employment, and the standard of living ? The answer is that
the Federal Reserve, through its influence on credit and
money, affects indirectly every phase of American enterprise
and every person in the United States.52
Under its present Chairman, a sound course has been set which has
enabled our dual system of State and National banks to work together
in an orderly fashion to promote the growth and stability of our
The majority’s report is primarily concerned with the fact that
the Federal Reserve authorities had sufficient courage to halt the boom
in 1953, even though politically this course was not advantageous for
the incumbent administration. However, the policies which were pur­
sued at that time made possible the good times which we experienced
for the next few years.
Once again there were excesses in 1957 which required firm and
courageous action. To be sure, a boom was curbed by the deliberate
actions of our monetary authorities. This set the foundation for the
stable and sound recovery we are now enjoying.
Apparently those who accept the thesis expressed in the majority’s
report would set the country on a course of attempting a continuous
boom which would surely end in the largest bust in history. This
might be politically popular while the boom lasted, but in the broader
perspective of history those who would accept this formula would be
denounced as having jeopardized not only our economic solvency but
also the security of the free world which depends on a strong and
healthy economy in the United States.
6 . Antitrust and price prenotification
Americans are ever mindful that our spectacular economic achieve­
ments are the direct result of competition. Former President Herbert
Hoover, in his address at the Brussels Fair on July 4, 1958, expressed
the views of most informed Americans. He said:
We are often depicted as living under the control of
wicked men who exploit our economic life through gigantic
trusts and huge corporations. They are supposed to grind
the faces of the poor and to exploit other nations. All this
ignores the fact that our laws for nearly 70 years have pro­
hibited the existence of trusts and cartels. In few other
»2 The Federal Reserve System, Board of Governors of the Federal Reserve System,
Washington, D.C., 1954, pp. 1, 2.



nations have the fundamentals of fair and open competition
been so zealously maintained.
This competition has spurred our industries to adopt
every laborsaving device. And, to create them, there are
more than 5,000 industrial research laboratories that pour
out new ideas which become open to all the world.53
Unfortunately, the majority’s report attempts to link size with
monopoly. It states:
* * Granted that the best size of a firm for gaining the
advantages of technology and of research may be quite large
in some industries, it does not follow that industrial giant­
ism is necessary. There is no evidence, to indicate that
greater and greater efficiency goes in step with greater and
greater size; rather, most of the huge corporations in industry
enjoy no greater economies of mass production and provide
no greater improvements through research than do firms onequarter or one-eighth of their size. * * *
The Senate Antitrust and Monopoly Subcommittee in its investiga­
tion of the automobile industry had an opportunity to study the
contributions by various-sized firms to advancing research and tech­
nology. The minority views of the junior Senator from Illinois,
Everett McKinley Dirksen, stated that:
One of our most significant postwar developments has been
the establishment of great research centers by America's
leading corporations. They include the Bell Telephone Lab­
oratories, Du Pont, General Electric, General Motors, RCA,
United States Steel, Ford, and others. None of these facili­
ties would be available to meet the intense competition with
Soviet Russia if any producer were limited to a size merely
sufficient to secure maximum economy in the manufacture
of a limited product line.54
President Eisenhower participated in the dedication of the Gen­
eral Motors Technical Center. The President said:
This particular center is a place for leadership in fur­
thering new attacks on the technological frontier. Beyond
that frontier lie better and fuller employment, opportunities
for people to demonstrate yet again the value of a system
based on the dignity of the human being, and on their free
opportunities in life. Beyond it lie people, better capable
of working with others and so that they may share what they
learn with our friends in the world.
So in this technological center, we have this development of
new machines responding in their efficiency to the constantly
inquiring mind of the technician, that they in turn will pro­
duce yet broader freedoms and richer dignity for human
beings, more rewarding lives, for all America and we hope
through all the world.55
53 “Administered Prices, Automobiles.” report, together with individual views of the
Subcommittee on Antitrust and Monopoly of the Committee on the Judiciary. U S Senate
pursuant to S. Res. 231, 85th Cong., 2d sess., Nov. 1, 1958, p. 311.



The majority's report ignores the Nation’s need to maintain firms of
sufficient size to support these research institutions. The term giant­
ism has become relative. Mr. George Romney, president of the Amer­
ican Motors Corp., one of the more progressive but smaller factors
in the automobile industry, at the request of the chairman, prepared
an estimate of the minimum economic size of an automobile-produc­
ing unit and the capital investment which would be necessary for
its establishment. The majority's report of the Antitrust and Monop­
oly Subcommittee referred to his statement as follows:
* * These estimates are based 011 current reproduction
costs for building, machinery, equipment, and standard tools
and dies, plus organizational expenses and estimated firstyear losses. Mr. Romney chose to submit his estimates in
terms of an enterprise producing 250,000 automobiles a year.
His estimate of the total capital requirements for a new com­
pany with this production breaking into the market for the
first time is $576 million. * * * 56
With an estimated automobile demand of 5 million units, a firm
capable of building only 5 percent of the industry’s output would re­
quire an investment of more than a half billion dollars. Hence, it
is not surprising that large size is a characteristic feature of many
mass production establishments.
The majority’s report also implies that concentration is increasing.
Yet, over the years there has been no significant increase in concen­
tration. In the case of the steel industry, testimony before the Sen­
ate Antitrust and Monopoly Subcommittee by Mr. Roger Blough,
chairman of the board of the United States Steel Corp., showed that in
1902 his firm produced 66 percent of the total steel made in the United
States, whereas in 1957 it was responsible for less than 30 percent of
domestic production.57 To be sure, the United States Steel Corp. has
increased in size during this period, but its share of the market has
declined to less than half of its former position during this period of
55 years.
The majority’s report suggests numerous specific legislative pro­
posals ranging from amendments to the Clayton Act applying it to
bank mergers and to legislation for civil investigative demands. These
are matters which cannot be disposed of in less than eight lines of a
Legislation to authorize the Department of Justice to proceed with
civil investigative demands when it believes that there is a probable
violation of the antitrust laws has been endorsed by the administration.
The principal problem surrounding this measure has been the preser­
vation of the confidential nature of the material submitted to the
Department of Justice for law enforcement purposes. Such legis­
lation must not be misused in fishing expeditions by congressional
committees or others who may seek headlines. A bill, S. 716, was
passed by the Senate on July 29, 1959. It provides that the Depart­
ment of Justice may remove such records as it deems pertinent for
inspection and examination. Such a course would deprive a business
of its essential operating records. The same purpose could be accom67
“Vrtmin‘i?tered> Prices, Steel,” report of the Committee on the Judiciary, U.S. Senate,
Subcommittee on Antitrust and Monopoly, pursuant to S. Res. 57, 85th dong., 2d sess.,
Mar. 13, 1958, p. 1S9.



plished by permitting the Antitrust Division to examine a firm's
records and make such copies as it deems necessary to assist it in the
enforcement of the antitrust laws.
The majority's report also includes support for measures which
would involve the Federal Government in key price- and wage-setting
processes. It states:
While we recognize the difficulties and dangers of, and share
the presumption against, Government participation in the
price-wage-setting process, there is a need, at least on a stand­
by basis, for a factfinding procedure in key price, and asso­
ciated wage, increases which seriously threaten economic sta­
bility, to be invoked at the discretion of the President, and to
result in the issuance of a report and recommendations re­
garding the justification and desirability of such proposed
The American economy is based on free enterprise in which com­
petition in the market place determines prices and collective bargain­
ing the wages paid to labor. Inspite of the serious loss of production
and incomes which have been experienced in major labor disputes,
it would be a tragedy to compound our difficulties by authorizing in­
tervention by the Federal Government into these areas. Measures
are pending before the Congress, including S. 215 which has already
been discussed, that would require prenotification before a price in­
crease could be put into effect bv firms in so-called concentrated in­
dustries, The structure of the American economy is exceedingly com­
plex, and even a casual glance at available data shows that almost half
of the products of American manufacturing would fall into this
A report entitled “Concentration in American Industry'" by the
Subcommittee on Antitrust and Monopoly of the Senate Judiciary
Committee, issued in July 1957, shows that at least 600 separate prod­
uct categories are affected.58 Still another measure which is presently
pending before the Rules Committee of the House of Representa­
tives, II.R. 4870, introduced by Representative Reuss, would inject the
Council of Economic Advisers and the White House itself into these
All collective bargaining would become a farce should such a
measure be enacted into law, as the participants in any wage-price
decision would wait for the White House or some other Government
agency to act rather than to settle their problems themselves. This
is the path that leads to socialism and a planned economy—not to
voluntarism which underlies the American way of life.
While the majority's report refers to key industries, experience
shows that they set both the wage and price patterns for others to
follow. In effect, the majority's report provides a thinly disguised
support for Government price and wage controls. This measure
would particularly embarrass small firms who would be unable to in­
crease their prices until their more successful competitors were willing
to accept a review of their costs and other data, which would be dis­
closed to competitors here and abroad. Competition is not possible
under such circumstances.
68 “ Concentration in American Industry,” report of the Subcommittee on Antitrust and
Monopoly to the Senate Judiciary Committee, 85th Cong., 1st sess., pursuant to S. Res.
57, committee print, July 1957, pp. 41-<32.



