View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

INVESTIGATION OF THE FINANCIAL
CONDITION OF THE UNITED STATES

HEARINGS
BEFO R E T H E

COMMITTEE ON 1’INA.NCE
UNITED STATES SENATE
E IG H T Y -F IF T H

CO N GRESS

FIRST SESSION

AUGUST 13, 14, 15, 16, AND 19, 1957

PART 3

Printed for the use of the Committee on Finance




UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1957

C M ITTE O FIN N E
O M E N AC
H A R R Y F LO O D B Y R D , Virgin ia, C h a irm a n
R OBER T S. K E R R , Oklahoma
J. A L L E N F R E A R , J r ., Delaware
R U S S E L L B. LONG, Louisiana
G EO R G E A . S M A T H E R S , Florida
C L IN T O N P. A N D E R SO N , New Mexico
P A U L H . D O U G L A S, Illinois
A L B E R T GO R E, Tennessee
E l iz a b e t h B

E D W A R D M A R T IN , Pennsylvania
JO H N J. W IL L IA M S , Delaware
R A L P H E. F L A N D E R S , Verm ont
G EO R G E W . M A L O N E , Nevada
F R A N K CA R L SO N , Kansas
W A L L A C E F, B E N N E T T , Utah
W IL L I A M E . JE N N E R , Indiana
S p rin ge r, C h ie f C lerk

S a m u e l D. M c I lw a in , S p ecia l C o u n s el f o r I n v e s ti g a ti o n

n




CONTENTS
Page
Discussions between Hon. William McChesney Martin, Jr., Chairman,
Hoard of Governors of the Federal Reserve System, and members of the
Committee on Finance:
Members of the Committee on Finance:

E XH IBITS
Answers of Chairman Martin to questions of Chairman Byrd____________ 1217
Average annual percent increase in real private product per man-hour___
1417
Bank borrowing at Federal Reserve banks______________________________
1572
Boundaries of Federal Reserve districts and their branch territories______ 1504
Canada:
Selected balance of payments statistics_____________________________
1333
Selected Federal budget estimates--------------------------------------------------1334
Changes in consumer prices and in average weekly earnings in manufac­
turing, July 1946-June 1957---- -------- -------------------------------------------------1225
1507
Circulation statement of United States money— June 30, 1957___________
Composition of Consumer Price Index--------------------------------------------------1529
Composition of Wholesale Price Index__________________________________
1535
Conditions under which gold may be acquired and held, transported,
^melted or treated, imported, exported, or earmarked--------------------------1470
Consumer and wholesale prices, July 1955, 1956, and 1957_______________ 1486
Consumer Price Index_________________________ _____ ______________ 1528,1530
Consumer Price Index of the Bureau of Labor Statistics for January 1933__ 1486
Conversion opportunities|into higher yielding issues_____________ _____ 1324
Convertibility of foreign-held currencies__________________ _____ ________
1456
Countries which allow their nationals to hold, transfer, buy, and sell gold
domestically_________________________________________________________
1458
Countries which have either completely blocked foreign-held balances or
t imposed substantial restrictions on their use since 1939________________
1464
Countries which permit unrestricted imports and exports of gold------------1459
Directors of Federal Reserve banks and their branches----- . _
-----1496
Effects of the increase of 1 percent (i. e., from 4 percent to 5 percent) on
interest payments for mortgages of various principal amounts and
maturities________ ____________________________ ___ -----1402
Fall in Consumption Noted, article in New York Times
1356
federal financial measures for economic stability---------1229
Federal Reserve System________________________________ ______ ________
1275
foreign dollar holdings. 1934-57.__.........
...
------------1443
<»old reserves of central banks and governments, bv countries (excluding
U. S. S. R .), as of March 31, 1957__________
_
....
____
1445
<»ood News— And Bad, article in the Washington Post and Times Herald,
August 15, 1957___ . _____
...
- ---------------------------1436
Imposition of interest charge on outstanding Federal Reserve notes. ..
1580
Increase in average consumer prices from July 1956 to July 1957---------1486
Increase in gross national product, 1954-57----- -------------------------------------1218
increase in public and private debt, December 31, 1954, to June 30,1957*
1227
Influence of credit and monetary measures on economic stability........
1234
Interest on Federal Reserve notes_________
_______ ______
____
1582




m

IV

C NE T
O T NS
Page

Investment in producers’ durable equipment— annual average growth
rates in uniform 1956 dollars----------------------------------------------------------------Legal authority for “ float” ------------------- ---------- ------------------------ -- ------------Long and short-term interest rates---------------------------------- -------- ------------- Manufacturing----------------------------------------------------------------------------------------Money rates--------------------------------------------------------------------------------------------Number o f member banks and capital of Federal Reserve banks, June 30,
1957_______ ______ ____________________________________________________
Output Lags as Capacity Grows, article in Business Week, July 13, 1957.,
Output per man-hour, compensation o f employees, and corporate profits,
selected periods, 1909-56— ----------------------------------------------------------------Output per man-hour, manufacturing----------------- ------------------------------ Paid-in capital of the 12 Federal Reserve banks combined on June 30,
1948-57________________________________________________________________
Per capita disposable income_____________________________________________
Percentage of total currency in circulation consisting o f gold certificates
for 25 years before enactment of the Federal Reserve A ct_____________
Prices and yields, United States marketable securities, August 19, 1957__Prices, hourly earnings, and interest rates, selected periods, 1929 to 1956..
Principal policy actions of Federal Reserve System, February 1945 to
August 1957----------------------------------------------------------------------------------------Production and business activity— industrial production_________________
Production increases, 1949 to date, inclusive, in terms of annual average
percentage change over the previous year, measured in uniform 1956
dollars_________________________________________________________________
Prosperity Gets Set for Another Year, article in the Washington Post and
Times-Herald, June 30, 1957----------------------------------------------------------------Questions relating to productivity, wages, profits, e tc ____________________
Real output per man-hour, agriculture----------------------------------------------------Recent Canadian business developments_________________________________
Relatively lower rate of the increase in productivity in the past 2% years.. _
Roles of gold and silver in the United States monetary system__________
Short-term dollar holdings of international institutions, May 31, 1957_
_
Short-term interest rates_______________________________________ 1245, 1430,
Silver Purchase Act of 1934______________________________________________
Silver purchase laws--------------------------------------------------------------------------------Small-business interest costs_____________________________________________
Statement of Edward Wayne, first vice president, Federal Reserve Bank
of Richmond------------------------------------------------------------------ --------------------Summary submitted by Senator George W. Malone_____________________
Trends in consumer expenditures, annual average growth rates in uniform
1956 dollars____________________________________________________________
Unemployment and labor force___________________________________________
Unemployment as a percent of the civilian labor force___________________
United States outflow ( —) to Canada____________________________________
United States currency as to which a holder can demand redemption in
silver---------------------------------------------------------------------------------------------------United States currency in circulation, June 30, 1957_____________________
United States investment abroad, by area________________________________
Wholesale price indexes_________________________________________ _________
World gold reserves (excluding U. S. S. R.) as of June 30, 1957__________




1398
1576
1246
1418
1400
1505
1377
1419
1366
1505
1349
1546
1589
1433
1249
1387
1341
1434
1416
1366
1332
1419
1514
1441
1431
1511
1512
1405
1272
1596
1347
1412
1335
1465
1510
1516
1482
1533
1454

INVESTIGATION OF THE FINANCIAL CONDITION OF
THE UNITED STATES
TU ESD AY, AUGUST

13, 1957

U n it e d S tates S e n a t e ,
C o m m it t e e on F in a n c e ,

Washington, D . G.
^The committee met, pursuant to recess, at 10:10 a. m., in room 312
Senate Office Building, Senator Harry Flood Byrd (chairman)
presiding.
Present: Senators Byrd, Kerr, Long, Martin, Williams, Flanders,
Carlson, Bennett, and Jenner.
Also present: Winfield Riefler, assistant to the Chairman, Board
of Governors of the Federal Reserve System; Woodlief Thomas,
economic adviser, Board of Governors of the Federal Reserve Sys­
tem; and Edward Wayne, first vice president, Federal Reserve Bank
of Richmond.
Elizabeth B. Springer, chief clerk; and Samuel D. Mcllwain, special
counsel.
The C h a ir m a n . The committee will come to order. Mr. Martin,
we are pleased to have you here. I believe this is your first appear­
ance before the Senate Finance Committee.
Mr. M a r t in . T h a t’s right, sir.
The C h a ir m a n . The Chair assumes that you know the Senate

Finance Committee is undertaking to make a complete study of the
financial condition of the United States, including—
(1) The revenue, bonded indebtedness, and interest rates on all
public obligations, including contingent liabilities;
(2) Policies and procedures employed in the management of the
public debt and the effect thereof on credit, interest rates and the
Nation’s economy and welfare; and
(3) Factors which influence the availability and distribution of
credit and interest rates thereon as they apply to public and private
debt.

. This study has been understaken as a result of conditions confrontthe committee in the discharge of its direct responsibilities for
legislative matters relating to Federal revenue and debt, tariff and
trade, and social security and pensions.

These conditions involve the existing credit and interest situation
and, more important, inflation which has started again with its
ominous threat to fiscal solvency, sound money and credit, and indiv
’idual welfare.
.The committee is exploring these areas and examining the con­
ditions in a serious effort to determine the causes, and so far as possible
find the remedies.




11
25

1216

F A C L C N IT N O TH U IT D ST T S
IN N IA O D IO F E N E
AE

To make such a study complete, the committee must examine fiscal
and monetary policies, mark the distinctions between them, and study
their relationships, one to the other.
In the discharge of its more direct, responsibilities, the committee
is necessarily more familiar with other policies involved than it is
with monetary and credit policies. The record at this point in the
study contains the testimony of the Secretary and the Under Secre­
tary of the Treasury as a basis for consideration of fiscal policy and
debt management.
The Federal Reserve Board determines general monetary and credit
policy and, as a basis for consideration of this aspect of the conditions
which confront us, the committee would be pleased to have your testi­
mony, as Chairman of the Board, with respect to these and related
subjects.
You are invited to proceed in your own way to a discussion of con­
ditions, policy and action in this area, but for the record it would be
appreciated if, at the outset, you would briefly—
1. Summarize the provisions of the Federal Reserve Act, as
amended;
2. Outline the powers, facilities, functions, and responsibilities of
the Federal Reserve System and the Board;
3. Describe their organization;
4. Review their relationships with the fiscal agencies and policies of
the Government, and the banking systemof the Nation; and
5. Explain the purposes of monetary and credit policy, how it is
made, why and when it is changed, and how it is implemented.
In addition, it would be helpful to the committee if, in the course
of your statement you would discuss the following questions:
1. What, in your own words, is the best simple layman’s definition
of inflation ?
2. Are we in a period of inflation now, and if so, when did it start ?
3. Do you regard inflation as our greatest domestic problem at this
time?
4. What are the factors which ordinarily cause and contribute to
inflation ?
5. What caused the value of the dollar to decline between 1940 and
1952?
6. Why did it stabilize between 1952 and April 1956?
7. Witli basic production generally equal to or in excess of demand,
and in the absence of deficit financing, what caused the decline in the
value of the dollar to be renewed in April 1956, and the continual
decline since that date ?
8. Can present inflation be traced in any degree to increased Fed­
eral spending started in fiscal year 1956, and the. easy availability of
Federal loans and Federal guaranties and insurance on mortgages
sincethat time?
9. To what extent is this inflation being caused by increasing labor
costsin a degree out of proportion to labor’sincrease in productivity ?
10. To what extent is this inflation being causedby increasing inter­
est costs in a degree out of propoi*tion to the increased productivity of
the m
oney borrowed.
11. Is inflation being accelerated now? If so, what is the cause?
If not, what is the stabilizing influence?



F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T S

1217

12. If inflation continues, liow far can it go, and what will be the
effects in the process?
13. O inflation is started, how can it be stopped and can the
nce
value of the dollar ever b regained?
e
14. Generally, will you distinguish between fiscal policy (embrac­
ing expenditures, taxes and debt), and monetary and credit policy,
and then relate them, one to the other ?
15. How do Federal Reserve policy accelerate or control inflation?
es
Roughly, will you list in chronological order the major Federal Re­
servepolicy actions in this respect since World War I I ?
^16. Is fiscal policy action usually necessary a a com ent to
s
plem
Federal Reserve policy action with respect to m
oney and credit? If
*>• will you list recent instances of such policy com
binations, cite the
occasio s, and evaluate the effects or results?
n
17. I quote section 2 of the so-called Full Employment Act of
1946:
The Congress hereby declares that it is the continuing policy and responsibility
the Federal Government to use all practical 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 promote free competitive enterprise and the general welfare, conditions
under which there will be afforded useful employment opportunities, including
sf*if.employment, for those willing, and seeking work, and to promote maximum
employment, production, and purchasing power.

Will you estimate and describe the weight of this statutory require­
m on Federal Reserve decisions? Will you estimate and describe
ent
the weight of this statutory requirement on the combination of m
one­
tary, credit, and fiscal policy decisions?
18. What are the Federal Reserve plans further to com inflation
bat
an decline in the value of the dollar ?
d

In your testimony it is not necessary that you take these questions
in the order I have listed them; please treat them in any combination
letter arranged for clarity of discussion, but I would like a written
statement concisely answering these questions—to be submitted at
the conclusion of your testimony.

(The answers subsequently submitted by Chairman Martin to the
ab ve questions by Chairman Byrd follow:)
o
1. What, in your own words, is the best, simple, layman’s definition of
inflation?
Inflation can, of course, be defined in various ways. The most important
thing, it seems to me, is to focus on its causes, its course, its effects, and the
means of overcoming and preventing it. My opening statement, as a whole, is
devoted to that purpose. See in particular these sections: The Current Probof Inflation, Conflicting Views on Causes, the Inflationary Spiral, Expecta­
tions of Continuing Inflation, Creeping Inflation, Effects on Productive Enter­
prise, Effects of Inflation, Basic Factors in Recent Inflationary Pressures, What
More Can Be Done? (to restrain inflation), and Action Required.
In my opening statement appears one definition of inflation: “Aggregate
demand * * * in excess o f aggregate availabilities of * * * resources at existjn8 prices.” Mr. Wayne's presentation included another definition: “ Inflation
** a flow o f spendings in excess of the flow of goods and services.” The effect
J* inflation is, of course, manifest in rising prices. Thus, in my statement,
I noted that “ inflation, * * * in terms o f the man on the street, * * * is the
nsing cost o f living.”
2. Are we in a period of inflation now and when did it start?
Inflationary pressures still exist in the economy and are being reflected in
further advances in prices.




1218

F A C L C N IT N O TH U IT D ST T S
IN N IA O D IO F E N E
AE

The current period o f inflation started during the third quarter o f 1955. A t
that time recovery from the moderate recession o f 1953-54 had evidently turned
into boom. Gross national product, personal incomes, employment, and indus­
trial production had increased to new highs. More important from the point
o f view o f inflationary pressures, however, was the overriding strength o f
demands relative to capacity to produce. Output in key industries was at or
near capacity and the backlog o f manufacturers' orders for durable goods w as
rising rapidly. Not only were business expenditures for plant and equipment
increasing, but, as became abundantly clear subsequently, business concerns
were in the process o f reappraising upward their fixed capital needs. Demands
for manpower as well as for industrial resources were heavy. In response to
these strong demands, the increase in the labor force was exceptionally large
between mid-1954 and mid-1955 and unemployment declined to low levels. In
manufacturing industries, the length o f the workweek was still increasing in
the second half o f 1955 and overtime was widespread. In financial markets,
too, demands were heavy.
The strength of demands relative to available resources put intense pressure
on the price and cost structure. Industrial prices, which on the average had
shown little change earlier in the recovery period, rose considerably after
mid-1955, the rise amounting to 3.5 percent from June to December o f that year.
The wholesale price index for all commodities, however, increased by less than
1 percent; prices o f farm products declined substantially further and food
prices also came down as industrial prices rose. The wage structure was subject
to upward pressures, with average hourly earnings in manufacturing up 6 cents,
or 3.2 percent, in this period. Consumer prices, however, changed little in 1955.
The sharp increase in consumer spending in 1955 was reflected both in that
year and in 1956 by expansion o f business expenditures for fixed capital—cu r­
rently in record volume. In the second h alf o f 1955 and in the course o f 1956,
aggregate demands appeared sufficiently strong to permit increases in wage and
other costs to be recovered through price advances. W ith the demand-costprice spiral well underway, expectations o f continued inflation became wide­
spread. These expectations, as well as the advanced level o f prices, are major
influences on continued strong demands fo r funds.
Lenders today have no
difficulty whatever in finding favorable outlets fo r their funds.
Industrial
prices are now 8 percent and consumer prices 5 percent higher than 2 years ago.
Average hourly earnings in manufacturing industries have increased almost
9 percent.
The following table indicates the extent to which increases in the dollar totals
o f gross national product over the past 2 years have reflected rising prices and
increases in the physical volume o f goods and services.
Increase in gross national product 1954-57

,

Period

Current
dollars

Prices

Physical
output

Percentage increase
2d quarter 1944 to 2d quarter 1955................................................
2d quarter 1955 to 2d quarter 1956................. .............................
2d quarter 1956 to 2d quarter 1957.............. .................................

8.1
6.0
5.7

1.1
2.6
3.5

7.0
3.3
2.2

Distribution of increase (percent)
2d quarter 1954 to 2d quarter 1955................................................
2d quarter 1955 to 2d quarter 1956............................................ .
2d quarter 1956 to 2d quarter 1957................................................

100
100
100

14
45
62

86
55
38

Increases in physical volume o f product were more difficult to achieve after
mid-1955 than earlier, since manpower and industrial resources were by then
intensively utilized. Moderate increases in output have been achieved over the
past 2 years, but inflationary pressures have been so strong that half or more of
the dollar increase in product has represented rising prices. The wide disparity
between the two over the past year largely represents the steady rise in consumer
prices.




F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H N E T T S

1219

3. Do you regard inflation as our greatest domestic problem at this time?
In my opening statement I stated: “ * * * Clearly the most critical economic
problem now facing this country is that of inflation. * * *M
4. What are the factors which ordinarily cause and contribute to inflation?
The factors which contribute to inflation are those which lead to a rate of
spending in the economy greater than the rate at which goods and services are
being made available on the market at existing prices. When the economy is
Hlready operating at a high rate—as it was by mid-1955, after recovery from the
U
*54 recession—further marked increases in spending bring about further
increases in supplies only gradually and lead very soon to increases in prices,
for both goods and services. Once prices start up, as they did in wholesale
markets for industrial commodities in this country after mid-1955, many forces
operate to keep them going—including the expectation of further price increases.
'Hie factors in the current situation and different views concerning them are
discussed in my statement, especially on pages 9-11:
“ C o n f l ic t in g V ie w s on C a u s e s

“There is much current discussion o f the origin o f inflationary pressures.
Some believe they reflect a recurrence o f demand pulls, similar to those present
in the earlier postwar period. Others believe they originate in a cost push
engendered by administered pricing policies and wage agreement that violate
the limits o f tolerance set by advances in productivity.
“These distinctions present an oversimplification of the problem. Inflation is
a process in which rising costs and prices mutually interact upon each other
wrer time with a spiral effect. Inflation always has the attributes, therefore, o f
a cost push. At the same time, demand must always be sufficient to keep the
spiral moving. Otherwise the marking up o f prices in one sector o f the economy
would be offset by a reduction o f prices in other sectors.
“There is much to be said for the view that contractual or other arrangements
designed as shelters or hedges from inflation have the effect of quickening its
tempo. The 5-percent rise in the cost of living which we have experienced over
the last 2 years has probably reflected and been reflected in more rapidly rising
wage costs because of the prevalence of cost-of-living clauses in many modern
wage contracts. Cost-plus contracts tend to have the same quickening effect on
the inflationary spiral.
“The spiral is also, however, a demand spiral. At each point of time in the
development of the inflationary spiral, there must be sufficient demand to take
the higher priced goods off the market and thus keep the process moving.
“t h e i n f l a t i o n a b y s p ib a l

‘‘The workings o f the spiral o f inflation are illustrated by the economy of
the moment. As has been brought out at some o f the earlier hearings o f this
committee, we are now faced with the seeming paradox that prices are expected
j® continue to rise, even though the specific bottlenecks in capacity that impeded
j € growth o f production in 1956 have now been largely relieved, and investment
J* productive facilities continues at very high levels. Houses, automobiles,
household appliances, and other consumer goods, as well as most basic materials,
are all readily available—at a price. The problem is no longer one o f specific
Shortages or bottlenecks causing prices o f individual commodities to be bid up
because of limited availability but rather it is one o f broad general pressure on
of our resources. In other words, aggregate demand is in excess o f aggre****:availabilities o f these resources at existing prices.
^Taking the situation as a whole, as individuals, corporations, and governments
Proceed with their expenditure plans, buttressed by borrowed funds, they are in
d e position o f attempting to bid the basic factors of production—land, labor, and
capital—away from each other and in the process the general level o f costs and
is inevitably pushed upward. Recently, this general pressure has been
~*Pr®*sing itself particularly in rising prices for services as compared with
I * ” ** Despite the existence in some lines o f reduced employment and slack
many employers now face rising costs when they seek to expand activity
adding appreciably to the number employed. Often, the additional manpower
jjW red has to be bid away from other employers. As a result, many current
wins for further expansion o f capacity place great emphasis on more efficient,
"tore productive equipment rather than on more manpower.




1220

F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T S

“ This generalized pressure on resources comes to a bead in financial markets
in the form o f a shortage o f saving in relation to the demand fo r funds. A con­
siderable volume o f expenditure is financed at all times out o f borrowed funds.
When these funds are borrowed from others who have curtailed their own expendi­
tures, no additional demand for resources is generated. On balance, however,
demands for funds by those who have wanted to borrow money to spend in excess
of their current incomes have outrun savings. Those who have saved by limit­
ing their current expenditures, and thus made funds available fo r lending, have
still not kept pace with the desire o f governments, businesses, and individuals
to borrow in order to spend.1
’
5. What caused the value o f the dollar to decline between 1940 and 1952?
During the period 1941-45, the enormous volume o f Federal Government war
expenditures, matched only in part by taxation, increased incomes greatly while
available supplies o f goods were limited by the need to devote resources to the
war. Rationing and price and wage controls, as well as patriotic motives, held
down expenditures and restrained but did not prevent price advances.
With outlets for spending limited, involuntary savings o f consumers and busi­
nesses were large and took the form o f substantial accumulations o f cash and
Government securities. A considerable growth o f the money supply was to be
expected in view o f the greater needs for currency and deposits accompanying
higher levels o f economic activity and greater mobility o f the military and
civilian population. The supply o f money, however, increased more than was
required for these needs, as indicated by the decline in velocity o f money during
the war years. The record expansion in the money supply—from $42 billion at
the end o f 1940 to §102 billion at the end o f 1945— reflected large-scale purchases
of Government securities by banks. The expansion o f bank credit was based
on reserves supplied by the Federal Beserve System, in accordance with policy
o f financing the wartime deficits at stable and low interest rates.
At the end o f the war Federal Government expenditures declined, but private
outlays rose sharply as consumers, including returning servicemen, spent accu­
mulated savings in order to replenish wardrobes, acquire and furnish homes,
and purchase automobiles; at the same time, businesses were motivated to
undertake investment outlays that had been deferred and to increase their in­
ventories. Also, State and local governments increased their outlays to provide
war-deferred community facilities. Foreign countries, many o f them suffering
from war damage, also added significantly to demands fo r goods in the United
States.
These heavy demands for goods and services, backed by large accumulations
o f cash and of Government securities in the hands o f consumers, business, banks,
and other financial institutions, imposed strong pressures on the administrative
effectiveness of existing price and rationing controls. As these were relaxed
and finally eliminated, prices rose rapidly. Moderate cash surpluses in the Fed­
eral budget in 1947 and 1948 helped to restrain inflationary pressures in these
years, as did regulation o f the use o f installment credit. On the other hand,
the Federal Reserve was inhibited from exercising flexible market restraints by
the continued policy of supporting market prices o f Government securities. Thus
member bank reserves were provided virtually on the demand o f holders o f such
securities. Between 1945 and 1948 the Consumer Price Index rose one-third;
this 3-year period accounts fo r about one-half the absolute increase in the Con­
sumer Price Index from 1940 to 1952.
Prices reacted in the latter part o f 1948 as the economy underwent a moderate
inventory recession. A vigorous recovery began in the autumn o f 1949 and
prices started upward again in the first half o f 1950, before the outbreak o f
the Korean war.
This upward price movement was sharply accelerated during the Korean war
as consumers and businesses stepped up their purchases o f goods actins: upon
expectations of inflation and shortages that might result from the Korean
hostilities and the defense program then being formulated. This expansion o f
private buying was financed in part by a large and rapid expansion in bank
loans. Until March 1951, when the Federal Reserve policy o f supporting Gov­
ernment securities was ended, there was little deterrent to sales of Govern­
ment securities by banks and other holders for the purpose o f expanding pri­
vate expenditures. Moreover, enlarged Government expenditures in connection




F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H N E T T S

1221

with the Korean hostilities as well as the defense buildup here and abroad soon
added to the overall demand for goods and services. Price and wage controls,
materials allocations, and installment credit regulations were reimposed.
Wholesale prices turned down in early 1951, but consumer prices continued to
creep upward during the rest o f that year and in 1952, as rents, transportation
and utility rates, and other lagging prices continued to rise slowly.
6. Why did it stabilize between 1952 and April 1956?
Relative stability in commodity prices was established in early 1951, about
the time when the Treasury and the Federal Reserve reached an accord “ with
respect to debt management and monetary policies to assure successful financing
of the Government and at the same time to minimize monetization of the public
debt.” This stability followed a period of sharp price rise in late 1950 that
resulted from the wave of overbuying, overborrowing, and overpricing on the
part of the private economy in what proved to be exaggerated anticipation of
the effects of the huge defense program that was being inaugurated.
Actually, this wave was brought under control and price pressures subsided
while defense spending was expanding, and the economy as a whole maintained
a fairly well-balanced position during most of 1951 and 1952. The more flexible
operating policies which the Federal Reserve was able to adopt as a result of the
accord, together with various selective and direct controls—including regula­
tion of consumer and real-estate credit and the voluntary credit restraint pro­
gram, as well as price ceilings and allocations o f scarce goods—kept private de­
mands within the limits o f productive capacity. Also, increases in taxes offset
*>me of the additional Government expenditures. By mid-1952, the pace of
expansion o f defense expenditures was beginning to slacken, and there was again
leeway for growth in private expenditures for consumption and investment.
The various selective and direct controls were relaxed and discontinued.
Wholesale prices in general declined somewhat in 1951 and 1952, reflecting
principally decreases in prices o f those commodities which had risen most
sharply in 1950, particularly farm products and other basic raw materials.
Prices o f farm products continued to decline until the end o f 1955, as the world­
wide structure o f agricultural output was adjusting from wartime distortions
and also to rapid increases in the productivity o f farms. Finished industrial
products, on the other hand, were relatively stable or tended to rise moderately
in price from 1951 through 1953, reflecting the generally strong demand for these
products. Wage rates also rose. Consumer prices continued to rise moderately
in 1951 and subsequent years, owing in part to relaxation of price controls,
Particularly those over rents, and to gradual absorption into prices o f the
increases in costs o f various services whose prices had risen more slowly during
the war and early postwar years than had other prices.
In late 1952 and early 1953, with defense expenditures still large, private
spending for both consumption and investment expanded again. The economy
generally was operating on an overtime basis, supported by substantial credit
expansion on the part o f both private borrowers and the Federal Government,
mortgage loans and consumer installment credit showed the most pronounced
ncreases, as they had in most o f the postwar years. Business borrowing—both
long-term and short-term— also expanded, as did borrowing by State and local
governments. Although savings by the public increased in this period, they
did not suffice to meet the growth in demand for loans, and the Federal Reserve
System applied restraints to prevent undue substitution o f bank credit for
®avings. These measures were reversed rapidly in the late spring as strains
developed in the money market.
Sharp curtailment o f defense expenditures beginning in mid-1953, some slacke*Jing in consumer durable goods buying on credit, and a related inventory
adjustment brought a moderate recession in economic activity until mid-1954.
Prices remained relatively stable during this period. Consumer spending for
Endurable goods and services, residential building, and State and local govern­
ment expenditures continued to increase. A general recovery began in the latter
!*rt o f 1954 and by the latter part o f 1955 economic activity was at new highs.
During this period o f changing., economic climates, Federal Reserve policy
aimed at supplying adequate credit for growth but at the same time
Jvoiding credit excesses. Restraint on bank credit expansion was strengthened
*
j j 1952 and early 1953. During the slackening in activity from mid-1953 until
{he last half o f 1954, the major contribution o f credit policy was to facilitate
“®nk lending and to avoid a decrease in the money supply. The easier credit
availability provided support for mortgage lending and for financing by utilities
and by State and local governments. In addition to easier credit, large tax




1222

F A C L C N IT N O TH U ITE STA S
IN N IA O D IO F E N D
TE

reductions in 1954 helped to stimulate both consumer baying and business invest­
m ent A fter mid-1955, resumed economic expansion and accelerated credit
demands again pressed upon the limits o f productive capacity and the supply o f
savings available for investment. Credit restraints were exerted to help keep
monetary growth within reasonable bounds.
In summary, the relative stability in the value o f the dollar that prevailed
from the Treasury-Federal Reserve accord in March 1951 until mid-1953 may
be attributed largely to the restrictive monetary policy which limited credit
expansion and permitted flexibility in interest rates in the fa ce o f huge and
expanding defense expenditures and vigorous demands from the private
economy. Other factors which had a moderating influence in the early part
o f this period were direct and selective controls o f various sorts and reaction
to the excesses that followed the Korean outbreak, as well as the basic adjust­
ment in agriculture.
When the defense program was sharply curtailed after mid-1953, a relaxation
o f credit restraints stimulated demands, particularly fo r residential building,
utility expansion, and State and local government borrowing fo r community
facilities. A tax reduction early in 1954 provided another stimulus. By the
end o f 1954 general expansion in economic activity had been resumed and
credit restraints were again imposed to keep expenditures within the limits o f
sustainable growth and o f productive capacity and thus to maintain stability in
the value of the dollar.
7.
W ith basic production generally equal to or in excess o f demand,
and in the absence o f deficit financing, what caused the decline in the value
o f the dollar to be renewed in April 1956, and the continual decline since
that date?
The basic cause o f renewed decline in the value o f the dollar, to quote from my
opening statement, is that "aggregate demand is in excess o f aggregate avail­
abilities o f these resources at existing prices.” It is true that expenditures fo r
some important products—notably automobiles and houses— declined consider­
ably in the course o f 1956 and currently are smaller than in the third quarter
o f 1955. Business inventory accumulation this year has also been smaller than
in 1955 and 1956. On the other hand, other demands have increased. Business
outlays fo r plant and equipment are currently 28 percent above the level o f
2 years ago. Consumer outlays for nondurable goods and services and State
and local government expenditures have risen without interruption. I f demands
for autos and housing had continued as strong as earlier, in addition to the
demand pressure we have actually experienced, overall inflationary pressures
would have been even more intense than they have been.
So far as the Federal Government’s fiscal position is concerned, its antiinflationary influence declined in the fiscal year 1957. The pertinent figures
fo llo w :
[In billions of dollars]
Federal surplus or deficit (—)
Fiscal'year
Budget
1955...........................................................................................................................
____________________
1957....................... .................. - ............................ - .................................................

-4 .2

1
.6
1
.6

Cash
-2 .7
4.5
2.0

1

i Estimate.

The shift from deficit to surplus in fiscal year 1956 was a move in the right
direction in restraining inflationary pressures, but clearly was not sufficient in
the light o f actual developments. In fiscal year 1957, the budget surplus was
the same as in 1956, but the cash surplus was smaller so that total fiscal opera­
tions o f the Federal Government, including trust funds transactions, had a
smaller anti-inflationary influence than during the fiscal year 1956.
Fundamentally, the force o f inflationary pressures has not been interrupted
over the past 2 years, although its pattern o f influence has changed. In the late
winter and early spring o f 1956, the opinion was expressed in some quarters
that the boom was coming to an end and that inflationary pressures were
virtually over. In retrospect, it is clear that this view was a misreading o f the
situation. The view relied heavily on the decline in consumer outlays for auto­
mobiles and housing. It did not adequately appraise the formidable strength of



F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H N E T T S

1223

business demand for fixed capital. When the McGraw-Hill and CommerceSEC surveys o f business intentions to spend on plant and equipment, available
in the spring o f 1956, revealed intentions o f further large expansions, from al­
ready record levels, and as business concerns began to borrow in enormous
volume both in the long-term capital market and from banks (particularly at the
March and June tax dates), views about the future again became generally
bullish. Moreover, throughout this period consumer demands for nondurable
Koods and services and State and local government demands related to capital
programs and current operations continued very strong.
Industrial prices were strong on the upside from mid-1955 to the spring of
1956, and in the second half of 1956, following the steel wage settlement, they
again advanced rapidly. This year, however, average industrial prices have
increased little further. Consumer prices in April 1956 began the rapid and
almost uninterrupted rise which has continued through June 1957, the latest
available data. This sustained advance reflects the continued vigor of aggregate
consumer demands. On the cost side, it represents in part the working out of
previous price increases at the manufacturing level, rising costs incurred by re­
tailers, and the sustained rise in the cost o f services.
8. Can present inflation be traced in any degree to increased Federal
spending started in fiscal year 1956, and the easy availability of Federal
loans, and Federal guaranties and insurance on mortgages, since that time?
The recent period is characterized by increases in spending in most sectors of
the economy, and recent price advances stem from the combined impact of these
demand pressures on available supplies o f goods and services. Among these
sectors, expenditures of the Federal Government, specifically those for national
security programs, have increased substantially since the middle of 1956. These
outlays have represented an additional demand for available goods and services
and they may also have stimulated some related private expenditures. The
effect o f the increase in Federal outlays has been offset in part by some increase
in Federal tax receipts as a result of expanding incomes— an expansion itself
In part the result o f inflation— but receipts have not increased as much as ex­
penditures. The Federal cash surplus in fiscal 1957 amounted to only about $2
billion, compared with $4.5 billion in fiscal 1956. Thus, the anti-inflationary con­
tribution of the Government’s fiscal position decreased in fiscal 1957 from the
preceding year. Under conditions o f strong private credit demands, a substan­
tial Federal Government surplus and retirement o f Government debt help to
provide additional funds for financing private and State-local government in­
vestment. In this way, Federal fiscal policies contribute to economic growth in
a noninflationary manner.
In periods o f active demand, as in recent months, any specific Federal programs
*hich stimulate borrowing or improve the credit status of borrowers, must be
considered in addition to the actual cash surplus or deficit in order to complete
an appraisal o f the role o f various sectors of the economy in contributing to in­
flationary pressures. To the extent that such Federal programs actually have
teen effective in stimulating borrowing, they have added to pressures on capital
markets.
In retrospect, considering the course o f events over the last 2 years, it is
clear that in an economy as large as ours and with the proportion of Governmentstimulated activity as high as it is in our economy, the Federal Government
should plan on larger budget surpluses in periods o f high activity. As I com­
mented in my statement, “ The present situation calls both for a larger budgetary
surplus than we have had or have in prospect, and a continuance of restraint upon
creation o f new supplies o f money.”
9. To what extent is this inflation being caused by increasing labor costs
in a degree out o f proportion to labor’s increase in productivity ?
In m y o p e n in g s ta te m e n t I in d ic a te d t h a t r e a l w a g e s in th is c o u n tr y h a v e
J ® to t h e h ig h e s t le v e ls in th e w o r ld b e c a u se o f th e in c r e a s in g p r o d u c tiv ity
o u r n a t io n a l e c o n o m y .
W h i l e th e r e h a v e b e e n m a n y in s ta n c e s o f p a u s e o r
j* e n t e m p o r a r y d e c lin e in p r o d u c tiv ity , o v e r th e lo n g p u ll p ro d u c tiv e efficiency
“ • I n c r e a s e d f a i r l y s te a d ily .
C h a n g e s in th e r e la tio n s h ip s o f w a g e s , p ric e s, a n d p r o d u c tiv ity a r e u n e v e n
*T°m y e a r t o y e a r ; i t i s , th e r e fo r e , e x tr e m e ly d iffic u lt to d e te rm in e f o r a n y g iv e n
w o r t-r u n p e r io d th e p r e c is e in flu e n c e o f w a g e -p r o d u c tiv ity d e v e lo p m e n ts o n
a n d p r o fits .
T h e f a c t s f o r t h e p o s t w a r p e r io d in d ic a te f a i r l y c le a r ly t h a t r e a l w e e k ly e a m y
h a v e in c r e a s e d s ig n ific a n tly o n ly in th o s e p e r io d s in w h ic h p r ic e s w e r e
•fcble.
( S e e t a b le a t e n d o f a n s w e r .)
O v e r t h e p a s t y e a r r is in g c o n su m e r




1224

F A C L C N IT N O TH U IT D ST T S
IN N IA O D IO F E N E
AE

prices have offset wage increases with little or no real gains in earnings fo r the
average worker. Workers have been attempting increasingly, through cost-ofliving escalator clauses or current wage negotiations, to obtain wage increases
which will both meet the rise in prices and also provide fo r increases in standard o f living. I f past experience is any guide, however, further increases in
money wages are not likely to result in gains in average real earnings as long
as prices rise. This is one manifestation o f the process o f inflation in which
rising costs and prices mutually interact upon each other over time with a
spiral effect.
Unfortunately, the available data on output per man-hour do not allow us
to say with any degree o f precision what the short-run changes in produc­
tivity or in unit labor costs have been from month to month, quarter to quar­
ter, or even year to year. There is first the problem o f accuracy o f the measure­
ment o f output per man-hour which requires relating output and man-hour
series to each other, each with different weighting factors, seasonal movements,
and many possible, but unknown errors. Then there are problems o f concept, in­
cluding questions relating to the inclusion o f various categories o f workers, the
measuring o f changes in quality o f product, the use o f physical output versus
deflated dollar output, the weighting o f respective series, etc. W hile these prob­
lems are difficult and controversial, progress is being made in measurement.
At present, however, there is no one official series pertaining to productivity.
The preliminary data fo r manufacturing, based on production workers only,
suggests that in the last half o f 1955 and the first half o f 1956 output per manhour was relatively stable rather than increasing. Wage rates continued to
rise during this period. A fter mid-1956, however, it appears that output per
man-hour again began to increase with the rise in output per man-hour between
mid-1956 and mid-1957 probably more in line with historical trends. These
data, it should be noted, do not include nonproduction workers. The number
o f professional, managerial, and clerical workers in manufacturing has been
growing rapidly in recent years, while the numberof production workers has
declined. Thus, basing productivity measurements on total manufacturing em­
ployment rather than production worker employment, would tend to lower the
rate o f growth in productivity. There are further technical problems involved
in going a step further and attempting to measure unit labor costs. Private
security and welfare programs, such as pension and health, have been extended
rapidly and changes in hourly or weekly earnings do not fully represent growth
in worker’s compensation or employer’s labor costs. Expansion in such non­
wage benefits increases the difficulties o f measuring statistically changes in unit
labor costs in manufacturing.
In the nonmanufacturing sector, measurement o f output per man-hour is
subject to even greater qualification than in the manufacturing industries,
because it is so difficult to measure output in physical terms. In any event, the
very expansive demands in all nonindustrial activities in the past 3 years—
especially in the trades, services, and State and local governments— have been a
significant factor in bidding up wages and prices in these activities.
This year the steep rise in the cost o f living, rather than productivity, has
become the major factor in collective bargaining and wage determination. For
instance, the auto workers between mid-1956 and mid-1957 received approxi­
mately 15 cents, or 7 percent, in additional wages, but 9 cents o f that wage in­
crease came as result o f an escalator clause and merely offset the higher cost o f
living. The size o f the total wage increase thus had less relation to changes in
productivity in the industry or in the economy than earlier. As a result of
recent price rises, there has been a resurgence in labor management contracts
containing such cost-of-living escalator clauses. This year roughly 4 million
workers have or will get cost-of-living adjustments. In addition, most o f the
major agreements, such as those in rubber, petroleum, and construction in­
dustries, which were reopened or renegotiated in recent months also provide for
substantial increases in pay. The amount o f these increases would seem to
indicate that employee demands for higher wages to match higher living costs
have been taken into account by employers in final settlements. Wages have also
advanced to record levels in sectors o f the economy usually considered as out­
side the sphere o f direct union bargaining, with higher living costs also an
important influence on the size of the recent adjustments made. The continuing
strong demand for additional labor in these sectors has also contributed to wage
pressures.
Rises in “ real weekly earnings” in manufacturing industries in the postwar
period have varied from year to year and have not always paralleled yearly



F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T S

1225

•hunges in productivity. In the long run, real wages have increased in line with
rising productivity, but in the postwar era money wage rates have risen fairly
steadily from year to year, while real gains in earnings occurred when con­
sumer prices were relatively stable. Average wage increases were only about
sufficient to offset higher prices when prices were rising rapidly, but they were
accompanied by real advances in worker’s earnings when prices were stable.
From mid-1946 to mid-1948, a period of sharply rising prices following the con­
clusion of World War II, both consumer prices and average weekly earnings in
manufacturing rose by almost 25 percent. This was followed by a period of little
change in prices between mid-1948 and mid-1950, prior to the outbreak of Korean
hostilities. In this period “ real” weekly earnings increased about 10 percent.
In the following 2 years, mid-1950 to the spring of 1952, sharply rising prices
again offset rising weekly wages, each rising about 10 percent in the period. With
prices again relatively stable between the spring of 1952 and early 1956, weekly
wages continue to rise and significant gains in “ real earnings” were achieved. In
♦
ontrast, since early 1956 consumer prices have advanced by 5 percent, about the
same as the rise in weekly earnings in manufacturing industries.
In nonmanufacturing industries also, money earnings have risen fairly steadily
hut gains in real earnings appear to depend on stable consumer prices. This con­
clusion perhaps applies even more in these industries since in periods o f rising
consumer prices, wages in most of these sectors have often not been able to
adjust to rising prices so quickly as those in the manufacturing lines.
Changes in consumer prices and in average weekly earnings in manufacturing,
July 1946-June 1957
Percentage changes
Period

Consumer
Price
Index

Average weekly
earnings in
manufacturing

10.
To what extent is this inflation being caused by increasing interest
costs in a degree out o f proportion to the increased productivity of the money
borrowed?
In my opening statement, I discussed the question “Do rising interest rates
*»dd to inflation?” as follow s:
“We must be clear in viewing these relationships to distinguish cause from
effect and not to confuse them. It is sometimes said that rising interest rates,
by increasing the costs of doing business, lead to higher prices and thus contribute
to inflation. This view is based upon an inadequate conception of the role of
interest rates in the economy, and upon a mistaken idea of how interest costs
compare with total costs. In municipal government budgets, it is about 2 per­
cent ; in many utilities, it is 3 to 5 percent. Thus, as an element o f cost, interest
rates are relatively sm all; but, as a reflection o f demand pressures in markets
for funds, interest rates are highly sensitive. As previously explained, rising
interest rates result primarily from an excess of borrowing demands over the
available supply of savings. Since these demands are stimulated by inflation,
under these circumstances rising interest rates are an effect of inflationary
pressures, not a cause. Any attempt to prevent such a rise by creating new
iiiotiey would lead to a much more rapid rise in prices and in costs than would
result from any likely increase in interest rates. Such an attempt, moreover,
*ould not remove the need for a fundamental adjustment in the relation between
saving and consumption and probably would fail in its purpose of stabilizing
interest rates.”
I went on to sa y :
“A major cause o f recent inflationary pressures has been the attempt to crowd
Into this period a volume o f investment greater than the economy could take
without curtailing consumption more than consumers have been willing to do.




1226

K A C L C N IT N O TH U IT D S A E
N N 1A O D IO F E N E T T S

In fact, there baa been some increase in consumption on borrowed funds. In*
creases in interest rates naturally come about under sucb conditions; they are
the economy’s means o f protecting itself against sucb excessive bunching o f
investment or the building up o f an unsustainable rate o f consumption. W hile
the effect o f a moderate change in interest rates on the cost o f goods currently
being produced and sold is small and relatively unimportant, changes in interest
rates do assume importance as a cost in the planning o f new investment outlays.
These costs do not affect current operations or add to upward price pressures
to any substantial extent. They do tend to deter the undertaking o f new invest­
ment projects and to keep the amount o f investment spending that is being
undertaken in line with the economy’s ability to produce investment goods. To
maintain artificially low interest rates under these conditions, without intro­
ducing any other force to restrain investment, would be to invite an unbridled
investment boom, inflation, and an inevitable collapse later.
“ It is necessary to emphasize that there are many influences, other than mone­
tary policies and interest rates, that affect the volume o f consumption, invest­
ment, and saving and their relationships.”
With regard to the specific question, these earlier remarks may be supple­
mented as follow s:
1. Borrowers encompass every sector o f the economy—business, consumers,
government. The bulk o f borrowing is done fo r purposes fo r which the concept
o f “ productivity” is most elusive. This is the case especially fo r consumer
borrowing which, as the table on page 5 shows, accounted for about one-half
o f the total increase in public and private debt from the end o f 1954 to mid-1957.
In a general way, we might say that better housing, more consumer durable
goods, more adequate schools and roads, etc., increase the ability o f individuals
to make a more productive society, as well as improve their immediate well­
being. There is no way statistically to distinguish between the contribution
o f these influences to productivity and to higher standards o f current living.
For consumer and government borrowing, higher interest costs are small in
comparison with the sort o f widespread price increases that develop in an in­
flationary situation.
For individual consumers, the amount o f interest payments may at times
be considerable. For consumers as a group, however, total interest outlays
are relatively small portions o f total outlays, and total interest receipts are
relatively small portions o f total receipts. Thus, the Federal Reserve Board
flow-of-funds accounts show that the consumer sector paid out $6.9 billion of
interest in 1955, only 2.1 percent o f their nonfinancial use o f funds. This com­
pares with interest outlays o f $3.5 billion in 1950, or 1.45 percent o f total uses
in 1950. Meanwhile, the consumer sector received $8.5 billion o f interest in
1955, 2.5 percent o f aggregate funds from nonfinancial sources, and $6.2 billion
in 1950, or 2.6 percent o f funds. It may also be noted that, as o f December 1956,
mortgage interest paid accounted for only 1.7 percent of the weight o f all items
in the BLS Consumer Price Index (interest on installment debt is not included
in this index).
2. The question appears more relevant fo r business borrowing, and in par­
ticular for business borrowing to finance investment in fixed capital. In this
connection, it may be noted that a large proportion o f such investment—
varying, however, from industry to industry and concern to concern— is financed
out o f internal resources; i. e., depreciation allowances and undistributed profits.
3. I f the question is interpreted as relating to productivity o f fixed capital,
it should be emphasized that the measurement of such productivity is ex­
tremely difficult for both conceptual and statistical reasons. The study—
Productivity, Prices, and Incomes— recently published by the committee staff
o f the Joint Economic Committee states (p. 23) : “ The ratio o f capital to out­
put fluctuates widely according to how capital and output are defined or meas­
ured and according to changing economic relationshpis, including relative
costs of labor, capital, materials, etc.”
Data are not available to indicate how output per unit o f new capital has
behaved. It is evident, however, that new fixed capital is considered by man­
agement to be generally more productive than existing fixed capital and, indeed,
much investment is made primarily because products cost less when made with
new plant and equipment than when made with existing equipment.
Changes in labor productivity are generally measured by dividing changes
in total output o f goods by changes in the total input o f man-hours expended
in producing the goods. Actually, o f course, increased output results largely



F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H N E T T S

1227

from providing workers with more and improved machinery and equipment,
so that in a sense changes in output per man-hour measure changes in the
productivity o f capital as well as labor.
While efforts may be made to pass on higher interest costs on new capital in
the form of higher prices, for most industries the additional costs would be rela­
tively small.
4.
Despite higher interest rates, business outlays per fixed capital are at record
levels. With the fixed-capital producing industries operating at or close to
capacity, these business demands have added to inflationary pressures. They
have also, however, expanded our productive base and also our ability to turn
out a larger volume of goods for a given labor input.
Rising interest rates, reflecting demands for funds in excess of the avail­
able supply, do perform a rationing function; i. e., on the whole, the free play of
market forces tends to allocate available funds to those sectors where demands
are most urgent. This function is not performed perfectly by any means, but
it is performed better through market competitive forces than by any al­
ternative open to us. The presumption is strong that, so far as business is con­
cerned, funds have, on the whole, been allocated by this process to the most
productive uses.
I n c r e a s e in p u b lic a n d p r i v a t e d e b t , D e c . S I , 1954, to J u n e 3 0 , 1951
T.
I tern

[B illions o f dollars]

Increase
( + ) or
decrease
( —)

Net public and private, total__________________________________________

73.2

Net public, total______________________________________________________

—0.1

Federal Government and agencies_________________________________
State and local____________________________________________________

—11.9
11.8

Net private, total_____________________________________________________

73.3

Business, total___________________________________________________

37.1

Nonfarm--------------------------------------------------------------------------------Farm_________________________________________________________

34.3
2. 8

Consumer, total___________________________________________________

36.2

Mortgage_____________________________________________________
Installment----------------------------------------------------------------------------Other_________________________________________________________

24.9
8. 7
2.6

ift?2u rce: Survey o f Current Business, May 1957, and prelim inary estimates for June 30,
19J7, by Division o f Research and Statistics o f the Federal Reserve Board.
Net debt fo r the public sectors o f the econom y represents total outstanding indebtedness
®inus intrasector holdings o f such debt, e. g.t total Federal debt minus such portions o f
rnut debt as are held by Federal Government corporations and agencies. Net corporate
iI k rePrespl*ts total corporate debt minus intercom pany debts o f affiliated companies.
!*™t figures fo r the noncorporate private area are gross, with no adjustment fo r intraJJctor holdings. Excluded from gross and net debt o f all sectors are (1 ) deposit liability
o’ banks anrt amount o f bank notes in circulation. (2 ) value of outstanding policies and
annuities o f life-insurance carriers, (3 ) short-term debt o f individuals and unincorporated
nonfinancial business concerns held by other individuals and unincorporated businesses,
«na (4 ) nominal corporate debt, such as bonds authorized but not issued, and issued but
^■acquired. Data as classified in the Survey o f Current Business have been modified bv
nt. ^ e lu sio n from loans to nonfarm business (and from the change in total debt, as well)
■r: (1 ) credit extended by commercial banks to real estate mortgage lenders, secured or
>
unsecured by m ortgages (data used fo r this purpose relate to mid-August 1954 and mid. n£ 1957, the available dates closest to Dec. 31, 1954, and June 30, 1957) ; (2 ) borrowing
*y finance companies through security issues, open market paper, and bank loans.

11.
Is inflation being accelerated now? I f so, what is the cause. If not,
what is the stabilizing influence?
In recent months inflationary forces have continued dominant in the economy.
< 1 sumer prices reached a new high in June and apparently rose further in
.0 1
July, to a level about 5 percent above that prevailing from mid-1952 to the spring
of 1956. In wholesale markets, commodity prices increased in June and early
Joly, to a level about 7 percent above that in mid-1955, when the present broad
Advance began. Aggregate spending has continued excessive in relation to sup*
Nies of goods and services available at existing prices.

963 5— 3
3 3 — 7 pt. ----2



1228

F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T S

Spending this year for new residential building and automobiles, and also fo r
business inventories, has been below earlier highs, but spending o f most other
types either has been maintained at an advanced level or has risen further.
Producers’ expenditures for new construction and equipment have risen some­
what further, beyond the high level reached toward the end o f last year after a
rapid uninterrupted advance o f a year and a half. Government outlays have
increased further at both the Federal and the State and local level. Consumer
outlays, particularly fo r services, have continued to expand. The aggregate o f
spending—private and governmental— in the second quarter this year was higher
than ever before.
While inflationary forces have continued dominant in the economy, with some
important influences operating in the direction o f speeding up the current price
advance, other influences have been tending to slow down price increases. Saving
in financial form has increased. Industrial capacity has grown to a level where
it is capable of meeting current and immediately prospective demands. Business
demands for goods to increase inventories have been cut back fo r a variety o f
reasons: (a ) holdings are larger now, following further buildup last year; (&)
costs o f carrying inventories have been rising; and ( c ) businesses have become
more concerned about their liquidity positions. Reflecting diverse influences,
industrial price changes have become more selective, with some declines in
evidence as well as increases.
In general, however, the upward price movement has continued and in some
sectors recent price advances have been substantial, as illustrated by the latest
increase authorized for freight rates. Thus, the broad upward price movement
has become more selective but has not yet stopped.
12. I f inflation continues, how fa r can it go, and what will be the effects
in the process?
13. Once inflation is started, how can it be stopped and how can the value
of the dollar ever be regained?
In the past, an inflation, once started, has continued until it was stopped,
usually either by appropriate monetary and fiscal policy or, failing the adoption
o f such policies, until it collapsed from imbalances it had generated. In extreme
cases inflations have come to an end because people refused to accept what was
in effect worthless money. As I said in my statement (pp. 1 3 -1 4 ):
“ Once such a spiral is set in motion, it has a strong tendency to feed upon
itself. I f prices generally are expected to rise, incentives to save and to lend are
diminished and incentives to borrow and to spend are increased. Consumers
who would normally be savers are encouraged to postpone saving and, instead,
purchase goods o f which they are not in immediate need. Businessmen, likewise,
are encouraged to anticipate growth requirements fo r new plant and equipment.
Thus, spending is increased on both counts. But, because the economy is already
operating at high levels, further increases in spending are not matched by corre­
sponding increases in production. Instead, the increased spending for goods and
services tends to develop a spiral o f mounting prices, wages, and costs.”
History tells us, however, that inflations have stopped. Sometimes they
stopped because the currency became worthless and people refused to accept it in
payment. The Continental currency issued in this country during and after the
Revolutionary W ar is an illustration. Sometimes inflations have stopped before
this stage was reached because o f industrial and financial breakdown. As I
pointed out on page 14 o f my statement, “ * * * if further inflation is expected,
speculative commitments are encouraged and the pattern o f investment and
other spending—the decisions o f what kinds o f things to buy— will change in a
way that threatens balanced growth.” In other words, various types o f imbal­
ances tend to develop in the structure o f industry. These may take the form o f
overinvestment in specific types of facilities based on the miscalculation that
temporary inflation-induced consumer buying reflected a real growth trend. Or
imbalances may take the form of speculative accumulation o f inventories which
promise to profit from rising prices. Or overextended financial commitments
may be made which dangerously reduce the liquidity o f borrowers. Once these
imbalances are recognized, market forces tend to move to correct them and, i f
the imbalances have become at all general, to bring on readjustments that some­
times become serious. Prices as well as employment are likely to react when an
inflation stops as the result o f major imbalances.
The most constructive results ensue when inflation is stopped because appro­
priate fiscal and monetary policies are applied in time. As I said in my state­
ment. “ The most constructive result is the encouragement o f a volume o f savings
and investment that permits continued expansion o f productive facilities at a



F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H N E T T S

1229

rate consistent with growing consumption demands.” This type of constructive
result takes place recurrently in the course of the business cycle when the forces
generated during the upswing do not culminate in an inflationary spiral but
rather diminish in potential as full capacity is reached. Adjustment of this type
takes place without severe price repercussions. The higher price level prevail­
ing at the time of the adjustment tends to be maintained except as it may subse­
quently reflect increases in productivity.
An inflation will stop when a condition is achieved where current investment
can be financed out of savings without undue reliance on newly created money
and where prospective savings and investment are not motivated by the expecta­
tion of further or continued inflation. As I said in my statement, “ Only in this
way can the standard of living for a growing population be improved and the
value of savings be maintained.
“ Such constructive adaptations, if made in time at the onset of inflationary
pressures, need not be large in order to restore balance between prospective
demands and the resources available to meet them. It is essential, however, that
the adjustment be made. Otherwise prospective expenditures will continue to
exceed the resources available and the pressure of excess demand will foster an
inflationary spiral.”
14.
Generally, will you distinguish between fiscal policy (embracing ex­
penditures, taxes, and debt), and monetary and credit policy, and then relate
them, one to the other?
An article, Federal Financial Measures for Economic Stability, published in
the Federal Reserve Bulletin for May 1953, answers this question as well as the
first part of question 16.
The article is as follow s:
“ F ederal F in a n c ia l M e a su r es

fo r

E c o n o m ic S t a b i l i t y 1

“Government financial measures are especially appropriate for promoting
•table developments in private-enterprise economies. For the most part they
are impersonal and operate indirectly through markets by their effects on incen­
tives to spend. To the extent that sources of instability are financial, moreover,
they deal with basic causes.
“The preceding article in this series explored in some detail the relation of
<*redit and monetary action to economic stability. Before considering the func­
tioning o f the several instruments by which such action is effected, it is desirable
to discuss, briefly and broadly, credit and monetary measures in relation to fiscal
measures and debt management, the other financial methods available to the
Federal Government for influencing the flow of the economy’s expenditures.
Bach of these methods has a special and complementary role to play in sustain­
ing orderly and stable progress.
“ c r e d it

a n d m o n etary m easures

“ Credit and monetary actions affect expenditures particularly of the private
*H‘tor of the economy. As explained in earlier articles, they exert an influence on
toe availability and amount of credit, on the cost of lending and borrowing (both
Public and private), on the volume of saving, on capital values on the volume of
money, and on the value of the dollar at home and abroad.
“There are three main methods of executing credit and monetary action—
discount operations, open-market operation, and changes in reserve requirements. Though they operate somewhat differently, each influences bank reserve
l**itions and hence affects the ability and willingness of commercial banks to
lend. Since the banks are a major factor in the credit market, changes in their
•Wlity and willingness to lend affect the whole credit market, that is, the
av&ilability, cost, and volume o f credit.
’Bringing about credit restraint or ease through these measures has wideK
pread effects on the economy. Their most direct impact is on the amount of
18 the third o f a series of articles considering the operation of credit and monetary
I?
the United States. These articles are based on selected replies submitted early
•5*5® i»y the Board o f Governors o f the Federal Reserve System to a questionnaire from
Jft»wfli?com,nittee on General Credit Control and Debt Management of tbe Congressional
£onm lttee on the Economic Report. The material selected has been modified and
,n order to bring it up to date and to fill gaps in content resulting from the fact
l w f e °£}Sinal material was organized in reply to definite questions,
preparation o f the articles Is under the direction o f Ralph A. Young, Director of the
TU,°a of Research and Statistics.




1230

F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T S

spending done with borrowed funds. There is alm ost always a fringe o f bor­
rowers or potential borrowers whose decisions about investments with marginal
profitability or about consumption o f marginal usefulness are influenced by
changes in the availability or cost o f cred it A s lenders become less able and
less willing to lend, they both increase the rates o f interest at which they lend,
thus cutting back some o f the demand for funds, and raise their standards o f
creditworthiness applicable to new borrowing. As lenders become more able to
lend, they w ill lend at lower rates o f interest and accept higher risk borrowers.
These credit developments have secondary effects that are reflected in spending
and savings activities o f all sectors of the economy.
“ A supplementary method o f exerting an influence over credit conditions is
the use o f selective instruments which directly affect the equity or maturity
terms o f specific types o f loans extended by banks and other lenders. A t present
only stock-market credit may be regulated in this way.
“ In some periods o f expansion, certain credit sectors may not be readily
responsive to general measures o f credit and monetary restraint. Examples of
such developments are the growth o f stock-market credit in the late 1920’s and
expansion o f consumer installment credit and mortgage credit after the outbreak
o f fighting in Korea. Regulation o f stock-market credit was authorized in the
mid-1930’s to enable the reserve banking authorities to prevent a recurrence
o f excessive stock speculation financed through credit. Regulation o f consumer
credit and real estate construction credit was authorized on a temporary basis
after Korea in order to effect restraint in these credit areas during an abnormal
period. Regulation o f consumer credit had earlier been used to curb personal
spending financed by credit during the war period and in immediate postwar
years.
“ Credit and monetary measures are indispensable to stable progress, but alone
they cannot assure that progress. Their effectiveness will be conditioned by
Federal fiscal action and debt management and by various specific Government
programs. Their effectiveness may also be conditioned by unpredictable and
sudden developments and changes in moods and impulses that affect activity in
the economy.
“ Credit and monetary action, while powerful in combating an inflationary
upswing, is sometimes viewed as being less effective in conteracting a deflationary
downswing. This view is largely based on experience in a few depressions
which followed major booms in which economic activity was seriously distorted.
In these instances, shaken confidence o f both lenders and borrowers militated
against active response to an increased availability and supply o f credit and
money and a reduced interest cost o f borrowing. While expansionary credit
and monetary policy was essential to economic recovery under such circum­
stances, it was not sufficient by itself to achieve it.
“ The administration o f credit and monetary measures is a task involving
discretion, patience, and judgm ent Action must be guided not by a single
indicator or simple combination o f indicators but by a balanced assessment
o f the entire credit and economic situation in the light o f the fullest informa­
tion available. Action, moreover, must be adapted promptly to changing con­
ditions, because its full effectiveness on the economy will not be felt until
after some time lag. To the extent that promptness is not achieved, credit and
monetary policy falls short o f its potential and may even itself be a source o f
instability.
“ FISCAL MEASURES

“Fiscal measures work mainly through the money-collecting and moneyspending activities o f the Federal Government. The amount, type, and timing
o f tax collections and o f Government outlays affect expenditures directly and
indirectly throughout the economy, and these effects will vary with the size
o f the Federal budget. Through the level o f taxes, Government revenues influ­
ence directly the amount o f private income available for spending, and because
the Government buys large amounts o f goods and employs large numbers o f
workers, its outlays affect directly demand and supply in specific markets. Fed­
eral fiscal activities also have indirect effects in stimulating private expenditures
and in influencing the general economic outlook in a fashion similar to the action
o f credit and monetary policy. In addition, fiscal action may shift the distribu­
tion o f income, alter the uses made o f the Nation’s resources, and have repressive
or incentive effects on economic productivity and output.
“ The influence of fiscal action on economic stability arises chiefly out o f a
difference between the Government’s cash receipts and cash expenditures. The



F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H ' N E T T S

1231

difference causes a cash flow of payments between the private sectors of the
economy and the Government. In general, a cash flow from the Government has
expansive effects on the economy’s overall expenditures, while a cash inflow has
contractive effects. These effects induce further spending or restriction of spend­
ing in the private sector.
Various combinations of taxation and Government expenditure programs
will have different effects on total expenditures in the economy. For example,
increased taxation combined with reduced Government spending will have con­
tractive effects on the Nation's spending activities, and hence be appropriate
to a period of inflationary pressures. On the other hand, reduced taxation
combined with increased Government expenditures will expand the total volume
of expenditures during a period of recession. This assumes, of course, that
specific Government expenditure programs are not of the kind that displace or
compete with private economic activity, thereby discouraging rather than stim­
ulating business confidence, private investment, and private consumption.
“To some extent, changes in tax and Government expenditure programs come
about automatically over the course of business fluctuations. This built-in
flexibility of the budget tends to counteract swings in private spending without
deliberate action on the part of the public authorities. For instance, with
graduated income taxes the Government takes a larger part of national income
at higher than at lower levels, and a change in national income will be quickly
reflected in the tax take under existing pay-as-you-go tax arrangements. At
the same time, Government expenditures as a result of the social security and
agricultural support programs will tend to be greater in depressed periods
than in prosperity.
“Reliance upon built-in budget flexibility to adapt fiscal policy to severe eco­
nomic fluctuations is unfeasible so that some discretionary action through
legislative processes must be counted on for this purpose. By their very nature,
however, the fiscal tools of tax and expenditure programs are complex, and they
involve controversial aspects such as their effects on the distribution of income,
on incentives to produce and to save, and on industrial and regional development.
Speedy action, consequently, is difficult. Much time is necessarily absorbed in
the legislative process—in the initial formulation of programs and in their
consideration and final enactment. Execution of both tax and expenditure
programs requires additional time, although to the extent that taxes are paid
on a current basis the effect of tax changes is fairly immediate. In a downturn,
expenditure programs may be hard to get into operation as promptly as needed;
in a boom, it may prove to be impractical or wasteful to bring long-range pro­
grams to a halt.
“Even if it were possible to get sufficient variation in fiscal action, it might
he impracticable and possibly inadvisable to vary the whole program of Gov­
ernment expenditures and taxation primarily in accordance with the evident
needs of economic stability. In some situations, other policies are so important
as to outweigh considerations of economic stability in governmental decisions:
the conduct of war or the undertaking o f a major defense program are striking
examples of such situations. Many large items in the budget are directed to­
ward noneconomic objectives and do not lend themselves to the flexible treat­
ment required in counter-cyclical fiscal policy. Furthermore, anticyclical actions
®ay be in conflict with measures based on other important criteria. The tax
structure needs to take account long-term investment growth and taxpayer
fQnity. Remedial action based on these criteria is a desirable goal at all times
not always be consistent with immediate programs aimed at stability.
Because discretionary fiscal action involves many special problems and cannot
siways be taken speedily, decisions as to its timing usually involve the difficult
art of long-term forecasting. On the one hand, any action will affect economic
activity only after some timelag, and anticipatory action runs the risk of ac­
centuating rather than ameliorating cyclical fluctuations. On the other hand,
countercyclical potential o f fiscal action is severely diminished if steps are
until the economy finds itself in recession or boom.
d E^fferent combinations o f taxation and Government expenditures result in
jjencits or surpluses and accordingly involve Treasury borrowing or permit rejj V ^ n t o f borrowing. The amount of the borrowing or repayment is deterin
^ fiscal action; the manner and kind o f borrowing or repayment are
im
realm o f debt management. The extent of the expansive or restrictive
of fiscal measures depends not only on the relation between taxation and
rxP*nditures but in part on debt management operations. The effects o f fiscal

*°ay




1232

F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T S

action in attaining economic stability are thus related also to debt management,
and the effectiveness o f this relationship in turn depends on the financial climate
created by credit and monetary measures.
“ debt

m anagement

“ As a complementary tool o f countercyclical financial policy, debt management
now has great importance because o f the present size o f the Federal debt and
because o f the special role such debt plays in the asset structure o f financial
institutions. The Federal debt now amounts to about two-fifths o f the economy’s
total debt It is the only debt that is entirely free from credit risk. Short-term
Federal debt serves as a principal liquid or operating reserve asset of banks,
other financial institutions, and business corporations. Longer-term Federal
debt functions as a major investment asset o f individuals and savings institu­
tions and competes with other investment mediums in absorbing the economy’s
money savings. The types o f Government securities issued thus have a signifi­
cant effect on the liquidity o f the entire cconomy and on the market for other
securities.
“ Debt management has two major aspects. It involves refunding operations
affecting the maturity arrangement of outstanding debt. It also involves the
expansion or retirement of debt in response to the current cash deficit or surplus
o f the Government. The maturity composition o f the debt has its most direct
tie with credit and monetary policy while the changes in the amount o f debt
are most immediately related to fiscal policy. Both aspects combine to deter­
mine the composition o f the total Government debt at any given time and in this
process exert an influence on the attainment o f economic balance.
“Management o f the Federal debt makes a primary contribution to economic
stability by arranging a maturity composition o f that debt that will support
and not impede development o f appropriate credit and monetary policy. In
general, such a debt distribution would be one with maturities well spaced over
a period o f years. This kind o f maturity distribution is also important fo r
administrative reasons in debt management.
“ There is, of course, constant need for a large volume o f short-term issues
to meet the basic liquidity requirements o f banks, financial institutions, business
corporations, and others. In a period o f economic slack or depression this
liquidity may be expanded by issuing additional short-term obligations. In
the subsequent period of expansion the volume o f these issues may be reduced
somewhat by refunding operations or by retirements out o f surplus.
“ To change the existing debt structure, however, takes time. Financing
decisions o f the past necessarily impinge heavily on the present and the future,
and debt management actions must continually be a compromise between what
may be most appropriate for the current economic situation and what may be
appropriate in terms o f a longer run view o f economic stability. This balance
in judgment relates primarily to the volume o f very short term securities
which may be outstanding at any time. Because the liquidity o f such securities
is not readily influenced by credit and monetary measures, the greater the pro­
portion o f the debt in these issues the less responsive the economy will tend to
be to restrictive credit and monetary action when such measures may be
appropriate.
“ From the point of view o f economic stability, the maturity distribution of
outstanding debt should always be such that moderate changes in the level of
interest rates will have an important effect on the liquidity positions of holders,
thereby influencing spending and lending decisions. To attain this, a sizable
portion of the debt should be spread out over intermediate and long-term maturi­
ties so that when interest rates decline, and the market prices o f these securities
therefore rise, liquidity positions o f holders w ill come to be regarded as more
adequate than formerly. Conversely, when interest rates rise and security
prices decline, holders will tend to view these positions as less adequate. Such
a spread maturity distribution would limit the dependency o f debt management
on current interest rates and security market conditions and on the other hand,
would increase the sensitivity o f the entire economy to interest-rate changes.
“ Within the standards set for debt balance, current debt management can
operate to reinforce or offset in part the impact o f a Federal deficit or surplus.
For example, a deficit in a recession period may be made somewhat more effective
if in its financing the emphasis is placed on the use o f shorter term obligations.
The expansive effects will tend to be greater and will support an expansionary
credit and monetary policy to the extent that such issues are absorbed by the



F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T S

1233

banking system and foster expansion in the money supply. Conversely, a sur­
plus in a boom period will be more effective as a restraint on expenditures if it is
used to retire short-term debt rather than to purchase long-term securities in the
market. The restraining effects will tend to be increased and will reinforce
restrictive credit and monetary policy if the repayment of debt reaches the
holdings o f short-term issues by the banking system, thus affecting bank liquidity
positions.
“Debt management actions to promote economic stability through shifts in
terms and maturities of security offerings are limited by the necessity of meeting
existing market conditions. Public debt must be handled so that the investing
community will be receptive to new issues from refunding operations and will
take additional debt into its portfolio. While public debt differs from private
debt instruments in quality, public debt instruments compete with similar secu­
rities of private origin in the market In short, the debt must be in such form
that it is readily assimilated in the market.
“There are other practical problems of debt management to be resolved.
Recently, acceleration of corporate tax payments has resulted in a concentration
of Treasury receipts in the first half o f the year while Government outlays
are more evenly distributed. This necessitates a seasonal pattern of short-term
borrowing and repayment o f borrowing even if the cash budget is in balance.
“ Debt management must develop its policies and feel its way not only in
response to immediate Treasury needs, to security market developments, and to
investor preferences, but also with regard to the cost of servicing the debt.
Prom both the standpoint of interest cost and economic stability there are
many alternative arrangements o f a given debt. Problems of current interest
cost must be weighed against the costs to the Federal budget and the economy
in general if debt management decisions are excessively inflationary or de­
flationary. They must also be weighed against possible future interest costs
under different economic circumstances. Debt management decisions thus must
consider both the present and future, as well as the implications of action on the
effectiveness o f other instruments for achieving economic stability.
“IN T E R A C T IO N

OP

F IN A N C IA L

M EASU RES

“ The combination o f credit and monetary measures, fiscal measures, and debt
management that will be most appropriate at any particular time will depend
on the circumstances prevailing and on the feasibility o f action in one field or
the other. How they are interrelated in Government policy can be shown by a
brief description of their use in periods of contraction and inflation.
''Periods of contraction.— In combating recession and deflation, fiscal measures
can make a broad, direct attack by lowering taxes, increasing Government ex­
penditures, or both, in an effort to cushion or offset the decline in the total volume
of private income and expenditures. These fiscal actions will make for an
excess of expenditures over receipts and an expansion o f public debt.
“ Debt management as well as credit and monetary measures will condition
the impact o f fiscal action. The expansionary potential will be affected by
the manner in which the deficits are financed. The effect will be greatest
if the deficit is financed with funds that would otherwise have been idle or with
new deposits generated by bank investment. The effects of a Federal deficit may
be partly neutralized if it is financed with funds that might otherwise have found
outlet in private consumption or investment. In summary, fiscal measures by
themselves can produce an increase in total expenditure by an excess o f expendi­
tures over tax receipts, and perhaps to some extent by changes in tax and ex­
penditure patterns which take advantage o f differential tendencies o f various
sectors o f the economy to spend for investment and consumption. The rise in
expenditures promoted by fiscal measures will be far greater, however, if debt
management and credit and monetary actions are also operating in a way that
stimulates total demand.
“In depressed periods, credit and monetary measures should ease bank reserve
positions, making bank credit and other credit cheaper and more readily avail­
able. Such action will encourage the use o f credit and prompt a rise in Govern­
ment security and other capital values, thus increasing the economy’s liquidity.
This kind o f policy will also facilitate financing of any Federal deficit. I f some
substantial portion o f the new securities offered are shorter term obligations,
debt management will be functioning at the same time to increase the liquidity
the economy. To the extent that such securities are purchased by banks
there will be an offiset to contraction o f private bank credit and a consequent




1234

F A C L C N IT N O TBS U IT D S A E
IN N IA O D IO F
N E TTS

stabilizing effect on the volume o f money. Along with an expansionary credit
and monetary policy, this w ill help to develop a condition o f banking liquidity
favorable to private bank credit expansion and resumed growth in the money
supply. Increased liquidity o f lenders generally will also help to sw ell the flow
o f credit.
“ Expansion periods when inflationary pressures are strong.— When inflationary
pressures are strong, it is o f paramount importance that fiscal, credit, and
monetary, and debt management policies supplement one another in limiting
expansion o f both public and private demand. A t such times, fiscal policy should
avoid deficits and aim fo r surpluses in order to restrain expansion o f expendi­
tures. Credit and monetary policy should restrict bank reserve positions, mak­
ing bank and other credit less readily available and more costly. This will
dampen the expansion o f bank credit and the money supply and low er capital
values, thus reducing generally the liquidity o f the economy. This kind o f action
will put a brake on expansion o f spending financed by credit and at the same
time operate to increase saving. Debt management policy should be directed at
reducing the liquidity o f the existing debt by refunding some maturing issues
into longer term obligations and by applying surpluses, when available, to reduce
the volume o f short-term d eb t Reduction in liquidity so effected w ill exert a
retarding influence on the momentum o f spending. Thus these three methods o f
Federal financing policy can work consistently in an inflationary period toward
the primary goal o f economic stability.
“ T o the extent that any o f these instruments does not work toward combating
inflationary trends, the burden is made heavier on the others. T otal spending
will not decline as a result o f fiscal action i f the dollars taxed away are replaced
by dollars created by bank credit expansion; nor w ill restrictive credit and
monetary policy be fully effective if fiscal or debt management policies are
expansive. At times in expansion periods it may be diflicult to avoid stimulative
fiscal policies, and credit and monetary policy together with debt management
must then carry an extra load.
“ The combination o f credit and monetary measures, fiscal measures, and debt
management that will be desirable at any particular time will depend in some
degree on the special circumstances prevailing and on the feasibility o f action in
one field or another. These instruments o f Federal financial policy are com­
plementary, but to an extent use o f one may be substituted for use o f another.
Inappropriate action in one area o f policy, however, may overburden the task
o f the others and reduce their effectiveness. The greatest contribution to eco­
nomic stability from Federal financial measures may thus be achieved when these
are used as mutually reinforcing instruments o f public policy.”
15.
How does Federal Reserve policy accelerate or control inflation?
Roughly, will you list in chronological order the major Federal Reserve
policy actions in this respect since W orld W ar II?
An article, Influence o f Credit and Monetary Measures on Economic Stability,
published in the Federal Reserve Bulletin fo r March 1953 answers the first part o f
this question.
The article is as fo llo w s:
“ I nfluence

of

C redit

an d

M o netary M e asu res

on

E co n o m ic S t a b i l it y 1

“ Credit and monetary measures influence economic activity and prices initially
through effects on the availability, cost, and volume of cred it Their force, how­
ever, extends beyond lenders and borrowers. It is reflected in the quantity of
money, in the market value and liquidity o f assets, and in the overall liquidity o f
the economy. Ultimately, it is reflected in the spending and saving decisions of
income receivers and o f holders o f cash balances and other assets.
“ The first article in this series provided a brief description o f the nature of
money, o f the processes by which changes occur in the quantity o f money, and o f
the reserve banking measures that influence expansion o f the money supply. In
the present article, the discussion is pursued further to consider the ways by
which reserve banking action affects the lending and investment decisions o f
1 This is the second of a series of articles considering the operation of credit and mone­
tary policy in the United States. These articles are based on selected replies submitted
early in 1952 by the Board of Governors of the Federal Reserve System to a questionnaire
from the Subcommittee on General Credit Control and Debt Management of the congres­
sional Joint Committee on the Economic Report. The material selpcted has been modified
and expanded in order to bring it up to date and to fill gaps In content resulting from the
fact that the original material was organized in reply to definite questions.
Preparation or the articles Is under the direction of Ralph A. Young, Director of the
Division of Research and Statistics.




F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H ' N E T T S

1235

commercial banks and other lenders, alters the decisions of borrowers, and in­
fluences the lending, spending, and saving of all sectors of the economy. The dis­
cussion deals only with the mechanism by which credit and monetary measures
affect the tempo of economic activity and thus contribute to stable economic
progress.
“ some

general observations

“Credit and monetary measures have widespread effects in encouraging or dis­
couraging expenditures. A general tightening of credit has its most direct effect
in restricting the amount of spending with borrowed funds. Credit restraiut
also curbs the expansion of money, arid so limits increases in the amount o f cash
balances held by individuals, businesses, and other spending groups.
“Credit restraint, moreover, has important deterrent effects on spending out
of existing cash balances and from funds obtained by the sale o f assets, where no
credit granting and no money creation are involved. These are indirect effects
which come about in a number o f ways. There may be a dampening of too
optimistic expectations o f businesses and consumers. A rise in interest rates
produced by credit tightening will tend to reduce the value of capital assets, a
development that will discourage some new investment in construction and in
producers’ equipment. Consumers and businesses may decide to save more,
either because they are less sure that credit will be available for possible emer­
gencies or to insure fulfillment o f future plans, or because the interest return
on savings has become more attractive.
“Easing o f credit, on the other hand, tends to have opposite effects. It en­
courages spending with borrowed money. It also stimulates greater spending
out of current income and past savings. Credit easing does this by promoting
the belief that prices o f goods will rise, by reducing interest rates and thereby
both lowering the cost o f borrowing and stimulating a rise in capital values, and
by making it less necessary and less profitable for businesses and consumers to
save.
“Whether a tightening or an easing of credit will find a response in the de­
mand for credit depends on the existence o f a fringe o f borrowing or potential
borrowing. That is, greater difficulty in obtaining credit or increased cost of
credit influences decisions of borrowers by deterring them from using credit for
investments with marginal profitability or for consumption of marginal useful­
ness. It may also deter borrowers from using as much credit for other purposes
as might have seemed profitable or useful had credit conditions remained un­
changed. In a boom period, when credit is in great demand, there is always
fringe borrowing which can be cut out either by greater selectivity in lending
or by higher interest costs. I f an easing o f credit is to stimulate borrowing in a
period of business recession, there must be a similar fringe o f potential borrow­
ing which will become effective when credit is more readily available and cheaper.
I'nder most conditions such a fringe exists, and an easing o f credit will stimu­
late borrowing in amounts or for purposes that were previously not regarded as
Profitable or useful, and for purposes for which credit could not previously be
obtained.
“This fringe o f potential borrowing, however, may be very limited under special
circumstances. In a period of inflationary boom, investment in plant and equip­
ment (productive capacity) and in housing and purchases o f durable goods may
proceed so rapidly, unless checked somewhat, that future needs will be too far
anticipated. Then, in case of a serious business downturn, many activities involv­
e s credit that would ordinarily have been greatly stimulated by an easing of
**redit may not respond, because for the time being the demand for them has
already been filled in the previous boom. Other potential borrowers may feel
^discouraged about profit possibilities as a result o f the downturn that they, too,
* ‘1 not borrow, however cheaply and readily credit may be available. Once
1
*jch conditions and attitudes have developed, the immediate effect of an easing
or credit will be limited, although such an easing is still an essential measure
setting the stage for ultimate recovery. The ability to combat a recession
with credit and monetary action, therefore, depends in large part on the extent
10 *hich restrictive credit action has been taken in the preceding boom, as well
how early and aggressively easing action occurs after a downturn.
# ‘A general tightening of credit results from a reduction in the availability
^ cred it relative to the demand for it. Such tightening may develop because
y supply o f credit has contracted without a corresponding reduction in demand,
••ctnae the demand for credit has increased without a corresponding increase




1236

F A C L C N IT N O THE U IT D ST T S
IN N IA O D IO F
N E
AE

in supply, or from some combination o f these. In a boom period, demand fo r
credit typically increases and credit conditions tend to tighten even though
there is an actual increase in the volume o f credit granted. In order to keep
credit from tightening under such conditions, reserve banking policy would need
to permit the total credit and monetary base to expand at the pace set by the
progress o f the boom, regardless o f the inflationary or other unsound develop­
ments that might be occurring.
“ A general easing o f credit results from an increase in the supply o f credit
relative to the demand fo r it. Easier credit conditions may generally be expected
to develop in a period o f economic recession, except when there are banking
difficulties or extreme pressures for liquidity on the part o f consumers and
businesses. Credit and monetary policy in such a period should encourage the
development o f easier credit conditions.
“ e f fe ct

on le n d e r s

“ A general tightening or easing o f credit affects lenders in all sectors o f the
credit market, from short to long term. In the short- and intermediate-term
sectors o f the market, the m ajor suppliers o f funds are the commercial banks.
Expansion or contraction o f their loans and investments tends to expand or con­
tract the volume o f money. There are, however, many other lenders that supply
a substantial volume o f short- and intermediate-term credit through the invest­
ment in prime-grade marketable paper o f cash balances not needed fo r current
expenditures and o f secondary reserve funds. The volume o f such investment
varies with the attractiveness o f the interest return. The supply o f bank credit
is dependent on bank-reserve positions, which in turn may be tightened or eased
by reserve-banking actions, as was explained in the first article o f this series.
The total supply o f short-term credit is thus highly flexible.
“ In the market for long-term credit, the supply o f funds is related to the
volume o f saving. M ajor lenders in this market, in addition to individuals, are
insurance companies, savings banks, savings and loan associations, public and
private pension funds, and nonprofit institutions. Commercial banks, although
primarily short-term and intermediate-term lenders, also invest their time
deposits in real-estate loans and in long-term corporate, Federal, and State and
local government securities. The supply o f investment funds is relatively fixed
at any time and does not adjust quickly to changes in demand. In a period o f
boom, however, increased demand for long-term credit tends to spill over into
the short-term credit market, and in a period o f recession lack o f long-term
credit demand may induce investment funds to seek short-term outlets. Con­
ditions o f availability and cost o f short-term and long-term credit thus are con­
stantly interacting. Moreover, the lending and investing activities o f com­
mercial banks bridge the markets and help to link them together.
" Commercial bank*.— Individual commercial banks obtain funds primarily
from the deposits o f working balances and savings o f individuals and businesses.
For the banking system as a whole, however, most of the deposits result from
credits extended by banks. Commercial banks as a group can expand their
credits only to the extent that thev have or can obtain the reserves needed to
support the resulting growth in deposits.
“ The availability o f reserves is directly subject to Federal Reserve influence.
Aside from a gold inflow or a return o f currency from circulation, which
can usually be counteracted by reserve banking action, and except for certain
temporary technical factors, the volume o f bank reserves can be increased
only by bank borrowing at the Reserve banks or through open-market purchases
o f securities by the Federal Reserve.
“ Commercial banks consider borrowing a temporary expedient. They do not
like to be long in debt. Individual banks can get additional funds to lend
by selling Government or other securities or by permitting maturing issues
to run off. As a group, however, banks cannot expand their total supply o f
loanable funds in this way except when such paper is being bought by the
Federal Reserve System. Unless the Federal Reserve is buying securities
and thereby supplying reserves, reduction in security holdings by one or more
banks will normally draw reserves from other banks and no net addition
to reserves will occur. An attempt by banks as a group to obtain additional
reserves by selling securities, or by allowing maturing issues to run off, w ill
increase the supply o f short-term paper fo r sale in the market, thus lowering
prices and raising yields on such paper. Similar market pressure may result
if banks draw upon balances with correspondents or call loans made in central
credit markets in order to build up reserves.



F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T S

1237

“At the lower prices and higher yields, Government and other short-term
securities will be more attractive. Nonbank investors may be induced to buy
more of them, using temporarily idle deposit balances. Sales o f short-term
paper by banks to nonbank investors and the use by banks o f the proceeds
to make loans will shift the ownership of deposits and may increase the activity
of existing deposits, but such sales will not increase total bank reserves so as
to permit an increase in total bank credit and deposits.
“ With prices lower and yields higher on short-term paper, banks are less
likely to reduce their holdings of secondary reserve assets, notably short-term
Government issues. Some banks may continue to do so, but others will stop
celling or many buy. In the aggregate, the secondary reserve position o f banks
will tend to stabilize. This development is brought about in several ways.
Many banks and other potential lenders are reluctant to sell securities at a
loss. As the potential loss becomes greater, this reluctance deepens. Rising
yields on short-term paper, moreover, make the credit outlook uncertain, and
this uncertainty, together with the fact of potential losses on the sale o f paper
beld, makes the secondary reserve positions o f banks less satisfactory to bank
managements. Hence, holdings of liquid assets that were previously viewed
as adequate or even more than adequate come to be viewed with concern.
The result is a greater unwillingness on the part o f bank managers to reduce
holdings o f liquid securities in order to make more loans.
"The key fact is that with a tightening in the credit situation banks cannot
count with as much certainty on the ready availability o f additional reserve
funds and will therefore tend to be more restrictive in their lending practices
and standards. This restraint both reflects and is a part o f the process o f credit
tightening. As the credit and monetary climate thus changes, bankers will
modify their expectations about the general outlook for business and commodity
prices. Applications for loans, particularly inventory loans, will be more care­
fully screened. Businesses which obtain credit to accumulate inventories will
be under pressure from their bankers to keep inventories more closely in line
with actual requirements. Bankers will also bring pressure for repayment on
many borrowers with outstanding obligations. In general, they will be alert
to find reasons for refusing credit requests or not meeting them fully and for
accelerating repayment o f outstanding loans, rather than eager to extend credit.
“When credit conditions ease, more and more banks will free themselves
from borrowing and, as reserves accumulate in excess of working requirements,
they will become more aggressive in competing for loans and marketable paper.
Other lenders and investors will also be under pressure to keep their funds
employed. This change in the credit situation will find prompt response in
declining yields in all sectors o f the market. Uses o f credit that under condi­
tions of credit tightness were postponed or not cultivated by lenders will be
promoted by them under conditions of credit ease.
"Lenders and investors in long-term market.—A tightening in credit and the
ammipanying increase in interest rates will significantly affect lenders and
investors who operate primarily in the long-term credit market, including lifeinsurance companies, mutual savings banks, savings and loan associations, and
pension funds. They will become less willing to make any but the best grade
loans and investments. They will generally exercise greater caution in acceptlllK marginal applications for credit
“In part this change in attitude reflects the declining value of assets asso­
ciated with rising interest rates. All income-producing assets yielding a fixed
rate of return tend to decline in price when market rates of interest rise. This
true because they are valued in the market on the basis o f expected
returns, capitalized at the appropriate current rate of interest, including al­
lowance for risk. It is easy to see this relationship in the case o f prime-risk
securities, since their market value changes only with changes in interest rates ;
*’hen interest rates rise, the value o f such securities correspondingly declines.
Actually the decline can be even more marked in the case of securities or
other income-yielding assets o f lesser grade. As interest rates increase, invesu*rs become less optimistic about the business outlook and therefore change their
•ppraisals o f risk positions. Such changes in appraisals of risk, combined
the general increase in interest rates, will result in an even greater decline
•1 value for lesser grade securities than for prime assets.
1
‘Thus in a period o f tightening credit, long-term lenders and investors, while
at first attracted by the higher yields available on assets of less than top grade,
^aduaUy become more restrictive and selective. They become less willing to
prime securities to acquire higher yielding but more risky assets, partly




1288

F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T S

because they can sell the prime securities only a t a loss, which they hesitate to
accept They also become more interested in retaining in or adding to their
portfolios the more liquid types o f assets, because o f concern about the decline
in the market value o f their entire investment portfolio and the general uncer­
tainty about future developments. In addition, the higher interest rates on
these more liquid assets in a period o f tightening credit come closer to provid­
ing the average interest rate which institutional lenders must obtain on their
earning assets in order to meet contracts with their own creditors.
“ In recent decades the flow o f savings to nonbank institutional lenders, par­
ticularly insurance companies, has been increasing rapidly and the size o f
the investment problem o f these lenders has grown accordingly. In order to in­
sure the ready replacement o f funds regularly becoming available fo r invest­
ment from new savings and from repayment o f old loans, the m ajor savings
institutions have developed techniques for committing their funds in advance
to corporate, mortgage, and other borrowers. Such commitments make it pos­
sible for potential borrowers to proceed with projects which they might not
undertake without assurance o f financing on satisfactory terms. But nonbank
lenders will hesitate to commit themselves beyond the funds they expect to
have coming in if they fear that interest rates may rise in the near future and
that they may therefore have to sell securities at a loss to meet future commit­
ments. As a result, when credit is tightening, some proposed projects requiring
long-term credit may be deferred because a financing commitment cannot be
arranged.
“ When interest rates decline, investors in the long-term market w ill find
their positions more liquid. The yields available on high-grade securities will
fall and the prices o f such securities will rise. This development in itself will
encourage long-term lenders to extend investment into areas with more attrac­
tive rates o f return. Moreover, if institutional lenders are quite certain that
interest rates will fall and that prices o f high-grade securities w ill rise, they
will be willing to commit themselves to future lending that will require the sale
o f high-grade securities in order to make loans with a more attractive interest
return.
“ Underwriters and security dealers are important in the money and capital
market, and their responses to credit tightness in turn affect the availability
o f credit. They are particularly sensitive to changes in interest rates because
they customarily carry a large inventory o f securities in the process o f distri­
bution. They risk large losses i f they are holding large amounts o f securities
in a period o f rising interest rates, since they may not be able to sell them
except below cost or may have to carry the securities fo r some time on bor­
rowed money. Thus underwriters and dealers may be expected to carry securi­
ties less readily and hence to discourage security flotations while interest
rates are adjusting to higher levels. When yields are stable or are expected
to fall, they will be more likely to encourage such flotations.
“ e f fe ct

o n borrow ers

“ Restraint on borrowing exerted by tightening credit results in part, as already
explained, from the increased difficulty o f finding lenders and obtaining loans.
It also results in part from the influence on the borrower o f higher interest costs
and from his greater uncertainty about future credit and business developments.
“Borrowers fo r business investment.— Much business is done on the basis o f
l>eing able to borrow capital at rates o f interest lower than the return that is
expected to be obtained on the use o f that capital.
These margins will be
affected by changes in interest rates and by changes in the profitability o f the
business concerned. Each change, though small, may influence borrowing fo r
which the profit margin is narrow, while not affecting the bulk o f economic
i nterprise. Such small effects, however, help to maintain economic balance.
“ The sensitivity of business borrowers to changes in interest rates varies
widely, however. In certain fields o f long-term investment, such as industrial
«iwl commercial construction, public utilities, and railroads (which are large and
important fields), interest costs are particularly significant.
In such fields
comparatively small increases in interest rates can have a substantial effect in
jiostponing the demand for capital. Even in other fields where interest costs
sire less important, fringe borrowers may be deterred from borrowing when
interest rates rise, while other borrowers may decide to get along with less cre d it
The higher that long-term rates become, and the more likely that the condition
is temporary, the greater will be the tendency for long-term borrowers to postpone



F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H N E T T S

1239

investment expenditures because they expect to be able to borrow later at
considerably lower interest costs.
“An increase in interest rates does more than just affect the cost of credit
to borrowers. It also reduces the market value o f existing assets unless the
actual or expected earnings on these assets rise, since earnings are capitalized
at a higher rate o f interest.* The liquidity position of all asset holders is
adversely affected by this development, and their willingness to undertake new
long-term commitments may be influenced.
“A rise in interest rates also influences the utilization of productive resources,
directing some activity away from production of long-lived, slowly depreciating
capital goods and thereby freeing resources for an immediate increase in output
of consumption goods and o f producers’ equipment to make consumption goods*
An interest rate increase has this effect both by increasing the cost of long­
term borrowing and by changing the relationship between prices of existing
capital assets and the cost of producing new assets. In the fixed capital area
these changes, together with changes in the outlook for profits and risks due
to the altered credit and monetary situation, shift the balance of business
decisions toward holding or buying old assets, and by adapting old assets to new
uses, rather than buying new ones.
“ How the changed relationship between prices of existing capital assets and
costs o f producing new ones occurs is illustrated below. The illustration pertains
to hypothetical office buildings with a net income from rent of $100,000 a year.
“Estimated cost of constructing new building______________________ $1,500,000
“Capitalized market value o f existing building with earnings from
rent (net o f all current costs and depreciation) of $100,000:
‘‘If the current interest rate, with allowance for risk, is 6 percent- 1,666,667
“I f the current interest rate, with allowance for risk, is 7 percent- 1,428,571
“If the current interest rate for such investment, with allowance for risk, were
^Percent, the capitalized value of the existing property would be more than
the cost o f constructing a new building with the same earning prospects. An
investor in this type o f real estate, instead o f buying an existing building,
would build a new structure, other things being equal. If, on the other hand,
^ r e le v a n t interest rate were 7 percent, the decision would go the other way.
“Business borrowers in the short-term market may also be greatly influenced
by changes in credit conditions. Inventory accumulation is normally financed
m substantial part by short-term credit. When businesses have been building
up inventory positions, a tightening in the credit and monetary situation removes
jome o f the incentives for inventory accumulation. Uncertainty with respect to
the possibility o f renewing the credit, moreover, increases the possibility that
inventory holdings may have to be sold under unfavorable market circumstances,
deters particularly inventory accumulations of a purely speculative variety.
Lower interest rates, through their effects on costs, capital values, and busi­
ness anticipations, will encourage borrowers to make additions to physical
prJP®rty and also to accumulate inventory.
^C onsum er borrowers.—Use of credit by consumers is not subject to direct
p
**triction by higher interest rates in the credit market. Consumer credits are
^ a l l y extended on fairly standardized terms and at relatively high and in­
flexible credit charges. The rates paid for money at wholesale by the institu­
tions that lend to consumers is only one o f a number of important cost ele­
ments in the credit charge to consumers at retail. Thus changes in interest
e.ntV1!1 highly developed economy such as the United States, the volume of accumulated
1

lu U z 18 »
l%
u

process or puDiication, it is estimated m a t ror tne x*o -yearp en o«
*verage yearly rate of growth of reproducible tangible wealth in the United States
percent, or about 2 percent on a per capita basis. At the end of 1948 reprotangible wealth owned by individuals, businesses, and farmers was valued at
4f£™*imate)y $600 billion. Athough not all of this represents assets whose value is
i * ! : , / affected by changes in interest rates, the figure serves to give some idea of the
of reproducible assets involved. In addition, values of income-producing lands
d. as are values of negotiable claims not represented by real assets. The study
to is part of a comprehensive inquiry into savings and investment in the American
lftsn

Jlvv,
dnM i
K

•WtsVi? *5*we« the period of borrowing that may be involved in its purchase. Long-lived
iS t
^ 7 thus be made, in effect more equivalent to shorter-lived producers’ equiptw
from the standpoint of the effects of credit tightness on their purchase and from
■'•adjoint o f the obsolescence risk involved.




1240

F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T S

rates In the credit market bave a less than corresponding effect on the charge
for credit to consumers. Nevertheless, the interest cost is one important element
in lenders’ costs, and general credit tightness or ease tends to be transmitted
to consumer credit through its influence on the strictness or leniency o f credit
standards applied by consumer-credit-granting institutions. Alteration o f credit
standards is a method by which lenders in this area control other important
elements o f their costs, namely, collection costs and losses by default. Because o f
the nature o f the consumer credit market, selective credit regulation has been
used in this field during emergency periods.
“ Residential mortgage cred it— Mortgage borrowing fo r house purchases is
considerably affected by increases in interest rates. Borrowing to buy houses
is typically long term and on an installment-repayment basis. An increase in
the interest rate, which adds to the monthly mortgage payment, raises the at­
tractiveness o f rental housing compared with ownership. Total spending fo r
houses may thus be reduced, as some buyers are discouraged altogether and
others are induced to buy cheaper houses. The effect o f this on economic activity
is felt most directly through the market for new houses. The size o f the monthly
payment on a mortgage, however, reflects the length o f the borrowing term as
well as the interest rate. By lengthening the period o f mortgage repayment the
restrictive effect in the housing sector o f an increase in interest rates may be
largely offset. It is, consequently, highly important to avoid encouragement o f
longer mortgage maturies during a period o f boom when credit tightness is being
relied on to maintain economic stability and hold down inflationary pressures.
The tendencies described, o f course, work in reverse to stimulate house pur­
chases during a period o f recession.
“Investors and traders in corporate stock.— The direct effect o f changes in
interest rates on demand for credit to finance purchases o f corporate stocks
depends largely on what is happening in the stock market. When stock prices
are stable, credit trends to be used by regular investors and professional traders
who deal in lots o f substantial size and expect only small unit profits. Credit
demand for such transactions may be sensitive to interest rates, since the
increased cost o f higher rates may wipe out profits, while lower rates will tend
to add to profits. On the other hand, when stock prices are rising or declining
under the impact o f speculative pressures, the expectation o f quick capital gains
may be so strong as to make borrowing costs a matter o f distinctly secondary
importance. In such circumstances, selective credit regulation o f margin
requirements on loans to purchase or carry stocks can aid in restraining credit
expansion in this area.
“ Tighter or easier credit conditions may indirectly affect borrowing on stocks
through their influence on the pace o f economic activity. The willingness o f
individuals to buy and hold stocks, both outright and on credit, is necessarily
related to their judgments o f business developments and prospects.
“ effect

on sa v in g

“ Changes in credit conditions and concomitant changes in interest rates will
affect the volume o f savings. I f some groups in the economy increase their
savings, an increase can take place in investment exiienditures, or in consump­
tion expenditures financed bv borrowing or by drawing down asset holdings,
without resulting in an increase in the total demand in the economy.
“To trace the effects on saving o f a tightening or easing o f credit and the
accompanying changes in interest rates requires a many-sided approach. To
begin with, one needs to have in mind some facts about the term ‘saving’ as it
is generally used. First, o f all, saving may be done not only by individuals
{including unincorporated businesses) but also by corporations and certain other
Institutional forms in the economy. Second, and more important, the aggregate
volume o f individual or other saving in any period is a total o f the experiences
o f all who saved in the period, minus the total o f all who consumed, or dis­
tributed as dividends, more than their incomes— that is, dissaved— by borrowing
or by drawing on accumulated assets. Third, there are many forms o f saving,
or rather many uses o f saving, and they vary in their response to credit tighten­
ing or ease and in their economic effects. In a discussion o f how saving is
affected by changes in credit conditions, each o f these points must be considered.
“ For saving by individuals, credit tightness and a rise in interest rates, for
example, may set up several cross-currents o f response. Some individuals save
for the purpose o f building up assets that will provide a retirement income o f
a certain size. As long-term interest rates rise, the amount o f saving required



F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H N E T T S

1241

for such an income declines. Such savers can reduce their saving and still meet
their needs, if they choose to do so. On the other hand, some individuals are
concerned about the current return and will save more when a more attractive
return is available. It is not easy to establish where the balance of these motiva­
tions may be.
“ It is not necessary, however, that those who save increase their total saving
in order to have an increase in the aggregate of personal saving. An increase
in the aggregate of saving may be achieved by a reduction in the volume of
dissaving—that is, a reduction in the extent to which consumption is financed by
using past savings or by borrowing.
“Here the effect of a tightening credit policy is clearer. First, since credit is
less readily available, the amount of dissaving with borrowed funds will be
reduced from what it would otherwise have been. Second, dissaving through
the use of previous savings will also be discouraged, depending on the form
in which such savings are held. For savings held in marketable bonds and
many other noncash assets, a decline in market values will accompany the gen­
eral rise in interest rates. The sacrifice o f principal involved in liquidation
of these savings will deter dissaving of this kind. Dissaving through the use of
past savings held in savings accounts or in other liquid forms will be less penal­
ized. For some types, however, the current interest return will rise with the
general advance in interest rates and thus the accumulated savings will be
more attractive to keep.
“Another important consideration when credit conditions are tightening is
that dissaving of any kind will be discouraged, and saving encouraged, by the
fact that action to restrict the availability o f credit is being taken for the
purpose of restraining speculative and inflationary ternds. There will be less
incentive to hedge against advancing prices by buying in anticipation of such
advances. The fact that measures are being taken to tighten credit and to curb
Wontary expansion will in itself reduce the likelihood o f rising prices and
lessen the incentive of individuals to buy goods ahead o f needs. Also, overly
optimistic expectations as to future income, other than from interest, will be
tempered, and saving will be encouraged as a matter of prudent management
of personal finances.
“A business corporation saves when it pays out less in dividends in any period
than it makes in profits. Dissaving occurs w’hen losses are sustained or when
more is distributed in dividends than is made in profits. Total corporate sav­
ing over any period is equal to the sum of all such saving minus all such dis­
saving. Again taking the situation of credit tightening, corporations that plan
to expand plant and equipment are likely to be more cautious in their dividend
policies (save more) in order to insure that funds will be available for such
outlays. Because availability o f credit is uncertain, other corporations will be
inclined to hold larger cash balances rather than to increase dividends—on the
chance that an emergency or a profit possibility requiring cash might develop.
“ Savings may be held or used in many different ways. Personal savings,
for example, may be invested in capital assets, either directly, such as in houses
or individual business enterprises, or indirectly, such as in corporate stocks or
bonds. Savings may be held as accumulated cash balances in demand deposit
accounts or as currency holdings. They may be channeled into savings institu­
tions through increased ownership o f savings deposits or shares, or through the
building up of claims in pension funds, annuities, or life insurance. Savings
may also be kept in savings bonds or other Government securities.
“The form in which savers wish to hold savings, current or past, is of great
Importance for economic stability. A policy o f credit and monetary restraint
for instance, can influence the decisions of many savers, both individuals and
corporations, to invest new savings in such dollar claims as savings deposits
or Government securities and to keep old savings in that form. Yields on these
investments tend to become more attractive. At the same time the desire to in­
vest in goods in order to beat price increases is reduced because the expectation
of price increases, particularly o f capital goods, is lessened. Holders of certain
Hquid savings, such as bonds, are discouraged from liquidating them to invest
elsewhere by the fact that the selling prices o f the bonds decline with increasing
Interest rates.
“ In a period of recession, increased credit availability and declining interest
rates, together with the expectation o f continuing monetary ease, will tend to
make employed individuals more willing to spend and go in debt for consumption
and business purposes and corporations more willing to maintain dividend pay­




1242

F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T S

ments even though borrowing is required to provide fo r plant and equipmen*
outlays. Both Individuals and corporations w ill be encouraged by tbe greater
certainty o f credit availability and capital gains on assets held to rely on sales
of such assets i f necessary to meet future needs. Added to all this w ill be a grow*
ing confidence that declines in incomes and prices w ill be checked. Relatively
low levels o f interest rates on prime assets under such circumstances may en­
courage savers to invest In lower grade, higher yielding securities.
“ effects

traced b y categories of e c o n o m ic a c t iv it y

“Gross national product o f an economy may be divided fo r analytical purposes
into categories o f investment and consumption. Credit and monetary policy ac­
tions influence activity in these areas in varying degrees. For illustrative pur­
poses it may be helpful to outline the effects o f credit tightening on spending fo r
broad categories o f goods and services. The effects o f credit easing would be
generally the opposite o f those for credit tightening. The discussion will be
limited primarily to the initial and direct effects o f credit and monetary action.
No attempt w ill be made to relate to special economic sectors the pervasive in­
direct effects o f such action.
“ Gross private domestic investment.—New construction is ordinarily financed
to a considerable extent through long-term cre d it The volume o f expenditures
for this purpose is thus subject to substantial direct influence through credit
measures. This is true o f outlays fo r housing and fo r business construction,
but perhaps most particularly fo r housing. In addition to the direct restraint
through reduced credit availability, the effect o f rising interest rates on capital
values and on profit expectations is a restrictive factor in the construction
area.
"Since producers’ durable equipment is frequently bought on credit, reduced
availability o f credit curtails such purchases. For some producers’ goods the
credit period is typically long and the interest rate is an important cost con­
sideration. Interest cost is particularly relevant in connection with invest­
ment in heavy, long-lived equipment. The effect o f rising interest rates on
capital values and in changing the relationship between prices o f existing capital
assets and the cost o f producing new assets is also o f considerable significance
here. In the purchase o f some other types o f equipment, credit is usually shorter
term, and here the factor o f interest cost may be less important, although less
ready availability o f credit is a deterrent to borrowing.
“Changes in business inventories are influenced to an important extent by
reduced availability o f credit, for inventory investment is heavily dependent
on short-term credit. There is usually a close business relationship between
bankers and inventory borrowers, and changes in the credit climate will be
quickly reflected in bankers’ advice to borrowers to proceed cautiously. In addi­
tion, the mere existence o f a policy o f credit restraint will help to reduce the
expectation o f rapid price advances that encourage inventory speculation.
_“ Personal consumption expenditures.— Automobiles, household appliances,
furniture, and other durable goods are frequently bought on credit, and limita­
tion on the availability o f credit will reduce such outlays. Interest rates in the
credit market, however, have relatively little bearing on credit charges to con­
sumers where credit is available. Because o f general credit tightness, never­
theless, credit grantors will need to place greater emphasis on the creditworthi­
ness o f borrowers and on the terms on which the credit is extended. This change
in lenders’ attitudes will exclude some borrowers from the market, and the ex­
istence o f some credit tightness will encourage others to postpone durable goods
purchases i f they expect lower prices later.
“ Credit is not a key factor in purchases o f nondurable goods, although credit
restraint may indirectly curb such expenditures by making it necessary fo r con­
sumers to use more o f their available cash and less credit for housing and for
durable goods purchases, thus curtailing the money available fo r spending fo r
other purposes. Also, merchants, because o f reduced access to credit and higher
interest costs on carrying charge account receivables, may screen applicants
for such accommodation more carefully and pay more attention to prompt col­
lection o f outstanding accounts. Credit tightening w ill further have some in­
fluence 011 nondurable goods purchases through its encouragement of saving,
which will presumably reduce buying o f these as well as other goods, and
through its effect in reducing the expectation o f price increases, which will lessen
advance buying o f goods.
“ Since services are usually not bought on credit, credit tightness will have
relatively little direct effect on such spending. Expenditures in this area will



F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H N E T T S

1243

be affected indirectly in ways similar to the effect on spending for nondurable
goods.
"Net foreign purchase*.—A restrictive credit policy will tend to reduce the dol­
lar volume of United Stales imports. Effects upon exports will bo mixed. To the
extent that restraint of domestic demands reduces prices, some United States
materials and products may become more attractive to foreign buyers, and ex­
ports may be stimulated. On the other hand, foreign purchases in this country
may be reduced if short- or long-term credit in this country is restricted and if
no alternative means of financing such payments are available. On balance, the
overall short-run effect on United States export-import trade is difficult to
predict
“ International movements of liquid funds to this country in response to inter­
est rate increases or to changes in the outlook for stability in the United States
economy might be substantial. I f so, they would tend to be reflected in a flow
of gold to this country, which would ease the credit situation somewhat unless
offset by reserve banking action or other factors. Such movements of funds
would tend, however, to tighten reserve positions abroad and might lead to
restrictive credit developments there, assuming that inflationary pressures were
worldwide. This would curb foreign demand for goods and reduce foreign
purchases of goods in this country.
“ Govfrnment purchases of goods and services.—The general availability and
cost of credit, particularly in the long-term capital market, has an influence
on the timing of State and local government outlays which require credit
The outlays of the Federal Government are influenced considerably less by the
availability and cost of credit.
“s

e c o n d a r y

e f f e c t s

“The effects of changes in credit conditions on lending, spending, and saving
discussed in this article are their initial and more direct results in combating
excess or deficient demand and resultant inflationary or deflationary pressures.
These initial effects are succeeded by secondary effects which may be of great
importance. I f credit becomes tighter, for example, initially less money is
I*aid out to consumers at a time when additional money income would merely
increase prices without expanding the supply of goods available. As a result,
there will be less to spend for goods and services in later periods, and accordingly
«n abatement in further pressure of demand against the supply of goods. Cur­
tailed spending for consumer goods and other finished products in turn will
have a dampening effect on the demand for machines and other producers’ equip­
ment to make them. Consumers and investors may anticipate these secondary
effects and, through their attitudes and actions, may bring them about more
promptly and in greater amount.
“ M A G N IT U D E

O F IN T E R E S T

RATE

CHANGES

“ Interest rates, as the prices paid for credit, perform the important function
of influencing the flow of funds into various channels. They also serve as a basis
for establishing the present value of any assets which are expected to provide in­
come over a succession o f years. Changes in interest rates constitute signals
and incentives by means o f which demand for funds is kept in balance with
supply.
“Thus far the discussion has been carried on without specific reference to the
Magnitude of interest rate changes. As has been explained, a tightening of credit
Involves an increase in interest rates; an easing of credit, a decline in interest
r*tes. Higher interest rates tend to eliminate some marginal demand for loans.
At the same time the increased interest rates, combined with capital losses o d
assets and a change in business expectations, make lenders more selective in
their lending activities and spenders in general less willing to spend. Conversely,
lower interest rates tend to increase marginal borrowing, to encourage lenders
*° expand into lower grade securities, and to make spenders generally more
wllling to spend.
“The magnitude o f interest rate changes necessary to bring supply and demand
funds into equilibrium and to retard the development o f inflation or defla­
tion depends on many factors. This section will give some examples o f these
factors, with specific reference to their operation in periods o f tightening credit
auditions.
"Kinds of interest rates.—There are many interest rates because there are
•any kinds and grades o f loans and investments. They are all related to one

9 * 8 O— *----«
8 8 —T pt



1244

F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T ®

another in some degree and reflect in varying measure the relationship in the
market between the demand for credit and the supply of funds available for
lending and investing.
“In a free-enterprise system, interest rates are established by the interplay of
market forces. Traditionally, reserve banking influence is directed to expanding
or contracting the supply, availability, and cost of Reserve bank credit as needed
to maintain general economic and financial stability. This activity necessarily
affects the supply, availability, and cost of other credit. The Reserve bank
discount rate has a relationship to the cost of credit generally. Since Reserve
bank advances are extended on short-term paper of prime quality, the relation­
ship between the discount rate and other market rates is closest in the short­
term prime credit area.




FINANCIAL
CONDITION
O
F
THE
UNITED
STATES

1245




1246

F A C L C N IT N O THE U ITE 8TA B
IN N IA O D IO F
N D
TB

“ Under present conditions in the United States, Government securities play a
key role in the credit m arket The market rate on Treasury bills is the most
sensitive index o f changes in credit market forces, including particularly changes
in commercial bank reserve positions. Other short-term interest rates usually
have generally similar movements. When credit and monetary demands expand
and member bank borrowing at the Reserve banks increases, rates on short-term
Government securities tend to rise, and this tendency toward higher rates is in
turn transmitted to other credit markets. The discount rate is adjusted or not in
accordance with the judgment o f the Federal Reserve as to the general economic
situation and the strength and soundness o f credit developments. The relation
o f the discount rate to other short-term interest rates since the First W orld
War is shown in the chart.
“ Long-term rates generally rise when short-term rates rise and decline when
short-term rates decline. The tighter or easier credit conditions which accom­
pany changes in business activity are generally felt directly in both long- and
short-term fields. Moreover, fo r some lenders the long-term markets fo r credit
are competitive with the short-term markets.
“ While short- and long-term rates generally move together, the change in long­
term rates is ordinarily smaller in magnitude than that in short-term rates.
Lenders generally expect extreme levels o f short-term rates to prevail fo r only a
short period o f time. Since the current yield on long-term securities will be
received until the maturity of the security, a relatively small change in long-term
rates will restore the competitive relationship. Moreover, as already noted, when
yields rise the capital loss incurred on long-term securities may serve to check
sales and thus moderate the rise in long-term yields. Short-term paper, on the
other hand, is generally held by both banks and nonbank investors for the ex­
press purpose o f adjusting to changed requirements for funds and hence tends
to be sold or brought as cash assets temporarily fall below or rise above desired
levels.
“ In recent years, long-term rates have been constantly above short-term rates,
but this has not always been the case. The chart show's the relationship since
1900 between the commercial paper rate and the yield on long-term corporate
bonds.
L o n g - a n d S h o r t -T e r m I n t e r e s t R a t e s

Percent per annum

1900

*0

*0

*40

'50

N ote .— Annual averages of monthly figures. High grade corporate bond yield series
comprises Standard and Poor's Corporation series on high-grade railroad bonds through
1919, Moody Investors Service series on Aaa railroad bonds for period 1920-29, and Moody
series on Aaa public utility bonds beginning in 1930.




F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T S

1247

‘'Influence of general economic and financial factors.—The extent of interest
rate increases under conditions of credit tightness will depend on the entire
economic background at the time. To understand that background calls for
careful consideration of many questions. For example, how strong are the credit
demand pressures? By what forces are they heing generated? How extended or
overextended is the underlying economy itself? How optimistic is the climate of
business expectations? And always, in appraising the possible response of inter­
est rates to a general tightening of credit, it is necessary to take into account
the established organization of the credit market and the investment and operat­
ing experience of the institutions which make up this market.
‘Tnder some circumstances, reserve banking measures involving only minor
increases in interest rates would be adequate to restrain undue credit and
monetary expansion; with another background, effective credit and monetary
policy would require pronounced increases in rates.
“The response of the economy to reserve banking action will depend in part
on the habits and patterns of financial management built up over the preceding
months and years. Restrictive action, for example, may be effective with rela­
tively small increases in interest rates if existing interest levels have prevailed
for some time. Under these circumstances, institutional investors will be doing
business on the assumption that interest rates will remain substantially stable
and that consequently securities may be sold without significant loss. To these
investors and to a great many others, a tightening of credit will introduce new
problems of liquidity and bring about a retrenchment in their activities, includ­
ing their commitments to grant credit at some future time. In the light of ex­
tensive past experience, uncertainty regarding future interest-rate increases will
promote caution among lenders as long as demand for credit continues strong.
"The absolute level o f interest rates prevailing at a given time and the range
of variation in interest rate for various kinds and grades of credit are other
factors influencing the extent to which a given credit action may cause inter­
est rates to change. A given absolute increase in rates, for example, has a more
depressing effect on the capital values o f prime long-term investments if they
are capitalized on the basis of a 2% percent rate rather than at a 4 percent.
More significantly, if the spread between the rate on prime paper and the rates
on secondary grade credits has been small, the impact on capital values of a
given increase in prime rates will tend to be carried more quickly throughout
the entire credit market than if a wider spread in rates has prevailed.
“The effect o f a change in interest rates depends also on the total volume
of those types of assets having market prices that will respond quickly to such
a change. The larger this volume is, the greater and more immediate will be
the impact on the entire economy o f a given interest rate movement. On bal­
ance, developments in the American credit market in the past 25 years, in­
cluding particulary the large expansion in marketable public debt, have in­
creased the importance o f assets having prices that move promptly with interest
rate changes.
"Influence of special credit conditions.— Institutional and other factors that
w ist in the credit market at a particular time can have a big influence on the
responsiveness of the economy to credit tightness and on the size o f interest rate
increases that credit tightness will bring about. In 1928 and 1929, for example,
speculation in the stock market had raised stock prices so high that equity
capital was available to corporations on more attractive terms than debt capi­
tal. The cost of debt financing (the long-term interest rate) was increasing,
but a corporation could sell stock on such favorable terms that this became the
favored method of financing. In this period corporations relied heavily on the
JQUity market for capital. Investors on their part were attracted into equities
prospects for future gains, even though yields on high-grade bonds were
higher than those currently obtainable on stocks. The stock-market boom in
those years was based largely on margin trading financed heavily in the brokers*
loan market, mostly by nonbank credit (loans to brokers and dealers for the ac­
count of others). Interest rates o f 9 percent or more in this market did not
prevent a large volume o f borrowing for speculation in stocks.
“ Under such circumstances, credit actions taken to restrict the general
availability of credit could not easily be made effective in curbing an un­
attainable speculative boom in the stock market except by affecting eco­
nomic activity in general and in that way making investment in equities un­
profitable. Despite the decline in long-term interest rates in the downturn that
followed the eventual stock market crash, long-term borrowing was still con­
siderably less attractive
the equity financing that had been available to




1248

F A C L C N IT N O TH U IT D ST T S
IN N IA O D IO F E N E
AE

m a n y p r im e b o r r o w e r s in 1029. L e g is la tio n d e s ig n e d t o p r e v e n t a r e p e t itio n o f
t h is s i t u a t i o n a u t h o r i z e d t h e F e d e r a l R e s e r v e t h r o u g h m a r g i n r e q u ir e m e n t s t o
r e g u la te t h e u s e o f c r e d it in t h e s t o c k m a r k e t.
“ U n d e r o t h e r a n d q u ite d iffe r e n t c ir c u m s t a n c e s , r e s t r a in t o n c r e d it m a y h a v e
a s h a r p ly r e s t r i c t i v e i n flu e n c e b e f o r e t h e i n t e r e s t r a t e r i s e h a s b e e n la r g e . F o r
ex a m p le ^ w h e n a l a r g e a m o u n t o f b u s i n e s s f i n a n c i n g i s b e i n g d o n e i n t h e b o n d
m a r k e t, in v e s tm e n t u n d e r w r it e r s a n d s e c u r it y d e a le r s n e e d t o c a r r y a s u b ­
s t a n t ia l in v e n to r y o f b o n d s . F o r t h e s e in s tit u t io n s t h e r a t io o f c a p ita l t o t h is
in v e n to r y i s t y p ic a lly s m a ll, a n d t h e ir o p e r a t io n s a r e h e a v ily d e p e n d e n t o n t h e
u s e o f s h o r t -t e r m b a n k c r e d i t . M o d e r a t e i n c r e a s e s i n in t e r e s t r a t e c a u s e t h e
v a l u e o f t h e i r i n v e n t o r y o f b o n d s t o d e c l i n e , p u t t h e i r c a p i t a l p o s i t i o n in
je o p a r d y , th r e a te n t h e ir c r e d it w o r t h in e s s , a n d c a u s e th e m t o r e d u c e t h e v o lu m e
o f n e w f l o t a t i o n s o f s e c u r i t ie s t h a t t h e y a r e w i l l i n g t o u n d e r t a k e .
“ T o g iv e a n o th e r e x a m p le , i n t h e s p r in g o f 19 51 t h e m o r t g a g e m a r k e t w a s
p a r tic u la r ly s e n s itiv e t o a m o d e r a t e in c r e a s e in lo n g -te r m r a t e s . T h is w a s b e ­
c a u s e m a jo r le n d e r s w e r e o v e r e x t e n d e d in t h e ir le n d in g c o m m itm e n ts . I n r e ­
s p o n s e t o t h e c h a n g e in t h e c r e d i t s i t u a t i o n a t t h a t t im e , a n d t h e u n c e r t a i n t y a s
t o f u t u r e i n t e r e s t r a t e a n d s e c u r i t y p r i c e l e v e l s , t h e s e l e n d e r s r e d u c e d s h a r p ly
t h e i r c o m m it m e n t a c t i v i t i e s i n m o r t g a g e fi n a n c i n g a n d t o s o m e e x t e n t in o t h e r
fin a n c in g a l s o . T h i s b r o u g h t a b o u t s o m e l i m i t a t i o n o n t h e v o l u m e o f t h e i r
le n d in g , w h i c h u p t o t h a t t im e h a d b e e n r u n n i n g s u b s t a n t i a l ly i n e x c e s s o f t h e
f u n d s t h e y h a d f r o m r e p a y m e n t s o f o l d l o a n s a n d n e w s a v in g s , w i t h t h e d i f ­
fe r e n c e m a d e u p b y s a l e s o f G o v e r n m e n t s e c u r i t ie s w h ic h in t u r n h a d b e e n p u r ­
c h a s e d b y th e F e d e r a l R e s e r v e a t s u p p o r te d p r ic e s .
“ C O N C L U D IN G C O M M E N T

“ T h i s a r t i c l e h a s d e s c r i b e d t h e w a y i n w h i c h a g e n e r a l t ig h t e n i n g o r e a s in g
o f c r e d i t , w i t h a c c o m p a n y i n g c h a n g e s i n i n t e r e s t r a t e s , m a y f u n c t i o n t o h e lp
m a in t a in e c o n o m i c s t a b i l i t y . I t h a s n o t d e a l t w i t h t h e m a n y f o r c e s , o t h e r t h a n
c r e d it a n d m o n e ta r y fo r c e s , t h a t c a u s e in s ta b ility . I t h a s ta k e n f o r g r a n te d
th a t c r e d it a n d m o n e ta r y m e a su r e s a r e n o t t h e o n ly r e lia n c e o f p u b lic p o lic y
in s u s t a in in g e c o n o m i c b a la n c e .

“ The discussion has largely focused on the broader effects o f credit tightness
and rising interest rates on lending, spending, and saving. The mechanism o f
credit ease is in general the opposite ot credit tightness. The response to credit
easing, however, is greatly influenced by cyclical or other prevailing circum­
stances, and the effectiveness o f credit easing in checking monetary contraction
and in bringing about resumed growth in economic activity depends greatly on
earlier effective reliance on credit tightness to limit excessive credit and monetary
expansion.
“ In considering the mechanism o f credit tightness and related interest rate
increases in counteracting unsound business booms, it is important to bear in
mind the alternative to such developments. To avoid credit tightness it would
be necessary to supply additional funds to meet all demands, even though they
might be excessive from the standi>oint of the maintenance o f stable economic
progress. In a free enterprise economy, decisions regarding the use o f pur­
chasing power are made by the individuals who receive incomes and have
savings, rather than dictated by Government. The extent to which it is possible
to devote resources to expansion o f productive capacity and the stock o f housing
and commercial construction without generating excessive, inflationary bank
credit and monetary expansion depends largely on the combination o f individual
decisions to save and to dissave— on the aggregate volume o f saving. When
savings are very large, as they ordinarily are in this country, sustained expan­
sion is possible in substantial volume without an excessive and unstabilizing
growth o f credit and money.”
Following is a list o f principal ]>olicy actions o f the Federal Reserve System
during the period February 1945-August 1957, in chronological order.




F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H N E T T S

1249

P i c p l p l c a t o s o Federal Reserve System, February 1945-August 1957
rnia o iy c i n f
Date
February 1945 to Janu­
ary 1946.

April to May 1946.

January 1946 to October

December 1946

February 1947................

Basis of action
Margin requirements raised
from 40 to 50 percent of
market value In February;
to 75 percent in July; and
to 100 percent In January
1946.
Removal of preferential dis­
count rate of H percent on
advances secured by short­
term Government secu­
rities.
Reduced total holdings of
Government securities by
more than $2,000,000,000.
Retirements of about $7,000,000,000 of maturing se­
curities offset In part by
$5,000,000,000 net pur­
chases of other short-term
securities. Buying rate
on bankers’ acceptances
raised (July-August 1946).
Removed noninstallment
credit from regulation;
list of articles under credit
control curtailed.
Margin requirements re­
duced from 100 to 75 per­
cent of market value.

July 1947 to October 1947. Discontinued buying rate of
H percent on Treasury
bills and support of certifi­
cates at 7 i percent.
/

N
iJSnberm7toMarch Bought $5 billion Treasury
bonds.

November 1947.

Sold or redeemed over $6 bil­
lion of short-term Govern­
ment securities. Buying
rate on bankers’ accept­
ances raised (December
1947-January 1948).
Joint statement by bank
supervisory authorities.

January 19 8 to August
4

Buying rate on bankers'
acceptances raised (Au­
gust). Raised discount
rate from 1 to 1 H percent
at all banks.

F e y
ef

Bought $2,000,000,000 Gov­
ernment securities in Sep­
tember including $1,500,000,000 bonds and $500,000.000 bills, certificates,
and notes. Raised reserve
requirements on demand
deposits from 20 to 26 per­
cent at central Reserve
city banks; 20 to 22 per­
cent at Reserve city; and
14 to 16 percent at country
banks; on time deposits
from 6 to 7J4 percent at all
banks.

1948 to Sep-

to^ber 1948.




Continued upward trend of stock prices, volume
of trading, and stock-market credit.

Required borrowing banks to pay regular dis­
count rate of 1 percent and thereby made it less
easy for member banks to obtain Federal
Reserve credit on the basis of which to expand
loans. Indicated that the Federal Reserve
System did not favor a further decline in inter­
est rates in the circumstances then prevailing.
Restrained growth in member bank reserves (due
chiefly to gold inflow) by redeeming maturing
United States securities as Treasury retired
securities using accumulated balances in war
loan accounts and budget surplus. Business
active; inflationary pressures were strong.

For purpose of simplifying the regulation, making
it administratively more workable, and nar­
rowing its scope to a minimum consistent with
the exercising of a stabilizing influence on the
economy. Amended regulation covered ap­
proximately 70 percent of installment credit.
Stock prices and the volume of credit in the stock
market had been reduced to levels at or below
those prevailing at the time of the previous
increase in requirements.
Relieved Federal Reserve System of necessity of
continuing to buy short-term securities at the
extremely low wartime rates and thereby pro­
viding the basis for further monetary expan­
sion. Business activity at very high levels;
inflationary pressures strong. Coupon rates on
new issues of certificates raised by Treasury to
1 percent.
Bought large amounts of Treasury bonds in No­
vember and December to stem decline in bond
prices. Dropped buying prices in late Decem­
ber to levels slightly above par. Bought bonds
thereafter to maintain these price levels.
Sold or redeemed short-term Treasury securities
partly to offset effect on bank reserves of bond
purchases and continued gold inflow, in tbe
effort to restrain tbe growth in bank credit.
Inflationary pressures continued strong.
Short-term rates rose further.
Urged banks to avoid making nonessential loans
in view of inflationary conditions. Statement
was followed by action by American Bankers
Association to arrange bankers’ meetings in
various parts of the country early in 1948 to
urge avoidance of unnecessary or undesirable
extensions of credit.
Part of an anti-inflationary program designed to
keep pressure on member bank reserves and
thereby to restrain expansion of bank credit
and at the same time continue the policy of
stabilizing the long-term rate on Government
bonds.
, , .
. .„
Reserve requirement action to help absorb addi­
tional reserves made available by gold inflow
and by Federal Reserve purchases in support
of the market for Government securities.
Congress provided authority (until June 30,
1949) for increases in reserve requirements
above those otherwise authorized. Securities
purchased in open market to maintain the
stability of tbe market and to assist tempo­
rarily in the adjustment of member banks to
increased reserve requirements.

1250

F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T S

Principal policy actions of Federal Reserve System, February 1945-August
1957—
Continued
Basis of action
Congress restored (until June 30, 1949) Board’s
authority to regulate consumer credit, which
it had terminated in November 1947. Con­
sumer installment credit was expanding at a
rate of $2,000,000,000 a year; this growth was
contributing to inflationary pressures. Regu­
lation as reestablished affected about 70 per­
cent of consumer installment credit.
Stock market credit outstanding was close to the
March 1949..
lowest level on record. Stock prices declining
and volume of trading low. Equity financing
of business small.
March 1949 to April 1949. On consumer installment Consumer buying pressures had moderated sig­
nificantly; many commodities covered by regu­
credit reduced downpay­
lation in larger supply; consumer installment
ment to 10 percent (except
credit expanding less rapidly than formerly;
on autos); increased ma­
turity to 24 months on all
general inflationary pressures had abated
somewhat.
listed articles.
May 1949 to September Reduced reserve require­ Recession in business and prices. Credit policy
aimed at encouraging a high level of business
ments on demand deposits
1949.
activity, but avoiding conditions of such ease
by 4 percentage points; on
as would prevent needed adjustments or en­
time deposits by 2J-6 per­
courage undue expansion.
centage points. Changes
in several steps.
January 1949 to Septem­ Reduced holdings of Gov­ To prevent prices of long-term bonds from rising
sharply and to meet heavy demands for short­
ernment securities by
ber 1949.
more than $5,000,000,000.
term United States securities arising out of
Sold over $3,000,000,000 of
reduced member bank reserve requirements,
b o n d s fro m Ja n u a ry
net Government disbursements, reduced cur­
through June; sold or re­
rency circulation, gold inflow, and other factors
deemed $2,000,000,000 of
More flexible credit policy announced June 28
bills, certificates, and
determining operations on basis of the needs of
notes.
general business and credit situation and of
maintaining orderly conditions in the Govern­
ment security market, rather than a fixed pat­
tern of rates on U. S. Government securities.
Open market operations throughout the period
consistent with easier credit conditions, while
recession lasted.
November 1949 to June Sold $1,500,000,000 of long­ Sales of bonds to meet market demand for long­
1950.
term Treasury bonds.
term securities and discourage overextension of
private long-term financing.
Bought a net of $1,600,000,- Operations designed to allow money market to
000 of short-term Govern­
firm moderately in response to increased de­
ment securities.
Little
mand for funds, as business recovery gained
change in total portfolio.
momentum and signs of inflationary pressures
reappeared, and at same time to aid Treasury
refunding. Slight rise in yields on both short­
term and long-term securities.
August 1950...
Buying rate on bankers' Output and employment close to peacetime
a c c e p t a n c e s r a is e d .
record levels; accelerated expansion of credit;
Raised discount rate from
prices rising; prospective increases in Govern­
1W to \% percent at all
ment expenditures for military purposes.
banks. Request by bank
System announced it was prepared to use all
supervisory agencies for
means at its command to restrain further bankvoluntary cooperation of
credit expansion consistent with policy of main­
lenders in restraining
taining orderly conditions in Government
credit.
securities market.
August 1950 to Decem­ Bought $8 billion of matur­ Purchases to aid Treasury refundings and pre­
ber 1950.
ing Government securities
vent decline in long-term bonds below par.
(August), $1 billion of re­
stricted bonds (September-December), and $1.4
billion of short-term secu­
rities (December).
Sold $7 billion of short-term Sales of short-term securities at lower prices
Governm ent securities
(higher yields) to offset effect of purchases.
(August).
N ote.—T he above-mentioned sales did not c mpletely offset purchases so that the actual net
effect of operations for this period was expan­
sionary.
September 1948..




On Installment credit for a
list of consumer durable
goods reimposed down­
payment of 20 to 33^ per­
cent; maximum maturity
15 to 18 months; same
maturity on installment
loans.
Margin requirements re­
duced from 75 to 50 per­
cent of market value.

F A C L C N IT N O TH H T E S A E
IN N IA O D IO F E O T D T T S

1251

Principal policy actions of Federal Reserve System, February 19'/.')-August
1957—Continued

September 1950 to Octo­
ber 1950.

November 1950.

January 1951 to Febru­
ary 1951.

January 1951 _
January
1951.

to

February

On installment credit for
list of consumer durable
goods downpayment 1033H percent; maximum
maturity 15 months, ex­
cept home improvements
30 months; maximum ma­
turity of 15 months on
Installment loans. On
real-estate credit down­
payments 10-50 percent of
value of residential prop­
erty; maximum maturity
20 years with certain
exceptions.
Banks again requested to
restrain unnecessary credit
expansion.
Bought $800,000,000 of long­
term Treasury bonds.
Raised reserve requirements
by 2 percent on demand
deposits; 1 percent on time
deposits; maximum limits
except at central Reserve
city banks.

Bought a net of $300,000,000
of short-term Government
securities.
Margin requirements raised
from 50 to 75 percent of
market value.
Real-estate credit control
extended to cover multifamily and certain nonresidential properties.

February to May 1951... All financing institutions
requested to participate
in program of voluntary
credit restraint.

Mtrch to mid-April 1951

Lowered buying prices on
Government securities.

Bought $1,100,000,000 Of
Treasury
bonds
and
$100,000,000 of bills.

April 1951.

Ceased purchases of Gov­
ernment securities except
primarily to maintain
orderly market conditions.

Mid-April 1951 to Nov­
ember 1951.

Bought $300,000,000 of long­
term bonds through June,
and $1,500,000,000 of short­
term securities during
refunding periods.
Sold or redeemed $1,700,
000,000 of short-term Gov­
ernment securities at other
times.




Unprecedented rate of expansion of consumer
installment and rcal*estate credit. Regula­
tions are parts of fiscal, monetary, and credit
measures to restrain inflationary pressures and
facilitate diversion of critical material and man­
power to production of defense needs, under
authority of Defense Production Act of 1950.
For reasons of administrative and regulative
efficiency consumer credit regulation confined
to installment credit and scope set to affec
about 75 percent of such business.

Unprecedented expansion in bank loans from
midyear to mid-November. Continued ex­
pansion in credit put upward pressure on
prices, impairing purchasing power of dollar
and adding to cost of defense program.
To maintain prices of long-term Government se­
curities.
Continued expansion of bank credit. Action
taken to absorb about $2 billion of funds, largely
from seasonal return of currency and System
purchases of bonds, and generally to reduce the
ability of banks to expand credit that would
add to inflationary pressures. At central Re­
serve city banks requirements were raised to a
level considerably above those that prevailed
during most of the war period.
To facilitate adjustment to reserve requirement
increase.
Continued upward trend of stock prices, volume
of trading, and stock-market credit.
To add further restraints on inflation by limiting
the credit available for the financing of nonresidential construction and to bring about a
decrease in building to provide materials and
labor for the defense program.
Program formulated by representatives of banks,
investment bankers, and life-insurance com­
panies, in consultation with Federal Reserve
representatives, for organized effort by all types
of financing institutions to restrain unneces­
sary credit expansion In accordance with the
Defense Production Act of 1950.
Action taken, under Treasury-Federal Reserve
accord, to terminate support of Government
securities market at fixed prices, with a view to
promoting a self-sustaining market and dis­
couraging sales of Government securities to
Federal Resrve System to obtain funds with
which to extend credit to private borrowers.
Interim purchases taken to maintain orderly
market conditions in transition to self-sus­
taining market and to facilitate exchange of
long-term marketable bonds Into nonmarketable bonds with longer term and higher interest
coupon.
To minimize monetization of public debt without
jeopardizing necessary Government financing;
to enable the Federal Reserve System to regain
greater control over its extensions of Federal
Reserve credit through security operations, and
thereby more effectively to restrain inflationary
expansion of credit.
Purchased restricted bonds to aid in readjust­
ment of bond market; purchased short-term
securities to aid in Treasury refundings.
Sales to absorb reserves created by above pur­
chases.

1252

F A C L C N IT N O TH U IT D ST T S
IN N IA O D IO F E N E
AE

Principal policy actions of Federal Reserve Bystem, February 1945-August
1951— Continued

July 1951.

September 1951..

December 1951.
January 1952-------------February to June 1952..

September 1952..

July to December 1952.

January to April 1953...

January 1953........... —

February 1953.

M ay to June 1953..

July 1953.

J lytoDc me 15.
u
ee br 93




On installment credit for list Action taken to bring regulation W into con­
formity with the provisions of the Defense Pro­
of consumer durable goods
duction Act amendments of 1951.
and for installment loans
increased maximum ma­
turity to 18 months (home
improvements, 36 months);
downpayment on appliances reduced to 15 per*
cent cash or cash and
trade-in.
Increased maximum matu­ Action taken to bring regulation X into con­
formity with the provisions of the Defense
rity to 25 years for houses
Housing and Community Facilities and Serv­
up to $12,000; raised maxi­
mum value per family
ices Act of 1951.
unit for specified down­
payment requirements;
suspended credit restric­
tions for programed hous­
ing in critical defense hous­
ing areas.
Increased holdings of securi­ To meet seasonal reserve needs.
ties in late December by
about $600,000,000 net.
Reduced holdings of securi­ To offset currency inflow and the effects o f other
seasonal factors on bank reserves.
ties by $1,100,000,000, net.
Increased holdings by about Large purchases of securities made in February
$200,000,000, net.
and June to facilitate market adjustments to
Treasury financings. Most of those purchases
were offset by sales of other securities.
Suspension of regulation of To conform with the terms of the Defense Pro­
real estate credit.
duction Act, as amended, requiring suspension
of regulation if housing starts in each of 3 con­
secutive months fell short of an annual rate of
1,200,000 units, seasonally adjusted.
Limited net purchases of To meet seasonal and other reserve drains only in
U. S. Government securi­
part, requiring banks to borrow some of the
ties in open market to
reserves needed so as to restrain bank credit and
$1,800,000,000.
deposit expansion at a time when credit de­
mand was very large and the economy was fully
employed. Purchases in August and Septem­
ber were made primarily at times of Treasury
refunding operations and were offset in part by
subsequent sales.
Sold in open market or re­ T o offset seasonal changes in factors affecting
deemed $800,000,000 net of
reserves and thus to maintain pressure on
U. S. Government securi­
member bank reserve positions.
ties.
Raised discount rates from To bring discount rates as well as buying rates on
1H to 2 percent and buy­
acceptances into closer alinement with open
ing rates on 90-day bank­
market money rates and to provide an addi­
ers' acceptances from H i
tional deterrent to member bank borrowing
to
percent.
from the Reserve banks.
Reduced margin require­ To reduce margin requirements from the high
ments on loans for pur­
level imposed early in 1951, in the judgment
chasing or carrying listed
that the lower requirement would be adequate
securities from 75 to 50
to prevent excessive use of credit for purchasing
and carrying stocks.
percent of market value
of securities.
Purchased in open market To provide banks with reserves and to permit a
a b o u t $900,000,000 o f
reduction of member bank borrowing from the
United States Govern­
Reserve banks at a time when such borrowing
ment securities.
was high, credit and capital markets were
showing strain, and seasonal needs for funds
were imminent.
Reduced reserve require­ T o free additional bank reserves for meeting
ments on net demand de­
expected seasonal and growth credit demands,
posits by 2 percentage
including Treasury financing needs, and to
points at central Reserve
further reduce the pressure on member bank
city banks and by 1 per­
reserve positions.
centage point at Reserve
city and country banks,
thus freeing an estimated
$1,200,000,000 of reserves.
Made net purchases in open To provide banks with reserves to meet seasonal
market of U. S. Govern­
and growth needs and to offset continuing gold
ment securities totaling
outflow with little or no additional recourse to
$1,700,000,000.
borrowing.
This action and the one below were taken in pur­
suance of a policy of active ease adopted in
view of the business downturn.

F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H N E T T S

1253

Principal policy actions o f Federal Reserve System, February 19$5-August
1957— Continued
Date

Action

Basis of action

January to June 1964___

Limited net sales to about
$900,000,000 of U. S. Goveminent securities in open
market.
Reduced discount rates
from 2 to IH percent and
buying rates on 90-day
bankers* acceptances from
21s to \% perccnt.

To absorb only part of the reserves made avail­
able by seasonal deposit contraction and return
flow of currency thereby further easing bank
reserve iwsitions.
To bring discount rates as well as buying rates
on bankers' acceptances into closer alinement
with market rates of interest and to eliminate
any undue deterrent to bank borrowing from
the Reserve banks for making temporary re­
serve adjustments.
Do.

February 1954................

Reduced discount rates
from \% to l l percent and
A
buying rates on 90-day
bankers' acceptances from
1H to 13" percent.
2
Reduced reserve require­
June to August 195i.
ments on net demand de­
posits by 2 percentage
points at central Reserve
city banks and by 1 per­
centage point at Reserve
city and country banks,
and requirements on time
deposits by 1 percentage
point at all member
banks, thus freeing about
$1,500,000,000 of reserves
in the period June 16 to
Aug. 1.
Sold in open market or re*
deemed V. S. Govern­
ment securities totaling
about $1,000,000,000 in
July and August.
September to November Made net purchases in open
market of approximately
1954.
$850,000,000.
December 1954............. Made net purchases of U. .S.
Government securities in
open market of less than
$50,000,000, all under re­
purchase agreements with
dealers and brok ers.
Member bank borrowing
increased to an average of
$250,000,000 in December.
January to June 1955___ Sold in the open market or
redeemed u. S. Govern­
ment securities totaling
$1,300,000,000. M e m b e r
bank borrowing increased
to an average of more than
$400,000,000 in the second
quarter.
January 1955_________ Raised margin requirements
on loans for purchasing or
carrying listed securities
from 50 to 60 percent of
market value of securities.
AprU 1955.................... Raised margin requirements
on loans for purchasing or
carrying listed securities
from 60 to 70 percent of
market value of securities.
April 1955....................... Raised discount rates from
1J4 to 1H percent.
April to May 1954.

Match to December 1955. Made




net purchase of
bankers’ acceptances in
open market totaling
$28,000 000.

To supply the banking system with reserves to
meet expected growth and seasonal demands
for credit and money, including Treasury
financing needs.

Reductions in reserve requirements were offset
in part by temporary sales of securities in
order to prevent excess reserves from increasing
unduly at the time, but security purchases
were resumed as need for funds developed.
To supply the banking system with reserves to
meet expected growth and seasonal demands
for credit and money.
To meet part of the temporary end-of-year needs
of banks for reserve funds, but in view of rising
credit demands, to permit these needs to be re­
flected in part in slightly less easy reserve posi­
tions.

To offset effects of seasonal factors affecting bank
reserve positions and, in view of strong credit
demands, to bring about somewhat greater
member bank borrowing from Federal Reserve
banks.

To help prevent an excessive use of credit for pur­
chasing or carrying securities in a period of in*
creasing use of credit for carrying securities.
Do.

To bring discount rates into closer alinement
with open-market money rates and make
borrowing by individual banks more expensive.
To recognize increased use of bankers' accept­
ances by business as a means of financing inter­
national trade.

1254

F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T S

Principal policy actions of Federal Reserve System* February 1945-August
1951—Continued
Bs ofa n
ais ctio

Dte
a
July to December 1965. . Made outright purchases of
Treasury bills in the open
m arket totaling $700*
net and increased
repurchase agreements
with dealers and brokers
by $300,000,000. Member
bank borrowing increased
to an average of about
$850,000,000 in September
and more than $1,000,000,000 in November but
declined to about $850,000,000 in December.
November to December Purchased when-issued
Treasury certificates of
1955.
indebtedness totaling
$167,000,000.
August to September Increased discount rates
from
to 2H percent.
1955.
This increase was made
in 2 steps at all Reserve
banks except Cleveland.
Increased discount rates
November 1955.
from 2J4 to 2H percent.
January 1956___
Reduced System holdings
of U. S. Government secu­
rities by over $1,400,000,through sales in the
market, redemption of
maturing bills, and ter­
mination of repurchase
agreements. M em ber
bank borrow ings in­
creased to weekly aver­
ages of $900,000,000 in late
January.
February to March 1956_ Bought small amounts of
Government securities at
times.
Member bank
borrowings declined some­
what in February but in­
creased substantially in
March as result of sharp
increase in required re­
serves.
April to May 1956..
Discount rates raised from
A
X percent to 2U percent
at 10 Reserve banks and
to 3 percent at 2 banks
around middle of April;
System holdings of U. S.
Government securities re­
duced by $350,000,000.
Member bank borrowings
at Reserve banks rose to
over $1 billion.
Late May to early Au­ Increased System holdings
gust 1956.
of U. S. Government se­
curities around end of
M ay and end of June and
maintained holdings at
higher level than in pre­
vious period.
August to November Discount rates raised late in
1956.
August to 3 percent at the
Reserve banks with
rates of 2U percent. Sys­
tem holdings of 17. S. Gov­
ernm ent securities in­
creased b y n e a rly $!,,000,000; member bank
borrowings at Reserve
banks rose to average of
$900,000,000 in August and
averaged between $700,and $800,000,000 in
other months.




00 0
0 ,0 0

00
0

2

1
0

00
0

00 0
0 ,0 0

T o meet part of reserve needs associated with
seasonal factors, thus requiring bonking system
to meet needs in part by further increasing
indebtedness. This action was taken with a
view to providing for seasonal needs while
limiting undue expansion of bank credit.

T o facilitate Treasury refunding in period of
money market stringency. Supply of reserve
was consistent with overall open market policy
at time.
To keep discount rates in an appropriate relation­
ship with market rates of interest and thus
maintain a deterrent on excessive borrowing by
individual banks at the Reserve banks.

T o offset seasonal return flow of currency and
reduction in reserve needs and restore degree
of restraint prevailing before December action
to moderate restraint temporarily.

T o meet changing reserve needs and avoid an
increasing degree of credit restraint in view of
growing tone of uncertainty as to economic
prospects.

T o increase restraint on credit expansion, in view
of sharp increase in bank credit in March and
indications of broad increase in spending,
growing demands for credit, and upward
pressures on prices and costs.

To meet currency needs around holidays, to cover
added demands for reserves around tax pay­
ment and midyear settlement periods, and to
avoid increasing the degree of restraint in view
of uncertainties in economic situation.
Discount rates increased in conformity with rise
in market rates resulting from vigorous credit
demands. Policies designed to increase and
maintain restraint on undue credit expansion
while covering seasonal and other temporary
variations in reserve needs, including effects of
frequent Treasury financing operations.

F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T S

1255

Principal policy action* of Federal Reserve System, February 1945-August
1957—Continued
Action

Basis of action

System holdings of TJ. S.
Government securities
and bankers’ acceptances
increased by over $550,,000, including sub­
stantial repurchase agree­
m ents w ith dealers.
Member-bank borrowings
declined to weekly aver­
ages of around $600,000,000,
except in last week of year,
and at times were less
than excess reserves.
Reduced holdings of Gov­
ernment securities by
about $1,800,000,000.
Member-bank borrowings
Increased from an average
of $400,000,000 in January
to $1,000,000,000 in June.
Discount rates raised from
3 to ZH percent at 8
Reserve banks (through
Aug. 16).

To supply reserve funds in recognition of addi­
tional pressures in money, credit, and capital
markets resulting from seasonal factors and
international conditions, at a time when lower
liquidity ratios of banks were themselves
exerting restraint on bank lending.

Date
December 1956.

00
0

January to June 1957....

August 1957..

To offset the effect on reserves of seasonal factors
and the sale of $600,000,000 of gold to the U. 8.
Treasury by the International Monetary Fund,
and to exert pressure on bank reserve positions
by bringing about a higher level of member
bank borrowings.
To bring discount rates into closer alinement
with open-market money rates.

16.
Is fiscal policy action usually necessary as a complement to Federal
Reserve policy action with respect to money and credit? I f so, will you
list recent instances of such policy combinations, cite the occasions, and
evaluate the effects or result.
The Federal Reserve Bulletin article, Federal Financial Measures for Eco­
nomic Stability (reprint of which is submitted in answer to question 14), indi­
cates that fiscal policy and debt management have special and complementary
roles to play in relation to credit and monetary policy.
Throughout the postwar period, fiscal policy and Federal Reserve policy gen­
erally have worked in the same direction. During a considerable part of the
period, however, the ability o f the Federal Reserve System to combat economic
Instability was seriously limited by its policy o f supporting the United States
Government securities market Fiscal policy performed well in fiscal years 1947
and 1948 as Federal expenditures declined and tax rates were maintained, pro­
ducing cash surpluses totaling $15.7 billion in the 2 years. In this period tne
Federal Reserve supported the Government securities market and consequently
one of its most important policy tools— open market operations—could not func­
tion in a counter-inflationary manner. As long as the Federal Reserve acted as
a residual buyer of securities offered in the market, the initiation in the creation
of bank credit rested with the market, not the Federal Reserve authorities. At­
tempts were made to offset these effects by resort to other actions. For example,
reserve requirements were increased on three occasions in 1948 and the discount
tote twice; also selected regulations were applied to stock market credit and
consumer credit.
Both fiscal and Federal Reserve policy shifted as the economy started to de­
cline in the winter of 1948-49. During the fiscal years 1949 and 1950, Federal
cash expenditures rose, the $5 billion tax cut that had been enacted earlier in
1948 took effect, and the cash surplus was replaced by a small cash deficit The
Federal Reserve eased credit conditions. It reduced reserve requirements by 2
percentage points in the summer o f 1949, eased consumer credit regulation in
2 steps, before the temporary authority finally expired, and reduced margin
requirements.
The Korean conflict brought about a sharp reversal of public policies. Tax
legislation enacted in late 1950 and 1951 was designed to produce added revenues
of nearly $15 billion in a full year and a large cash surplus resulted in fiscal 1951.
The discount rate was increased in August 1950; margin requirements were
increased in January 1950; regulations on consumer and real-estate credit were
Imposed in the fall o f 1950; and reserve requirements were increased in January
1951. Following the Treasury-Federal Reserve Accord o f March 1951, the Fed­
eral Reserve System was able to use open market operations, and thus all its
instruments, to promote economic stability. Actions over this period contributed
tabstantially to the ending of the price rise by the spring o f 1951.




1256

F A C L C N IT N O TH U IT D S A E
IN N IA O D IO F E N E T T S

During 1952 and early 1953, price rises were held in check despite vigorous
growth in the private sector o f the economy. Fising defense outlays produced a
Federal cash deficit, but this was counterbalanced by a restrictive credit policy.
Open market operations were conducted so as to limit credit expansion generally
and the discount rate was raised in January 1953, but consumer and real estate
credit regulations were suspended in 1952 to conform with the intent o f the
enabling legislation.
By mid-1953, the economy reached another turning point. During the fiscal
years 1954 and 1955, when the economy was operating at below-capacity levels,
a series o f Federal Reserve actions eased credit conditions. Expansive openmarket operations took place from June 1953 through the end o f 1954; reserve
requirements were reduced in the summers o f both 1953 and 1954; and discount
rates were reduced twice in early 1954. Meanwhile, most o f the tax reductions
scheduled by law were permitted to take place at the end o f 1953; most excisetax rates were reduced by 1954 legislation; and the 1954 Internal Revenue Code
provided a variety o f tax reliefs. Federal expenditures, however, declined
rapidly from mid-1953 through mid-1955, so that the Government’s deficit was
smaller than in 1953, despite the tax reductions.
During the past 2 fiscal years o f inflationary pressures, fiscal and monetary
policy have operated in the same direction. Scheduled tax reductions were
postponed and no new reductions were enacted. Although tax rates were not
increased, receipts rose— mainly as a result o f increases in incomes— and a
substantial cash surplus o f $4.5 billion was achieved in fiscal 1956. In fiscal
1957, the surplus declined despite further increases in Federal revenues from
further expansion o f incomes and profits, which, in part, reflected price in­
creases, as Federal expenditures rose by a larger amount. The impact o f mone­
tary policy has been on the side o f restraint; open-market operations have
been designed to restrain undue growth in the money supply, and as market
rates rose discount rates have been increased several times in order to maintain
a deterrent on excessive borrowing by members banks.
17. I quote section 2 o f the so-called Full Employment Act o f 1946:
“ The Congress hereby declares that it is the continuing policy and respon­
sibility o f the Federal Government to use all practical means consistent
with its needs and obligations and other essential considerations o f national
policy, with the assistance and cooperation o f industry, agriculture, labor,
and State and local governments, to coordinate and utilize all its plans,
functions, and resources for the purpose o f creating and maintaining, in
a manner calculated to foster and promote free competitive enterprise and
the general welfare, conditions under which there w ill be afforded useful
employment opportunities, including self-employment, fo r those willing,
and seeking work, and to promote maximum employment, production, and
purchasing power.”
W ill you estimate and describe the weight o f this statutory requirement
on Federal Reserve decisions? W ill you estimate and describe the weight
o f this statutory requirement on the combination o f monetary, credit, and
fiscal policy decisions?
I answered this question at some length in my response to question 5 ad­
dressed to me by the Subcommittee on General Credit Control and Debt Man­
agement o f the Joint Committee on the Economic Report in 1952. In sum, I
said that it would be impossible “ to foster and promote * * * the general
welfare” and “ to maintain maximum employment, production, and purchasing
power” if prices were highly unstable and credit use were unrestricted. The
achievement o f these objectives requires the maintenance o f reasonable stability
in the value o f the dollar as well as the avoidance o f credit liquidation that
would inevitably follow excessive credit expansion.
The objectives expressed in section 2 o f the Full Employment A ct o f 1946
have been, in fact, the aims and goals o f the Federal Reserve System since early
in its history. In the Annual Report o f the Federal Reserve Board fo r 1923,
for example, tbe broad purposes of System policy were described as follow s on
page 33:
“ The problem in good administration under the Federal Reserve System is
not only that of limiting the field o f uses of Federal Reserve credit to productive
purposes, but also o f limiting the volume o f credit within the field o f its appro­
priate uses to such amount as may l>e economically justified— that is, justified by
a commensurate increase in the Nation’s aggregate productivity.”




F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H N E T T S

1257

In order to dispel any possible doubt that the policy declaration of the Full
Employment Act of 1956 has this meaning, I made the following suggestion on
page 25 on my opening statement to this committee:
“The goal of price stability, now implicit in the Employment Act, can be
made explicit by a straightforward declaration and directive to all agencies of the
Government that anti-inflationary actions are to be taken promptly whenever
the cost of living begins to rise.”
18.
What are the Federal Reserve plans further to combat inflation and
decline in the value of the dollar?
A direct answer is given in my statement: ‘‘The Federal Reserve System,
itself a creation of the Congress, can—and I assure you that it will—make every
effort to check excesses in the field of money and credit that threaten the cost
of living and thus undermine sustained prosperity and growth of our economy.”
In that effort, the Federal Reserve will continue to use the powers assigned it
by the Congress, as enumerated in the opening part (pp. 2-8) of my statement,
in the manner most appropriate in the light of economic developments as they
occur, to achieve the System’s objective “ to promote monetary and credit condi­
tions that will foster sustained economic growth together with stability in the
T
value o f the dollar.”

M r. M a rtin , w ill y o u proceed, s ir , in y o u r ow n w a y ?
STATEMENT OP WILLIAM McCHESNEY MARTIN, JR., CHAIRMAN,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Mr. Martin. I will be very glad to give you the written statement
at the end, Mr. Chairman.
T h e C h a ir m a n . J u s t one p o in t th ere. I t h in k I w o u ld lik e the
w ritte n statem ent a t y o u r e a rlie st co n ve n ie n ce ; n o t at the end.
M r. M a r t in . I w ill be v e ry g la d to g et it .
T h e C h a ir m a n . T h e re w ill p ro b a b ly be som e q u estio ns I w o u ld
lik e to a sk yo u in re la tio n to i t
S e n a to r M a r t in . I f we h a d it b e fo re u s, it w o u ld h e lp a ll o f u s.
S e n a to r K e r r . H ow lo n g do yo u t h in k it w o u ld tak e yo u to do th a t?
M r. M a r t in . I t h in k I can do it in a co u p le o f d a ys.
S e n a to r M a r t in . I t h in k it w o u ld be h e lp fu l to a ll o f u s i f we
co u ld h av e it .
S e n a to r F la n d e r s . I t w o u ld c o m p lica te M r. M a rtin ’s p re se n ta tio n
but I w onder i f it w o u ld be p o ssib le fo r h im to h av e these q u estio n s
before h im an d th e n fro m tim e to tim e sa y , “T h is re la te s to q uestio n
No. 16 ,” o r have som eone else d o in g it w ho is f a m ilia r w ith w n at you
are p re se n tin g . T h a t p e rh a p s co m p lica te s th e th in g an d it w as ]u st
a q u ic k su g g e stio n .
T h e C h a ir m a n . P le a se accom m odate y o u rs e lf. W e d o n’t w an t to
d isa rra n g e y o u r p re se n ta tio n , b u t w hen yo u can g et a w ritte n response
to the q u estio ns we w o u ld lik e to h ave it .
M r. M a r t in . W e w ill go r ig h t to w o rk on it , S e n a to r.
O u r c o u n try h as been e x p e rie n c in g a p e rio d o f u n u su a l p ro s p e rity ,
featu red b y h e a v y sp e n d in g , both g o ve rn m e n ta l an d p riv a te . A s a
n atio n , we h ave been t r y in g to sp end m ore th a n we e a rn th ro u g h
p ro d u ctio n , an d to in v e st a t a ra te fa ste r th a n we save. T h e re s u ltin g
dem ands, stro n g an d in ce ssa n t, h ave pressed h a rd up on o u r reso urces,
both h u m a n an d m a te ria l. I n consequence, p ric e s h ave been r is in g ,
and the p u rc h a sin g p o w er o f the d o lla r h as been f a llin g .
I t is o f the utm o st im p o rta n ce to b r in g to b e a r on th is c r it ic a l p ro b ­
lem a ll o f the in fo rm a tio n an d in te llig e n c e th a t we can m u ste r. T h a t




1258

F A C L C N IT N O TH U IT D ST T S
IN N IA O D IO F E N E
AE

is w h a t y o u a re se e k in g , a n d t h a t is w h y t h is o p p o rt u n it y to a p p e a r
h e re is t im e ly a n d m o st w elco m e.
W e a re n o t f a c in g a n e w , o r in s o lu b le p ro b le m — it is a s o ld a s th e
in v e n tio n o f m o n e y— a n d h is t o r y is m a re e d w ith b o th d e fe a ts a n d
triu m p h s in d e a lin g w ith t h is in v is ib le b u t d e a d ly e n e m y o f in f la t io n .
T h e q u e stio n is n o t w h e th e r w e c a n so lv e th e p ro b le m , b u t h o w b e st
to d e a l w ith it u n d e r o u r fo rm o f g o v e rn m e n t a n d fre e -e n te rp ris e
in s titu tio n s . S o lv e it w e c a n — so lv e it w e m u st.
Y o u h a v e been in q u ir in g p a r t ic u la r ly in to fis c a l p o lic ie s a n d it is
e q u a lly im p o rta n t to in q u ir e in to c re d it a n d m o n e ta ry p o lic ie s . T h e y
a re c lo s e ly in te rre la te d , a n d a re th e tw o p a ra m o u n t a n d tim e -te ste a
m ean s a v a ila b le to th e G o v e rn m e n t in c o m b a tin g in f la t io n .
T h e re
a re u n d e n ia b ly p r a c t ic a l lim it a t io n s o f t im in g a n d sco p e u p o n b o th ,
b u t th e y a re th e m o st e ffe ctiv e w eap o n s in th e a rs e n a l a g a in s t t h is
d e s tru c tiv e in v a d e r. I n fa c t th e y a re in d is p e n s a b le .
B y w a y o f p re fa c e a n d f o r th e re c o rd I s h o u ld lik e to o u tlin e f ir s t
th e g e n e ra l s tru c tu re a n d o rg a n iz a tio n o f th e F e d e r a l R e se rv e S y s te m .
T h e n I w a n t to g o in t o th e n a tu re a n d c h a ra c te r o f th e p ro b le m s th e
N a tio n is n o w f a c in g .
FEDERAL RESERVE STRUCTURE

T h e F e d e ra l R e se rv e A c t o f 1 9 1 3 w a s th e o u tg ro w th o f p ro lo n g e d
c o n g re ssio n a l s tu d y o f th e h is t o r y o f c e n tra l b a n k in g in o th e r c o u n trie s
a n d o f o u r ow n e x p e rie n c e , p a r t ic u la r ly w ith th e F ir s t a n d S e c o n d
B a n k s o f th e U n ite d S ta te s.
T h e C o n g re ss, se e k in g to a v o id e ith e r p o lit ic a l o r p r iv a t e d o m in a ­
tio n o f th e m o n e y s u p p ly , c re a te d a n in d e p e n d e n t in s t it u t io n w h ic h is
a n in g e n io u s b le n d in g o f p u b lic a n d p r iv a t e p a r t ic ip a t io n in th e
S y ste m ’s o p e ra tio n s u n d e r th e c o o rd in a tio n o f a p u b lic b o d y — th e
F e d e ra l R e se rv e B o a rd — h e re in W a s h in g to n .
T h is q u e stio n o f in d e p e n d e n ce h a s been th o ro u g h ly d e b a te d th ro u g h ­
o u t th e lo n g h is t o r y o f c e n tra l b a n k in g . O n n u m e ro u s o c c a sio n s
w hen am en d m en ts to th e F e d e ra l R e se rv e A c t w ere u n d e r c o n sid e ra ­
tio n th e q u e stio n h a s been re e x a m in e d b y C o n g re s s a n d it h a s re p e a t­
e d ly re affirm e d it s o r ig in a l ju d g m e n t th a t th e R e se rv e S y ste m sh o u ld
be in d e p e n d e n t— n o t in d e p e n d e n t o f G o v e rn m e n t, b u t" in d e p e n d e n t
w it h in th e s tru c tu re o f th e G o v e rn m e n t. T h a t does n o t m e a n th a t
th e R e se rv e b a n k in g m e c h a n ism ca n o r s h o u ld p u rsu e a co u rse th a t is
c o n tra ry to th e o b je c tiv e s o f n a t io n a l eco n o m ic p o lic ie s . I t does m ean
th a t w ith in it s te c h n ic a l fie ld , in d e c id in g u p o n a n d c a r r y in g o u t
m o n e ta ry a n d c re d it p o lic y , it s n a il be fre e to e x e rc ise it s b est c o lle c tiv e
ju d g m e n t in d e p e n d e n tly .
T h e R e se rv e S y ste m is an in s tru m e n t o f G o v e rn m e n t d e sig n e d to
fo ste r a n d p ro te ct th e p u b lic in te re s t, so f a r a s th a t is p o s sib le th ro u g h
th e e x e rcise o f m o n e ta ry p o w ers. I t s b a s ic o b je c tiv e is to a ssu re a
m o n e ta ry c lim a te th a t p e rm its eco n o m ic g ro w th to g e th e r w ith s t a b ilit y
in th e v a lu e o f o u r m o n e y.
P r iv a t e c itiz e n s sh a re m a d m in is t e rin g th e S y s te m , b u t, in so d o in g ,
th e y are a c tin g in a p u b lic c a p a c ity .
T h e m em b ers o f th e B o a rd o f G o v e rn o rs a n d th e o ffice rs o f th e F e d ­
e r a l R e se rv e b a n k s a re in a tru e sense p u b lic o ffic ia ls ; th e p ro ce sses o f
p o lic y d e te rm in a tio n a re su rro u n d e d w ith c a r e f u lly d e v is e d s a fe g u a rd s
a g a in s t d o m in a tio n b y a n y s p e c ia l in te re s t g ro u p .