7. Tariffs
The majority's report recommends that we reduce our tariffs grad­
ually. The Congress enacted legislation on August 11, 1958, H.R.
12591, 85th Congress, 2d session, which extends the Trade Agreements
Act to June 30, 1962. It authorizes the President to reduce tariffs up
to 20 percent below the levels existing at that time, but no more than
10 percent in a single 12-month period. It allows the cuts to be made
any time within 4 years beyond the end of the act’s extension, or up
to June 30, 1966.59
In view of the fact that at the forthcoming GATT negotiations,
tariff cuts may be negotiated under the terms of this act, there is little
to be gained by recommending a new tariff policy at this time until
the present tariff reduction powers have been exhausted. Further­
more, in connection with our tariff program, it will become more and
more important for the administration and the Congress to protect
America’s gold reserves since under present conditions, imports are
entering the country faster than our exports of goods and services.
In December 1957 the U.S. gold reserves totaled $22,857 million.60
The most recent data available as of October 1959 shows that they
had declined to $19,647 million.61 Under these conditions, and with
the powers already granted for tariff reduction, it is more important
to stabilize our international trade than to cause additional disloca­
tions by tariff changes. Furthermore, in the next few years, we will
be confronted wTith increasing competition from the European Com­
mon Market, as well as the countries constituting the Outer Seven.
Until these new international factors have been adequately appraised,
it is a disservice to suggest that the Congress even consider any legis­
lation relating to tariffs.
8. The farm problem
America’s farm problem stems from the fact that in three wars we
were called upon to furnish the food and fiber which normally would
have been produced by our allies themselves. As the economies of
other nations once again were able to adapt themselves to peaceful
pursuits, the policies which we had adopted during wartime produced
vast and unwieldy surpluses. The Congress reduced the land under
cultivation for the basic crops through the conservation reserve in
the soil bank program.
Additional efforts were made to secure a workable farm program
during the past 2 years with no success, since the Congress was un­
willing to accept the administration's recommendations. In many
cases the farm organizations themselves were not in agreement as to
the best overall agricultural policy.
The majority report proposes that:
Let us support farm income rather than farm prices
through a system of production payments but with dollar
limits on such payments. The difference between market
price and a given percentage of parity—say, 85 percent—
would be met by a direct subsidy. But let us limit the
bushels or amount of such production which can qualify for
58 Congressional Record, U.S. Senate, 85th Cong., 2d sess., vol. 104, pt. 13, Aug. 11,
1958, p. 16821.
60 Federal Reserve Bulletin, December 1959, Board of Governors of the Federal Reserve
System, Washington, D.C., p. 1556.
61 Ibid.



payments as well as the total amount of such payments to
any one farm or farmer.
This is not a new suggestion. On the contrary, it was first pro­
posed by the Secretary of Agriculture, Mr. Charles F. Brannan, in
1949 and endorsed by President Truman in his Midyear Economic
Report transmitted to the Congress on July 11, 1947. He stated:
There is immediate need to overcome a number of short­
comings in existing farm legislation. It is necessary to as­
sure fair and adequate supports for major farm products,
notably livestock products, which have not been covered in
past programs. It is necessary to authorize the use of direct
production payments as an alternative to the pegging of
market prices if an effective support program is to be carried
forward without waste of commodities and without denying
to consumers the benefits of agricultural abundance. It is
desirable to recognize clearly that the objective farm support
prices is to maintain an adequate level of farm income and
promote shifts in lines of agricultural production which will
encourage and increase in the total domestic consumption of
farm products. I urge the Congress to enact at this session
legislation to meet these needs.02
Accordingly, there are no new and novel proposals in the majority’s
report. Once again it has undertaken to usurp a field which has been
intensively reviewed by the congressional committees dealing with
agricultural problems. They have a better conception of the needs
of the farming community and are staffed with knowledgeable experts
in these fields.
While the Nation expended vast sums to assist the producers of
basic crops, it should be noted that countless farmers are enjoying
satisfactory incomes producing vegetables, fruit, nuts, livestock, and
other commodities which are not subject to Federal controls over pro­
duction, or prices. On the contrary, with the exception of the tobacco
program, all of the difficulties arise from our continuing to support
the production of unneeded surpluses in a few basic commodities.
This approach was thoroughly justified during wartime.
As any nation becomes industrialized and enjoys a higher standard
of living, less of its productive efforts will be devoted to agricultural
pursuits. Census data frequently fails to reflect these shifts, as many
industrial workers continue to live on their farms and are classified
as farmers. Yet, their principal income stems from other activities
either in industry or in the serivce trades.
Dr. Simon Kuznets of Johns Hopkins University describes this
normal shift from basic agriculture as follows:
* * First, in the countries where per capita income grew
significantly, the proportion of the labor force engaged in
agriculture declined and that engaged in nonagricultural
industries increased. The shifts have been quite marked.
Thus in the United States the share of the labor force in
agriculture was over 70 percent in 1820 and less than 20
percent in 1940. In Japan this share was 72 percent in 1870,
and less than 30 percent by the mid-1930’s. Second, in com­

162“MidyearEconomicReportof thePresident,” July1949, pp. 9-10.



paring the industrial structure of countries at a recent point
of time, we find a fairly close negative association between
the level of per capita income and the share of the labor force
in agriculture: the higher the former, the lower the latter,
and vice versa. Thus the share of the labor force in agri­
culture in India, China, Indonesia, and many of the poorer
countries in Latin America, is between 60 and 70 percent ;
that in countries with high income per capita, even those that
are great exporters of agricultural products (Canada,
Australia, New Zealand), is usually well belowr 30 percent.63
Sooner or later the American people must adjust to the basic
economic facts which prevail in all societies as they become more in­
dustrialized and their living standards rise. There is no permanent
solution to the farm problem embodied in the majority’s report.
9. International affairs
In the discussion of tariffs, it was shown that further reductions as
recommended in the majority’s report would cause grave dislocations
in our economy. These views are supported in the majority’s report
itself in the statement that:

In the last 2 years, the United States has become acutely
aware of a host of new^ problems about our economic position
in relation to the rest of the world. The very large balanceof-payments deficits of the last 2 years and the gold drain,
which became acute in 1958, have led this committee to reex­
amine the American position.
Although aware of the fact that our international position has
deteriorated, the majority’s report makes no reference to the fact that
labor costs which constitute the principal element in all costs have
continued to rise, thus limiting the market for American products.
Furthermore, inasmuch as the United States has contributed the
major share of the defense expenditures for the free world, these
costs too have had to be factored into the prices of all goods and
services produced in the United States. American workers are more
concerned about their take-home pay after taxes than in their hourly
wage rate or monthly salary. Every new spending program must
ultimately result in wage and salary increases which, in turn, require
price increases. The greatest contribution which the Congress can
make toward stabilizing our international position would be to re­
duce Government spending programs so that tax reductions might
take place. This would increase workers take-home pay without add­
ing to employment costs, and hence, prices.
Most of the recommendations contained in the majority’s report
would have the opposite effect. The majority’s report appears con­
cerned with the increase in the productivity which has occurred in
other countries. It refers to the growth not only in western Euro­
pean countries, but more specifically within the Soviet Union. It
The recent growth record of the American economy con­
trasts with that of most of the advanced economies of the
63 “National Policy For Economic Welfare At Home and Abroad,” Doubleday & Co., Inc.,
Garden City, N.Y., 1955, p. 31.



world * * * the rate of increase of output was much larger
elsewhere. In the OEEC countries of Europe as a whole,
gross national product rose at a rate of 4.9 percent for the
period 1950-57, the most recent dates for which comparable
figures are available. Industrial production, which rose at
a rate of 4.4 percent in this country from 1950 to 1957, rose at
6.2 percent in OEEC countries. Economic growth in the
Soviet Union had been at an even higher rate with total out­
put growing at approximately 7 percent.
It is vital that we do not fall into the practice long followed by
the Russians of measuring our progress in terms of percentage changes
without regard to the magnitude of the base from which changes are
measured. The National Industrial Conference Board, a private
and well-respected research organization on September 24, 1959, con­
ducted a panel discussion on the prerequisites for economic growth.
Dr. Solomon Fabricant, director of research of the National Bureau
of Economic Research, one of the leading students of the problem of
measuring comparative growth, reviewed America’s performance as
contrasted with that in other countries. He said:
* * Nevertheless, whatever projections you or other
people make— and this is extremely important— about our
rate of growth or the rate of growth of Russia or that of
Western Europe, or China—they are, after all, projections.
They are not firm forecasts of wThat is inevitably to happen.
They are, at best, forecasts of what might happen on the basis
of certain assumptions; and the assumptions may not be
He also said:
Today in Western Europe, the average level of national
income per capita or its nearest measurable equivalent
(which is usually gross national product) is about half that
of the United States. The Swedish report also makes ex­
trapolations or projections of the national income per capita
of these Western European countries. Even on optimistic
assumptions, the level they might expect to reach in 1975
is 20 percent below the present average level in the United
States. Now these Western European coimtries are among
the most prosperous countries of the world. The comparison
then only serves to highlight the degree to which the bulk of
mankind still needs goods and services.05
A strong America with a minimum of Government interference re
straining the initiative of its free citizens provides the best hope for
mankind to counter the challenge of the monolithic state. They de­
vote the energies of their people to the wishes of those temporarily
entrusted with power rather than to the desires of their individual
citizens. By setting an example of performance, such as we have
achieved during the past 6 years, we can make our maximum con­
tribution toward maintaining freedom in other lands. Insofar as we
avoid cost price pushes due either to excessive labor demands or un­
64 “ Prerequisites for Economic Growth,” National Industrial Conference Board, Studi<!
in Business Economics, No. 66, New York, Sept. 24, 1959, p. 20.
* Ibid., pp. 10-11.



necessary Government expenditures, we shall restore our dwindling
gold reserves and maintain the respect not only of our allies but also
the uncommitted millions who are appraising the merits of our way
of life as contrasted with the promises held forth by the Com­

These supplemental views deal only with a few of the major mis­
conceptions contained in the majority’s report. These supplemental
views are filed with keen disappointment because a unique opportunity
had been presented by the Congress to establish some economic facts
and data in an area where fundamental knowledge is meager. In­
stead, a political document has been prepared without regard to the
best interests of the Nation.
Mr. John S. Sinclair, the President of the National Industrial Con­
ference Board, in opening the roundtable discussions on the prere­
quisites of economic growth, stated:
* * Business, Government, and popular interest in the
subject of economic growth has welled up markedly in recent
years. It is surprising how readily it has been assumed that
we know the past’s secrets of economic growth and so can
clearly state the rules for present growth here or in any other
country or can meaningfully compare the growth of one na­
tion or one system of government with that of another.
In striking contrast to this intensive interest is the relative
paucity of authoritative materials designed to answer all or
any one of these questions. Certainly, until the prosperity
of the postwar period, much of the research effort here and
abroad wTas upon the problem of the business cycle rather
than long-term economic growth.66
It is regretable that the special study staff in the preparation of the
majority’s report neglected this challenge to add to our knowledge
on this admittedly vital subject.
06“Prerequisites for Economic Growth,” National Industrial Conference Board, Studies
in Business Economics, No. 66, New York, Sept. 24, 1959, p. 9.


While I am joining in the minority views, I also believe it is of
special importance to stress the positive aspects of U.S. policy on
employment, growth, and price levels, and I am therefore filing these
additional comments to set out my views on certain affirmative matters.
The leading requirements for our Nation in economic terms are, I
believe, major increases in productivity, new methods in labor-management relations to assure continuing production, constructive en­
forcement of antitrust laws, major increases in international trade
and investment, a rational trade, tariff and travel policy, partner­
ships with other industrial countries to give foreign aid and technical
assistance adequate to retain the newly developing nations within the
free world, training of a corps of young Americans to work abroad
for government and business, and an even-handed fight against in­
Present in the majority report is the repeated inference, often ex­
plicitly stated, that the basis for the Nation’s economic problems of
productivity, inflation, high interest rates, etc., dates from some clearly
identifiable day in early 1953. Such an inference must have a politi­
cal coloration, for the facts show that basic influences on our economy
have a continuous history, at least since World War II. This politi­
cal coloration cannot be just dismissed because, by beclouding im­
portant issues, it does a disservice to our people and to those among
our people who are responsible for our policies.

Differences as to ways and means and as to the dollar amounts of
specific welfare measures and Federal Government expenditures for
construction are important and absorbing questions for political de­
bate, but in principle there is far greater agreement on the desirabil­
ity of and support for most of these programs than we are often led
to believe. But a preoccupation with means ought not to divert our
attention from the one really overriding question which involves the
very destiny of our country. This question, whether we like it or not,
is whether our country, thrust into the position of world leadership,
will lead the world in peace, productivity and higher levels of pros­
perity and living, or yield that role to a foreign and abhorred political
and economic ideaology.
These are, in short, not normal times for our country or for the
world and we cannot deal with economic problems as if they were.
Yet, we are deeply committed to free institutions; there are some
actions we will just not resort to in the way of regimentation of the
economy or the discipling of the individual, whatever may appear to
be their attractiveness in terms of dealing with economic problems.
Although we are not engaged in a “hot war,” the life and death
struggle between the economic and social systems of freedom versus
communism—still the “cold war” now phasing into predominantly




an economic struggle—demands unusual expenditures, personal sacri­
fice and a dynamic policy. The peaceful competition between the
United States and the free world versus the U.S.S.R. and the Com­
munist world is now shifting more and more into the economic
sphere— an indication of growing confidence by the U.S.S.R. in its
power in the economic area. In this global conflict, U.S. foreign
economic policy could well have a decisive influence on the success of
the revolution of rising expectations for tolerable living standards in
Asia, Africa, and South and Central America; and therefore ma­
terially influence the more than 1 billion people in the less developed
areas of the free world— among them the peoples of 20 nations newly
created since World War II, whose ultimate decision will be so critical
in determining whether freedom or communism is the rule of the

For these all-important reasons, I find that I cannot agree with the
current popular political test which seeks to distinguish between the
“spenders” and the “savers”—the effort to polarize and thus make ir­
reconcilable the views of those who believe in the necessity of economic
growth more and those who fear inflation more. The majority, I am
pleased to note, unequivocally rejects either leaping or creeping infla­
tion as an acceptable economic condition.
We must reaffirm our own faith in our ability to meet decisively the
economic challenges which now confront us while at the same time w^e
make measurable progress forward in our national development— we
must do this confidently without making “budget balancing” our sole
aim, but at the same time with the objective of balancing the budget—
and indeed securing a surplus for the reduction of the national debt
wherever possible, by a careful, hardheaded regard for budget and
fiscal necessities. The financial viability of this country is a major
element in national security and therefore we cannot lay aside budg­
etary considerations. But the at same time, it would be equal folly
to permit them to become the primary determinants of our policy.

Prerequisite to fulfilling the destiny of the Nation in this critical
time in world history is the necessity for “gearing up" U.S. produc­
tion and productivity in the proper lines so that we can have not only
the strength required for free world leadership but can also, both by
our aid and example, help other parts of the free world in their striving
for higher standards of living for their people, who are so often the
primary targets of communism. The optimum per annum increase of
5 percent is generally cited, compared with the present Sy2 percent
and the lower average of the last 5 years.
Allen Dulles, Director of the Central Intelligence Agency, testified
before our committee that “Soviet gross national product has been
growing twice as rapidly as that of the United States over the past 8
years." We must remember, moreover, in making comparisons be­
tween the economic strength of the Soviet bloc and that of the Western
World, that the Soviet, including its satellites, is indeed constituted
and prepared to act as a bloc. On the other hand, the strength of the



Western World, to the extent that it depends upon our friends and
allies, must be constantly nurtured and maintained by diplomatic and
economic persuasion demonstrating to the other free and uncommitted
peoples that their long-range hopes and interests are best served as
parts of the free world.
Today, the productive power of the West alone, composed of the
United States, Canada, and the countries of Western Europe, en joys
a more than 3-to-l lead over the Soviet industrial bloc, composed of
the U.S.S.R. and its European satellites; the West's gross national
product is rapidly approaching $1 trillion, which can be translated
into a per capita share of the gross national product amounting to
$1, 633. That is in contrast to the Soviet industrial bloc's national
product of $245 billion and an $815 per capita share.'
It seems clear accordingly that an increase in productivity is essen­
tial not only to enable us to meet the needs of our growing population,
but to improve as well our oversea position in terms of our balance of
payments and to enable us to carry the leadership of the free world for
peace. Allen Dulles also said in this regard, ‘T would emphasize
that we must increase our recent rate of growth to hold the Soviets to
limited gains.”
A conscious effort to increase our productivity may well be made
with help from our wartime experience, during which 5,000 labormanagement productivity councils were registered with the Federal
Government. The Department of Labor in cooperation wTith the De­
partment of Commerce and other appropriate agencies should begin
to lay plans for the development of local and regional labor-management productivity councils. Such councils should have representa­
tives of the trade unions, management, and possibly local govern­
ment. They could at this time plan for improving labor management
relations, the transition to automation, improving plant efficiency and
safety, improving job training and apprenticeship programs, reduc­
ing avoidable absenteeism and establishing better mutual understand­
ing between industry and the community. I am planning legislation
which would amend the Employment Act of 1946, which is also the
basic authority for this committee, to promote the establishment of
such councils.
The questions raised by the organization of labor-management
productivity councils lead directly to the question of automation.
It is clear that the danger shown by our imbalance of international
payments (1958 and 1959 at $7 billion) is only a warning signal. It
shows that we are now an inherent part of the competition in the
whole free world. As the economies of Western Europe and Japan
and other industrial countries revive—thus realizing successfully all
of the efforts which have been made to bring about exactly this result,
beginning with the Marshall plan and in the mutual security pro­
gram—the competition for world markets will get keener. Automa­
tion, advanced technology, ingenuity, and improved know-how will
be needed in even greater quantity if we are to stay ahead in the race
for markets.
But automation, desirable as it is in accordance with what has
represented U.S. economic success in the past and what appears to be
required for continued success in the future, must have its humani­
tarian consideration. And here we find the need for retraining and



reequipping the individual workers who may be displaced by auto­
mation in order to take care of his problems during a transition
period and to see that he is established in a proper economic place.
This process has been going on anyhow and is evidenced markedly by
the material rise in those who work in services and professions in
in the United States since the end of World War II as' compared
with those who are engaged directly in the production process. We
all know that this trend is bound to continue.
We should therefore get to work on minimizing the amount of
human dislocation which automation makes. It will take money
and effort to retrain workers in order to give them* new and very
often better opportunities when they are displaced by virtue of auto­
mation. At the same time new needs are created by the very pro­
ductivity and greater wealth production which increased productivity
brings, especially as the statesmanlike phases of the orgainzed labor
movement now assure more and more a fairer division of the avails
of production between the various elements in the economy.


The recent steel strike has shown that our existing means of dealing
with national emergency labor disputes are not adequate to meet the
necessities of modern life. Therefore, legislation recently proposed
by myself and Senator Aiken would authorize the President, in the
event of a national emergency labor dispute, to appoint a public fact­
finding board which would make recommendations for settlement.
Following such action, and where the national health and safety is
involved, the President may direct the Attorney General to go into
court and request the appointment of a special receiver who would
take possession of the affected facilities in the name of the United
States and operate them to the extent required to protect the Nation’s
health and safety. The bill would not negate the use of existing
procedures but would make available alternative methods of dealing
with emergency situations triggered by national emergency labor
disputes while at the same time encouraging the use of collective
bargaining in order to achieve final settlement.
On the other hand, I am opposed to suggestions which would apply
the antitrust laws to trade unions, as being inappropriate to the de­
clared objectives of those laws. There are more appropriate and
effective ways to give the public interest full effect in labor-manage­
ment relations, as, for example, the proposals, discussed above.