F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H N E T T S

1259

B ro a d ly , th e R e se rve S yste m m a y be lik e n e d to a tru ste e sh ip created
b y C o n g re ss to a d m in iste r the N a tio n ’s c re d it an d m o netary a ffa irs —
a tru ste e sh ip d e d ica te d to h e lp in g sa fe g u a rd th e in te g rity o f th e c u r­
re n cy. C o n fid en ce in th e v a lu e o f the d o lla r is v it a l to co n tin u e d eco­
n o m ic p ro g re ss a n d to th e p re se rv a tio n o f th e so c ia l v a lu e s a t th e
h e a rt o f fre e in s titu tio n s .
T h e F e d e ra l R e se rve A c t is , so to sp eak, a tru s t in d e n tu re th a t th e
C o n g re ss can a lte r o r am end as it th in k s best. T h e e x istin g S yste m is
b y no m eans p e rfe ct, b u t ex p e rien ce p r io r to 19 14 suggests th a t e ith e r it
o r so m e th in g c lo se ly a p p ro x im a tin g it is in d isp e n sa b le . I n it s p re s­
ent fo rm , it h a s th e a d v a n ta g e o f b e in g ab le to d raw upon th e k n o w l­
edge a n d in fo rm a tio n o f th e d ire c to rs an d officers o f it s 1 2 b a n k s an d
24 b ran ch e s in fo rm u la tin g an d c a rr y in g o ut c re d it an d m o n e ta ry
p o lic ie s .
BOARD OF GOVERNORS
T h e B o a rd o f G o v e rn o rs, as v o u kn o w , is com posed o f 7 m em bers
ap p o in te d b y the P re s id e n t a n a co n firm ed b y the Senate, each fo r a
term o f 14 y e a rs.
I n a p p o in tin g th e m em bers o f th e B o a rd , th e P re s id e n t is re q u ire d
to g iv e due re g a rd to a f a ir re p re se n ta tio n o f th e fin a n c ia l, a g ric u l­
tu ra l, in d u s t r ia l, an d co m m e rcia l in te re sts, as w e ll as the g e o g ra p h ic a l
d iv is io n s o f th e c o u n try .
F ro m am o ng these m em bers th e P re s id e n t d esig n ates a C h a irm a n
and a V ic e C h a irm a n fo r te rm s o f 4 y e a rs. So m e o f the fu n c tio n s o f
the B o a rd o f G o v e rn o rs a re ( 1 ) to ex ercise su p e rv isio n o v e r th e F e d ­
e ra l R e se rv e b a n k s ; ( 2 ) to n x , w ith in sta tu to ry lim it s , th e reserves
w h ich m em ber b a n k s are re q u ire d to m a in ta in a g a in st t h e ir d e p o sit
lia b ilit ie s ; (3 ) to re vie w an d d e te rm in e the d isco u n t ra te s w h ic h are
e sta b lish e d b iw e e k ly a t each F e d e ra l R e se rve b a n k , su b je ct to a p p ro v a l
o f th e B o a rd in W a s h in g to n ; (4 ) to p a rtic ip a te , as m em bers o f th e
F e d e ra l O p e n M a rk e t C o m m itte e , in d e te rm in in g p o lic ie s w h e reb y th e
S y ste m in flu e n ce s th e a v a ila b ilit y o f c re d it p r im a r ily th ro u g h th e
u rch a se o r sa le o f G o v e rn m e n t se c u ritie s in th e open m a rk e t; (5 ) to
x m a rg in re q u ire m e n ts on lo a n s on sto ck exchang e c o lla t e r a l; an d
(6 ) to p e rfo rm v a rio u s su p e rv is o ry fu n c tio n s w ith re sp ect to com ­
m e rc ia l b a n k s, su ch as e x a m in a tio n s, th a t a re m em bers o f th e S yste m
M id to a d m in iste r F e d e ra l R e se rv e , h o ld in g co m p an y, an d o th e r le g is ­
la tio n .
FEDERAL RESERVE BANKS

S

E a c h F e d e ra l R e se rv e b a n k h a s a b o a rd o f 9 d ire c to rs, o f w hom 6 a re
elected b y th e m em ber b a n k s. O f these, 3 a re b a n k e rs, 1 fro m a la rg e ,
1 fro m a m e d iu m , an d 1 fro m a s m a ll b a n k .
T h re e m ore m u st n o t be b a n k e rs, b u t m u st be engaged in som e n o n b a n k in g b u sin e ss.
T h e id e a here w as to h ave the le n d e rs re co g n ize d . T h e o th e r three
m em bers are a p p o in te d b y th e B o a rd o f G o v e rn o rs in W a sh in g to n ,
w h ich a lso d e sig n ate s one to be th e c h a irm a n an d an o th er the d e p u ty
e h & irm an . N o n e o f these th re e m a y be a n officer, d ire c to r, em p lo yee,
O r sto c k h o ld e r o f a n y b a n k . T h e d ire c to rs o f a R ese rve b a n k su p e r­
v ise it s a ffa irs . S u b je c t to a p p ro v a l o f th e B o a rd o f G o v e rn o rs, th e y
a p p o in t th e p re sid e n t a n d f irs t v ic e p re sid e n t. S u b je c t to re v ie w and




1260

F A C L C N IT N O TH U IT D ST T S
IN N IA O D IO F E N E
AE

d e te rm in a tio n b y th e B o a rd o f G o v e rn o rs , th e y e s ta b lis h d is c o u n t
rfttos*
T h e sto c k o f e a ch F e d e r a l R e s e rv e b a n k is h e ld b y th e m e m b e r
b a n k s o f it s d is t r ic t . T h is sto c k d o es n o t h a v e th e n o rm a l a ttrib u te s
o f c o rp o ra te s to c k ; ra th e r, it re p re se n ts a re q u ire d s u b s c rip t io n to th e
c a p it a l o f th e R e se rv e b a n k , d iv id e n d s b e in g fix e d b y la w a t 6 p e rc e n t.
T h e re s id u a l in te re s t in th e s u r p lu s o f th e F e d e r a l R e se rv e b a n k s
b e lo n g s to th e U n it e d S ta te s G o v e rn m e n t, n o t to th e b a n k ’s s to c k ­
h o ld e rs.
FEDERAL OPEN M A R KET CO M M ITTEE
T h e F e d e ra l O p e n M a rk e t C o m m itte e c o n sists, a c c o rd in g to la w ,
o f th e 7 m em b ers o f th e B o a rd o f G o v e rn o rs , to g e th e r w it h 5 p r e s i­
d e n ts o f th e F e d e r a l R e se rv e b a n k s. F o u r o f th ese fiv e p re s id e n ts
se rv e o n a ro ta tin g b a s is ; th e f if t h , th e p re s id e n t o f th e F e d e r a l
R e se rv e B a n k o f N e w Y o r k , is a p e rm a n e n t m e m b e r o f th e co m m itte e .
S in c e J u n e 19 5 5 , w h e n it s e x e c u tiv e c o m m itte e w a s a b o lis h e d , t h is
co m m ittee h a s u s u a lly m e t a t 3 -w e e k in t e r v a ls , o n a n u m b e r o f o cca ­
sio n s 2 w eeks, to d ire c t th e sa le a n d p u rc h a s e o f s e c u ritie s in th e open
m a rk e t.
I n p ra c tic e , a ll 1 2 p re s id e n ts a tte n d th e se m e e tin g s a n d p a rt ic ip a t e
f r e e ly in th e d is c u s s io n , a lth o u g h o n ly th o se w h o a re m em b ers o f th e
co m m itte e vo te.
I n th e p a st 2 y e a rs , M r . C h a ir m a n , w e h a v e b een u s in g t h is O p e n
M a rk e t C o m m itte e a s a fo ru m , a c le a rin g h o u s e f o r a ll o r th e a sp e cts
o f p o lic y d e te rm in a tio n in th e S y s te m , n o t f a ilin g to re co g n iz e th e
s ta tu to ry re s p o n s ib ilit y o f th e B o a rd o f G o v e rn o rs f o r re se rv e re ­
q u ire m e n ts a n d f o r s to c k -m a rk e t m a rg in s a s d is t in c t fro m th e O p e n
M a rk e t C o m m itte e , b u t u s in g t h is co m m itte e a s a fo ru m w h e re a ll
asp e cts o f th e p ro b le m s o f th e S y s te m c a n be d isc u sse d . S in c e w e
m et a t 3 -w e e k in t e r v a ls it m ean s th a t a ll 1 2 o f th e p re sid e n ts c a n m eet
w ith th e 7 m em b ers o f th e b o a rd , th a t is 19 m e n , a n d s u rv e y a ll a s­
p e cts o f S y ste m p ro b le m s a n d p o lic ie s o n a 3 -w e e k in t e r v a l. T h a t is
n o t in d is re g a rd o f th e sta tu te b u t it is th e m o d u s o p e ra n d i th a t w e
h a v e been u s in g to effe ct c re d it p o lic y re c e n tly in , w e t h in k , a m o re
d e s ira b le w a y a n d w ith o u t a n y c o n flic t w ith th e p re se n t sta tu te .
FEDERAL ADVISORY CO U N CIL
T h e F e d e ra l R e se rv e A c t a ls o p ro v id e s f o r a F e d e ra l A d v is o r y
C o u n c il o f 1 2 m em b ers. O n e is e le cte d b y th e b o a rd o f e a ch R e se rv e
b a n k f o r a p e rio d o f 1 y e a r. _T h e C o u n c il is re q u ire d b y la w to m eet
in W a s h in g to n a t le a s t fo u r tim e s e ach y e a r. I t is a u th o riz e d to co n ­
f e r d ir e c t ly w it h th e B o a rd o f G o v e rn o rs re s p e c tin g g e n e ra l b u sin e ss
c o n d itio n s a n d to m a k e re co m m e n d a tio n s c o n c e rn in g m a tte rs w it h in
th e B o a rd ’s ju r is d ic t io n .
T h e m em b ers o f t h is C o u n c il a re ch o se n fro m re p re s e n ta tiv e an d
o u tsta n d in g b a n k e rs in each d is t r ic t , a n d I w a n te d to m a k e th a t c le a r
h e re . I w a n t to quote— in lo o k in g th ro u g h a ll th e lit e r a t u r e on th is
it seem s to m e th a t t h is e x c e rp t fro m th e re p o rt o f th e H o u s e C o m ­
m itte e on B a n k in g a n d C u r re n c y on th e o r ig in a l F e d e ra l R e se rv e A c t
o u tlin e s th e n a tu re o f th e F e d e ra l A d v is o r y C o u n c il b e tte r th a n a n y ­
t h in g I h a v e been a b le to com e a cro ss, a n d I w ill re a d th a t.



F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H N E T T S

1261

Section 13 provides for the creation of a Federal advisory council which is to
consist of as many members as there are Federal Reserve districts, each such
district electing through the board of directors of its Federal Reserve bank a
representative of that bank. The functions o f this board are wholly advisory
aud it would amount merely to a means of expressing bankiug opinion, inform­
ing the Reserve Board of conditions of credit in the several distric ts, and serving
as a source of information upon which the board may draw in case o f necessity.
The desirability of such a body as a source of information and counsel is
obvious, and it is believed that it gives to the banking interests of the several
districts ample power to make their views known, and, so far as they deserve
acceptance, to secure such acceptance.

I
m ig h t sa y th a t in o u r e x p e rien ce in the la s t 6 y e a rs, th is C o u n c il
has p ro ve d v e ry u se fu l. I t h a s in no w a y d o m in ated the d e cisio n s o f
the F e d e ra l E e se rv e B o a rd , b u t it h a s g iv e n us an o p p o rtu n ity to get
firsth a n d a d v ice and co u n sel fro m p e o p le w ho are c lo se ly in to uch w ith
the b a n k in g a c tiv itie s o f t h e ir p a r t ic u la r d is tric ts .
JUDGING ECONOMIC TRENDS

N ow a t t h is p o in t I w a n t to tak e u p th e o p e ra tio n s an d th e w o rk o f
the S y ste m , an d it is o b vio u s th a t the m ost im p o rta n t ta sk th a t we set
fo r o u rse lve s is ju d g in g eco n o m ic tre n d s. T h e w o rk o f the S ystem
re q u ire s a c o n tin u o u s stu d y an d ex ercise o f ju d g m e n t in o rd e r to be
ale rt to th e w a y th e econom y is tre n d in g an d w h a t F e d e ra l R ese rve
actio ns w ill best c o n trib u te to su sta in e d eco no m ic g ro w th . S u c h d e ci­
sions are o ften h a rd to m ake because o f th e existence o f cro ss c u rre n ts
in the econom y. E v e n in g e n e ra lly p ro sp e ro u s tim e s, som e p a rts o f
the econom y m a y no t fa re as w e ll as o th ers.
C re d it p o lic y m u st, ho w ever, fit the g e n e ra l s itu a tio n an d n o t re flect
u n d u ly e ith e r th e c o n d itio n o f c e rta in in d u s trie s e x p e rie n c in g po o r
business, o r th a t o f o th er in d u s trie s e n jo y in g a boom . R e s id e n tia l
co n stru ctio n , I t h in k , illu s tra te s t h is p o in t.
In 19 56 an d so f a r in 19 5 7 d em an d p re ssu re s on a v a ila b le reso urces
have been g e n e ra lly stro n g a n d p ric e s lia v e been m o v in g u p , b u t ho us­
in g c o n stru ctio n h a s receded c o n sid e ra b ly fro m it s 19 55 p e ak . T h e
h o m e -b u ild in g in d u s try u n d o u b te d ly c o u ld s u p p ly h o u sin g a t a fa ste r
rate th a n is now p r e v a ilin g .

But even at the current volume, building costs continue to increase.
The prices of some building materials have fallen, it is true, but the
overall cost of housing construction has increased appreciably even
in the face of moderately lower demand.
The explanation is to be found in the fact that expenditures for all
major types of construction except residential have been maintained
at or above record levels.
This example shows why credit policy must take account of the
overall situation, and cannot be deterred unduly by special cases that
are not typical of the whole.
Another factor complicating economic interpretation is that even in
a period of broad advance and upward pressure on prices, there may be
lulls when conditions seem to be stabilizing and the next turn of events
is difficult to appraise.
. The flexible character of monetary policy permits prompt adapta­
tion to changed circumstances, and this is something that we are alwavs anxious to determine.
Senator F l a n d e r s . I don’t find that passage in the manuscript.




1262

F A C L C N IT N O TH U IT D ST T S
IN N IA O D IO F E N E
AE

M r. M a r t in . I a d d e d it , S e n a to r.
Senator F la n d e r s . I thought you were still reading.
M r. M a r t in . I a m a d lib b m g a lit t le b it h e re a n d th e re .
PURPOSES
T h e o b je c tiv e o f th e S y ste m is a lw a y s th e sa m e — to p ro m o te m o ne­
t a r y a n d c r e d it c o n d itio n s t h a t w ill fo s te r su s ta in e d e co n o m ic g ro w th
to g e th e r w it h s t a b ilit y in th e v a lu e o f th e d o lla r .
T h is g o a l m a y b e th o u g h t o f in h u m a n te rm s a n d s h o u ld be. T h e
f irs t p a r t m a y be c o n sid e re d a s co n ce rn e d w ith jo b o p p o rtu n itie s f o r
w age e a rn e rs ; th e la t t e r a s d ire c te d to p ro te c tin g th o se w h o d e p e n d
u p o n s a v in g s o r fix e d in co m e s, o r w h o r e ly u p o n p e n sio n r ig h t s . I n
fa c t, h o w e v e r, a re a liz a t io n o f b o th a im s is v it a l to a ll o f u s. T h e y a re
in s e p a ra b le . P r ic e s t a b ilit y is e s s e n tia l to s u s ta in a b le g ro w th . I n ­
fla tio n fo s te rs m a la d ju s tm e n ts . I n som e p e rio d s th ese b ro a d a im s c a ll
f o r e n c o u ra g in g c re d it e x p a n s io n ; in o th e rs, f o r re s t r a in t o n th e
g ro w th o f c re d it . T h e la t t e r is w h a t is re q u ire d a t p re se n t, f o r c le a r ly
th e m o st c it ic a l e co n o m ic p ro b le m n o w f a c in g t h is c o u n try in o u r
ju d g m e n t is th a t o f in fla t io n , o r p u t in th e te rm s o f th e m a n on th e
stre e t, it is th e r is in g co st o f liv in g .
T H E CURRENT PROBLEM! OF IN FLA TIO N
T h is p ro b le m is f a r d iffe re n t fro m th e o ne th a t beset u s d u r in g th e
d e p ressed 19 3 0 ’s , a n d le f t a n in d e lib le im p re s s io n o n o u r t h in k in g .
T h e p ro b le m th e n w as one o f d r a s t ic d e fla tio n w ith w id e sp re a d u n e m ­
p lo y m e n t, b o th o f m en a n d m a t e ria l re so u rc e s. T o d a y ’s p ro b le m h a s
p e rsiste d th ro u g h th e y e a rs sin c e W o r ld W a r I I . I t c o n sists o f in f la ­
t io n a r y p r ic e in c re a se s a n d th e eco n o m ic im b a la n c e s t h a t h a v e re s u lte d .
T h is is th e o v e rrid in g p ro b le m th a t fa c e s th e F e d e r a l R e se rv e S y s ­
tem to d a y , f o r a s p ir a l o f m o u n tin g p ric e s a n d w ag e s see ks m o re a n d
m o re fin a n c in g .
I t c re a te s d e m a n d s f o r fu n d s in excess o f s a v in g s , a n d sin c e th e se
d e m an d s c a n n o t be s a tis fie d in f u ll, th e re s u lt is m o u n tin g in te re s t ra te s
a n d a c o n d itio n o f s o -c a lle d t ig h t m o n e y. I f th e g a p betw een in v e s t ­
m e n t d e m an d s a n d a v a ila b le s a v in g s s h o u ld be f ille d b y c re a tin g a d d i­
t io n a l b a n k m o n e y, th e s p ir a l o f in f la t io n w h ic h te n d s to becom e c u m u ­
la t iv e a n d s e lf-p e rp e tu a tin g w o u ld be g iv e n f u r t h e r im p e tu s. I f th e
F e d e ra l R e se rv e S y ste m w ere a p a r t y to t h a t p ro ce ss, in o u r ju d g m e n t
it w o u ld b e tra y it s tru s t.
CO N FLICTIN G VIEW S ON CAUSES
T h e re is m u c h c u rre n t d is c u s s io n o f th e o r ig in o f in f la t io n a r y p re s ­
su re s. S o m e b e lie v e th e y re fle c t a re c u rre n c e o f d e m a n d -p u lls s im ila r
to tho se p re se n t in th e e a r lie r p o s tw a r p e rio d .
O th e rs b e lie v e th e y o rig in a te in a co st p u s h e n g e n d e re d b y a d m in ­
iste re d p r ic in g p o lic ie s a n d w age ag re e m e n ts th a t v io la te th e lim it s o f
to le ra n c e set b y a d v a n ce s in p r o d u c t iv it y .
T h e se d is tin c tio n s , I t h in k , p re se n t a n o v e rs im p lific a tio n o f th e
p ro b le m . In f la t io n is a p ro ce ss m w h ic h r is in g co sts a n d p ric e s m u tu ­
a lly in te ra c t u p o n e a ch o th e r o v e r tim e w ith a s p ir a l effe ct. In f la t io n
a lw a y s h a s th e a ttrib u te s , th e re fo re , o f a co st p u sh . A t th e sam e tim e ,



F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H N E T T S

1263

demand must always be sufficient to keep the spiral moving* Other­
wise the marking up of prices in one sector of the economy would be
offset by a reduction of prices in other sectors.
There is much to be said for the view that contractual or other ar­
rangements designed as shelters or hedges from inflation have the
effect of quickening its tempo.
The 5-percent rise in the cost of living which we have experienced
over the last 2 years has probably reflected and been reflected in
more rapidly rising wage costs because of the prevalence of cost-ofliving clauses in many modern wage contracts. Cost-plus contracts
tend to have the same quickening effect on the inflationary spiral.
The spiral is also, however, a demand spiral. At each point of
time in the development of the inflationary spiral, there must be
sufficient demand to take the higher priced goods off the market and
thus keep the process moving.
THE INFLATIONARY SPIRAL

The workings of the spiral of inflation are illustrated by the economy
of the moment. As has been brought out at some of the earlier hear­
ings of this committee, we are now faced with the seeming paradox
that prices are expected to continue to rise, even though the specific
bottlenecks in capacity that impeded the growth of production in
1956 have now been largely relieved, and investment m productive
facilities continue at very high levels.
Houses, automobiles, household appliances, and other consumer
goods, as well as most basic materials, are all readily available—at
a price. The problem is no longer one of specific shortages or bottle­
necks causing prices of individual commodities to be bid up because
of limited availability but rather it is one of broad general pressure
on all of our resources.
In other words, aggregate demand is in excess of aggregate avail­
abilities of these resources at existing prices.

Taking the situation as a whole, as individuals, corporations, and
overnments proceed with their expenditure plans, buttressed by
arrowed funds, they are in the position of attempting to bid the
b
asic, factors of production—land, labor, and capital—away from
?ach other and in the process the general level of costs and prices is
mevitably pushed upward. Recently, this general pressure has been
expressing itself particularly in rising prices for services as compared
*ith goods.
l)espite the existence in some lines of reduced employment and slack
demand, many employers now face rising costs when they seek to
expand activity by adding appreciably to the number employed.

g

Often, the additional manpower required has to be bid away from
<*her employers. As a result, many current plans for further expan­
sion of capacity place great emphasis on more efficient, more produc*,v££quipment rather than on more manpower.
This generalized pressure on resources comes to a head in financial
ttiarkets in the form of a shortage of saving in relation to the demand
w funds. A considerable volume of expenditure is financed at all
TmOM of borrowed funds.
.When these funds are borrowed from others who have curtailed
own expenditures, no additional demand for resources is gen­



1264

F A C L C N IT N O TH T N T D ST T S
IN N IA O D IO F E J T E
AE

e ra te d . O n b a la n c e , h o w e v e r, d e m a n d s f o r fu n d s b y th o se w h o h a v e
w an ted to b o rro w m o n e y to sp e n d in excess o f t h e ir c u rre n t in c o m e s
h a v e o u tru n s a v in g s . T h o se w h o h a v e sa v e d b y lim it in g t h e ir c u rre n t
e x p e n d itu re s, a n d th u s m ad e fu n d s a v a ila b le f o r le n d in g , h a v e s t ill
no t k e p t p a ce w ith th e d e sire o f g o v e rn m e n ts, b u sin e sse s, a n d in d iv id ­
u a ls to b o rro w in o rd e r to sp e n d .
J u s t a s a n in te n se g e n e ra l p re ssu re o n a v a ila b le re so u rc e s m a n ife s ts
it s e lf in r is in g w a g e s a n d p ric e s , a d e fic ie n c y o f s a v in g s r e la t iv e to
th e d e m an d f o r b o rro w e d m o n e y m a n ife s ts it s e lf in a n in c re a s e in
th e p r ic e o f c re d it. I n su ch c irc u m s ta n c e s , in te re s t ra te s a re b o u n d
to ris e . T h e r is e in ra te s m ig h t be t e m p o ra rily h e ld d o w n b y c re a tin g
new b a n k m o n e y to m eet b o rro w in g d e m a n d s, b u t t h is , a s I h a v e s a id ,
w o u ld a d d fu e l to in fla t io n a n d b r in g a b o u t f u r t h e r in c re a s e s in
d e m an d s.
I n th e e n d , as p ric e s ro se e v e r fa s te r, in te re s t ra te s c o u ld n o t be
h e ld do w n. I n su m m a ry , w h a te v e r th e s p e c ia l fe a tu re s o f th e c u r ­
re n t in fla t io n , th e im p o rta n t f a c t is th a t it is h e re , a n d t h a t i t h a s
cre a te d d e m an d s f o r b o rro w e d fu n d s in excess o f f in a n c ia l s a v in g s ,
e ven th o u g h th ese h a v e g ro w n a p p re c ia b ly .
A n y a tte m p t to su b stitu te n e w ly c re a te d b a n k m o n e y f o r t h is
d e fic ie n c y in s a v in g s c a n o n ly a g g ra v a te th e p ro b le m a n d m a k e m a tte rs
w o rse.
EFFECTS OF HIGHER INTEREST RATES

T h e resp o nse to h ig h e r in te re s t ra te s is c o m p le x . O n e r e s u lt is
th a t som e w o u ld -b e b o rro w e rs d ra w o n c a sh b a la n c e s to fin a n c e p ro ­
je c te d e x p e n d itu re s o r le n d e rs d ra w o n t h e ir b a la n c e s to le n d a t th e
h ig h e r ra te s, th u s re d u c in g t h e ir liq u id it y a n d in c re a s in g th e t u r n ­
o v e r o f th e e x is t in g m o n ey s u p p ly .
I n re ce n t y e a rs , w ith th e la r g e v o lu m e o f F e d e r a l G o v e rn m e n t
se c u ritie s o u ts ta n d in g , m a n y h o ld e rs o f th e se s e c u ritie s — b o th in s t i­
tu tio n s a n d in d iv id u a ls — h a v e liq u id a t e d t h e ir h o ld in g s in o rd e r to
s h if t fu n d s to o th e r uses.
T h is h a s been a n im p o rta n t in flu e n c e in b r in g in g a b o u t th e d e c lin e
in bond p ric e s . T o th e e x te n t th a t a c c u m u la te d c a sh b a la n c e s o r
o th e r p a st s a v in g s ca n b e used m o re a c t iv e ly , e x p e n d itu re s re m a in
h ig h re la t iv e to a v a ila b le re so u rce s a n d p r ic e s te n d to r is e , b u t th e
re d u ce d fin a n c ia l liq u id it y e v e n tu a lly e x e rts r e s t r a in t o n b o rro w in g
a n d sp e n d in g .
A n o th e r re s u lt o f h ig h e r in te re s t co sts, to g e th e r w ith g re a te r d iffi­
c u lt y in o b ta in in g lo a n s , is th a t m a n y p o te n tia l b o rro w e rs re v is e o r
po stpo ne t h e ir b o rro w in g p la n s . T o th e e x te n t th a t e x p e n d itu re s a re
re v ise d o r d e fe rre d , in fla t io n a ry p re ssu re s a re re d u ce d .
T h e m o st c o n stru c tiv e re s u lt is th e e n co u ra g e m e n t o f a v o lu m e o f
sa v in g s an d in v e stm e n t th a t p e rm its c o n tin u e d e x p a n sio n o f p ro d u c ­
tiv e f a c ilit ie s at a ra te c o n siste n t w ith g ro w in g c o n su m p tio n d e m a n d s.
O n ly in t h is w a y can th e s ta n d a rd o f liv in g f o r a g ro w in g p o p u la tio n
be im p ro v e d a n d th e v a lu e o f s a v in g s b e m a in ta in e d .
S u c h c o n s tru c tiv e a d a p ta tio n s , i f m a d e in tim e a t th e o n set o f
in fla tio n a ry p re ssu re s, need n o t be la r g e in o rd e r to re sto re b a la n c e
betw een p ro sp e c tiv e d e m an d s a n d th e re so u rce s a v a ila b le to m eet th e m .
T h is is p a r t ic u la r ly tru e in a c o u n try th a t is as s tro n g a n d v ig o ro u s
an d a s d y n a m ic a s th e A m e ric a n eco n o m y. I t is e s s e n tia l, h o w e v e r,
th a t th e a d ju stm e n t be m ad e. O th e rw is e p ro sp e c tiv e e x p e n d itu re s



F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H N E T T S

1265

w ill co n tin u e to exceed th e reso urces a v a ila b le and the p re ssu re o f
excess d em and w ill fo ste r an in fla tio n a ry s p ir a l.
EXPECTATIONS OF CONTINUING INFLATION

O n ce such a s p ir a l is set in m o tio n it h as a stro n g ten d en cy to feed
upon it s e lf . I t p ric e s g e n e ra lly are expected to ris e , in c e n tiv e s to
save an d to le n d a re d im in ish e d and in c e n tiv e s to bo rro w an d to spend
are in cre a se d .
C o n su m e rs w ho w o u ld n o rm a lly be sa ve rs are enco uraged to p o st­
pone s a v in g a n d , in ste a d , p u rch a se goods o f w h ic h th e y a re n o t in
im m e d iate need.
B u sin e ssm e n , lik e w is e , a re enco urag ed to a n tic ip a te g ro w th re q u ire ­
m ents fo r new p la n t an d eq u ip m en t. T h u s , sp e n d in g is in cre a se d on
both co u n ts. B u t , because th e econom y is a lre a d y o p e ra tin g a t h ig h
le ve ls, fu rth e r in cre a se s in sp e n d in g a re n o t m atch e d b y co rre sp o n d ­
in g in cre a se s in p ro d u c tio n . In s te a d , th e in cre a se d sp e n d in g fo r
goods a n d se rv ice s ten d s to d evelo p a s p ir a l o f m o u n tin g p ric e s,
w ages, an d costs.
U n fo rtu n a te ly , d u rin g th e p a st y e a r, as p ric e in d e x e s g ra d u a lly
rose, som e segm ents o f th e co m m u n ity a p p a re n tly becam e re co n cile d
to the p ro sp e cts o f a c re e p in g i f n o t a ru n a w a y in fla tio n .
O n e o f the b a n e fu l effects o f in fla tio n stem s fro m th e e x p e cta tio n
o f in fla tio n . W h ile a p ric e in cre a se , in it s e lf , m a y cause se rio u s d is ­
lo catio n s a n d in e q u itie s, o th e r a n d m ore se rio u s effects o ccu r i f the
p rice ris e b rin g s w ith it a n ex p e cta tio n o f s t ill o th er in cre a se s.
E x p e c ta tio n s c le a r ly h a v e a g re a t in flu e n ce on econom ic an d fin a n ­
c ia l d e cisio n s, m u ch m ore so, p e rh a p s, th a n we som etim es re a liz e . I n
fact d e c isio n s to sp end o r to in v e st too m u ch in a g iv e n tim e are a
d ire c t cause o f in fla tio n . A ls o , i f fu rth e r in fla tio n is expected, sp ecu­
la tiv e co m m itm en ts a re en co u rag ed a n d th e p a tte rn o f in v e stm e n t an d
other sp e n d in g — th e d e c isio n s on w h a t k in d s o f th in g s to b u y— w ill
change in a w a y th a t th re a te n s b a la n ce d g ro w th .
CREEPING INFLATION

T h e u n w a rra n te d a ssu m p tio n th a t c re e p in g in fla tio n is in e v ita b le
deserves com m ent. T h is te rm h a s been used b y v a rio u s w rite rs to
m ean a g ra d u a l ris e in p ric e s w h ic h , th e y su g g est, co u ld be h e ld to a
M oderate ra te , a v e ra g in g p e rh a p s 2 p e rce n t a y e a r. T h e id e a o f
rices r is in g 2 p e rce n t in a y e a r m a y n o t seem too s t a rt lin g — in fa c t,
u rin g th e p a st y e a r, av e rag e p ric e s h a v e in cre a se d b y m ore th a n 2
percent— b u t t h is co ncept o f c re e p in g in fla tio n im p lie s th a t a p ric e
rise o f t h is k in d w o u ld be expected to co n tin u e in d e fin ite ly .
A c c o rd in g to those w ho espouse t h is v ie w , r is in g p ric e s w o u ld th en
the n o rm a l e x p e cta tio n a n d the F e d e ra l R e se rv e a c c o rd in g ly w o u ld
lo n g e r s triv e to keep th e v a lu e o f m oney sta b le b u t w o u ld simply
try to tem p er the ra te o f d e p re c ia tio n . B u sin e ss an d in v e stm e n t d e c i­
sions w o u ld be m ad e in the lig h t o f t h is p ro sp e ct.
S u c h a p ro sp e ct w o u ld w o rk in c a lc u la b le h a rd s h ip . I f m o n e ta ry
p o lic y w ere d ire c te d w ith a v ie w to p e rm ittin g th is k in d o f in fla tio n —
®ven i f it w ere p o ssib le to c o n tro l it so th a t p ric e s rose no fa s te r th a n
2 p ercent a y e a r— th e p ric e le v e l w o u ld d o u b le e v e ry 35 y e a rs an d
v a lu e o f th e d o lla r w o u ld be c u t in h a lf each g e n e ra tio n .

S




1266

FIN N IA C N IT N O TH U IT D ST T S
A C L O D IO F E N E
AE

Losses would thus be inflicted upon millions of people, pensioners,
Government employees, all who have fixed incomes, including people
who have part of their assets in savings accounts and long-term bonds,
and other assets of fixed dollar value. The heaviest losers would be
those unable to protect themselves by escalator clauses or the other
offsets against prices that were steadily creeping up.
Moreover, the expectation of inflation would react on the compo­
sition of savings, A large part of the savings of the country is mobil­
ized in savings deposits and similar claims that call for some stated
amount of dollars. If people generally come to feel that inflation
is inevitable, they will not save in this form unless they are paid a
much higher interest premium to compensate them for the depre­
ciation of their saved dollars.
It is for this reason that it is impossible, in a period of demand^ in
excess of savings, to maintain lower interest rates through a policy
of easy credit.
The country is experiencing a period of generally high employment
in which investment outlays remain high, but if fears of inflation cause
people to spend more of their incomes and save less, the result could
only be more rapid inflation and still less saving in relation to income.
Such saving as remained, furthermore, would oe less and less in the
form of loanable funds to finance homes, highways, school construc­
tion, and other community needs.
EFFECTS ON PRODUCTIVE ENTERPRISE

An inflationary psychology also impairs the efficiency of produc­
tive enterprise— through which our standard of living has made
unparalleled strides. In countries that have had rapid or runaway
inflations, this process has become so painfully obvious that no doubt
remained as to what was happening to productivity. In the making
of decisions on whether or not to increase inventory, or make a capital
investment, or engage in some other business operation, the question
of whether the operation would increase the profit from inflation
became far more important than whether the proposed venture would
enable the firm to sell more goods or to produce them at lower cost.
The incentive to strive for efficiency no longer governed business
decisions.
The man who suffers the most from this is the consumer.
PRODUCTIVITY— KEY TO SUSTAINED PROSPERITY

Why have real wages in this country risen to the highest levels in
the world, thus permitting our standard of living to rise corre­
spondingly?
Certainly, it is not just because wages have risen as the cost of living
has risen.
Some people seem to think that is the reason for it. The big source
of increase has been the increasing productivity of our national econ­
omy. Real incomes have gone up because the total size of the pie,
out of which everybody receives his share, has grown so magnificently.
What has enabled the productivity of the American economy to
achieve the levels that malse all this possible? One vital factor has



F A C L C N IT N O T E U IT D S A E
IN N IA O D IO F H N E T T S

1267

been the striving by so many people, each in liis own field, for better
and more efficient ways of doing things. Equally important has been
the willingness to set aside a part of current income to provide the
machines, tools, and other equipment for further progress. Both are
essential if our standard of living and material welfare are to go on
advancing.
EFFECTS OF INFLATION

Inflation does not simply take something away from one group of
our population and give it to another group. Universally, the stand­
ard of living is hurt, and countless people injured, not only those who
are dependent 011 annuities or pensions, or whose savings are in the
form of bonds 01*life-insurance contracts.
The great majority of those who operate their own businesses or
farms, or own common stocks or real estate, or even those who have
cost-of-living agreements whereby their wages will be raised, cannot
escape the effects of speculative influences that accompany inflation
and impair reliance upon business judgments ana competitive
efficiency.
I may say parenthetically here, Mr. Chairman, that in some respects
inflation is not unlike war in that you may point out certain war
profiteers and others that benefit by war but in the long run nobody
really benefits out of war. The point I am trying to make here is that
really nobody benefits out of inflation.
Speculators and slick operators and others may temporarily derive
benefit, but the common welfare becomes the welfare of all of us, as
Adam Smith once said, and I question very much whether a case can
be made that anybody specifically benefits over any period of time out
of inflation. It has a deleterious effect on all of us.
Finally, in addition to these economic effects, we should not over­
look the" way that inflation could damage our social and political
structure.
Money would no longer serve as a standard of value for long-term
savings. Consequently, those who would turn out to have savings in
their old age would tend to be the slick and clever rather than the
hard working and thrifty.
Fundamental faith in the fairness of our institutions and our Gov­
ernment would deteriorate. The underlying strength of our country
and of our political institutions rests upon faith in the fairness of these
institutions, in the fact that productive effort and hard work will earn
an appropriate economic reward. That faith cannot be maintained in
the face of continuing, chronic inflation.
There is 110 validity whatever in the idea that any inflation, once
accepted, can be confined to moderate proportions. Once the assump­
tion is made that a gradual increase in prices is to be expected?and this
assumption becomes a part of everybody’s expectations, keeping a ris­
ing price level under control becomes incomparably more difficult than
the problem of maintaining stability when that is the clearly expressed
goal of public policy.
Creeping inflation is neither a rational nor a realistic alternative to
stability of the general price level.




1268

FINANCIAL CON
DITION O THE UNITED STATES
F
PEGGING T H E M A R K E T

It has been suggested, from time to time, that the Federal Reserve
System could relieve current pressures in money and capital markets
without, at the same time, contributing to inflationary pressures.
If such were the case, it would be nice and I am sure we would
have endeavored to work out something along these lines a long time
ago. These suggestions usually involve Federal Reserve support of the
United States Government, securities market through one form or an­
other of pegging operations. There is no way for tne Federal Reserve
System to peg the price of Government bonds at any given level unless
it stands ready to buy all of the bonds offered to it at that price.
This process inevitably provides additional funds for the banking
system, permits the expansion of loans and investments and a com­
parable increase in the money supply—a process sometimes referred
to as monetization of the public deot.
One of my predecessors referred to it as turning the Federal Reserve
into an engine of inflation.
Senator F l a n d e r s . I didn’t get that.
Mr. M a r t i n . I said one of my predecessors described it as turning
the Federal Reserve into an engine of inflation.
The C h a i r m a n . Who was that?
Mr. M a r t i n . Mr. Eccles.
The amount of the inflationary force generated by such a policy
depends to some extent upon the demand pressures in the market at
the time. It would be dangerously inflationary under conditions that
prevail today. In the present circumstances the Reserve Systemcould
not peg the Government securities market without, at the sam time,
e
igniting explosive inflationary fuel.
DO RISING INTEREST RATES ADD TO IN F L A T IO N ?

We m be clear in viewing these relationships to distinguish
ust
cause from effect and not to confuse them. It is sometimes saia that
rising interest rates, by increasing the costs of doing business, lead to
higher prices and thus contribute to inflation.
This view is based upon an inadequate conception of the role of
interest rates in the economy, and upon a mistaken idea of how interest
costs compare with total costs. In municipal government budgets,
it is about 2 percent; in many utilities, it is 3 to 5 percent. Thus, as
an elem of cost, interest rates are relatively small; but as a reflection
ent
of demand pressures in markets for funds, interest rates are highly
sensitive. <
As previously explained, rising interest rates result primarily from
an excess of borrowing demands over the available supply of savings.
Since these demands are stimulated by inflation, under these circum­
stances rising interest rates are an effect of inflationary pressures, not
a cause.
Any attempt to prevent such a rise by creating new money would
lead to a much more rapid rise in prices and in costs than would result
from any likely increase in interest rates. Such an attempt, moreover,
would not remove the need for a fundamental adjustment in the rela­
tion between saving and consumption and would probably fail in its
purpose of stabilizing interest rates.



FINANCIAL CONDITION OF TH E UNITED STATES

1269

I would like to m it clear at this point, Mr. Chairm as I have
ake
an,
repeatedly testified, that I do not favor high interest rates.
I would like to see interest rates as low as it is possible to have
them without inducing an inflationary process, because I believe you
will have the greatest formation of capital under those conditions,
but you have to recognize that interest is a wage to the saver as well
as a cost to the borrower, and that interest rates, when they ignore
the inflationary forces are just adding fuel to the fire, although of
course, they are one of the costs, one of the prices that have to be paid,
but they are a balancing factor in the economy.
BASIC FACTORS IN RECENT INFLATIONARY PRESSU ES
R

A major cause of recent inflationary pressures has been the attem
pt
to crowd into this period a volume of investm greater than the
ent
econom could take without curtailing consumption m than con­
y
ore
sum have been willing to do.
ers
In fact, there has been som increase in consumption on borrowed
e
funds.
Increases in interest rates naturally come about under such con­
ditions; they are the economy’s m
eans of protecting itself against
such excessive bunching of investm or the building up or an un­
ent
sustainable rate of consumption.
While the effect of a moderate change in interest rates on the cost
of goods currently being produced and sold is sm and relatively
all
unimportant, changes in interest rates do assum importance as a cost
e
inthe planning of new investment outlays.
These costs do not affect current operations or add to upward price
pressures to any substantial extent.

They do tend to deter the undertaking of new investm projects
ent
and to keep the am
ount of investm spending that is being under­
ent
taken in line with the economy’s ability to produce investm goods.
ent
To maintain artificially low interest rates under these conditions,
without introducing any other force to restrain investm would be
ent,
to invite an unbridled investment boom, inflation, and an inevitable
collapse later.
It is necessary to em
phasize that there are many influences, other
than monetary policies and interest rates, that affect the volume of
consumption, investm and saving and their relationships.
ent,
Monetary policies operate directly through the volume of bank
credit and bank-created money.
The volume of current saving out of income and the uses made of
new and outstanding savings have a more important bearing upon
the availability of investment funds than bank credit.
Interest rates, therefore, are influenced by the relationship between
investment demands and the availability of savings, independently of
monetary policies.
Interference with these relationships through monetary policies, m
&ct, may prevent necessary and healthy adjustments that help to
maintain equilibrium in economic growth.
IN A NUTSHELL

A. An inflationary spiral is always characterized by—
1. An interaction between rising costs and rising prices; and



1270

FINANCIAL CON
DITION OF THE TO TED STATES
O

2. An increase in overall effective demand sufficient to keep the
spiral going. As prices generally keep rising, a larger and larger
volume of demand (in dollar terms) is needed to sustain the same
volume of transactions (in physical terms).
As long as it persists, therefore, an inflation will always show evi­
dence of both demand pulls and cost pushes with their relative mani­
festations shifting as the inflation runs its course.
B. The tempo of interaction between rising costs and rising prices
will be speeded up if the situation is characterized by—
1. The release of a previously created overhang of pent-up money
demand (such as existed when direct controls broke down or were
relaxed at the end of the war).
I might just point out there that from the time regulation W was
taken off, in the course of a year $5 billion more was expended in that
area alone. I am not criticizing it, but that is a fact.
2. The creation in volume of new money demand through excessive
credit expansion and/or activation of existing cash balances (such as
happened when war broken out in Korea).
3. The widespread existence in the economy of escalators which act
automatically to transfer rising costs or prices into rising prices and
costs (cost-of-living clauses in collective-bargaining agreements, costplus contracts, etc.).
4. The degree to which a speculative psychology backed by effective
demand pervades business decisions.
C. The tempo of interaction between costs and prices will also be
affected by the degree to which administered prices and wage rates
are prevalent in the economy. These effects are not always in the
sam direction. The net effect of the many and various factors in­
e
fluencing administered prices and wages sometimes tend to slow up
and sometimes to accelerate price movements, depending upon the par­
ticular circumstances.
D. Whatever the mix of the above ingredients, an inflation once
underway will tend to persist as long as the credit necessary to finance
the rising level of costs and prices is forthcoming. Credit may be sup­
plied through new bank credit expansion or by activation of already
existing money.
E. What its antecedent characteristics, an inflation will tend to
feed upon itself and be accentuated once the investing and saving pub­
lic come to think of further inflation as the prospect.
F. It is the nature of inflation hedges to act as aggravating rather
than equilibrating factors.
G. No one suffers more than the little man from the ravages of in­
flation.
H. A monetary authority dedicated to promoting the public wel­
fare must not relax restraints in the face of continuing inflationary
pressures, since any efforts to relax merely add to the forces tending
to keep the inflation in motion.
Mr. Chairman, I want to conclude this phase of my statement with
n call for action.
W H A T MORE CAN BE DONE?

How, then, may further inflation be restrained ? Bluntly, the an­
swer is to be found in a moderation of spending, both governmental
and private, until the demands for funds are balanced by savings.



FINANCIAL CONDITION OF THE UNITED STATES

1271

This prudence m be coupled with sound fiscal policy, which m
ust
eans
alarger budget surplus as well as effective monetary policy to restrain
the growth of bank credit.
Among the factors influencing 9aving and consumption are those
fiscal policies relating to taxes and governmental budgets. These re­
quire special attention because they are not as responsibe to changes
in the availability of credit and interest rates as are private activities.
Untimely fiscal policies can create or aggravate im
balance in the
economy and thus dilute the effectiveness of monetary policies. On
the other hand, fiscal m
easures that help to maintain balance can re­
duce the degree of restraint that monetary policies might otherwise
have to exert.
Experience over the centuries has demonstrated that there is no
tolerable alternative to adequate fiscal and monetary policies, operat­
ing in an environment of open, competitive m
arkets under our system
of hum freedoms.
an
Neither an economic dictatorship nor complacent acceptance of
creeping inflation is a rational or tolerable way of life for the Ameri­
can people.
There is no panacea, no magical m
eans of assuring orderly economic
growth, nor are we much more likely in the future than in the past to
achieve perfect performance in the timing and execution of policy
andaction.
W have every reason to believe, nevertheless, that we can discern
e
and follow the right path. Thus, it is clear that the present situation
calls both for a larger budgetary surplus than we have had or have in
prospect, and a continuance of restraint upon creation of new sup­
plies of money.
ACTION REQUIRED

I«t us not follow the defeatist path of believing that widespread
unem
ploym is the alternative to inflation.
ent
There is no question that the Federal Government and the American
People, pulling together, have the power to stabilize the cost of living.
The only question is, whether there is the will to do so.
. If the will is there, and it is demonstrated convincingly to the Amer­
ican people, the cost of living can be stabilized, interest rates will
relax, and a sufficient volume of savings will be encouraged to provide
for the economic growth needed in this generation and the next.
I might say parenthetically here that I amone of those who believe
haven’t even scratched the surface so far as the potential developtoent and opportunities in this country are concerned.
This committee and the Congress can contribute greatly to that end
?y declaring resolutely—so that all the world will know—that stabil­
isation of the cost of living is a primary aim of Federal economic
policy.
The goal of price stability, now implicit in the Employment Act,
be m explicit by a straightforward declaration and directive to
ade
wl agencies of the Government that antiinflationary actions are to be
“ ten promptly whenever the cost of living begins to rise.
The executive and legislative branches of Government, in conjunccan assure adjustment of Federal revenues and expenditures so
in times when total spending threatens to burst the bounds of
••'P and drive up the cost of living, the Federal Government will
acity



1272

FINANCIAL CO DITION O THE UNITED STATES
N
F

set an example of restraint in outlays and at the same time produce
a surplus to counter inflationary pressures from any quarter.
The Congress and the Executive can take steps to assure that free
and vigorous competition is maintained in all segments of the economy
as the Dedrock of our free-enterprise system.
The Federal Reserve System, itself a creation of the Congress can—
and I assure you that it will—make every effort to check excesses in
the field of money and credit that threaten the cost of living and thus
undermine sustained prosperity and growth of our economy.
In all of these ways we can, if we have the will, set the face of the
Nation so resolutely against inflation as to keep that enemy from our
gates.
No greater tragedy, short of war, could befall the free world than to
have our country surrender to the easy delusion that a little inflation,
year after year, is either inevitable or tolerable.
For that way lies ultimate economic chaos and incalculable human
suffering that would undermine faith in the institutions of freemen.
The C h a i r m a n . Thank you, Mr. Martin.
Mr. M a r t i n . I would like at this point, Mr. Chairman, if I could,
to askMr. Wayne, who is the first vice president of the Federal Reserve
Bank of Richmond, one of the banks that has performed yeoman serv­
ice in explaining our activities to the public through the years, if he
would put on as the concluding part of this presentation this morning
a flannelboard presentation of the structure and organization of the
system. I would ask him to stop at the end of the structure of the
system, and I would like if it is agreeable to you to put on first thing
in the morning a continuation of his show which will take about 45
minutes, which will give our diagnosis of the situation in a little dif­
ferent way, but exactly in parallel to what I have put in the printed
statement that I have here and having completed that, I would then
open myself to questions and I will go immediately to trying to get
the answers to these questions that you have given me here, and try
to get them up here just as quickly as I can.
The C h a ir m a n . You have completed your initial statement as I
understand it.
Mr. M artin. I have, sir.
The C h a i r m a n . Do y o u have charts?
Mi*. M artin . Yes, Mr. Wayne, will you take over at this point, sir?
STATEMENT OF EDWARD W AYN E, FIRST VICE PRESIDENT,
FEDERAL RESERVE BANE OF RICHMOND

Mr. W a y n e . Mr. Chairman, we would like to place on this flannel­
board a diagram of structure of the Federal Reserve System to illus­
trate what Chairman Martin has been saying.
Certain features of the Federal Reserve System are in sharp con­
trast to those of foreign central banks. Most notable is the apparent
determination of the founders of the system that exercise of system
powers would be based upon a blending of divergent views and experi­
ence. It lias been said that in the determination of policy the plurality
of origin is an essential aspect of the competition of ideas which marks
the democratic process.
Representation on the policymaking groups within the Federal Re­
serve System reaches into ail regions of the country. Balance of



FINANCIAL CONDITION OF THE UNITED STATES

1273

pow within the System rests with the Board of Governors of the
er
Federal Reserve System, but the System organization was so designed
that we might have asingle national credit policy based upon informa­
tiondrawn froni the widest possible practical day-to-day contacts with
different areas in the national economy.
The structure of the Federal Reserve System includes m than
ore
6,400 m ber banks. Not quite half of the commercial banks in the
em
United States belong to the Federal Reserve System but these banks
,
hold about 85 percent of the Nation’s banking resources. The law
stipulates that these m ber banks m provide the capital for the
em
ust
1 Federal Reserve banks. Each m ber bank m be required to
2
em
ay
subscribe to the capital of its Reserve bank an am
ount equal to 6 per­
cent of its capital and surplus, but only half of that am
ount has been
paid in. The other 3 percent is subject to call.
The 12 Federal Reserve banks operate all told 24 branches, and
w these 36 offices throughout the United States perform m
ith
any
public services. Among others providing the currency needed to m
eet
seasonal and other dem
ands of the economy, clearing of checks that
are so essential in the functioning of a highly developed exchange
econom making telegraphic transfer of funds for m ber banks
y,
em
and their custom
ers, making appropriate loans to m ber banks
em
temporarily in need of funds, acting as fiscal agent of the United
States Government in issuing and redeeming Government securities
and handling the Treasury’s principal checking accounts and so on.
Profits are not the object of operation of the Federal Reserve banks
andtheir stockholders, the m ber banks, do not have the usual rights
em
of owners . They do elect six of the directors of the Federal Reserve
banks. Class A directors may be and usually are bankers, but 3 of
th 6 directors elected by m ber banks may not be bankers. They
e
em
m be neither officers nor directors nor employees of banks, and m
ay
ust
b actively engaged in commerce, industry, or agriculture in the dis­
e
trict which they represent.
Now the Board of Governors of the Federal Reserve System, as
yougentlemen know, comprises seven m bers appointed by the Pres­
em
ident with the approval of the Senate. Each m
ember is appointed
to 14-year terms, and the terms are so staggered that 1 appointment
expires every 2 years. No 2 m bers of the Board may come from
em
any 1 Federal Reserve district. The Board of Governors appoints
th remaining 3 directors of the Federal Reserve bank, class C
e
directors, and from these directors the Board of Governors desig­
n
ates 1 of these class C directors as Chairman and 1 as Deputy
Chairm
an.
These class C directors can be neither officers, directors, nor em
­
ployees of banks. In fact they are prohibited by law from being even
stockholders. These directors together with the 150 plus directors of
thebranchesprovided an unparafleled source of economic information
essential to Federal Reserve policy formulation.
The Board also exercises general supervision over the individual
Federal Reserve banks. The m bers of the Board sit as m bers
em
em
°f the open market committee along with five of the presidents of
the Federal Reserve banks who are elected by the Federal Reserve
bank directors. As Chairman Martin has pointed out, 4 or these 5
ar®on rotation service.




1274

FINANCIAL CO D N O THE UNITED STATES
N ITIO
F

The Federal Reserve bank directors also elect the members of the
Federal Advisory Council, one from each of the districts, usually a
banker. The Federal Advisory Council advises the Board of Gov­
ernors on matters of current interest.
The basic tools of monetary policy are reserved 1 to each of these
3 groups. The Board of Governors determines the Reserve re­
quirements of member banks. It also administers selective restric­
tions, when they are in effect, determines the maximum interest rates
paid by member banks on time deposits and has many other respon­
sibilities.
The open-market committee is responsible for the determination
of open-market policy. The New York Federal Reserve Bank acts
as agent for the system in executing the mechanics of open-market
operations for the obvious reason that the money market is physically
located in New York City.
The directors of the 12 Federal Reserve banks establish the discount
rate subject to review and determination by the Board of Governors
of the Federal Reserve System. The directors are also responsible
for the discount policy of the Reserve banks within the provisions of
regulations issued by the Board of Governors.
So this, in a diagrammatic form, is the Federal Reserve System, a
unique istitution designed by Congress to assist in meeting the credit
and monetary needs of a large, diversified, and complex economy.
The power of decision over the 3 basic instruments of monetary policy
are divided among these 3 bodies. The organization of the System
was designed to insure that the vitally important decisions in the
field of monetary policy would be made on the basis of maximum
evidence and informed judgment in the crucible of the conflict of
views and ideas.
(The chart referred to follows:)




FINANCIAL
C N ITIO
OD
N
O TE
F H
U ITED
N
ST T S
AE
1 275




1276

FINANCIAL CO D N O THE UNITED STATES
N ITIO
F

Mr. W a y n e . Mr. Chairman, that concludes the brief presentation
of the structure of the Federal Reserve System through the use of
visual aids. As Chairman Martin says, with your permission we
would return to the other portions of our presentation tomorrow.
The C h a i r m a n . We have a half hour yet.
Mr. M artin . I would like to hold it over because it will go too long.
Then it would go past 1 o’clock and I would like to bring these up
a little closer too if I could, for the overall presentation, if you
wouldn’t mind.
The C h a ir m a n . How long will it take tomorrow to complete it?
Will you have any further statement?
Mr. M artin . No, I won’t have anything further. We can speed
this up a little bit, but I would like to get that whole presentation in
if I could.
The C h a ir m a n . How long would it take tomorrow ?
Mr. M artin . Tomorrow we could do it in an hour, I’m sure, and
then we can take questions.
The C h a ir m a n . What is the pleasure of the committee ?
Senator F landers. Mr. Chairman, I hate to stop. I would like to
keep going and if there is an hour’s presentation tomorrow, why can’t
we have it now?
M r. M artin . I think it would be better for the continuity if we
could be sure we went through the whole thing, Senator Flanders.
The C h a ir m a n . I think the chairman has made his plans and as
far as I am concerned I would be willing to comply with them.
Is there any objection ?
Senator B enn ett . Further, Mr. Chairman, if an orderly and full
presentation would require a little more than an hour, I would rather
the time tomorrow than have them feel that they are under pressure
to crowd it in.
The C h a ir m a n . There will be an hour or more for questioning to­
morrow. Without objection the committee will recess until 10 o’clock
tomorrow morning.
(Whereupon, at 11:35 a. m., the hearing was adjourned, to recon­
vene at 10 a. m., Wednesday, August 14,1957.)




INVESTIGATION OF THE FINANCIAL CONDITION OF
THE UNITED STATES
WEDNESDAY, AUGUST 14, 1957
U nited S tates S enate,
C ommittee on F inance ,
W ashington , D . O.

The committee met, pursuant to recess, at 10:10 a. m., in room 312,
Senate Office Building, Senator Harry Flood Byrd (chairman) pre­
siding.
President: Senators Byrd, Kerr, Long, Smathers, Anderson, Gore,
Martin, Williams, Flanders, Carlson, Bennett, and Jenner.
Also present: Winfield Riefler, assistant to the chairman, Board of
Governors, Federal Reserve System; Woodlief Thomas, economic ad­
viser, Board of Governors, Federal Reserve System; Edward A.
Wayne, first vice president, Federal Reserve Bank of Richmond;
George W. McKinney, Jr., assistant vice president, Federal Reserve
Bank of Richmond; Robert R. Fentress, assistant cashier, Federal
Reserve Bank of Richmond, Richmond, Va.
Elizabeth B. Springer, chief clerk; and Samuel D. Mcllwain,
special counsel.
The C hairm an . The committee will come to order.
STATEMENT OF WILLIAM McCHESNEY MARTIN, JR., CHAIRMAN,
BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM— Resumed

Mr. M artin . I will turn the floor over to Mr. Wayne, if that is all

right.

The C h airm an . Yes; please identify him for the record.
Mr. M artin . This is Mr. Edward Wayne, first vice president of the
Federal Reserve Bank of Richmond.
Will you identify, Eddie, when you come to it, the two officers you
want to help you ?
Mr. W ayn e . Yes, sir.
The C h airm an . All right. You may proceed, sir.
Mr. W ayn e . Mr. Chairman and gentleman, in continuing this pre­
sentation this morning it is not our purpose here to forecast the future
of the dollar nor to predict the course of economic events in the
months that lie ahead.
We propose merely to recall for you certain basic facts and funda­
mental economic principles with which the monetary authorities and
all thinking citizens should be and are vitally concerned.
An American statesman recently observed that:
Within a decade this Nation has been thrust into a position of enormous re­
sponsibility in a highly uncomfortable new world.




1277

1278

FINANCIAL CON
DITION O THE UNITED STATES
F

This is the first basic fact with which we are confronted.
The free world looks to the United States for security not only in a
political but in an economic sense, and so the value of the American
dollar, your money’s worth, has meaning, it seem to us, for peoples
s
throughout the whole world.
The second basic fact is that in the past several decades our econ­
omy has undergone a fundamental shift from an economy with a
deflationary bias to one with a distinctly inflationary bias.
From the days of the earliest settlers in this country until per­
haps the early part of this century, one of the prime limiting factors
in the Nation’s fabulous growth was the inability of the money supply
to adjust itself to a rapid expansion.
As the population grew and spread, the country was plagued with
a series of so-called money panics. Our money supply simply could
not adjust itself with sufficient rapidity to meet the growing needs
of the economy.
As all of you gentlemen know, one of the stated objectives of the
Federal Reserve Act was to achieve an elastic currency. Our prob­
lem in recent years has been too much money rather than too little
money most of the time.
In the past couple of decades we have also accelerated this shift
to an inflationary bias in our economy by certain measures which
have gained wide acceptance, and many of which have been written
into tne laws of the land.
In addition to antideflation curbs which have been built into our
economy, the Congress has declared it to be the established policy of
this Nation to exercise the powers of Government to achieve and
maintain employment and production at maximum sustainable levels.
In other words, we are now confronted and must deal with a
changed and changing situation. As the economists would say, we
have a new “frame of reference.”
The third basic fact is that in the past several years this inflationary
bias has been intensified by the pressures of World War II, by the
Korean conflict, and other developments, with the result that your
money’s worth, our money’s worth, has been under severe attack.
The ensuing inflation has cut the value of our dollar almost in half,
in terms of pre-World War II levels—it is now a 49-cent dollar.
With your permission, in making this presentation we would like
to adopt medical terminology. It seem to convey the idea satisfac­
s
torily.
If you would assum with us that the patient we are examining
e
is the economy of the United States of America, we would like to
explore the nature of the virus that infects the bloodstream of our
economy, and list the prescriptions available in our Nation’s medicine
chest.
Mr. Robert Fentress, assistant cashier of the Federal Reserve Bank
of Richmond, and Mr. George McKinney, assistant vice president of
the Federal Reserve Bank of Richmond, will assist in this presenta­
tion.
Mr. Fentress will undertake to, again continuing the use of medical
terminology, diagnose the patient’s illness; and Mr. McKinney w
ill
undertake to outline the treatments which are available to us.
Then I shall return to summarize and answer any questions you
may wish to present concerning the presentation.



FIN N
A CIAL C N IT N O THE U ITED STA S
O D IO F
N
TE

1279

This gentleman is Mr. McKinney; and this is Mr. Fentress.
Mr. Fentress?
Mr. F e n t r e s s . Much we will say this morning will be couched in
term of inflation. This is not necessarily because of the short-run
s
outlook, but rather, we do it for three reasons:
First of all, som
eone has said that today was bom yesterday. If
w are to understand where we are now, we m look at the road we
e
ust
traveled to get here.
Second, in the interest of conserving time, we shall treat only one
side of the picture. Deflation is essentially the reverse of inflation.
As we proceed, we shall see that the causes are but the opposite of
each other; even the rem
edies are essenially the sam medicine applied
e
in reverse.
The third reason is that, no matter what the short-run outlook, we
are convinced that the long-run outlook is definitely for more infla­
tionary pressures.
Well, just what has the patient’s history shown? Let’s look at in­
flation’s fever chart. It is a little hard to realize, but for the period
since the Japanese surrender in 1945, prices consum pay have risen
ers
55 percent.
Let m say here, however, that rising prices are no more the cause
e
of inflation than rising fever is the cause of a patient’s illness. Both
are but manifestations of the disorder, but both are pretty good m
eas­
ures of the extent of the disorder.
Well, let us see just what has been taking place in this postwar
period.
In August of 1945, the Bureau of Labor Statistics’ index of con­
sum prices stood at 78, based on the 1947-49 average as 100. In
er
the succeeding 10 months, business was busy converting to peacetime
production. Most wartime controls were still in effect, and the index
climbed only a couple of points.
Then what happened? Well, in June of 1946 most direct controls
were lifted. The lids were off. Rationing was abandoned. Most
controls over prices and wages were lifted. It was then that we got
im ediate proof that controls do not prevent inflation. They merely
m
damup, postpone the dem
and.
When the floodgates are again opened, this pent-up demand bursts
on the market with the effect of a tidal wave. Consum pour into
ers
the market seeking consumer goods. Business pours into tne m
arket
seeking larger plants, new equipment, and to expand inventories, and
prices are forced higher and higher.
Well, the inevitable happened. Prices spiraled. The index reached
105 as of August 1948. That was a 25-point rise in just 26 m
onths.
By then, much of this overhanging consumer dem had been
and
satisfied. Certain fiscal and monetary actions were taking effect. In­
ventory accumulation had about run its course. In fact, many busi­
nesses found them
selves in oversupply, and the pipelines were full.
A short time later, a mild so-called inventory recession got under
wav, and continued through 1949, with the index sliding to 100 as of
February 1950.
In the first half of 1950, strong upward pressure was again evident.
In spite of decreased Federal spending and a substantial rise in pro­
duction, the index climbed another point or two; and then, Korea.



[280

FINANCIAL CON
DITION O THE UNITED STATES
F

On top of this high level of business activity, we superimposed a
huge war and military-aid budget With plants already going full
blast, with labor scarce, with consumers mindful of the shortages of
H recent war and possessed of abundant disposable income and liquid
ie
savings, another buying wave was on and prices spiraled once again.
Then, in the spring of 1951, the Federal Beserve and the Treasury
reached their now famous “accord.”
Basically, this involved an agreement to permit market forces to
determine the prices of Government securities, and permitted much
more effective use of the tools of monetary policy in combating infla­
tionary pressures.
In addition, other monetary and fiscal measures were taken: “Scare
buying” subsided somewhat. The balanced inventory position
blunted the edge of consumer buying, and higher prices themselves
brought buyer resistance.
These and other factors induced a lull in the feverish rise of con­
sumer prices, and the index leveled out in March and April of 1951
at about 110. Then the Nation entered upon the most sustained
period of price stability in its history.
During the next 5 years, the index climbed only 5 points, a con­
trast of a point a month in the earlier period with a point a year in
this period.
In the spring of 1956, however, consumer prices started to rise
again, and today our index stands at 120.
Of course, a rise in prices is just another way of saying that the
dollar has depreciated in terms of purchasing power in some base
period.
Since our chart is based on the 1947-49 average as 100, an index num­
ber of 120 today means that, in terms of prices then, a dollar today is
worth only 83 cents. However, in terms of prewar purchasing power,
say 1939, a dollar today is worth only 49 cents.
Of course, the real question that all this poses is: How is our fever
chart going to read 6 months or a year from now? Will we be able
to regain this substantially sidewise movement which we had during
this period? Will deflation bring about a serious downturn, or will
persistent inflationary forces push our fever chart evenhigher?
(The chart referred to follows:)




r e fe r r e d t o f o l l o w s :)

FINANCIAL
C N ITIO
OD
N
O TE
F H
U ITED
N
ST T S
AE

1281




(The c h a r t

1282

FINANCIAL CONDITION OP THE UNITED STATES

' These are the questions, important questions, for every thinking
citizen. But they are of particular significance for the monetary au­
thorities who are charged with endeavoring to attain and maintain
economic stability.
Monetary authorities are concerned primarily with the cost andavailability of money as a means of influencing the spending stream,
attempting to moderate swings in our economy by indirection, by in­
fluencing the economic climate, and leaving to individuals the freedom
of choice as to specifics.
The objectives, of course, are to create easy money conditions when
business is depressed, and to restrain the growth in the money supply
in boom time.
Inflation creates such an aura of prosperity and works to undermine
our Nation’s economy in such insidious ways that confusion is bound
to result whenever we look only at the effects of inflation.
Inflation is so persistent and insidious, it presents one of the chief
threats to the defense of the dollar and our way of life, and for that
reason I think we should look closely at the nature of the disease and
its spread. Perhaps we should first begin by defining our terms.
We have adopted a fairly simple, nevertheless sound, definition of
inflation: “Inflation is a now of spendings in excess of the flow of
goods and services.” Conversely, “Deflation is a flow of spendings too
small to support the flow of goods and services.”
I find it easier to understand this concept of a flow of spending sup­
porting a flow of goods and services if I remember that one man’s ex­
pense is another’s income.
Let us assum that this factory is representative of any and all in­
e
dustry, and that this machine operator represents not only the factory’s
labor costs but all other costs as well. What is expense to the factory
is income to the worker and raw materials supplier.
In turn, the worker’s expenses, his suit of clothes from the mer­
chant, for example, become income to the retailer and others from
whom he buys.
The retailer then pays his clerk, replenishes inventory, with his ex­
pense becoming income to those from whom he purchases things.
So here we have the flow of spending carrying with it the flow of
goods and services. If there is no change in the now of spending, and
no change in the flow of goods and services, there can be no pressure
on prices.




FINANCIAL CONDITION OF THE UNITED STATES

1283

It is an economic truism that income can never exceed spending.
Only that which is spent can become income.
On the other hand, spending may be either more or less than current
income. We can spend more than current income by withdrawing
savings, the spending of yesterday’s income today, or by borrowing,
the spending of tomorrow’s income today.
We can spend less than current income by saving a part of it or by
repaying debt.
What is true of the individual is equally as true of business and
industry.
Government derives its income primarily from taxes. It can levy
these taxes at any point in this spending stream. Normally, the tax­
ing in and of itself is deflationary; it draws dollars from the spending
stream.
On the other hand, expenditures by Government pour dollars into
the spending stream.
Let us emphasize that these two processes, taxing and spending, are
distinct and separate.
Now, just as in the case of individuals and business, Government can
spend less than it takes in in taxes, running a surplus and retiring debt,
as it did in the first few postwar years.
On the other hand, Government can spend more than it takes in
in taxes. Of course, this spending in excess of taxes, this deficit
financing, puts pressure on priees.
In a period of mobilization, military buildup, and extensive foreign
aid, such as we have had during much of this period, not only does
this excess spending add to the spending stream, but the diversion
of strategic and scarce materials into the production of defense mate­
rial tends to limit the flow of goods available for consumers.
The result is we have twin pressures on prices—more dollars chas­
ing fewer goods.
To the extent that this excess spending can be siphoned off into
savings, the purchase of defense bonds, for example, the pressure on
prices is relieved. That is why we say that bond purchases, defense
bond purchases, are such effective anti-inflation medicine. I would
like now to convert this spending flow into dollars and cents figures
for the postwar period.







FINANCIAL CONDITION OF TH E UNITED STATES

1285

Spendings of consumers, business, and Government make up oui
total spending flow. By tracing their movements relative to the flow
of goods and services, you get a much clearer picture of the nature and
extent of our postwar inflation.
By looking ahead to probable future spendings of these components,
relative to prospective changes in output, we can make a reasonable
stab at predicting the course of the patient’s illness in the months that
lie ahead.
Let us first take a close look at the first few postwar years.
Our patient’s fever was mounting rapidly from year-end 1945
through the first quarter of 1951. During this period of roughly
5 % years, spending of consumers went up from an annual rate of
$128 billion to an annual rate of $210 billion.
Business spending for investment went up from $14 billion per
year to $57 billion per year.
Government spending at the year-end 1945 was at the rate of $55
billion a year, including $49 billion for national security. Thereafter,
Government spending fell as low as $27 billion or $28 billion. But by
the first quarter of 1951, it had risen again and totaled $52 billion,
including $27 billion for defense*
Total spending had risen from $197 billion to $319 billion, up
$122 billion.
Now, in physical terms, that is, in dollars of 1945 purchasing power,
we were able to increase our flow of goods and services in this same
period from an annual rate of $197 bulion to an annual rate of $228
billion. That is a substantial 16-percent increase in our Nation’s
production during this period of 5% years.
Now, of this $122 billion increase in spending, $31 billion was
balanced off by increased purchases of goods and services, leaving $91
billion which spilled directly into prices, and the Consumer Price In­
dex went up from 78 to 110, as we have seen on the fever chart.




1286

(The chart referred to follows:)

CONSUMER
PHYSICAL
OUTPUT

CONDITION
O TE
F H
UNITED
STATES




TOTAL
SPENDING

FINANCIAL

CONSUMER
PRICES

FINANCIAL CONDITION OF THE UNITED STATES

1287

Now, that is inflation—a flow of spending which increases faster
than the flow of goods and services. The excess spending inevitably
spills over into prices. There is just no other place for it to go.
Well, we have to look now at what enables this increase in spending
to take place. Of course, I am talking about the money supply ana
the turnover of money. I would like to make just a couple of points
here:
First, this money supply includes deposit money as well as cur­
rency. You can spend by check perhaps even more readily than with
cash.
Second, the most common way in which the money supply is
increased is through the making of loans by banks or the purchase
of securities by banks.
To illustrate this bank creation of money, let us look at what
happens when a bank makes me a loan.
Normally, the proceeds of this loan would be credited to my check­
ing account. This now means that I have more money which I can
spend as I see fit.
But does anyone else have any less money? No. There has been
a creation of deposit money which did not previously exist, and this
country’s money supply has been increased in exactly the same amount.
Money is created in just the same way when Government bonds are
sold to our banks. From year-end 1945 through the first quarter of
1951, our money supply rose from $102 billion to $113 billion.
But that was not all of it. We were also spending our money
faster.
That $10 bill which we got yesterday and spent again today is
going to be turned over many times during the year. It woula be
almost impossible to measure the number of times it is turned over.
But we can measure the turnover of checking accounts, and they are
money, too.
At year-end 1945, the turnover of checking accounts at 338 centers
in the country was at a rate of 14 times per year. That means simply
this: For every hundred dollars average balance which I might have
in my checking account at year-end 1945,1 was writing, at an annual
rate, $1,400 worth of checks.
By the first quarter of 1951, instead of $1,400 worth of checks, I
was writing checks at an annual rate of $1,900 for every hundred
dollars average balance in my checking account.
Now, these are the factors which permitted the growth in spending.
The swollen spending stream relative to the flow of goods and services
is the inflation. The inevitable result is a rise in prices.
Now let us look at another period of just about the same length,
the 634 years since the first quarter of 1951.




1288

FINANCIAL CON
DITION O THE UNITED STATES
F

During this period, each of these components of spending for output
increased once again. These permissive factors went up. The money
supply, $113 billion in 1951, is now $133 billion.
We still have been spending our money faster. The turnover of
checking accounts today is 23 times a year.
Each of these components of spending for output has increased sub­
stantially. Consumer spending is up from $210 billion fo $278 billion.
Business spending for investment is now at $69 billion, while Gov­
ernment spending has gone up to $87 billion per year. Total spending
is up from $319 billion to $434 billion.
But in this period, we were able to hold our flow of spending to a
more reasonable relationship to the flow of goods and services. This
time our physical output went up from $319 billion to $386 billion.
That is about a 21-percent increase in our flow of goods and services
in 6% years, despite the fact the flow of spending was not increasing
quite so rapidly during this period.
Of this $115 billion increase in spending, $67 billion was balanced
off by increased flows of goods and services, leaving only $48 billion
to spill over into prices; and the consumer price index climbed only
10 points.
As we saw from the fever chart, 5 of these 10 points have been since
the spring of 1951----Senator B e n n e t t . 1956.
Mr. F e n t r e s s . 1956, excuse me.




(The chart referred

to f o l l o w s : )

CONSUMER
TOTAL
SPENDING

PHYSICAL
OUTPUT

*

10
1
e

■

CONDITION
O
F
THE

78;

UNITED
STATES

1289




r»

FINANCIAL

CONSUMER
PRICES

1290

FINANCIAL CONDITION O THE UNITED STATES
P

Mr. F e n t r e s s . Whatever the future holds for our patient, the chills
and fever he faces from time to time arise from a common cause: A flow
of spending either too large or too small to support the flow of goods
and services which this Nation’s productive capacity can turn out.
With this, we have completed our diagnosis of the patient’s illness.
Now George McKinney will list the prescriptions available to treat
the illness.
The C h a i r m a n . Thank you very much, Mr. Fentress.
M r . M c K i n n e y . Let us now take a look at our Nation’s medicine
chest and see what prescriptions are available to treat this malady of
instability in our economy. What are our prescriptions for stability ?
Logically, the most desirable treatments are going to fa ll under the
heading of nature’s remedies. Most frequently mentioned as an anti;nflation cure is increased production.
i
! But increased production carries with it a certain amount of spend­
ing arising out of the payments for the goods and services, so that it
also adds to the spending stream and you do not necessarily come out
ahead on that.
We did have, as Mr. Fentress pointed out, a 16-percent increase in
5% years immediately after the end of the Second World War, but it
was not enough to match the rise in our spending.
The real contribution in this area is from increased productivity, in­
creased output per every man-hour worked. This increased produc­
tive capacity is pretty generally brought about by business investment,
bigger and beter plants and equipment, better tools to work with.
A t the time that business is spending for the acquisition of new
plant and equipment, it is pouring additional dollars into the spend­
ing stream and actually intensifying the inflation process.
But once the additional productive capacity becomes available, the
larger flow of goods and services materially serves to offset the excess
spendings that are bidding up prices.
During the postwar period, we had some unusual increases in pro­
ductivity. At times it has been more than double the 2 or 3 percent
traditional annual increase.
The second of nature’s remedies is increased savings. By “saving,”
I mean the negative act, not spending. We save, as Mr. Fentress
pointed out, when we build up our liquid assets. We also save by
repayment of debt.
Any dollar that we save pulls out of this spending stream one dollar
which does not continue to go around bidding up prices.
Increased saving also contributes to the long-run solution of the
inflation problem by making available true savings which can be used
to build up the capital stock of our country. That, of course, would
increase tomorrow’s productivity and offset some of that flow of spend­
ing when the productive capacity becomes available.
This particular medicine can be too effective. Back in 1933, we
were saving every dollar we could get our hands on, and we saved so
much that it shrunk this spending stream to a point where it could
not support our maximum sustainable flow of goods and services, and
a substantial portion of our Nation’s resources were wasted in idleness.
But saving has been very effective in a more helpful way in the
past 6 years. Following the accord between the Treasury and the
Federal Reserve in the spring of 1951, consumers substantially in


FINANCIAL CONDITION OF TH E UNITED STATES

1291

creased their rate of saving, principally because they cut down on the
amount of dissaving that they were doing.
The net rate of saving in the spring of 1951, the first quarter, was
about 3 1/2 cents out of every dollar of income available after taxes.
By the fourth quarter of 1951, that rate had gone up to 9 cents out of
a dollar of income.
Since then, it has fluctuated. Now it is more than 7 cents we are
saving out of a dollar of income after taxes, more than twice the rate
of saving when this fever chart was shooting up so rapidly.
Saving was one of the very effective factors contributing to the
leveling off of the price index.
If nature’s remedies prove inadequate to solve the problem of infla­
tion, what is our next logical step? It is the use of preventive
medicines.
These preventive medicines fall under the heading of fiscal policy
and monetary policy.
Fiscal policy relates to any action of government in the field of
taxing, spending, and the management of the public debt. That, of
course, includes Federal^ State, and local government.
We usually think in terms of the Federal Government, for a couple
of reasons: One is that two-thirds of this $87 billion total is Federal
Government spending for goods and services; and secondly, the Fed­
eral Government is concerned with the effects on the spending stream
of their taxing and spending activities.
Reduced spending is a very effective anti-inflation medicine. To
the extent that you can cut down on the number of dollars that Gov­
ernment pours into this spending stream, a contribution is made
toward solving the problem of inflation.
Increased taxes are, within limits, directly deflationary. Of course,
too high tax rates can have adverse effects by substantially diminish­
ing the incentive to produce, but basically, taxation pulls dollars from
this spending stream, thereby serving to reduce it and countering in­
flationary pressures.
The third fiscal policy medicine: debt management. The manage­
ment of the public debt, tailoring it so that it fits conditions in the
economy at the time, plays a very important role in the treatment of
the virus of inflation. To the extent that our national debt can be
placed in the hands of nonbank investors, we avoid creation of new
money.
The most important medicines of monetary policy fall under the
heading of general treatments, general restrictions. These treatments
mark out the bounds of play.
This illustration is supposed to be a football field. This marks out
the bounds of play, but does not restrict the actions of the individual
Players.
The indirect influence of these general treatments is brought to bear
through member-bank reserves. These member-bank reserves are the
key to the money-creating process, and the key to the way in which
banks are able to create money. By affecting the access of banks to
reserves, these general monetary medicines influence the cost and avail­
ability of money, which in turn exert an influence on this spending
stream.

0 6 3 5 — 3---- 6
3 3 — 7 pt.



1292

FINANCIAL CON
DITION OP THE UNITED STATES

This influence is in no way punitive. No individual is told what he
can or cannot do. Bather, it seeks to help bring about a flow of spend­
ing just adequate to support our maximum sustainable flow of goods
and services so that there is no excess spending to be wasted in price
increases, on the one hand, and, on the other hand, there is no wastage
of our Nation’s resources in idleness.
These influences are applied in three ways:
First, reserve requirements. The laws of the Federal Government
and of the several States prescribe certain reserves which must be
maintained by the banking system. These requirements determine the
extent to which banks have access to these reserves, and determine the
extent to which banks can create money on the basis of a given volume
of reserves.
Actually, it is these excess reserves, reserves in excess of require­
ments, which are the focal point of these monetary medicines.
The Federal Reserve System, whose member banks hold 85 percent
of the banking resources of this country, can vary these reserve re­
quirements, increasing them or decreasing reserve requirements within
limits prescribed by law.
Increasing them has a double-barreled anti-inflationary effect.
Here is how that works.
Under current conditions, $1 of reserves will support about $6 of
deposit money. Banks usually carry some excess reserves. An in­
crease in reserve requirements will serve to wipe out some of these ex­
cess reserves by making them required reserves.
Secondly, an increase in reserve requirements cuts down on the ex­
pansion potential of new reserves. Whereas the banking system now
can create $6 deposit money if it is supplied with $1 of new reserves,
if reserve requirements were increased from one-sixth of deposits to,
say, one-fifth of deposits, then $1 of new reserves would permit the
creation of only $5 of new deposit money.
This is a very effective medicine, but changes in reserve require­
m
ents are drastic treatments. Their impact often is greatest in those
sections of the country which are least able to adjust to the change.
Such indiscriminate and blunt treatments must be used with extreme
caution.
Then a second medicine: Banks can borrow reserves which increases
their excess reserves and increases their lending power accordingly.
The rediscount rate, then, is our second medicine, the cost to banks
of borrowing those reserves from the Federal Reserve System. To
the extent that a higher rediscount rate, discourages member bank
borrowing, it also discourages this creation of excess reserves, because
borrowings from the Federal Reserve System are reserves.
Even when banks are not borrowing extensively, an increase in the
rediscount rate has a psychological effect, in that it is usually inter­
preted as a caution signal.




FINANCIAL CONDITION OF THE UNITED STATES

1293

Banks generally are reluctant to borrow, and they are quick to
repay when they do borrow. Therefore, when the need to borrow
becomes widespread across the country, the rediscount rate acts as a
flexible drag on further creation of new money.
This medicine, the rediscount rate, works very closely with openmarket operations which increase or decrease the needs of banks to
borrow.
Under current conditions, open-market operations, the third mone­
tary medicine, are our most effective monetary medicine, and because
of that fact I would like to trace briefly, if I could, how open-market
oj>erations have their effect.
If you will pardon me, I will not stick strictly to the way that this
occurs literally, but this is more diagrammatic.
Let us assume that institutional investors are dumping large quan­
tities of bonds on the market. Now, this will create a downward
pressure on prices. But this pressure on prices is perfectly normal,
it. happens continually in any free market when selling pressures
build up.
If those bonds are purchased by nonbank investors, let us say by the
individual’s group, then the immediate effect is a transfer of existing
money between two groups. The check given in payment for the
Wmds is deposited in the bank, increasing the deposit account of the
seller. Then it is charged against the checking account of the buyer,
reducing his checking account accordingly, and the only thing that
happens is a transfer of assets between groups, and a transfer of money
tetween groups.
But if commercial banks pick up these bonds, then again the check
piven in payment for the bonds increases the deposit account of the
seller, but there is no corresponding reduction in deposits. There is,
rather, a 1-for-l expansion of the money supply.

So banks create money when they purchase bonds from outside the
banking system.
If the Federal Eeserve System enters the picture and purchases
these bonds, again, in effect, we give a check m payment for them;
that check will increase the deposit account of the seller. The bank
which receives that check will then present it to the Federal Reserve
System for collection, and collection is effected by crediting the
reserve account of that member bank—a creation of bank reserves
which did not previously exist.
So the Federal Eeserve System by purchasing securities in the open
market can create bank reserves.

Similarly, by the sale of securities, we can destroy bank reserves.




1294
FINANCIAL
CO D
N ITIO
N
O TE
F H
UNITED
STATES




( T h e c h a r t r e f e r r e d t o f o l l o w s :)

FINANCIAL CONDITION OF TH E UNITED STATES

1295

These three medicines—the reserve requirements, which may be
increased or decreased; the discount rate, which may affect memberbank borrowing; and the purchases and sales of securities in the open
market—these three medicines can be used separately or in combi­
nation.
In addition to these general restrictions of monetary medicines, I
would like to mention one more.
In recent years, at the direction of the Congress, the Federal Reserve
System has made use of selective medicines, selective restrictions that
are designed to limit expansion of particular kinds of credit.
These have included controls over stock margins, consumer credit,
real-estate credit. Only the authority over stock margins is still in
effect.
There remains one further category of treatments available in our
Nation’s medicine chest. In the case of an emergency, such as a fullscale war, we may have a need to resort to the straitjacket of direct
controls, or we may place our patient in this straitjacket even though
he shows no signs of becoming violent.
Controls—holding the lid on prices, holding down wages, doling out
and rationing allocations of materials—these controls can be made
to work, particularly under the stimulus of patriotic motives, as in
wartime.
However, to the extent that direct controls are effective, they are
very apt to substantially diminish the incentive to produce, and may
actually intensify the inflationary problem by cutting back on pro­
duction.
Further, to the extent that these direct controls are effective, the
day-to-day decisions are taken out of the hands of the 171 million
Americans and are placed in the hands of some central planning
authority.
In any event, direct controls serve to conceal and defer and not to
cure inflationary pressures.
Well, with this, we have completed the inventory of our anti­
inflation prescriptions.

The chart referred to follows:







FINANCIAL CONDITION OF THE? UNITED STATES

1297

We also have here on the board a diagnosis of the patient’s illness
in the last 11V2 years. Mr. Wayne will summarize our discussion.
Mr. W a y n e . Mr. Chairman and gentlemen, in this particular pre­
sentation we have used this morning, I would like to say a word about
its origin. This presentation was designed essentially for use before
business groups and students, who are from time to time visitors at
the Reserve bank or who ask us to provide an illustrated discussion
of monetary theory and instruments.
It was not designed for presentation to the Senate of the United
States, nor have we changed its presentation materially. We have
shortened 1 or 2 phases of the presentation in the interest of saving
time.
We have tried in the presentation to indicate our concept of the
problem with which monetary policies deal. We tried to indicate that,
as we see the situation, all of the instruments of monetary policy are
dealing with a set of relative conditions rather than absolute condi­
tions; that this stream of spending is a changing stream, the growth
of which is essential to the expanding economy which is the objective
of all of us.
But the problem arises when there are distortions that enter into
it and when imbalance creeps into the two sides of this equation.
These monetary instruments are balancing instruments in part, and
active instruments in part.
It is not the purpose of our presentation to discuss the use of the
instruments in the recent past at all, but rather, to outline them, to
outline the problem, and on yesterday to put before you in diagram­
matic form the structure of the Federal Reserve System.
If you wish, Mr. Chairman, I can quickly place that structure on
the board so that yon can see it. Maybe you could not see it back there
yesterday.
The Federal Reserve System includes the 6,400 member banks who
by statute provide the capital for the 12 Federal Reserve banks and
their 24 branches.
The directors of the Reserve banks, of which there are 9 in each of
the 12 Reserve banks, are elected, 6 by the member banks, 3 of whom
traditionally are bankers, 3 of whom by statute may not be bankers.
The coordinating body at the center of the System is the Board of
Governors, and that is the body which appoints the remaining 3 of
the 9 directors at each of the Reserve banks, and from these 3 desig­
nates a Chairman and Deputy Chairman.
Members of the Board of Governors sit as members of the Open
Market Committee along with 5 representatives from the 12 presidents
of the Reserve banks, who are elected by these directors.
The Board of Governors supervises the Federal Reserve banks,
exercises general supervision over them.

These directors of the Reserve banks elect the m bers of the Fed­
em
eral Advisory Council, 1from each of the 12 districts.
. The instruments of the System are divided, their statutory respon­
sibility, between these three groups, the Board of Governors having
within its sole jurisdiction authority over reserve requirements; the
Open Market Committee, a merger of the tw having within its
o^
jurisdiction the direction of open-market operations; and the direc­
tors of the Reserve banks fixing the rediscount rates, subject to review
and determination by the Board of Governors.




1298

FINANCIAL CONDITION OF T H E UNITED STATES

That, Mr, Chairman, is our presentation. Thank you.
The Chairm an. I want to thank the Richmond group for this
splendid presentation. I ’m very proud of them.
Senator Kerr desires to defer his questioning, and I desire to defer
mine.
The Chair recognizes Senator Martin.
Senator M a rtin . M r, Chairman, again I want to congratulate you
upon the fine manner in which you are conducting these hearings.
Also, I would like to express my appreciation tor the very excellent
and comprehensive questions which you submitted to Mr. Martin to
be answered later.
Next, I want to congratulate you, Mr. Martin, on the splendid state­
ment you made yesterday. It was most informative. I feel that it
provides a solid foundation for further inquiry into the many phases
of the inflationary problem.
The committee and the Nation have been most fortunate in having
the benefit of the testimony of the Honorable George M. Humphrey,
former Secretary of the Treasury, and the Honorable W. Randolph
Burgess, the Under Secretary. Both are men of outstanding ability,
and nave a thorough understanding of governmental financing.
One of the most encouraging developments has been the interest
shown by Members of Congress, the press, and the general public, in
the financial situation confronting them.
Many of the problems we face today grow out of the vast expansion
that has taken place in the United States in the last half century.
No nation in all history has experienced so great an expansion in a
similar period of time.
We have the most extensive transportation system ever conceived.
Our methods of communication have improved far beyond anything
thought possible a half century ago. We have many industries and
plants located in widely separated parts of the country; many indus­
tries and plants in distant parts of the world.
A ll are brought close together by the modern systems of transporta­
tion and communication.
We have the greatest prosperity ever enjoyed by this or any other
nation, with our people almost fully employed.
Current income is at an alltime high, and spending has been aug­
mented by borrowing in every field. Public and private debt have
grown at a rate never before witnessed in this or any other country,
reaching record totals with eachpassing month.
The cost of Government has reached unprecedented heights. The
demands for credit are pressing harder and harder on the available
supply of funds, finding expression in increased interest rates.
Now, Mr. Martin, I would like to ask you a few questions. Some
of them you gave answers to yesterday, but I feel they are of such
great importance that it w ill be necessary to repeat them from time
to time.
Mr, Chairman and members of the committee, I have been very much
encouraged by the interest that the people of the United States are
taking in this hearing. I think all of them have a better understand­
ing of the monetary situation and what fiscal policies mean than we
have ever had before.



FINANCIAL CONDITION OF THE TOUTED STATES

1299

These first questions, you gave very good answers to yesterday; but,
again, I think they are so important that they must be repeated, maybe
manytimes.
What are the purposes of the Federal Reserve System as expressed
in theFederal ReserveAct ?
M r . M a r t i n . Well, the purpose, Senator, is to produce a monetary
climate which w ill be conducive to growth in the economy, and to
stableprices and to the well-being of all of us.
Those are the purposes and the objectives which the System is
directing its efforts to at all times.
I stated it herein my prepared statement—

to promote monetary and credit conditions which will foster sustained economic
growth, together with stability in the value of the dollar.

And I emphasized there that we have to translate those into human
terms, which are job opportunities, employment, and at the sam time
e
recognize that the savings of people, the money that they have pre­
served out of their th rift and industry, has to be safeguarded, also,
becausethat is their nestegg.
And that applies to older people, people who cannot any longer enter
actively into any business activities, and we must recognize the two
purposes are inseparable in that sense; and we have to recognize that,
particularly now that we have social security and pension funds and
others, there is a twofold obligation here both to provide job oppor­
tunities and to preserve the purchasing power of the dollar.
Senator M a r t i n . In the United States, we pass an act of the Con­
gress, and then as we go along we frequently interpret it in various
ways.
I would like to ask you, regarding the purposes of the Federal
Reserve System as expressed or implied in other sources, what they
are.
. M r . M a r t i n . Well, the most important additional piece of legisla­
tion, I would say, is tne Employment Act of 1946, and I subscribe fully
to the objectives of the Employment Act.
The preamble is stated for us here in the questions the chairman has
given usto answer, and it seem to me that all the efforts of the Govern­
s
ment should be directed toward achieving, as it says in that statement,
maximumproduction, maximum employment, andmaximum purchas­
ing power .
Senator M a r t i n . I think we all are in agreement with that. But I
will come back to that, because I think that is a very important thing
that all of us have an understanding of it.
Mr. Maktcn. Right.
Senator M a r t i n . What are the principal powers or functions of the
Federal Reserve System asexpressed in the statute?_
You have covered that to som extent, but I think that is worth
e
repeating.
M r . M a r t i n . Well, I have listed here the ones that seem to me to
ed
cover the entire act. We, of course, have to exercise continuous
supervision over the Federal Reserve banks. That is a full-time job
for the Board of Governors here in Washington.
We have to fix, within statutory^ limits, the reserves which the
JJ^mberbank are required to maintain against their deposit liabilities.
The Congress has given us limits upon that.



1300

FINANCIAL CON
DITION O THE U IT D STATES
P
N E

I t is 13 to 26 percent in the case of central Reservecity banks,10 to
20 percent in the case of Reserve city banks, and 7to 14 percent in the
case of country banks. Those geographical divisions "were given us
in the Federal Reserve Act. Some or us feel those divisions are no
longer particularly important, but in terms of monetary policy we
have been able to adjust within them.
We also have to review and determine the discount rates which are
established biweekly at each Federal Reserve bank subject to our
approval, and we have to consider those and determine whether, in
our judgment, the recommendations of the local banks are in accord
with national interests and our national policy.
Then we participate, as shown in the outline, with five of the pres­
idents of the Reserve banks, in the Open Market Committee, to deter­
mine the purchases and sales of securities that we feel ought to be
made at a given time, it being clear, of course, that purchases of
securities add money to the market, and sales of securities take money
out of the market.
Also, I ought to make clear there that we do not have unlimited
authority for the creation of money, because the Congress has given
us alimitation there.
The base of our currency is gold, and the Congress has stated to us
that our liabilities for the Federal Reserve notes which are issued,
and for our deposits including the deposits which the member banks
keep with the Reserve banks, which constitute their reserves, must
never exceedfour times our holding of gold certificates.
In other words, there is a lim it there. Our ratio must always be
watched, our ratio at the present time being approximately 47 percent.
S e n a to r M a r t i n . A s a m a t t e r o f f a c t, th e m a tte r o f c u rre n c y is a
c o n g re s s io n a l r e s p o n s ib ility -------M r . M a r t i n . T h a t is r ig h t .

Senator M a r t i n . Which is placed there in the Constitution, and
personally, I doubt whether Congress has the right to delegate any
of its responsibilities.
What are the principal methods or means by which you exercise the
powers in the Federal ReserveAct ?
Mr. M a r t i n . Well, we do it through the reserve requirements under
the general restrictions or limits I mentioned earlier. We do it
through the rediscount rates; that is, the rate which is placed on
the borrowing that member banks can make from us, and the discount
window is always open.
Senator M a r t i n . D o you happen to have— was going to ask one
I
of the men there a moment ago, because I think that is one of the
most interesting demonstrations that I have observed for a long while.
I was going to ask the question, and then the chairman did not want
us to take the time, as to how much money our banks now have bor­
rowed from the Federal Reserve.
Do you have those figures ?
Mr. M a r t i n . It is about abillion dollars, Senator.
Senator M a r t i n . How does that compare with ayear ago? Do you
have that information ?
M r . M a r t in . For the latest week—through August 7—it is about
double, I would say, the preceding week and about a tenth above a
year ago.




FINANCIAL CONDITION OF THE UNITED STATES

1301

Senator M a r t i n . What is the source of your responsibility to pre­
vent inflation?
M r . M a r t i n . Well, I think it is our responsibility there, which is
implicit in the Employment Act, to provide maximum purchasing
power; and we have the responsibility, whenever imbalances are
occurring in the economy, to do everything within our power to
exercise these restraints which we have, in such a way as to permit
the market forces to make the adjustments that are required to attune
themselvesto astable dollar.
Senator M a r t i n . Mr. Chairman, the next two questions are most
debatable, and if you feel they are improper, I w ill not ask you to
answerthem.
Do you consider your obligation to encourage price stability, prevent
inflation, as important as your obligation to foster economic growth,
prevent unemployment ?
Mr. M a r t i n . I do not think there is anything improper in the ques­
tion at all, Senator. I think that is the problem we are dealing with
almost continuously.
What I have come to believe in the last few years is that you cannot
completely separate the two.
I think that we have a responsibility for growth. We should in­
crease the money supply to provide for that growth. But I like to
put it in terms of a stream or a river: We should try to get the flow
of money in such a way that the growth factors can be maintained
by a growing riverbed for that stream without overflowing the banks
on either side and flooding the fields; that we should provide for
growth and we should provide for maximum employment and maxi­
m job opportunities.
um
But I believe that we undermine the stability of existing jobs and
lay the groundwork for unemployment if we do not recognize the
fact that if that money supply grows too rapidly for the riverbed,
and I am using my illustration on that, it w ill create imbalances which
will undermine existing employment, and lead to further unemploy­
m
ent.
Now, in terms of the situation that we have been struggling with in
the last 6 years, the only possible means of attaining the objectives
of the Employment Act, in my judgment, are to resist inflation.
What com first is inflation, and then deflation. In other words, we
es
are fighting deflation all the time. But under the growth potential of
expanding population and expanding needs and the pent-up demand
from the war, and the technology and improvements in services and
needs of people, partly resulting from the war, and the worldwide
grouping of needs and the development of raw materials, we have to
recognize an entirely different situation than we had in the thirties;
that the pressures here are for imbalance on the up side, for a swollen
m
oney supply, creating imbalances which w ill ultimately lead to
^rious deflation unless the adjustments which the markets can make
are made, and made at times when they can be made on a rolling ad­
justment basis, without coming to a cumulative head as they w ill com
e
to a cumulative head if excesses just run rampant, and, consequently,
*hen we reach the precipice we suddenly find everybody having to
Blake an adjustment at the sam time.
e
Under those circumstances, the objectives of the Employment Act
*^11 be completely destroyed.



1302

FINANCIAL CON
DITION O THE UNITED STATES
F

I happen to be one of those who believe that we can have fu ll em­
ployment and price stability. I am not one of those who believe that
the alternative to inflation is unemployment.
I f you are talking about temporary employment, if you are talking
about the expendiency of employment created for a period of 3 or 4
months which w ill not be sustained, that is a different thing.
I t is my conviction that, as the future is developing today, the op­
portunities for development are still unlimited, and that we have with­
in our grasp a substantially higher standard of living with relatively
stable prices—nothing is precise in this area, relatively stable prices,
for many years to come, if wejust do not fritter it away Dy trying to do
too much too fast, and believing that you can ignore excesses or can
indulge in any amount of imprudence and improvidence and expect
that the Government or someone else w ill pick up the check for you.
Senator M artin . It is going to take a lot of courage on the part
of someoneto do that controlling.
Now this question, if you do not want to get into itj it is entirely
satisfactory to me, but I think it is one of the great things confront­
ing our country right now.
I f you were faced with the choice between price stability and tem­
porary cessation of economic growth on the one hand, or creeping in­
flation and continuing economic growth on the other hand, which
would you choose?
Mr. M artin . Again, Senator, I think it depends on the point you
are at in the process of inflation.
Inflation is a process. I t is a spiral. It is excesses. I t really
does not make too much difference whether you are talking about
wage inflation, price inflation, credit inflation— are talking about
you
excesses that have their origin in imprudence and improvidence, that
take the form of a cancerous growth.
It is not a narcotic that you can just take in small doses and con­
trol. It produces a spiral.
I do not want a recession of any sort at any time. I do not want
any man to be unemployed in this country if it is possible to avoid it.
But I still think you have to come face to face with the reality that
under conditions of excess, extravagance, waste, incompetence, and in­
efficiency—under those conditions somebody has to take a loss.
This is a loss economy as well as a profit economy, and we have no
way of getting away from the fact that if a child puts his hand into
the fire—I am not saying it is a good thing he gets burned—but he
does get burned, and I think that we have got to weigh at all times,
in answering the question you have propounded, that question of
whether this economy can take adjustments and take them promptly
and properly, without destroying itself, or whether we think we are
all-powerful, masterful controllers that can prevent any pain or suf­
fering in life.
I t is my conviction. Senator, that we can recognize the forces of
the market, and that it is not money and credit policy that controls
the matter.
I am constantly talking to people who say, “You are balancing on
the thin, razor edge of inflation and deflation, and what the Federal
Reserve does w ill be terribly important; it may destroy this economy
for years to come.”



FIN CIAL C N ITIO O THE U
AN
OD N F
NITED STA S
TE

1303

I hope you w ill not mind my saying, if I really thought those people
were accurate, I think I would give up the job. I could not sleep any
more. But I just do not believe it.
I think the vitality and the strength and the capacity of this econ­
omy is so great that the Federal Reserve may make a few mistakes—
ana I think it has already made a number of mistakes, and I think
the rest of us can make mistakes—
without catastrophe. I have more
confidence in the vitality and the adjustability of this economy than
most people have, and less confidence in the ability of money or credit
policy or other Gfovemment policy to work economic miracles.
But, fundamentally, I think, Senator, that these adjustments you
are talking about have to be related to our overall objectives, and our
overall' objectives are to have maximum production, maximum em­
ployment, and maximum purchasing power. And this is acontinuous
process.
When you get out of balance, as we are today, we have more dif­
ficult problems. This thing got away from us— have said this
I
publicly a number of times, and I reiterate it— think that inflation
I
got ahead of us a little over a year ago, and we now have to pick up
som of the pieces.
e
I illustrate that by saying that of the increase in the gross national
product from 1955 to 1956, in those 2 years, over $10 billion of it—
som people may say this is a small amount, but I do not think it is,
e
even on a $400 billion gross national product—
over $10 billion of that
increase is a markup in prices with no additional goods and services.
Now, that is an imbalance for which som adjustment has to be
e
m and I do not believe that it is money and credit policy that
ade,
m that adjustment. I think the adjustment is made when demand,
akes
although still there—at a price—fades to where either prices have
to be reduced in order to stimulate demand, or adjustments have to
bemade in the level of inventories; or som businesses have to recog­
e
nize that perhaps they are expanding too fast, and that they are
developing temporary overcapacity— overcapacity permanently,
not
but temporary overcapacity—which necessitates adjustments.
I do not think there is any industry you can think of which, in
terms of capacity, has anywhere near enough capacity today for what
I conceive to bethe needs of 15 or 20years from now.
Senator M a r t i n . Thank you very much.
A ll of us assembledhere this morning—the Chairman of the Federal
Reserve Board said they have made mistakes, in Congress we have
m mistakes, asAmericans we have made mistakes.
ade
But is it not marvelous to live in a country where there is no danger
of being purged when an official makes a mistake? And if we all use
* little commonsense, we w ill come out of it.
That is why I am working so hard in this. I feel that we have
oneof the most important jobs in any committee in Congress that has
wer been undertaken; we want to have a stable economy in this coun­
try; and we want our people employed.
Industry is entitled to a profit; the farmer is entitled to a profit
o his production. But in tne long run, all of us need a stable dollar.
d
Senator Kmm Off the record.
(Discussion off the record.)




1304

FINANCIAL CONDITION OF THE UNITED STATES

Senator M a r t i n . Getting back on the record, would you recommend
that price stability be set forth as a specific goal in the Federal Reserve
Act?
Mr. M a r t i n . Well, I think it is implied in the Federal Reserve Act
today, Senator.
In my prepared statement, and I have thought about this for a long
time, I said that it might be made explicit as well as implicit, although
I think you have to recognize that this matter of price stability, as an
overall goal, is not our end.
I happen to believe firmly that money should be our servant, and
not our master. I believe inflation makes money our master.
Senator M a r t i n . Money is just a matter of convenience.
Air. M a rtin . It is just a matter of convenience, and it seems to me
that---Senator M a r t i n . As the Chairman says, it is very convenient to
have.
Senator K e r r . What a convenience. [Laughter.]
Senator M a r t i n . I can remember, Mr. Chairman, in the United
States when we did do a great deal of bartering. I lived out in the
country, and when my father and mother needed some groceries, sugar,
and salt, and so on, they took some chickens and some eggs in to town
and they bartered.
Now, of course, it is so much more convenient to have a medium of
exchange. But that medium of exchange, so people may understand
our situation, ought to be stable; is that not correct ?
Mr. M a r t i n . It ought to be stable. I personally like the definition
that money is a medium of exchange and a standard of value, and
that its basic component is confidence.
And I think that is the definition we want to keep in front of us,
at least the confidence aspect of it, all the time.
Senator M a r t i n . I would now like to ask you some questions about
the present, current inflation.
When did this current inflation begin ?
M r . M a r t i n . Well, I cannot state it precisely, Senator. I t is pretty
difficult to say that it began at any precise point.
I think those of us m the System—and mind you, the System is
not a one-man operation, for we have many varying views—I think
we began to get worried about the current aspect of inflation in the
middle of 1955.
Senator M a r t i n . And that is when y o u began to recognize it as
a----Mr. M a r t i n . We began to recognize it.
Let me go back just a little bit, if I may. In the inventory reces­
sion of 1953-54, we pursued a policy, and I think we were quite cor­
rect in our policy^ in the early stages, of adjusting promptly, to make
the inventory adjustment as orderly as possible, by easing money.
By the end of 1953 and the early part of 1954,1 personally think
that we were overdoing it a bit. We were using the phrase “ active
ease.”
One thing you find out about this is that while your weapons may
be more effective in inducing restraint than they are in galvanizing
the economy, nevertheless it is more difficult to get people to recog­
nize the need for action when it comesto restraint.



FINANCIAL CONDITION OF THE UNITED STATES

1305

And I think in retrospect that one of the errors we made was that,
in 1954, when the adjustments that were being made by the market
w culminating and the base was being laid for the recovery that
ere
w had, we got a little bit enthusiastic about increasing the money
e
supply, and we lowered our discount rate in February of 1954 from
2to 1% percent; and then we lowered it again to iy2 percent in April
of that year.
And we were then fomenting a psychology of expansion rather
than letting the natural forces take their play, and I am inclined to
think, in retrospect, that we were permitting a validation at that
time of a price level which probably was not warranted, and that we
therefore laid the seeds for som of our later difficulties.
e
Now, that is ajudgment in retrospect.
The trouble in 1955, the place where I began to get concerned, was
when it took us from April of 1954 until April of 1955 to move back
from iy2 to 1% percent in the discount rate—a whole year—
because
the constant discussion in the System was, “Well, better not take a
step, you had better not do anything to slow things down.” You see,
everybody likes expansion.
Then we went up to 1%. We later moved up successively during
1 5 in four notches. But it was from the middle of 1955 that we
95
saw what was happening there was that a decline in farm prices was
taking place on a supply-and-demand basis, but inflation in manu­
factured products, end products, som of which were affecting the
e
farmer, was already beginning to take place.
So our price stability in the last half of 1955 was, in my judgment,
not the sort of price stability you would seek. It was one end going
up and the other end going down.
I do not think we can make prices, ever. I think we can help
influence them, but we do not control prices. And I think the minute
w in the Federal Reserve, or any of the rest of us, get the idea we
e
can completely control this economy or make this economy, we are
asking for trouble.
What we have to do is to make our adjustments within the frame­
work of the flow of the economy.
Senator M a r t i n . D o you feel you acted soon enough, and do you
feel those actions were strong enough to stave off inflationary pres­
sures then present?
Mr. M a r t i n . N o ; I do not think we did. But there are differences
of opinion on that within the System.
I would think we would have been more effective if we had acted
alittle bit quicker and a little bit sharper in our movements.
Senator M a r t i n . What factors or developments preceded the out­
ward evidence of price increases that you considered as inflationary?
What brought it to your attention?
Mr. M a r t i n . Well, in the last half of 1955, the price of manu­
factured products began to rise; and then, as we approached problems
during the guaranteed annual wage negotiations with the automobile
companies, and then the steel contract later in the year, we approached
this problem of the price level during that period tilting upward.
.And at one point in 1956, in the summer or 1956, it was not very
difficult to see that imbalances existed, and that the demand was so
much greater then for certain items—
certain types of steel, at that




1306

FINANCIAL CONDITION O THE UNITED STATES
F

point, at the time oi the steel strike—demand was so much greater than
' ,v ‘
y supply under those conditions
u the stage when the shortages
disappear and the demand then changes. The demand is there, out
at a price.
Senator M a r t i n . What are you doing currently to curb inflation ?
Mr. M a r t i n . Our most recent action was merely a recognition of the
money rates that had developed in the market.
The rate on Treasury bills has been higher than the discount rate
for roughly 9 months. We work very closely with the Treasury on
this proolem; our purpose is always to assist the Treasury, but not to
guarantee the Treasury a specific rate.
During this period, we have leaned over backward, I think, not
to lead tne market, but to keep in tune with the market. And our most
recent step here occurred recently when, starting in late May, there
was a conjunction of forces in the money market which were gradually
adjusting upward that culminated in the Treasury’s offering of a
1-year, 4-percent security, followed a little while ago by an increase in
the prime rate by the banks.
And, merely as an adjustment to these pressures that we think were
already here in the economy, we increased our discount rate at 7 of the
12 Federal Reserve banks.
We are not taking any overt actions at the moment. We are watch­
ing this situation very carefully, and I could not forecast what our
policy would be for the future. But we still think, the great majority
of us in the System, that inflation or, put in terms of the man on the
street, the cost of living, is our major problem.
Senator M a r t i n . Do you believe that the inflation w ill gradually
wear itself out asyour actions produce their intended effects ? In other
words, w ill added production coming from new investments create the
supplies to meet existing demand at stable prices ?
M r . M a r t i n . Well, I think in a country as strong and as vigorous
as this, in an economy as strong and as vigorous as this economy, that
savings accumulate surprisingly rapid. It does not take too long for
savings to accumulate.
Our problem at the moment is overspending; too much spending
in relation to the available savings.
I believe the trend is in the right direction at the present time. I
believe that savings are going up, and the money supply is going up.
But the demand has increased ancl has outpaced them.
I think that the factors are in the right direction. But let us not
exaggerate the importance of money and credit policy, because we have
to consider fiscal policy and we have to consider debt-management
policy as well asmoney policy in connection with this problem.
Senator M a r t i n . Yesterday you mentioned velocity of circulation.
To what extent has this factor nullified or diminished the effect of
your actions in restrictingthe increase of the supply of money?
M r . M a r t in . I t is o u r ju d g m e n t th a t w e h a v e b e e n t r y i n g t o lo o k
a t th e w h o le e c o n o m y — e a ch tim e w e h a v e a n o p e n -m a r k e t m e e tin g .
I w o u ld lik e t o lis t, i f I m a y , th e t h in g s th a t w e a r e lo o k i n g a t.

We are looking at the requirements of the Treasury. We are look­
ing at the seasonal requirements of business. We are looking at a
growth factor in the economy, and we think that growth factor should




FINANCIAL CONDITION OF THE UNITED STATES

1307

normally be in the neighborhood of 3 or 4 percent. In excess of that
is, we think, too much.
W have let the money supply —of course, these figures sometimes
e
are changed, because you add time deposits to demand deposits, but
w usually eliminate time deposits from these figures—we have let
e
the growth of the money supply slow down to about 1 percent.
We have let the balance of the 2 percent on our 3 percent growth
take place out of the velocity of money, the turnover of money, and
w have felt that that was about right, though I think sometimes we
e
felt that perhaps we have erred abit on the side of letting the velocity
accumulate faster—it is very difficult to measure—
than the situation
warranted.
But we do not think that the economy has been starved for money,
and we have not tried to starve it for money. We do not want a
drought of money supply at all. We want the forces of the market
to haveplay.
We consider ourselves as managers of the money supply. Congress
has delegated to us the responsibility for managing this money
supply. That means there should not be an oversupply or an under­
supply.
Now, within the limits of human fallibility, that is what we are
trying to gage.
Senator M artin . I f you make som mistakes in this, it is really the
e
Congress’ responsibility. We have just simply delegated that power
to you, and it is like a commander in the Army, if he selects the wrong
m to command his left wing, it is his error.
an
So really, after all, it is our mistake, if you make one.
Mr. M artin . Well, I do not know. We may make such mistakes
that you should remove us, but we are trying to serve as trustees for
your under the trust indenture which you have given us in the Fed­
eral Reserve Act, and within the latitude prescribed by that act.
The Chairman . At least we w ill not send you to Siberia. [Laugh­
ter.]
Senator M artin . Mr. Chairman, you have referred to the cost-push
effect on prices. The annual report of the Federal Reserve Board,
page 5, in discussing wage and price movements in 1956, states, and I
will quote:

Wage increases were widespread, and increasing numbers of wage agreements
covered a period of more than 1 year and incorporated cost-of-living escalator
clauses and automatic annual wage increases.
Tbe increase in average hourly earnings in manufacturing, amounting to 6
Percent in 1956, exceeded the rise in output per man-hour. About half of the
tain in hourly earnings was matched by the rise in consumer prices.

Is there any reason, as things stand today, that this w ill not be
true this year and in the years to com
e?
Mr. M artin . Well, that is a difficult question to answer.
Senator M artin . I know it is a very difficult one.
Mr. M artin . It is a veiy difficult question to answer. Senator.
I can only say I think if we can bring the nature of this problem
to the attention of everyone, it is possible that we can get a little better
*elationship.
. I w ill not say that any one of these things is the controlling factor
11setting things out ox line. But I think cumulatively we ha' e a
1
problemto deal with.
Mesa— 7 pt. a 7
5— —



1308

FINANCIAL CONDITION OF THE UNITED STATES

Senator M a b t i n . In fact, had not wage gains exceeded productiv­
ity gains since 1940$
Mr. Martin. I just do not know.
Senator Mabtin. I know that comes from another.
Mr. Martin, you have referred to monetary and fiscal policies as the
two important anti-inflationary tools of Government. You have also
said that industry, labor, and individual citizens must contribute their
part.
Just what can anybody do about the income demand on the price,
and spending by each or these? I would appreciate it if you would
comment on the governmental side of it first.
Mr. Martin. Well, on the governmental side, I have already pointed
out the necessity, under current situations, for a larger surplus, a
larger budgetsurplus, than we havehad.
l am not critical of anyone on the budget problem. I do not know
enough about it. But I think what you have got to recognize here
is that this is a rich country. We can support the programs we have
to support.
But we have to see our way clear to paying for them, and we have
got to provide taxes to cover programs that we think are essential^ or
to find some means of diluting some other program and keeping
within this spending-savings stream that is the heart of our problem
and the heart of our debt.
It seem to m that it is absolutely essential that we recognize that,
s
e
and that we try to get across to everybody that the inflation is not
inevitable, that it can be halted, it can be minimized.
But if we let this psychology which is the factor that has come in
the past year and ahalf that has caused us more concern than anything
else, this psychology of the inevitability of inflation, carry us away so
that you impair the saving investment process, then we will not be
able to finance the programs that are essential to the country, and
we will find a steady erosion of our dollar and, ultimately, I think,
a change in all of our institutions and the nature of our society.
Senator M a rtin . Have you given any thought to the effect this
cutback in defense spending may have upon our economy ? That it
may cause unemployment in certain segments of our industry? Have
you given any thought to that?
Mr. Mabtin. I would hope that, if it does, the employment could
be taken up in other segments of the economy.

Senator M a rtin . That is what we all hope. Of course, there is now
talk of decreasing the ground forces by at least 100,000 men. We are
bringing many troops back from Japan and other parts of the world,
and those men will be thrown out on the economy, and they must have
jobs. Do you feel there are enough of them that it will have any
serious effect on our economy ?
Mr. M a rtin . I amnot competent to comment on the military aspects
of it, but so far as the economy is concerned, I think there is still,
asI have said previously, unlimited opportunity here for development.
I think we have to recognize in this armament field, Senator, as you
know as well as I do, that there are some people who think that arma­
ment is a great blessing, because if we cut armament we are going
to collapse. I think that is a completely false thesis. I think that
is part of the thesis that war per se is a good thing.




FIN CIAL C N ITIO O THE U ITED STA S
AN
OD N F
N
TE

1309

We have to protect ourselves, to be sure, but the strength of our
econom is not arm ent. The strength of our economy is the pro­
y
am
duction of goods and services for individuals, apart from arm ent.
am
Senator M artin. I agree with you fully. But I think it is going
to take m like yourself to sell it to the American public, because,
en
just since this announcem has beenm I have had agreat num
ent
ade,
ber
of investors say to m “Well, that is going to cripple certain industries,
e,
it is going to put m out of employment,” and so forth. That is the
en
reason I am asking you to com
ment on it. What you say will go out
over the Nation m more than what a Senator will have to say.
uch
Mr. M artin. No one likes cuts. Nobody likes to take a loss.
Senator M artin. I agree with you fully, and I hope the day will
com when we do not have, when it is not necessary to have, anybody
e
under arm and I have done about as m soldiering as anyone.
s,
uch
But war is destructive. It does not create anything.
Now I would like to get back to the wage end again, and I want
to m this statem
ake
ent. I m the statem in an address last
ade
ent
Saturday, that I wanted to see every American, who wanted to work,
employed in gainful wages. I wanted to see the farmers have a
profitable sale of their production. And I felt that m who invested
en
m industry ought to have a proper return on their dollar. And I
agree in all of those things.
But there are som of these things that are bothering a lot of us
e
a great deal, and so I want to ask you som questions, because I
e
feel you are better informed than anyone, to my knowledge.
Are not wage increases continuing year by year, covering larger and
larger segm of the labor force ?
ents
M M artin . They are; but I think wage increases must be related
r.
to productivity.
1 think judging whether they are actually related to productivity
or not is something that you cannot precisely come to an agree­
m on. Thatis one of the reasons you have collective bargaining
ent
in labor negotiations.
There are som people who say they can never pay higher wages.
e
There are som labor people who say that there are no cost-price rela­
e
tionships to be considered, and I think that quite frequently the
truth is in the middle ground.
But it is real wages that we are talking about, and real wages that
w want to see increased. And we also want to have the produc­
e
tivity increases.
Senator M artin . If the productivity equals the increased cost in
^ages, there is no danger, so far as inflation is concerned?
# Mr. M artin . That is right. And if we can spread that produc­
tivity. What we want to do is to spread that productivity through
the entire economy as far as we can, and not get it imbalanced and
inthe hands of a relatively fewpeople.
Senator M artin . Are not more and more contracts including escala­
tor clauses?
M M artin . They are; and cost-plus contracts have become quite
r.
com on, also.
m
Senator M artin. Are not fringe benefits being extended by both
Government and in industry?
M M artin . They are.
r.



1310

FINANCIAL CONDITION OF THE UNITED SKATES

Senator M a r t i n . In all of this, has the supply of money aiid credit
been fully adequate to support these increasing demands?
M r , M a r t i n . I do not know whether it has been fully adequate to
support them, but it is our intention to keep a steady flow of money,
as steady a flow of money as we can have. And if that flow of
money does not cover the increases that are unwarranted, there should
be no pressure on us to increase the money supplyJust to validate
some imbalance which occurs in the economy which is not warranted
by productivity.
Again, I want to say I never wont any recession. I do not want
anybody to be unemployed. Certainly our job at the Federal Reserve
would be much better and much easier if we never had to look at a
decline of any sort. But, unfortunately, it is not made that way at
the present time.
Senator Martin. It is true that, starting with about 1819, we have
had the ups and downs in almost surprisingly equal cycles, I mean in
equal number of years. It is amazing how that has worked out. And
is it not true that most of the depressions followed too much borrowed
money?
Mr. Martin. I think that is generally correct.
Senator M artin. Of course, m the early days, it was land specula­
tion; and that was followed by railroad expansion, and different
things. We had got too much productivity for our consumer capacity,
and so on. But usually it was antedated by too much borrowing.
Mr. Martin. Borrowing is not the great blessing that some people
like to make it out to be. Debt is not. We have tended to glorify debt
in recent years, all out of proportion to the benefit that it produces.
That is not to say that I do not recognize that debt is important, and
certainly people should have access to borrowing.
But let us not forget the fact that the greatest slavery in the world
is to have people owe for borrowed money to the point that they are
just breaking their backs.
I have watched plenty of them just breaking their backs to meet the
payments.
One of the interesting things is that people who are always advocat­
ing easier terms are the people who are the least forgiving when it
comes to paying back a debt which ha9 been contracted.

That is one of the human nature facets that I have observed a good
many times.
The Chairman. Let m interrupt you to say that is one of the wisest
e
statements I have ever heard. You are right.
Senator Martin. Personally, I feel----The Chairman. And that applies to a nation as well as people.
Senator Martin. Personally, I wanted to make this addition to
what you said, Mr. Chairman: That governmental debt is even more
dangerous than corporate or individual debt. Individuals and corEorations have the means of creating wealth. Government does not
ave.
Government is just created for the purpose of defending and render­
ing service. Take here in the United States, our first job was to ar­
range for our defense. That was against the Indiana-




FIN CIAL C N ITIO O TH U ITE STA S
AN
OD N F E N D
TE

1311

And then, as we became anindependent country, to defend ourselves
against other countries.
So debt is a dangerous thing. And, of course, we have got to have
it But I have been worried, and I wonder what your thought is, as
to whether or not we do not now have in this expansion too m
uch
debt ascompared withtheequity capital.
M M artin. Well, I would not want to m a categoric statem
r.
ake
ent
onit, but I thinkthetrend hasbeenin that direction.
Senator M artin. At one tim I thought I would put in the record,
e,
M Chairman, the am
r.
ount of debt owed by the 20 largest corpora­
tions in the United States. And, I will tell you, w you study it, it
hen
worriesyou alot.
You referred yesterday to the dangers arising from expectations
of inflation. When it is here, how are people to avoid behaving
on the basis of expectation when it affects us, being felt daily ana
over aperiod of time ?
I do not know whether I have m that entirely clear or not. The
ade
American people are rugged individualists. They want to take care
of their own situation. And when we have this expectation of infla­
tion, they are worried about it.
M
agazines and commentators comment relative to it. Congressm
en
andSenatorsm speeches relative to it.
ake
I would appreciate a little further comment on that from you.
M M artin . Well, I would only reiterate the closing part of my
r.
statem yesterday, Senator, and say that I think you can destroy
ent
the cynicism of people on a matter of this sort when they see actions
beingtaken, andresolutedetermination.
And when they see, they notice a relationship between stocks and
bonds, for example; that is where the process does begin to work.
And people see that the yield on stocks is not as high as on bonds,
andthereis aclosingof thegap.
Now, this takes time. This does not happen overnight. And I
think one of the most unfortunate things, ana it is one of the things
w have been dealing with, is this psychology that has come into
e
thepicture.
Senator Martin. Do you anticipate any lessening in the dem
and
for wage increases, escalation provisions, and fringe benefits, in the
foreseeable future ?
M M artin. I do not know as I do.
r.
Senator M artin. How can prices be stabilized as long as labor
leaders compete with one anotner over who can achieve the largest
W£e gains and fringe benefits, irrespective of productivity gains in
a
their respective industries or in the economy as a whole?
M M artin. I think there I can only say the problem is to reduce
r.
spending and increase saving, and get back to the fundamentals.
. Senator M artin . That is what I am trying, through these ques­
tions, to do, and you are doing wonderfully well; what I want to do
1 to get these things before the American people.
8
We in the United States, we the people, ate still the Government,
I have always had, Mr. Chairman, great confidence in the Amer­
icanpeople whenthey understandthe situation.




13X2

FINANCIAL CONDITION OF THE UNITED 8TATB8

I have great confidence in the labor groups in our country. I have
great confidence in the agricultural groups. I have great confidence
in the industrial groups.
And what I think, Mr. Chairman, w ill do more good in this investi­
gation is if we get the real situation before the American people.
That is why our questions may seem at times a little cruel, but wedo
not intend them that way, because you and your group are in position
to understand these things, and people have confidence in you.
That is the reason I am asking them. I do not want my questions
to seemcruel, and I do not want them to be that way, because I think
probably you and I have the same ideas.
I want, again, to seeevery man and woman in America who wants to
work, gainfully employed. And then I want a stable dollar so that,
at the end of the year, if they are frugal, they have a little money in
their savings account.
But a savings account is not worth anything if the dollar is not
stable; is that not correct ?

Mr. Mastin’. That is correct, sir.
Senator Martin. Can it bethat the cost-push factor in the inflation­

ary pressures w ill not subside until a better balance is achieved by
negotiations of industry nad labor over wages and fringe benefits?
Mr. Martin. I just do not know on that, sir.
Senator Martin. A ll right.
Do higher interest rates cause inflation, or do they check inflation?
Mr. Martin. Higher interest rates, in my judgment, are not a cause
of inflation.
I pointed out in my prepared statement the relative problem. In ­
terest is a wage to the saver as well as a cost to the borrower.
Now, no one deprecates more than I do the cost of carrying the
national debt, and I do not favor high interest rates. I stated that
yesterday, and I keep stating it, as I did when I was over in the House
last week.
I favor as low interest rates as it is possible to have, without pro­
ducing inflationary pressures.
Senator Martin. You are saying we want to be able to buy bread
and meat as cheaply as we possibly can, as long as it does not disturb
the economy. Of course, you cannot produce meat and bread and
clothing without a profit, in our country.
Mr. M a rtin . The heart of the problem here is debt. And interest
is one of the balancing factors, it is one of the governors, and I think
that an increase in interest rates w ill encourage saving.
I do not agree with people that interest rates make no difference.
They take a long time to operate at times. But as to interest adjust­
ments—you have to pay more if you want to borrow more than is
available out of savings; you have got to pay more.
The way to reduce interest rates is to reduce spending, and to see
the level of saving go up in relationship to it : then you have a levelingout process. And I know of no other device in a free society that can
function better as the governor on the economic flywheel than the rate
of interest.
Senator Martin. Mr. Chairman, I appreciate very much the an­
swers to the questions made by Cousin B ill, but I would like the op­



FINANCIAL CONDITION OF THE UNITED STATES

1313

portunity of asking som further questions after he has m his
e
ade
answ to the questions which you propounded to him yesterday.
ers
The Chairman. Every m t)er of the committee will have that
em
opportunity.
M M artin . I would like to have them up here Monday morning,
r.
if that is all right, Senator.
The Chairman. I want to thank the Richmond group again for
their fine presentation.
The committee will recess until tomorrow morning at 10 o’clock.
(Whereupon, at 12 noon, the committee recessed, to reconvene at
J a. m Thursday, August 15,1957.)
O .,







INVESTIGATION OF THE FINANCIAL CONDITION OF
THE UNITED STATES
THURSDAY, AUGUST 15, 1957
U nited S tates S enate,
C ommittee on F inance ,
W ashington, D , G .

The committee met, pursuant to recess, at 10 a. m., in room 312,
Senate Office Building, Senator Harry Flood Byrd (chairman) pre­
siding.
Present: Senators Byrd, Long, Gore, Martin, Williams, Carlson,
and Bennett.
Also present: Winfield Riefler, Assistant to the Chairman, Board
of Governors, Federal Reserve System; Woodlief Thomas, economic
adviser, Board of Governors, Federal Reserve System; Elizabeth B.
Springer, chief clerk; and Samuel D. Mcllwain, special counsel.
The C hairm an . The committee will come to order.
The Chair recognizes Senator Williams.
STATEMENT OF WILLIAM McCHESNEY MARTIN, JR., CHAIRMAN,
BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM—Resumed

Senator W illiams. Mr. Martin, in your opening statement, I notice
in paragraph H you state:
A monetary authority dedicated to promoting the public welfare must not
relax restraints in the face of continuing inflationary pressures, since any efforts
to relax merely add to the forces tending to keep the inflation in motion.

Do you think that with today’s controls and mechanisms of our
Government we can eliminate booms and busts phases of our economy ?
Mr. M artin . I do not think we can eliminate them completely, Sen­
ator, but I think we have it within our power to keep them within
manageable proportions.
I do not think we can ever say we can precisely determine specific
limits that will keep us on a straight line.
Senator W illiams . But that is a part of the goal which you are
trying-----Air. M artin. That is definitely a part of the goal, and our most seri­
ous objective.
Senator W illiams . Are the recent months’ increase in the rediscount
rate a part of that planned program of the Federal Reserve System
to stabilize our economy and to eliminate these booms and busts J
Mr. M artin . They are.
Senator W illiams . Do you think we have been successful in that

field?




1315

1316

FINANCIAL CONDITION OF THE UNITED STATES

Mr. M a rtin . Not entirely. I think they have had some success. But
I think, again, we must never exaggerate the influence of money and
credit policy. It cannot do everything, and we have to recognize that
fiscal policy and management o f the debt also enter into it. They all
have to work together.
We have not been completely successful in halting the present infla­
tion, but I think it would have been a whole lot worse if we had not
taken the steps that we have taken.
Senator W illia m s. You think this was one of the essential steps?
Mr. M a rtin . One of the essential steps.
Senator W illia m s. Are the rediscount rates in general tending to
lead or follow the market in interest rates ?
Mr. M a rtin . I do not think you can state that, as each individual
move has to be considered on its own. There may be circumstances
where it would be desirable for the rediscount market, if we thought
there was heavy pressure building up, to lead the market a little bit.
But generally speaking, we recognize that the market forces are the
ones that are controlling—that we can influence the market. W e
never want to take the position that we do not have any influence at
all—that market forces just produce all these changes. Otherwise,
there would not be any reason for our existence.
We influence them. We lean against the wind when we can deter­
mine which way the wind is blowing. But we never try to usurp the
function of mating the wind. Whenever we think we can make the
wind, we think we are in trouble.
Generally, in recent years we have tended to follow the market rather
than lead the market. The last increase in the rediscount rate def­
initely followed.
Senator W illia m s. Was that the same situation a couple of years
ago?
Mr. M a rtin . It was a moot point of "judgment at that time.
Senator W illia m s. It was a point oi judgment. It was planned to
increase the rates; is that correct?
Mr. M a rtin . That is right.
Senator W illia m s. That was part of the plan.
Was one of the factors that were giving you concern, the speculative
activity in the stock market at that time?
Mr. M a rtin . Yes, that was one of the factors that concerned us, and
that concerned us more in 1955 than in 1956,
The stock market was in better control in 1956 than it was in 1955.
Senator W illia m s. Then has the leveling off of the market in the
last couple of years and, we will say, the recent decline in the market
been a part of your program ?
Mr. M a rtin . We have not consciously attempted to influence-----Senator W illia m s. I understand that. But I mean, you were try­
ing to put-----Mr. M a rtin . We wanted to minimize speculation.
Senator W illia m s. Minimize speculation.
Do you feel, so far as the management of the credit is concerned,
that you have the situation under control now ?
Mr. M artin . No, I would not want to say that, Senator.
I say we are working with it every day, and we are trying to keep
a flexible policy. We want to see to it that the legitimate needs of



FINANCIAL CONDITION OF THE UNITED STATES

1317

credit are met at all times. I would not want to make the specific
statement that we have the situation under control.
I think that we are doing everything within our power to watch
it and adjust to it as it develops, recognizing that it is a moving
picture; it is a continuous operation.
And I think that, by and large, we have not been entirely unsuccess­
ful ; let us put it that way.
Senator W illia m s. What, in your opinion, are the principal causes
of the inflationary pressures which we have experienced since the
spring of 1956 ?
Mr. M artin. Well, I would say that the primary force since the
spring of 1956 has been the plant and equipment expansion. We have
had a constant pressure on the capital markets for long-term financ­
ing, some of which had been postponed for sometime m hopes that
money would get easier or that they could use bank credit in place of
long-term credit for financing.
I just happen to have some figures here which I would like to
read into the record:
Corporate financing for the first 8 months of 1957 was $8.4 billion
compared with $6.6 billion in 1956.
State and local financing, $4.3 billion in 1957 compared with $3.7
billion in 1956.
I had those figures here yesterday in hopes somebody might ask
me that.
Senator W illia m s. You mentioned the fact that the control of in­
terest rates was just one phase of the problem, and that budget was
another factor, balanced budgets.
Do you think it is more essential today than perhaps ever before
that we do maintain a balanced budget at this time ?
Mr. M artin. I think it is extremely essential that we have a larger
surplus as long as we have the spending impetus that we have, than
we have had or presently have in prospect, because that definitely
lessens the inflationary pressures.
I would like to comment on the ebb and flow of this, as I see it.
When I was in the House last week, I commented that the forces
that we are dealing with here are very much like the tides. They are
as large as the tides. We cannot stand, like King Canute, on the shore
and tell the tides to stand back. We have got to adjust to them.
When the spending stream definitely exceeds the savings that are
available for the economy, it is most unfortunate, in our judgment,
to use bank credit to supply the deficiency.
Senator W illia m s. Do you feel that Government deficits are one
of the major contributing factors toward inflation?
Mr. M a r t i n . I think tnat—*I never favor deficit financing, although
I recognize that it can sometimes have an impetus on our economy.
But again, it is like debt, that I commented on yesterday: It is not
a situation to be desired. Under certain circumstances it may be
useful, but—and I do not want to make a blanket statement on it,
but I never favor deficit financing. I think it is wrong in principle;
and I think it is not really the benefit, even when it is used, that those
'who claim it has the benefits think it has.
Senator W illia m s. How long have you been in the Federal Reserve
System, Mr, Martin?




1318

FINANCIAL CO D N O THE UNITED STATES
N ITIO
F

M r. M a rtin . I was appointed on April—I took office on April 2,
1951.’
Senator W illia m s . 1951.
.
Well, since that time, we have had surpluses about half the time,
have we not?
Mr. M a rtin . That is right.
, «
t
t +
•
Senator W h-uam s. D o you think that the deficits prior to that time
were—I will put the question this w ay: Do you think that the inflation
between 1946 and 1951 could be attributed to the deficit, or partly to
the deficit financing during that period?
.
Mr. M a rtin . That was a very difficult period, Senator, because we
pumfl out of the war period with a heavy backlog of latent pressures,
and even though we had a balanced budget and a surplus I was m
the Treasury with Secretary Snyder in 1949 to 1951 before I came
with the Federal, and I think he did an extremely good job on the
budget, the surplus that he was trying to create.
But you had dammed up through the war years a very heavy backlog of demand and of money that had been kept in control by patriotic
moves and by the specific controls that were then in existence, and I
think you have got to be very careful on generalizing about those
periods.
. . , . .
And I do not think, when you talk about the budget—I think it is
always desirable to reduce debt. I refuse to join the group of those
who insist that an increase in the debt is beneficial.
Senator W illia m s. I recognize the unusual circumstances at that
time. The reason I asked the question was that beginning with 1953,
and through 1955, we did have a rather stable dollar, and during that
period we had a balanced budget.
Let me ask you this question: Do you think that the prospective
large budget which was submitted to us this year was inflationary ?
M r. M artin . I think the impact of it was, definitely.
Senator W illia m s . D o you think that if it were approved as sub­
mitted, that it would be a major contributing factor toward inflation?
M r. M artin . Under existing circumstances, yes, sir.
Senator W

illiam s .

Y ou think it would.

Do you think that it is the responsibility of Congress and the Execu­
tive, working together, to trim that budget?
Mr. M a rtin . I do indeed, sir.
Senator W illia m s. I think you indicated that you feel your poli­
cies on interest rates are working. Do you think we have reached
the point where you can say that you are satisfied with the levelingoff process or do you think further increases in these rates are going
to be necessary ?
M r. M a rtin . I do not know, Senator. That is forecasting the
future. And I fall back on the cliche that we are watching the situa­
tion on a day-to-day basis, and trying to adjust to the moves as we
see them developing. I will not forecast the future.
Senator W illia m s. O f course, part of your work is to try to picture
and forecast the future as far as you possibly can.
Mr. M artin . Well, it is, indeed. W e have to gage it in terms of
trends.
But whenever we get wedded to a theory, whenever we start
riding a hobby, as I frequently call it, I think we are probably asking



FINANCIAL CONDITION OF TH E UNITED STATES

1319

for trouble, because the nature of the problem we are dealing with
requires us to be ready to admit mistakes, just as well as to accept
its success in what we are trying to do.
Senator W illiam s. When was the last increase in the reserve
requirements?
Mr. M artin. September 1954. That was a decrease.

Senator W illiam s. Decrease in reserve requirem
ents.

Mr. M artin. The last increase, I am sorry, the last increase was in
January of 1951.
Senator W illia m s. Do you anticipate that this management of
the credit policy is going to necessitate a change in those reserve
requirements?
Mr. M artin. Well, I hope not. I have testified on a number of
occasions that I think, for the growth that I foresee in the country,
the reserve requirements—I will probably be picked up by the news­
papermen on this—I think reserve requirements are too high. That
does not mean we are going to change them tomorrow; but I think
in terms of the long-term growth of the country, reserve requirements
are on the high side at the present time.
The two reductions in reserves that were made in 1953 and 1954
have helped adjust them in that direction, but it is our objective always
to see that the legitimate credit needs of the country are supplied.

Under no circumstances do we want to completely starve the credit
stream
.
Senator W illiam s. Would you say this inflation of today was merely
a continuation of the war born inflationary pressures of 1946 to
1950?

Mr. M artin. No. I think the inflation today is in a little different
category than that. It is hard to put your finger on it, but as I said
yesterday in answer to Senator Martin, we were worried about it,
certainly I was worried about it, from mid-1955 on.
I was not worried about it in the sense that I have been talking
about it now. The spiral, the inflation spiral, it seems to me, seems
to have begun about a year ago, in the summer of 1956. And there
the important aspect of it was psychology, in the sense that there was
general acceptance that gradually grew in the early stages of 1957,
of the inevitability of inflation, and that is the most difficult thing
to deal with, because now you are dealing with people’s expectations.
I think the inflation which we had had previously did not have
quite that spiral effect of expectation. It had the other elements in it,
but the portion that has concerned me the most has had to do with
this psychological aspect of the expectation of the inevitability of
inflation.

It just seem to m wehave got to stop that.
s
e
Senator W illia m s. Do you have any theory to account for that
psychology on the part of the people?
# Mr. M artin. Theories, I think, are very difficult. I think unques­
tionably it was connected, and I do not know what point in time
to place this, but it was connected with a conviction that spending
was going to continue on an increasing scale, and a recognition of
the fact that savings were not available in amounts to handle that
level of spending.

Now, at what point that took hold, I do not know. I suspect it
tookhold in around the turnof i heyear, 1956-57.



1320

FINANCIAL CONDITION OF TH E UNITED STATES

Senator Williams. Do you think that was the result of a submis­
sion of an extraordinarily high budget?
Mr M a rtin . I think that was one of the factors in it.
Senator W illia m s. D o you think that toe inflation in the period
between 1946 and 1950, or the recent inflation which we are ju s t
experiencing, was in any way connected with the premature release
^ M ^ m I rtin. I think that that was a factor in it, yes. I think that
you cannot—I think it is extremely difficult to analyze the transition
from a controlled economy to a freer economy. It has to be taken
m Mygownn?udgmfntewas, and I expressed it at the time to the Con­
fe s s , we would have been a little wiser, much as I disliked regulation
W if we had not released regulation W and regulation X quite as
quickly as we did in 1952, along with all the other physical controls
that were being released at that time.
. , ,
It is very easy to make statements about things that might have
been done differently, but we did ha,ve an enormous buildup and
increase in consumer installment credit as soon as those regulations
were taken off.
Senator W illia m s. What year was that?
Mr. M a rtin . That was 1952. It was in June of 1952.
Senator W illia m s. What was your rediscount rate at that period i
Mr. M a rtin . In 1952, it was 1% percent.
Senator W illia m s. D o you think that your low money rates at that
timpi were a contributing factor, in looking back retrospectively; that
you perhaps made a mistake at the same time ?
Mr. M artin . I think you have to put that in perspective. I want
to comment here, Senator, that the Treasury-Federal Reserve accord,
which was adopted on March 4, 1951, was a transition to a flexible
money policy.
.
One of the elements in that accord was an understanding that in
view of the heavy Treasury requirements, the heavy financing needs
of the Treasury for the balance of 1951, that except in a cataclysmic
situation we would not change the rediscount rate.
When you are unpegging the market, you do not unpeg it in one
fell swoop, and that applies to controls and everything else. You
have to watch it.
We have the responsibility to see that markets do not go completely
haywire. We do not want the law o f the jungle prevailing in markets.
And when we embarked upon the unpegging of the Government securi­
ties market, we faced for a couple o f years the very difficult problem
in which the ordinary criteria of money and credit policy that we
are trying to apply today could not apply, because we had to take it by
stages.
We had Government securities pegged at par and twenty-two
thirty-seconds on the long end. They came down to about 99^, and
then stabilized there for a while.
It was our hope that perhaps the demand would strengthen at that
point, and they did strengthen for a little while, and then later they
adjusted further, when the demand for credit constantly grew.
The point I am trying to make here is that, in the perspective of
this period, I think probably we did not make a mistake in our dis


FINANCIAL CONDITION OF THE UNITED STATES

1321

count rate. I think our agreement with the Treasury there—and we
always have to have the requirements of the Treasury in mind—were
such that it would have been unfortunate for us to have adjusted the
discount rate.
And I think that understanding, which was a part of the TreasuryFederal Reserve accord, was an important part of it. I do not think
you can apply the ordinary criteria to that period.
Senator W i l l i a m s . Speaking of that Treasury and Federal Reserve
accord, the Federal Reserve has always been an independent agency;
is that not correct ?
Mr. M artin. That is correct, sir.
Senator W illiams. And the Treasury acts in an advisory capacity.
As I understand it, even in 1951, the final decision was with the Federal
Reserve; is that correct?
Mr. M artin. That is correct, sir.
Senator W illia m s. At that time, you were with the Treasury or
the Federal Reserve?
Mr. M artin. I was with the Treasury.
Senator W illia m s. When you speaK of the accord you were able

to reach, apparently referring to between Treasury and Federal Re­
serve, would you say that Treasury had more to say about determin­
ing the Federal Reserve policy then than they do today?
In other words, was that change in policy on the part of the Federal
Reserve to suspend the supporting of the Government bonds a decision
of the Federal Reserve alone, or was that done upon the insistence of
the Treasury, or what ?
Mr. M artin. Well, I cannot comment about the period prior to the
accord.
Senator W illia m s. I am speaking about the accord, at the time.
Mr. M artin. That is when I am speaking about, too. The accord
was brought together in March of 1951. Immediately prior to the
accord period, I had nothing to do with that aspect of finance. I was
an Assistant Secretary in charge of international finance. I con­
sulted with the Secretary directly on the matter.
Now, what understandings there were between the Treasury and
the Federal Reserve with respect to pegging the market is not a com­
pletely clear picture as far as I can see it.
But during the war period, an understanding had grown up between
the Treasury and the Federal Reserve that, in the interests of winning
the war, they would keep Government securities at a certain level.
As we came to the 1951 period, after Korea, the early stages of the
Korean conflict, you had a rather wild, almost hysterical period of
buying and readjustments of everything that went on, and the Treas­
ury was very anxious not to have the Government securities market
unpegged.
What those negotiations were with the Treasury and the Federal
Reserve at that time, I am not in a position to say.
t Senator W illia m s. I understand that. But I would be interested
m hearing about the part with which you are familiar, because as I
Understand it, you were in on the negotiations in 1951-----Mr. M artin. I had a------




1322

FINANCIAL CO DITION O THE UNITED STATES
N
F

Senator W illia m s (continuing). When they suspended the pegging
of the Government market, and I was just wondering whether the in­
fluence o f the Treasury was greater then than it is today.
Mr. M a rtin . N o; I would not say that. What we worked out with
the Treasury then was not something that was entirely satisfactory
to the Treasury. I do not know that it was entirely satisfactory to
the Federal. It was a compromise.
Senator W illia m s . You would say that the relationships between
the two departments are still good ?
Mr. M a rtin , They are still extremely good.
Senator W illia m s . In working out that agreement to suspend the
Federal Reserve supporting of Treasury, as I understand it, a part
o f the agreement was, the Treasury Department was to call a previ­
ously floated bond issue of about $16 billion, 2 y 2s ; they were 25-year
bonds, in which they were called and refinanced at 2%, with a proviso
that each bondholder would have an option to convert those bonds
into a 5-year certificate.
I wondered what was the basis or reason behind that, of a prema­
ture calling of a long-term issue, and floating it at a higher interest
rate and putting an option on it which would make it possible to con­
vert the entire issue into what at that time was recognized would be
a higher interest rate than the other. Because, as 1 understand it,
that was the beginning of the higher interest-rate policies.
Mr. M a rtin . Well, that was to face up to the fact that there was a
persistent overhanging of Government securities that were pressing
upon the market; the sales during the period were large, $15 million,
$20 million a day, and they were growing in volume and intensity.
As the demand for credit grew, it became apparent that the entire
flood of these longer-term securities was going to come into the market.
So this convertible issue that you refer to was a device which we
worked out in the Treasury-Federal Reserve accord, to remove that
overhang from the market. In other words, to give an incentive to
these holders of long-term bonds to stay in, give them a little better
interest rate and stay in.
I f the market had firmed up, they would have a longer term piece
of paper with 2 % percent instead o f 2% percent. I f they wanted to
get out at any time, they could convert into the 5-year security, and
they would have a H/2-percent marketable issue.
It was a device to handle a specific situation that was overhanging
the market.
Senator W illia m s . Well, what was there about that bond issue
that made it any different from the other types of bonds which were
outstanding % Because there were other 2y^% outstanding at the same
time, and just what was there about this particular issue that made
it-----Mr. M artin . W ell, the fact that you gave them a 2%-percent in­
terest rate and gave them the privilege of unlocking.
Mr. W illia m s. I understand that. But what was there about this

issue which made it necessary for the Government to favor this par­
ticular issue more so than any other issue? It unquestionably cost
the Government or substantially will cost the Government a sub­
stantial amount of money. You pay more for the extra carrying
charges on this issue over a 25-year period than you would have done
had they not called it.




FINANCIAL CONDITION OF THE UNITED STATES

1323

Mr. M artin. That was where the pressure was at the time. It was
in the long end of the market.
Senator W illiam s. But there were other long-term bonds out­
standing; were there not?
Mr. Martin* Let me ask Mr. Riefler to refresh my mind on that
period.
Mr. R iefler. I think it was offered in exchange altogether for the
four longest bank-restricted issues.
Mr. M artin. It was offered------Mr. R iefler. They were the ones that were so large.
Mr. M artin. They were offered for the 2^-percent bonds.
Senator W illia m s. Do you know any other instance in Government
financing where they have called a long-term bond issue and voluntar­
ily refinanced it at a higher interest rate?
Mr. M artin . I think there are some instances, but I will check it
for you, Senator.

Senator W i l l i a m s . And where it was called prior to the 20 years,
prior to the maturity, and voluntarily financed at a higher interest
rate.
Mr. Marttn. Mr. Thomas points out it was not actually a call. It
was an optional conversion.
Senator W i l l i a m s . That is true, but I would say that you had a
100-percent conversion. Anyone who had a 2^-percent bond would
certainly convert it into a 2%.
Mr. M a r t i n . Oh, no, we did not get anything like 100 percent. We
did very well on it. I do not have the precise figures, but I can get
them for you. And we did very well, but we did not get all of them
by any means.
Senator W illia m s. You mean there are still some of the 2% s
outstanding?
Mr. M artin. Oh, yes, indeed.
Senator W illia m s. But they are exchangeable into these l ^ s or
23/4s.
#
Mr. M artin . N o. They were only at that time.
Senator W illia m s. According to the Secretary, I understood the

bulk of them were transferred into 2%s, and about $8 billion of them
transferred into the 5-year certificates.
Mr. M artin. The transfers to 5-year certificates have been sub­
sequent.
Senator W illia m s. That is right.
Mr. M artin . There were practically none-----Senator W illia m s. At that time.
Mr. M artin (continuing). At that time.
Senator W illiam s. That is correct.
Mr. M artin. But there are still some of those bonds trading in the
market that were not converted at that time.
Senator W illia m s. But the conversion rights remained with them;
even today they remain?
Mr. M artin . Oh, no.
Senator W illia m s. To convert into 5-year certificates?
Mr. M artin. Oh, no. I f you did not take it at that time, you were
not eligible.
Senator W illia m s. I am sure you would know, but I wish you

would put that in the record.

9 3 — 7 p 3——
36 3 5 — t* ■ 8
■



1324

FINANCIAL CON
DITION O THE UNITED STATES
F

M r. M a rtin . I will.
Senator W illiam s . Because that is not the information we received

at the other hearing.
M r. M a rtin . I will, indeed. But I am quite certain I am correct on
that.

Mr. Riefler says you can convert the 2%, if you converted them at
that time, into notes. But if you did not convert at that time into
the 2%s, you have just the 2 percent securities.
Senator W illiam s . That is true. But the 2%s carries a continuing
option.
Mr. M a rtin . Oh, yes, if you converted it.
Senator W illiam s . That is the point.
I wish you would furnish at this point, if you can, any previous in­
stance wherein the Government called a long-term bond issue and sub­
stituted a higher interest rate.
Mr. M a rtin . I will check the records on that, Senator.
Senator W illiam s . On a voluntary basis. Because this was a
voluntary calling of a bond issue.
Would you make any estimate as to the extra cost to the Government
on that basis on that issue ?
M r. M a rtin . Well, I could take the amount that was actually con­
verted at that time.
Senator W illiam s . Could you furnish us an estimate of that?
Mr. M artin . We will put that in a memorandum.
(The following statement was subsequently furnished by Chairman
Martin:)
There have been two occasions prior to the offering of the 2% percent invest­
ment series B bonds in 1951 when holders of United States Government secur­
ities have been offered a conversion opportunity into higher yielding issues.
These were the issuance of the conversion 3-percent bonds of 1946 and 1947
(dated 1916 and 1917) and the liberty loan convertible bonds put out during
World War I.

CONVERSION 3-PERCENT BONDS OF 1 9 4 6 AND 1 9 4 7

Prior to the establishment of the Federal Reserve System, national banks
had the privilege of issuing national bank notes collateralized by United States
Government bonds deposited with the United States Treasury. United States
Government bonds so utilized were those bearing the circulating privilege. With
the establishment of the Federal Reserve System and introduction of a new
circulating media, provision was made for a shift out of the national bank note
circulation. To reduce national bank note circulation, Federal Reserve banks
were authorized to buy the United States Government bonds bearing the cir­
culating privilege and to use these bonds either as backing for Federal Reserve
bank notes or to convert into other United States obligations without the cir­
culation privilege.
In 1916 the Secretary of the Treasury issued a series of 30-year, 3-percent
bonds and of 1-year, 3-percent notes. According to the Federal Reserve Act of
1913, the Federal Reserve System could buy 2-percent circulation privilege bonds
from national banks at par plus accrued interest any time during the period
December 13,1915, to December 13,1935. The Federal Reserve banks could issue
Federal Reserve notes against these bonds or convert them, roughly one-half into
the new 3-percent, 30-year bond, and one-half into 1-year, 3-percent notes. The
Federal Reserve banks bought from the national banks $56,256,500 of the 2-percent bonds and converted them into $28,894,500 of the new 3-percent bonds and
$27,362,000 of the new 3-percent notes. The new 3-percent bonds thus acquired
by the Federal were then sold to the public at prices ranging from 94% to 103%.
This program ended with the outbreak of the war.




FINANCIAL CONDITION OF THE' UNITED STATES

1325

CONVERTIBLE LIBERTY LOAN BONDS

The first and second liberty loan bonds of World War I, which were issued with
coupon rates of 3 ^ and 4 percent, respectively, were each made convertible into
bonds bearing higher coupon rates. The terms of these liberty loans provided
for convertibility if any subsequent series of bonds bearing interest at a higher
rate should be issued by the United States before the end of the war with Ger­
many.
When holders of the 3^9, dated June 15, 1917, exercised this option, they re­
ceived the first liberty loan converted 4-percent bonds of 1932-47, dated Novem­
ber 15, 1917. These converted 4’s were, in turn, made convertible into any higher
rate bond issues during the war. Conversions of these 2 issues were in turn
converted into to first liberty loan converted 41 percent bonds during the period
/£
May 9, 1918, to June 30, 1925. Holders of the first 3^s were also permitted to
convert into the first-second liberty loan converted 4% percent bonds of 1932-47,
dated October 24, 1918.
The second liberty loan 4-percent bonds of 1927-42, dated November 15, 1917,
were also made convertible into any higher rate bond issued during the war.
This offer was good for the period November 15, 1917, to June 30, 1925. As a
result, practically all of the second 4’s were converted into second 4*4s during the
period May 9, 1918, to November 9, 1918. As in the case of the first liberty loan
bonds, this conversion privilege terminated June 30,1925.
INVESTMENT SERIES B CONVERTIBLE BONDS

It may be of interest to note the circumstances under which the 2% percent
investment series B convertible bonds were offered to holders of long-term
2% percent Treasury bonds.
The fundamental problem which both the Treasury and the Federal Reserve
faced in the postwar period developed out of the serious issue created by the
existence of a huge public debt in a period of growing private demands for goods
and services. Liquidation of Government securities on the part of holders was
an important source of funds for current spending and for credit expansion. In
order to give some assurance to investors that their securities would not be
subject to severe declines in prices and encourage the holding of such securities
and to aid Treasury refunding operations, the Federal Reserve had been follow­
ing a policy of supporting the market for Government securities. In view of the
recurrent heavy demands for funds during the period, these purchases had the
effect of monetizing substantial amounts of Government securities, creating bank
reserves, and laying the basis for excessive credit expansion.
Both the Federal Reserve and the Treasury recognized the dilemma presented
by the conflicting problems of debt management and credit restraint in the infla­
tionary situation which developed. Various measures were adopted through
credit, fiscal, and debt management policies in an endeavor to restrict credit and
monetary expansion, to retire debt, especially that held by banks, and to attract
the investment of savings into Government securities, without withdrawing sup­
porting pegs in the Government securities market. The problem came to a head
during the Korean crisis and led to the accord.
The following joint announcement was made on March 3,1951, for publication
March 4, by the Secretary of the Treasury and the Chairman of the Board of
Governors and of the Federal Open Market Committee of the Federal Reserve

System:

“The Treasury and the Federal Reserve System have reached full accord with
respect to debt-management and monetary policies to be pursued in furthering
their common purpose to assure the successful financing of the Government's
requirements and, at the same time, to minimize monetization of the public

debt.”