This is the leading, if not the only country, in the world which
has had upon its statute books for nearly three-quarters of a century
legislation to restrain monopoly and engrossing. We find in the
economic platforms of both parties today repeated statements of the
desirability of more vigorous and more effective enforcement of these
laws and at least lipservice to more generous budgetary support of
the agencies charged with such enforcement. These protestations
need to be implemented in the interest of curtailing the economic
power of monopoly where it is aimed at noncompetitive rigidity. It



seems to me also that consideration might be given to strengthening
the position smaller businesses have in competing with their giant
“competitors.’' A permissive degree of cooperation among small
businesses properly supervised by Department of Justice or by courtappointed special masters, by strengthening the hand of such small
businesses, might aid the Government in its antitrust enforcement
policy. In this context, I believe that the statements of the majority
and the minority in the area of antitrust policy can receive general


A major effort by the United States must be made in the economic
sphere to sharply step up its foreign trade, particularly exports. By
1964 we must strive to about double U.S. export-import trade, increase
ing it from $29 billion (excluding military aid exports) to $50 billion
Expanded foreign trade is indispensable to a budget surplus in
1960 and to the economic health and future of the United States.
The President’s expectation of a budget surplus is heavily based on
such trade expansion, according to the Economic Report. To bring
it about will call for two new programs in the Federal Government—
export credit guarantees and adjustment assistance for businesses and
workers adversely affected by imports.
We must expect increased imports if we seek to increase exports;
therefore, by supplying assistance to those parts of our society ad­
versely affected by certain imports, the national interest may best be
served. It should be especially noted that increased customs receipts
took place during a period when wre were lowering our tariffs in ac­
cordance with our reciprocal trade policy.
The United States is now running a substantial balance-of-pay­
ments deficit which can be redressed primarily by increased exports.
Yet a liberal U.S. import policy is essential to the economy of the free
world, especially of the newly developing areas to which an active for­
eign trade in primary commodities is indispensable, and such a U.S.
import policy is not practical without increased exports by us. Ex­
ports are a test of our productivity which is a critical element in the
struggle between free institutions and communism; and fairness to
consumers in the United States, as well as the increased competitive
sharpness of our production system, require a sufficient import policy.
We are undergoing an adverse balance of payments internationally
which in the 2 years 1958 and 1959 has aggregated $7 billion. While
the United States is economically and financially strong, our balanceof-payments position must be redressed eventually if we are to main­
tain a high level of employment and continue economic progress and
development, maintain our position of economic leadership of the free
world, carry out the mutual security program of economic aid to
newly developing areas, and maintain a vital private economic system.
Therefore, the United States has a tremendous interest in display­
ing a vigorous diplomatic initiative to bring about a means for living
together between the “Inner Six” European Economic Community
and the “Outer Seven” European Free Trade Association in Western
Europe. We have that opportunity at the negotiations under the
General Agreements on Tariffs and Trade which is scheduled to open
in September 1960.



The important contribution to economic development made by for­
eign trade and private investment programs is often unappreciated.
Even a small reversal of the progressively liberal trend of our trade
policies or a recession of demand in the United States can wipe out or
curtail large segments of our trade and have strongly adverse effects
on our friends. Governmental economic aid cannot take up this
slack. In 1958 our export and trade with Mexico exceeded $1.3 bil­
lion while our net economic grants and credits were $77 million; with
Cuba our trade was nearly $1.1 billion, economic aid was $11 million;
with Argentina an 8 to 1 ratio held true; with Colombia the ratio was
better than 10 to 1; and while our trade with Venezuela exceeded $1.7
billion our net economic grants and credits were only $3 million, and
with Indonesia the ratio was nearly 10 to 1. With the African na­
tions of Ethiopia, Ghana, and Liberia our trade was $200 million
while the net effect of our economic assistance was $15 million.
The developing countries of the world are heavily dependent on
exports to the United States as part of their total export program
and of their economic development. In 1958, the ratio of exports to
the United States versus total exports stood at 1 to 3 for Japan. The
Philippines exported well over half their goods to the United States
and Brazil more than 40 percent.
The industrial nations of the free world must share in the work of
economic development of the less-developed areas. That our NATO
allies can do so is evidenced by their gross national product which is
expanding at a rate about twice that of the United States and is al­
ready over the $300 billion mark, and by their efforts in the field of
economic aid to date.
Britain in 1958 spent some $350 million in Government aid to the
less-developed nations, while France’s program runs to $250 million
annually. The European Common Market countries have established
a $580 million common market oversea development fund, largely for
Africa. These figures show that the potential is there, the will exists,
and a start has been made. Now a full-scale program must be mapped
out whereby public and private investment by ourselves and our
friends will reach a goal of $10 billion a year, about 40 percent more
than at present, in the less-developed nations of the free world.
The NATO Parliamentarians Conference which met in Washing­
ton last November adopted the several resolutions of its Economic
Committee (of which I have the honor to be chairman), on this subject.
They proposed the economic integration of free world efforts to lib­
eralize trade and to raise the standards of living of the uncommitted
and less-developed nations of the free world through coordinated pub­
lic and private investment and though orderly primary commodity
markets. The first step toward such cooperation was taken in Jan­
uary 1960, by nations representing the European Common Market,
the European Free Trade Association, the Organization for European
Economic Cooperation, and the United States and Canada, and plans
were adopted for further negotiations for the establishment of a
20-nation organization of Atlantic economic cooperation including
the United States and Canada, which will pursue coordinated eco­
nomic policies.
A report on the place of the U.S. private economy in the foreign
policy efforts of our Government which is of monumental importance



to the peace leadership of the United States was recently issued. It
is entitled, “Expanding Private Investment for Free World Economic
Growth” and was prepared by the Departments of State and Com­
merce in cooperation with other Federal agencies and issued by Under
Secretary of State Dillon, based on the staff work of Ralph I. Straus
of New York. This report recommends a major increase in U.S.
foreign private investment in aid of our peace leadership. It deals
with tax incentives for oversea private investment ; participation of
small business; stimulation of treaties of commerce, friendship, and
navigation; material increase and improvement of the existing ICA
private investment guarantee program; improved administrative pro­
cedures of U.S. Government agencies in the foreign trade and invest­
ment field and other major matters of this character.
Of great importance to the outcome of the economic struggle will be
the degree to which U.S. civilians enlist directly in the effort to pro­
mote peace and prosperity in the free world by working overseas for
businesses and voluntary organizations, as well as for the Government.
A national drive should be launched to usher in a new era in 1960— an
abroad, as businessmen, students, workers, teachers, missionaries, tech­
nicians, and doctors, together with their families ready and willing
era of thousands of well trained, dedicated, versatile young Americans
to teach or to train as well as to listen and learn.
Person to person diplomacy by 500,000 American civilians working
overseas compared to the 100,000 working overseas now is a realistic
short-range goal, if U.S. public and private overseas assistance con­
tinues to expand and grow as it should in less developed areas and as
U.S. colleges and universities equip themselves to train thousands for
overseas assignments. To encourage qualified Americans to spend
some of their productive years working abroad, we should provide tax
incentives where necessary, especially in some areas of the less devel­
oped countries recognized as hardship posts. The great majority of
these Americans working abroad are destined to be stationed in the
front lines of the new economic struggle, for the less developed areas
are the favorite target for the Communist bloc’s economic penetration.


The possibility of a round of price rises growing out of the recent
steel strike settlement leads directly to another major problem facing
our country in its capability for carrying the great responsibility of
free world leadership. This Government, looked to as a leader and
challenged on all sides in the battle for productivity, has a major re­
sponsibility in protecting its own public against inflation. This does
not mean that economic growth and the realization of our capacities
for production should be submerged in a stubborn quest for price
stability. While the devices employed to restrain inflation may vary
from time to time, the least the Government can do is to lend its fact­
finding facilities and its good offices, to bring about a feeling of re­
straint in price rises by presentation of the facts themselves. This
might be done in much the same manner that we have come to accept
as appropriate intervention in the solution of labor-management dis­
putes. Just as the Federal Government makes available mediation
and conciliation services in labor-management disputes, it should have



facilities to provide such services in pricing policies in the interest of
consumers and all those affected by economic stability. Indeed, in an
acute case a factfinding board appointed by the President should not
be beyond the realm of consideration.
The majority report in dealing with the desirability of removing
the ceiling on interest rates paid on Federal Government securities
conditions removal upon first putting into effect by the Treasury
and Federal Reserve System of a number of suggested institutional and
administrative changes. Meritorious as some of these institutional
and administrative changes may be, they are not likely to change ma­
terially the debt management problems facing the country right now.
I, therefore, prefer to take a position which demonstrates enough
faith in ourselves to solve the problems of debt management under
flexible rules rather than leaving undone something which is in the na­
tional interest.
In the management of the public debt in such a way as to best pro­
tect the credit of the United States. I would suggest specifically two
immediate programs:
(1) An opportunity for the Federal Government to operate with
greater flexibility in respect to the public debt than it can now man­
age, due to the statutory ceiling on interest rates—this objective to
be gained through adoption of the President’s recommendation on
long term issues to the extent of permitting the President to exceed
the present interest rate ceiling during a term of years.
(2) In order to emphasize the special role of savings bonds, I wrould
propose lifting the ceiling on interest rates on savings bonds entirely—
provided that the authority for this latter action could be terminated
by the Congress through concurrent resolution not requiring the
President’s approval at any time. This should be followed by a drive
to sell to the public what we now call savings bonds but which should
be renamed peace bonds—this drive to feature a special $25 billion
issue of peace bonds which would seek to attract millions of new in­
vestors in a significant shift of the national debt into these antiinflationary securities.