It was agreed that there were both immediate and long-run factors which had
to be taken into account in arriving at an accord, and that the purpose of the
negotiation was to reach agreement upon policies that would reduce to a minimum
the monetization of the public debt without creating an adverse market psychology
with reference to Government securities.
Consideration was given to the matter of long-term bonds overhanging the
®aarket and at the time being offered for sale daily in large amounts. It was
•treed that a substantial portion of these bonds could be taken off the market
by a Treasury offer to exchange for them a nonmarketable 2% percent, 29-year
bond, redeemable at the holder’s option before maturity only by conversion into




1326

FINANCIAL CON
DITION O THE UNITED STATES
F

a 5-year marketable Treasury note. The 2%-percent bonds were not called but
were offered an optional exchange of this kind. The purpose of offering this new
security, as announced by the Treasury was to encourage long-term investors to
retain their holdings of Government securities, in order to minimize the monetiza­
tion of the public debt through liquidation of outstanding holdings of the Treasury
bonds of 1967-72. The Federal Reserve agreed to help the Treasury in explain­
ing to large institutional investors the nature and purpose of this new issue.
The extent of the acceptance of the offering testified to the success of this Joint
endeavor.
On March 4, 1951, the Treasury offered the investment series B long-term
nonmarketable convertible Treasury bonds of 1975-80 in exchange for $19.7
billion outstanding 2%-percent Treasury bonds of June 15 and December 15,
1967-72. On April 1, 1951, about $13.6 billion of these 2%-percent bonds were
exchanged into the 2%-percent investment series B bonds of 1975-80. In May
1952 the investment series B bonds were reoffered for cash or for combined cash
and exchange for a limited time for the June and December 1967-72 2^-percent
bonds and in addition for the March 1965-70 2%-percent bonds and the March
1966-71 2^6-percen* bonds. The latter two 2^-percent issues were outstanding
in amounts of $5.2 billion and $3.5 billion, respectively. Additional exchanges
totaling $1.3 billion were made into the investment series B bonds from the
June and December 1967-72 2y2-percent issues and from the 2^-percent bonds
of March 1965-70 and March 1966-71. In addition $450 million of the 2% -per­
cent bonds were issued for cash. The investment series B bonds are convertible
into marketable 1^-percent 5-year notes at the owner’s option. A total of
$4.8 bilUon of the $15.3 billion 2%-percent bonds originally issued have been con­
verted into the 1^-percent notes to date. Three of the latter issues have ma­
tured and have been refunded into regular marketable issues.
Taking into account the interest cost of the 2%-percent bonds, the l^-percent
exchange notes, and the issues into which 3 issues of the notes have been re­
funded, the additional iuterest cost to the Government through June 30, 1957,
amounts to about $15 million. Interest saved in the 2%-percent bonds totals
$2,279 million while interest cost on the convertible issues totals $2,294 million
through June 30, 1957. These interest costs are divided as follows: 2%-percent
bonds, $1,978 million; l^-percent exchange notes, $258 million; and issues
exchanged for maturing exchange notes, $58 miUion,

Senator W il l ia m s . As I understand it, at that time this was a pro­
gram which was worked out as a part of a planned program at that
time to promote higher interest rates, on the basis that it would be
better to aid and assist in controlling inflation; is that correct?
Mr. M a r t in . No, I do not think so, Senator.
This was used as a device to handle a money market situation that
was fast developing into one we could not handle. This was not a
part of a plan to raise interest rates. It was a specific handling of a
situation that, if the demand for credit had declined in the next 5,
6 months, or so, why, this would have been just something standing
out.
It was merely an adjustment to a market situation at the time.
Senator W il l ia m s . When did your program become a part of a
planned program to raise interest rates on the basis-----Mr. M a r t in . It never became part of a planned program to raise
interest rates.
Senator W il l ia m s . I understood in the beginning that you were
speaking about part of your plan which was that you were leading the
market on the basis that you felt it needed some restrictive controls,
credit controls, and that you were at that time promoting more ex­
pensive money in order to curtail some of this excessive expansion.
Mr. M a r t in . Well, the lead, whether we are leading or following the
market, it w the market forces that were the determining factors.
ras




FINANCIAL CONDITION OF THE’ UNITED STATES

1327

Now, it is my contention that if we lead the market and the de*
mand for credit falls away, then we are out in front and we have to
fall back after a time to adjust to the market.
Now, that is the fine line of judgment that we were discussing
earlier with respect to these trends m the economy. But so far as
consciously trying to promote higher interest rates, that has not been
our aim at all. And I keep stating this for the record because I
happen to believe it, that I favor as low interest rates as it is pos­
sible to have without producing inflation. I am not in favor of nigh
interest rates.
Senator W il l ia m s . I appreciate that. I did not mean to put the
question in that manner. But you said that you promoted as high
interest rates as necessary to combat inflation. And as I understood
it, your program a few months back was that you felt the inflation
threat was such that you had to combat it with, which you did, with
raising the discount rates.
Mr. M a r tin . We have to permit—yes, we raised the discount rate
because the forces in the market were such that they would have been
borrowing through the discount rate. And since we were keeping
the money supply at about a 3-percent growth factor in the economy,
any additions to the money supply over and above that could have
done nothing but add to higher prices and add to inflation.
Senator W illiam s . D o you believe that the current inflation is due
to causes which have developed since the end of the Korean conflict ?
Mr. M artin . Yes; I think the current inflation is. After the in­
ventory recession in 1953-54, we had a period toward the end of
1954 where mortgage financing and automobile purchases blossomed
into a full-fledged period of prosperity; and I think a great part of
what we have been having is prosperity, but the seeds of inflation,
which we presently have, resulted from too much expansion and too
much exuberance following that period and in that period.
Senator W ill ia m s . Would you say that the cariying over of the
authority for issuing these 5-year amortization certificates was infla­
tionary?
Mr. M a r tin . I think in retrospect that it was inflationary. It
was certainly one of the contributing factors to the exuberance in
the economy. I would think that it was perfectly sound to have a
better depreciation schedule than we had; but that taken with all the
other factors, it certainly was one of the factors that added to ex­
uberance of the economy.
Senator W ill ia m s . Well, by the same token, do you think the fact
that Congress had just recently repealed that authority, would be
deflationary?
Mr. M a r t in . I think it will tend that way; yes.
Senator W il l ia m s * You spoke a moment ago about the wide ex­
pansion in the financing of automobiles and the financing of goods
in general through small-loan companies.
In recent years, I noticed that many of our banks have established
separate departments wherein they operate their own small-loan busi­
ness and financing. Do you think that is a healthy trend to encourage
that?
Mr. M artin . Yes; I think it is all right. But I think it has to be
hatched very carefully. What the terms should be, and the handling




1328

FINANCIAL CONDITION OF TH E TOTTED STATES

of it has been left to the individuals concerned. It seems to me that
it is a perfectly sound business, provided it does not outrun the ca­
pacity of people to repay; and that at that point an element of judg­
ment that has to be exercised.
Senator W i l l i a m s . Are there adequate Federal controls over the
small-loan departments at these banks as o f today ?
Mr. M a r t in . I think that the small loan departments of the banks
are pretty adequately covered in our examination procedures. We
don’t use examination as a control, but we know what is going on in
these operations. Our control of the banks is through reserves.
Senator W il l ia m s . You have no objections to the banks entering
into this phase of operation?
Mr. M a r t in . None whatever.
Senator W il l ia m s . Do you think there is any danger in the existing
trend of the extension of branch banking ?
M r. M

a r t in

. W e l l , t h a t i s a — b r a n c h b a n k i n g , I p e r s o n a l l y ---------

Senator W il l ia m s . Let me put it this way: Do you tnink it is
being overextended in mergers ?
Mr. M a r t in . I think the merger trend ought to be watched pretty
carefully. I don’t think it is necessarily bad, but I think it has to be
examined on an ad hoc basis, as we do with our supervisory authority,
and I happen still to favor the dual banking system and believe that
it is desirable to have as many small unit banks as it is possible to
maintain.
Under certain circumstances, however, I think that mergers are
perfectly appropriate. The States have supervision over branch
activity and there is no question but there has been an activity in the
expansion of branches in recent years. Some of it is because of the
growing need for capital and the inability of the smaller units to
handle it.
Senator W il l ia m s . I notice you called our attention to the fact
that in small towns the banks are being absorbed through mergers by
the larger banks. Do you think that is a healthy trend or do you
think there is more value in local ownership ?
Mr. M a r t in . I think there is more value in local ownership. It is
not a trend that I welcome.
Senator W illiam s . Have you done anything about it, in your Fed­
eral Eeserve System, to frown on it, or made any recommendations to
your members ?
Mr. M a r t in . Well, the Federal Reserve System is presently en­
gaged in administering the Holding Company Act which the Congress
passed, and we have struggled with section 7 of the Clayton Antitrust
Act.
One of my first problems when I came to the System was the famous
Trans-America case, which we lost in the courts. But that is a problem
that is on our agenda at least every week, I would say, in some form
or another. It is a problem that we don’t have the complete answer
to, but-----Senator W il l ia m s . Would you say the present inflationary trend
was the result of shortage of goods ?
M r. M a r t in . At this particular stage, no.
I think that a year ago
that there were imbalances, taking steel as an example, where there
were real shortages in certain types of capacity; and that those short­
ages contributed at that time to the imbalances which have come about.



FINANCIAL CONDITION OF THE' UNITED STATES

1329

Now, I think that as we have gone ahead in this period, that those
shortages are now—the only really basic shortage today, outside of
certain types of skilled labor, is savings. I think that the principal
shortage today is savings, and that some overcapacity has developed
at the current levels for goods; but the demand tor goods, at a price,
is still substantially in excess of the supply that is available.
Senator W illiam s. Do you think that the recent increase in steel
prices was inflationary ?
Mr. M artin. I do not know, Senator. I have tried to study that a
little bit and I do not know. I have been reading Mr. Blough’s recent
speech. It is a little bit of a question of which came first, the chicken
or the egg.
Senator W illiam s. That is what I was going to ask you first.
Mr. M artin. Well, I just do not know. I simply say that when
prices are rising, it does not make too much difference which came
first, the chicken or the egg; the end result is that we have a higher
price.
Senator W illiam s. I noticed that the steel companies attributed the
rise in prices to labor, and labor attributed their demands to the rise
in prices, and each say there i9 no relationship between the other, and I
was wondering if you would-----Mr. M artin. I am just not competent to solve that one.
Senator W illia m s. Do you think that the escalator clauses in wage
contracts are constructive?
Senator B enn ett. The Senator has agreed to yield to me, so these
are words I am putting in his mouth.
If we had not been in an inflationary situation, would either the
wage increase or the price increase have been made so readily in the
steel situation?
Mr. M artin. I don’t think so.
Senator W illia m s. Do you think the escalator clauses in some of
the wage contracts are good or bad for the economy?
Mr. M artin. There again, I do not know. I have no objection to
escalator clauses, but I would say if the escalator clause in the long run
contributes to inflation, it is bad for the worker, and it does not achieve
its objective.
Now, it is a device to recognize an increase in the cost of living; but
if the overall cost of living gets away from us, I think that the person
benefited by the escalator clause suffers also.
Senator W illiam s. Now, I am not sure I quite followed you. Did
you agree with me? Do you think they are good for the economy or
not?
Mr. M artin. I did not say— if they make inflation, I think they are
bad for the economy.
inflation.

I am not certain that they do always make for

I think that they have to be related to the individual industry and
to the cost-price factors in that industry.
Senator W illia m s. In your opening statement, I understood you to
say that you felt that escalator clauses and cost-plus contracts were
both inflationary and should be avoided. Am I in error on that ? Did
I understand that to be----Mr. M artin . I said they could be factors in inflation.
mean to take the categoric position that they always are.




I did not

1330

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Senator W i l l i a m s . I notice in your statement beginning with para­
graph 3, under B :
The widespread existence in the economy of escalators which act automatically
to transfer rising costs or prices into rising prices and costs—

and so forth.
Now, that is listed as one of the inflationary cause9, and-----Mr. M a e t in . I have here under B :
The tempo of interaction between rising costs and rising prices will be speeded
tip if the situation is characterized b y :

Senator W illia m s . That is right.
Mr. M a r t i n . I think that is one of the factors that can speed it up.
I did not mean to say that it always speeds it up. But it certainly is
one of the factors that can speed it up.
Senator W illia m s . That was the reason I was asking the question.
M r . M a r t in . Bight.
Senator W illia m s . Because it was my understanding that you had
stated that.
Do you anticipate a climb of Government expenditures in 1958 or
1959 ? Of course, that is out of your department, if you would rather
pass on it.
Mr. M a r t in . I would rather pass on it, Senator. I do not know
enough about the-----Senator W illia m s . 1 will go back into your department. Do you
anticipate a climb in business activity in 1958 or 1959 ?
Mr. M a r t in . Well, 1958-59 is too far off for me to make any cal­
culation ; but I would say that the longer range outlook for business
is still quite good.
Now, there may be some dips from time to time, but I am quite
confident on the longer range outlook for business.
Senator W illia m s . Y o u feel, if the Government can bring its budg­
etary policies under control, we would have a reasonably good chance
of controlling this inflation which is with us ?

Mr. M a r t in . I think it would bevery helpful; yes, sir.

Senator W illia m s . Would you say that it would not only be help­
ful—I mean necessary—but it would be practically essential that
we do ?
Mr. M a r t in . Yes; I think it is practically essential; yes.
Senator W illia m s . Do you think one of the methods of doing that
would be to maintain the present ceiling on the national debt?
Mr. M a r t in . That is out of my field again, the management of the
debt. I do not know what the answer is. There are some real prob­
lems with the way taxes come in and the management of the debt, but
1 certainly favor keeping the debt down.
Senator W illia m s . Well, based upon your experience in the Treas­
ury Department, and, of course, your experience with the Federal
Reserve System.
Mr. M a r t in . I think a limitation on the debt is a very salutary
thing, generally speaking.
Senator W illia m s . And a limitation is not any good unless it is
maintained as a ceiling; is that correct ?
Mr. M a r t in . That is corrcet.
Senator W illia m s. If it is going to be moved every time we approach
the ceiling, then there is, in effect, no limitation ?



F IN A N C IA L

C O N D IT IO N

OF

THE

U N IT E D

STATES

1331

Mr. Martin. It certainly trends that way.
Senator W i l l i a m s . Do you think that the fact that in France infla­
tion has reached the point where they have had to recently devaluate
the French currency should be interpreted as a warning signal not only
to us but to other countries at this time?
Mr. M a r t in . I most certainly do.
Senator W il l ia m s . Do you think there is any danger that this
devaluation will extend beyond France ?
Mr. Martin. Well, I would not want to comment on that. I think
that any country that spends more than it has is faced with a real
problem, that sometimes the chickens come home to roost. I would not
want to make any comment on any foreign country.
Senator W il l ia m s . I think you are correct on that, I will not push
the point. But the effect, when one country is placed in a position
where it must devaluate its currency, it inevitably has an effect on other
countries; is that not correct ?
Mr. Martin. That is correct.
Senator W i l l ia m s . Do you not think that the fact that the Canadian
dollar has been in recent months selling at the highest premium over
the American dollar should likewise be interpreted as a warning signal
to America ?
Mr. Martin. It should certainly be interpreted as a warning signal
in the sense there is an imbalance there.
Senator W il l ia m s . Do you not think it would be just as appropriate
to say that the American dollar has declined 5 or 6 percent below the
Canadian dollar as it is that the Canadian dollar is 5 or 6 percent
above it? I mean maybe it protects our ego a little more to say that
it is higher; but, in effect, is that not what happened, that the American
dollar is worth less than the Canadian dollar by 5 or 6 percent ?
Mr. M a r t in . I think that is what the effect of it is, yes; without
getting into the technicalities of it.
Senator W il l ia m s . It is only in recent years that that situation
has prevailed ?
Mr. M a r t in . Has prevailed. There are reasons for that on the
investment side. But the effect is as you have stated.
Senator W il l ia m s . Would you care to give us some of the reasons
in order that we might have them in the record here at this time?
Mr. M a r t in . Well. I think the reason is primarily the tremendous
opportunity for investment in Canada and the confidence in the oppor­
tunity for developing raw materials and minerals up there that has
attracted a persistent flow of American capital to Canada. That is
the basic cause of it. It has been almost an overwhelming flood at
tim
es. The volume up on their stock exchanges and in their securities
markets in relation to ours has been proportionately greater, and
that unquestionably has been the major factor in causing the disparity
in the two currencies.
Senator W il l ia m s . Canada has done a relatively good job of bal­
ancing their economy, too ?
Mr. Martin. They have done a relatively good job; yes, sir.
Senator W il l ia m s . Their ta x rate is lower than ours, too; is it
not?
Mr. Martin. That I do not know.
Senator W il l ia m s . At least they have been reducing their taxes in
recent months. I know that is the case.



1332

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Mr. M a r t i n . I would be glad to have a little memo prepared on the
Canadian situation and put it in the record.
Senator W illia m s . I wish you would.
(Mr. Martin subsequently supplied the following:)
R e c e n t C a n a d ia n B u s in e s s D e v e lo p m e n t s

During the last few years, economic developments in Canada have been roughly
similar to those in the United States. The business adjustment of 1953-54 was
even more limited in Canada than in this country, but the recovery there came
several months later, in the spring of 1955 rather than mid-1954. In both coun­
tries, the recent boom has been dominated by unusually heavy investment in
business plant and equipment; in Canada, exploitation of natural resources—
oil, iron ore, waterpower, uranium, and nonferrous metals— has attracted
capital from all over the world. In addition, Canada has experienced a higher
population growth, with heavy immigration supplementing new births. This has
generated a strong demand for housing and public services.
Canada’s rapid growth has led to record imports, especially since the fourth
quarter of 1955. These imports, which have come principally from the United
States, have provided capital and consumer goods for the Canadian expansion
and have moderated inflationary pressures in Canada.
Despite the heavy excess of imports over exports, the Canadian dollar has
moved to the high esc premium in recent history. A sustained inflow of capital
from abroad, mostly long-term in character, has been more than sufficient to offset
the trade deficit; under the Canadian policy of letting the exchange rate fluctuate
freely, in response to demand and supply on the exchange market, this inflow has
boosted the value of the Canadian dollar in the foreign-exchange market.
There have been three principal sources of capital flowing into Canada:
Direct investment by foreign interests in Canadian firms; (6 ) new cash issues
floated in New York by local governmental authorities and Canadian businesses;
and (c) purchases of outstanding Canadian securities by foreigners. In the 18
months between October 1955 and March 1957, Canada showed a current account
deficit of Can$2,046 million offset by the following capital movements: Net direct
investment, Can$C39 million; net new security issues, Can$701 million; trade in
outstanding securities, Can$300 million; other capital flows, Can$390 million.
Canadian official holdings of gold and United States dollars rose by Can$16 mil­
lion. Appendix table 1 shows the quarterly movements in this flow of funds into
Canada since 1954.
Since 1954, the Canadian authorities have made use of flexible monetary,
fiscal, and debt management policies to promote economic stabilization. In early
1955, both monetary and fiscal measures were designed to aid business recovery.
Credit expansion was encouraged by a policy of monetary ease and bank rate
was reduced from 2 to 1% percent in February. The budget for 1955-56, intro­
duced in April, provided for a treasury deficit at the national income level
existing at the time.
With the rapid recovery of business activity in the second quarter of 1955,
Canadian monetary policy changed from encouraging to moderating credit expan­
sion. The discount rate was gradually raised to 3 % percent, and the Bank of
Canada persuaded the chartered banks to adopt a minimum level of secondary
reserves equal to 15 percent of deposits and to restrict certain types of long­
term lending. The banks’ loan expansion came to a halt in May 1956, but not
before general loans had increased by 40 percent over their February 1955 level;
this was the most rapid sustained bank-loan expansion in Canadian history. In
addition, the volume of corporate, and local and Provincial government borrow­
ing through the issue of new securities swelled to record proportions, reaching
Can$1.2 billion net of retirements in 1955 and Can$2.3 billion in 1956.
In November 1956, a policy of tying the discount rate to the weekly Treasury
bill tender rate was adopted. As market interest rates continued to rise, the
disccount rate rose correspondingly, reaching 4.28 percent on August 15, 1957.




(a
)

F IN A N C IA L

C O N D IT IO N

OF

THE

U N IT E D

1333

STATES

At the present time, market interest rates in Canada are at postwar record
levels and range from 0.4 to 0.8 percentage points above those in the United
States.
Fiscal policy has had a less active role in recent Canadian stabilization efforts
than monetary policy. After the Korean boom, there were significant tax reduc­
tions for fiscal years 1953-54 and 1955-56. The tax reductions for 1953-54 con­
sisted mainly in eliminating a surcharge on individual income taxes and a re­
duction in the corporate profits tax. Similar but small reductions character­
ized the rate changes for 1955-56, introduced when the extent and timing of the
economic recovery was st l unknown. For 1957-58, there were smaller cuts in
il
indirect taxes, reducing aggregate tax revenues by about 1 percent and s i l
tl
leaving an increased budget surplus. (See appendix table 2.)
Because of differences in tax bases, exemptions, and income categories i i not
t s
feasible to compare directly Canadian and United States tax structures. C o m ­
parison of the percentage of G N P absorbed by Federal taxes is more meaningful.
In Canada, this percentage has averaged 17 percent for the past 2 years com­
pared to 19 percent for the United States. It must be remembered, however, that
the United States has felt it necessary to spend more than 50 percent of its budget
on national defense compared with about 40 percent in Canada. The share of
total tax revenue derived from individual and corporate income taxes is smaller
in Canada than in the United States; in turn, however, excise and sales taxes
are heavier.
Prices in the recent boom in Canada have been much more stable than in the
immediate post-World W a r II and post-Korean war periods. From 1952 to mid1956, consumer prices remained virtually unchanged; however, in the 13 months
from M a y 1956 through June 1957, they increased by 4.3 percent, compared with
an increase of such prices in this country of 3.6 percent. Wholesale prices have
also increased in the past few years but at a slightly slower rate than in this
country.
In recent months, several soft spots have appeared in the Canadian economy—
in particular, in housing, automobiles, and lumber products. The percentage un­
employed has been slightly greater than in 1956, and the index of industrial pro­
duction, seasonally adjusted, has declined slightly from its high point in Febru­
ary of this year. Nevertheless, consumer prices and wage rates have continued
to rise in the face of monetary restraint and a budget surplus.
T a b l e 1 .—

Canada: Selected balance-of-payments statistics
Financed b y Current
account
deficit

1054:
...
.
I ____
II.............................................
I l l ..........................................
IV ........
.............
1955:
...............
III..........
.............
h i ______ ................................
I V ..........
...............
1956:
I—
I I........................... .............
h i ........... : : : ..........................
IV ............................................
1957: I

-177
-1 95

+0
2

Net
direct
invest­
ment

Net new
security
issues

+ 92
+80
+47

Trade
in out­
standing
securities

+149
-9
-1 4
-1 9

-8 0

+0
12

-1 8 5
-1 63
-8 5
-2 6 5

+74
+103
+ 92
+74

-3 63
-4 35
-2 04
-370
-4 09

+55
+164
+ 96
+170
+ 80

+1
2
-5 1
+8




+13
-1 9

Changes
in
official
reserves1

-4
-3 7
-3 8
-4 5

+177
+195

+38
+168

+185
+163
+85
+265
+363
+435
+204
+370
+409

-2 7

+146

+71
-5 6
-7
+36

+39
+153
+151
+183

+61
+53
+80
+40
+30

+179
+95
-118
+4
+84

+29
-3 0
-5
-2 7
+13

+0
22

-1

Net
capital
flow

-8 0
+124
-1 5
+29

-1 8
+36

1 Minus denotes increase and plus a decrease in official reserves.
8°uroe: Dominion Bureau of Statistics.

+0
2
+37
0

Other
capital
flows

+0
1

-20

+80

1334

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Table 2.— Canada: Selected Federal 'budget estimate*
[In millions of Canadian dollarsl

Estimated
receipts at
previous
year’s
rate
1963 to
1954 to
1955 to
1956 to
1957 to

1954.
1955.
1956.
1957,
1958.

Estimated
amount
of tax
reduction

Estimated
receipts
after tax
changes

4,710
4,500
4,350
4,775
5,225

-148
-12

-237
-3 6

4,473
4,464
4,202

-5 5

4,763
5,170

Planned
budget
expendi­
ture

4,462
4,460
4,362
4,650
5,018

Planned
budget
surplus
(+ ) or
deficit ( - )

is

-160
4*113
+152

Source: Budget speech of tbe Minister of Finance,

Senator W illiams. When inflation hits a country, who is it that
is hurt the most?
Mr. Martin. I am convinced, Senator, that it is the little man that
bears the brunt of inflation.
The man who has small savings, small income, the white-collar
worker, and the men at the older ages, with the pensions—those are
the people who are almost defenseless.
Now, as to the bigger operators, in the long run, of course, as I
have tried to outline in this paper, everybody stiffers from inflation.
But in terms of its immediate impact, I think the primary sufferer
is the small man.
I think the best illustration of that is in the way that so many wellto-do individuals have been able to purchase securities and properties
and one thing or another, and thus participate in the expansion,
whereas the little man has been limited to a fixed income security
largely, unless he has been willing to gamble pretty heavily with his
small means. He is not in position to adjust to inflation as the larger
individual is.
Senator W illiams, A s a rule, the smaller individual has his invest­
ments either in a pension fund, life-instirance policies, savings
accounts, or Government bonds; isn’t that true?
Mr. Martin. That is correct.
Senator W illiams. And the result of the American dollar losing
one-half its purchasing power, is it not the net effect of that action,
the destruction of one-half the savings of the American people?
Mr. Martin, That is correct.
Senator W illiams, As they are invested in those fixed-income
items?
Mr. Martin. That is correct.
Senator W illiams. That is all the questions I have.
Senator Long. Looking at these factors which you said contribute
to inflation, I think it might be well to look at the labor supply. Dur­
ing the first 6 months of this year, we averaged more than 4 million
unemployed. In the years 1950, 1952, 1955, and 1956, there was less
unemployment and less inflation.
On this basis, would you say that we have too much strain on our
labor force, or too much employment?
Mr. Martin, Could I get those figures again, Senator ?
Senator L ong. Here is a tabulation that I made. Do you have a
copy of Economic Indicators here?
Mr, Martin. The most recent figures we have—I see.



F IN A N C IA L

C O N D IT IO N

OF

THE

U N IT E D

STATES

1335

Senator L o n g . I will supply for the record here a tabulation of
unemployment as a percentage of the civilian labor force for these
years: 1952,1953,1956, and the first half of 1957.
(The tabulation is as follows:)
Here is a tabulation of unemployment as a percent of the civilian labor force:
Tear:
Percent
195 2
2.7
195 3
2. 5
1956_______________________________________________________
3. 8
1st half of 1957______________________________________________
4.1

Mr. Martin. I would say that the record is quite good during this
period. I am a little bit surprised at the 4.1 percent in the first half
of 1957. I do not know what the precise figure on unemployment
ought to be; and I am sure I agree with you that I do not want any­
T
one to be unemployed.
But by and large it is my view that we have had during these
periods, 1952, 1953, and so on, that you cite here, what I would con­
sider full employment.
Senator Long. Do you have Economic Indicators available to you?
Mr. Martin. Yes.
Senator Long. If you will look at page 11.
Mr. Martin. I have got it.
Senator Long. Y ou will see that, on the third from the last col­
um allowing for seasonal adjustment, unemployment during the
n,
first half of 1957 has been more—has averaged more than 4 million.
There is some improvement in the next succeeding month, I under­
stand. Even so, this is a higher rate than we had in these other years
which I have mentioned, when there was much less inflation.
The question I have in mind there is: With approximately 4 mil­
lion people unemployed, do we have any strain on the labor force
that could be regarded as an inflationary pressure?
Mr. Martin. Well, I have not analyzed these figures, but I feel,
generally speaking, we have had full employment during this period.
I do not mean everybody has been employed, but the level of em­
ployment has been extremely high.
Senator Long. Well, to illustrate what I have in mind, let us take
the year 1952. We had about 1 percent inflation during that year,
and we had 2.7 percent unemployed, which was about 50 percent
less than the current figure, that is, there is about 50 percent more
unemployment today than you had at that time. Or if you look at
1953, which was a year in which there was very little inflation—
there was less than 1 percent inflation that year—and then you had
2.5 percent unemployed, which again would indicate about 50 percent
m
ore unemployment, at least, now. Or if you look at it the other
way around, unemployment then was about one-third less than today.
Would that at all indicate that we have any inflationary pressures
today, as a result of shortage of the labor supply ?
Mr. Martin. Well, you have to recognize that we had a—we have
^ne through a transition period in which there has been a lot of
drifting of labor, and the removal of controls and shifts in the
military program, and one thing or another, have caused a lot of
■hifts in employment of one sort or another that cannot be taken
,lPquickly in figures of this sort.




1366

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

But the principal labor shortages that I would see at the moment
are all in skilled types of labor. I do not think there are too many
of them, but I think that there are certain areas where the only way
you can get certain types of technicians is to bid them away from
somebody else.
Senator L o n g . Have we had, would you say, in any general sense,
any inflationary pressure as a result of the shortage of labor supply,
very recently?
M r . M a r t in . I would think that in skilled labor there is, Senator,
som
e.
Senator L o n g . Would you make that statement in a general sense
with regard to labor, that there is a shortage of the labor supply today
which is creating an inflationary pressure?
Mr. M a r t in . I w o u ld th in k so.
Senator L o n g . Well, can you support that statement, as compared
to previous years, when we had 1 percent or less inflation, when the
labor supply was as short as 2.5 percent unemployed, or far less un­
employment than we have now—in other words, here we have the
first half of 1957 a percentage of unemployment of 4.1; in 1952 we
had 2.7; in 1953 we had 2.5. So the percentage now is one-half
greater than in those years. Those were not regarded as inflationary
years. In fact, the administration has taken quite a bit of solace
from those years, in saying those were years in which you had what
might be called stability and that inflation was less than 1 percent
during those years.
Mr. M a r t in . Well, I would say that as indicated on the chart we
had yesterday, that from April 1951 to A pril 1956 we had a reason­
ably good record. I place this on a completely nonpolitical basis be­
cause that includes a year and a half of the previous administration.
Now, the point, it seem to me, on these figures is, that without
s
quarreling with them, I think they do an awfully good job in putting
them together----Senator L o n g . Well, you are perfectly free to make your own
calculation.
Mr. M a r t in . N o ; I wasnot quarreling.
Senator L o n g . Y o u and I are looking at the sam publication.
e
M r . M a r t in . I w a s n o t q u a r re lin g w ith th e fig u re s a t a ll. I w a s
ju s t m a k in g th e p o in t th a t in th e s h ift th a t h a s o c c u rre d a n d th e n e w
o p p o rtu n itie s th a t h a v e d e v e lo p e d w ith th e a d v a n c in g te c h n o lo g y ,
th a t u n q u e s tio n a b ly i t seem s to m e th e re a re a t th e p re s e n t tim e s h o rt­
ages in la b o r, as I say in m y s ta te m e n t h e re , w h e re e m p lo y e rs fa c e
ris in g costs b y h a v in g to b id e m p lo yees a w a y fr o m som eone e ls e o f a
s k ille d v a r ie ty in o rd e r to h a n d le th e ir e x p a n s io n .
Senator L o n g . Well, of course, have you not always had that prob­

lem with regard to training skilled labor? Did you not have it in
1952, in 1953, when we were developing new weapons and things of
that sort ? Did we not have the same problems then we have now in
that respect?
M r . M a r t in . Well, it is accentuated.
The period, the post-Korean period, the period right after Korea
was, in my experience in the Government, the worst I have ever ex­
perienced. You had almost hysteria in the purchasing of goods be­
cause the public had in front of them the recent war experience, you




FINANCIAL CONDITION OF THE UNITED STATES

1337

see, and we were not adequately equipped to handle it so quickly after
one war.
Now, the early part of the post-Korean period was a period where
w had to use all the weapons in our arsenal. The Congress promptly
e
granted authority to invoke the price control and wage control mecha­
nism at that time. But the thing got a head of steam on us, and we
had a very difficult problem handling things through 1950-51. And
then gradually it turned out that the Korean war was a different type
of conflict than we anticipated it would be when we started. And I
think that some mistakes were made in that period, too, by all of us;
and certainly I think that money could have been handled a little
less freely than it was in the early stages of the Korean conflict.
Senator L o n g . I would like to stay with this question of the labor
force just a moment or two longer, because we always have a problem
of training skilled labor. Even if we did not have any unusual sit­
uation, we would have somebody die, and we would have to replace
him and have somebody to train and take his place. But as long as
w have an ample labor force from which to recruit the laborers and
e
train them, I would not regard that as being any inflationary pres­
sure, certainly not in a general sense. We may have need of some
particular type of technicians, but I do not see that we have an
inflationary situation if we have enough unemployment, or enough
labor available so that labor can be recruited and trained for the
job. Certainly the laboring man is not in any position to make any
excessive demands for wage increases in a general sense when we
have a considerable amount of unemployment, is he ?
Mr. M a r t i n . That is right. I think it is just a matter of degree.
Senator L o n g . Well now, the point I have in mind is that when you
have a higher degree of unemployment now than you had in these
years that were not inflationary, can we regard a labor supply with
approximately 4 percent unemployed as having any genuine infla­
tionary pressure upon our economy ?
M r . M a r t i n . W e l l , I t h in k i t h a s s o m e in fla t io n a r y p r e s s u r e a t th e
presen t tim e a r is in g f r o m it s o r i g i n o f a y e a r a g o .
Now, this is a moving picture here. W e have got from 1951 through

1956, I think from April of 1951 to April of 1956, we did have a
reasonable stability. Then I think the situation got a little bit out
of hand in 1956. And the impact of the very valid point that you
are raising is one that we will see in the next year or so.
Senator L o n g . I just have in mind at this moment the labor supply,
and looking at the published figures in Economic Indicators, I see
that we have had more unemployment during the first 6 months of
this year than we had—that is, over the period—than we had over
toy year starting with 1952, with the exception of the 1954; and
that year was regarded as being a recession era when we had 5 million
unemployed.
Mr.JI a r t in . That is right.
Senator L o n g . That prompts the question from me as to whether
*e can regard the current labor supply as creating inflationary pres­
sures. In January, you had 4.9 million; February you had 4.7 mil­
lion unemployed; March, 4.3. Then down it dropped down to 4 in
April and to 4 in May; then up to 4.8 in June. And I understand it




1338

FINANCIAL CONDITION OF THE UNITED STATES

is going to come down by several hundred thousand in the next month,
when the next Indicator comes out.
I do not see how you can contend that we have inflationary pres­
sures or a shortage of labor supply, when you compare this to the
years which were not inflationary years, and when unemployment
was a third less than it is now. It seems to me as though the labor
shortage should certainly be regarded as being greater during those
times, less available labor to employ? and I do not see how you con­
clude on this basis that you have an inflationary labor situation now,
certainly not compared with years where you had little or no inflation
but far greater labor shortages.
M r . M a r t i n * Well, now, I do not have the gross national product
figures, but look at the increase in gross national product in the same
period.
Senator L o n g . It seems to me that the crucial point would be the
percentage of unemployment as against the amount of civilian-labor
force available. Now, those are the figures that I gave you for the
record.
Mr. M a r t i n . That is right.
Senator L o n g . As to how productive these laborers are, that re­
lates to the kind of machinery they have, or perhaps how long they
are working, or how much overtime employment they are putting in,
and I believe that the overtime is no higher now. We are not working
people any considerable degree of overtime now, are we ?
Mr. M a r t i n . N o . That has diminished, but the reason I introduced
the gross national product was that you have a tremendous shift in
the whole content of the economy during this period, and I think your
point is perfectly valid, but I do not think it can be done on a com­
parative basis. You have got to relate all this to the achievements
of the economy.
Now, the last year from 1955 to 1956, as I indicated yesterday, you
have more than $10 billion of the increase in your gross national prod­
uct that has been merely a markup in prices without any additional
goods and services. And that is a factor to be taken into consideration
also in this picture. And I still think, as to the labor force, that we
are in a condition of full employment, and certainly in certain skilled
lines there is a shortage.
Now, I agree with you that the availability of labor here and the
educational—I think one of the great things m this country has been
the educational facilities we have been providing.
Senator L o n g . It seems to me, when one asks the question, what is
causing the inflation that we have now, and what has been causing it
for the last 6 or 7 months, you just cannot say that it is the shortage
of labor. There may be a shortage in some particular skills, but m
general, labor is in more full supply now than it has been for several
years.
You have got to go back to 1954 to find a time when labor was in
more full supply than now,
Mr. Martin. I am not contending for a moment that labor is the
only factor at the present time.
Senator L o n g , Aside from 1954, you have got to drop back to 1950
to find a time when labor was in more full supply.
You say—you do not contend that-----


FINANCIAL CONDITION OF THE UNITED STATES

1339

Mr. Martin. I do not contend for a moment that labor is the pri­
m
ary inflationary factor, but I think it is one of the factors.
Senator L ong. Y ou think that a shortage of labor is creating an
inflationary pressure upon our economy at this time ?
Mr. Martin. In certain skilled areas, yes; I think that they have to
bid—I stated it in my statement here. I said:
this general pressure has been expressing itself particularly in rising prices for
services as compared with goods. Despite the existence in some lines of reduced
employment and slack demand— I recognize that— many employers now face
rising costs when they seek to expand activity by adding appreciably to the
number employed.

I think that is true, Senator.
Senator Long. Well, in some instances, of course, you have to pay
m
ore. But did you not have the same situation back to the Korean
war? We have been having a shortage of these skills. I have been
on the Armed Services Committee, and the Air Force has been com­
plaining they could not get these skilled technicians because industry
w buying them away from them. And did not that same general
as
situation exist all through these previous years?
Mr. Martin. Yes. But wages have been steadily going up during
that period. So that the price factor, you see, has gotten into that. I
am not criticizing the wages going up.
Senator Long. Wages have gone up, but did they not also go up
during years like 1950 or 1953 or 1954 or 1955 ?
Mr. Martin. I do not think they went up to the same extent.
Senator Long. Let us keep this in mind: It is one thing for wages
to go up because a labor union calls their men out on strike and in­
sists on a pay raise in order to go back to work. That is something
you and I cannot do much about with monetary policy.
Mr. Martin. That is right.
Senator Long. But it is another matter for wages to go up because
labor is in short supply, and to hire labor—and I do not mean just to
hire a few skilled ones, but I mean to hire labor in a general sense—
you have got to bid the price up because it is very difficult to get
labor.
Mr. Martin. That is right.
Senator Long. The point I am making is we had years where we
had very little inflation; and the Administration, I think properly
pointed to those years, and Secretary Humphrey in his testimony here,
and I think he had a right to, pointed to those years as years of very
little inflation. And during those years, there was a greater shortage
of labor than there is now, and I am speaking of it in the general
sense. There were times as low as 2.5 percent for an annual average
for unemployment, which is a very low figure. And the point I have
in mind that there is now no inflationary pressure with regard to
a general shortage of labor, and there is no widespread shortage of
labor as far as the availability of labor is concerned.
Mr. M a r t i n . I will agree with you on a widespread basis, I agree.
Senator L o n q . In fact, it seems to me that, in a general sense, it
would be desirable to increase employment at this time, when you look
at your June figure of 4.8 million unemployed. I understand that
the July figure will bring that down by 600,000. Even that would be
£2. And while there may be some adjustment made in the availa­
bility of labor, reducing or increasing the labor force in ways which



1340

FINANCIAL CONDITION OF THE UNITED STATES

might affect the figure, I should think that even at that figure it would
be desirable further to reduce unemployment. Would you agree
with that statement?
M r . M a r t i n . I would like to see unemployment reduced to the
vanishing point, but I want the employment that occurs to be not
of a temporary nature but of a permanent nature. And if you just
get oversupply in some goods or temporary overcapacity—and it is
only temporary, in the growth of the country as I see it today—you
are going to have pressure then on profits, and there will have to be
some reduction of prices or losses taken to remove inventory accumu­
lated under those circumstances, and then you will be forced to some
unemployment.
Senator L o n g . I do not share your hope that we are going to reduce
unemployment to the vanishing point, Mr. Martin, I think we are
always going to have some unemployment, even if it is people who
have left one job to try to seek a more desirable job. And it does
seem to me that there are inflationary pressures, if you try to get
unemployment down below a million. I should think, when we are
above about 2.5 percent unemployed, if labor is fairly well adjusted
to the areas where we need it, that we do not necessarily have infla­
tionary pressures. And I say that is based on years when you did
have 2.5 percent unemployed, a very low figure, and yet we had very
little inflation. I have particularly in mind the year 1953 which
had that effect. There was a year with less than 1-percent increase
in prices,
M r . M a r t i n . Well, and by the end of the year 1953 you had an
inventory recession underway, and then your unemployment rose to
5 percent in the following year.
Senator L o n g . That is right; and that was the highest degree of
unemployment that you had; that was regarded as a recession year.
Certainly, no one is going to argue in that year that you had any
inflation because of a shortage of labor supply. That was a year
where you had an excess of labor supply, I would say. Would you
not agree?
M r . M a r t i n . That was a year where the adjusting process resulted
in an increase in unemployment.
Senator L o n g . Well, it did not result in any inflation ?
Mr. M a r t i n . Oh, no.
Senator L o n g . Yes. That is the point I have in mind, that we
could operate with a smaller number of unemployed by a considerable
degree than we have now without having inflation, based on our
actual experiences.
I would like to look at production. Here is my tabulation, and I will
hand you a copy of this.
M r , M a r t i n . This is from the President's economic report, page 124.
Senator L o n g . Here is my tabulation of production increases, 1949
to date, inclusive, in terms of annual average percentage change over
the previous year, measured in uniform 1956 dollars. I would like
to put that tabulation in the record.




FINANCIAL CONDITION OF THE UNITED STATES

1341

(T h e tab u lation is as fo llo w s :)
Here is m y tabulation of production increases 1949 to date, inclusive, in terms
of annual average percentage change over the previous year, measured in uni­
form 1956 dollars:
Year:
Percentage
1949 to date, inclusive (average)________________________________+4.0
1949 to date, inclusive, but excluding 1951 (average)_____________ +3.5
1953 to date, inclusive_________________________________________ -f-3.1
1956 to date, inclusive_________________________________________ +2.7
2d quarter 1956-2d quarter 1957________________________________+2. 7
2d half 1956-lst half 1957____________________________________ +1.2
(See p. 124, President’ Economic Report, also p. 2, Economic Indicators.)
s

Senator L o n g . Y o u could find that for all the years at page 124
of the President’s Economic Report. That is my own tabulation of
the percentage of change. I believe you can glance over that and check
the accuracy of that calculation.
M r . M a r t i n . I w i l l c e r t a in ly a c c e p t y o u r fig u r e s, S e n a to r .
Senator L o n g . I expect you to correct me if you find them wrong,
Mr. Martin.
M r . M a r t i n . I c e r t a in ly w ill.
Senator L o n g . Because you have got some better calculators over
there than I have in my office, and I am sure, when your people look
it over, that they can correct it if it needs correction.
Here is what my calculations indicate: From 1949 to date, the
average increase in production, measured in terms of uniform dollars,
was 4 percent.
Now, during that period of time we had the Korean war, and we had
a great increase during the year 1951. It would seem to me it might
be well to drop out that year, if you wanted to arrive at what sort of
increase you could expect in peacetime. And so if we drop out the
year 1951, the average for 1949 to date, excluding 1951, would be 8y2
percent increase; or 1953 to date, during this administration, the in­
crease has been 3.1 percent.
Now, that accords with what you stated to be a desirable rate of
T
growth, between 3 and 4 percent.
In 1956 to date, inclusive, the increase has been 2.7 percent, which
is less than 3.
If you would refer to the Economic Report on page 2—pardon me,
the Economic Indicators on page 2, the picture can be brought for­
ward. If you allow for the degree of inflation which has occurred,
which is about 3.5, comparing the month of this year as compared to
last jrear, or is a 3-percent increase if you compare the first quarter
of this year to the average of last year, my calculation is that from
the second quarter of 1956 to the second quarter of 1957, your in­
crease in real production has been only 2.7 percent.
Here is the final figure that I calculate. The second half of 1956
against the first half of 1957, the increase is only 1.2 percent.

Mr. Riefler. Is that annual, 2.4?
Senator Long. Perhaps annual 2.4. Would this indicate any inflationary strain onour production facilities?
Mr. M a r t i n . I woula say it certainly show we are reaching ca­
s
pacity, Our production index----




1342

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Senator L ong. Y ou say indications are we have reached our ca­
pacity?
Mr. M a r t i n . We are over our capacity, we are straining against
our capacity in that sense. What 1 am trying to relate are these—
well, I cannot relate all of these items here, Senator. These are only
manufacturing.
Mr. T h o m a s . This is more comprehensive, his figures.
_ Mr. M a r t in . Well, we certainly have been straining against the
limits of our production capacity. And do not forget, as I pointed
out earlier-----Senator L o n g . It seems to me quite the contrary, that we are not
producing because we are not consuming.
We could produce a lot more houses, a lot more automobiles, a lot
more consumer durables in things like washing machines or household
appliances, which we are not doing; and we have 4 million people
unemployed.
Mr. M a r t in . And we have got demand for them at a price. But
at the price level we have gotten up to—
Senator L o n g . Let us see what the strain is on our productive facili­
ties now. That is the point I have in mind at this moment.
I attempted to calculate, for example, as against 1956, allowing for
the price increases, where we stand in the first and second quarters
of this year. It appeared to me, if you adjust your prices upward
from the first quarter of 1956—looking at that, page 2 of the Economic
Indicators, looking at what our production was at, say, $405.2 billion,
do you see that second column there, first quarter 1956 ?
M r. M

a r t in .

Y e s ; I h a v e g o t t h a t fir s t q u a r t e r .

Senator Long. $405.2 billion?
M r . M a r t i n . Bight.

Senator L o n g . Then compare that to the first quarter of 1957, com­
pare that to $429.1 billion. Now to see where you stand, however, you
would have to make a calculation of 3% percent to allow for price
inflation, which would cause you to add $14 billion to that first quarter
1956 figure, which would give you $419.7 billion, which woula show
a 2-percent production increase in real terms from first quarter 1956
to first quarter 1957.
Now during that year, with a 2 percent increase of production, we
had a IV2 percent increase in our population. Would you call that a
desirable rate of expanding our gross national product ?
Mr. M a r t in . I would say that we are expanding our gross national
product here—you are adjusting on prices there. You are taking
314 percent; is that right?
Senator L o n g . Yes. You certainly cannot say—I mean by the time
you look at your gross national product to see whether you are increas­
ing or falling off, you have got to allow for the change in prices.
Mr. M a r t in . Right.
Senator L o n g . And if you had a 314-percent price increase, and if
your production figure in current dollars stays constant, your real
production has declined. When you make that calculation, you get
slightly more than a 2-percent increase in real gross national product
in the first quarter of 1957, as against the first quarter of 1956; and
you get even less increase if you compare the second quarter of 1957
with the second quarter of 1956.



FINANCIAL CONDITION OF THE UNITED STATES

1343

So that would show that our rate of increase in our gross national
product has fallen off almost to a standstill.
You do not regard that as a desirable situation; do you?
Mr. M a r t i n . Well, I want to see the gross national product ex­
pand, but I also—you have to recognize that business has to earn a
profit, and that-----Senator L o n g . Y o u are not complaining about business profits at
this time; are you ? My impression is they are in good shape at the
present time.
M r . M a r t i n . T h e y a re b e g in n in g t o b e sq u eezed , b u t th e m a in p o in t
h ere is th a t y o u h a v e g o t t o h a v e d e m a n d t o ta k e c a r e o f th e p r o d u c t s
th a t a re b e in g t u r n e d o u t ; i t h a s t o b e th e re , a n d it h a s t o b e a t a p r ic e
th a t th e c o n s u m e r — w h o h a s m o n e y t o d a y ; th e re is n o q u e s tio n o f th e
a b ility o f th e c o n s u m e r t o b u y —th a t h e w ill ta k e. I f y o u w a n t to say
y o u c a n p r o d u c e — i f y o u w a n t t o g iv e a w a y h o u se s o r i f y o u w a n t t o
g iv e a w a y a u to m o b ile s , y o u c a n d o th a t.
Senator L o n g . I am not trying to give them away. I am not pro­

posing that. All I am discussing at this point is whether there is
any inflationary pressure upon our productive capacity in this coun­
try, based upon tne average annual increase of 3 to 4 percent which
you state is aesirable, and a showing that the actual increase has been
substantially below that, in fact, hardly keeping up with the increase
in population so far as the expansion of our gross national product is
concerned. Do you regard that as indicating any inflationary pres­
sure upon our productive capabilities in this country ?
Mr. Martin. Well, I cannot go on your statistical basis here. I do
not think it is a statistical problem.
Senator L o n g . N o w , that is not my statistical basis. These are the
facts presented for you and me to look at, and to attempt to see where
w stand, and to help us in analyzing what is happening and where
e
w are going and where we have been.
e
I am just attempting to convert these matters to constant dollars,
just as the President’s economic indicators do when they make them
available. They make them available right up to 1957, but we have to
calculate ourselves from the year 1956 into 1 5 .
97
Mr. M a r t i n . Well, I cannot do more with it, Senator, than to s a y
that--—
Senator L o n g , Well, there are the figures and they are published
for that purpose, and they do not indicate that expansion; do they ?
They do not indicate that there is any pressure on our productive
facilities that are exerting any inflationary pressures upon this
economy ?
Mr. M a r t i n . Well, I just cannot concede that. I would have to——
Senator L o n g . Well, you and I know what it is like to have in­
flationary pressures upon our productive capacity; do we not? You
’ust take the year 1942, when we increased our real production
)j almost 13 percent in a single year, as against this 2 percent this

J
year.
Now,

that is what you would call real inflationary pressure, when

you had tremendous pressures to produce, and that caused great price

increases. We just do not have anything like that now; do wef In
fact, we are well below, and I should imagine even distressingly
below, what we would hope for, as far as our rate of expansion is

ooncerned.




1344

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Mr. Martin. If you had a planned economy, you would seek a
higher level than is projected by these particular figures; but you have
to recognize here that you are quite correct in saying that a year ago
or over you had this constant pressure in which the supply of goods,
where there were shortages—that is the easiest way to think of it.
Now those shortages do not exist today in that sense, but the con­
sumer is not willing to take som of this supply at the prices at which
e
they are being offered, and therefore you have temporary overcapac­
ity coming into the econom that will only be absorbed by adjust­
y
ments in prices of som sort or developing a market, marketing tech­
e
niques to sell further products.
Senator L o n g . D o you think it is desirable that we should try to
setinto action aroundof declining prices ?
M r . M a b t in . I d o n o t th in k w e set it in t o a c tio n .
d e te rm in e d b y th e m a rk e t.
L ong. D o

I th in k t h a t is

Senator
you think it is desirable that we should have a
fiscal or monetary or tax policy that should contribute to that result?

Mr. Mamtn. We should have a fiscal, monetary, and credit policy
that contributes to stability.

Senator L o n g . I mean either.
a r t i n . That permits the market to operate; otherwise we
have a completely controlled econom
y.
Senator L o n g . Wait a minute. I wanted to relate that to your
previous answer, saying that goods are available, but they are at a
lice that the consum will not pay. Do you regard it as a desirable
er
ovemment policy, in any respect, whether fiscal, monetary, taxa­
tion, or any other way, that we should try to set into effect a round of
declining prices?
M r. M

S

Mr. Mar t i n . I have never advocated recession at any time.

Senator L o n g . Well, you used the word “recession.” I did not use
it. I suspect that is what it would mean.
Mr. M a r t i n . I think you are quite correct. I do not quarrel with
you as to the use of the word.
Senator L o n g . Therefore, it would be desirable, and I want to know
if you agree with this, that it would be desirable that we should at
this time have higher consum expenditures at the existing price
er
levels?
M r . M a r t e n . N o ; I do not think so. I think what weneedtoday for
plant and equipment expansion is more savings.
Senator L o n g . First perhaps I should have prefaced that by this
question: Do you believe it would be desirable that our gross national
product in real terms should expand more rapidly than our popula­
tion?
M r . M a r t i n . I d o n o t t h i n k y o u c a n r e la t e p o p u l a t i o n a n d t h e g r o s s
n a t i o n a l p r o d u c t t h a t p r e c i s e ly .
B u t c e r t a i n l y i f p r o d u c t i v i t y -------L ong.

Senator
Why not? Because in time you have more people,
you have got more mouths to feed, more to clothe, more to house,
more to put in automobiles. Why not? Why should you not be
able to state the desirability of increasing the gross national product
more rapidly than you increase your population, s that living
o
standards can rise.
M r . M a r t i n . I f i t c a n b e e x p a n d e d o n a b u s in e s s b a s is , i t is d e s i r ­
a b le t o d o it . B u t i f i t is t o b e e x p a n d e d w i t h o u t r e g a r d t o w h e t h e r




FINANCIAL CONDITION OF THE UNITED STATES

1345

the consumer will pay the price, without response to market condi­
tions, I do not see how it can be done.
Senator L o n g . I am just trying to understand your answer. You
tell me on the one hand that you do not think prices ought to be
reduced.
M r . M a r t i n . Oh, no, I have not said that at all.
Senator L o n g . Y o u said you did not think we ought to do anything
to contribute to a declining price level.
Mr. M a r t i n . I think the forces of the market produces that.
Senator L o n g . Fiscal policy, monetary policy, or any other policy
aside, do you think a declining price level is desirable at this time?
Mr. M a r t i n . I do not say it is desirable. I say it is inevitable if the
goods cannot be moved at current prices.
Senator L o n g . Y o u are the one who used the word “recession.”
M r . M a r t i n . I will stick to it.
Senator L o n g . Do you think it would be desirable for us to use any
fiscal or any monetary policies that would head off a recession?
M r . M a r t i n . I d o n o t b e lie v e y o u c a n —th e r e is n o w a y , th e r e is n o
m a g ic t o th is. Y o u c a n n o t ju s t tu r n o n a le v e r a n d p r e v e n t a d ju s t­
m en ts. Y o u c a n n o t tu r n o n a le v e r a n d c r a n k i t u p .
Senator L o n g . Well, you testified here—and it took you some time

to present it, a very learned statement—that you were using fiscal
.an monetary policies at the Federal Reserve Board level, which you
d
as chairman-----M r. M

a r t in .

W e h a v e n o c o n t r o l o v e r fis ca l p o li c y .

Senator L o n g . You were using monetary policies then; is that
correct?
Mr. M a r t i n . Yes.
Senator L o n g . Let us use monetary policies. You were using mone­
tary policies in your effort to prevent inflation.
Should you use your monetary policies, in terms of your respon­
sibilities as you interpret them, to prevent a recession?
M r . M a r t i n . Why, if we could, we certainly will. We want to pre­
vent either. But tne point I am trying to make is that inflation
precedes the recession; and that is just the reason why at the present
time we have to come to grips with inflation. We are always fighting
inflation.
Senator L o n g . Here is the thing we are discussing: We are dis­
cussing the fact that, as of this past year, we have had a very inade­
quate increase in our national production. And the question that I
am attempting to get to is whether it is desirable that we should have a
further increase in our national production, or our gross national
>roduct, so that it will increase more rapidly than we increase popuation? And I would like to see us increase it considerably more
rapidly than we increase population. I would like to see us increase
it around 4 percent on the upper end of the 3 to 4 percent that you
say is desirable.
Now that being a desirable result, the question I have in mind is:
Is it desirable for us to use any efforts at this time to reduce consumer
spending or restrain it ?
Mr. M a r t i n . Well, we have to have more savings if we are going
to finance the programs of Government—more savings if we are going
to have to finance the State, local, municipal, county plans, if they are

(




1346

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

going to finance this education we both agree is so essential in terms
of technology for the new type of skilled labor that is required. We
have got to nave——
Senator Long. But now, on the other hand, if we are going to make
more of the better things of life available—that is, in terms of more
clothes, better food, better diet, better housing, more automobiles,
more household appliances for our people—then we also need to in­
crease our production, and in order to do that, we need to increase
the consumption of consumer goods, do we not ?
Mr. Martin. Well, the consumer has to have the wherewithal to
buy the goods. We could not compel him to spend his money. He
is the one who has to determine wnat he needs and what he wants,
and we can not just force “X” added production on the market with­
out regard to his wishes.
Senator L ong. Now, insofar as, and separating this item of infla­
tion for a moment and looking at consumer spending only, insofar as
a tight money situation, and a high interest rate situation, reduces
consumer spending, is that a desirable thing at this time?
M r. M artin . W ell, I contend that there is no tight money situation
that is reducing consumer spending at the present time.

The problem is that the consumer is spending at a colossal rate, and
I think the phrase “tight money” is a misnomer. I think it is really
loose money we have been having for the past year or so.
Senator L ong. Is the consumer spending at a sufficient rate to en­
able us to expand our production at the normal rate which you have
advocated, between 3 and 4 percent?
M r. M artin . It is not unless we have more savings that come into
it—you have got to have plant and equipment.
Senator L ong. I do not think you need at this point to condition
anything. I t looks to me as if you can look right there at the facts
before you, and see whether we are doing it or not. You can take the
next column, consumption expenditures, and see the extent that it
has increased during the past year.
Mr. M artin . I would say the consumer is spending quite adequately
at the present time. The thing we have got to do is—we are not earn­
ing enough through our production-----Senator L ong. H ow do you account fo r the fact that we have had
so little expansion in our gross national product, although we have
built all these new plants and have tremendously increased production
capabilities, and yet we are hardly expanding production more rapidly
than the population is increasing? H ow do you account fo r that?
Mr. M artin . I account for part of it by inflation.
Senator L ong. Well now, we just got through calculating for in­

flation; that is how we found out that we have not gotten anywhere.
Mr. M artin . Well, Senator, the only comment I can make on that—
and I comeback to it—is that inflation is a process; it is not something
that you can calculate here as Sy2 percent and measure it from this
point to the other point. This is a continuous process that is operating
m a spiral.
I f we can project production for a constant level of increase, 3 or
4 percent, without regard to the ebb and flow of markets, why then I
think your thesis is perfectly correct; but I do not think you
Senator Long. Let me go back to this question I tried to get
answered sometime ago, and perhaps we are ready to get an answer




F IN A N C IA L

C O N D IT IO N

OF T H E

U N IT E D

STATES

1347

to it now: On this showing— these are the figures I have to show
and
it, and I hope you can answer this question yes or no, but you do not
have to—do these figures show any pressure on our productive capa­
bilities of a genuine inflationary nature?
Mr. M a r t i n . N o w , in terms of prices, I think it does.
Senator L o n g . Let us not talk about that just yet, let us talk about
productive ability to produce to meet demand.
M r. M

a r t in .

W e l l , th e d e m a n d is a t a p r ic e , t h o u g h .

Senator L o n g . In other words, I would like to separate thesethings,
and that is the reason I started talking about the labor force. I want
to talk first about our capabilities to produce, and I do not want to talk
about the price at this moment. We w ill get to that later, and if you
want to make a statement about that now or any other time, I w ill be
glad to hear it. But I want to know if the facts before us, the
facts in the President’sEconomic Report, the facts in Economic Indi­
cators show any pressure whatever upon our overall productive capa­
bilities to indicate that there is an inflationary strain on our productive
capabilities?
Mr. M a r t i n . Well, if you are talking about can we produce more
than we are producing at the present time, without regard to whether
w can sell it at current prices, I think there is very---e
Senator L o n g . That is all I am talking about at this moment.
Mr. M a r t i n . A ll right. I think there are very few instances where
you can show any strain on our capacity at the moment.
Senator L o n g . In ageneral sense, the answer is “No,” is it not ?
Mr. M a r t i n . In a general sense, the answer is “No. But on prices,
I want to com back to it.
e
Senator L o n g . That is all right. I am not foreclosing you.
Mr. M a r t i n . At aprice. That is right. I know you are not.
Senator L o n g . We w ill tackle this price issue. But as far as th e
production is concerned, there is no snowing here that production is
under any inflationary strain, is there?
Mr. M a r t i n . I would say that you are generally correct at the
moment.
Senator L o n g . N o w , I would like to discuss in somewhat g r e a te r
detail consumer expenditures: and I have prepared a table, and I
shall refer to how I calculated it, and here is one for the record.
This is my calculation of the trend in consumer expenditures,
annual average growth rate in uniform 1956 dollars.
Trends in consumer expenditures, annual average growth rates in uniform 1956
dollars

Tear

Fervent

1958 to 1st half of 1957----------------------------------------------------------------------4-3.7
1955 to 1958______ __________________________________________________+ 8 .3
2d quarter of 1956 to 2d quarter of 1957---------------------------------------------- + 1 .7
2d half of 1956 to 1st half of 1957------------------------------------------------------- -f 1.4
I derived that fr o m two sources: One is from page 124 of the Presi­
dent’s economic report. That is where I derived the basicfigures, and
I calculated the increases, which I do not believe you w ill find sub­
stantially in error, if at all, in terms of personal consumption expendi­
tures. You w ill seethat as the second column.
Senator L o n g . On that page—
that indicates that from 1958 on
through the first half of 1957, our consumption expenditures increased
•t aa MinBtl rate of 3.7 percent in uniform 1956 dollars.



1348

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Now, that is in line, I have always contended, with the fact that in
order to produce, you have got to consume—you have got to have buy­
ing power in order to have production.
Now, there you have an average of 3.7 percent, which is within the
range that you referred to as desirable, between 3 and 4 percent.
Take the average from 1953 through 1956, where the average is 3.3
percent. Then, referring to page 1 of the Economic Indicators,
and adjusting for price change, it appears to me that if you compare
the second quarter of 1956 with the second quarter of 1957, that the
real expansion rate is about 1.7 percent.
Now, you can calculate that at some other time if you want to, but
that is the information that is available to me.
Mr. Mabtin. A ll right.
Senator L o n g . And I would ask you, assuming the substantial cor­
rectness of those figures, does that not indicate that our consumption
expenditures are not increasing at the level that would be desirable?
Mr. M a r t i n . No, not a bit, Senator.
I think that it shows that the savings trend is in the right direction,
and that if we can continue to reduce those expenditures and increase
our savings, we w ill be able to finance this plant and equipment expan­
sion that w ill lead to a sound expansion.
Senator L o n g . I t is not going to do us any good to have a lot of
Slants, if they do not have somebody to buy the stuff they are proucing.
I t takes both; does it not?
M r. M artin . They have got to have the earning to pay, and you
cannot just manufacture savings, you know. We cannot use bank
credit to produce these buildings and plants.
Senator L o n g . Let me ask you—over here on about page 11 of the
Economic Indicators, in terms of income, I think it ought to be there—
’
Ju s t one second. L e t us find disposable personal income in your
indicators.
No, it is not on page 11. On page 6, there is a figure that I know
is not satisfactory from your point of view, and it is not a desirable
figure from mine. I f you w ill look at the second to the last column,
per capita, compare the second quarter of 1956 with the second quarter
of 1957,you w ill seein the second quarter of 1956, per capita disposable
income was $1,713.
The per capita disposable income for the second quarter of 1957
was $1,705, and I would like for the reporter to put this particular
column in the record.
That is in terms of uniform dollars, which indicates that income
after taxes for the average person on a per capita basis is $8 less this
year than it was last year.
Now, that is not desirable, is it, for this quarter?
Mr. M abtin . Is there an adjustment o f prices in that, Senator ?

Senator L o n g . That is in terms of constant dollars, in order to
allow for the inflation of the dollar during that period.
Mr. M a b t i n . Well, that is an $8 loss, then, as a result of inflation.
(The table previously referred to follows:)




PER CAPITA DISPOSABLE INCOME

FINANCIAL
C N ITIO
OD N
O TE
F H
U ITED
N
STA S
TE
1349




1350

F IN A N C IA L

Period

C O N D IT IO N

1954...................-.........................
1955..............................................
1956..............................................

TH E

Total disposable personal
income (billions of dollars)1
1956
prices1

Current
prices

1983..............................................

OF

70.4
187.6
188.2
206.1
226.1
237.4
250.2
254.5
270.2
287.2

137.9
212.0
214.8
232.9
236.7
243.0
254.0
257.6
274.3
287.2

U N IT E D

STATES

Per capita disposable per­
sonal income (dollars) 1
Current
prices
538
1,279
1,261
1,359
1,465
1,512
1,568
1,567
1,635
1,708

1956
prices*

Population
(thousands) *

1,053
1,445
1,439
1,536
1,534
1,548
1,592
1,586
1,660
1,708

131,028
146,631
149,188
151,683
154,360
157,028
159,636
162,417
165,270
168,174

1,697
1,713
1,701
1,711
1,701
- 1 , 705

167,150
167,824
168,594
169,416
170,158
170,859

Seasonally adjusted annual rates
1986:1st quarter..........................
2d quarter— .................—
3d quarter...........................
4th quarter..........................
1957:1st quarter..........................
2d quarter *.........................

279.6
285.8
288.8
294.0
295.5
299.7

283.6
287.5
286.8
289.9
289.4
291.3

1,673
1,703
1,713
1,735
1,737
1,754

>Income less taxes.
* Dollar estimates in current prices divided by consumer price index on a 1956 base.
« Includes Armed Forces overseas. Annual data as of July l; quarterly data centered in the middle of the
period, interpolated from monthly figures.
* Preliminary estimates by Council of Economic Advisers.
Note.—Series revised beginning with 1954. For details, see Survey of Current Business, July 1957.
Sources: Department of Commerce, Department of Labor, and Council of Economic Advisers.

Senator L ong. Well now, you say as the result of inflation; but we
have had some years of inflation, when the real per capita income
nevertheless increased very greatly. In other words, we both increased
our real income and had the inflation all at the same time, because
the increase in dollar income ran way ahead of the increase in prices.
That occurred all during the years 1939 on up, in fact, almost up to
the present time.
For example, let us just take— if you take the years during this ad­
ministration, under President Eisenhower— let us give credit to the
Eisenhower administration here—in terms of real dollars, every year
starting in 1953, with the exception of 1954 when there was a slight
falloff that year and we did not regard the recession as being desira­
ble—but going forward then, 1950, 1951, 1952, 1953, 1955, we had
increases. Then it increased in 1956 until we got to the latter part,
and then it started falling off.
This year we find, comparing one quarter to the other, here is a year
we are just spinning our wheels so far as making any progress. That
is not because of inflation, Mr. Martin, that is because of failure
to produce; is it not ?
Mr. Martin. No, I cannot agree with you, Senator.
Senator L ong. Well, suppose we had produced substantially more.
We would have had more to share and more for everybody to buy.
Mr, Martin, We have to come back to our price, i f you could
ignore prices it would be, perhaps-----Senator L ong. Suppose it had been a case of spending more and
producing more. Suppose the automobile producers had more output,
and the producers of household appliances had more, suppose we pro­
duced more automobiles, household appliances, homes, clothing, any
particular thing you might want to mention in terms of consumer



f i n a n c i a l c o n d itio n

o f t h e u n it e d

sta te s

1351

goods, and the people, having produced them, had proceeded to pur­
chase them. We would not have this kind of showing of a falling off
in real terms, inflation or no inflation; would we ?
Mr. Martin. Well, you are completely ignoring the necessity though
for using a portion of our income to come out of savings for the pro­
duction of these items.
We cannot use bank credit or borrowed money for that type of
productive----Senator Long. Let us get around to that in a moment, because you
have discussed that at considerable length here, and you have en­
lightened us on that, perhaps, not enough, but I will learn more about
that, I am sure.
But, for the moment, I want to talk about where we are going and
whether we are making any headway.
Here we have a showing that during this last year, without any tax
increase, mind you, income after taxes did not keep up with the
increase in the population; did it?
That is, comparing this quarter to the same quarter of last year,
is what I am talking about. That is the figure. I do not make those
figures. Those figures are made by responsible people who are doing
their job from day to day as conscientious Federal employees, I
assum ?
e
Mr. Martin. Absolutely. They do an excellent job.
Well, I think the cause-and-effect relationship which you cite and
that I cite are just the opposite. That is the point.
Senator Long. Let me ask you this: Does not that, plus what I have
been saying about the gross national product, indicate a desirability
of more consumer spending?
Mr. Martin. Well, but under the present demands for capital, I
earlier this morning mentioned-----Senator Long. Let us just leave the demand for capital out of it for
the moment, because that might change the answer—and if so, why
you are entitled to prove that. [Laughter.]
But if we just leave the demand for capital out and say, based on
these facts, separating the demand for capital at the moment, does
not the slow increase of gross national product and the actual reduc­
tion of per capita disposable income, without any tax increase—and
that is the only calculation you make to find out what your disposable
incom is, you say, “How much did I make ? What are my taxes, and
e
how much have I left after taxes?” and that is disposable income—
now, without any tax increase, with disposable income going down
rather than up, and with our gross national product hardly expand­
ing fast enough to meet the increase in population, does not that in­
dicate that there is a desirability for more consumer spending?
Mr. Martin. No, not under present conditions, because you are
taking out of this wheel-----Senator Long. I asked you to separate this thing, that you want to
explain, that makes all the difference, this price matter.
Mr. Martin. Well, the only point-----Senator Long. This industrial expansion that you want to talk
about, let us separate that for a moment. Let us just say that, based
0*1 those facts, without any reference to other things, standing alone
without any reference to the industrial expansion problem, these
tands are not desirable.




1352

M r. M

F IN A N C IA L
a r t in .

C O N D IT IO N

OF

TH E

U N IT E D

STATES

W e ll, i f I a c c e p t y o u r h y p o th e s is , y e s.

Senator L ong. That it is desirable to have more consumer spend­
ing?
Mr. Martin, That is right, if I accept the hypothesis.
But again, the point I am trying to make is, where we disagree is,
that we cannot stop it at a given point and isolate these things. This
is a circle, you see, this turning around.
Senator L ong. Mr. Martin, it seems to me that you feel you are being
led to an answer you do not want to give, and that you are afraid these
facts add up to it.
Mr. Martin. No.
Senator L ong. Later on, as far as your argument about the in­
dustrial expansion and the inflationary pressures that that creates,
we can look at these other factors, and I think we should. But here
are the facts before us, and it does seem to me the answer is fairly
clear and obvious, as far as this particular point about consumption
is concerned.
I know you are not going to say it is desirable in peacetime to have
a reduction in per capita consumer expenditures unless there is some
major factor to account for that.
Mr. Martin. I think it is desirable.
Senator L ong. Let me ask you this: Do you think it is desirable to
have less consumer spending if the result of it is less production ?
Mr. Martin, Well, there again you are taking the wheel—if you
could take any isolated point and project-----Senator Long. You are the man who told it to me first. You are
the one who told me here that you have less production because of
people not being willing to buy, you say, at these prices.
I say, “Is it desirable to reduce prices ?” And you say, “No.”
“Is it desirable to increase prices ?” And you say, “No,” if I under­
stand you correctly,
Mr. Martin, No. I think you are misquoting me a little.
Senator L ong. Let me ask a second question.
Do you say it is desirable to increase prices ?
Mr. Martin. To increase prices ?
Senator L ong. Yes,
Mr. Martin. No; I have not said it is desirable.
I say that the market forces are the ones that are going to control
ultimately these price adjustments, and that neither you nor I can
make them; that there you are up against the operation.
Now, if we could plan the economy in its entirety and ignore this
problem of saving and investment, we could unquestionably just try
to produce more goods, but the people want them at lower prices all
the time. I just do not think you can do that in this production,
consumption, and distribution scale.
Senator L ong. We will be through by 10: 30 here if you will just
give me the correct answer, [Laughter.]
All I am trying to get from you is just the answer as to whether
or not it is desiraole, one, to have a reduction in normal times of per
capita disposable income where no tax increase has occurred from
one year to the other; that means, after taxes.
Mr. Martin. Senator, would you object to letting Mr. Riefler com­
ment on this?



FINANCIAL CONDITION OF THE UNITED STATES

1353

Senator Long. That is all right with me, provided you will claim
the answers as your own. It is all right with me, Mr. Martin.
Mr. Martin. I will claim it as my own.
Mr. Riefler. This is a computation of per capita income in con­
stant dollars.
Senator Long. That is completely correct*
Mr. Riefler. They take tne total income and divide it by per
capita. Then they take out estimated price change, and get per
capita.
What it shows, if the figures are correct, and these are difficult
things to get within fine margins-----Senator Long. You are not going to accuse me of falsifying that
thing, I know that. [Laughter?]
Mr. Riefler. No; but what it shows is less output per capita this
year than last.
Senator Long. You mean less income per capita.
Mr. Riefler. Less output.
Senator Long. Both ways.
Mr. Riefler. So that would mean that productivity has fallen off.
Now, that would be a very serious thing. I really think that you
probably will find the explanation in the difficulty of making these
adjustments so finely.
But to say that productivity has fallen off during the last year,
that is what it shows-----Senator Long. It does show that.
Mr. Riefler (continuing). That would be a very serious thing, be­
cause it is our productivity increasing that all these growth trends
w are talking about are based on.
e
Senator Long. You are saying that if that is correct, it is not a
desirable thing?
Mr. Riefler. If productivity is falling off, then we will not have
growth trends. That is not due to lack of demand. I mean there is
a general thesis that inflation impairs productivity. I do not really
think that when you carry it all through-----Senator Long. Well, we have had some of our greatest increases in
production during some of our greatest periods of inflation.
Mr. Riefler. When you had slack resources.
This one starts with—well, you quoted 1942. There were slack
resources.
Senator Long. Take the years like 1942. By that time you had---Mr. Riefler. Slack resources were still in existence.
Senator Long. Y ou had 14 million men in the armed services.
Mr. Riefler. But you were---Senator Long. And you started the war with 9 million unemployed,
so you had to increase your labor force by about 5 million at the same
time you were taking 5 million men more into the Armed Forces than
you had in the unemployed when the war started.
Mr. Riefler. Ana you released an enormous volume of labor from
the sheer process of distribution.

As the Government becam the sole buyer or more nearly the sole
e
buyer, there was a terrific release of personnel there.
Senator Long. You also had tremendous increases during the year
after that andthe year after that, but you had inflation----




1354

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Mr. R i e f l e r . Yes.
Senator L o n g . Y o u had inflation, but you also had tremendous
increases in your production at the same time.
Mr. R i e f l e r . Yes.
You see, that is productivity—when you get into multiplying mil­
itary items by millions of times, the productivity factor can come in
quite fast, but that World War thing is a very different kind of
business.
Senator L o n g . This thing of having an inflationary year, a year of
inflation, where you had so little increase in production, is a very
unusual thing; is it not ?
Mr. R e e f l e r . Well, it is something that accompanies-----Senator L o n g . Can you tell me when i t happened before?
Mr. RiEFiiEB. It is characteristic of a hyperinflation, and it is a
phenomena of a hyperinflation.
I would be very surprised if the final figures when they all get
corrected, if they would bear this out, because what this seems to show
is a decrease in productivity during the past year, and at a time when
so much plant improvement has come in.
Senator L o n g . It is a threatening sign; is it not ? It is a bad sign.
Mr. R i e f l e r . It would be a sign inflation was more widespread than
I think it has been.
Senator L o n g . Can you point to any other year when you had
inflation and a reduction, a falling off of production at the same time ?
Mr. R i e f l e r . Oh, yes. That is usually true of all extended periods
of inflation.
You see, people are not interested in producing the most efficient
things. They are interested in making inflation profits, because when
you actually get a reduction in productivity, there is an inflation profit
involved.
Senator L o n g . I am just trying to get the answer to this question,
and so far I cannot seem to get it, which seems to me obvious enough,
and we wander all over the lot, but there is never a direct answer to this
question.
All I want to know is this: With 4 million people unemployed, our
production increased-----Mr. R i e f l e r . Three.
Senator L o n g . Well, the last figure-----Mr. M a r t i n . It is 4 percent you are quoting. It was 3 million.
Mr. R i e f l e r . The number was 3 million.
Senator L o n g . Let me now see whether it is 3 million. I am just
referring to the last published figure. I understand it came down last.
Mr. M a r t i n . Yours would be 3.3 million, then.
Mr. R i e f l e r . 3.7 million.
Senator Long. June 1957, 4.8 unemployed, seasonally adjusted, 4.5.
Did I say million, or percent ? I thought I said it was 4 million
unemployed.
4.8 percent unemployed, as of now ?
Mr. R i e f l e r . Yes. It is 4.2 in July.
Senator L o n g . I do not have the July figure. I only have the p u b ­
lished figure here.
I have been asking for it, but I have not been able to receive it; 4.2
percent unemployed, which works out to 3 million.



FINANCIAL CONDITION OF THE UNITED STATES

1355

Four and two-tenths percent unemployed, an increase in production
slightly more than the increase in the population, and an actual drop,
an actual decline in disposable personal income, would it be desirable
to have additional consumer spending if that meant additional pro­
duction ?
Mr. Kiefler. Well, those figures do not exactly jibe. They are a
little inconsistent there.
Mr. Martin. I still com back, Senator, to the point that under
e
current conditions, the real need is for savings, not for consum
er
expenditures.
Senator Long. You are familiar with Prof. Sumner Slichter, are
you not ? You either know of him or you know him, one or the other ?
Mr. Martin. Yes.
Senator Long. He is well regarded by a great num
ber of people in
the field of economics. Here is a letter on August 8 of this year that
he wrote to the New York Times. He says that:
The figures—

which I assum refer to these figures w are discussing here—
e
e
The new figures show that the weak spot in the economy is now consumption,
especially consumption of durable consumer goods—

and I assum that relates to automobiles, household appliances, and
e
things of that sort—
and that this weakness exists in spite of a fairly good increase in personal in­
comes.
For more than 6 months the American economy has been merely marking time.
Physical production in the second quarter of 1957 was virtually the same as in the
f r t quarter, and between the last quarter of 1956 and the first quarter of this
is
year there was only a negligible rise in physical output.
As a result, total physical production today is only about one-half of 1 percent
greater than i was in the last quarter of last year. Industrial production i
t
s
even less today than it was 9 months ago and is not even 1 percent greater
than i was in the spring of 1956— in spite of large outlays by factories and
t
mines on new plant and equipment.

He goes on down, and I will not read the whole letter, but it is all
along that line, and he makes this statement:
But the fact that the American economy has made virtually no progress in
increasing production for over 6 months shows that the number one economic
Problem is not inflation— i is the problem of restoring expansion to the economy
t
by persuading individuals to increase their spending, thereby creating markets
for a larger volume of production.

Do you agree with that statement ?
Mr. Martin. No, I do not agree with it. He has got a billion
dollar error in there. That is not terribly important, but it is true,
but I do not agree with the statement at all.
There is an answer to it from a life-insurance president today that
I think is rather good. He says:
In a time of relatively full employment as is the present, to state as does
Professor Slichter in his letter of August 8 that the number one economic
Problem of the moment is “to restore expansion to the economy by persuading
individuals to increase their spending*’ is to argue for an increas in the forces
taking for inflation.

. Senator Long. Let me ask you this question: Do you think a lifeinsurance president can be an unbiased witness ?
Mr. Martin. This is from an economist.
93633— 57— p t. 3--------10




1356

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Senator L o n g . I thought you said he was a life-insurance presi­
dent.
Mr. R i e f l e r . He was an economist and a professor of economics a
few years ago, and he has become the president of this life-insurance
company.
Senator L o n g . He is president now. He is not their economist; h e
is their president.
Well, I repeat the question, do you think that the president of a
life-insurance company can plead from a position of an unbiased wit­
ness in this situation ?
Mr. M a r t i n . I think so. I think he has got---- Senator L o n g . D o high interest rates substantially increase the in­
come of a life-insurance company ?
Mr. M a r t i n . Yes. But the depreciation of the dollar destroys
entirely his business, and no one has more concern about the deprecia­
tion of the dollar than a life-insurance company.
Senator L o n g . Nor has anybody more concern about the increased
rates, do they ?
Mr. M a r t i n . No, I do not think that follows, Senator. I think
the No. 1problem for a life-insurance company, is making good----Senator L o n g . Y o u say the witness would not be biased; that the
increase in his income would not relate to his judgment ?
Let us go ahead and hear the rest of it.
Mr. M a r t i n (reading):
With the level of expenditures for investment as high as they have been daring
the past year, where would industry have obtained the materials and labor to
produce a higher volume of consumer goods?
The really phenomenal thing is not that consumer expenditures have not
expanded during this period, but rather that it has been possible to increase
expenditures for investment so much without causing their decline.
Perhaps later, when the current investment has resulted in an enlarged plant
capacity, the need may then be to increase consumer expenditures in order to keep
the enlarged plant running full capacity. But not now, when our economy is
practically bursting at the seams.

Senator W i l l i a m s . May I break in for a moment ?
Senator L o n g . Yes.
Senator W i l l i a m s . I would just like to make the observation that
this letter was written by one of Delaware’s outstanding economists.
Senator L o n g . That may very well be.
I know the cigarette people hired themselves a mighty fine doctor
to testify that cigarettes cannot give you lung cancer—and he said it
was not conclusive, after he made a study of the findings.
I would like to put Dr. Slichter’s letter in here.
(The letter from Dr. Slichter follows:)
[New York Times, August 8, 1957]
F a l l i n C o n s u m p t i o n N oted
STIMULATING SPENDING DECLARED OUB PBIMARY ECONOMIC PROBLEM

The writer of the following letter is professor of economics at
Harvard University. He is the author, among other works, or
What's Ahead for American Business?
To the E d it o r of t h e N e w Y o r k T i m e s :
The figures on the state of the economy in the second quarter of 1957, recently
released by the Joint Economic Committee, show important changes that should
be of interest to businessmen and Government policymakers. The new figures



FINANCIAL CONDITION OF THE UNITED STATES

1357

show that the weak spot in the economy is now consumption, especially consump­
tion of durable consumer goods, and that this weakness exists in spite of a
fairly good increase in personal incomes.
For more than 6 months the American economy has been merely marking time.
Physical production in the second quarter of 1957 was virtually the same as in
the first quarter; and between the last quarter of 1956 and the first quarter of
this year there was only a negligible rise in physical output.
As a result, total physical production today is only about one-half of 1 percent
greater than it was in the last quarter of last year. Industrial production is
even less today than it was 9 months ago and is not even 1 percent greater than
i was in the spring of 1956, in spite of large outlays by factories and mines on
t
new plant and equipment.
A C C O U N T IN G FOR L U L L

The present lull in business was originally brought about by the wise decision
of many enterprises to reduce their inventories. But this cause does not explain
the continuation of the lull through the second quarter of 1957.
The unsatisfactory production record in the second quarter occurred in face
of the fact that industry was producing more than it was selling, with the result
that the physical volume of inventories rose in the second quarter by $1.5 billion
a year.
The crux of the difficulty has been the reluctance of consumers to spend their
growing incomes. Personal incomes after taxes rose by $4.2 billion a year
between the first and second quarters. But personal consumption expenditures
increased by only $1.1 billion a year and buying of durable consumer goods
actually dropped by $900 million a year.
The small rise in consumer expenditures was not enough to offset the rise in
prices, so that Americans actually consumed a smaller physical volume of goods
in the second quarter than in the f r t
is.
INDUCEMENTS TO BUY

Sooner or later Americans will undoubtedly spend nearly all of the increase in
their growing personal incomes. But at the moment, many consumers are evi­
dently paying off old debts while waiting for industry to offer better goods at
more attractive prices.
The job of getting individuals to spend a larger proportion of their incomes,
and thus ending the present stagnation of the economy, is obviously not one that
the Government can do. Only business firms can persuade people to spend a
larger proportion of their incomes.
But the fact that the American economy has made virtually no progress in
increasing production for over 6 months shows that the No. 1 economic problem
of the country is not inflation— it is the problem of restoring expansion to the
economy by persuading individuals to increase their spending, thereby creating
markets for a larger volume of production.
SUMNEB H. SUCHTER.
M a d is o n , W is ., July S I ,1957.

Senator Long. I take it, then, you do not feel there is any desirabil­
ity for increasing consumer spending? I take it that would be your
view even if that should mean increased production ?
Mr. Martin. I think the important thing at the moment is to in­
crease savings. That has to come out of the consumers.
Senator Long. Since you mentioned that subject of increased sav­
ings, do you believe that it would be desirable to increase consumer
savings even in order to finance plant expansion, even though this
m
eans a considerable reduction in consumer spending resulting in a
considerable reduction in production of consumer goods at a time
^hen we have a large amount of industrial expansion, that is, indus­
trial facilities, to spare?
Mr. M a r t i n . I do not think we have a large amount to spare. I
think you have got to recognize the size of this economy.
Senator L ong . L et us consider this.




1358

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Here we are producing 2 million automobiles less than we are capa­
ble of producing. We are producing far less than we are capable of
producing in terms of household appliances.
We are producing 20 percent less houses than we are capable of
producing, and real income is not increasing because the public is not
buying, and you pointed out yourself that seems to be one of the
reasons it is not increasing.
Do you really feel that, even if it means that there should be a fur­
ther reduction in real income—that it, income after taxes, income of
the individual—we should nevertheless try to take from consumer
spending additional savings, even though that means a reduction in
production and a reduction in personal income?
Mr. Martin. I do not think it would mean either of those, Senator,
I think that the problem here is the turn of this wheel that we are
talking about. Now, I put down here in my statement, and I will
stand on it, that the volume of savings and investment permits con­
tinued expansion of productive facilities at a rate consistent with
growing consumption demands.
Now, this population is growing-----Senator Long. Let us just refer to that statement for a moment
since you want to use that.
You say you are talking about permitting us to expand our plant
and equipment, as I understand it, relative to consumption demand;
is that correct?
Mr. Martin. Well, your problem here is that people have to—there
is a time element in it, with a growing population and a growing con­
sumption demand-----Senator L ong. That is just it. There is no growing consumption
demand. You are the one to say that here it is lower than it was on
a per capita basis, and it ought to go still lower,
Mr. Martin. No ; we are talking now about real income.
Senator L ong. That is right, because if you use the inflated figures,
it looks as though it might have increased, but it has not.
Here we are at a standstill, showing the actual reduction in per
capita income in terms of real dollars—that is, in terms of constant
dollars—and here you are saying that it would be good to further
reduce it and that this would meet growing consumer demand.
I do not understand that. There is growing consumption demand,
I believe is the term you used. Well, it is not growing; I mean, it is
getting less rather than more, according to this,
Mr, Martin, No ; it is growing, but the demand—the problem
that you have here is that the demand for these products is offset by
an enormous requirement for plants and equipment expenditure for
the production of these products in all lines, not just the lines that
you mentioned, but across the board, and that is in excess of our avail­
able savings, so that if you create bank credit to supply that, why, you
are just endangering the deposits of everyone.
Senator Long. Well, now, let us just look at this for a moment.
If you make additional funds available for the expansion of these
plants and facilities, then you must have more funds available to pur­
chase more goods and commodities than are being produced today;
must you not?



FINANCIAL CONDITION OF THE* UNITED STATES

1359

Mr. Martin. But the price factor comes into it. This money sup­
ply, then, if you are going to say that the way to increase production
is to increase the supply of money, when there is an inadequacy of
savings-----Senator Long. Let us take it step by step.
Mr. Martin. There is no other way to do it.
Senator Long. You are the one who told me the way to increase
production is to increase consumer spending.
Mr. Martin. No.
Senator Long. Didn’t you ?
Mr. Martin. No, I have never said that.
Senator Long. Did you not make this statement here that this
failure to expand our gross national product to any considerable de­
gree, and this failure to increase our per capita total income, related
to the fact that consumers were not willing to buy at present prices ?
Mr. Martin. Do you want to comment on this, Mr. Riefler?
Mr. Riefler. Yes.
He brought in the fact that when you talk about a specific line, like
automobiles or appliances, or something where you have more capacity
than current demand, you must remember that there the consumers
w not buying that larger output, potential output, because possibly
ere
of a price factor. But, for the total situation, not at all. The point,
in general, is that the labor force, employed labor force, is very much
larger than ever.
We do have output at capacity. Now, some of these things are
curious.
One of the things that has happened this last year apparently is a
trem
endous or a very appreciable shift in demand toward services.
If you look into the employment figures, it is the service sector where
the growth of employment is.
If you look at the price series, it is the service component where
prices are going up faster. So that it looks as though there is a shift
toward the services in what the consumer is demanding at the present
tim
e.
Now, it may be that that helps explain your other dilemma also.
It may be true—and I do not know this—it may be true that pro­
ductivity has not increased in the provision of services as much as it
has in the output of factories. It is in the output of factories that you
get the effects of the new machines, increasing productivity.
Senator Long. Well, productivity has fallen off because of lack of
dem
and for the product.

Mr. R i e f l e r . No.
Senator Long. Lack of money to buy it, one way or the other.
Mr. Riefler. The consumer is spending his money, and prices are
going up. There is no question that prices are high. Prices could not
go up unless they were spending.
Senator Long. Y ou are producing 20 percent less homes.
Mr. R i e f l e r . But the prices are up.
Senator Long. At their peak.
Mr. R i e f l e r . T h e p r ic e s a re u p .
Senator Long. I know prices are up.
fclr. R i e f l e r . That shows that people are spending their money.
J^es could not go up if people were not spending their money.




1360

FINANCIAL CONDITION OF TH E UNITED STATES

Senator L ong. But they are buying less.
Mr. Riefler. Because the prices are higher.
Mr. T homas. They are buying less in constant dollars.
Mr. Riefler. They are buying less in constant dollars, but not less
in actual dollars. It may be that these figures that show a decrease in
productivity, after correction for price changes, may represent a shift
of demand to an area where there has been less increase in produc­
tivity. The thing you were bringing up earlier about 1952 or 1953,
and the last part of 1951, where you had this abnormally low per­
centage of unemployment at a time when prices w
^ere not rising, that
was a period in which you were getting a very rapid increase in the
efficiency of merchandising, that was the period in which the discount
house was coming in, and that sort of thing, cutting the distributive
margin, and part of the fact, part of the explanation, of,that period
that you could have rapidly rising wages without a reflection in prices,
was the increase in the efficiency of distribution that was taking place.
Now, at the present time, these figures sort of seem to indicate that
you are getting: a reverse effect in the efficiency of distribution; that
as demand shifts toward services from factory output, you get—when
you divide through you get a general productivity factor, you get a
decrease in per capita income in constant dollars. That may be an
explanation.
Senator Long. Well, you can answer this question if you want to,
or your assistant can, but my impression is, perhaps, we are talking
about a different definition of productivity.
To me, when you have got the ability to produce 20 percent more
houses than you are producing, the definition that I would ordinarily
use of our productivity would not cause me to think-----Mr, Riefler. Physical output per capita.
Senator Long. Y ou are not able to sell them or move them. But
you certainly have the ability to produce them.
Mr. Riefler. People are always shifting their demands, according
to what it costs. They could buy houses or vacations. This year
they are buying more vacations than ever before, even though they
are buying less houses.
Senator L ong. If you look at the overall figures, they are very
revealing. The overall figures are, so far as personal consumption is
concerned, show that it has not expanded the way that you would
expect it to, even when you include your increased purchase of per­
sonal services in there.
Mr. Riefler. Well, the necessity for increasing savings to finance
these larger capital expenditures, must necessarily be reflected in a
decrease in the rate of expansion of personal spending. That is just
mathematics.
Senator L o n g , Well, the hour of 1 2 : 35 having arrived, Mr. Martin,
I assume-----Mr, Martin. I have plenty of time.
Senator Long, I was hoping we would be through at this time, but
I still have several things I had hoped to get to, and I hope we will
be able to cover them tomorrow in, perhaps, a half hour or so.
Mr. Martin. I will see you at 10: 30 ?
Senator Long. We will recess until 10: 30.
(Whereupon, at 12:35 p. m., the committee recessed to reconvene
on Friday, August 16,1957, at 11:25 a. m.)



IN V E ST IG A T IO N

OF
THE

THE

F IN A N C IA L

U N IT E D

C O N D IT IO N

OF

STATES

FRIDAY, AUGUST 16, 1957

United States Senate,
Committee on Finance,
Washington>D. C.
The committee met, pursuant to recess, at 11:25 a. m., in room 312,
Senate Office Building, Senator Eussell B. Long presiding.
Present: Senators Byrd (chairman), Long (presiding), Carlson,
Bennett, and Jenner.
Also present: Winfield Riefler, assistant to the Chairman, Board
of Governors, Federal Reserve System.
Elizabeth B. Springer, chief clerk; and Samuel D. Mcllwain,
special counsel.
Senator Long. The committee will come to order.
Mr. Martin, I would like to talk a little bit about the independence
of the Federal Reserve Board. You made the statement in your pre­
pared statement that the Federal Reserve Board apparently had an
obligation to follow the administration with regard to administration
policies, and that it was not independent of them, but that it nonethe­
less exercised its own independent judgment with regard to the way
that those policies should be implemented. Would you elaborate upon
that, as to your understanding of the degree to which the administra­
tion fixes its policy with regard to employment, and with regard to
direction of our economic and fiscal policies, and the degree to which
the Federal Reserve Board exercises its judgment?
STATEMENT OF WILLIAM McCHESNEY MARTIN, JR., CHAIRMAN,
BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM— Resumed

Mr. Martin. Well, we feel ourselves bound by the Employment
Act and by the Federal Reserve Act. And in the field of money and
credit we consider ourselves to be, regardless of what the decisions of
the administration may be—we consult with them but we feel that we
have the authority, if we think that in our field, money and credit
policies, that we should act differently than they, we feel perfectly at
liberty to do so.
, Senator Long. In other words, you feel that you have freedom
promoting what you believe to be the full employment policy of the
law?
Mr. M a r t i n . That is right.
Senator Long. To adopt policies that may not be the policy of the
^ministration itself?
Mr. M abtin. That is right.



1361

1362

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Senator L o n g . And you feel that there is the right within the Board
to adopt a policy that may be completely at variance with the attitude
and the direction of the policy of the administration ?
Mr. M a r t i n . Well, I wouldn’ say that—we will discuss it at con­
siderable length.
Senator L o n g . Y o u have the right to disagree with them?
Mr. M a r t i n . Exactly.
Senator L o n g . And you believe that the Federal Reserve Board, if
it does disagree, has the right to pursue a policy that is completely con­
trary to the policy that the administration proceeds to follow, not
meaning that you are doing this or that you have done it, but that you
feel that under the law you do have that right ?
Mr. M a r t i n . Under the law we feel it is our prerogative; yes, sir.
Senator L o n g . At the same time you believe, if 1 understand it
correctly, that you should in a sense persuade them that the policy
that you are pursuing is the correct policy, and that their policy should
be consistent with yours, and that you should make your views avail­
able to the Executive for the Executive to persuade you if possible that
the policy that the Executive is pursuing is the policy to which you
should direct your activities ?
M r. M

a r t in .

T h a t is r ig h t .

Senator L o n g . At the present time, if I understand it, the testimony
from the executive branch has been that their policy is consistent with
the policy that you are pursuing?
Mr. M a r t i n . Well, I think m a broad sense that is correct. We
have differences of opinion—differences of judgment with respect to
our actions.
Senator L o n g . Yes. Has the administration of recent date, the
spokesmen for the Treasury Department or the President in any
other capacity, been urging you to take a position or adopt a policy
contrary to the one that you have been pursuing?
Mr. Martin. Well, over the last year there has been no pressure,
Senator, such as saying, “If you do not follow this policy, we will
drop you out of office.”
They have tried on a number of occasions to persuade us that we
should not take action which we did take, but it was a perfectly
friendly discussion and honest disagreement, not about broad policies
so much as about timing and judgment with respect to whether it was
a wise course for us to pursue under present conditions.
Senator L o n g . Could you give us some indication of recent d e c i ­
sions and recent actions that the Board has taken which you feel were
not the policy that was recommended or was, perhaps, contrary to
the attitude that you believed that the administration would h a v e
taken if it had been charged with the same responsibility that you
have?

Mr. M a r t i n . Well, I think the most glaring instance of that was
in April of 1956. Pursuing our method of cooperation, I began d i s ­
cussions with Secretary Humphrey. In February of that year Gov­
ernor Balderston and I had a meeting with Secretary Humphrey
and there was a disagreement as to the nature that the economy
was developing. We were so convinced; we discussed i t w i t h
various people, and in a series of meetings from about the middle of
February until the last week in March.



FINANCIAL CONDITION OF THE UNITED STATES

1363

By the last week in March the position in the Federal Reserve—
w
hich was not a 1-man operation; you see, the 12-bank directors were
considering all aspects of this—was that it would be wise for us to go
up in the discount rate.
I think Secretary Humphrey subsequently testified that his judg­
m
ent, at that time, was that the timing was poor, but that he was not
opposed to the long-run objective.
We finally reached a point where there was no meeting of the minds
that could be had, and there was nothing for the Federal Reserve to
do except to go and act. And we acted.
Senator Long. Since that time, the discount rate has been advanced
several additional steps, has it not ?
Mr. M artin. It has. And it has been discussed persistently with
the Treasury and with the Council of Economic Advisers and others
in the administration. And we benefit a great deal from these dis­
cussions with them, just as we benefit from the meeting here before
this committee, getting the different points of view.
Senator L o n g . Are you free to say whether there was a divergence
of opinion on the subsequent increase in the rediscount rate ?
Mr. M artin. In some degree I think there was. There was no pres­
sure put on us not to do what we did. Everything was very friendly
and amicable, but I am inclined to believe, to be honest, that if it had
been handled by the administration it would have been handled dif­
ferently.
Senator L o n g . Are you inclined to believe that the administration
w
ould have been more rapid in advancing the rediscount rate or less
rapid?

Mr. M artin. They would have been less rapid, although I want to
b very fair in this and say at one point, early 1955, I think, the
e
administration probably would, if they had had the authority, or
might have gone up and at that time we were opposed to going up.
It has not been a one-way street.
Senator L o n g . A s of yesterday, the Government paid more than 4
percent interest on their 90-day indebtedness?
Mr. Martin. That is correct. The rate was 4.17.
Senator L o n g . 4.17?
Mr. Martin. Yes.
Senator L o n g . Can you tell me when was the last time that the rate
ona 90-d a y indebtedness was that high ?
Mr. Martin. T o be correct, it should be noted th at this 4.17-percent
issue was not fo r 90 days —it was 237 days.
Senator L o n g . 237 days?
Mr. Martin. Right. We will have to look up the “last time.” It
has been a number of years.
Senator L o n g . D o you have any off-hand recollection, just an im­
passion that you could give us, for the moment, how long back it has
beensince you paid that much ?
Mr. Martin. It would be probably in the 1930J Mr. Riefler says
s.
newspaper account said 1933. We haven’t checked it. We will
°beck it and give it to you for the record.
(The information referred to is as follows:)
On March 6,1933, a 93-day Treasury MU was auctioned at an average interest
**•<*4*26.




1364

FINANCIAL CONDITION OF TH E UNITED STATES

Senator Long. That is an extremely high burden for this Nation to
assume, to pay interest at that level, is it not ?
Mr. Martin. It is a high rate; yes, sir.
Senator L ong. And if we had to refinance our entire national
debt, recognizing that the long-term bonds draw higher rates than
the short-term obligations, do you have any idea as to how much
that would increase the cost, so far as the interest charges on the
Government debt are involved ?
Mr. Martin, I haven’t, Senator. You see, you cannot say that the
long-term rate will be or become the overall rate, but what we are
dealing with here is a rate that may well be the high for a long time
to come. It also may not be. But by and large if you are talking
about refinancing the whole debt and making an estimate of the
cost, you are making a projection of a rate of activity and a flow of
spending in money that just may not be in existence a year from now.
Let me just close on that by saying that this particular rate was
not set by the Treasury, It was bid for in the open market.
Senator Long. Let us just return to some of the matters we were
discussing yesterday, with regard to this item of inflation. I didn’t
expect the point to be made yesterday, when I said that per capita
personal disposable income has declined in the second quarter of 1957
as against the first quarter of 1956, and when you suggested that Mr.
Riefler should comment on that subject, that the slowdown of produc­
tion might be explained and that the actual decline of per capita
income might be explained on the basis of a decline in productivity. I
do not think that was the cause in any respect, and if you are at all
under that impression I believe we ought to nail it down right here
and now.
I have prepared a statement on that subject, which I think it might
be well for you to read. You might read it, and then I will read it to
you, because I think it analyzes this subject matter. I do not believe
it leaves any doubt whatever, and I have the facts here to prove it,
that there has been no decline whatever in productivity.
Productivity is the output per man-hour worked, and therefore
productivity is a measure of efficiency or technology. If the slow­
down in total output and the corresponding decline in per capita
consumption was due to cessation of growth in productivity, then we
would not have the steep increase in unemployment, the virtual aban­
donment of the overtime worked, and the greatly excess plant capac­
ities in almost every major line.
All of these trends show that productivity is continuing to increase.
But total production is not increasing accordingly, with conse­
quent unemployment of manpower and of plant, because consumer
demand is not growing rapidly enough to make full utilization of the
increasing productivity.
It is just because productivity is increasing that we have the eco­
nomic power to continue to raise the standards of living, and it is just
because productivity is increasing that the only alternative to a
corresponding expansion of production and consumption is rising
unemployment, unused plants, and ultimate recession.
I cannot understand the confusion on the part of the Federal Reserve
Board as to the distinction between productivity and production.
Is there any inclination on the part of Federal Reserve to believe
that there has been, or is a decline in productivity?



FINANCIAL CONDITION OF THE UNITED STATES

1365

Mr. Riefler. I think I stated I doubted whether it was that. What
I said was that there had been a shift toward services in the expendi­
ture of disposable income, and it might be that that would have that
effect in the aggregate.
It might be that services had not been increasing their productivity
over the past year. I questioned the validity of the whole position
in using statistics quite so finely as they were being used. Statistics
actually show that there was a very big increase in money demand
over the past year, even on a per capita basis. It increased from
$1,703, did it not, to $1,754 ?
Now, that is an increase in money demands. It showed that money
dem
and was much larger even on a per capita basis than last year.
Senator Long. First, let us settle this matter of productivity.
Mr. Riefler. I think I said I doubled whether productivity had
decreased. I doubted if the figures showed that.
Senator L ong. Y ou suggest that might explain-----Mr. Riefler. I said-----Senator Long. That that might explain the fact the disposable in­
com on a per capita basis has declined. I would like to ask Mr. Martin.
e
Mr. Riefler. Disposable income is not down. It is only when you
divide it by the price index that you find a decline. The figures say
here disposable income, per capita income, has increased from $1,703
to $1,745. That is what the figures show.
Senator Long. We will have to go back to page 6 of the economic
report.
Mr. Riefler. Disposable income, second quarter 1956-----Senator Long. Do you want to take credit for the inflation—I
take it ?
Mr. Riefler. Disposable income has increased.
Senator Long. Disposable income ?
Mr. Riefler. On a per capita-----Senator Long. Measured in terms of constant dollars ?
Mr. Riefler. Then you are taking-----Senator Long. Listen, just wait until I ask a question, and after I
*sk the question, answer. It is more difficult to direct a question
tow
ard Mr. Riefler because Mr. Riefler insists on talking while I am
talking. After I get through asking my question, answer.
I am trying to examine the Chairman of the Board. If you want to
com ent on it, that is all right, because you are the one that suggested
m
«ere that there was a decline in productivity. The Chairman said he
*ould accept your statement.
It seem to me that is one of the worst misstatements you have made
s
yet, but let me just nail this down. Here is page 6, where we have the
imputation or per capita disposable income, and those who prepared
in about three different places in the Economic Indicators have gone
to the trouble of calculating it by making the correction to allow for
inflation, or deflation. So that you can look at the thing in terms
°f constant dollars.
That is why we have this second column on per capita, one in
Wins of current prices which can be completely misleading .because
does not take into account inflation which has occurred or deflation
might have occurred in one period against another.
Then a second column is prepared for a very good reason, so you
see what happened in terms of constant dollars, what hap­



1366

FIN A N CIA L CONDITION OF T H E U N ITED STATES

pened allowing for the difference in purchasing power. There you
have in the second column, which I put in tne record some time
ago, your second quarter figure of the personal disposable income—
second quarter 1956, $1,703, second quarter 1957, $1,705, which is an
actual decrease. That takes into account increase in population; it
also takes into account inflation as it occurred during the last year.
Now, it was you who suggested, Mr. Riefler, and the Chairman
adopted that as his answer, that perhaps this could be explained by
a decline in productivity. I think that we better dispose of that to
see if there is any decline in productivity. You suggested it. You
did not offer any support of it, other than to talk about services. I
think we had better get the facts in the record on productivity.
Here is one phase of it, but first I think we ought to put in the record
the figures on productivity so far as labor is concerned. Here at
page 148 of the report of the Joint Economic Committee, 85th Con­
gress, 1st session, is the record of the output per man-hour in manu­
facturing. And I will make these figures available to you here:
from an index of 111.6 in 1951, based on 100 as of 1947 to 1949 average,
the index rose; 1952, 115.3; 1953, 119.7; 1954, 123.6; 1955, 130.0;
1956,133.5. And the information I have is that from early indications
in 1957—the figures are not yet available—it will show a continuing
increase. There is a steady increase in productivity so far as manhours in plants are concerned. Here is the record so far as production
per man-hour in agriculture, which shows a similar increase.
And I will put these two tabulations in the record, and those are
taken one from page 148 of the Economic Report and the other from
the Department of Agriculture.
That indicates a steady rise in productivity per man-hour of labor,
does it not?
(The tabulation referred to is as follows:)
Output per man-hour, manufacturing (Joint Economic Committee, June 1957,

P. U8)
[1947-49 = 100]

1851_____________ 111. 6 11953______________ 119. 7 I 1955---------------------- 130. 0
1952_____________ 115.3 11954_____________ 125.6 I 1956______________ 133. 5
N ote .— E arly 1957 figures in d icate m uch fa ste r gain than fro m 1955 to 1956,

Real output per man-hour (Department of Agriculture)
[1947 = 100]

195 1
195 2

120.4 11953_____________ 132.9 I1955______________ 149. 7
125. 7 11954_____________ 143.9 11956_____________ 154. 8

N ote .— B ased on (1 ) agricu ltu ral p riv ate p roduct, as appearing in P resid en t’s E co n o m ic
R eport, p. 1 2 6 ; and (2 ) adult m ale w orkers in agriculture, a p p earin g at v arious places in
D epartm ent o f A griculture publication entitled 4A gricu ltu ral P ro d u ctio n and E fficiency,”
1

Mr. R i e f l e r . So far as these industries covered by the computation
is concerned, yes.
Senator L ong. One covers “all manufacturing” and the other covers
“all agriculture,” and that I think pretty certainly indicates, so far as
all manufacturing and all agriculture is concerned, there is a steady
increase in productivity per man-hour.
Here is an article from Business Week, July 13, 1957, which is
pretty current, which shows that “Output lags as capacity grows,”
with regard to practically every major industry. In fact, this general



FINANCIAL CONDITION OF THE UNITED STATES

1367

statem is made with regard to industry, and I would like to read an
ent
excerpt or two from it:
Industrial production is down, industry’ productivity is up, and the growing
s
gap between the two is made up of expensive manufacturing plant that isn’
t
fully used, some of which may be obsolescent and expensive to operate, perhaps,
but unused nevertheless.
In a few industries, the gap has been growing for more than a year. In most, i
t
has increased largely in the last 6 months. Before the beginning of the year, the
chief factor causing the growth in the gap was rapid addition of extra productive
capacity. But, since the beginning of the year, while industry has kept adding
to i s capacity, production itself has slipped.
t

Is that in accordance with your understanding of the econom facts
ic
of today ? I will ask Mr. Martin that.
Mr. Martin. That production has slipped? It slipped slightly
on our index, but not on the longer run. We could put into the record
our general index, but we have just readjusted our index for June, I
think to 144, which is about 3 points higher than a year ago. It is
about three points higher than a year ago.
Senator Long. Is that after allowing for the price increase—that is
after you allow for inflation, I take it ?
Mr. Martin. That it is real ?
Senator Long. That is in terms of dollars.
Mr. Martin. It is in real terms—actual physical output.
Senator Long. Let me just go forward with this:
Industry generally prefers to operate in normal times— periods other than
war and similar emergencies— at about 90 percent of productive capacity. The
extra 10 percent of its plant i normally under repair or in reserve. But since
s
the end of 1956, industry’ overall production has slipped from an estimated 85
s
percent to 81 percent of capacity.

Does that accord with your understanding?
Mr. Martin. Well, I do not know on the precise figures, Senator,
but production has held at a very high level. I do not think that there
°an be any doubt of that.
. Senator Long. How about the unused capacity—do you have the
^pression at the present time w have m
o
ore than a normal amount
°f unused plant capacity ?
Mr. Martin. No, I do not think we have more than a normal amount
of unused plant capacity. I think the situation is one in which the
P
eople are trying to spend more than they have, which m
eans there
*s dem
and for more goods than in the aggregate is available. That is
th controlling factor. Otherwise, w would not have the constant
e
e
P rises that have been going on.
rice
Senator Long. I think we should make this correction, betw
een
discussing a genuine classic inflationary situation such as occurs m
wartim and the type of situation that we have now. In wartime,
e,
J e have business requiring funds and making expenditures, we have
^
Governm
ent requiring expenditures, enorm
ous expenditures for war
Purposes, and we also have consumers requiring funds and making
expenditures.
_ ,
.
The demand becomes so excessive that you simply do not have
enough production available to meet all of those requirem
ents,
Jh is the situation such as we had back during World War II, where
at
productive facilities were simply not able and not capable or
supplying goods to meet all of the enormous amount of purchasing




1368

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

power that was being turned loose, and we made every possible effort
to build up savings on that basis, consumer sayings, to postpone
purchases until the time when the productive facilities were available
to meetconsum demands.
er
By contrast, this situation that wehave nowis onewhere the require­
mentsof business, andI can include all industry in that, consumers and
Government, are not in excess of productive capacity, in fact, are far
below our productive capacity. And the figures are here to demon­
strate it. Can you appreciate the difference between those two sit­
uations?
M r . M a r t in . I a p p r e c ia t e th e d iffe r e n c e b e tw e e n th e t w o s itu a tio n s ,
b u t I c a n n o t a g r e e w i t h y o u i n y o u r a n a l y s is o f t h e c u r r e n t s i t u a t i o n .

I think we have obviously a situation where the cost of living has
risen for 10 consecutive months, and where prices are moving upward.
Senator L o n g . Right.
Now we are trying to explain that. We are trying to see what
is causing it.
Yesteraay we did dispose of one thing. I hope we are going to
dispose of all of them. But yesterday we did dispose of one. The
current inflation is not causedby shortage of labor, that is, by a general
shortage of labor. And I thought we disposed of that.
What I am trying to settle now is whether the inflation is being
caused by any shortage of productive capability or productive plant
and facilities, plant and equipment. And here is a general statement
from BusinessWeek. Let m read specifically, and see if this accords
e
with any of your understanding of any of these industries:
Steel mills worked at about 87 percent of capacity through the first half of the
year—

that would mean, I take it, this year—
though the rate has been around 80 percent lately.
percent)

(The preferred rate: 96

There they are producing at 80 percent, when the preferred rate is
96 percent. Is that in accord with your understanding ?
M r . M a r t i n . I do not know enough about the steel industry to know
what the optimum rate of production would be. But, of course, it
takes—it costs more money to increase your production, and in terms
of a situation that we are dealing with today, there is no inadequacy
of purchasing power. The inadequacy is this: demand, the total
demand, including the demand for new plant and equipment ca­
pacity—that is part of the spending stream here, is above our available
rate of savings.
Now, the money supply we have kept rising.
Senator L o n g . Let us check this answer as you make it.
You have made a statement here with which I find myself in dis­
agreement. You say there is no inadequacy of purchasing power.
Let us apply that to the steel industry.
They are operating at 80 percent of capacity. Their preferred
rate is 96 percent. Do you contend on that basis that there is adequate
purchasing power to move from the market the articles for consumer
usethat the steel industry is capable of producing?
Mr. M a r t i n . Unless you increase the prices across the board. You
cannot get away from the fact that the cost of living is persistently



FINANCIAL CONDITION OF THE UNITED STATES

1369

rising, and disposable personal income made a new high, I think, this
last month. I have not checked it.
Senator Long. You say “disposable income.” Well, did it make a
newhigh in real dollars ?
Mr. Martin. Well, one of the problems is that the dollars do not
buy as much as they did before. I do not know the figures, but that
is really what the problem is, and----Senator Long. Per capita disposable income has not increased. I do
not think you want to take credit for any increase in disposable income
based on inflation that has occurred, when the fact of the matter is that
in terms of constant dollars the income has actually gone down.
I do not think you would want to give the public the impression
they are better off, when they are actually worse off, would you ?
Mr. Martin. I certainly do not; that is why I am so against infla­
tion.
Senator Long. So if we look at it in real terms, it is down as of
the last figures we have; and if you have any figures which would indi­
cate in real terms it is now up above, to an all-time high, I would like
to have those figures available. I have not seen them.
Mr. Martin. We will get you the last figures on disposable per­
sonal income. But the overriding problem that we are dealing with
is one where prices persist in rising, where there is adequate purchas­
ing power, in my judgment, unless you want to say that people should
just borrow—this is borrowed money we are talking about here in
large measure.
Senator Long. Here is the point we are trying to settle at this
moment: Whether there is any inflation—whether inflation is in any
degree being caused by the inability of this country and its factories
and labor to produce sufficient goods to meet consumer demand.
Now, we have gone over the labor situation. There is adequate
slack in the labor supply. Now we are looking at the steel industry,
which is capable of producing, in fact prefers to produce, at 96 per­
cent, and is now producing at 80 percent.
The question is, Can you say with regard to that industry that
there is any inflationary pressure because of the inability of the steel
industry to produce to meet the demand of consumers ?
Mr. Martin. Well now, a year ago there were definitely shortages in
som lines of steel, and this thing has been going on for about a year.
e
Now, I cannot accept completely the statement that there is no
labor shortage. We discussed skilled labor yesterday, and I think
the labor situation is better today than it was a year ago. But I do
not think you can completely say you can get all of the labor you want,
if you want to increase production, or plant and equipment capacity,
unless you want to bid that labor at a price away from someone else,
today.
Senator Long. Y ou are the person who made the statement that,
with regard to the housing industry, production was down 20 percent;
but that, looking at the overall situation—and you said that the Board
tad to look at the overall situation—that construction as a whole-----Mr. Martin. That was in the building industry.
Senator Long. It was down. Yes. You were looking at the over­
all problem. You said it was your responsibility to look at the over­
all problem.




1370

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Is it not your responsibility equally to look to the overall problem
as far as employment is concerned ? On the whole, you have got more
slack in employment than you have had for quite a while, and you
certainly have got more slack in employment than you had back dur­
ing noninflationary years or when the inflation was 1 percent or less.
Would not your statement about looking at the overall have the
same logic applied to the labor situation that it would have applied to
the construction industry ?
Mr. Martin. I just would like to make one comment on the low
level of unemployment with stable prices. That is one of the points,
it seems to me, that confirms the view that I have expressed here, in
my opening statement—that unemployment is not necessarily the
alternative to stable prices, as is frequently said by some people,
I think we can have the two, but we have to recognize both job
opportunities and the situation of fixed-income people, and we have got
to have a stable dollar so that the saving-investment process can oe
continued.
Now, the plant and equipment expenditures are still going ahead at
an amazingly high rate, and it is the inadequacy of saving to finance
those that is causing us our basic trouble at the moment.
Senator Long. I do not want to just wander off into these fields, be­
fore we pin each point down. I find if we do not watch out, we never
solve anything, and never get the information that we are seeking, un­
less we stick to each point until we settle it.
And the question—perhaps you have attempted to answer it, but I
do not believe you have given me a direct answer to the question—
is whether, with the steel mills operating at 80 percent of capacity as
against an optimum rate of 96 percent, which apparently seems to be
the most desirable rate for operation of the steel industry, there is any
general or even any considerable inflationary pressure with the steel
people operating that far below their capacity.
In other woras, can you say that we have inflation in the steel indus­
try because the steel people cannot produce enough steel to meet the
demand at a time while they are operating at 80 percent of capacity ?
If you want to say that, go ahead and say it, and we will pass on to
the next point. But I just do not see how you can make that conclu­
sion.
Mr. Martin. I do not know what, as I said before, the optimum rate
of steel production is, but——
Senator L ong. You know it is well above 80 percent, do you not?
Mr. M artin. No, I do not. I think you have got to relate it to the
market for their products, and to the cycle. When I point out that a
year ago or a little over a year ago there were any number of steel
items that it was virtually impossible to acquire, and then-----Senator Long. Did you not say in your statement that bottleneck
had been broken ?
Mr. M artin, Why, certainly that bottleneck has been broken, but let
me point out we lost over $10 billion in inflation in the interim. That
is one of the adjustment problems we have to deal with.
I was just coming back to the point that I think it is very signifi­
cant that from 1955 to 1956, we lost over $10 billion in a mere markup
of prices, without any additional goods and services being supplied to
anyone, which seems to me quite a serious situation.
Senator L ong, That is not the question I asked, Mr. Martin,



FINANCIAL CONDITION OF THE UNITED STATES

1371

Mr. Martin. But it bears directly on the question, in my judgment.
Senator Long. It perhaps bears on it, but the question I asked was:
As of this date, with the steel industry operating at 80 percent, and as­
suming the correctness of this Business Week statement here that the
desirable rate is 96 percent of capacity, do you see any reason there to
believe that there is any inflationary pressure upon our economy-----Mr. Martin. Well, now, Senator-----Senator Long. In the steel industry?
Mr. Martin. Yes. Let me say this: I do not want to appear evasive
or to be ducking your question. That is not my point at all here. But
I really do not think you can pinpoint a given point in the business
picture and say that as of this point a given industry is not operating
to its full capacity.
It has got to be related to the whole business cycle, the whole business
principle.
Senator Long. We are getting ready to do that, but it seem to me
s
w first have to settle this one. In fact, the steel industry is so im­
e
portant that it is the one on which the Government keeps productivity
figures, and attempts to keep them in terms of constant dollars
and for various analysis purposes.
That is the reason, perhaps, why Business Week leads off with the
steel industry. The Government tries to keep figures on it, so does
Business Week, because this is one of the principal industries, one
of the basic industries, and one of the largest, which is oftentimes
thebell cow as far as the trends in employment, industry, and financial
conditions are concerned.
Mr. Martin. Eight.
Senator Long. So that is the reason I asked you about the steel in­
dustry first.
bI have some information about some of the others, but I would first
like to get your answer with regard to the steel industry.
Mr. M a r t e n . Well, I can only say-----Senator Long. That, standing alone. You say it would not be safe
to generalize. Let us just take that one and recognize it is not safe to
generalize.
Mr. Martin. All right. I say I do not know what the capacity sitt*ation in the steel industry is at the moment in relation to the business

cycle.

Now, steel was subjected to terrific pressure in late 1954 and early
1955 by the upsurge of automobile and housing expansion, along witn
all the other demands.
Senator Long. But during those times—there you say you had great
pressure on the industry, ana during those times we had no particular
tttflation, did we, in 1954 and 1955 ? The steel industry apparently met
|*at demand against considerable pressure, but we had no general in­
flationary situation did we?
Mr. M a r t i n . Well, it is pretty hard to pinpoint—I think we cer­
tainly had an excess that was created then.
You must remember that we had an expansion. We had not only
the wage-cost-price push, but we had the record levels of consumer
and mortgage credit going on coincident with that. We had

And then, on top of that, we superim
posed an unprecedented ex§ansicmof plant and equipment, and as that gatherea m entum it
om
g sesa — 6T— p t s— - i i




1372

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

developed this spiral that we have been discussing here. Otherwise,
we would not have any problem.
Now, I think it would be nice, I mean if you want to take this thing,
and say in 1953-54, if the Government just kept cranking out money,
we would not have had any recession in 1953-54.
The point I have been trying to make is that it would be nice if we
had some magical formula or device by which we could crank this
thing up or crank it down. We would have discovered it a long time
ago if we had it.
But when waste and extravagance and incompetence and inefficiency
come into the picture, they have to be adjusted for from time to time.
To just increase the money supply when you have rising prices—and
the cost of living is our major economic problem, in my judgment,
at the moment—when you have that cost of living going up, to sugjest that you just add to the money supply just compounds the probem, as I see it.
Senator Long. Mr. Martin, were you an attorney before you went
with Government?
Mr. M a r t i n . No, I am not an attorney, and I am not an economist,
Senator. I just have worked, as you have-----Senator L ong. I just asked that question because I sometimes gain
the impression it is more difficult to get a direct answer from an attor­
ney than almost anyone else that you have testifying before com­
mittees, especially if you just ask a simple question where you want
a simple answer.
And if you are in position to supply the facts, and all I am asking
you to answer is just the question of whether there is any inflationary
pressure—and I would be satisfied with a general answer from you—
assuming the correctness of these figures that steel is operating at 80
percent capacity with 96 percent being their preferred rate, if there
is any inflationary pressure in any general sense because of the inabil­
ity of the steel industry to produce to meet consumer demand?
Mr. Martin. T o produce at a price so that the consumer will take
it, yes, I think there is still inflationary pressure in steel.
Senator Long. Well, I have been trying to analyze that statement.
Mr. Martin. Could Mr. Riefler-----Senator Long. On yesterday—let me just make this statement.
On yesterday, you understood to explain the failure of consumption
to expand adequately in real terms by saying that there was not
enough buying power at current prices.
This is another way of saying that there would have been enough
buying power, but not in an inflationary amount, if prices had not
risen.
If this is the case, why did prices rise? This illustrates the very
point I was making, namely, that prices did not rise because of exces­
sive consumer expenditures or consumer buying power. The Federal
Reserve Board introduced the price factor in a way that put the cart
before the horse.
The fact is, and it is the only point that I was making and am
making now, that prices rose although consumer buying power at
the lower level was not imposing an inflationary strain upon produc­
tive capability, and consumer prices are still rising even now, when
consumer buying power at the current price level is far short of pro­
ductive capabilities.

f




f in a n c ia l

c o n d it io n

of

th e

u n it e d

STATES

1373

I thought that over sufficiently so that I thought, after I dictated it,
I decided to read it back a time or two for my own puiyoses, and 1
would like for you to read that statement, and Mr. Riefler can read
it, because that, to me, is a problem that we are facing, it seem to
s
m You are finding a different way of saying the same thing I am
e.
saying, and thus giving the answer I am seeking to obtain from you.
Mr. Martin. Could he make a statement first ?
Senator Long. If you do not mind, I would like for you to answer
that, and if you want to, you can consult with Mr. Riefler. He talks
in much more technical terms than you do, and he talks while I am
talking, which makes it very difficult when I seek to get information
through Mr. Riefler.
Mr. Martin. All right.
Well, you cannot take consumer buying alone—what we are talk­
ing about is total expenditures, business and consumer expenditures,
and total spending has exceeded the limits of availabilities now for a
good many months.
That is the point that I make.
Senator Long. Let us analyze this statement I have handed you
here. What I am saying is that prices did not rise and are not rising
now because of excessive consumer expenditures beyond the ability of
our plants to produce.
Now, you say that the plants could produce a lot more, you con­
cede that, I believe. And if not, we will go into more figures on it.
And you say that the public will not buy at these particular prices,
these high prices.
To which I ask the question: Then why did the prices rise? The
point being that they did not rise because of any inability on the
part of our plants to produce more consumer goods.
Mr. Martin. Well, the shift from consumer goods for some
tim
e-----Senator Long. I thought-----Mr. Martin (continuing). For some time, soft goods have been in
growing supply, but the plant and equipment, the expenditures for
plant and equipment, have so far exceeded the bounds of available
savings that pressure has been for rising interest rates all through
this.
Senator Long. We can get around to that latter factor later on, you
see. You have not been here testifying contrary to what I am seekmg—the answer I am seeking to obtain from you. You have not
testified here that industry cannot produce these goods to meet con­
sum demand, and I am not seeking to obtain from you any an­
er
sw in conflict with what you said in your prepared statement.
er
All I am seeking to do, at a time when you say that the inflation oc­
curs because of this investment boom, is to nail down the point that
it is not occurring because of excessive consumer buying.
You did not say it is in your prepared statement, so far as I know.
Perhaps you did, but I did not find it there. And I am attempting
to nail that point down, that it did not occur because of excessive consum buying or because of inability of the American economy and
er
productive facilities to meet consumer demand.
Now, can we agree upon that statement ?
.Mr. M a r t i n . Well, do you include in “consumer buying5 purchases
*
for plant and equipment? To what are you limiting it?



1374

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Senator L ong. Oh, no. I am talking about things that ordinary
people buy, that consumers buy for their use, things like food, clothing,
automobiles, transportation, household appliances, consumer items
asagainst industrial items.
Mr. M a b t i n . Well, there has been a shift that we pointed out
here, from buying toys in the comer drugstore to taking vacations
and services. The service industry has expanded enormously, and
that is all----Senator L o n g . That is all fine.
Now perhaps we are prepared to get the answer to the question—
in other words, if people are buying more vacations and spending more
time buying things other than the manufactured articles and farm
articles, more vacations, more recreation, more luxury items, spending
more on haircuts and beauty parlors and things of that sort, that even
highlights the point I have in mind, that we are n o t having any
inflation because of the inability of the plants of America to produce
the manufactured articles that the people of this Nation want.
Now, can we agree upon that?
Mr. M a b t i n . Well, I w ill agree with you that there are no specific
shortages of consumer goods at the moment, that I know of. But
I w ill not agree with you that people are not spending. They have
to earn this money, mind you, and they have to keep this.
You have had this terrific increase in consumer installment buying,
and in mortgage borrowing, and it is earned money; we want the
people to be able to have these goods and to retain them.
But I insist that, as I see it, they are spending more than they have
earned in order to try to buy more goods in the aggregate than are
readily available, goods and services in the aggregate.
Senator Loxo. You just got through making a statement that you
want to explain inflation based on two things: One, that there was
an excessive expenditure for plant and equipment; another, that
people tend to be shifting expenditures more to services as against
manufactured goods, meaning that they would spend less on manu­
factured goodsthan they had in the past.
Here you have a showing, here you make the statement that people
w ill not buy manufactured goods at these high prices, which is an
apparent explanation of the fact that you have a vast amount of
plant capacity idle.
Here are the figures, and here are all the business writers explaining
that there is a vast amount of plant capacity idle, and you are still
declining to acknowledge that we do not have any inflation because
of inability of the American productive facilities to manufacture and
produce goods sufficient to meet consumer demand.
Mr. M a r t i n . N o w , I have great respect for Business Week. I have
read it for a long time. But if you w ill take Business Week over the
last 4 or 5 years, and pinpoint the times they have stated that a given
industry was in a state of oversupply or undersupply, and then see
what happened in a period of 0 months, you w ill find that their errors
of judgment have been pretty high, also, as w ill all of us in this.
Now, this is a continuing cycle. I have never intended to imply
in anything I have said that this boom in plant and equipment is
unwarranted. "What I have been trying to say is that this boom in
expenditures for plant and equipment is moving too. fast, too rapidly
for the resourcesthat wehave available.




F IN A N C IA L

C O N D IT IO N

OP T H E

U N IT E D

STATES

1375

S e n a to r L o n g . M r . C h a ir m a n , I w ill b e g l a d t o d is c u s s th is b o o m
in p la n t a n d e q u ip m e n t a t g r e a t le n g t h -------M a r t in .

Mr.
I am not against the boom in plant and equipment
at all.
Senator L o n g (continuing). At the time when we get around to
that, but it seem to me there is too much difficulty in agreeing on
s
certain specific items, where I think all the facts and figures are avail­
able to establish what I have in mind or what you have in mind. It
se m to m that weought to be ableto settle som of thse simple things
es e
e
before we get around to perhaps som of those more controversial
e
things,
You just got through telling m you knew nothing about the steel
e
industry, had no idea what their productive capabilities might be
or should be. And now you proceed to tell m tnat Business Week,
e
which does think it knows something about the steel industry, does
not know what it is talking about.
M r . M a r t i n . N o , no. I am talking about—that is the point they
m at agiven time.
ake
Now, the point I am trying to make on figures, let m just make
e
that onfigures, andthen I w ill stop onthis.
Senator L o n g . Yes.
Mr. M a r t i n . When I first went to Wall Street, I lost my shirt all
the time because I studied figures too hard, and I am not a figure
expert today. I do not pretend to be.
But I say they can be extremely misleading. What you have got to
do is to apply your com onsense in terms of the overall picture. I
m
jun not challenging the validity of any of these figures, but I say this
is a moving operation, this business cycle. This business movement
that we have does not stop at a given point; and therefore you
cannot say at this given point there is overcapacity, and at this point
there is undercapacity.
A ll of these factors are coming into the aggregate.
Senator L o n g . It se m s to m e , Mr. Martin---Mr. M a r t i n . I amnot criticizing your useof the figures at all, but I
to simply saying that from my point of view, as I learned early in
m experience, tnat you can certainly lose your shirt in business if
y
you depend too much on that type of analysis.
Senator L o n g . Let me just seeif we are going to get anywhere here.
Sofar asI can se —I do not object at all to your elaborating onyour
e
answer, because I would like it to be an answer that you are satisfied
with, but I would like also to feel that you have given a responsive
answer to the question I have asked.
Now, I have asked the sam question several times here this morn­
e
ing, and you have discussed a great number of things .which, so far
amconcerned, are not at au imp<>rtant as an answer to the ques­
tion I had in mind. Perhaps you want to stay by the only com­
mitment you have made to the question asked, and I think it is
wrong if t.W. is your answer. But I do want to ask this question.
*&d I w ill lim it it to this one specific situation based on what I
looted to you:
In the steel industry, with that industry operating at 80 percent
capacity as against— assuming that 96 percent is a desirable rate
and
for the operation of that industry—an optimum of 96 percent, could




1376

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

it besaid that we at this time have any inflation becauseof the inability
of the steel industry to produce to meet consumer demand?
Mr. M a r t i n . Well, I am not trying to invoke the fifth amendment,
Senator----Senator L o n g . I would suggest that you commit yourself one way
or the other.
M r . M a r t i n . I do not know.
Senator L o n g . And even if it is wrong, let u s get on to the next one.
I think we ought to settle that one way or the other.
Mr. Martin. Well, I can only answer that I do not know.
Senator L o n g . Very well. You do not know. A ll right.
I would like to ask about the petroleum industry, and here is a state*
mentmadein this July 13 issue of Business Week:
Petroleum refiners generally aim to run their plants at about 95 percent of
capacity. This time last year they were ahead of that mark, running at about
96.1 percent But since this year’s first quarter, they haven’t been able to keep
going at this preferred rate. In the last 2 months, after a seriep of refinery
cutbacks, the rate has been dipping steadily until today refiners are producing
at about 88 percent of capacity.

Would your answer be “ I don’t know” with regard to that same
question again? In other words, if I asked you the question whether
or not there is any shortage with regard to the petroleum-refining
industry, and any inflation resulting from the inability of the indus­
try to meet consumer demand, would your answer in that instance also
be, “I don’t know” %
Mr. M a r t i n . My answer would be “ I do not know.”
Senator L o n g . Now, the same thing is the case with similar state­
ments made with regard to the machinery industry, the electricalmachinery industry, the fabricated-metal industry, the nonferrousmetals industry, tne rubber-products industry, the chemicals indus­
try, the paper and pulp industry, autos, trucks and parts, textiles,
and I assume that your answer would be, “I don’t know,” with regard
to those?
Mr. M a m i n . We have a review of all of these at at least every
2- or 3-week period; we are going to have one on Monday in the staff
of the Board, and these things shift in the periods that we have
reviews.
Now, obviously there are periods when they are moving up. Then
there is a dip. We do not go up in a straight line; we do not go down
in a straight line, as a rule.
The point I am trying to emphasize is that at a given point, I do not
believe it is a profitable thing to say positively that there is no short­
ageor that there is.
Senator L o n g . Well, all I am pointing out to you— and I would
suggest you take a look at this article, because I have been referring
to it---M r . M a r t i n . Yes; I would be very glad to.
Senator L o n g (continuing). Is that insofar as industry is con­
cerned, both specifically with regard to those industries and generally
with regard to manufacturing industry as a whole, there is a widen­
ing gap, demonstrated by Business Week, as to industry’s ability to
produce and actual industrial production.
In most instances, there is shown to be a reduction in the produc­
tion of those industries, although their productive capabilities are
continuing to rise.



FINANCIAL CONDITION OF THE UNITED

STATES

1377

Mr. M a r t i n . Right. And this is something that we are watching
very carefully, and reviewing each week in the Board.
Senator L o n g . Yes.
The point I am making here—and as to whether you agree with it, I
understand your answer to be that you do not know—but whether
you agree with it or not, the point here is that here are the facts
and the figures available are analyzed by Business Week, which I
regard as being one of the better economic publications-----Mr. Marttn. A fine publication; I agree.
Senator L o n g (continuing). Pointing out quite clearly that there
is no pressure of an inflationary nature as a result of the inability of
American industry to produce to meet consumer demand. I would
like to ask the reporter, if possible, that this article be reproduced
at this point in the record, with the charts insofar as the Printing
O
ffice can reproduce those charts.
(The article referred to is as follows:)
[Business Week, July 13, 1957]
O u t p u t L ags a s C a p a c it y G ro w s
Index Dec. 1950=100

Do to.

ftd ftes*rv* Had BSNS WEfff
trol
o r , UI ES

fst.m ofvi

On these pages you see the evidence of what’ to be one of industry’ major
s
s
problems through at least the next several months. Industrial production is
down, industry's productive capacity is up, and the growing gap between the
two is made up of expensive manufacturing plant that isn’ fuUy used (some of
t
which m a y be obsolescent and expensive to operate, perhaps, but unused never­
theless).
In a few industries, the gap has been growing for more than a year. In most,
i has increased largely in the last 6 months. Before the beginning of the year,
t
the chief factor causing the growth of the gap was the rapid addition of extra
Productive capacity. But, since the beginning of the year, while industry has
fcspt adding to its capacity, production itself has slipped.
Industry generally prefers to operate in normal times— periods other than war
jnd similar emergencies— at about 90 percent of productive capacity. The extra
*0 percent of its plant is normally under repair or in reserve. But since the end
of 1966, industry’ overaU production has slipped from an estimated 85 percent
s
w 81 percent of capacity.




1378

f in a n c i a l

c o n d it io n

of

the

u n it e d

states

Not since 1954’s dip in production and employment has industry had to face
a situation like this.
PR O SP EC T S

How long will this gap between capacity and production be one of the major
zones of anxious attention for United States economists? From industry to
industry, often from company to company, the answer varies. Say some: “The
gap will diminish and the proper balance between production and capacity will
return by the end of this year.” Others guess the gap win remain until the
early 1960’s. ‘'We’re in an interim period. There’ll be a slowing of growth until
new products appear, and the enlarged markets that are expected to grow from
the rapidly increasing adult population, arrive in the 1960’s.”
NEW RATIO

Supplementing these views, economists for congressional committees in Wash­
ington have noted the recent rise in the ratio of capital investment to output,
and they’re wondering if it’s becoming a trend, and whether that trend is dan­
gerous for the economy. They supply no answer.
Meanwhile, business is preparing to learn the answer by experience.
What foUows is a report on how the major industrial groups are faring.
Index Dec. 1 9 5 0 = 1 0 0

Steel mills worked at about 87 percent of capacity through the first half of
the year, though the rate has been around 80 percent lately. (The preferred rate:
96 percent) But the gap isn’t worrying the industry as a whole. Though their
mills have more ofteu than not run at 100 percent of capacity in the last 17 years
of war and inflation, steel’s leaders still hail this year’s production rate.
The dip, they say, is part of the price they’re paying for the 3-year no-strike
contract they signed last year with the United Steelworkers. That contract
freed steel’s big customers from the need to build inventories against the threat
of a strike before 1959. Tight money and the weaker 1957 auto market helped
customers reduce inventories, too.




FINANCIAL CONDITION OF THE UNITED STATES
IN

1379

BALANCE

Now steelmen guess their customers have cut inventories about as far as they
can. Until late next year, when a new inventory buildup is likely in anticipation
of a strike in July 1959, steel production should correspond closely to general
business activity.
In short, steel guesses its dip is short-term, and it doesn’t regard it as serious.
While it lasts, steelmakers are still pressing their expansion plan, which call
for 15 million tons capacity to be added by 1960.
Index Dec. 1950=100
180---------------------------------------------------------------

P etroleu m R efin in g
160---------------------------------------------

140’

100'

801------------1
----------- 1
_______ I------------1
_______
Dec. June
Dec.
June
Dec. June
1954 1955
1955
1956
1956 1957

Petroleum refiners generally aim to run their plants at about 95 percent of
capacity. This time last, year they were ahead of that mark, running at about
W.1 percent. But since this year’s first quarter they haven’t been* able to keep
going at their preferred rate. In the last 2 months, after a series of refinery
cutbacks* the rate tyas been dipping steadily until today refiners are working at
tbout 88 percent of capacity.
*
Their perennial problem, the heavy wintertime growth of gasoline inventories,
has caught up with them to a greater degree than usual this year. Outside fac­
tors have helped oilmen to reduce those large start-of-summer inventories in
most postwar years: the Korean war demand, closure of the Abadan (Iran)
refinery, the Suez crisis, and strikes in United States refineries. This summer
there have been no such upheavals.
SH O BT

TEBM

costs have forced the industry to increase prices, but now leaders are
wondering if they can make the increases stick. Refinery cutbacks could help:
®otal demand in June was estimated at 8.8 million barrels a day; refinery runs
Staled 7.9 million barrels a day.
The refiners see their troubles as strictly short-term. By next year, industry
®conomists say, the capacity-production equation should be closely enough bal•^ced to let refineries ran at near preferred rate.
Rising




1380

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Index Dec. 1 9 5 0 = 1 0 0

} 0 --------------------------8

80|________I_______ i_______ I________I-----------Dec.
June
Dec.
June
Dec. June
1954
1955
1955
1956
1956 1957

There’s little room for generalizing about this broad industrial category. Its
products vary from machine tools (production high so far this year but new
orders dwindling), to construction machinery (production up but far below
expectations), and office machinery (production close to capacity).
It’s also difficult to judge capacity for this group. Machine-tool makers, for
instance, can add heavily to capacity in a few weeks by calling in subcontractors.
But it is possible to estimate that machinery makers as a whole are working
at more than 5 points under their preferred operating rate of about 89 percent
of capacity. Machine-tool makers, in particular, are caught in a decline that
threatens to last through 1958. They blame part of the dip on a slowdown of
expansion in the auto industry, hope for gains as the auto makers begin to
retool their plants for 1959 model production.




FINANCIAL CONDITION OF THE UNITED STATES

1381

Index D 1950=100
ec.

Two groups of products—vastly different in size, cost, and sales performance—
make up this industrial category: appliances and the major electrical apparatus
that’s sold to utilities and to industry. Appliances are lagging about as far as
they ever have; the makers of major electrical machinery are having their
best year ever.
Overall, electrical-machinery makers have a preferred operating rate of about
S percent of capacity. Today, due to slackening appliance production, their
O
operating rate is close to 85 percent. There’s no sure figure on appliance mak­
ers* operating rates alone. Rough estimates put the rate at between 60 and 70
percent of capacity.




1382

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Id"'"e------010
nx c15=0
eD. 9
180
Fabricated Metal
IfiO------------------- ---------------------------

Products & Instruments

8l ---1-- I _ I _ I _
0
_ _ _
Dec.
1954

June
1955

Dec.
1955

June
1956

Dec, f June
1956 1957

A vast range of products f l s this industrial category, and some are booming
il
while others are depressed. Instrument makers, for instance, have rarely had
it better, n e w orders indicate the second half of the year will be just as good.
But business for fabricators of nonferrous metal products— tubes, pipes, wire,
and so on— is down. In m a n y brass mills a 4-day week is common. Producers
put some of the blame for their lagging sales, and production, on the decline in
housing starts, afcd appliance and auto production. But they reserve a good
part of the blame for competition from lower priced imports from Europe.
Economists aren’ guessing about the prospect of an upturn for nonferrous
t
products. M a n y manufacturers of those products are pressing for steeper tar­
iffs against European competition. That m a y m e a n that they believe the dip is
likely to last more than 6 months.




901
10 15=0.
8.........0

index Dec.

—

801----------^ ------------ L _______I________I_______
Dec. June
Dec.
June
Dec. June
1954 1955
1955
1956
1956 1957

FINANCIAL CONDITION OF THE UNITED STATES

1383

The four major products in this group are aluminum, copper, lead, and zinc.
Through most of the year’ first half, production of all but aluminum climbed
s
above last year’ rate. N o w zinc has gone into a tailspin. Its trouble is overs
production.
Meantime, copper and lead producers turned out only between 2 and 3 percent
more between January and June this year than in the first 6 months of last
year.
OVERSU PPLY

At midyear, aluminum production was 5 percent less than at the end of 1956.
Simultaneously, aluminum’ productive capacity has increased. So far, the in­
s
dustry isn’ worried about the dip in production. The decline stems from tem­
t
porary inventory reductions by customers, say the producers.
For the short term, the producers need not worry about oversupply. During
the Korean war, the Government encouraged expansion by signing “put or take”
contracts with producers. These contracts require the Government to buy cer­
tain percentages (up to 100 percent in some cases) of plant output i the pro­
f
ducer can find no private market. A fetv outside economists foresee a rapidly
growing gap between production and capacity. In the next 3V years, almost
2
1 million tons annual capacity will come into production, raising 1960 capacity
to 2.6 million tons. This, the economists believe, will be too much for the
economy to absorb. Digestion of the extra aluminum capacity may be delayed
a year or so.
In the 15 months since they began exercising their rights, producers have sold
the Government 144,000 tons of aluminum under these contracts. Meantime,
the Government slowed its direct stockpile purchases of aluminum, and 4 months
ago decided to halt entirely purchases other than those made under “put or
take” contracts.
In the next 2 years most of the “put or take’’
contracts expire.
Index Dec. 1950=100

1954

1955

1955

1956

1956

1957

The rubber industry isn’ up to its 90 percent of capacity preferred rate
t
of operations, but it’ close to i . The backbone of its sales gains this year is
s
t
auto tire manufacturing. In the first 5 months of the year, the industry shipped
14.9 million passenger-car tires to Detroit, turned out replacement tires at a
record rate of 59 million a year.
This year’ big replacement business stems from 1955’ record number of auto
s
s
sales. The average auto owner replaces tires when his car is 2 years old.
In the midst of all this, the rubber industry is little worried by the overall
dip tn its production. As of now, the industry is running ahead of the economy,
tnd its economists say, “The dip is no more than a short-term readjustment*'




1384

F IN A N C IA L

CONDITION O F T H E

U N IT E D

STATES

There’s the prospect of 2 or 3 years of continuing growth in the gap between
production and capacity in the chemical industry. Today, it’s operating at about
83 percent of capacity.
This year and last, the industry budgeted a total of $3.3 billion for new and
modernized plant. Next year, it will probably spend at about the same rate.
Just about all that extra plant will be on stream by 1960. Then, say industry
economists, there’ll be excess capacity for perhaps 2 years.
Index Dec. 1 9 5 0 = 1 0 0

1954

1955

1955

1956

1956

1957

Pulp and paper mills last month ran around 90 percent of capacity, compared
with a rate of almost 90 percent at the same time last year.
Sales dipped in mid-1955 and though they gained again by the end of the year
they didn’t come up to expectations. Since then, the industry has been taking
a second look at its expansion plans, which called for addition, by 1960, of
7 million tons. Now the plans aim to add 1.8 million tons annual capacity by
1960.




FINANCIAL CONDITION OF THEf UNITED STATES

1385

Index D 1950=100
ec.

The auto industry (p. 28), just winding up its second-best 6-month production
period, turned out 3,370,100 passenger cars from January to June this year. That
was 5 ^ percent more than in last year’ first half. But i was s i l about 20
s
t
tl
percent below the 4 % million cars produced in the first half of 1955, and that
reduced number of autos was turned out by an industry whose productive
capacity has been enlarged some 10 percent in the last 18 months.
Index Dec. 1950 = 100
180--------------------------------------------------------------




A u tos, Trucks & Parts

1386

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

I8-----------________
n o 9010
d c
M
10D.19=0
Textiles
160--------------------------------------------------------------------

140-

_____ »
■
D. Jn 15 Jn 15 Jn
a 15 D 15 D. 15
c u 95 u 96 uI
e e. 96 e 9e
c e ■_____ 7
c
15 M
94

80 ______«
1

Textile companies h a t expected a sales gain in the first half of the year. I t
came, bat it lasted only a few weeks.
The broader picture of the industry is one of long-term recession that started
about 2 years ago and is persisting. Industry economists are not predicting
when their market will undergo a real change. But they do argue that the
industry has shrank about as far as it should, that capacity is coming into
better balance with demand.

Sentor L o n g . With regard to productivity, perhaps I can find these
figures, we have the industrial production index, both in the Presi­
dent’s Economic Report and in the Economic Indicators.
What is your impression with regard to the industrial production
indexes during the last several years? Do you believe that at the
present time, as of this time, they are on the upgrade, or on the
downgrade?
Mr. M a b t i n . We have been pretty steady here recently, Senator.
We reached our peak, I think, last December, last November or De­
cember, at 147, and it is now 144. I t has been a plateau, more or less,
for sometime.
Senator L o n g . So it is actually now below what it was during the
last quarter of 1956?
Mr. M a r t i n . During the peak. But higher than it was this time
ayear ago, you see.
Senator L o n g . Let us check that and see what Economic Indicators
shows. I w ill attempt to check that, and perhaps Mr. Riefler w ill
find where that is in the Economic Indicators, to show where it
is most recently.
Mr. M abtin. Here we are, December.

Senator L o n g . I am looking at page 16 of Economic Indicators
myself. Does that accord with your figures? Those are your figures?
Mr. M a r t i n . Yes; they are our figures.



FINANCIAL CONDITION OF THE UNITED STATES

1387

Senator Long. And they are supplied for Economic Indicators,
which I find reproduced in this publication of July 1957.
Mr. M a r t i n . There is just one correction.
Senator Long. Just looking at that column—and I will ask that
that column, that the figure for 1956 be reproduced, that the remainder
of that column as shown here be reproduced. That is on page 16 of
the Economic Indicators. I would suggest it might be well to repro­
duce that entire column there, starting in 1939 and coming forward.
(The material referred to follows:)

08633—57—pt. 3------ 12




1388

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

[1947-49^100, seasonally adjusted]
Manufactures
Period

1938................................................................
1948 ____ - ......................................................
1949..................................... ..........................
1950..................................................................
1951.................. .............. _..............................
1952. *...........................................................—
1953..................................................................
1954.......................................- .........................
1955 ................................................................
1956..................................................................
1956—M ay__________ - __________________
June_____ . . . . ___________________ _
July................................................ ......
August_________________________ —
September________________ ______ „
October___ ____ _____ . . . _____ ____
November. . . . ______ . . . . __ _______
December_______________________ _
1957—January 1
_________________________
February 1________________________
March 1.................................................
...................................................
A p ril1
M ay i....................................................
June1____ ___ _______ ____ __ __
_

Total in­
dustrial
production

Minerals
Total

58
104
97

12
1
10
2
124
134
125
139
143
141
141
136
143
144
146
146
147
146
146
145
143
143
143

57
103
97
113

11
2
125
136
127
140
144
143
142
138
144
146
147
147
149
147
148
147
145
145
145

Durable
49
104
95
116
128
136
153
137
155
159
157
167
148
158
162
163
165
167
164
164
162
160
159
160

Nondurable

6
6
12
0
99
11
1
114
114
118
116
126
129
129
128
128
130
130
131
129
130
131
131
131
129
130
130

6
8

106
94
105
115
114
116

11
1
12
2

129
128
129
123
130
131
131
130
130
130
132
132
130
131
131

i Preliminary estimates.

Source: Board of Governors of the Federal Reserve System.

Senator L ong, That column shows that, with the exception of the
recessionary year 1954, there has been a steady increase in industrial
production, with the exception, with the possible exception of this
year, which, of course, is not yet complete.
Now, we have a showing that the industrial production was at
the level of 143 on the average for 1956. It reached 144 in Sep­
tember of last year, it reached 146 in October and November, 147 m
December, and 146 in January and February of this year. Then it
fell off in March to 145, in April down to 143, and in May to 143, and
in June to 143.
So it is lower now than it was during the last 4 months of 1956, and
during the first 3 months of this year.
Now, the question is ask is, Does that indicate again any inability
of American industrial plant and facilities to meet consumer demand ?
Mr. Martin. In my statement, I made clear what our thinking on
it was, which is that there are no specific shortages or bottlenecks, but
there is a broad, general pressure on all of our resources.
Senator L ong. There you are, you said broad, general pressure;
and here is a fact, that far from expanding our production, we are
moving in the wrong direction, we are contracting, and we should
be able to expand our production at the rate of at least 3 percent
a year, I should think that is a reasonable rate, it is the kind of rate
you advocated. Yet here we are going backward, going downhill at
the rate of 2 percent a year based on the figures here.
Mr. Martin. Well, the year is not over. And I would like to
correct, if you do not mind, that June is 144 instead of 143, and July,
which we have now got, is also 144.
Senator Long. That should be 144 ?




FINANCIAL CONDITION OF THE UNITED STATES

1389

Mr. Martin. One hundred and forty-four in July, which we now
have also, and 144 in June. I say there is a pretty good plateau at a
very high level.
Senator Long. In your prepared statement, you would have ap­
peared to be one of those who believes in a steadily expanding economy,
and one who would not be satisfied with a stagnating economy.
Now, I should not take it that you would be satisfied with a plateau
of industrial activity in a Nation where the population is expanding.
Would that be correct?
Mr. Martin. Y ou and I are in complete agreement on that, but we
do not want to get that expansion by inflation; and expansion does
not occur necessarily in a straight line. This year is not finished, and
the levels of our production here are substantially higher than May,
June, and July a year ago; and yet our price level, the cost of living,
has gone up for 10 successive months.
Senator Long. Let me ask you this question: Can you tell me of
anything that tends to provide the answer to inflation any more than
the production of goods to meet demand ?
Mr. Martin. Well, if you are going to-----Senator Long. In other words, if you are trying to find a cure for
inflation—we had a lecture here about the disease and the cure. Now,
if you are trying to provide a cure for inflation, can you suggest
to me any better cure than to increase production to meet the demand ?
It is certainly a better cure than rationing, is it not? It is a better
cure than credit controls, or is it ?
Mr. Martin. Well, you cannot cure inflation by supplying more
money.
Senator Long. Well now, wait a minute, I am not talking about
supplying more money here; that is not what I am talking about. I
am talking about supplying goods.
Mr. Martin. I know. But in order to supply more goods at the
present time-----Senator Long. That is not the question I asked you, and I am just
afraid we will go round in a circle for a while longer to get back to our
starting point. What I am talking about here is the production of
goods: food, fibers, housing, transportation, automobiles, anything,
tangible goods. Question: Do you know of any better cure for infla­
tion than the production of goods to m demand ?
eet
Mr. Martin. You want these goods to be held when people acquire
them and we have an economy that is an earning economy. If people
,
cannot pay for the goods out of earnings, they cannot retain them.
You can give houses away, but the Government then will have to
supply the funds.
Senator Long. Now, what you are saying is, if I understand it, you
want to make a qualification, you want a qualified statement, and I
would suggest that you make the statement and then qualify it, be­
cause how can I anticipate your statement bv your qualification?
In other words, I am saying this: Do you know of any better cure
for inflation than increased production, or the production of adequate
goods to meet consumer demand?
I would suggest that first you give us the answer and then you pro­
vide the qualification that you would like to add to it, because to
<juaiify without giving the answer makes a qualification rather mean-




1390

E T N A N C IA I* C O N D IT IO N

OF

TH E

U N IT E D

STATES

ingless. If your answer is yes, if people have the money to buy, or it
is no, even if they do have the money to buy, why, that is all right,
that is a satisfactory answer to me. But I would like to get the
answer and then the qualification. Would you mind answering in
that fashion?
Mr. Mabtin. Well, I want this production that you are talking
about, and I think that there is-----Senator Long. The question is: Do you know of a better cure for in­
flation than that of providing goods to meet demand in an adequate
amount to meet demand?
Mr. Martin. D o you want Mr. Riefler to take that? I cannot
answer that.
Senator L ong. I would suggest you answer the question. I f he
wants to consult with you, I would suggest that you consult with him.
Mr. Martin. All right, I will consiSt with him.
Senator Long. Then you can answer the question ?
Mr, Martin. Well, there is no limit—I have consulted with Mr.
Riefler and I am not sure that he and I see eye to eye on it, so far as
that goes.
Senator L on g. You see, that is a good reason why Mr. Riefler
should not answer the question, because you would have been in a
osition of vouching for that answer with which you would have
een in disagreement.
Mr. Martin, I understand that, but he is extremely valuable and
I need any advice I can get.
Senator L on g. Let me say there: If there is any other man who can
take us around in circles without answering the question, I do riot know
who it is, because he is supplying more technical information that leads
contrary to the answer to a question I am trying to get than anyone I
have examined here yet. He got us off on this productivity thing, and
I think it took us about a half-hour to get back on the right track after
that.
Mr. Martin. Well, I will say that I think that the production of
consumer goods, is certainly one of the basic cures for inflation, pro­
vided it is not an inflationary operation which creates additional de­
mand for goods, because demands are unlimited. I do not know any­
body who does not—well, I will not say “anybody”—but people of
my acquaintance always want to spend more and more and more.
The question is whether they can earn it, whether they have means
of paying for it.
Senator Long. The typical inflationary situation is a situation where
you have the public with money that the public wants to spend, the
purchasing power is there, and the public wants to spend that money
faster than industry can produce goods. And against the classic
inflationary situation which I think that would be, do you know of
any better cure for it than to provide the goods in terms of additional
production ?
Mr. Martin. I f you can provide the goods in a way that they can be
paid for. I f they are just provided by largesse, they just add to the
spending stream, and you do not come out any differently than at the
start.
Senator L ong, So that answer could have been prefaced by a ques­
tion: if you can provide the goods that the public has the funds to
pay for?

E




FINANCIAL CONDITION OF THE' UNITED STATES

1391

Mr. Martin. That is right.
Senator Long. All right.
So with regard to inflation, that happens as a result of rising prices,
people wanting to buy more than there are goods available. The best
answer to it is to increase the production of those goods and make
them available for the public to purchase; is that correct ?
Mr. Martin. Make it available for them to purchase in a way that
they can hold, and we cannot by creating debt—debt is not the answer
to the problem.
Senator Long. Well now, let us get to the next point. You are advo­
cating, if I understand your correctly, an increase in consumer savings
in order to finance the expansion of plants and equipment at this time;
is that correct?
Mr. Martin. I am, and any other capital expenditures.
Senator Long. N o w , if this increase m consumer savings must re­
sult—in order to build additional plants—must result in a reduction
of consumer expenditures, which is the only thing that could happen,
is a reduction in consumer expenditures and additional idleness in
plants that are producing for consumer use, a desirable result at
this time ?
Mr. Martin. Well, that is the only way you are going to get the
adjustment.
Senator Long. Well, could you tell me why can we not have both?
Why can we not go right on ahead producing additional consumer
goods—in other words, anything from a face towel to an automobile—
for the public and at the same time, knowing we have vast additional
productive capabilities in all of these fields, and knowing we have
m
ore slack labor supply now than we have had for a considerable
period of time, at the same time go on producing industrial items the
industry wants, especially in view of the fact that our production
now in the overall is below what it was 6 months ago?
Mr. Martin. Well, there is a plateau there, but what you have got
is a situation in which the price level continues to rise. And against
a rising price level, why, the expectation of additional price rises
causes speculative activity; and more and more people, instead of
looking at the sound holding of property and goods, look at it on a
speculative basis and this wheel just goes on and on and on.
Senator Long. Let me ask you this-----Mr. Martin. Printing money is not the answer.
#Senator Long. Why is overall production down as of the present
time? Why is it down even when you look at this investment boom?
Why is it down from what it was 6 months ago?

Mr. M a r tin . It is not down very much.
Senator L o n g . But it is down, and it is down by 1 percent; and you
are one of those who advocates that it should increase by 3 percent a
year.
Mr. M a b t i n . N ow , there ig no magical way, Senator, of increasing
™ 3 percent or 4 percent---is
Senator L o n g . W h y is it down?
M r . M a b t i n (continuing). In X months.
Senator L o n g . Why is it down?
Mr. M a r t i n . Why is it down now? This is only manufacturing
production, industrial production, and I doubt very much whether




1392

FINANCIAL CONDITION OF T H E UNITED STATES

Senator L o n g . Why is industrial production down? Let us just
talk about what you have there.
M r. M a b t in . Because we have been going ahead too fast. I think
there has been a shift to services. And we have gone and developed
plant capacity faster than we can absorb it.
Senator L o n g . Now, did you not just answer the question I tried to
get you to answer about a half-hour, when I asked you if there was
any inflation because the plants could not manufacture to meet the
consumer demand ?
Mr. M artin . N o, I do not think so, Senator. That is what I said in
my prepared statement, and I do not back away from that at all. I
think that we have no specific bottlenecks at the moment. But I do
think that, as I stated here, causing prices of individual commodi­
ties to be bid up because of limited availability—rather it is a prob­
lem of broad general pressure on all of our resources, and I think
that broad general pressure is there; otherwise I do not think prices
would continue to go up and the cost of living would keep climbing.
Senator L ong. In your prepared statement, you say you had this
broad general pressure upon all of our resources with regard to
industrial plant and equipment. You make this statement, that we
are below what we were producing 6 months ago because we built so
much plant that we do not have enough consumer buying to keep
those plants busy.
Now, that is the statement you made just a moment ago, when I
asked, Why is industrial activity and industrial production down ?
Mr. M artin . Well, I do not think it is down for that reason. I
think it is down for financing reasons.
Senator L ong. Perhaps you would like to take back that answer
you made just a moment or two ago.
Mr. M ar tin . No; I do not want to take it back, but I want to keep
it in the perspective of the current situation, and I just do not think
that taking X figures for 3, 4, or 5 months is relating it to the cycle
that we are dealing with.
Senator L ong . I suppose we could deal with that subject in greater
detail some time hereafter, but it does seem to me that the answer you
made a moment ago is the obvious answer; and perhaps you might
want to take it back: that we do not have any inability of the plants
to produce far more than they are producing at the present time to
meet consumer demand, and now----M r. M ar tin . A t a price.
Senator L ong. And the fact is, again with regard to

this statement
you made about price, I thought about it enough to analyze the state­
ment that I gave you. The question is: Why did the prices rise?
They certainly did not rise because industry could not produce to
meet the demand. Is that not correct?
Mr. M ar tin . They rose because the price spiral was in operation,
and the manufacturer wants to pass it on to the consumer, and how
is the consumer ever going to get that back?
Senator L ong. That is just fine. I am glad you made that state­
ment, because I can ask tne sam question again. They did not rise
e
because of the inability of the plants to produce. Here we have been
2 hours getting that answer; have wenot ?
Mr. M artin . N o. Well, I just cannot put it in as simple terms as
that.




FINANCIAL CONDITION OF TH E UNITED STATES

1393

Senator L ong. Y ou are saying they rose; you are saying that there
is plenty of production available at a price, but that the consum
ers
arenot willing to pay the price?
M M artin. Well, I assum at som point—we cannot compel con­
r.
e
e
sum to buy or to save.
ers
Senator L ong. I s that not what you said a m ent ago ? Did you
om
not say, in fact, a m ent or two ago, in fact, repeated it here, that
om
there are plenty of goods available at a price, but that the consum
ers
cannot pay that price---M M artin. No; I said---r.
Senator L ong. Or at least arenot willingto pay the price.
Mr. M artin. There is plenty of dem for the goods at a price,
and
not goods available at aprice.
Senator L ong. At alesser price?
M M artin. At alesser price---r.
Senator L ong. But that consum arenot willing to pay the present
ers
price?
M M artin . In a num of instances. I have watched 1 or 2
r.
ber
plants this spring where a reduction in price stim
ulated dem
and.
Senator L ong. Let us just analyze that statem then. Assuming
ent
noreduction inprices, your answer would thenm and could lead to,
ean,
only one conclusion: that industry can produce m consum goods
ore
er
than consum are willing to purchase at existing prices; is that
ers
correct?
Mr. M artin . At am ent.
om
Senator L ong. At this time?
Mr. M artin . At a m ent. But I do not think you can take a
om
m ent andisolate it. That is where wedisagree.
om
Senator L ong. All right.
Would you care to say that the answer would be any different as
of aw ago or asof am
eek
onth ago ?
M M artin . I think it is changing every day. I do not think you
r.
canpinpoint it onaday.
Senator L ong. Well, now, do you think that— there any tim
is
e
during the last 2 months when you would have said that the answer
woula have been different, that industry could not produce more goods
thanthepublic could buy at existingprice levels?
M M artin . Well, we are talking about industry in general, and
r.
I think that that is apretty broad concept.
Senator L ong. That is right. But you are the m who cam here
an
e
with aprepared statem saying we should not talk about these things
ent
in specific examples, we ought to talk about them in general, because
that is the way you feel you should exercise your responsibilities.
M M artin . No; that is not the way I---r.
Senator L ong. Did you not say with regard to construction of
housing---M M artin. I said withregard to housing---r.
Senator L ong. Did you not say with regard to the construction of
housing that housing starts were down to a considerable degree but
that on the whole the construction industry was up and that you felt
that your responsibility had to be exercised by looking at the overall
picture?
Mr. M a r t i n . That is right. That isright.




1394

FINANCIAL CONDITION OF T H E UNITED STATES

Senator L ong. Yes,
Mr. M artin. Overall building is up.
Senator L o n g . So that theoverall building wasup ?
Mr. M a r t i n . Overall building was up.
Senator L o n g . So therefore you did not feel you should adopt some
policy that would encourage the addition of housing starts inasmuch
asbuilding activity as awhole is at a high level.
You made the general statement that the board had to look at these
overall items ana it could not be too much impressed by a specific
wheel within a wheel ?
M r. M

a r t in .

T h a t is r i g h t .