It will be noted that in the foregoing analysis I have endeavored
to deal with the direct problems of employment, growth and price
levels, based not alone upon the action of the Government, but upon
action of the private economy as well as it is directly affected by and
motivated by the Government. Our Committee can serve the Nation’s
purposes best by showing the lines along which we must travel to put
us on the high road of realizing our national destiny and discharg­
ing our responsibility to men and women everywhere. Americans
have had a fair curiosity about, but never have they been overly pre­
occupied with, postmortems.

1 st S e s s io n



1 0

Iv IL O *

1 u

M a r c h 24, 1959

Ordered printed as passed

Resolved by the Senate (the House of Representatives concurring),
That the Joint Economic Committee, or any duly authorized subcom­
mittee thereof, as authorized by the Employment Act of 1946, as
amended, is authorized and directed to conduct a full and complete
study of and investigation into the problems of providing maximum
employment and an adequate rate of economic growth, as well as
maintaining price stability and preventing inflation, including, among
others, the following subj ects:
(1) Historical and comparative rates of unemployment, production,
and prices;
(2) Inflation and deflation caused by increases and decreases in the
effective supply of money and credit and the effects of these and of
interest rates on growth, employment, and economic stability;
(3) The effect of monopolistic and quasi-monopolistic practices
upon prices, profits, production, and employment ;
(4) The effect of increases in wages, salaries, and the prices of
personal services, together with union and professional practices, upon
prices, profits, production, and employment;
(5) The effect of governmental expenditures, taxation, and budget­
ary surpluses and deficits and of monetary and debt management
policies upon price levels, production, and employment;
(6) International influences affecting prices, production, trade, and
employment ; and
(7) Constructive suggestions for reconciling and simultaneously
obtaining the three objectives of maximum employment, an adequate
rate of growth, and substantial stability of the price level.
S e c . 2. For the purposes of this resolution, the joint committee, or
any duly authorized subcommittee thereof, is authorized through Jan­
uary 31, 1960 (1) to appoint and fix the compensation of such experts,
consultants, or organizations thereof, and clerical and stenographic
assistants as it deems necessary and advisable; and (2) to hold such
hearing, to sit and act at such times and places, to require by subpena
or otherwise the attendance of such witnesses and the production of
such books, papers, and documents, to administer such oaths, to take
such testimony, and to make such expenditures, as it deems advisable.




Subpenas shall be issued under the signature of the chairman or vice
chairman of the joint committee and shall be served by any person
designated by them.
Sec. 3. The joint committee shall from time to time report its find­
ings and recommendations to the Senate and the House of Representa­
tives and shall make its final report at the earliest practicable date but
not later than January 31, 1960.
Sec. 4. The expenses of the joint committee under this resolution,
which shall not exceed $200,000, through January 31, 1960, shall be
paid from the contingent fund of the Senate upon vouchers approved
by the chairman of the joint committee.


Single copies of the publications listed may be obtained upon written request
from the Joint Economic Committee (Senate Post Office, Washington 25, D.C.),
except for items which are marked with an asterisk (*); these items and addi­
tional copies of other materials may be purchased from the Superintendent of
Documents, Washington 25, D.C. The prices shown are for single copies.
There is a discount for quantity orders.

*Staff Report on Employment, Growth* and Price Levels: December
1959. $1.50.

Employment, Growth, and Price Levels, Report of the Joint Economic
Committee, pursuant to Senate Concurrent Resolution 13, 86th
Congress, 1st session: January 1960. 15 cents.

1Part 1. The American Economy, Problems and Prospects: March 1959.
*Part 2. Historical and Comparative Rates of Production, Productivity,
and Prices: May 1959. $2.00.
*Part 3. Historical and Comparative Rates of Labor Force, Employment
and Unemployment: June 1959. 35 cents.
*Part 4. Influence on Prices of Changes in the Effective Supply of Money:
July 1959. 75 cents.
*Part 5. International Influences on the American Economy: September
1959. 50 cents.
*Part 6A. Government’s Management of Its Monetary, Fiscal, and Debt
Operations: September 1959. $1.25.
*Part 6B. Government’s Management of Its Monetary, Fiscal, and Debt
Operations: November 1959. 75 cents.
*Part 6C. Government’s Management of Its Monetary, Fiscal, and Debt
Operations, Replies to Questions on Monetary Policy, and other
materials: November 1959. 65 cents.
*Part 7. The Effect of Monopolistic and Quasi-Monopolistic Practices
Upon Prices, Profits, Production, and Employment: November 1959.
*Part 8. The Effect of Increases in Wages, Salaries, and the Prices of

Personal Services, Together With Union and Professional Practices
Upon Prices, Profits, Production, and Employment: November 1959.
75 cents.
*Part 9A. Constructive Suggestions for Reconciling and Simultaneously

Obtaining the Three Objectives of Maximum Employment, an Adequate
Rate of Growth, and Substantial Stability of the Price Level: December

70 cents.

* Available only from the Superintendent of Documents, Government Printing Office, Washington 25,
i Part 1 is out of print.




*Part 9B. Same title as 9A. Materials submitted by 12 organizations
at the invitation of the Joint Economic Committee: December 1959.
45 cents.
Part 10. Additional Materials Submitted for the Record: In press,
January 1960.


*No. 1. Recent Inflation in the United States, by Charles L. Schultze:
September 1959. 40 cents.
No. 2. Steel and the Postwar Inflation, by Otto Eckstein and Gary
Fromm: November 1959. 25 cents.
No. 3. An Analysis of the Inflation in Machinery Prices, by Thomas A.
Wilson: November 1959. (Included with Study Paper No. 2.)
No. 4. Analysis of the Rising Costs of Public Education, by Werner Z.
Hirsch: November 1959. 30 cents.
No. 5. Trends in the Supply and Demand of Medical Care, by Markley
Roberts: November 1959. (Included with Study Paper No. 4.)
No. 6. The Extent and Nature of Frictional Unemployment, by the
Bureau of Labor Statistics: November 1959. 25 cents.
No. 7. The Incidence of Intlation: Or Who Gets Ilurtf, by Seymour E.
Harris: November 1959. 45 cents.
No. 8. Protection Against Inflation, by H. S. Houthakker: November
1959. (Included with Study Paper No. 7.)
No. 9. The Share of Wages and Salaries in Manufacturing Income,
1947-1956, by Alfred H. Conrad: November 1959. (Included with
Study Paper No. 7.)
No. 10. Potential Public Policies to Deal with Intlation Caused by
Market Power, by Emmette S. Redford: December 1959. 25 cents.
No. 11. A Brief Interpretive Survey of Wage-Price Problems in Europe,
by Mark Leiserson: December 1959. (Included with Study Paper
No. 10.)
No. 12. The Low Income Population and Economic Growth, by Rober t J.
Lampman: December 1959. 25 cents.
No. 13. The Adequacy of Resources for Economic Growth in the United
States by Joseph L. Fisher and Edward Boorstein: December 1959.
(Included with Study Paper No. 12.)
No. 14. Financial Aspects of Postwar Economic Developments in the
United States, by John Gurley: In press, January 1960.
No. 15. Profits, Profit Markups, and Productivity: An Examination
of Corporate Behavior Since 1947, by Edwin Kuh: In press, January
No. 16. International Effects of U.S. Economic Policy, by Edward M.
Bernstein: January 1960. 30 cents.
No. 17. Prices and Costs in Manufacturing Industries, by Charles L.
Schultze and Joseph L. Tryon: January 1960. 20 cents.
No. 18. National Security and the American Economy in the 1960’s, by
Henry Rowen: In press, January 1960.
No. 19. Debt Management in the United States, by Warren L. Smith:
In press, January 1960.
No. 20. The Potential Economic Growth of the United States, by James
W. Knowles: In press, January 1960.

* Available only from the Superintendent of Documents, Government Printing Office, Washington 25,



No. 21. Postwar Inflation, by Harold M. Levinson: In press, Janu­
ary 1960.
No. 22. An Evaluation of Anti-Trust Policy: Its Relation to Economic
Growth, Full Employment, and Prices, by Theodore J. Kreps: In
press, January 1960.
No. 23. Unemployment in Surplus Labor Market Areas, by the Bureau
of Labor Statistics: In press, January 1960.



Date of

Feb. *

Apr. 4.

Financing problem

Refunding of 2V£-percent Offer exchange for notes or
bonds maturing Mar. bonds with maturity of 3
to 6 years and coupon of
15, 1952.
2U to 2U percent, depend­
ing on maturity.
Refunding of 1%-percent Offer optional exchange for
A percent, 11^- or 12certificates maturing
month certificates or the
Apr. 1, 1952.
same notes or bonds sug­
gested above.
Call of 2- and 2M-percent Do not make call at this time.
bonds eligible for re­
Cash offering of long-term Offer $1 billion on Mar. 15 or
Apr. 1 of 35-year 3-percent
Cash required to cover Offer long-term marketable 3deficit of upward of $10 percent bond with maturity
of 30 years. Market should
be approached experiment­
ally with initial offering of
$1 billion to $1>£ billion.
For short-term borrowing, in­
crease offerings of bills.

Refunding of short-term
bills and certificates.

June 27.