Senator L o n g . N o w , looking at the same situation with regard to
consumer goods and industrial production, do you know of any time
during the last 2 months when your general statement, which I think
is a satisfactory general statement for these purposes, that industry
could produce more and substantially more than the public would
buy at existing prices, do you know of any period within the past
2 months when your statement in that regard would not be correct
or any time during the past 2 months at which you felt that the
statement should be the other way around ?
M r . M a r t in . N o, I d o n o t k n o w o f a n y tim e in th e la s t 2 m o n th s
o r a t t h e m o m e n t , b u t w e a r e t a l k i n g a b o u t a b r o a d p la t e a u .
Senator L o n g . Good.

So here we are on a broad plateau, and not just on a pinnacle for
1 day. Now, that being the case, is not that statement tantamount to
saying that industry can produce substantially more consumer goods
than the public can buy at existing price levels?
Mr. M a r t i n . Well, no; I do not think so, Senator.
Senator L o n g . What is the difference?
M r . M a r t i n . Well----Senator L o n g . Why would not that follow? You are saying t h a t
prices are so high that the consumers will not buy that which industry
will produce, and that there is plenty of production and plenty of
productive facilities available, and that there is a shortage of con­
sumer demand at existing prices. Does it not follow that at this exist­
ing price level industry can produce far more goods than the public is
ready to buy?
Mr. M a r t i n . Well, the cost goes up as they produce more, and a s
the cost goes up, why, then there is less buying power even than there
is at the moment. And this is just a clear case of a cost-price opera­
tion that industry wants to pass on to the consumer and i t is g e t t i n g
more and more difficult to do it.
Senator L o n g . Well, the hour of 12:40 having arrived, I amwilling
to suspend at this time.
Senator Carlson, if you wanted to ask some additional questions,
you are at liberty to do so.
I would suggest that we recess on call of the Chair. I would like
to continue this examination because there are quite a few additional
things that I would like to cover.
I regret, Mr. Martin, that I have such difficulty in getting the an­
swers I want, or perhaps it is my fault that I do not put the ques­
tions so that---M r . M a r t i n . It may be my fault, Senator.



FINANCIAL CONDITION OF THE UNITED STATES

1395

Senator L ong. Y ou can convey the m
eaning that you would want to
convey, but in any event, I would like for us to attem to get these
pt
m
atters for the record, and perhaps we can m again before the
eet
Senate adjourns, at which tim I could ask m questions, and if I can
e
y
get my information for the record, I will be glad to yield to Senator
Carlson.
Senator C arlson. As I understand it from the session this morning,
you would conclude and I was to follow.

Senator L ong. All right.

(Whereupon, at 12:45 p. m., the hearing was adjourned, subject to
the call of the Chair.)







INVESTIGATION OF THE FINANCIAL CONDITION OF
THE UNITED STATES
MONDAY, AUGUST 19, 1957
U

S tates S e n a t e ,
C o m m it t e e o n F i n a n c e ,

n it e d

W ashing ton, D . C.
The committee met, pursuant to recess, at 10:30 a. m., in room 312
Senate Office Building, Senator Harry Flood Byrd (chairman) pre­
siding.
Present: Senators Byrd, Kerr, Frear, Long, Martin, Williams,
Malone, Carlson, and Bennett.
Also present: Winfield Riefier, Assistant to the Chairman, Board
of Governors, Federal Reserve System.
Elizabeth B. Springer, chief clerk; and Samuel D. Mcllwain, special
counsel.
The C h a i r m a n . The committee will come to order.
Senator Long is here, and will continue his interrogation.
Senator L o n g . Mr. Chairman, I did not know we were meeting this
morning. I just did not get the notice that you sent me.
The C h a i r m a n . I would like to state the program, so far as it is
possible to foresee at this time. Senator Long will continue his ex*
amination, and I would suggest, Senator Long, that the record show
that it is a continuation of your previous examination.
Senator L o n g . That would be fine.
The C h a i r m a n . Then Senator Carlson; then Senator Malone, who
has returned and desires to ask questions, which he thinks will take
about 2 hours, and he has asked to have a meeting at 2 o’clock this
afternoon.
Mr. M a r t i n . That is right.
The C h a i r m a n . Should that program be followed, the committee
will then recess to the call of the chairman.
Mr. M artin . Yes.
The C h a i r m a n . Senator Long, you may proceed.
STATEMENT OF WILLIAM McCHESNEY MABTIN, JR., CHAIRMAN,
BOARD OE GOVERNORS, FEDERAL RESERVE SYSTEM— Resumed

Senator L o n g . I hope I c a n get through here in a half hour this
morning, Mr. Chairman.
I will say that to both chairmen, the chairman of the committee and
of the Board.
In the testimony of Mr. Humphrey and Mr. Burgess, they both
indicated that they felt this investment boom was going ahead too




1397

1398

FINANCIAL CONDITION OF T H E UNITED STATES

rapidly, and that it was not good that it should be going ahead that
fast.
My impression from your testimony thus far is that you believe
that the current rate is a good thing, and perhaps should be going
ahead at this rate.
Do you agree with their point of view, or do you feel this invest­
ment boom should go ahead as rapidly as it is ?
Mr. M artin . No. I think it is going ahead too rapidly at the
present for the level of savings which we have.
S e n a t o r L o n g . A n d d o y o u b e l i e v e i t is d e s ir a b le t h a t i t s h o u l d b e
s lo w e d ?
M a r t in .

Mr.
I believe that the rate of investment ought to; that we
ought not to be supplying bank credit to cover the deficiency in savings
that I think is there.
Senator Long. Yes. Now, the fact of the matter is that these high
interest rates, and even this tight-money policy, have not prevented
this rapid increase in investments in plant and equipment, and it seems
to me that one of the main reasons is that, in most of the major indus­
tries, the interest expense is less than 1 percent of the expense of doing
business. Do you agree with that statement?
M r. M

a r t in .

T h a t i s a s m a l l p e r c e n t a g e ; y e s , s ir .

Senator L o n g . We all know it is less than 1 percent of the cost.
Mr. M a r t i n . Yes, sir.
Senator L o n g . The conclusion I draw is that, since it is less than
I percent of the cost, an increase in interest rates would have very
little effect on major industry insofar as a decision to expand plant
and equipment.
Mr. M a r t i n . It has had very little direct effect that we can find to
date, but I believe that there are a great many plans that you cannot
put your finger on which have not only been sloved up but have actu­
ally been laid aside for the time being because of the expectation of
interest costs rising, and a tendency toward wondering if it would
not be better to wait until the financing situation was a little bit
better. But it has not prevented----Senator L o n g . The facts are that this tight-money policy, which
has been accompanied by high-interest rates, has not at all slowed
the investment boom, as far as the figures would indicate. I have here
a compilation—I will supply you with a copy of it—which I ask be
placed in the record.
Senator F r e a r (presiding). Without objection, it will be placed i n
the record.
(The table referred to is as follows:)
Investment in producers’ durable equipment, annual average growth rates in
uniform 1956 dollars
Year:
Percent

1953 to 1st half 1957______________________________________________
3.3
1956 to 1st half 1957______________________________________________ 10. 1
2d quarter 1956 to 2 d quarter 1937--------------------------------------------------9. 6
1st half 1956 to 1st half 1957______________________________________ 1 1 . 1
(Derived from p. 124, President's Economic Report, and August 1957 Economic
Indicators.)

Senator L ong. This indicates the average investment in terms of
constant dollars. I derived this from page 124 of the President’s



FINANCIAL CONDITION OF THE? UNITED STATES

1399

Economic Report and from Economic Indicators, which are my source
m
aterials.
The average annual increase from 1953 to date was 3.3 percent.
That is the growth rate in producers’ durable equipm
ent. But from
1956 to the first half of 1957, the annual growth rate was 10.1 percent*
In the second quarter of 1956, as against the second quarter of 1957,
it has increased by 9.6 percent, or, comparing the first half of 1956
with the first half of 1957, the increase has been an 11.1-percent
increase, interm of constant dollars.
s
That is certainly a very rapid increase. According to Secretary
Humphrey, this rapid expansion of plant and equipm more than
ent,
any other one thing, has led to the inflation that we are having. Do
you agree with that statem ?
ent
M M artin . Well, I think that plant and equipm expenditures
r.
ent
havebeenthe primary m inthe last-;--ove
Senator L ong. We have had these high interest rates and this tightm
oney policy during that period of tim The fact is that this rapid
e.
expansion has taken place in spite of that. How m more rapid
uch
do you calculate it would have been if you had not had high interest
andtight money ?
Mr. M artin. I have no way of calculating it, Senator; but I think
it would have beensubstantiallymorerapid*
Senator Long. It stands to reason that a decision to expand plant
and equipment would also be hastened if the companies could take a
more rapid depreciation allowance as a tax matter, would it not?
M r. M

a r t in .

T h a t is r ig h t .

Senator L ong. And the bill passed in 1954, which m it possible
ade
for people to take their depreciation more rapidly during the first
year or 2 or 3 years that they had the equipment, undoubtedly did
contributeto this rapidexpansionof plant anaequipm
ent.
Mr. M artin. That is correct.

Senator L ong. If we were trying to think of what we might do
that might slow it down, perhaps we might very well have m this
ade
depreciation law flexible, so that it could nave been changed or so that
it could have been terminated in the event the investm was going
ent
ontoo rapidly. That occurs to m as one thing that perhaps we could
e
do even now; we could slow down the rate at which we permit people
to take depreciation on equipment, if we wanted to slow down the
investm boom. We have had a steady increase of interest rates
ent
during the last 5 years, although I believe there had been som
e
instances in which there has been som slight downward fluctuation.
e
Can you tell me when the downward fluctuations have occurred, and
how long those fluctuations continued, during the last 5 years?
Mr. M artin. I could prepare a paper for you and put it in the
record. I could not do it out of my head, Senator.
Senator Long. Very well.
Do you have that at the present time ? Is there a chart available
for it? Perhaps that could also be placed in the record.
M r. M

a r t in .

Y e s , s i r ; w e c o u ld p u t th e c h a r t in th e r e c o r d .

Senator Long. Yes.
doubtlessly.




So there nave been some motions in that,

MN Y R T S
O E AE
»lf t C IH T V I I A l ll W jl

FINANCIAL CONDITION O THE UNITED STATES
F




o
W

FINANCIAL CONDITION OF THE UNITED STATES

1401

Senator L o n g . I understand you do not believe high interest is
good per se. You believe it is something that you have to put up
with from time to time, but that it is bad for the Government and
it is not good for the economy, aside from other factors.
M r . M a r t i n . T h a t is r ig h t . I w o u ld lik e t o see as lo w -in te r e s t
ra tes as w e c a n h a v e w it h o u t p r o d u c in g th ese in fla t io n a r y p ressu res.
Senator L o n g . That brings me to this point: The cost of Govern­

ment is up more than a billion and a quarter dollars because of these
increases in interest rates, and if we refinanced the entire national
debt at the present level, it would increase the cost of Government
by more than $4 billion.
That leads me to this question: Assuming that we get past this in­
vestment boom, and that the inflationary pressures subside so that
we do not have inflation to contend with, would you then propose to
use the powers of the Federal Reserve Board to bring these interest
rates down to a level where they were in 1953, or even lower than
that?
M r . M a r t i n . I d o n o t t h in k w e w o u ld h a v e m u c h tr o u b le . O n c e
th e d e m a n d f o r fu n d s d e c lin e s s u b s ta n t ia lly , y o u w ill fin d th a t th e
in te re st r a te le v e l b e g in s to d e c lin e .

We would not be the slightest bit averse to using our powers, once
deflation is clear, to ease money. We have got to make a judgment
of when the time comes and what the right time is.
In 1958, we started easing money, and we got a little bit overenthusiastic about it, I think, toward the end of the year, but we actually
pursued a policy of active ease during that period.

Senator L o n g .

H

ow

low did interest rates go during that tim
e?

Mr. M a r t i n . In 1954, to around one-half of 1 percent on the bill
rate, Senator, in about the middle of 1954.

Senator L o n g . Were you using an open-market operation at that
tim ?
e
M M a r t i n . Yes. We were supplying funds by purchasing Gov­
r.
ernm securities.
ent
Senator L o n g . The use of th e open-market operation by the Federal
Reserve Board can be used as a very powerful factor to bring interest
rates down, can it not?

Mr. M a r t i n . It is an extremely powerful operation. But it cannot
make people borrow money if they do not see an opportunity for
profit.
Senator L o n g . The point is, that you have this supply-and-demand
situation, you have competition for money, and you have the reverse
of that, competition for securities. If the Federal Reserve Board
were using its power to buy Government securities, it could tend to
bring the general level of interest rates down by entering the field and
competing with private lenders, could it not ?
M r. M

a r t in .

It can----

Senator L o n g . So m y question is, assuming that we get this infla­
tion under control, do you then propose to use the powers of the Fed­
eral Reserve Board to bring these interest rates back to where they
were?

M M artin. Bringing themback to where they were---r.
Senator L ong. Back down, I m
ean, to a level of where they were
several years ago----




1402

FINANCIAL CONDITION OF T H E UNITED STATES

M r. M artin . We would use-----Senator L ong (continuing). A t a time when the interest rates were

low.
Mr. M artin . We will use the power of the Federal Reserve to lean
against either deflationary tendencies or inflationary tendencies.
Senator L ong. Here is another question I have m mind: Leaving
out this matter of inflation, is it not true that high interest does in­
crease the cost for a great number of people in this country ? In other
words, in many respects it increases the cost of living for many people,
in and of itself.
Mr, M a rtin , It is one of the factors in increasing costs; as I pointed
out earlier, it is a minor factor in relation to the cost o f the goods and
services that they are buying, but unquestionably it is one o f the
costs.
Senator L ong. The point was made by Under Secretary Burgess
that for a major industry the interest cost was less than one-half o f 1
percent, and therefore an increase in interest rates of 50 percent would
only increase its costs of doing business by perhaps one-quarter o f 1
percent.
On the other hand, let us see what it does to home building. Here
is a tabulation that I have made to show, on a 10-year and 20-year
mortgage—no, put it on a $10,000 and $20,000 mortgage based on the
period of years for which that mortgage is outstanding—the difference
in cost.
Now, I notice this: that the monthly payment and the final interest
cost is almost 9 percent higher on a 20-year mortgage if you increase
interest rates from 4 percent to 5 percent; the same 1-percent increase
would increase the cost of buying a house on a 25-year mortgage by
more than 10 percent, almost 11 percent; and it would increase the cost
of buying that house, if bought over a 30-year period, by 12.4 percent.
I would like to make these available for the record.
(The information referred to is as follows: )
Effects of the increase of 1 percent (i. e.t from 4 percent to 5 percent) on interest
payments for mortgages of various principal amounts and maturities

Principal

Term
(years)

20
20

$10,000______________ ____________________ _______________
$10,000................................. ............................ .......................................
Difference................................................................................

..............
$10,000..................................................... ................ ................ ..............
$10,000...................................................................................................

__ _ „

Interest
rate
(percent)

5
4
____________

M on th ly
payment
to principal and
interest

$66.00
60.60
5.40

Percent increase in m onthly paym ents....................

25
25

4

5

$58.50
52.80
5.70

30
30

5
4

$53.70
47.80
5.90

Difference................................................................................
Percent increase in m onthly payments_________ _____ __

$10,000________________________________________________
$10,000_____________ ____________________ _______________
Difference........ .................. .................................... ................
Percent increase in m onthly paym ents................... ..............




Total
interest
payment

$5,838.19
4, 543.28
1,294.91
8.9
$7. 525. 55
5,831. 51
1, 694.04
10.8
$9,317.20
7,167. 42
2.149.78
12.4

FINANCIAL CONDITION OF THE UNITED STATES

1403

Senator L ong. That does increase the cost of living for those people
buying homes, does it not ?
Mr. M artin. Well, it certainly is a factor in increasing the cost
of living to them.
But putting it against the cost of building supplies and building
equipment—I do not have the figures here, but I would be glad to work
up a table for you and show you that cost has gone up infinitely more
than this cost.
Senator L ong. Well, if a person is buying a house, his cost is
10 percent higher than it would be if you had interest rates 1 percent
less, is it not? There is his average monthly payment. Ten percent
would be a fair average, depending on those figures.
Mr. M artin . I do not know— well, the increase in monthly pay*
ments here would be 10.8 percent more. Now, what the cost of the
house would be on the higher cost, that would be------Senator L ong. There it is, right there. There it is on the right-

hand tabulation; you can see the final payment in interest, and that
works out to about 10 percent additional interest costs.
Mr. M artin. Yes. But the point I am trying to make, Senator, is
that you are neglecting the rise in building costs that is occurring
coincident with this.
Senator L ong. I am just saying, in and of itself, let us leave out this
argument about inflation for a moment----Mr. Martin . Well, but I-----Senator L ong (continuing). And I am saying, how much does the
additional interest cost increase the cost of buying a house ?
Well, a 1-percent increase in interest works out to about a 10-percent
increase in the monthly payment on the house, does it not ?
Mr. M artin . Assuming that you can keep the cost of the house
static.
Senator L ong. I got those figures from the Banking and Currency
Committee, by the way. I did not compute them myself.
Mr. M artin. All right.
But that is assuming you can keep the cost of the house static. The
point I am making is, you just cannot make the assertion in a vacuum
that it costs this amount, an increase in this amount. It has to be
related to what the cost of the house is.
Senator L ong. Well, if I want to buy a home, ordinarily, let us say
there is a $10,000 house I want to buy. I f I can get a 4-percent mort­
gage, then my payments would run about 10 percent less than they
would if I have to take it on a 5-percent mortgage; would that not
be correct?
Mr. M artin. Well, yes. But what about the $10,000 house maybe
costing $12,000 because of the current inflation ?
Senator L ong. What I am saying is, and I hope you will agree with
this, that in and of itself, leaving out all other factors, an increase
in interest cost increases the cost of living for a homebuyer as 1 is to 10.
In other words, every 1-percent increase in interest increases the
cost of buying the house by about 10 percent.
Mr. M artin. Well, the point I am trying to make is that in and of
itself, you cannot separate this price. I just do not think you can
make a statement—I mean, I do not think I can agree that in a vacuum
you can say that the cost goes up by 10.8 percent. There certainly
93633—07—pt. 3— 13




1404

FINANCIAL CONDITION OF T H E UNITED STATES

will be an increase in costs; if you eliminate the factors of inflation
and if current business factors were static, you would be correct. But
I do not think that is so.
That is where you and I have a disagreement.
Senator L ong . Mr. Chairman, there is the tabulation, and if you
are buying a house, you have got to think about the same thing I am
thinking about, and that is, how much do I have to pay in total
when I pay the mortgage off ?
Even though I just computed how much my new mortgage is going
to cost me, it is now going to cost us for the same mortgage $50 a
month extra, or $600 a year more than we were paying before, be­
cause of the increase in interest costs on a $20,000 mortgage.
The same thing would be true of rent, would it not?
Mr. M artin . Oh, yes. Rent would fall in the same category.
Senator L ong. In other words, a landlord has to think in terms of
the cost of money on his investment, and when interest costs go up,
then of course it is necessary for him and all other landlords to ad­
vance their rents; is it not ?
Mr. M artin . I doubt very much whether that is true in the pres­
ent market, but it is certainly a factor that he has to consider, like­
wise.
But I think that a good many vacancies are appearing.
Senator L ong . Even in the supply of housing, if a person is trying
to decide whether to build one of these large apartment buildings
around Washington, or anywhere else in the country, to supply more
housing, he has to think in terms of charging rents which will enable
him to pay the interest on his money and to amortize his investment;
does he not ?
M r. M artin . He does, indeed.
Senator L ong . This being the case, an increase in interest means
that, certainly for rental new housing, the housing will not be con­
structed unless the landlord feels he is in position to get the interest
plus a fair profit and an amortization of his investment.
Mr. M artin . That is correct.
Senator L ong. In and of itself, standing alone, the increase in in­
terest rates also increases the cost of a small-business man doing busi­
ness, and to a much higher degree, on the average, than the cost of
large business; does it not ?
M r. M a rtin . N o , I cannot say that. We have discussed that a good
many times, and I am not at all certain of that. It increases the
costs-----Senator L ong. Y ou think that with businesses which have an
equity investment, equity holding of, say, less than a quarter million
dollars, that the interest cost is less than 1 percent o f their costs of
doing business ?
M r. M artin . W ell now, rates on small loans have not gone up as
much as on large loans.
Senator L ong, That is not what I am asking, though. I am just

asking if an increase in interest does not increase the cost of doing busi­
ness tor a small-business man even more than it does for most of the
large industries ?
Mr, M artin . N o; I cannot say I agree with that.



FINANCIAL CONDITION OF THE UNITED STATES

1405

For the marginal borrower and, it is not a matter of whether he is
small, medium-sized, or large, it certainly makes it more difficult for
the marginal borrower to obtain credit.
But I am unconvinced—we are going to make a careful study of
this—but I am unconvinced yet that you can demonstrate that the small
person has been discriminated against during this period.
Senator L ong. Can you undertake to get us some figures, some in*
formation, to show us what percentage of small business’ expense is
represented by interest costs? The figures were provided with regard
to basic industries by Under Secretary Burgess.
I wonder if you might be able, either directly or through some of
your interdepartmental committees, to provide us with material to
show us what is the percentage of cost represented by interest ex­
pense for small businesses ?
Mr. M artin. We will do our best on it, Senator.
Senator L ong. I believe that is just about all the questions I wanted
to ask, Mr. Chairman. Thank you very much.
(The information referred to is as follows:)
S m all-B u s in e s s I n ter est Co sts
The latest detailed information on business expenses available is the Internal
Revenue Service tabulations of corporate income tax returns for 1953. These
tabulations indicate that interest is a relatively smaUer cost for small businesses
than for large concerns. Thus, interest payments as a proportion of total com­
piled deductions (total expenses allowed in computing net income) averaged
one-half of 1 percent for nonflnancial companies with assets under $250,000, but
amounted to a full 1 percent for corporations with assets of $50 million or
more. Unfortunately, no comparable information is available from the tabu­
lations of tax returns filed by proprietorships and partnerships.

The C hairman . The Chair recognizes Senator Carlson.
Senator Carlson. Mr. Chairman, I appreciate very much the grant­
ing of this opportunity at this time. I will want to complete the
statement, as you have just stated; otherwise, I would have been
pleased to wait until Senator Long was present, because I talked with
him Friday, and he had not concluded.
Mr. Chairman, I have appreciated your very frank statements in
regard to our monetary policy. Your opening statement seemed to
me to stress the fact that the Federal Eeserve had but one goal, and
that is to give this Nation a stable and sound monetary program which
would provide our economy with sufficient money and credit to furnish
high employment, expand production, and prevent inflation from
robbing our people of their savings.
It is my intention to ask a few questions in regard to labor, the
gross national production, and the effects of employment and unem­
ployment on our economy.
My first question is going to be: Is there a shortage of labor ?
Mr. M artin. The labor supply has fluctuated, Senator. In the last
few years, as was evident in my colloquy with Senator Long, I think
that in certain skilled areas today there is a shortage of labor.
A year ago, I think the shortage of labor was greater than it is
today. But in certain skilled areas and in certain areas of the coun­
try, there is definitely, in my judgment, still a shortage of labor.
Senator Carlson. I noticed just recently, I believe last week, where
the Secretary of Commerce and the Secretary of Labor, Mr. Mitchell,




1406

FINANCIAL CONDITION OF T H E UNITED STATES

stated that we had an alltime high, I believe, o f 67,200,000 employed
during July.
The question then gets to be, if we have a shortage of labor, do you
think that we are faced, then, with the choice between price stability,
a higher level of unemployment, and a slower rate of economic growth
on the one hand, or creeping inflation and continued economic growth
on the other hand ?
Mr. M artin . Well, Senator, I am convinced that the alternative
to inflation is not widespread unemployment. I think we can have—
and that is evidenced, I think, by the years in which we have had
lower unemployment than we have presently, and also less inflation
than we have currently—we can have very high levels of employment
without inflation.
The employment that we want is stable employment. It is employ­
ment that will be sustained and maintained, not temporary additions
to the labor force which will be cut back as soon as excess capacity
develops in the line.
And it is my conviction we can have the goals of the Employment
Act in a country that has the growth potential of this country if we
will recognize that if we try to do things too fast, we are going to
have needless unemployment.
Senator C arlson. And following that suggestion and statement, if
it should develop that we had to make a choice between creeping infla­
tion or some unemployment, which would you choose ?
Mr. Martin. I think it depends on the point that you are in the
cycle. I think that any employment which would develop as a result
of a creeping inflation of the sort you are talking about would be
very temporary indeed, and I think you cannot separate price stability
and growth in the economy. I think that you have to recognize that
they are very closely related. It is not possible to completely isolate
one from the other.
Now, I would not make a conscious choice in favor of unemploy­
ment at any time. I would not make a conscious choice in favor of
price stability. But I think on an ad hoc basis, you have to gage the
position in the cycle of the operations.
Senator C arlson. I f the Federal Reserve had pursued a much easier
credit policy over the last 18 months, what would have been the
result ?
M r. M artin . You would have had, in my judgment, more inflation
than we have had. You would have had inflation feeding upon itself
in a way that it has not fed upon itself, and I am confident that you
would have had greater demands upon our resources than we could
have met without rather sharp further increases in prices.
The cost of living has gone up for 11 successive months, as it is.
Senator C arlson. Well, am I to understand if we would have had
easier credit policies, there would not have been more people em­
ployed ?
M r. M artin . I do not think there could have been more people
employed except temporarily here and there. I think you were
pressing against capacity all through the period.
Senator C arlson. Are the decisions the free market makes about the
allocation of savings, in line with the economic welfare of our people?
For instance, is it consistent with our economic welfare for wealthy
corporations like the A. T. & T., General Motors, and many others, to




FINANCIAL CONDITION OF TH E UNITED STATES

1407

be able to borrow money, while school districts, housing, and other
worthy enterprises have unsatisfied demands for credit?

That has been one of the problems, I know, which has been discussed
for some time before this committee.
Mr. M arxist. I say in a free economy, of course, if a corporation
has retained earnings, just as if a wealthy man has wealth, they can
be used. I f we had had additional savings recently and less exuber­
ance in our economy, there would have been more funds available for
schools and highways and churches and playgrounds and the type of
financing which ought to be done out of savings and not out of bank
credit.
Senator C arlson. Did I understand from that statement that the

funds under this economy are determined or will be determined by
savings ?
Mr. M artin. Until there is a better balance between spending and
saving, I am confident that it should be.
Senator Carlson. Would you recommend Government measures to
assure that a larger proportion of the savings go to States and cities,
school districts, and to housing ?
Mr. M artin. I think allocating the funds should be left primarily
to the market. I do not think we can very readily maintain a free
economy and take these funds and specifically allot them, except by
congressional action; that, I think, is within the province of the
Congress.
Senator C arlson. Well, do you consider the current rise in prices
is at least partially independent of monetary developments?
Mr. M artin . I think it is partially, because I think that spending,
governmental and State and private spending, is a factor. There are
the three factors here, money and credit policy, budget policy, and
management of the debt, all of them working together, and I think
that money and credit policy is just one of those three factors.
Senator C arlson. We have been discussing some of these phases of
employment and gross national production as it affects our economy
as a whole. I want to get back to employment again.
Do you think employment is (a) over full? I mean bv that, if we
are employing 96 percent of our employable people or labor force, is
that about as high as we can get?
Mr. M artin . I would say it is about as high as we can get. I would
say we have had a condition of full employment for roujpily the last 2
years.
Now, I would not want to be dogmatic and say that the degree of
unemployment which is consistent with a stable price level is neces­
sarily an accurate definition of full employment. But I think that
you have to bear in mind that at all times when employment is rising
at the expense of price stability, you are one step removed from de­
flation. And our battle should constantly be against deflation.
I think that is our objective in resisting inflation. First you have
inflation, which is followed by deflation. When you have a strong,
growing economy such as we have had-----Senator C a r l s o n . Well, now, with this inflation, is it the natural
tendency for a shortage of labor to cause prices to rise?
Mr. M a r t i n . Well, labor is just one factor in it. I f you have to
bid labor away from one industry to put it in another industry, and




1408

FINANCIAL CONDITION OF T H E

UNITED STATES

you are already straining against capacity, in a general sense, why, I
think that in itself contributes to a rise in prices.
Senator C arlson . You have just stated, I believe, that a shortage
of labor is not necessarily the cause of a rise in prices, and that we ao
have, not necessarily full employment, but certainly very high employ­
ment. There are some people who do not agree with the policies o f the
Federal Reserve, and contend that your present policies are preventing
full employment, increased gross national production, and increased
inflation. I have here a clipping from the Washington Post of August
14, the heading o f the article being “ Economic Blundering Laid to
Ike.” It is dated “ Chicago.”
The AFL-CIO executive council today launched an all-out attack on Eisen­
hower administration economic policies with a charge that they were designed
to hasten a recession.
The council, meeting in its summer session here, issued a legal-style statement
condemning tight-money policies and accusing business and administration
leaders of “blundering dangerously.”

Do you concede that you are blundering dangerously at the present
time?
Mr. M ar tin . Well, obviously, I do not think the Federal Reserve
Board is blundering dangerously. I think that to take the position
that the way to cure an inflation is by additions to the money supply
is just asking for more inflation, and I am convinced that the No. 1
economic problem today is to direct all o f our energies to reducing
spending and increasing savings. We have within our grasp, as I
stated earlier, I think, a higher standard of living on a sound basis,
if we just do not try to do too many things too fast, and if we give
savings a chance to accumulate to be utilized in the way they should
be, instead of depending upon the creation of bank credit to supply
a deficiency in savings.
Senator C arlson . Well, now, just following on in this same article,
and I read:
The statement was hammered out last night at a meeting of the AFL-CIO’s
economic policy committee, headed by Reuther and attended by Keyserling.
It was organized labor’s most blanket indictment to date of Eisenhower economic
policies.

They state here, and I read:
“A thorough reappraisal of all public policies and private actions that affect
the stability and growth of the American economy is long overdue,” it added.
The statement attacked decisions to raise interest rates by the Federal Reserve
Board and the Federal Housing Administration and the offering of Government
bonds at 4-percent interest by the Treasury Department.
Such actions, the statement said, were designed to hasten a recession.

Am I to understand that the Federal Reserve has in mind to hasten a
recession ?
Mr. M artin . There is no intention on the part of the Federal Re­
serve to hasten a recession. I do not want recession at any time.
I have pointed out that, if there are excesses which develop, correc­
tions are necessary from time to time. The actions, the overt actions,
we have taken—we influence the money supply, but do not control it—
have been as a result of reflections o f the demand, the terrific, over­
whelming demand for credit that has occurred persistently in the
economy for the last 2 years.
It seems to me that it is tantamount to a California gold rush in its
intensity, and that the forces which we are dealing with cannot be



FINANCIAL CONDITION OF TH E UNITED STATES

1409

equalized in any sense without the use of the price mechanism, and
interest rates are merely a reflection of this operation.
Interest is a wage to the saver as well as a cost to the borrower, and
it will, over a period of time, have an equalizing effect.
Senator Carlson. I have just read a recent article entitled “Cracks
in the National Economy,” by Leon H. Keyserling, which appeared
in the July issue of the Progressive magazine, published in Madison,
Wis. Leon Keyserling is a personal friend of mine, and I have
listened to him on many occasions, but I want to read 2 or 3 state­
ments from this article which appeared in this magazine.
The facts of our economic life show:
Our overall economic growth in real terms, which averaged 4^ percent a year
for several years after World War II, has averaged only 2% percent during the
past few years, and even less during the past 15 months. This slowdown has
caused almost $60 billion in lost production within 4 years. Total production
during the past few months ha« been at an annual rate of about $25 billion below
full production. By the first quarter of 1957, the true level of unemployment
was 40 percent higher than in 1953.

First, I would like to ask you, what would have happened to our
economy had we poured out $60 billion more in gross national produc­
tion in the last 4 years ?
Mr. M artin. Y ou would have had an acceleration of the point that
I have commented on, that between 1955 and 1956 we lost more than
50 percent of the increase in our gross national product in a markup in
prices, without any additional goods and services, and I think that
would have been accelerated substantially if what you said had
occurred.
Senator Carlson. Well, now, by the first quarter of 1957, and I am
reading now—
By the first quarter of 1957, the true level of unemployment was 40 percent
higher than in 1953.

I am not familiar with the figures in 1953, but I believe you stated
that we have fairly high employment at the present time.
Mr. M artin. We do have fairly high employment. I had not pre­
pared it for that purpose, Senator, but I have an analysis of current
unemployment here, which I would be glad to put in the record, made
by our staff recently, which, certainly, I think, would be at variance
with those figures you read. I think you could analyze these figures
a great many different ways, and I would not offhand want to—I
would be glad to put this in the record.
Senator Carlson. Mr. Chairman, I am going to ask that it go in the
record. I have not seen it.
The C hairman . Without objection.
Mr. M artin . It is an analysis of the unemployment situation.
Senator C arlson. I think it would be appropriate.
Senator B ennett. Is it in such shape that it could be read for the
information of the committee, to follow the questioning?
Mr. M artin . I will read this.
FACTORS ACCOUNTING FOR DIFFERENCES I N UN E M PL O Y M EN T ;
M ID -1 9 5 3 AND 1 9 5 7

1951

to

Current unem ploym ent

First, in terms of perspective, it is worth while examining cur­
rent levels of unemployment.




1410

FINANCIAL CONDITION OF T H E UNITED STATES

In July 1957, unemployment totaled 3 million, or 4.3 percent o f
the civilian labor force, based on new definitions which were adopted
starting January 1957, I f old definitions were used— and data on
the old basis are the only data comparable with earlier periods—un­
employment in July would have been reported as 2.7 million, or 3.8
percent, of the labor force.
The summer months tend to be the high months in the year in
respect to unemployment because o f a large influx of students and
graduates looking for summer jobs. As students leave the labor force
m September and as the usual fall expansion in industrial activity
gets underway, unemployment drops rather sharply.
Between July and October, unemployment can usually be ex­
pected to decline by 700,000 to 800,000. Thus, if only seasonal fac­
tors affect unemployment between now and fall, the number o f work­
ers seeking jobs in October of this year will be only about 2,2 mil­
lion, under the new definition.
Since early 1955, seasonally adjusted unemployment has remained
virtually unchanged, with the unemployment rate moving within a
one-halr percent range and with no consistent trend in either direc­
tion.
I just made this up for my own information.
During this period, over S million workers were added to the
labor force, a much larger increase in the labor force than would have
been expected on the basis of growth of the population of working
age, reflecting the continuing strong demands for workers.
TTiis fact also indicates the frictional nature of current unemploy­
ment, in that it has been necessary to go outside of the labor force
to meet demands for additional employees.
Other indications of the current low level of unemployment are that
about two-thirds of the unemployed have been looking for work less
than 6 weeks, and that only 500,000, or less than 1 percent of the la­
bor force, were reported as having been unemployed for 15 weeks
or more in July.
Except for the very young age groups who are just starting their
work careers or looking for summer work, unemployment rates among
adult workers are very low. In each age group 25 years and over,
the unemployment rate was substantially below the average.
For married males with wife present, the unemployment rate in
July was only 2.3 percent.
While there are a number of areas which report substantial labor
surpluses—unemployment rates of 6 percent or more—they consist
mainly of textile towns and mining areas, in which the age, sex, past
work experience, and geographical location have in large part pre­
vented the absorption of these persons into gainful employment m a
period of expanding demands for workers.
In contrast, there are still reported shortages for engineers, teachers,
and other professionals along with some kinds of skilled workers.
Senator C arlson, That was certainly a very interesting statement.
I f I understood it correctly, in July the unemployment had reached
only 2 or 3 percent, less than 3 percent, of our national labor force.
Mr, M artin . I will continue this a little bit further, if I may.
I have here comparison of current unemployment with 1951 to
mid-1953:



FINANCIAL CONDITION OF THE UNITED STATES

1411

In the first half of 1957, average unemployment was about 800,000
to 1 million more than in comparable months in 1952 and in 1953.
The old definition was used in both instances for purposes of com­
parability.
Since 1952, some 6 million people have been added to the labor
force. I f the data is standardized to take account of increases in the
labor force and differences in age and sex distribution in the two
periods, unemployment would have increased by 200,000.
The major differences in unemployment in the two periods pri­
marily result from the Korean hostilities. Between mid-1950 and the
defense peak, the Armed Forces increased by 2.3 million. This re­
sulted in a sharp reduction in the number of unemployed males under
25 years of age.
Since mid-1953, however, the Armed Forces have been reduced by
800,000 men, from 3.6 million to 2.8 million, and this to some extent
accounts for a slightly higher unemployment rate among younger
men in 1957 than in the earlier period.
During the period of the Korean conflict, there was a well-adver­
tised manpower shortage. Public agencies and many employers con­
ducted an active and extensive drive for workers. This apparently
had a number of effects.
It tended to reduce unemployment as well as the length of unem­
ployment for those seeking work. On the other hand, it led to hoard­
ing of workers and use of less efficient workers on the part of em­
ployers who feared that sufficient manpower might not be available
m the future.
On the whole, in this period it appears that there was a good deal
of underutilization of manpower, and there was very little growth in
productivity. It was not until after cessation of hostilities that output
per man-hour started to rise again.
It seems likely, although it is difficult to prove, that during periods
of hostilities—World War II and Korea—people interviewed in the
census household sample surveys, may have been reluctant to admit to
being unemployed, on the assumption that unemployed persons were
not contributing to the defense effort in view of stories of worker
shortages delaying war efforts and other patriotic appeals. During
World War II, reported unemployment fell to the very low figure of
400,000.
Since 1953, there has been a reduction in manpower requirements in
the railroad, mining, and textile industries which has resulted in some
increase in longtime unemployment and is reflected in somewhat higher
rates of unemployment among older workers now than in the 1951-53
period.
As mentioned earlier in this memorandum, this has resulted in what
might be called some chronic unemployment; but the number of such
persons appears to be small.
In 1956 and 1957, there have been a number of mixed trends in the
employment situation resulting in some layoffs. In 1956, the reduc­
tion of automobile production was definitely reflected in the unem­
ployment totals but was offset by other gains.
In 1957, while unemployment among automobile workers declined,
reductions in residential construction, lumber, electrical machinery
a n d more recently aircraft employment, have tended to keep the un­




1412

FINANCIAL CONDITION OF T H E U N ITE© STATES

employment totals fairly constant, but probably slightly higher than
if all activities were currently rising.
The unemployment series is based on a sample survey and has all
the difficulties of such data including sampling error, A difficult fac­
tor to evaluate has been the improvement in unemployment data re­
sulting from two changes in the census sample since 1952-53.
In 1957, census interviewed about 35,000 households in 330 areas
each month. In 1952-53, only 21,000 households were interviewed in
68 areas each month. Sampling error for unemployment in 1952 was
calculated as 190,000. In 1957, the sampling error is 100,000 for
unemployment.
The census sample was increased from a 68-area sample to a 230-area
sample in January 1954. The results of the new sample showed that
for January 1954, unemployment exceeded the old sample figure by
some 700,000, or 31 percent, a considerably larger difference than could
reasonably be attributed to sampling variability.
An examination of the evidence by the Census Bureau’s staff and a
special technical committee led to the conclusion that the old sample
figure was understated, partly because of inadequacies in interviewing
during the period o f transition to the new sample.
On the basis of comparing the total unemployment statistics with
the number of persons receiving unemployment compensation, it was
concluded that the understatement started in September 1953.
On this basis, an adjustment was made by arbitrarily graduating
downward the percentage difference between the old and new sample
estimates of unemployment from January 1954 to September 1953, and
no change was made for prior months.
In April 1956, the sample was again expanded, this time to 330 areas,
but the unemployment figure was reported as approximately the same
for both samples.
(Tabulation on unemployment and labor force submitted by Mr.
Martin is as follows:)
Unemployment and labor force , July of each year

1950

Number unemployed (thousands)_______
Unemployment rate:
Total all ages_______________________
14 to 19 years................................, ........
20 to 24 years___ _____ ______ _______
25 to 34 years......................... ................
35 to 44 years_______________________
45 to 54 years_____ ____ _____________
55 to 64 years.................. .....................
65 years and over_________ ____ _____

3,213

1951

1,856

1952

1,942

1953

1,548

2,686

3.8
10.9
5.5
3.4
2.3
2.5
2. 7
3.0

5.0

2.9

3.0

2.4

12.0

8.1

8.8

6.6

2.2
2.0
2.1

1.8

7.0
4.5
3.3
3.6
3.8
3.6

3.6

4.2
2.3
2,3

1957 (old 1957 (new
definidefini­
tion)
tion)

3.2
1.9
1.8

3,007
4.3
11.8
6.2

3.8
2.8

2.2

1.5
2.3
1.4

Total labor force (thousands)......................
Armed Forces (thousands)................... ......

65,742
1,315

67,477
3,095

67,642
3,466

68,804
3,590

73,056
2,823

73,051
2,823

Civilian labor force (thousands)____

64,427

64,382

64,176

65,214

70,233

70,228

2.4
1.7

2.3

2.7
3.0
3.3

Mr. M artin , I had that made up, Senator, because I wanted to go
over the data on unemployment. It is not a completely scientific
analysis, as you can see.
Senator C arlson. Mr. Chairman? I think you made a very valuable
contribution this morning, because it is one of the problems confront­



FINANCIAL CONDITION OF THE UNITED STATES

1413

ing this committee, the percentage of unemployment, and whether
we have full employment.
The gross national production we have at the present time, which
I understand is very high, is based on this 96 or 97 percent of full
employment.
^Then I would ask again—I still have this article before me of Mr.
Keyserling’s—who would have produced—and I am quoting now:
Total production during the past few months has been at an annual rate of
about $25 billion below full production.

Who would have produced those goods, $25 billion worth, with
this employment?
Mr. M arttn. Well, I do not know who would have, and I think it is
perfectly obvious that prices have been rising during this period, and
they would have risen more, if you had had further additions to debt,
which is largely what we have been dealing with here: we never want
to forget the fact that of recent additions to purchasing activity, a
good percentage is accounted for by debt. I deplore the idea of spend­
ing more than you have to try to buy more goods than are available.
The creation of money to add to the spending stream under such cir­
cumstances can do nothing but put prices up, as I see it.
Senator C a r l s o n . I want to read another section from this same
article by Mr. Keyserling, and I do not do this because of anything
personal against Mr. Keyserling, but it is a philosophy that he evi­
dently has advocated, and there is a conflict between different views
in this Nation, and I think we ought to analyze it a little, and I
quote:
The slowdown in economic growth has resulted largely from an even greater
slowdown in consumption growth. Purchases by American consumers, measured
in 1956 dollars, grew only 1 % percent from the fourth quarter of 1955 to the
fourth quarter of 1956. The deficiency in this consumption now accounts for
70 percent of the deficiency in total production.

From that statement, may I inquire about the purchasing power
of our American people. Do they have the funds to buy with, or what
is our situation?
Mr. M artin . W ell, purchasing power has been high ; if you take dis­
posable personal income, this last month it made a new high $302.5
billion— personal income was $345.5 billion.
I might read here what I have on consumer disposable income.
The assertion that consumer disposable income has not increased
during the past year disregards the inflation which is our problem by
stating it in terms of ex-inflation dollars.
This is the colloquy I had with Senator Long. I am sorry he is not
here.
Consumer personal income available for spending has grown ap­
preciably, both in absolute amount and on a per capita basis, during
the past year.
It is the largest single component, by far, of the total spending
stream that has sustained the continued rise, both in wholesale prices
and in the cost of living. If consumers had saved a larger proportion
of this income, which is the point I made earlier, it would have been
available for the financing of schools, highways, and capital plant,
without contributing further to inflation and the reduction in the
value of their spending dollar.




1414

FINANCIAL CONDITION OF T H E UNITED STATES

As it is, the inflation that has actually occurred has offset in large
part the buying pow er o f the increase in consum er disposable income.
There is just no percentage in increasing disposable personal income
if you are going to lose more than 50 percent o f the increase from
one year to the next in a markup in prices without any additional
goods and services*
. , ..
,
Senator C a r l s o n . In other words, a reduction of the dollars pur­
chasing power would not increase the amount o f goods the consumer
got, but he would pay more for them.
Mr. M a r t i n . That is right.
Senator C a r l s o n , As I read this, I was concerned about it, because
it states in this article, and I will read again now :

The deficiency In this consumption now accounts for 70 percent of the
deficiency in total production.
In view of your statement, it seems to me we have been producing
pretty well at capacity, and any additional production to be pur­
chased by the consumer would have been bought at greatly inflated
prices; would that not be correct ?
Mr. M a r t i n . That i s correct.
I have a comment on production here I would like to read, if you
would permit it, Senator.
Senator C a r l s o n . Y o u may.
. _ .
Mr. M a r t i n . Increased production per se does not cure inflation.
Money income is generated in the process of production, and becomes
part of the spending stream.
As was pointed out on Tuesday, one man’s expense is another man s
income. Consequently, increases in production in themselves add to
the flow of spending as well as to the flow of goods.
Increased output to the full extent permitted by our capabilities is
good, provided, of course, it is the right production and is financed in
such a way as to promote continued prosperity.
However, if there is excess money demand present in the economy
at a time when resources are actively employed, that excess will cause
a rise in prices. Increased production under these circumstances
will add to the spending stream as well as to the stream of goods and
services.
It will not, therefore, eliminate the excessive money demand that is
the cause o f rising prices. For inflation to be curbed, excess money
demand must be absorbed from the spending stream.
This may come about by the development of a budget surplus, by
increased planned savings, by curtailed borrowing from banks, or by
a slowing down in the growth of the money supply or in its turnover.
It does not result automatically from increased production.
No one would maintain that a cessation of production, the reverse
of this proposition,- would stop a deflation. Likewise, an increase in
production does not in and of itself stop an inflation.
The unhappy condition of France today is a standing example of
this fact. It sharply increased its production as well as its produc­
tivity, but it failed to take measures adequate to reduce the excess
money demand that was necessary to avoid a crisis.
Senator C arlson. Mr. Chairman, that is an answer to a question I
expected to get into, because I am getting into productivity, so I will
ask a question now that I feel you have answered:




FINANCIAL CONDITION OF TH E UNITED STATES

1415

Do you consider the current inflation is due to increases in profits
or wages greater than increases in productivity?
Which is about what you have stated in that statement you just
read.
Mr. M artin . That is correct.
Senator Carlson. I notice that Dr. Gardiner C. Means, an econo­
mist for the Committee for Economic Development, who invented the
term, I think, “ administered prices,” has come up with a theory that
the current inflation is an “ administered” inflation.
As I read the statement, he contends that the sellers of commodities
can administer prices to any level they choose, and labor, in view of
its great bargaining power, can increase wages in any amount they
care to, and that this is “ administered” inflation rather than a mone­
tary inflation.
Do you agree with that theory ?
Mr. M artin. N o, I do not agree with that, Senator. I have com­
mented from time to time on administered prices, and I recognize that
there are such things, and that they can he effective for periods of
time.
But I insist that in the long run, you cannot get away from the
fundamental forces of supply and demand, and that is what we are
dealing with here. When we talk about inflation, it really does not
make too much difference whether we are talking about cost inflation,
rice inflation, or how it comes about; the fact remains it is still ination, and we have got to do everything within our power to stop it,
or the expectation of further inflation will become one of the ele­
ments of psychology in the country in such a way that saving and in­
vestment which is at the heart of a growing economy, will be eroded.
That, in essence, it seems to me, is where the problem lies.
Senator C arlson. Then I believe your answer to that would be that,
it would not be correct to state, rising prices cause inflation, but that
they are the result of inflation?
Mr. M artin . That is correct.
Senator Carlson. Well now, if we should agree with Dr. Means’
theory, and there are some who do, would it not mean that it would
take a national buyers’ strike to end or retard inflation, if we followed
through in his theory?
Mr. M artin. I do not know about a national buyers’ strike, but, in
a free economy, you cannot make consumers either spend or save or
increase their spending by fiat, by decree. It has to come about by
their recognition of the business process, and their wants and desires,
and the satisfaction of them.
(
I do not think that you will have a buyers’ strike per se in this
country, from business causes. It would be more likely a buyers’
strike, if you want to put it that way, would come from a sort of
psychological frustration.
And one of the psychological frustrations that could become over­
whelming would be just general frustration about the course of our
fiscal ana monetary affairs.
Senator Carlson. Would you indicate statistically or graphically
the relative rates of increase in profits, wages, and productivity, in
manufacturing, and such other segments of our economy for which

S




1416

FINANCIAL CONDITION OF T H E UNITED STATES

figures are available, for the periods beginning in the year, for in*
stance, 1900 to the present-----Mr. M artin . I would be very glad to have that prepared.
Senator C arlson. Prepared, and put it in the record.
Mr. M artin . Prepared, and put it in the record.
Senator C arlson . D o that, and then take 1930 to the present, 1940
to the present, 1946 to the present, and 1953 to the present, and 1956
to the present.
Can the aggregate o f profits and wages rise more rapidly than pro­
ductivity without causing a rise in prices ?
Mr. M a r t i n . I d o not think so.
Senator C arlson . Is it reasonable for the public to expect that
with proper Federal Reserve policy and a balanced budget, wage
increases will be compatible with a stable dollar ?
M r. M artin . I think so.
Senator C arlson. D o you have figures there which would show the
rate of increase in productivity since the end of 1945 ?
Mr. M artin . I will be glad to get them for you.
Senator C arlson. I f they are available, I would like to have them.
M r. M artin . Why do we not get them and put them in the record ?
Senator C arlson. Place them in the record. And if you do that,
would you get them since the end of 1954 ?
M r. M artin . I would be glad to.
(The information referred to is as follow s:)
Q u e s t io n s R e l a t in g t o P r o d u c t iv it y , W a g e s , P r o f it s , e t c .

It should be stressed that available data relating to output per man-hour (pro­
ductivity) are subject to significant limitations. Furthermore, for 195T the
available data relate only to manufacturing, and these are as yet quite tentative.
In Chairman Martin’s answers to No. 9 of the questions submitted by Senator
Byrd, it was stated:
“Unfortunately, the available data on output per man-hour do not allow us
to say with any degree of precision what the short-run changes in productivity
or in unit labor costs have been from month to month, quarter to quarter, or
even year to year. There is first the problem of accuracy of the measurement
of output per man-hour which requires relating output and man-hour series to
each other, each with different weighting factors, seasonal movements, and
many possible, but unknown errors. Then there are problems of concept, includ­
ing questions relating to the inclusion of various categories of workers, the
measuring of changes in quality of product, the use of physical output versus
deflated dollar output, the weighting of respective series, etc. While these prob­
lems are difficult and controversial, progress is being made in measurement. At
present, however, there is no one official series pertaining to productivity.
“In the nonmanufacturing sector, measurement of output per man-hour is
subject to even greater qualification than in the manufacturing industries, be­
cause it is so difficult to measure output in physical terms * *
The committee staff of the Joint Economic Committee, in its productivity,
prices, and incomes (published in 1957) has compiled a great variety of infor­
mation relating to the above questions. The Joint Committee staff is fully aware
of the difficulties engaged in measuring these variables and is careful to caution
users about their limitations. Thus, on page X I of this report it is stated: “We
submit these data with some hesitancy, since many of them are subject to aU of
the Umitations and frailties of statistics in general. Data covering long pe­
riods of years collected by different agencies and for varying purposes must be




1417

FINANCIAL CONDITION OF TH E UNITED STATES

used with great caution since concepts, coverage, consistency, and degree of ac­
curacy make their interpretation uncertain and the drawing of inferences and
relationships hazardous. On the empirical evidence of statistics alone it is,
moreover, dangerous to ascribe casual relationships where correlations, no mat­
ter how close or how elusive, appear to exist.” On page 5 it is stated: “The
problems of measurement have been particularly troublesome in studies of pro­
ductivity, prices, and incomes.”
For the purpose of answering Senator Carlson’s questions, some relevant (lata
have been selected from this report.
The following table is reproduced from page 22 of this report:
Average annual percent increase in real private product per man-hour 1

Period

Total

1910-19........... ..............
1919—
29...... ...................
192 9-39 ... ________
1939-47........................
1947-53................. ..

0 .7
2. 5
2 .5
2 .2
3 .6

Farm
0 .4

1.1

2 .0
2.3
3 .7

Nonfarm
0 .7
2 .5
2. 5
1.6
3 .4

Period

Total

1 9 5 3 -5 6 ....
1910-39.
1910-53 .........
1947-56
.................. !
|
1910-56

1

2 .2

l.R

2. 1
3 .0
2 .2 I

Farm
4.R
.

8
1. X

4 .0
2.0

Nonfarm
1.9

1.9
2 .0
2 .8
2 .2

t
i.
1 Computed from least squares trends of the logarithms of the index numbers of tables 3 (p. 89 of the report)
and 5 (p. 91).

On page 18 of this report it is stated: “The long-run average rate of increase
in output per man-hour has been about 2.2 percent per year for total real private
nonfarm product, about 2 percent for farm product, about 3 percent for manu­
facturing, 2.4 percent for farm production (gross), over 2% percent for mining,
and about 3 percent for steam railroads.
“The rates of increase in each segment have varied widely over shorter periods.
For example, in manufacturing the average rate of increase per year (computed
from a least squares logarithmic trend line) was about 2.9 percent from 1900
to 1914, no change from 1914 to 1919, about 5.3 percent from 1919 to 1929, about
2.2 percent from 1929 to 1939, less than 1 percent from 1939 to 194T, and about
3.7 percent since 1947. Gross agricultural production per man-hour increased
by only about 1% percent per year from 1910 to 1939, but rose at a rate of 4 to
percent per year from 1939 to 1956.”
The accompanying table 1 shows for manufacturing industries, for selected
years:
(a) Real output per man-hour, 1947-49=100.
(5) Hourly earnings of production workers in both current and 1956 prices.
(c) Payrolls (1947-49=100).
(<£) Corporate profits in manufacturing before and after tax.
(e) The BLS Consumer Price Index, in addition to the data relating to manu­
facturing industries only.
These are a complex set of data to analyze, quite apart from the limitations
of the statistical measurement of output per man-hour. It should be noted*
however, that the changes in corporate profits and in total payrolls reflect, among
other factors, changes in prices, in total output, in employment, and in the length
of the overage workweek. Between the terminal years 1914 and 1956, the data
suggest that hourly earnings after allowance for changes in consumer prices,
have shown about the same increase as has real output per man-hour. Within
this long period, however, there have been intervals when hourly earnings, after
allowance for changes in consumer prices, have apparently increased faster than
output per man-hour and other intervals when they have increased slower.




1418

FINANCIAL CONDITION O THE UNITED STATES
F
Tabue 1.—Manufacturing

Year

1909 .................. .........
1914.................................
1929................................1930....................- ............
1940.................................
1946.................................
1953.................................
1954__________________
1955................................
1956.................................

Hourly earnings
Corporate profits
Beal output Consumer (production workers) Payrolls (billions of dollars)
(1947-49per man-hour Price Index
(1947-49** 100) (1947-49** 100)

35.4
40.8
70.0
71.6
95.1
90.5
119.7
125.6
130.0
133.5

0) 42.9
73,3
71.4
59.9
83.5
114.4
114.8
114.5
116.2

Current
dollars
Q)
0.223
.566
,552
.661
1,086
1.77
1.81
1.88

1.98

1956

100)

prices
(*)
0.604
.897
.899
1.283
1. 513
1.80
1.83
1.91
1.98

Before
tax

After
tax

b)

0)
)

10.8

12,7
36.6
29.7
34.6
81.4
151.4
137.7
152.5
161.3

4.8
1.6

5.5
11.4
21.2

18.4
24.8
24.6

0

4.2
1.3
3.8
6.7
8.9
8,6

11.9
11.5

Percentage increases
1909-56 .
...... .........
1914-56
1929-56...........................
1940-56............................
1946-56,...........................
1953-56...........................

277.1
227.2
90.7
40.4
47.5

11.5

170.9
58.5
94.0
39.3

1.6

787.9
249.8
199.5
82.3

11.9

227.8
120.7
54.3
30.9

10.0

1,393.5
1,170.1
340.7
366.2
98.2

6.5

412.5
347.3
115.8
16.0

173.8
202.6

71,6

29.2

1Not available.
Source: Heal output per man-hour and payrolls from staff of the Joint Economic Committee report,
Productivity, Prices, and Incomes; Consumer Price Index and hourly earnings from Bureau of Labor
Statistics; corporate profits from Department of Commerce.

Table 2 shows for selected years indexes of real private production per manhour and estimates, in billions of current dollars, of total compensation of em­
ployees and of total corporate profits before and after corporate profits tax lia­
bility. Also shown are employees' compensation and corporate profits as per­
centages of national income. It should be noted that the data on production per
man-hour are based on deflated estimates of output; whereas the estimates of
employees* compensation and profits reflect price changes as well.
These estimates indicate that growth in real production per man-hour for the
private economy as a whole was substantially smaller than the increase in pro­
ductivity for the manufacturing sector (shown in table 1), both for the entire
period from 1909 to 1956 and for the last decade of this span. On the other hand,
the estimated gain since World War II in real average hourly earnings in the pri­
vate nonagricultural area as a whole (not shown in the table) was about the
same as the increase in real average hourly earnings of production workers in
manufacturing. (See estimates and discussion in Bureau of Labor Statistics
study, Productivity, Earnings, Costs and Prices in the Private Nonagricultural
Sector of the Economy, 1947-56, May 13, 1957.)
The relative shares of total national income accounted for by employees’
compensation and by corporate profits before tax showed relatively small changes
from 1953 to 1956 and were at levels well above those in 1929 and in 1940.
Reflecting higher rates of taxation on corporate income, corporate profits after
tax in recent years have been a smaller percentage of national income than in
the immediate postwar and in prewar years. Thus, while employees* compensa­
tion and before-tax profits both increased by over 360 percent from 1940 to 1956,
after-tax profits rose by about 225 percent. Taxes on individuals* incomes, how­
ever, have also been increased and, on an after-tax basis, the increase in em­
ployees* compensation would also be considerably smaller than the before-tax
data in the table indicate. Estimates of personal taxes paid by employees are
not available separately from the total of such taxes.




FINANCIAL CONDITION OF THE UNITED STATES

1419

T a b l e 2.— Output per man-hour, compensation of employees, and corporate
profits, selected periods, 1909-56

Year

Real
Total corporate profits
Percent of national income
Total
private
produc­ compensa­
tion per
tion of
Total
Total corporate profits
man-hour employees Before
After
compensa­
tion of
(1947-49
tax
tax
= 100)
employees Before tax After tax

1909...........................
1929........................
1930.......................
1940________ ____
1946^......................
1953.........................
1954...........................
1955..........................
1956...........................

47.7
66.9
64.9
85.9
97.1
118.6
120.4
125.4
125.9

Billions of
current
dollars

(9

51.1
46.8
52.1
117.7
208.1
206.8
223.1
241.4

Billions of
current
dollars
0)

9.6
3.3
9.3
22.6
37.0
33.5
42.5
43.0

Billions of
current
dollars

<9 8.3
2.5
6.5
13.4
16.7
16.0
21.0
21.0

0)

58.2
61.8
63.8
65.5
68.9
69.2
68.8
70.3

0)

10.9
4.4
11.4
12.6
12.2
11.2
13.1
12.5

0)

9.5
3.3
8.0
7.5
5.5
5.4
6.5
6.1

Percentage changes
1909-56..
1929-56..
1940-56..
1946-56..
1953-56..

163.9
8 .2
8
46.6
29.7

6
.2

372.4
363.3
105.1
16.0

347.9
362.4
90.3
16.2

153.0
223.1
56.7
25.7

1 N ot available.
Source: Real private production per man-hour from staff of the Joint Economic Committee report,
Productivity, Prices, and Incomes; compensation of employees and corporate profits by Department of
Commerce.

Senator C arlson. What is the cause of the relatively lower rate of
the increase in productivity in the past 2y2 years ? And I believe we
had testimony to that effect here from Secretary Humphrey and Secre­
tary Burgess, and maybe yourself.
Mr. M artin. Well, I do not know. I cannot answer that specifi­
cally. I think there has been some tendency perhaps to compress,
but I cannot explain.
Senator C arlson. Would you be willing, if you can prepare some
statement on that matter, to present it for the record ?
Mr. M artin. I would be very glad to prepare it.
(The information referred to is as follows:)
Tbe tables submitted for changes in productivity indicate that (a) Real private
production per man-hour changed little from the year 1955 to the year 1956; and
(& output per man-hour in manufacturing activities showed a much smaller rise
)
from the year 1955 to the year 1956 than in most preceding postwar years.
Any persistent decUne in the rate of productivity increase would, of course, be
a matter of concern. It should, however, be stressed that gains in output per
man-hour have in the past been uneven from year to year. For example, from
1950 to 1951 real private production per man-hour showed about the same increase
as from 1955 to 1956, while output per man-hour in the manufacturing industries
changed little—and may have declined. Developments in late 1955 and early
1956 cannot, of themselves, be taken as indicative of a significant lowering of the
long-term rate of productivity gain. Furthermore, these data give no indication
of changes in productivity in 1957. Thus, to quote from Chairman Martin’s
answer to question 9 submitted by Senator Byrd, “The preliminary data for
manufacturing, based on production workers only, suggests that in the last half
of 1955 and the first half of 1956 output per man-hour was relatively stable
father than increasing. Wage rates continued to rise during this period. After
Kid-1956, however, it appears that output per man-hour again began to increase
rise in output per man-hour between mid-1956 and mid-1957 probably
more
with historical trends.”

with the
in line

93633— 7 pt 3
0 — ----1
4




1420

FINANCIAL CONDITION OF T H E UNITED STATES

The reasons for the slowing up in the rate of productivity increase in the
second half of 1955 and the first half of 1956 cannot be stated with certainty.
The slowing up may in part represent the intensive utilization both of manpower
and industrial capacity during this period. Thus, plants may have been used
beyond their most efficient operating level. 'The effects of the large investment
program on which industry embarked in early 1955 would not be felt until later.
The tight labor market may well have been reflected in hiring new workers in a
number of occupations who were not as experienced as the bulk of the work
force. Furthermore, shortages of labor may have resulted in excessive work
forces (in effect, hoarding) in many companies. Finally, the strong demands of
the period and the fact that profits were at advanced levels may have put some­
what less pressure than usual on employers to push for productivity gains.

Senator C arlson . What is the basic cause of a continuous rise in
productivity over the past 50 years ?
I think our economy has been growing, expanding. What is basi­
cally the cause of it ?
Mr. M artin . I think the worker has performed more efficiently, and
I think technology has played a very important part in it.
Senator C arlson. What about the increased skill o f workers ?
Mr. M artin . I think that has been a major factor. That is one of
the reasons why we need to keep p u r educational facilities abreast o f
the things, particularly in technical schools and that type o f thing.
We need additions to the skilled labor force in every way that we
can get them.
Senator C arlson. What about increased capital investment in more
efficient machinery ?
Mr. M artin . I think that has been a major factor also.
Senator C arlson. I recently read an article which stated—I thought
it was so interesting I copied a paragraph or two of it—which stated
that today our labor force numbers 67 million and supports a popula­
tion o f 170 million by producing goods and services at the phenomenal
rate of $425 billion per year.
The article also stated that it required a capital investment of about
$12,000 to give him a job and furnish him employment over an 8-hour
day, Now, this same article estimated that by 1965 each factory
worker’s job will represent an investment of $18,000, and that we
should have at that time 76 million workers.
Now, is it your contention that our savings must be expanded to
take care of this increased job of furnishing labor with jobs ?
Mr. M artin . I do indeed. I think that, and I believe we can pro­
duce the savings for that. I think that we ought to devote our energies
in a period like this to reducing spending and increasing savings so
that we can properly finance this expansion which is required, and
desirable.
Senator C arlson. Well, on that basis, if we have a gross national

production now of $425 billion or $427 billion, by 1965, where are you
going to have us at that time ?
Mr. M artin . I am not good on forecasts, Senator. But I think it
will be higher than it is presently.
Senator C arlson. I think I read sometime back that Dr. Burns, who
was the economic adviser to the President sometime back, stated that
we would reach $600 billion but I do not know whether it was 1970
or 1975. I have forgotten the figures.
Mr. M artin . He is a very able economist, and I am not, but I have
great faith in the future of this country.



FINANCIAL CONDITION O THE UNITED STATES
F

1421

Senator C a r ls o n . Y o u may not take credit for being an economist,
but you work with this every day so I am sure you follow it closely.
Should the source of the increased productivity influence the dis­
tribution or the benefits accruing from such increased productivity ?
Mr. M a r t i n . Yes, I think so. 1 think there should be wide distribu­
tion of the gains that there are to all of us. Gains from increased
productivity should be spread through the economy as widely as it is
possible to spread them.
Senator C a r ls o n . Well now, in distribution, that takes effect, I
assume, in the normal operations of a free enterprise system, or is it
going to require congressional action to move some of these benefits?
Mr. M a r t in . My conviction is that we will get wider distribution,
assuming that competition is maintained, through the free-enterprise
system than through congressional mandate or action. In fact, I
think the size of the economy and the nature of the economy is such
that, even with congressional action, it is very difficult to effectively
direct the flow at any time.
Senator C a r ls o n . It seems like when Congress starts tampering
with the economy, and we have—I have been here 22 years, and I
have observed some of these controls; not only wages, but allocations
of materials—that it may work temporarily, but, over the long term,
we get into difficulty. Is that not about right ?
Mr. M artin . That is right.

Senator C a r ls o n . If increased productivity is due, primarily, to
increased investment, is there any reason why so much of such bene­
fits as is in excess of that claimed by capital should go to labor in
higher wages rather than to the entire public in lower prices?
Mr. M a r t in . Well, I think it should be shared by everybody; as to
the excess that you are talking about, I think, sometimes, that the
consumer is the forgotten man in most of our discussions, and I think
he ought to be given a very prominent role. It seems to me we are
all working, in a sense, for the consumer, and we ought to do what
we can to see that he gets some of these benefits.
Senator C a r ls o n . Some contend, Mr. Martin, that the taxpayers
have been forgotten, too.

M M a r t i n . Well---r.

Senator C a r ls o n . What was the increase in rate of increase in
productivity since the end of 1945 ? If you do not have that, I would
like for you to get it.
Mr. M a r t i n . I will be glad to get that.
Senator C a r ls o n . Make it since the end of 1954, also.
Mr. M a r t i n . All right
Senator C a r ls o n . What is the cause o f the relatively lower rate
of the increase in productivity during the last 2% years? If you do
not have it----Mr. M a r t i n . I do not know, but I w ill work up a memorandum
on it.
Senator C a r ls o n . How can continuous increases, in the aggregate,
of profits and wages be prevented from exceeding increases in
productivity?
Mr. M a r t i n . Well, we have collective bargaining, and I think that
both management and labor have got to study that. It is not a one­
sided operation. I think that, as you approach most of the labor
negotiations, management is inclined to claim they cannot do any­




1422

FINANCIAL CONDITION OF T H E UNITED STATES

thing and labor is inclined to ask for the moon, and I think the answer
is probably in the middle ground.
S e n a to r C arlso n . Y o u h a v e been m u ch con cern ed f o r som e y ea rs
a b o u t th e n e e d f o r m a in t a in in g a s t a b le d o lla r .
I n y o u r te s tim o n y
t h e o t h e r d a y , y o u s a i d t h a t m o n e t a r y a n d b u d g e t a r y p o l i c i e s a r e only
p a r t o f th e a n sw er.
As y o u se e it , w h a t p a r t o f t h is p r o b l e m is n o t
s u s c e p t ib le t o m o n e t a r y a n d b u d g e t a r y p o l i c y , a n d a l o n g w h a t l in e s
a r e s o lu t io n s t o b e f o u n d ?
Mr. M a b t i n . Well, I think that the management of the debt is some­

thing that should be borne in mind at all times, and I think that it
is very difficult for money and credit policy to operate against a debt,
for example, such as we had at the time o f the pegged market, when
marketable Government securities virtually were interest-bearing
money because you could get par and twenty-two thirty-seconds for
them anytime you wanted. And I think that if you are faced with
a constant increase in spending and, during a period o f high utiliza­
tion o f resources and generally favorable employment, if the Govern­
ment does not contribute to a budget surplus and use that period as an
opportunity to reduce its debt, I do not know when in the world it
wifi.
I do not think money and credit policy can do much except to put
its little finger in the dike against that. I think it is important to do
that; I am not saying it is helpless; I say it is important to stick your
finger in the dike. But, if you have a flood o f spending that threatens
to overwhelm the bounds of available income, I would not want to
depend too much on money and credit policy to stop the leaks.
Senator C a r l s o n . Well, ever since these hearings started with Sec­
retary Humphrey and Secretary Burgess, and, I noticed, in your
own statement, there has been some discussion about the accord, as
of March 1951. I f I understand the Federal Reserve policy correctly,
after the accord of March 1951 you abandoned that policy of con­
tinuous market support in order to assure artificially low levels of
interest rates, but you did from time to time aid the Treasury in re­
funding by buying substantial amounts of maturing Treasury issues.
In other words, while you ended that in 1951, as I understand it, it
was not completely ended; is that correct ?
Mr. M a r t i n . It was a gradual process, Senator, starting in April
of 1951—March, actually—with the unpegging of the Government
market. We had to recognize that you do not stop something that has
gone on for 10 years with just 1 jolt. You have got to recognize
that we have a responsibility for a market. Free markets are not
markets that participate in the law o f the jungle.
We recognized our responsibility to make the transition. During
the period of 1951 and early 1952, we intervened in the Treasury
market. W e always wanted to help the Treasury finance, but to try
to help them gradually move toward the time when we would not be
monetizing a large portion of their new issues by direct purchases.
We finally ceased that direct intervention in November of 1952, and
there was a Treasury issue floated in the latter part o f 1952 without
any Federal Reserve intervention whatever.
In 1953, we went through the entire year without intervening in
the Treasury market, and the Treasury financing was conducted not
perfectly but quite successfully.



FINANCIAL CONDITION OF THE UNITED STATES

1423

We did the same in 1954, and in 1955 we had one difficult period.
The demand for credit was growing constantly, and in late 1955,
November of 1955, we raised the discount rate. That was pretty close
to the Christmas season, which is one of the difficult periods in the
money market. The transfer of funds at the Christmas period is a
colossal undertaking at that time of year, and the increase in the dis­
count rate and the general situation in the Treasury at the time led to
considerable apprehension about an issue that they were putting out.
And after a long debate, all of which you have the record of in our
annual report, we decided to buy up to $400 million of Treasury se­
curities. We only had to buy $167 million of them. But that is the
only instance of intervention in the period since the accord up to the
present time.

The C h a irm a n . W were you m Chairm
hen
ade
an?
Mr.

M a r tin .

April

2, 1951.

The C h a irm a n . During practically all of your tenure there hasbeen
no real support of the bona m
arket by the Federal Reserve?
M r. M a r tin . That
Senator C a r ls o n .

is correct, sir.
Then, as I understand—and the chairman has
brought in a question there that I think is very appropriate at this
time, because there is some criticism of the Federal Reserve because
of the inflexibility of it—in other words, you have a very rigid pro­
gram and you stay with it, but you did follow that program in 1951,
1952, and m 1953 you began to change it, and in 1954 you continued,
and in 1955 you again eased up and purchased some of these securi­
ties. Is that not right ?
Mr. M a r t i n . We did; and under unusual circumstances we would
be prepared to do it again.
We do not intend to be inflexible. But we do think that as a general
principle, both the Treasury and the Federal Reserve should work
to see that Treasury financing is achieved with a minimum moneti­
zation of the debt. And while we want to help them in every way
w can, we want to see that their securities stand on their own feet
e
in the market.
Senator C a r ls o n . Then am I to conclude that it is now your policy
not to assist the Treasury in any way whatsoever except by refraining
from demanding cash payment for your maturing securities?

M
r.

M a r t i n . W e ll, we help them— i f you are talk in g about that
in a general sense— we w ork w ith them ju st as closely as we can,
advise them , help them , do everything we can to see that their issues
adequately financed, but so fa r as direct intervention is concerned,
we do not peg prices.

are

Senator C a r l s o n . That was not true back in 1951 and 1952, then,
w you had an accord? That would be a direct intervention, would
hen
it not?
M M a r t i n . I would say that the accord provided for moving as
r.
rapidly as we could in the direction of halting the monetization of
the debt, but recognized that we had a very difficult transition period
ahead. You do not spend 10 years in a pegged m
arket and then com
e
out of it the day after tomorrow without confronting som problems
e
that require a different attitude. Let m put it this way; you had
e
to reeducate the entire business and banking community to what the
nigredients and requirem
ents of a free market w
ere.




1424

FINANCIAL CONDITION OF T H E UNITED STATES

Senator C a r l s o n . Well, do you believe that your anti-inflationary
policy requires such a completely negative and unhelpful attitude
toward the financing of the obligations of the United States?
Mr. M a r t i n . Well, I would not want to say that it is completely
negative, our present policy. I think there is much to be desired in
improving the Government securities market, and we are working
constantly in that direction. We have not always agreed on what
the best way to do that is, but it seems to me that we can work out
with the Treasury some way in which we can put them in a position
where they won’t be under the pressure that they have been in the
last couple of years, and we intend to work with them in that direction
without pegging the Government securities market.
Senator C a r l s o n . I believe at about the last day that Secretary
Burgess was at the stand, one o f the last, that they increased the
discount rate in the Federal Reserve Banks in Kansas City, Minne­
apolis, Chicago, and I believe, Philadelphia.
M r , M a r t i n . That is right, sir.
Senator C a r l s o n . And I, I would not say I complained bitterly,
but I did ask a question or two as to why they would increase the
discount rates out in the great agricultural Midwest and I know there
is some problem with credit.
Now, since that time I understand that several other banks have
done the same, but I noticed here in last Friday’s issue of the Wall
Street Journal the heading says, “ New York Federal Reserve Bank
Again Declines To Hike the Discount Rate,” and I could read some
other section here but I am sure you are familiar with it.
What interpretation can you place on that situation?
M r . M a r t i n . I think that there has obviously been some difference
of estimate between the New York bank and some of the others as to
the desirability or necessity of increasing the discount rate at the
present time.
Now, on the economics of the situation, I do not think there is any
disagreement between the New York bank and the Board or the other
banks in the System, It may well be that before long the New York
bank will raise its rate.
Now, we have the authority in the System to order rates but we have
not exercised it, because we have tried to make this operate as a System.
This is a technical problem, in my judgment, and it seems to me that
the problem is that the banks that are closer to the loan demand than
we are—we follow it very closely, but after all, banks are the first line
on the matter of judging loan demand, and they decided to go up in
their prime rate to
percent.
Now, with a 4 ^ -percent prime rate and a discount rate of 3 per­
cent—and we have had a bill rate in excess of 3 percent for nearly 9
months—it means that the policing of the discount window by the in­
dividual Reserve bank has a good bit more strain with a 1%-percent
spread than it had with a quarter of 1-percent spread.
I believe you can police the window effectively, but our judgment
in the Board and throughout a good portion of the System was that
this was a technical situation; we would have just as much difficulty
explaining not going up in the rate as we would explaining going up in
the rate; and we recognized it as a technical operation and therefore
increased the rate.



FINANCIAL CONDITION OF THE UNITED STATES

1425

Now, if the expected demand for loans this fall does not materialize,
then the commercial banks were in error in raising their prime rate.
If there should be a decline in loans of a substantial amount this fall,
and business should taper off, we might want to consider reducing the
discount rate*
I am not sayin g we are doing s o ; I am just saying that is one o f the
problems we have to deal with continuously at all times, and I am
delighted that the boards o f these individual Reserve banks give as
much time and attention as they do to these problems, and we have
never tried to insist that they do our biddin g unless we should reach a
point where we felt that national policy required that a decision had
to be made.
Senator C a r l s o n . Well, the Reserve bank, a regular National Re­

serve bank then has an economy in its own right, they determine their
own operations and action without pressure, so to speak, from Wash­
ington ?
Mr. M artin. We want them to, and I believe that is in the legis­
lative record of the Federal Reserve Act: That the hazards of a man­
aged currency are such that you should have, as far as you can, a
decentralized central bank and not have just a little group of men in
Washington to decide, at the drop of a hat to do something, and then
move.
Senator Carlson. Well, of course, we folks out in the Middle West
will be very happy when we are able to reduce the discount rate out
there and certainly not have it go up any higher than it is.
M r. M a r tin . W e ll, I would say the soundest and the surest way to
get low er interest rates, to get a reduction in the cost o f money today,
is— to use this phrase that I am gettin g tired o f saying— to reduce
spending and increase savings. I believe that doing so w ill bring
about that effect much faster than people realize; and I think the
capacity to increase saving in this country is very, very strong. I
think it does not take as lon g as some people th in g fo r savings to pile
up. I think in the last year we have had overspending and under­
saving.

Senator Carlson. Well, that is the question I was going to get into
now, and I think maybe you have answered this.
Have you caused interest rates to rise ?
Mr. M artin . We have not. The “demand for credit,” to use the
phrase I have used several times now, is, I think, tantamount to a
California Gold Rush; it has been persistent, at times overwhelming.
I put some figures on corporate and State and local securities into the
record a few days ago. There never has been a time in the history of
the country when there have been as many capital flotations as have
been occurring, or a time, in my judgment, when money in the overall
sense has been as loose as it is.
We have a misnomer: tight money. The reason interest rates have
been rising is because unless there were some governor in the credit
mechanism, you would have just been creating money and pushing
prices up, and there ought to be some incentive to save and some dis­
incentive to spend. The only thing we have is interest rates.
Senator Carlson. I think you have made the record clear, at least
for me, that we do have sufficient money in this country. There has
been some criticism over the fact that we did not have sufficient quan­




1426

FINANCIAL CONDITION OF T H E UNITED STATES

tity of actual money in this Nation for the growth and expansion of
our economy in peaceful employment.
As I understand, there is sufficient money, and the velocity of this
money has been higher than it ever has been—or for some years at
least.
Mr. M a r t i n , Higher than it ever has been at any time in my experi­
ence in the System. I think that we have an overriding responsi­
bility to see that the legitimate credit needs of the community are met.
I do not think we ought ever to lose sight of that. We do not want
to starve this stream, this money stream; but although we ought to
allow for some additions to the money supply, we have got to recog­
nize, I think, that all inflations are in large measure connected with
the money supply, define them any way you want.
Senator C a r l s o n . These hearings, of course, have been built around
and much of the testimony has been around, first, tight money, and,
second, high interest rates, so that we are going to discuss interest
rates now for just a little bit.
Thinking of interest rates now, do you consider your attitude has
been passive, and that you merely have freed interest rates, with the
result they have fluctuated with market influences?
Mr. M a r t i n . I don’t think, with varying degrees of emphasis, our
attitude has been passive. We do have an influence on the money
market; there would not be any reason for our existence if we did
not. But we do not control the money market. And I am fond of
saying that whenever we think we can control the market, the money
market, whenever we think we can make the trend, I think we are
attributing to ourselves more power than we have.
Now, I think that the influence that we have been exerting clearly
in the last few years has been directed toward not interfering with
the forces of supply and demand in the money market; and not forc­
ing interest rates up, because—I want to keep testifying to this be­
cause I happen to believe this—I think that for the growth of the
country and the development of the country we ought to have as low
interest rates as we possibly can have without producing inflationary
pressures, because I think that will make the major contribution to
the formation of capital. But we cannot just make interest rates low
against the forces of supply and demand when we are not only not
adding to capital formation, but we are adding to a spending stream,
particularly m the form of borrowed money that is just pushing prices
up.
Senator C a r l s o n . Y o u just stated that you did not think your atti­
tude in regard to interest rates had been passive. Do you consider
that you have affirmatively acted in such a way as to cause an upward
movement in interest rates ?
Mr. M a r t i n . N o , I do not think we have acted affirmatively to cause
anupward movement in interest rates,
I think we have permitted the forces of the market to operate;
and insofar as we can influence them at particular times, we have
not discouraged the movements that were in the economy.
Senator C a r l s o n . Has this upward movement been the incidental
result of your action in limiting the availability of credit ?
M r . M a r t i n , Yes.
Senator C a r l s o n . Have you intentionally caused interest rates to
rise for the purpose o f discouraging borrowing ?