Committee recommendations

Call of 2- and 2H-percent
bonds eligible for re­
Refunding of certificates
due Aug. 15 and Sept.
1, 1952.
Refunding of 1^-percent
certificates due Oct. 1,
New cash of $5 billion in
second half of year.

Call by Aug. 15 of 2- and
2J4-percent bonds eli­
gible for redemption on
Dec. 15, 1952.

Revise savings bond program:
Increase yield on series E to
3 percent; offer new 3 per­
cent current-income bond as
companion to series E
bonds; adopt more favorable
yield curve modified to
yield 2% percent for 12 years
on series F and O bonds.
Treasury should feel its way
a*? year goes on, and roll over
maturities into similar is­
sues or wherever possible,
into medium-term issues.
Under present conditions is­
sues should not be called.
Suggested combined refund­
ing into a similar certificate
or note.
Roll over into similar obliga­
Issue long-term marketable
bonds at appropriate rate
in autumn; revise rates on
tax notes; issue tax bills
maturing around the March
tax date; sell larger amounts
of 90-day bills.
Do not call under present cir­

Treasury offerings
Offered exchange for 226percent bonds due Mar.
15, 1959.
Offered single exchange for
1^s-percent 11-month cer­
Call was not made.
No long-term bonds Issued.
Marketable bond not of­
fered. Reopened 2H percent nonmarketable
bonds due 1980 in May
for cash and exchange for
outstanding marketable
2M>-percent bonds.
Weekly issues of bills were
increased by an aggregate
of $1.6 billion between
Apr. 7 and July 3.
Savings bond program was
revised on May 1 along
the basic lines recom­
mended by committee.
All maturities were rolled
Call was not made.
Offered exchange for 2percent certificates due
Aug. 15, 1953.
Offered 2^-percent 14month note due Dec. 1,
No long-term bonds issued.
Sold in October $2.5 bil­
lion tax-anticipation bills
due Mar. 18, 1953; also
in November $2 billion
tax anticipation bills due
June 19, 1953.
Call was not made.




Dec. 5.

Refunding of 1^-percent
certificates due Feb. 15,
Call of 2- and 2K-percent
bonds eligible for re­
Handling maturity of
series F and G bonds.
Cash offering of long-term
bonds in first half of

Mar. 20___

Refunding of 1^-percent
certificates due June 1,
bonds recalled for re­
demption on June 15,
Cash offering to cover at­
trition on refunding and
apparent cash deficit.

Refunding maturing series
F and G bonds.

June 19-

New cash of $5 billion in

Refunding of 2-percent
certificates on Aug. 15,
Aug 26.

Refunding of 2-percent
bonds maturing Sept.
15, 1953.
New cash of about $2.5
billion in October.

Oct; 13— .

New cash of %l1
A to $2
billion in early Novem­
Refunding of 2^6-percent
notes on Dec. 1, 1953.

Nov. 13-

Refunding of 2^-percent
notes on Dec. 1, 1953.



Optional exchange for a certifi­
cate or note due in about 1
year at an appropriate rate,
or a bond maturing in 1956,
1957, or 1959.
Call partially tax exempt 2-per­
cent bonds of June 1953-55.
Do not call fully taxable 2Hpercent bonds.
Secure broad permissive legis­
lation to extend series F and
G bonds at maturity.
Extension of maturities can be
determined from time to
time only In light of invest­
ment market; sound out
market for long-term bond
as conditions appear propi­

Offered optional exchange
for 2J4-percent 1-year
certificates or 2H-percent 5-year 10-month
bonds due Dec. 15, 1958
Call of 2-percent bonds was
Call of 2H-percent bonds
was not made.
Series F and G bonds were
not extended.

Offer optional exchange for
either 1-year 2J4-percent
certificates or a short-term
bond, due around 1961.

Offered single issue of 2%percent certificates due
June 1,1954.

Time was not opportune for
sale of long-term bond and
no cash offering should be
made in May or June. Sug­
gested consideration of the
short-term bond due around
Offer holders in exchange a 3percent marketable bond
maturing in 15 years to test
the market for a moderately
long-term bond.
Offer tax anticipation certifi­
cates maturing Mar. 15,
1954, at rate determined by
market conditions which
would prevail in July.
Refund with 1-year certifi­
cates, or possibly a some­
what longer issue if condi­
tions at time favor it.
Offer optional exchange for 1year 2^-percent certificates
or 2>§-percent notes matur­
ing in about 3Vi years.
Preliminary recommendation
to sell additional notes of
about 33^-year maturity, or
longer if market conditions
are favorable. Would not
be prudent to sell new long­
term bonds at this time.
Issue $2 billion of 2K-percent
bonds maturing in 3X
A to 6

Offered for cash subscrip­
tion $1 billion of 334-percent bonds, dated May
1, 1953, and maturing
June 15,1983.

Preliminary recommendation
for offer of an optional ex­
change for short-term and
intermediate-term bonds
(12- to 14-year 3-percent
bond, or longer if market
conditions permit). Exact
terms would have to be de­
termined by prevailing con­
ditions at time of offering.
Offer optional exchange for 2percent notes maturing
Mar. 15, 1955, or 3-percent
bonds of about 15-year
maturity; however, if hold­
ers of series F and G bonds
maturing in 1st half of 1954
are not also offered the right
to exchange into the same
3-percent bonds, the longer
part of the optional exchange
should be 2H-percent bonds
maturing Dec. 15, 1958.

(See meeting of War. 20,

Exchange offer was made
for 3J4-percent bonds ma­
turing June 15, 198-3.
Sold for cash $5.9 billion
2M-percent tax anticipa­
tion certificates due Mar.
22, 1954.
Offered exchange for 1-year
2%-percent certificates.
Offered optional exchange
into 1-year 2^-percent
certificates or 3H-year
22'8-percent notes.
(See meeting of Oct. 13,
1953, below.)

Offered late in October $2.2
billion of 2%-percent
bonds maturing Sept. 15,
(See meeting of Nov. 13,
1953, below.)

Offered optional exchange
of 1%-percent notes ma­
turing Dec. 15, 1954, or
2H-percent bonds ma­
turing Dec. 15, 1958.


Nov. 13___





Refunding 2J4-percent cer­
tificates on Feb. 15,
1954, and 196-percent
notes on Mar. 15,1954.

Consolidate issues in single
refunding operation.
cific recommendations could
not be presented at this time.

(See meeting of Jan. 20
1954, below.)

Refunding of 2*4 -percent
certificates of Feb. 15,
1954, and 196-percent
nates of Mar. 15,1954.

Combine refunding on Feb. 15,
1954, with option to exchange
for 13-month 1^-percent
notes or 2^-percent bonds
maturing in
years or
slightly longer.
Call should be made for re­
demption on June 15.

Offered optional exchange
of maturing issues for 12month 1^-percent cer­
tificates or 2H-percent
bonds maturing in 7
years 9 months.
Call was made on Feb. 15,
but redemption of these
issues, as well as the 2percent bonds due June
15, was anticipated by
offering holders right to
exchange on Feb. 15 for
the 2H-percent bonds
maturing in 7 years 9
months also offered on
the refunding.
Offered $1.5 billion of tax
anticipation bills due
June 24, 1954.

Jan. 20.

Call on Feb. 15, 1954, for
redemption on June 15
of the 2H -percent bonds
of 1954-56 and 2Vi-per­
cent bonds of 1952-55.

New cash of $2 billion to
$3 billion after Mar. 15,
Apr. 23.

Refunding of 2^6-percent
certificates due June 1,
Refunding on June 15,
1954, of 2-percent bonds
and remaining 2J4-percent called bonds that
were not exchanged in
New cash of $2 billion in
Refunding of 2-percent
bonds maturing or calla­
ble in December 1954.

July 9.

New cash of $4 billion by
Aug. 1, 1954.

Refunding of 236-percent
certificates due Aug. 15
and Sept. 15, 1954.

Sept. 17..

Call on Aug. 15, 1954, for
redemption on Dec. 15
the 2-percent bonds of
New cash of about $3.5
billion in October.
New cash of about $1.5
billion in December.

Refunding of 1^-percent
notes and 2-percent
bonds on Dec. 15, 1954.

Sale of 3-percent long-term
bonds, maturity to depend
upon market conditions at
time of offering.
Offer holders option of a short
obligation maturing within
18 months or 2 -percent
bonds maturing in last half
Offer an exchange into only
the short obligation matur­
ing within 18 months.

Sale for cash of $2 billion of 214percent bonds maturing in
last half of 1960.
Maturity should be antici­
pated by giving holders the
privilege of exchanging into
the 2*4-percent bond ma­
turing in 1960.
that all of the above financ­
ing be combined in 1 opera­
tion in May.)
Majority of committee recom­
mended $2 billion each of
1-percent notes maturing
Sept. 15, 1955, and 1^6-percent notes maturing Sept.
15, 1957; minority favored
tax-anticipation certificates
or notes maturing Mar. 18,
Refund together their op­
tional exchange fori-percent
certificates maturing Sept.
15,1955, or 2^6-percent bonds
maturing Sept. 15, 1960.
Call should be made on Aug.
Dual offering of
tax certificates maturing
June 22, 1955, and 1-year
certificates of indebtedness.
Preliminary recommendation
that 3-percent long-term
bonds be offered, maturity
to be determined by market
Preliminary recommendation
that holders be offered an
optional exchange of 1-year
certificates or medium-term
obligations with a maturity
not to exceed 10 years.

Offered optional exchange
for 1-year 1} 6-percent
certificates or 1^-percent
notes due Feb. 15, 1959.
Offered exchange into 1year lH-pereent certifi­

Offered $2 billion of 17
percent notes due Feb.
15, 1959.
December maturities were
not included in this
financing operation.
(Financing was combined
in 1 operation in May.)
Sold $3.7 billion 1-percent
tax anticipation certifi­
cates maturing on Mar.
22, 1955.

Offered optional exchange
into 1-year 1^-percent
certificates or 2^-percent
bonds due Nov. 15, 1960.
Call was made.

Sold $4.1 billion of 1^6percent notes maturing
May 15, 1957.
(See meeting of Nov. 18,
1954 below.)




Nov. 18___

Refunding of 1%-percent
notes and 2-percent
bonds on Dec. 15, 1954.

New cash in December___

Issuance of F N M A deben­

Jan. 27____

Apr. 17.

Refunding of 1%-percent
certificates due Feb. 15,
1955, and lM-percent
notes due Mar. 15, 1955.
Refunding of 274-percent
bonds called for redemp­
tion on Mar. 15, 1955.

Refunding of 1^-percent
certificates due May 17,
New cash of $2.5 billion to
cover maturity of taxsavings notes in May
and June.

June 24.

New cash of $3 billion in

Refunding of 1^-percent
certificates due Aug. 15.

Retirement of maturing
tax savings notes.

Sept. 25..

New cash of $2.5 billion
at end of September.



Offer holders option of a short
obligation—either 1-year 1J4percent certificates or 1>6percent certificates matur­
ing Aug. 15, 1955; or a longer
ob ligation —2>£-percent
bonds maturing in about
8 years.
December cash financing an­
ticipated in September
proved unnecessary. There­
fore com mittee recom­
mended that long-term bond
should not be offered at
that time but should be
done on the first appro­
priate occasion.
Expressed view that Treasury
could sell at least $500 mil­
lion FNM A debentures if
conditions were set forth as
to F N M A credit from the
Treasury, restrictions on
amount offered against port­
folio, maturity, and rate,
and fiscal arrangements.

Offered optional exchange
into either: 1-year 1Hpercent certificates or
1^-pprcent certificates
maturing Aug. 15, 1955;
or 2V£-percent bonds ma­
turing in 8 years 8
No new bond financing
was undertaken.

Offer optional exchange of 156percent 13-month notes or
2^-percent notes maturing
Dec. 15, 1957.
Majority favored optional ex­
change for l^s-percent 13month notes or 3-percent 40year bonds. Minority fav­
ored $1.5 billion cash offering
of 3-percent 40-year bonds,
with the 2^8-percent bonds
receiving same exchange op­
tion indicated above for the
maturing notes and certifi­
Offer optional exchange for
1^-percent 1-year certifi­
cates or 2^-percent bonds
due Dec. 15, 1958.
Make cash offering of $2.5 bil­
lion of 1%-percent 1-year

Offered optional exchange
of 156-pcrcent 13-month
notes or 2-percent notes
maturing Aug. 15. 1957.
Offered optional exchange
of 156-percent 13-month
notes or 3-percent 40year bonds.

(Committee recommended
that the refunding and cash
offering be combined in one
Reopen subscriptions to 3percent 40-year bonds due in
1995 for cash of $750 million
to $1 billion; obtain balance
throigh sale of 1^-percent
tax anticipation certificates
due Mar. 22, 1956.
Offer optional exchange for
1-year 2-percent certificates
(or 11-month certificates), or
the outstanding 2^-percent
bonds maturing Dec. 15,
1958. (Suggested refunding
be done at time of cash

Obtain funds by increasing
bill offerings by at least
$100 million each week for
cycle of 13 weeks.
Offer 21
/ i-percent tax-anticipation certificates due June 22,

Offered $500 million of 2Kpercent F N M A 3-year
notes in January 1955.

Offered exchange for only
2-percent 15-month notes.
Offered $2.5 billion of 2percent 15-month notes
for cash.
(Financing was combined
in 1 operation.)
Offered $750 million of 3percent bonds of 1995 and
$2 billion of tax-anticipation certificates due Mar.
22, 1956.
Offered optional exchange
for 1-year 2-percent notes
due Aug. 15, 1956, or 2percent tax-anticipation
certificates due June 22,
1956. Did not offer the
longer option. (Terms of
financing were withheld
until payment date of
cash tax certificate fi­
nancing announced ear­
Offered $100 million of
additional bills each week
between July 27 and
Sept. 29.
Sold $3 billion of 2J4-per­
cent tax-anticipation cer­
tificates due June 22,


Nov. 18___

Feb. 29___

Refunding of 1^-percent
certificates and 1%-percent notes on Dec. 15,
New cash of $1 billion by
year end.

Refunding of 1^-percent
notes due Mar. 15, 1956,
and lH-percent notes
due Apr. 1, 1956.

Call by May 15, 1956, of
2%-percent bonds of
1956-59 for payment on
Sept. 15, 1956.
July 12 _



Offer single exchange for 1-year
2^-percent certificates.

Offered optional exchange
of 1-year 2>^-percent cer­
tificates or 23/2-year 21
/ \r
percent. notes.
Sold in December $1.5 bil­
lion of tax anticipation
bills due Mar. 23, 1956,
on competitive bids.

Make cash offering of taxanticipation bills due Mar.
22, 1956.
Suggested combined refund­
ing. Majority favored op­
tional exchange for 2^-percent certificates due Feb 15,
1957, or outstanding 2!ipercent notes due June 15,
1958; also later offering of
$500 million additional 3percent bonds of 1995 for
cash or advance exchange of
2M-percent bonds of 1956-58.
Minority favored single ex­
change for 2%-percent certif­
icates due Feb. 15. 1957, to
be coupled with $500 million
cash offering of 3-percent
bonds of 1955 at time of re­
Call should be made.................

Refunding of 2 percent
notes due Aug. 15, 1956.

Offer exchange for 2% percent
notes due Aug. 1, 1957.

Refunding of 2% percent
bonds called for redemp­
tion on Sept. 15, 1956.
New cash of $2A billion
in August or September.

Obtain funds by increasing
bill offerings by $100 million
weekly for a 13-week cycle.
Offer tax anticipation issue
due on or about Mar. 22,

Refunding of 2% percent
certificates due Dec. 1,

Offer optional exchange for
3M percent tax anticipation
certificates due June 21 or
24, 1957, or 3% percent certif­
icates due Nov. 29, 1957.

Refunding of special bills
due Feb. 15, 1957, 2%
percent certificates due
Feb. 15, 1957, 2% per­
cent notes due Mar. 15,
1957, and 1M percent
notes due Apr. 1, 1957.

Offer holders of all 4 issues
optional exchange for 3%
percent certificates due Feb.
14, 1958, or 3M: percent notes
due Feb. 15, 1960.

Mar. 13-.

New cash of about $3
billion after March tax

Sale for cash of 3A percent
notes due Apr. 15, 1958 with
privilege of conversion at
maturity into bonds of 12to 14-year maturity.

Apr. 14.

Refunding of 1% percent
notes due May 15, 1957.

Offer optional exchange for (1)
certificates due May 1, 1958
at rate of not more than 3A,
percent (or a shorter matur­
ity if market rates so dic­
tated) or (2) 3A percent
notes due May 1, 1960 and
convertible into 3A percent
15-year bonds.

Nov. 15..

Jan. 31..


Offered optional exchange
for 2^-percent certifi­
cates due Feb. 15, 1957,
or 2%-percent notes due
June 15, 1958. No long­
term bonds were offered.

Call was made.

Offered exchange for 2%.
percent notes due Aug. 1,
Paid off the bonds in cash.
Did not increase weekly
bill offering.
Sold in August $3.2 billion
of 2% percent tax antici­
pation certificates due
Mar. 22, 1957.
Offered optional exchange
for 3Y± percent tax antic­
ipation certificates due
June 24, 1957, for 334 per­
cent certificates due Oc­
tober 1, 1957.
Refunded bills with tax
anticipation bills due
June 24, 1957. Offered
2% percent certificates
and 2V% percent notes
optional exchange for 3%
percent certificates due
Feb. 14, 1958, or 3X
A per­
cent notes due May 15,
1960. Offered 1H percent
notes exchange for the 3%
percent notes due Feb.
14, 1958.
Offered $2^ billion of 3%
percent certificates due
Feb. 14, 1958, and %%
billion 3A percent notes
due May 15, 1960. (This
was a reopening of issues
offered in February re­
Offered optional exchange
for 3lA percent certifi­
cates due Apr. 15, 1958,
or 3% percent notes due
Feb. 15, 1962.






Offered optional exchange
for 3b
A percent certifi­
cates due Dec. 1, 1957, 4
percent certificates due
Aug. 1,1958, or 4 percent
notes due Aug. 1, 1961,
but redeemable at option
of holder on 3 months’
advance notice on Aug. 1,
1959. However, October
maturities were restrict­
ed to 4 percent certificates
or extendable notes.
Offered $3 billion for cash
as follows: $500 million
of 4 percent bonds due
Oct. 1, 1969, $1.75 billion
of 4 percent notes due
Aug. 1,1962, but redeem­
able at option of holder
at end of 2x
/ 2 years, and
$750 million of 4 percent
certificates due Aug. 1,

July 17..

Refunding of 2% percent
notes due Aug. 1, 1957,
2 percent notes due Aug.
15, 1957, 314 percent cer­
tificates due Oct. 1, 1957,
and 1Vl percent notes
due Oct. 1, 1957.

Offer holders of all four issues
optional exchange for 3%
percent certificates due Apr.
15, 1958, or 4 percent notes
due in July 1959, with right
of holder to extent maturity
for 3 additional years.

Sept. 10.

New cash of about $3.5
billion in late Septem­
ber and early October.
To keep within debt
ceiling, $3 billion before
Oct. 1, and the other $0.5
billion after maturity of
Oct. 1 issues.

Nov 14_

Refunding of 3% percent
certificates due Dec. 1,
New cash of about $1.5

To obtain .$3 billion, offer $1
billion of 4 percent certifi­
cates due Aug. 1, 1958, and
$2 billion of 4 percent notes
due Aug. 1, 1961, redeemable
on Aug. 1, 1959 at holder’s
To obtain $0.5 billion, concur­
rent with above offering an­
nounce offering of 10-year
4 percent bonds, payment
to be made in early October.
Offer exchange for V/% percent
certificates due Dec. 1, 1958.

Nov. 1 8 .....

Jan. 28____

Apr. 1.

Review recommendations
of Nov. 14, 1957, due to
change in market follow­
ing lowering of discount

Refunding: recommend
which issues of notes,
certificates, and bonds
maturing in first half of
1958 should be refunded
in e a rly F e b r u a r y ;
whether special bills ma­
turing Apr. 15 should be
offered an exchange; and
refunding terms.

Cash: should offering be
made at time of refund­
ing, if legislations rais­
ing debt limit passed by
Call on Feb. 14, 1958, for
redemption on June 15,
the 2^-percent tax ex­
empt bonds of 1958-63.
New cash of about $3,500,000,000.

(See meeting of Nov. 18,
1957, below.)

Offer $1 billion of 4 percent 5year notes and $500 million
4 percent 17-year bonds.
Because of debt limit, pay­
ment on two issues to be 50
perccnt on Nov. 26, and 50
percent on or about Dec. 2.
If 17-year bond not offered,
all $1.5 billion should be in
a 5-year note.

See meeting of Nov. 18
1957, below.)

Offer exchange for 3% percent
certificates due Dec. 1, 1958.

Offered for exchange 3% per­
cent l-year certificates
due Dec. 1, 1958.
Offered for cash $1 billion
3% percent notes due
Nov. 15, 1962, and $500
million 3% percent bonds
due Nov. 15, 1974.

New cash offering of $1 billion
of 3%, percent 5-year notes
and $500 million of 3% per­
cent 17-year bonds.
Offer holders of 3%-percent
certificates due Feb. 14,1958,
2H-perc-ent bonds due Mar.
15, 1958, lVo-percent ex­
change notes due Apr. 1,
3H-percent certifi­
cates due Apr. 15, 1958, and
special bills due Apr. 15,
1958, an optional exchange
for 2 x
/ 2-percent 1-year certi­
ficates, 3-percent obligations
maturing in 5 or 6 years, or 3
H-percent 30-year bonds.
Defer refunding of June ma­
Delay consideration of cash
financing until after the re­
funding and change in the
debt limit.
Call should be made__________

Offer $3, 500,000,000 of 2^-percent notes due Feb. 15,1963.

Offered recommended is­
sues optional exchange
for 2M>-percent certifi­
cates due Feb. 14, 1959, 3percent bonds due Feb.
15, 1964, or 3MrPercent
bonds due Feb. 15,1990.

Following refunding opera­
tion and raising of debt
limit, offered for cash
$1.25 billion 3-percent
bonds due Aug. 15,1966.
Call was made.

Offered $3,500,000,000 of
2%- percent notes due
Feb. 15,1963.


May 28.

Refunding of 2%-percent
notes, 2^-percent bonds,
and 2%-percent bonds
on June 15,1958.

Inclusion of two bond
issues called for redemp­
tion on Sept. 15,1958, in
June refunding.
Refunding of 4-percent
certificates due Aug. 1,
1958, and bond issues
called for redemption
Sept. 15, 1958.
Cash financing of unde­
termined amount in

Sept. 23..............

Nov. 7_.

New cash of about $3,500,-


Refunding of 3^-percent
certificates due Dec. 1,
195S, and 2H percent
bonds due Dcc. 15, 1958,



Offer holders optional ex­
change for 1%-percent notes
due Aug. 14, 1959, 2^-percent bonds due Feb. 15,1965,
3-percent bonds due May 16,
1971, or 3^-percent bonds
due May 15, 1985.

Offered optional exchange
for 13^-percent certifi­
cates due May 15, 1959,
or 2^-percent bonds due
Feb. 15, 1965.

Refunding of called bonds
should be deferred.

Offered for cash $1,000,000,000 of 3 ^ -p e r c e n t
bonds due May 15, 1985,
at price of 100H.
Refunding limited to June

Offer holders of all issues ex­
change for 1%-percent 1-year
certificates due July 31, 1959.

Offered exchange for 1Hpercent certificates due
Aug. 1, 1959.

should assure the market
that the August cash financ­
ing would be in securities
with maturity of less than
1 year.
Offering should
be tax anticipation certifi­
cates or bills maturing in
March 1959 but exact terms
would depead upon amount
of cash to be raised and con­
dition of short-term market
at time of offering.
Offer up to $1,000,000,000 of
33 2-percent notes due May
15, 1960; and later auction
about $2,750,000,000 of spe­
cial bills duo May 15, 1959.

Announcement made as
suggested. Offered $3,500,000,000 of 1^-percent
tax anticipation certifi­
cates due Mar. 24, 1959.

Offer optional exchange for
certificates due in Novem­
ber 1959 or notes due in 4 to
5 years. Securities should
be priced at rates sufficient

Offered optional exchange
into 3H percent certifi­
cates due Nov. 15, 1959,
at 99.95 percent of par or
3?* percent notes duo
May 15, 19G1, at 99%
percent of par.

at tim e of offering to avoid

New cash in December....
Should part of about $4,500,000,000 cash needed
for period January to
March 1959, be ob­
tained by additional
weekly bills.
Jan. 8 -


large attrition and with the
longer issue above the short­
er issue to encourage exten­
sion of debt.
Offer $3,000,000,000 of tax an­
ticipation bills due June 22,
1959, on auction basis.
Meet the problem by making
offering during JanuaryMarch period.

New cash of about $2.25

Offer $750 million of 4-percent
bonds due Feb. 15, 1980, at
price of 99 to yield 4.07 per­
cent, and auction $1.5 billion
of tax anticipation bills due
Sept. 22, 1959.

Preliminary recommenda­
tions on February re­

Under then existing conditions
a 3-way optional exchange
for 1-year certificates, 3-year
to 5-year notes, or bonds
with maturity of about 10
Offer optional exchange for
3^-percent certificates due
Feb. 15, 1960, or 4-percent
notes due Feb. 15, 1962.

Refunding of 23^-percent
certificates due Feb. 14,
1959, and 1%-percont
notes due Feb. 15, 1959.


Offered $1,000,000,000 ^ of
3>^-percent notes due
Nov. 15, 1959, at par
and $2,500,000,000 special
bills due May 15, 1959,
at a price of 98.023 to
yield 3.25 percent.

Offered at auction *3,000,000,000 tax anticipation
bills due June 22, 1959.
Undertook additional bill
financing by introducing
new cycle of both 13week and 26-week bills,

Offered $750 million of 4percent bonds due Feb.
15, 1980, at a price of 99
and $2.5 billion of 334percent notes duo May
15, 1960, at a price of 99^
to yield 3.45 percent.

Offered optional exchange
for 3%-pcrcent certifi­
cates due Feb. 15, 1960,
or 4-percent notes due'
Feb. 15, 1962.






Offered $500 million addi­
tional 4-pereent bonds
due Oct. 1, 1909, at par,
about $1.5 billion 4-per­
cent notes due May 15,
1963, at par, and about
$2 billion of special bills
due Jan. 15, 1900. Hill
auction followed sub­
scription closing on bonds
and notes.
Redeemed special bills in
cash. Offered
lK-percent certificates exchange
for 4-percent certificates
due May 15,1960, at 99.95
to yield 4.05 percent.

Mar. 19.

New cash of about $4 bil­

Offer $500 million of additional
4-percent bonds due Oct. 1,
1969, at par, $1.5 billion 4percent notes due May 15,
1963, at par, ani approxi­
mately $2 billion special
bills duo Nov. 15, 1959 at

Apr. 19.

Refunding of special bills
and 134-percent certifi­
cates due May 15, 1(J59.

Offer holders of special bills
exchange for 3% percent tax
anticipation obligations due
Dec. 22, 1959, and holders of
1.^-percent certificates ex­
change for 33^-percent cer­
tificates due May 15, 1960,
at price to yield about 4 per­
Auction for cash special bills
due Apr. 15, 1960.

New cash of about $1.5 to

June 25.

New cash of about $5 bil­

July 16.

Refunding of 1%-percent
certificateSL and 4-per­
cent notes, due Aug. 1,

New cash in August.

Auction for cash $3 billion of
tax anticipation bills due
Mar. 22, 1960, and later, $2
billion special bills due
July 15, 1960.
Redeem 4-percent notes In
cash. Offer 1%-percent
certificates optional ex­
change for 4%-percent issue
due Aug. 1 or 15, 1960, or
45^-percent notes due May
15, 1964.
Refunding announcement
should state August cash
financing to be limited to
short-term securities ma­
turing in less than 1 year.

Auctioned for cash $2 bil­
lion special bills due
Apr. 15, 1960, and $1.5
billion tax anticipation
bills due Dec. 22, 1959.
Offered at auction $3 bil­
lion of tax anticipation
bills due Mar. 22, I960,
and $2 billion special bills
due July 15, 1960.
Offered notes and certifi­
cates optional exchange
for 4%-percent notes due
Aug. 15, 1960 or 4^-percent notes due May 15,
(Not yet announced.)