FINANCIAL CONDITION OF THE UNITED STATES

1427

M r. M a r t in . We have not been disappointed that interest rates
have moved up to discourage borrowing, because it seems to me that
discouraging borrowing is one of the policy objectives that we have
hoped would come about, but we have tried to keep the money stream
fluid and adequate. In fact, I am inclined to think, as I said here
the first day, that we have probably contributed a little bit too much
money to the stream, in terms of availability.
If we had been a little bit less free m supplying money to the
stream we might not have had the inflation get ahead of us to the
extent that it has. But still I would rather err on the side of seeing
that there is no starvation in the money stream than be dogmatic or
rigid in contracting the money suj^ply.
Senator C a r ls o n . Well, is that not your hope: That as the interest
rates have risen—and I think we are all agreed to that—it will dis­
courage some borrowing, at least temporarily ?
M r . M a r t in . T h a t is correct.
Senator C a r ls o n . D o you consider

higher interest rates are an
effective deterrent to borrowing?
Mr. M a r t i n . I think they work in that direction. I do think that
if people are convinced that they can make money, interest rates are
a small charge and they are not the compelling cost; and one of the
things about inflation is that when people are convinced that inflation
is taking place or that they can make a speculative profit out of in­
flation, then interest gets smaller and smaller as a factor.
I remember being on the floor of the stock exchange just at the
time of the collapse and interest rates had gone up and up, because in
terms of stock prices, people thought they might make 5 points in a
day, so they did not mind paying any interest rate. But that is a
situation that comes at the end of a move, and it is not a controlling
factor.
I think interest rates have much more effect than people recognize.
They do not have it immediately, but I refuse to believe that they have
no effect, a thought prevalent in some quarters.
Senator C a r ls o n . Now, do interest rates at 4, 5, or even 6 percent
discourage industrial borrowing in a time of substantial profits and
rapidly rising prices?
Mr. M a r t i n . Well, they make the borrower, as they go up, stop,
look, and listen. I know you have corporation executives and others
who say they do not pay any attention to it if the outlook is good.
I do not believe that. I think that is one of the factors that they
consider, and I think that its consideration means that they have to
make a business judgment that they would not make if rates were not
moving up.
Senator C a r ls o n . N o w , under our present tax structure is it not
true that an interest rate of 4 percent today, which the Government
is willing to pay those who buy its notes, does not really yield a cor­
poration investor anything like that amount, actually, because of the
52 percent corporation tax rate ? The Government takes back 2.8 per­
cent of it from the lender and the lender retains only 1.02 percent
of the so-called 4 percent interest rate. Is that actually a practical
statement?
Mr. M a r t i n . That is correct.
Senator C a r ls o n . Does that not have some effect in the financing of
Some o f these large expenditures for production ?




1428

FINANCIAL CONDITION OF T H E UNITED STATES

a r t i n , It d o e s .
Senator C arlson . Is it not true that the individual never pays 5
percent on mortgage money he borrows? For if he is in the initial
income-tax bracket, his interest rate automatically becomes 4 percent?
Mr. M a r t i n , That is right.
Senator C arlson. Let us go back a few years when 6 percent was the
usual rate for mortgages. There was little income-tax deduction
for the borrower, while for the lender 6 percent meant 6 percent
income and the Government had no take. Therefore, is it not true
that interest rates based on actual cost to the borrower were much
higher at that time?
M r . M a r t i n . I t h i n k t h a t is r i g h t .
Senator C arlson. Let us take during the 19205 when corporate
s
tax rates were around 11 percent, so that there was no such deduction
as there is today to benefit the borrower as a business expense. It
seems to me that with the Government taking 52 percent of all income
from corporations and businesses we are virtually on a 50-50 partner­
ship basis with the Government on these loans.
Then would it not be true that the actual interest rate for corpora­
tions and businesses is about 50 percent of the actual rate paid?
Mr. M artin . I think that is about right.
Senator C arlson. Would it not be true that if we had an interest
rate of 6 percent for Government bonds— and I hope we never get to
that place, Mr. Chairman-----Mr, M artin , So do I.
Senator C arlson (continuing). Which would be regarded by most
people as alarming—yet in reality because of the tax deductions, such
rate for corporate investors would give them only 2.88 percent income
in the way of interest. Is that about right ?
Mr. M artin . I think that is about right.
Senator C arlson. It is an interesting study when you get into it
and begin to realize the importance of taxes on the present economy
and the income of individuals.
Do you think excessive rates o f income tax are inherently inflation­
ary, first because they prevent accumulation of new capital in the
hands of individuals and businesses, and, second, thus force excessive
reliance on bank credit as a means for business expansion, which—I
think all are agreed, a corporation that wants to expand does not nec­
essarily go out and sell stock because they can borrow money if they
can borrow it at only 50 percent of the regular interest rate—is what it
actually costs them ?
Mr. M artin . Y es; I am inclined to think that is correct.
Senator C arlson. Would you agree that the neutral income-tax
system would be one which first provided a minimum interference
with economic decisions of individuals and businesses, and second,
did not penalize hard work, success, and business expansion, which
is about what I believe we are doing at the present time?
Mr. M artin . Well, I think I would agree in general with that,
Senator. I am not a tax expert, and I have not been devoting much
attention to taxes. But it seems to me that along the lines of what I
have been testifying to here, that our tax policy should be directed
toward reducing spending and increasing saving also; and whatever
can be
 done in that field, to produce what I believe to be the desirable
goal, should be done.
http://fraser.stlouisfed.org/

M r. M

Federal Reserve Bank of St. Louis

FINANCIAL CONDITION OF THE UNITED STATES

1429

Senator C a r ls o n . Well, now, we discussed borrowing of corpora­
tions and businesses.
Do you consider that higher interest rates would deter large expend­
itures by the Government, whose outlays now equal 10 percent of the
gross national product, as long as the budget is balanced?
M r. M a r tin . Yes. I think it discourages outlays by the Govern­
ment. I think that if we could provide 2 percent interest for the Gov­
ernment in new issues that there would be considerably more infla­
tionary pressures than there are. There are plenty of pressures now,
but I think that is one of the things that we have to deal with, and
the Government has to compete in this money market, also.
Take the early part of this year. One of the tilings that was easing
the money market was the return from F and G bonds and savings
bonds which was going into the money market and financing private
expansion.
Senator C a r ls o n . Well, now, we discussed borrowings by corpora­
T
tions and businesses and by Government .
Do you consider that consumers will borrow less at the current rates
as long as the repayment can be spread over long periods with no great
increase in the amount of the monthly installment ?
M r. M a r t in . W e ll, I wish the consumer understood better w hat he
was p a yin g than he does. I am not against consumer installm ent
credit, but we have gotten in the habit o f quoting prices on things
in terms o f how much down and how much per m onth instead o f
what the actual price and cost is.

We have had record levels of consumer installment credit and mort­
gage credit for a long time, and a great many people have not ade­
quately figured what their cost is.
I am confident, however, that availability of money, as well as in­
terest costs, does have some impact on consumer spending.
Senator C a r ls o n . Well, do you consider that home construction
is reduced by reason of higher interest rates despite reduced down­
payments and extended terms ?
M r. M a r t i n . Well, I think that higher interest rates on mortgages
make it possible for money to be attracted to the mortgage field.
They have a better chance of competing as a result of it, but I do
think that the cost of housing has gone up substantially, and the vol­
ume of housing in relation to the cost, I think, is extremely high.
I think the problem is to get housing on a cost basis that the con­
sumers can pay, and after they have paid it, keep the house and
not just have something that may be foreclosed the first time they
have the slightest bit of adversity, because we are going to have some
adversity sometime; we are not going to have perpetual prosperity.
Senator C a r ls o n . D o you consider that higher interest rates have
a psychological deterrent ?
M r. M a r t i n . I do.
Senator C a r ls o n . Really out of proportion to the additional money
costs?
M r. M a r t i n . That is very difficult to measure. I think at different times they do. I think there is a psychological effect.
Senator C a r ls o n . Well now, if you have considered higher inter­
est rates a desirable deterrent to overexpansion in the past, do you
consider that interest rates even higher than at present may be nec­
essary in the immediate future?




1430

FINANCIAL CONDITION OF TH E UNITED STATES

M r. M a r t i n . I do not know, Senator. I hope that we are reach­
ing a leveling out place. I do not want to forecast the economy at
all, but there are certainly soft spots in the economy as well as strong
spots in the economy at the present time, and I think that savings
are increasing, and I am inclined to think that we may have a leveling
out process here and we may find that interest rates w ill stabilize
and may even decline. But if that is a forecast— I do not want to
make a forecast.
Senator C a r l s o n . W ell now, does the history of interest rates in­
dicate any long-term trend ?
Mr. M a r t i n . It is pretty difficult to make a history of interest
rates but here is a chart we can put in the record. I t is pretty hard
for me to see any specific trends.
(The chart referred to is as follows:)




o

S O T E I IN E E T IA E
H K -T M T R S
TS

FINANCIAL CONDITION O THE UNITED STATES
F

1940

1942




14
96

1948

1950

1952

1954

195*

1958

1960

1431

iimwii) r mw w *•«* >*r¥*

14
94

1432

FINANCIAL CONDITION OF T H E UNITED STATES

Mr. M artin . I f you look over the discount rate, for example, apart
from any general interest rates, you can see the highest discount rate
we have had was 7 percent in 1920. W e got down to 1 .percent in
August of 1937— I remember it very w ell: I was active in the stock
exchange at the time— and we went then for nearly 11 years at 1 per­
cent or less until an increase in 1948— that is an 11-year period of very
low rate. A nd over that period there was very little play in interest,
rates. Money became so available that there was no particular interest,
in it. I t did not cure unemployment. Y ou had during that period a
contraction of credit going on pretty consistently. There was a tend­
ency here and there for prices to decline^ and there was widespread
unemployment. A n d I think that the history of interest rates does
not really demonstrate much more than that they fluctuate.
Senator C arlson. Does this chart or the periods reflected by this
chart show the effect on wages and prices during those periods of vary­
ing interest rates 1 Do you nave any study on that ?
M r. M a r t i n . Yes; we have some studies on that, or we can make
up a memorandum on it. I w ill have this chart analyzed for you.
Senator C a r l s o n . I would like, M r. Chairman, if the Federal
Reserve would, if they can— and I am sure they can— prepare a state­
ment which shows, following the trend of interest rates back to 1920
or 1930 some place, and show at the same time the effect, if there is an
effect, show the condition of wages, prices, and the reduction of the
interest rates, if you can. I would like to have that.
M r . M a r t i n . W e will do the best we can.
Senator C a r l s o n . W ould you have objection to that, Mr. Chair­
man?
The C h a i r m a n . Without objection, it w ill be inserted in the record.
(The statement referred to is as follows:)

The accompanying table shows indexes of average wholesale prices (for com­
modities other than farm products and foods), indexes of average hourly earn­
ings in manufacturing industries, and interest rates on corporate bonds and
prime commercial paper for selected years from 1920 to 1956. Each of these
series is, of course, only broadly representative of developments within its specific
area and in any particular period there are always significant variations in
prices, wages, and interest rates that are not indicated by these figures.
Changes in prices, wages, and interest rates are closely interrelated in our
economy and reflect a wide variety of influences. It would certainly be unwise
to attempt to explain changes or trends in any one of these solely in terms of the
others. In general, however, broad movements in demands for commodities, for
labor, and for funds are correlated; hence it is not unusual for prices, wages,
and interest rates to change in the same direction for prolonged periods.




FINANCIAL CONDITION OF THE UNITED STATES

1433

Table 3.—Prices, hourly earnings, and interest rates, selected periods, 1929-56
Year

Wholesale price
index for all
commodities
other than farm
products and
food

Consumer
Price
Index

Average hourly
earnings of pro­
duction workers
in manufactur­
ing

Corporate
bond yields,
Moody’s Aaa
(percent per
annum)

Rates on prime
commercial
paper, 4-6
months
(percent per
annum)

42.6
41.5
49.7
81.7
133.2
136.2
141.5
149.0
156.5

4.73
4.55
2.84
2.53
3.20
2.90
3.06
3.36
3.99

5.85
3.59
.56
.81
2.52
1.58
2.18
3.31
3.88

1947-49=100
1929...........................
1930...........................
1940....... ...................
1946...........................
1963..........................
1964..........................
1966...........................
1966.........................
July 1957...................

65.5
60.9
59.4
78.3
114.0
114.5
117.0
122.2

125.6

73.3
71.4
59.9
83.4
114.4
114.8
114.5
116.2
120.8

Source: Prices and hourly earnings from Bureau of Labor Statistics; bond yields from Moody’s
Investors Service; rates on prime commercial paper from Federal Reserve.

Senator Carlson. Mr. Martin, you have been very careful about
making predictions, but I noticed just a few months ago you stated
you did not want to look very far ahead. You are very cautious about
forecasting the economy, I know. But I have here an article written
by J. A. Livingston, and he has been quoted several times around here
since this hearing started, so I am not starting something new. It
is a recent article entitled, “Prosperity Gets Set for Another Year.”
It is a very interesting article.
I am not going to read it, Mr. Chairman, but I do want to read a few
extracts from it :

After 12 years, I am about to take a “sabbatical” from the Business Outlook
to finish a book on the American stockholder. Fortunately, I can do so in good
conscience. Nine out of 10 economists assure me that when I return to my
column in the fall, Wall Streeters will not be seeking crash shelters, help-wanted
ads will still bring in good revenue to newspapers, consumers will have spending
money, and prosperity will be America’s lot.
Fifty-two out of the fifty-seven economists who repUed to my semiannual ques­
tionnaire on the business outlook confirm my feelings. My hunch has been that
business would slip in the first half of 1957 and that recovery would be under­
way in the second half. The economists go further. They’re optimistic for 1958
as well. They do not anticipate a sharp slump in capital spending—construc­
tion of new factories, installation of new equipment, and erection of new office
and commercial buildings.
I wanted to read that, and I am asking, Mr. Chairman, that we
have it placed in the record, because there are some folks who seem
to be contending we must be approaching a very serious recession and
probably look forward to a depression.
W h ile y o u h a v e b e e n c a u tio u s , 52 o u t o f 57 o f o u r e c o n o m is ts — I
d o n o t k n o w w h o th e y a re, b u t I a ssu m e th e y a r e su b s ta n tia l— seem
to th in k th e r e a re g o i n g t o b e g o o d tim e s t h r o u g h 1958.

The Chairman. Without objection, the insertion will be made.




1434

FINANCIAL CONDITION OF TH E U NITED STATES

(T h e a rtic le is as fo llo w s :)

[From Washington Post and Times Herald* Jnne 30,1957]
B u s in e s s O u t lo o k — P r o s p e r ity G e ts S e t f o r A n o t h e r T e a r

(By J. A. Livingston)
After 12 years, I am about to take a “sabbatical” from the Business Outlook
to finish a book on the American stockholder. Fortunately, 1 can do so in good
conscience. Nine out of ten economists assure me that when 1 return to my
column in the fall, Wan Streeters will not be seeking crash shelters, help-wanted
ads will still bring in good revenue to newspapers, consumers will have spending
money, and prosperity will be America’s lot.
Fifty-two out of the fifty-seven economists who replied to my semiannual
questionnaire on the business outlook confirm my feelings. My hunch has been
that business would slip in the first half of 1957 and that recovery would be
underway in the second half. The economists go further. They’re optimistic
for 1958 as well. They do not anticipate a sharp slump in capital spending—
construction of new factories, installation of new equipment, and erection of
new office and commercial buildings.
t h o s e e c o n o m ic b u b b l e b a t h s

And these are men strategically posted for business analysis. They’re asso­
ciated with banks, industrial corporations, investment firms, Government agen­
cies, labor unions, research organizations, and universities. They not only are
influenced by business decisions, they also influence such decisions.
And yet there is a remarkable, perhaps alarming, conformity in the forecasts.
A popular delusion has been creeping up on us—the delusion of “2 percent a year
inflation”—the feeling that bit-by-bit inflation can occur without culminating in
a speculative bust.
Although the economists expect industrial production to rise 2 percent from
current levels to the end of 1958, they expect the dollar value of all goods and
services to rise by more than 4 percent. In short, a little more little-by-little in­
flation. Such thinking leads to popular delusions and economic bubble baths,
such as HoUand’s tulipomania in 1634; John Law’s Mississippi failure in 1720;
WaU Street’s new era crash in 1929. When human minds converge onto a
single track, beware.
This 2-percent inflation theory is often said to have a “laboristic base.” Labor
unions are powerful. They can wrench annual wage increases from employers
above increases in productivity. Yet, it has an “industrialistic base,” too. If
it weren’t profitable for businessmen to avoid strikes, they wouldn’t raise wages.
They’d take strikes. But the market—the consumer—has paid the tab.
Thus, the economists predict that wages in manufacturing, which were $81.78
in May, will climb to $83.30 by the end of this year and $85.71 by the end of
1958. That, in spite of an expected increase in unemployment from 2,715,000 to
3.032.000 workers.
And wholesale prices will advance from the current level of 117.3 to 119.5 by
the end of 1958. The cost of living will push up further from 119.6 to 122.1. But
farm prices will go up hardly at all—from 243 to only 244. Industrial, not farm,
prices tilt the index.
In summary, the economists expect that:
Expenditures on new plant and equipment—business investment—will hold
steady throughout the next 18 months, at just under $38 billion a year.
Housing starts, now running at a 990,000 annual rate, will climb to nearly
1.100.000 by the end of 1958.
C O N S U M E R S W IL L C O N S U M E

Defense spending will increase slightly. It’s now running at an annual rate
of $45 billion; it will hit $47 billion by mid-1958; then slough off to $46 billion,
reflecting recent budget-cutting efforts of Congress.
Consumers will do what consumers are expected to do: Spend, They won’t be
bothered too much by tight money or low bond prices. Result: Department
store sales will increase 5 percent—from 124 to 130 in the Federal Reserve Board
index.



FINANCIAL CONDITION OF THE UNITED STATES

1435

A N O PT IM IST IC 1958 C O N SEN SU S
Top economists expect production and stock prices
to move up from present levels.

*>---------- :----------------:— ^ -------------- ------^ 1 0*
6

-1-052

—t L -Q 5 3 -J L-J954- J I— 1955- J t— 056—I l_(957-J L-1958— J

Swc S u rd& o r , Fdr l Rtev Bc d
o rt: to fe Po’* e ea a r * or

J A. L
.
ivingston

And so, industrial production, as measured by the Federal Keserve Board
index, will climb from current levels of 143 to 146, not quite up to the high
recorded in December last year—147. And total output of goods and services,
measured in dollars, will rise from $427 billion to $434 billion by the end of 1957,
and to $446 billion by the end of 1958—successive new highs.
What makes me hopeful, what makes me “absorb strength” from the con­
sensus, is that slack is now appearing in the economy. Since December, hours
of work are down from 41 to 39.7 per week. Steel, aluminum, copper, newsprint,
and other commodities, long in short supply, are readily available. And the drop
in the bond market has served notice that new financing is going to be costly and
more difficult. There’s less talk of inflation and some talk of deflation. The 2
percent inflation theory has had a setback.

GOOD TIMES THROUGH 19 58
That’s the consensus of 1957 of the Nation’s top-ranking economists. They’re
not alarmed by tight money. Here’s the way they see things:
Consensus
Indicator
Latest

Production:
Gross national product (bill. l f A ) ..........
Industrial production (2, B )...... .................
Business investment (bill. 1 , 3, A)..............
Housing starts (000, 4, A )...........................
_ Defense spending (bill. 1 , A )......................
Prices:
Wholesale prices (4, B )................................
Farm prices (5, C )........................................
Cost of living (4, B )......................................
Stock prices (6, D )....................................
Unemployment, wages, retail sales:
Unemployment (000,7 ) ................................
Weekly wages in manufacturing (4).......... .
Department store sales (2, B )......................

December
1957

$434

June 1958

December
1958

$45.3

$439
144
$37.39
1,044
$47.1

$446
146
$37.60
1,066
$46.2

(d) 117.3
(6) 243
(б) 119.6
(«) 50.5

118.1
243
120.5
51.0

118.6
243
121.3
51.5

119.5
244

(6)2,715
(6) $81.78
(6) 124

2,870
$83.30
128

3,035
$8126
128

3,032
$85.71
130

(a) $427
(&) 143
(c) $37.89
(6)990
(а) $45.0

$37.88
1,000

122.1

52.8

1. Department of Commerce; 2. Federal Reserve Board; 3. SEC; 4. Department of Labor; 5. Depart®*at of Agriculture: 6. Standard & Poor’s; 7. Bureau of the Census.
(«) 1st quarter; (6) May; (c) 3d quarter 1957; (d) week ended June 18; («) June 24.
A. Annual rate; B. 1947-49-100; O. 1910-14-100; D. 1941-43-10.

98688— 57—pt. 8------IS




1436

FINANCIAL CONDITION OF TH E UNITED STATES

Senator C a r l s o n . They have here a table showing the anticipated
gross national production for December o f 1957. They have it
$427 billion in July, $434 billion in September, $439 billion in June
of 1958, and $446 billion in December 1958. And they go through
here with industrial production, prices, and unemployment. And
frankly, I think it is an article that ought to be encouraging to those
who might feel we have some troubles m the immediate future.
Then I would like to ask, Mr. Chairman, that an editorial that
appeared in the Washington Post on August 15, Good News—and
Bad, be placed in the record.
It reads—I am not going to read the entire thing:

The recent further increase in bank interest rates, quickly foUowed by a
rise in the rediscount rate of several Federal Reserve banks, is “good” news
in at least two respects. It indicates that bankers do not believe that any
business recession is immediately in sight; rather they seem to expect that
the demand for credit to expand plant and inventories will take its customary
autumn upturn. This judgment is not universally held in the financial world,
but the doubters are a minority.
I w ill ask th a t b e m a d e a p a r t o f th e r e co r d .
The C h a i r m a n . That w i l l be made a part

of the record.

(The editorial is as follows:)
[From the Washington Post, August 15. 1957]
G ood N e w s —

and

B ad

The recent further increase in bank interest rates, quickly followed by a
rise in the rediscount rate of several Federal Reserve banks, is “good” news
in at least two respects. It indicates that bankers do not believe that any
business recession is immediately in sight; rather they seem to expect that
the demand for credit to expand plant and inventories will take its customary
autumn upturn. This judgment is not universally held in the financial world,
but the doubters are a minority.
Moreover, the rather courageous action by the “Fed” to close the widened gap
between the prime bank rate and the rediscount rate seems to show that there
is no disposition in the administration to be intimidated by the political clamor
for a return to cheaper money. In fact the steam seems to have gone out of
this movement in recent weeks, after all the initial fuss attending the launching
of the Senate Finance Committee’s “grand investigation” of money matters.
At the same time, it must be recognized that a strong reason for the further
and unexpectedly large increase in interest rates is the continuing price in­
flation. The marked rise in money costs of the past year has not been a total
cure for this alarming ailment, although falling wholesale indexes may fore­
shadow an improvement. This suggests that, while no weakening of interest
rates is called for now, further doses of this remedy may not be what is needed.
A more diligent search for other “medicine” is in order, including, perhaps, a
more sympathetic and unprejudiced consideration of consumer-credit controls.
Senator C a r l s o n . I thank you for your kindness.
The C h a i r m a n . On Senator Carlson’s time, the Chair would like
to ask one question.
As I understand your testimony this morning, Mr. Martin, you
think too much spending and too little savings are among the chief
factors in the current inflation ?
M r. M

a r t in .

T h a t is c o r r e c t , s ir .

The C h a i r m a n . N o w , the Federal Government owes, as you know,
approximately $275 billion and it is spending from 98 to 99 percent
o f its current income. Would you agree with me that perhaps the
Federal Government is perhaps the chief offender?
M r . M a r t in . I d o a g re e w ith th a t , s ir .



FINANCIAL CONDITION OF THE UNITED STATES

1437

The C h a i r m a n . Would you agree that reduction in the public debt
would be one of the best things to do to avoid any further inflation?
Mr. M a r t i n . I do, indeed.
The C h a i r m a n . Thank you.
(Discussion off the record.)
Senator F r e a r (presiding). All right.
As you understood the chairman to say, we will recess until 2 p. m.
this afternoon, at which time Senator Malone will ask questions. We
stand in recess until 2 p. m.
(Whereupon, at 12:20 p. m., the hearing was recessed until 2 p. m.)
AFTERNOON SESSION

(Also present: Arthur W. Marget, Director, Division of Inter­
national Finance, Federal Eeserve Board; Guy Noyes, adviser, Divi­
sion of Research and Statistics. Federal Reserve Board.)
Senator B e n n e t t (presiding). The meeting will come to order.
Senator Malone is recognized.
STATEMENT OF WILLIAM McCHESNEY MARTIN— Resumed

Senator M

Mr. Martin, I am glad to meet you.
Thank y o u , s ir .
Senator M a l o n e . I think that this hearing now being conducted by
the Senate Finance Committee, if it is properly pursued until com­
pleted and hears the witnesses that should appear, could prove to be
one of the most important hearings ever held by a Senate committee.
I think the Secretaiy of the Treasury made a fine witness. He
knew exactly what his field was, and he was very reluctant to step out
of it, and I think he had a point there, although I was disappointed,
because I was always led to believe, of course, that the Secretary of
the Treasury knew everything everybody was doing under him or with
him, who had anything to do with the good of the Nation in the way
of conducting its fiscal policies.
The Secretary said he was for our managed-currency policy, started
in 1934. He said that he would not change it now.
It is difficult for me to understand how this Nation can have a
“managed currency” and avoid a “managed economy.”
We criticize foreign nations, including Russia, for their “ managed
economy”—their socialistic tendency. But Bulganin said, in answer
to my direct question, that socialism was the first step to communism.
The Secretary left many of my questions for you to answer.
He said, and probably properly so, that you knew more about it
than he did, and I hope that is true.
Mr. M a r t i n . I question that, Senator.
Senator M a l o n e . Well, you are very complimentary, and I like
that because George Humphrey is one of the oest men we have ever
had in the Cabinet.
I think a lot of George Humphrey. But, of course, this country is
bigger than George Humphrey, William McChesney Martin, or Sen­
ator Malone, or anybody else for that matter, and that is the reason for
my questions to you.
For those of us who pass in review, like the Secretary and you, as
Chairman of the Federal Reserve Board, and all the rest of us, it is
M r. M

a lo n e .

a r t in .




1438

FINANCIAL CONDITION OF T H E UNITED STATES

not so much a question of how long we stay here; it is what we do
while we are here that counts.
Do you agree?
Mr. Martin. W e do—I do.
Senator M a l o n e . W e are all replaceable.
Mr. Martin. That is correct.
Senator M a l o n e . Some of these questions, Mr. Martin, several based
on your testimony, I hope you wul bear with me if some prove to
be repetitious, and some questions that may seem simple to you will
tend to complete the record so that the public and the committee may
have the complete picture available to them.
You understand.
Mr. M artin. Yes.
Senator M a l o n e . N o w , I note from your testimony, or at least it
was suggested during your appearance here, that some economists
have said that we should have at least 2 percent inflation a year.
Now, should we, or should we have any percent of inflation a year
for the good o f the country?
Mr. M a r t i n . W e should not have any percent, Senator, for the
good of the country.
I think I made a computation here that shows at that rate o f 2
percent a year we would have the purchasing power of the dollar
halved in a generation.
Senator M a l o n e . W e have already done that; have we not?
M r . M a r t i n . W e have done it once.
Senator M a l o n e . And deliberately?
M r. M

a r t in .

W e ll , X w o u ld n o t s a y it w a s d o n e d e lib e r a te ly .

Senator M a l o n e . Why wouldn’t you say so ? W e went off the gold
standard deliberately; did we not?
Mr. M a r t i n . I do not think that we went off it in order to halve
the price o f the dollar.
Senator M a l o n e . Halving the price o f the dollar is inflationary.
Why do you think we went oft the gold standard ?
M r . M a r t i n . Why?
Senator M a l o n e . Yes.
Mr. M a r t i n . I think it was partly experimentation^ partly a new
period that we were coming into, and many conflicting views and
ideas as to what would actually happen, and a certain amount o f
experimentation.
Sentor M a l o n e . It is a dangerous thing to experiment with; is it
not?

Mr. M a r t i n . I think it is .

Senator M a l o n e . What were these different ideas?
Mr. M a r t i n . Well, there are constantly people who think if you
adjust the price of gold that you will get monetary relationships that
will improve the purchasing power o f the mass.
Now, I do not think it works out that way, but the move in 1934 was
directed to—when we changed the price of gold from $20.67 an ounce
to $35 an ounce, there were some people who sincerely thought it would
validate a level of debt that would Ibe beneficial to everyone.
Senator M a l o n k . Let me ask you, as long as we quit using it for
money and forbade anyone to have any gold, what difference would
it make what the price was?



FINANCIAL CONDITION OF THE UNITED STATES

1439

M r . M a r t i n . Well, it would have the sam value then as any other
e
commodity. The fact that it is used for m
oney gives it a different
perspective than if---Senator M a l o n e . Where is it used for m
oney?
M r . M a r t i n . W h e r e is i t u sed f o r m o n e y ?
M alone.
M r . M a r t i n . W e l l , it is u sed in th is c o u n tr y f o r m o n e y .
M alone. H o w ?
M a r t in .

Senator

Yes.

Senator
Tell us about it.
M
r.
Well, we have a modified gold standard today. The
base of our currency is gold.
Senator M a l o n e . Tell us about it.
M M a r t i n . Well, at the present tim our m
r.
e
oney supply is m up
ade
of, the base of our m
oney is gold. We have roughly $22 billion.
Senator M a l o n e . We d o ?
M r. M

a r t in .

W e do.

M r. M

a r t in .

W e l l , w e o w n it.

M r. M

a r t in .

T h a t is c o r r e c t .

Senator M a l o n e . Where?
M M a r t i n . We have it in Fort Knox and in various Federal Re­
r.
serve banks around the country.
Senator M a l o n e . You m it is nice just to have it stored here;
ean
the people who really own it are not charging us to keep it in the
United States storage, so we can say that it is in fact stored in the
United States, and that m
akes it all right; is that it?
Senator M a l o n e . D o you? Explain that to m
e.
Mr. M a r t i n . We have purchased it at $35 an ounce.
Senator M a l o n e . We went all through this twice now. The Secre­
tary of the Treasury said, and the Under Secretary not only confirmed
it and w more positive, that if we followed our well-established longas
range policy to honor a dollar balance by payment in gold when pre­
sented by a foreign nation— foreign private holdings were con­
and
verted, then our gold holdings would be less than $6.5 billion. That is
the policy?
Senator M a l o n e . N o w , the Secretary of the Treasury testified that
he could refuse to give them the gold on their legitimate dollar bal­
ances, but if he did, it would have a trem
endous adverse effect on the
m
arket value of our dollar; is that true?
M M a r t i n . It would. I would hope he would never refuse.
r.
Senator M a l o n e . All right.
Now, if you understand this, it will take less time if you want to
just tell m The table is in the first volum of the printed hearings.
e.
e
I would like to say to you that it w established that the foreign
as
nations’ dollar balance w som
as ewhere around 9y2 billion. Does that
ring a bell?
M M a r t i n . About $1 3 billion, I think, Senator.
r.
Senator M a l o n e . The foreign nations’ balance?
M M a r t i n . These are foreign dollar balances, sir.
r.
Senator M a l o n e . I amtalking about foreign nations now. Do not
get it confused.
M r . M a r g e t . Do you m
ean— am just questioning to get the facts.
I
Do you want the monetary authorities?
Senator M a l o n e . What is your nam sir?
e,
Mr. M arget. My nam is Marget, sir.
e
Senator M a l o n e . Will you identify yourself for the record?



1440

FINANCIAL CONDITION OF TH E UNITED STATES

Mr. M arget. Arthur W . Marget, Director of the Division of Inter­
national Finance.
Senator M a l o n e . Then you should know something about this.
M r . M a r g e t . I w a n t t o b e s u r e , s i r , I h a v e u n d e r s t o o d y o u r q u e s t io n .
The figure for dollar balances owned by foreigners----Senator M a l o n e . By foreign nations, now. Let us not get it con­
fused.
Mr. M a r g e t . Do you want to distinguish between the monetary
authorities and individuals?
Senator M a l o n e . Yes, because the next question will be about in­
dividual holdings.
Mr. M a r g e t . Yes; the amount held by monetary authorities is $ 7
billion, sir.
Senator M a l o n e . Well, I think you had better take another look.
It required a full day to get this correct amount from the Secretary
of the Treasury, and I hope it does not take that long to get it from
you.
M r . M a r g e t . I hope not, s ir .
Mr. Notes. Are you referring, sir, to the table on page 482?
Senator M a l o k e . I think that is true. “Foreign official short-term
dollar holdings are $9,108 million.” That is the figure I finally was
given after considerable correspondence with the Under Secretary of
the Treasury. He seem reluctant to give it. If there is any differ­
ed
ence, I want you to go into some detail.
Mr. M a r g e t . If you include among these foreign official holdings
what we call international institutions, there is about $1.7 billion held
by foreign institutions such as, for example the----Senator M a l o n e . What was that----Mr. M a r g e t . Such as, for example, the International Monetary
Fund----Senator M a l o n e . Wait just a moment.
What are these international institutions?
Mr. M a r g e t . Such as the International Monetary Fund, chiefly.
Senator M a l o n e . Is that the World Bank ?
Mr. M a r g e t . No, sir. The World Bank is a separate institution.
As for its dollar holdings, I do not happen to have them right here.
They are relatively small.
Senator M a l o n e . The International Monetary Fund?
Mr. M a r g e t . It is the main holder.
Senator Maloxe. How much do they hold ?
Mr. M a r g e t . I do not have the exact figure of that portion of the
$1.7 billion, but they hold most of the $1.7 billion.
Senator M a l o n e . That is $1.7 billion ?
Mr. M a r g e t . Something over $1 billion of that $1.7 billion is held
by the International Monetary Fund.
Senator M a l o n e . All right.
Now, give us the others.
Mr. M a r g e t . The International Bank—the World Bank that you
referred to—is the other one which would be holding the balance of
these.
Senator M a l o n e . What are the other two international organiza­
tions?
Mr. M a r g e t . Those are the two main ones.
S e n a to r

Malone.




T h e re is a n o th er one re ce n tly o rg a n ize d .

FINANCIAL CONDITION OF THE UNITED STATES

1441

Mr. M arget. The International Finance Corporation.
Senator M alone. Does it hold any of this gold ?
Mr. M arget. It holds a small amount of these dollar balances.
Senator M alone. International what ?
Mr. M arget. International Finance Corporation, the IFC.
Senator M alone. Well, let us confine ourselves to the words, be­

cause I am not going to memorize several hundred initials of foreign
organizations financed with American taxpayers money.
Now, there is the International Monetary Fund, the International
Bank, which corresponds to the World Bank----Mr. Marget. That is right.
Senator M alone. The International Finance Corporation, and the
Import-Export Bank.
Mr. M arget. N o, sir. The Export-Import Bank is not an inter­
national institution. That is an American, United States Govern­
ment institution.
Senator M alone. I understand that, but we are speaking of gold,
it does not hold any gold ?
Mr. M arget. That is right.
Senator M alone. Now, tell us the individual holdings in the $1.7

billion of each of these organizations. All four are organized to pro­
mote American capital investment abroad.
Mr. M arget. I do not have the breakdown of that $1.7 billion.
Senator M alone. Will you provide it for the record at this point ?
Mr. M arget. Yes, sir; we will provide it.
(The information referred to follows:)
As of May 31, 1957, short-term dollar holdings of international institutions
were as follows:
Millions
of dollars

International Monetary Fund_______________________________________ 1,415
International Bank for Reconstruction and Development--------------------224
International Finance Corporation__________________________________
14
Other international institutions--------------------------------------------------------47
Total________________________________________________________ 1,700

Senator M alone. That is important when we analyze the objectives
of each one of these institutions.
Mr. M arget. All right. We will provide the breakdown of that $1.7.
Senator M alone. Now, they have $1.7 billion.
Mr. M arget. That is right.
Senator M alone. That is included in the $9,108 billion?
Mr. M arget. That is right.
Senator M alone. Already included in it ?
Mr. M arget. Yes.
Senator M alone. What does that leave them for the international
banks, the countries, the nations?
Mr. M arget. The official holdings; the latest figure I have in front
of me, sir, is from the Federal Reserve Bulletin for the end of May
1957, which gives the holdings of the official institutions as $7.8 billion.
t Senator M alone. The two together, then should equal the $9,108
billion; should they not ?
Mr. M arget. Yes, except for variations in date. Obviously there
^vould be some slight difference.




1442

FINANCIAL CONDITION OF T H E

U TTB
N D

STATUS

Senator Malone. That corresponds to the $9,108 million in the table
submitted by the Under Secretary, does it not?
Mr. M arget. Yes.
Senator M alone . This corresponds then to table I , page 482, part 1
of the official hearings we are now conducting, table I, entitled “United
States gold stock, monetary gold reserve requirements, and foreign
dollar holdings, 1934-57.” That is on an average, I suppose?
Mr. M arget. It could be. I do not have that in front of m
e.
Senator M alone . Right now, in 1957, as of this date, it is $9,500
million.
M r. M arget. Yes.

Senator M alone . It continually fluctuates, does it not?

Mr. M arget. Yes.

Senator M alone . It is confusing to the committee to give partial
figures which may not be inaccurate, but do not include the whole
story.
The second question then: How much is owned by foreign individ­
uals apart from foreign nations? “Total Foreign Dollar Holdings”
are listed in the same table as $16,246 million. Does that correspond
withyour information ?
Mr. M arget. Yes, sir; roughly. These are again different dates,
and it depends whether you include----Senator M alonk. As'of this date, what is the total ?
Mr. M arget. A s o f the latest date we have a record o f ?

Senator M alone . Yes.
Mr. M arget. The corresponding figure would be obtained by adding
$1.7billion to $13billion.
Senator M alone . That does not make very muchsense, does it ?
Mr. M arget. Why not, sir?
Senator M alone. Because it was $16,246 million, the best figure the
Secretary could jrive us whenhe was here.
Mr. M arget. It must be a discrepancy because of the date, sir, or
because of a difference with respect to the components. All I can do,
sir, is this: I can tell you what goes into the figures which we publish
currently.
I do not know how these figures were arrived at, these ones here
in the book, but we shall study them and then, perhaps, we can see
what discrepancies there are.
Senator M alone . I will just ask you then if you will do this, and
do it for this point in the record, take the same kind of a table—this
comes up to March 1957----Mr. M arget. Yes.
Senator M alone. And bring it up to August.
Mr. M arget. Yes, sir. We would be glad to do that. It may not
be up to August because our figures are not necessarily that late, but
as recently as we can bring it up.
Senator M alone . How late?
Mr. M arget. The next issue of the bulletin, which would be the next
published figure, would give the figure for the end of June.
Senator M alone . When is that published ?
Mr. M arget. It should be published very soon.

Senator M alone . Those figures are .available to you today; are
they not ?



FINANCIAL CONDITION OF THE UNITED STATES

1443

Mr. Marget. Yes, sir. We can provide that.
Senator Malone. Then you can give them to us for this partic­
ular day ?
Mr. Marget. Yes, sir; for our latest date.
(The information referred to follows:)
Foreign dollar holdings, 1934-57
[In millions of dollars]
Short-term dollar holdings

End of period

Total
dollar
holdings

Foreign countries
Total
Total

1934............. .
670
1035............. .
1.301
8
193 6
.
1,623
(9
193...............7
1,893
(!)
193........ 8 .
2,158
(lJ
193................9
3,221
<
9
194________ 0
3,938
<
9
194 1
.
3,679
194...............2
4,205
194...............3
5,375
194...............4
5,597
8
.
194 5
6,883
(9
194............. 6.................... (9
6,480
194________ 7
7,116
(1
J
194...............8
....................
7,718
(9
194........ 9 .
8,226
7,618
195 0
.
8,645
10,197
195 1
9.302
10,173
195............. 2.................... 11,719 10,546
195...............3
....................
12,739 11,648
1954.............
14,019 12,919
195 5
15,230 13,601
195 6
16,433 14,939
1957-March.
16,201 14,563
May...
16,402 14,791
June..
16,486 14,833

8

670
1,301
1,623
1,893
2,158
3,221
3,938
3,679
4,205
5,375
5,597
6,883
6,007
4.854
5.854
5.960
7,117
7,661
8.961
10,019
11,149
11,720
13,487
13,005
13,091
13,260

O
ffi­
cial

8
8

(9
<
9
(9

(1),
2,244
3,320
3,335
4,179
3.044
1,832
2,836
2,908
3,620
3,548
4,654
5,667
6,770
6,953
8.045
7,550
7,803
7,929

Pri­
vate

Holdings of U. S. Govern­
ment bonds and notes

Inter­
national
institu­
tions

3

eign

8

(9
;9

8

<9

<9
(9
(9

(9
(9
(9
(9

(9

474
2,262
1,864
1,658
1,528
1,641
1,585
1,629
1,770
1,881
1,452
1,558
1,700
1,573

Inter­
national
institu­
tions

(9
(9
(9

(9

(9
(9
(9
(9

1,961
2,055
2,262
2,704
2,963
3,022
3,017
3,052
3,497
4,113
4,307
4,352
4,379
4,767
5,442
5,455
5,288
5,331

F
or­

Total

8
<
»
}
608

1,552
871
1,173
1,091

10
,1 0
1,629
1,494
1,638
1,611
1,653

<
7

(*
!
449

1,276
610
903
806
746
1,308
1,103
1,242
1,240
1,282

(9
(9
(9
276
261
270
285
354
321
391
396
371
371

1 Not available.

N o t!.“ (1) Details may not add to totals because of rounding.
(2) A table showing the United States gold stock, monetary reserve requirements, and foreign dollar
holdings, 1934*57, has been submitted by the Under Secretary of the Treasury and published as table I on
p. 482, pt. 1, of these hearings. The column “ Total foreign dollar holdings" of that table I corresponds
for the years 1934-48 to the column “ Short-term dollar holdings, total” of this table, and for the years
1949-57 to the column “ Total dollar holdings” of this table; the column “ Foreign official short-term dollar
holdings” cf that table I corresponds to the sum of the columns “ Short-term dollar holdings, foreign coun­
tries, official’* and “ Short-term dollar holdings, international institutions” of this table.
(3) Figures for “ Total dollar holdings'* forDecember 1956 and March 1957 have been revised.

Senator Malone. I see nothing wrong in this table— it says “United
States gold stock, monetary gold reserve requirements, and foreign
dollar holdings, 1934^57,” it begins with 1934 and it ends with that
part of 1957 ending with March.
Mr. Marget. Well, sir, if I may predict, because we will have to
study this table, I suspect there are various things that you can put
hi or leave out.
There will be no discrepancy. It will just mean our explaining
vhy this table differs from the table that we publish in our bulletin.
Senator Malone. But you see I do not get to you again. I do not
want an explanation. I want a table as of the later date, but like
this one.
Mr. Marget. We will provide the explanation for these tables.
Senator Malone. I do not want an explanation. I want the facts.
Mr. M arget. Yes, sir; you will have them.



1444

FINANCIAL CONDITION OF T H E UNITED STATES

Senator Malone. I want them cold on each year.

Mr. Marget. Yes, sir.
Senator Malone. If you say that Mr. Burgess gave me the wrong
figures, I want you to just tell me that.
Mr. M arget. Yes.
Senator M alone. Because I had to write him twice, and phone the
Secretary 2 or 3times, to get this far.
Thev seemed very reluctant to just give me the facts. No wonder
the public is all messed up about it.
You and the Secretary of the Treasury should get together on the
information you give out. The public cannot get the explanations.
They are working for a living. And we do not have time, either.
Mr. M arget. Yes, sir.
Senator Malone. So, I want them cold, just like Burgess gave
them to me in the second letter. He did not give me anything in the
first one, I thought, purposely. No one could understand it.
Mr. M artin. We will give them to you cold.
Senator M alone. All right. If they do not correspond, we will,
I hope, call you again. Now, 483; following that was a table show­
ing exactly where this money is, by nation up to the $16^4 billion.
Do you agree with those figures?
Mr. M arget. It means not where the money is, sir, but whom it
belongs to, whom these dollar deposits belong to, to which countries.
Senator Malone. Let us not split hairs. If I have $1,000, and
it is in the bank in Reno, then it is my money; it is not the bank’s
money. And it would be wrong for the bank to claim it; is that
right?
Mr. M arget. That is right, sir.
Senator M alone. Well, then, does this money belong to these for­

eign nations and to the foreign individuals?
Mr. M arget. Yes, sir.
Senator M alone. The custom is to pay

in gold for the dollar bal­
ances when properly presented to the Treasury of the United States;
is that true?
Mr. M arget. Yes, sir.
Senator M alone. Up to

the $16,246 million, or whatever it is at
the time they are presented; is that right?
Mr. M artin. That is right.
Senator M alone. Now, the Secretary of the Treasury said that there
is a certain amount of this held by individuals; the difference be­
tween the $9,108 million and the $16,246 million, whatever that is.
It is $7,100 million, roughly, which would be held by these indi­
viduals, who could not demand, as of themselves, this money; is that
true?
Mr. M arget. Yes, sir.
Senator M alone. And he was to put the details in the record, and
I suppose he did. I have been in all of these nations examining their
industrial strength and their manipulations of the price of their money
in terms of the dollar. They have ways and means of transferring
individual dollar balances into the Nation’s dollar balances, do they
not?
Mr. Martin. They do, sir.
Senator Malone. There are no exceptions, are there?
Mr. M artin . None that I know of.




FINANCIAL CONDITION OF THE UNITED STATES

1445

Senator M a lo n e . None that I know of either. The Secretary would
not say that, because he just said that you would know, and that he
would try to find out of course. We know that whenever they want
that gold delivered to their countries the transfers will be made. I
made a point, the first 10 years I was here, to visit all the foreign
nations of the world and that was one of the things I was very par­
ticular to check.
The other was to examine their industries and determine what
they were manufacturing, and what they were digging out of the
ground, and what they were raising, and how the people were dressing
and eating, and how they liked their work and their government.
So, if you will take that particular table and you will say in your
testimony now that it is the custom to honor these dollar balances up
to the $16,246 million, whatever the foreign balances currently are,
that is satisfactory when presented in proper form ; that will be your
testimony.
Mr. J C
M
artin* That is right.
Senator M a lo n e . How much gold is there altogether stored in Fort
Knox and Colorado and New York and other Government deposi­
tories?
M r. M a r t in . $22 b illio n , r o u g h ly .
Senator M a lo n e . Roughly, $22 billion ?
Mr. M a r t i n . That is correct, sir.
Senator M a lo n e . I think we had $22.4 billion,
T

but that fluctuates.

Mr. M artin . Yes.

Senator Malone. From day to day, I presume, since you honor
foreign dollar balances in gold?
Mr. M artin . Yes.
Senator Malone. Due to whatever dollar balances you have honored
and gold you have purchased ?
Mr. M artin . That is right.

Senator M a lo n e . That is very reasonable. Now, taking that $16,246
billion, that leaves $5,754 million of the gold in the United States that
we would still have in such depositories after honoring all of these
dollar balances; would that be about right?
Mr. M a r t i n . Yes; that would be right, Senator. Of course, you
have our reserve requirement listed in table II of this table.
Senator M a lo n e . Table II; what page?

M M a r tin .
r.

482. I

amtaking those figures.

Senator M a lo n e . Where?
Mr. M a r t i n . The second column, United States monetary gold re­
serve requirement, $11,761 million, the last one.
Senator M a lo n e . Yes. But that is not your requirement; is it?
Mr. M a r t i n . That is figured on our requirements.
Senator M a lo n e . What is your requirement based upon ? Twentyfive percent gold ?
Mr. Martin. Well, in the Federal Reserve Act we have to hold re­
serves against our deposit liabilities, including the reserves of our
member banks that are deposited with the Reserve banks, and against
our Federal Reserve notes outstanding; there the liabilities must not
exceed four times our holdings of gold certificates.

Senator M a lo n e . In other words, you have to have 25 percent gold
reserve,




1446

FINANCIAL CONDITION OF TH E UNITED STATES

Mr. M a r t i n . That is right, and the ratio today is about 47 percent.
Senator M a l o n e . O f what you actually have in the United States
depositories ?
Mr. M a r t i n . That is right.
Senator M a l o n e . But what percentage of gold would we actually
own if the dollar balances as described were demanded and paid?
Mr. M a r t i n . Can you figure what that figure would be ?
Senator M a l o n e . $ 5 ,7 5 4 million left after we paid off all o f the
foreign dollar balances o f today ?
M r . M a r g e t . T h e free g o ld , i f y o u take th is reserve requ irem en t o f
so m e th in g o ver $11 b illio n , a n d d ed u ct-------Senator M a l o n e . That is not the requirement;

is it?
Mr, Marget. Yes, sir.
Senator M a l o n e . H o w much money is there in circulation ?
Mr. M a r g e t . Well, this would be------

M r . M a r t i n . T h e r e is a b o u t $3 0 b illio n in cir c u la tio n a t th e m o m e n t.
Senator M a l o n e . Is that the amount you have to have, 2 5 percent

reserve in gold ?
Mr. M a r t i n . No ; it is not just the currency in circulation. It is the
currency in circulation plus the deposits that are outstanding.
Senator M a l o n e . What would that amout be ?
M r . M a r t i n . I w o u ld sa y it is abou t o n e -h u n d r e d -a n d -s ix ty -o d d
b illio n d o lla rs.
Senator M a l o n e .

What is it, plus the $ 3 0 billion now actually in
circulation? That is paper money; is it?
Mr. M artin . Yes; that is paper money.
Senator M a l o n e . How much, then, is to be added to that $30 bil­
lion ? You say the obligations to the banks, the member banks, the
outstanding deposits, is that it?
Mr. M artin . Yes; that is right.
Senator M a l o n e . What you owe the banks or they owe y o u ?
Mr. M a r t i n . What we owe the banks; they have deposited with us
as reserves.
Senator M a l o n e . H o w much is that ?
Mr. M artin . I do not have the figures.
Senator M a l o n e . A s of today?
Mr. N o y e s . Federal Reserve notes are $26.5 billion, sir; deposits
at Federal Reserve banks are roughly $20 billion in round figures,
$19.7 billion: so you have $46.5 billion.
Mr. R iefler. That was June 26,1957.
Mr. N o y e s . June 26, 1957.
Senator M alone. What is the answer to that question, then ?
M r. M

a r t in .

$ 4 6 .5 is th e am o u n t.

Senator M alone. $46.5 billion, is it not ?
Mr. M artin . That is right.
Senator M alone. $46.5 billion.
Mr. M a r t i n . Yes.
Senator M alone. Does that include the $30 billion ?
Mr. M artin . Well, I remembered that to be $26.5 billion as the
Federal Reserve notes outstanding.
Senator M alone. Oh, yes. It is not $30 billion.
Mr. M artin . I was incorrect.
Senator M alone. The Secretary testified it was approximately $27
billion, and, I suppose, it fluctuates ?




FINANCIAL CONDITION OF THE UNITED STATES

1447

Mr. M artin. That is right.
Senator M alone. S o you do have $46.5 billion as of this date, ap­
proximately, with any fluctuations, minor fluctuations, that may have
occurred since you aided it all up, outstanding against your Federal
Reserve ?
Mr. M artin. That is right.
Senator M alone. And you have listed here $11 billion ?
Mr. M artin. $11,761 million.
Senator M alone. $11,761 billion of gold reserve you have in the
bank— have that much gold?
Mr. M artin. That is right. That is our requirement.
Senator M alone. Oh, yes; that is your requirement.

How much do you figure you have ?
Mr. M artin . W e have $22 billion, roughly, all told.
Senator M alone. Let me ask you a question that bothers me, and I

know it bothers a good many just ordinary citizens of the United
States.
As long as we have possession of $11,761 million, whether or not
we actually could retain it if it were demanded, you believe that the
law is being complied with?
Mr. M artin . Yes; I do.
Could we retain this amount, do you mean ?
Senator M alone. I did not ask you that question.
Do you believe the law is being complied with as long as you have
in your possession $11,761 million in gold regardless of whether or not
it could oe demanded on foreign dollar balances.
Mr. M artin. Well, those are the requirements that we have in the
Federal Reserve Act, so we are complying with the law.
Senator M alone. A s long as you have in your possession that amount
of gold?
Mr. M artin . That is right, sir.
Senator M alone. Whether or not it is obligated or would have to
be paid out if demanded by foreign nations or on foreign nations’
request that had been honored on a principle for these 180 years,
whether you own it or not, that is to say, whether you would have to
pay it out if the custom were followed, you think you are complying
with the law?
Mr. M artin. We could not, Senator, dip into this reserve require­
ment without coming back to the Congress for a change in the law.
That is our legal minimum.
Senator M alone. What would you do if you suddenly, over the
months ahead, found there were enough requests—you have already
testified that under the custom you do honor the requests and I sup­
pose when there is a legitimate dollar balance, foreign*dollar balance
and—I suppose, you agree with the Secretary, that if you were to re­
fuse suddenly to honor such requests in gold that it would have a
severe effect on the price of our money on the exchange market?
M Martin. I do, indeed.
r.

Senator M alone. Then, suppose that this m
oney progressively was
requested on legitimate dollar balances from foreign nations or in
such a way that it followed the custom; what would you do w you
hen
would come to the point where you had only $11,761 million of gold

left!




1448

FINANCIAL CONDITION OF TH E UNITED STATES

Mr. M a r tin . I think at that point we would have to come back to
the Congress if the situation-----Senator M alone . Suppose the Congress asks you what you did with
the gold ? Then it would be a demand request from Congress, would
it not, since the gold would already be in foreign vaults ?
Mr. M ar tin . Well, Congress would have every right to think we
were violating the law if we-----Senator M alone . Maybe we would think you have already violated
the law since you only have less than $6 billion that you can rightly
call the property of the United States.
There are very few Senators, and I am one o f them, who understand
entirely all the machinations that you go through in international
exchange.
I know considerable about it since I have visited all the foreign
nations and watched their manipulations enough to know that we
gave them the money to build up a dollar balance. That is the reason
I was looking forward with much interest to getting these answers
from you.
Mr. M a r tin . Well, this is the law, and we would abide by the law.
Now, of course, you get into the-----Senator M alone . G o ahead.
M r. M ar tin . I was just going to say that if we conduct our monetary
affairs properly, I see no likelihood o f the situation you are suggesting
occurring.
Senator M alone . In other words, these people are most likely to

think that this gold is safer in United States vaults than it would be
over in their own countries that might be overrun by another country,
so they just leave their gold here ?
Mr. M ar tin . I think that is correct.
Senator M alone . But suppose there happened to be a conflict of
interests, which happens in dealings between foreign nations—you
are aware of that, I suppose?
M r. M ar tin . Oh, yes.
Senator M alone . Every day you pick up a paper and some country
has changed its mind. It believes that its best interests lie in another
direction.
Here is the list of countries: Asia; the China mainland has $38
million.
What makes you think they would not demand it if it would em­
barrass you and the Congress, the Congress of the United States ?
Mr. M ar tin . W ell, I would think we would be able to pay it out.
I do not think they are likely to demand it on the scale you suggest.
Senator M alone. Well, here is Thailand. I was there. They are

a nation of little people with men weighing about 110 pounds wring­
ing wet, and the women about 80 pounds, and they do not even know
who is running their country,
I hear all this talk, these wise, smart remarks that the State De­
partment makes about these countries—that if we just continue to put
up the taxpayers’ money everything will come out right,
I was in Thailand in 1948 for a considerable time; I even went down
y
their little canals in their boats or sampans; they are using the
water for domestic purposes and waste disposal, sewage disposal, and
bathing in it ; and it is all very interesting, but the point is they don’t
even know who is in charge of them.




FINANCIAL CONDITION OF THE UNITED STATES

1449

The Chinese businessmen were running the country, as you prob­
ably already know.
So what about Thailand? They would be very likely, if they
thought it would embarrass us, they would come in; would they not?
They have $168 million.
Mr. M artin . Well, we would be prepared-----Senator M alone. You would pay it, of course.
Mr. M artin. We would pay it; yes, sir.
Senator M alone. What about Germany? We are giving them

money all the time and they have piled up $1,777 million in credit.
What would you do if they demanded it ?
Mr. M artin . I would pay it.
Senator M alone. Well, you would pay it all; would you not?
Mr. M artin . I would, indeed.
Senator M alone. Until you come down and bounced on the $11,761
million balance in the depositories—and then would have to rush
madly up to Congress and just stop payment on the checks until we
acted; acted under duress, that is because the money would be gone;
is that correct ?
Mr. M artin . That is correct.
Senator M alone. What got us into this position ? How did we lose
that part of the $22,400,000 in the last 24 years? How did we dis­
tribute it so well and fast? What did we get for it?
Mr. M artin . Well, this has been—these have been deposits. We
had roughly, what is it, Arthur, 60 percent of the gold?
Mr. M arget. We have about 60 percent of the worId? gold.
s
Senator M alone. You mean you had about 60 percent o f the world’s
gold. What is the total amount of the world’s gold ?
Mr. M arget. We have the figures for you; we will get it in just a
moment I can give you the precise figure in just a moment. I would
say that it is-----Senator M alone. Roughly.
Mr. M arget (continuing). Let us say around $40 billion.
Senator M alone. Around $40 billion; and we own 60 percent of
that ?
Mr. M arget. That is right.
Senator M alone. That was $22 billion when?
Mr. M arget. That was as of June 1957.
Senator M alone. AVe just got all through with that, so you would
modify that to the point that the foreign dollar credits against the
$22 billion-----Mr. M arget. $22.7 billion, actually. I would say that that is 60 per­
cent, roughly, of the world’s monetary gold; I would have to give you
a precise figure of the gold holdings of the other countries.
Senator M alone. $22.7 billion in gold is what you have in the de­
positories now ?
Mr. M arget. As of June.
Senator M alone. We have gone all through that, and with foreign
dollar balances against it that leaves us clear and aboveboard, with
no mortgage on it or with no claim to it, of $5,754 million; that is just
roughly it, because as I understand you to say, it varies from day to
day; is that true?




1450

FINANCIAL CONDITION OF TH E UNITED STATES

Mr, M akget, Well, sir, again: Are we making a distinction between
the governments and the nationals o f other countries? Because it
does make a difference, you see, Senator.
Senator M alone , We went all through that. You sat right there
while we went through it with Mr. Martin, and you read the Secretary
of the Treasury’s testimony?
Mr. M artin . Yes.
Senator M alone . And then the testimony of the Chairman—you
are with the Federal Reserve?
M r. M artin . That is right.
Senator M alone . He would honor them and, so far as he knew,

he thought, as I do, that the nationals could transfer it in a very
short time to the Nation’s obligations. Why go all through that
again? Answer my question.
Mr. M arget. I may have misunderstood your question.
Senator M alone. I guess you did.
I asked you if, then, instead of your having $22 billion today, as
you said, 60 percent that we owned in 1934, instead of that amount,
what we actually own and control free of obligations through the
customary method of honoring dollar credits, is roughly $5,754 mil­
lion-----Mr. M arget. Making the assumptions you make; yes, sir.
Senator M alone . What assumption would you make ?
Mr. M arget. I do think there is a distinction, an important dis­
tinction------Senator M alone . Go ahead and make it. I want jo u to make it.
Mr. M arget (continuing). Between the official, foreign official hold­
ings and the holdings o f private individuals.
Senator M alone , I s your testimony different from the Chairman’s ?
Mr. M arget. No, sir.
Mr. M artin . No.
M r. M arget. I am trying to clarify it.
Senator M alone . You are not clarifying anything. You are mess­

ing it up for me, and I am working against time.
Say it again and do not tangle it,
Mr. M arget. I think, Senator, we are all trying to find out what
is our position as against calls that might be made against the United
States’ gold reserves.
Senator M alone . A ll right, make it.
Mr, M arget. W h a t I am saying is, if we want to get a realistic
appraisal of our position in terms o f demand obligations against us,
it is important to distinguish between official dollar holdings------Senator M alone . Y ou go ahead and do that. I gave you an oppor­

tunity awhile ago, and you did not do it. I am giving you another
one, and then I want you to keep out of it.
Mr. M arget. The reason why I make that distinction, Senator, is
that the existing practice, which was described by Secretary Hum­
phrey, and confirmed by Chairman Martin, is to honor requests from
monetary authorities abroad.
Senator M alone . Who are they?
Mr. M arget. They are the accredited monetary authorities in all
these countries, either the central bank, if designated by the Treasury,
or the treasuries of those countries.



FINANCIAL CONDITION OF THE UNITED STATES

1451

Senator M alone. Whatever it may be.
Mr. M arget. Therefore, I say, in asking how much we are likely to
be forced to face-----Senator M alone. You go ahead and use your own language, and
then I will ask you a couple of questions.
Mr. M arget. Yes, sir.

I simply am saying that I think the relevant figure for dollar
claims is the official holdings, as opposed to the total holdings, which
include private claims, private dollar deposits here.
Senator M alone. Are you through ?
Mr. M arget. Yes, sir.
Senator M alone. Now let me ask you a question. Do vou think
there is any difficulty in transferring these individual dollar credit
holdings claims in a foreign country to official government claims?
Mr. M arget. I think there might be—it depends on what foreign
governments choose to do in relation to their nationals.
I f the question is, sir, whether the foreign governments could
mobilize dollar claims from their nationals, I think that is perfectly
true.
The only—well, I would like to add a comment to that.
Senator M alone. Add it.
Mr. M arget. For a foreign government to, in effect, appropriate
the dollar holdings of its nationals means that that government is in
a very serious state, and it would not be normally likely to do it.
What that adds up to is that while it is perfectly true, as you have
been arguing, Senator-----Senator M alone. I have not been arguing. I am asking the
questions.
Mr. M arget. It has been implied.
Senator M alone. And vou are not asking them.
Mr. M arget. It is perfectly true that i f all these——
Senator M alone. I just want to stop you at that point. My argu­
ing will be done in committee after we start writing up the report.
Do you understand that?
Mr. M arget. Yes, sir.
Senator M alone. All right.
Mr. M arget. My point was only that it has been admitted by the
Chairman that if all these demand claims were suddenly called, we
do not have enough to meet these claims without violating the existing
law with respect to the reserve ratio.
But as I have understood the Chairman, he has said that it is not
likely to happen in anything but an extraordinary kind of crisis.
Senator M alone. Mr. Martin said that he agreed with the figure
balance of gold of $5,752 million less all foreign dollar balances. I
asked him the question, and he did not make a speech like you are
making. Go ahead and finish.
Mr. M arget. I am finished, sir.
Senator M alone. Then a question or two now.
Is there not any way that the Government could get these dollar
claims without confiscation?
Mr. M arget. Confiscation? It depends what one means by confis­
cation. These countries may have exchange-control laws which would
98633—57—pt. 8----- 16




1452

FINANCIAL CONDITION OF TH E UNITED STATES

require their citizens to deliver the money against a payment in their
own local currency.
Senator M alone. Most of them d o ; do they not?
Mr. M akget. Yes, sir; they do.
Senator M alone. Most o f them ?
Mr. M akget. In recent years, sir, the tendency has been to leave
more in the hands of their nationals as these countries have relaxed
their foreign-exchange controls.
Senator M alone. I think the Secretary of the Treasury was to
prepare a table. I am not sure that he did. He said he would, if he
could. He said he would prepare a table that would show what the
present practice was of each o f these nations. Do you know what
it is?
Mr. M abget. It would be a book about this thick. W e can deliver
it; that is, I think we can ask permission o f the Monetary Fund to
give it to you.
Senator M alone. I do not need a book that thick, and it is not
necessary to have a book that thick. What you can do, there are only
about 60 or 70 of these nations, and you can tell me what the practice
is now.
Mr. M arget. A s of now.
Senator M alone. Yes, and it does not need a book.
Mr. M argat. All right.
(The information requested is as follows:)
A list of countries requiring the surrender of dollar receipts to the monetary
authorities, or to banks subject to control by the monetary authorities, has been
submitted by the Secretary of the Treasury and published on page 461, part 1,
of these hearings. The book mentioned by Mr. Marget is the Eighth Annual
Report on Exchange Restrictions of the International Monetary Fund; the report
is filed with the committee.

Senator M alone. That is what is the matter with about 90 percent of
you people who sit on these soft cushions here and get to liking it.
You write a book, and no one reads it: so you are in the clear. You
have not answered my question. Any foreign nation under discussion
could exchange its own money on the free market for these individual
dollar credits, or property, or for this money without confiscation ?
Mr. M arget. The ordinary practice is for them to give their own
local currency.
Senator M alone. That is the practice. I am not so sure it is
altogether the practice, but, if they wanted to get the dollar balances
from a national of their own country, it could be done without confisca­
tion. It might be concessions of various kinds. It is not possible that
they could be paid off very liberally, and the nation get this dollar
balance without any confiscation at all.
Mr. M arget. Well, sir, my only point is, if the Government has
the power, and it certainly has the power-----Senator M alone. We have the power right here to condemn any­
thing, do we not ?
Mr. M arget. Yes, sir.

Senator M a l o n e . Why would they not have it?




FINANCIAL CONDITION OF TH E UNITED STATES

1453

Mr* M arget. Yes. But if the Government has the power, I do
not see why they should give them anything more than the local
currency.
Senator M alone. Well, of course, you know they have the power,
but if the man owning the dollar balance is influential enough, and
many of them are, many of these governments are run by top people,
and I am not so sure that we are entirely immune in a monetary
way—is it not possible, without using their currency, to compensate
them adequately for the dollar balances?
Mr. M arget. I do not know of any case, but I do not know why it
is not possible.
Senator M alone. O f course, you do not. It is not something I am
asking you at random. I have asked it in these nations, and I have
been in all of them. I suppose you visited some of them, as long as
you have such an important job, have you not?
Mr. M arget. Yes, sir.
Senator M alone. Well, did you find anything that is contrary to
what I am developing?
Mr. Marget. No. I just do not happen to know of any case in
which it was done that way.
Senator M alone. Don’t you know of any case; are you not familiar
enough with these nations to know the kind of concessions that are
given top people in the government in mining, in concessions in prop­
erty in land?
Mr. M arget. Again, I could not write a history of that. I just
do not know of any such cases.
Senator M alone. I am not asking you to write a history. In fact,
I am trying to get you to condense your answers.
Mr. M arget. Yes, sir. I know what the official practices are, and,
I repeat, sir, I know of no case corresponding to the kind of case
you have adduced. That is, maybe, because of my ignorance.
Senator M alone. Y ou do not see any reason why they could not
do it?
Mr. M arget. N o.
Senator M alone. It is helpful for you to get down to words of one

syllable. I do not want to shut you off. Any time you want to talk,
I want to let you talk, because I do not want anybody to say afterward
they did not have an opportunity to explain. I lmow, if I can get
it in language that I understand, that some of my neighbors are going
to understand. I am asking you in deadly earnest about how we
dissipated our gold reserve. I f it sounds simple to you, it ought
to be very simple to answer it. You told me that there were about
$40 billion worth of gold in the world today that you know about.
Mr. Marget. I can probably give you a more accurate figure, sir,
if you will just let me look for it.
Mr. M artin. We will get you the figure.
Mr. Marget. We will get you the exact figure.
Senator M alone. Get it for me.
Mr. M arget. It will be exclusive of Russia, because the Rus­
sians never give any official figures.




1454

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

(The information referred to follows:)
World gold reserves (excluding V. 8 . 8. R .) as o f June SO, 1957
[In millions o f dollars]

United States--------------Foreign countries----------International Monetary Fund..

Total.

22,732
15, 111
1,147
___ 38,990

Senator M a l o n e . I spent 2 ^ months behind the so-called Iron
Curtain. I traveled 14,000 miles in Russia, and I would not be
surprised, from my observation, if they have a couple of dollars in
^°Mr. M a r t i n . I think that is right.
Mr. M a r g e t . I have the figure published for March 1957. I t was
something under $40 billion. It was $38,765 million, and that is the
figure as of March 1957.
These are the reported gold reserves of central banks and gov­
ernments.
Senator M a l o n e . D o you have it by nations ?
Mr. M a r g e t . Yes. We have the principal nations here, and we
can give you a table on that.
Senator M a l o n e . How many nations are there, roughly ?
M r . M a k g e t . I w ill h a v e to c o u n t th e m u p , s ir .

T h e r e a re 3 5 .

Senator M a l o n e . Well, you can add or detract from that table, but
prepare it for us, if you w ill, because it w ill correspond roughly with
the table on page 483 of foreign dollar holdings.
M r . M a k g e t . No, s ir .
Senator M a l o n e . I do not mean the amounts w ill correspond, but
they w ill include the same nations.
to

Y o u a re g iv in g m e th e n n o t o n ly h o w m u c h g o ld th e re is k n o w n
be in th e w o rld to d a y , b u t w h e re i t is .

Mr. M a k g e t . Yes, sir.
But may I make one point clear ?
Senator M a l o n e . Yes.
M r . M a r g e t . There is a distinction between the gold holdings of
these countries and their dollar holdings. The gold holdings----Senator M a l o n e . I understand that. There need be no connec­
tion.
Mr. M a k g e t . A ll right; that is all.




F IN A N C IA L

C O N D IT IO N

OF TH E

U N IT E D

STATES

1455

(The information referred to follows:)
Gold reserves of central banks and governments, by countries {excluding
U 8. 8. R.) as of Mar. SI, 1957
.
[In millions of dollars]

Europe:
Austria __
Belgium Denmark
Finland „
France — ______________
Germany, Federal Republic

72
848
31
35
861

Latin America— Continued
P e r u __________________
El Salvador_____________
Uruguay _______________
Venezuela______________
Other------------------

35
32
183
669
51

1,931
Total_______________
o f ------------------------------------- 1,756
Greece_________________
11 Asia:
1350
Italy-----------------India_____
247
814
Netherlands-----------Indonesia_
43
N o r w a y ________________
Iran .
45
138
Portugal--------------Israel_________________
461
10
Spain
J a p a n _________________
56
128
S w e d e n ---------K o r e a _________________
1
252
Philippines-----------Switzerland_______
1,636
23
Turkey
112
144
Thailand-------------O t h e r _______________________
United Kingdom--------- *1,925
249
Yugoslavia_____________
18
Bank for International Set­
951
Totaltlements (including Euro­
pean Payments Union)_
367 Other countries;
113
O t h e r _________________
Australia__________
484
Belgian Congo------123
Egypt ------------188
Total________________ 10,166
Union of South Africa233
All other___________
104
C a n a d a ---------------1,112
Latin America:
761
Argentina-------------194
TotalBolivia________________
(*)
Total foreign countries— 14,921
Brazil_________________
324
International Monetary
Chile__________________
F u n d ______________ 1,438
457
Colombia______________
United States_________ 22,406
C u b a __________________
136
Dominican Republic______
11
World total (excluding
27
Guatemala------------U.S.S.R.)_________ 38,765
M e x i c o ________________
166
J-vU •f latest date
m
1 As VJL X1CU* 28.1957, Id ttw * WWW available.
of Feb.
Estimated gold holdings of British Exchange equalisation account, based on figure for
total holdings of gold and o f United States and Canadian dollars, as reported by British
Government.
* Less than $000,000.
4 As of Oct, SI, 1956, latest date available.

Senator M a l o n e . I might ask a question right there of you, Mr.
Chairman; is it customary for these other nations to honor their trade
balances with gold?
Mr. Mabhn. It is.
Senator M a l o n e . A ll of th e m ? A ll of th e m th a t h a v e th is gold ?
Mr. M a r t i n . Most of them. There have been som that have not.
e
Senator M a l o n e . W ill you also give me a list of the nations that
are honoring their foreign-money balances in gold when presented?
M r . M a r t i n . Right.
Senator M alo n e . Give me a list.
Mr. M a r t i n . We w ill give you the list.
Senator M a l o n e . I think that is very important.




1456

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

(The information referred to follows:)
C o n v e r t ib il it y

op

F ore ig n -H eld C u r r e n c ie s

The following tabulation shows primarily the absence or presence of restric­
tions on the conversion of currencies into dollars. Dollar holdings in turn can
be converted into gold, not only through transactions between foreign governments or central banks and the United States Treasury, but more generally in the
world gold markets, primarily the London gold market (see below, under “United
Kingdom”)
.
I. COUNTRIES PERMITTING CONVERSION OF FOREIGN-HELD CURRENCIES

(a) All accounts converted at uniform rates:
Canada
Bolivia; Cuba; Dominician Republic; El Salvador; Guatemala;
Haiti; Honduras; Mexico; P a n a m a ; Venezuela
Switzerland (restricts conversion of accounts held by residents of
countries that restrict conversion of their Swiss-held accounts)
Lebanon; Liberia
(l>) Some accounts (mainly those derived from capital transactions) con­
verted at free-market rates which in some cases are at a substantial
discount:
Costa Rica; Ecuador; Paraguay; P e r u ; Uruguay
II, c o u n t r ie s r e s t r i c t i n g c o n v e r s io n o f f o r e i g n - h e l d c u r r e n c ie s

A. Latin America
Argentina: Conversion permitted at various exchange rates for holdings de­
rived from current transactions within limits of import Ucensing system, from
profits earned after June 1955, and from investments m a d e after October 1955.
Brazil; Conversion permitted at varying exchange rates for accounts with
authorized banks within limits of import licensing system.
Chile: Conversion permitted at varying exchange rates, except that con­
version of company accounts requires license.
Colombia: Conversion permitted at varying exchange rates for accounts aris­
ing from current transactions.
Nicaragua:1 Conversion also permitted for accounts arising from current
transactions.
B . Continental Europe ( except Communist countries)
Austria1: In practice, conversion of foreign-held accounts generally possible
at a discount.
Belgium-Luxembourg: Conversion of virtually all accounts permitted at freemarket rate, which is practically identical with official rate.
Denmark.1
Finland: Conversion permitted for holdings arising from sale of convertible
currencies.
France1: In practice, conversion of foreign-held accounts generally possible
at a discount. Affiliated overseas countries: Morocco, Tunisia.
Germany: Conversion of most foreign-held accounts permitted at free-market
rate, which is practically identical with official rate.
Greece.1
Italy}
Netherlands: Conversion of virtually all accounts permitted at free-market
rate, which is practically identical with official rate. Affiliated overseas coun­
tries : Netherlands Antilles; Surinam.
Norway1
Portugal/
Spain.1
Sweden.1
Turkey.1
C. Sterling area
United Kingdom: Conversion permitted without restriction for "American,”
“Canadian,” or “registered” accounts, arising mainly from current transactions
currencfe^ or from 'a tfth orteed ^ reS i Investment, arl8ln* fr0m “ le ° f Con™ aWe



F IN A N C IA L

C O N D IT IO N

OF T H E

U N IT E D

STATES

1457

with residents of countries with convertible currencies or from sale of gold
or dollars; these accounts can also be used without restriction to purchase gold
in London gold market. Conversion into other foreign currencies permitted
without restriction for virtually all other foreign-held accounts (“transferable
accounts”) ;in practice, these accounts can be converted into dollars at a discount,
which in recent years has been less than 1 percent In practice, domestic hold­
ings (“resident accounts”) also can be converted into dollars, but at a substantial
discount.
Australia.®
Burma.1
Ceylon.1
Ghana.*

I e n.*
clad

India.1
Iraq.1
Ireland.
*
Jordan.1
Libya: License required for all conversions.
N e w Zealand.*
Pakistan.1
Rhodesia.*
Union of South Africa.*

D.

Rs o wr (e cp Cmui tcut ie)
et f old xe t o mns o nr s

Afghanistan.1
Cambodia: License required for all conversions.
Egypt1: Conversion of “authorized” investment accounts subject to limits.
Ethiopia,1
Indonesia: License required for all conversions.
Iran.1
Israel:1Conversion of “authorized” investment accounts subject to limits.
Japan.1
Korea: License required for all conversions.
Laos: License required for all conversions.
Philippines: License required for all conversions, except for limited amount of
profits.
Saudi Arabia: License required for all conversions.
Sudan.1
Taiwan:1 Conversion of “authorized” investment accounts subject to limits.
Thailand: Conversion permitted for holdings arising from current trans­
actions.
Vietnam: License required for all conversions.

Senator M a l o n e . H o w many of these nations right at this point
allow their own nationals to have the gold ?
M r . M a k g e t . T h e re a re s e v e ra l th a t a llo w th e m to h ave it.

There is none that undertakes to redeem it, redeem their currency in
gold at a fixed price.
In other words, there is a distinction in these countries between allow­
ing the nationals to hold gold domestically—on the one hand—and
then the governments5undertaking to redeem in gold any currency.
Senator M a l o n e . Eedeem their own money in gold ?
Mr. M a r g e t . That is right.
There are several countries which do allow people to hold gold inter­
nally. One is France, one is Switzerland, recently Belgium, and
Germany.
1 Countries permitting conversion of holdings arising from sale of convertible foreign
currencies or from authorized foreign investment.
* Countries permitting unrestricted conversion Into pounds sterling, and thus indirectly
conversion into dollars to the extent permitted or possible in the United Kingdom.
Note.— Countries that are printed in italic are members of the European Payments
Union, which also includes Switzerland (see above). Union members (including overseas
countries belonging to their currency area) settle balances with each other 25 percent in
credit, repayable by agreement or at the time of the dissolution of the Union, and 75
percent in gold or dollars.




1458

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Senator M a l o n e . Would you give me a list o f those nations that
allow their nationals to hold gold?
M r . M a k g e t . Yes.
Senator M a l o n e . And let them transfer it, buy it and sell it?
M r . M a k g e t . Yes.
Senator M a l o n e . In these nations, is there any limit on the price f o r
which they can sell it, if they can get it, if they can sell it for $20 or $50
or whatever amount they can get for it, or is that price controlled by
the government ?
Mr. M a k g e t . The price is not controlled by the government
(The information referred to follow s:)
According to available information the following countries allow their na­
tionals to hold, transfer, buy, and sell gold domestically:

Argentina
Belgium
Brazil
Canada
Chile
Colombia
Egypt
France
Germany

Greece
India
Iran
Italy
Japan
Lebanon
Mexico
Morocco

Pakistan
Pern
Portugal
Saudi Arabia
Thailand
Turkey
Switzerland
Uruguay

Senator M alone. That is free gold ?
Mr. M arget. Yes. Where they are allowed to hold it, they are
allowed to trade internally. There may be restrictions on export and
import.
Senator M alone. But internally they can buy and sell ?
Mr. M arget. That is right. This is not true, sir, o f all countries.
I am just talking of those countries where they are allowed to deal in
gold.
Senator M alone. Yes.
Now, how many countries are there which will allow export or
import of gold by nationals or by their own citizens ?
Mr. M arget. There are very few. We will give you a list.
Senator M alone. Y es; give us a list of those nations for the record.
Mr. Marget. A s opposed to the monetary authorities; as opposed to
the treasury, let us say, or the government?
Senator M alone. Independent o f it.
Mr. M arget. Free export and import.
Senator M alone. Yes.

Well, it might be they would have to have a permit, it might be,
but if they do, let the record show whether they can do it without a
permit, or whether they have to have a permit for import and export
of gold, and whether the price is fixed, if they do export or import, or
whether it is a free market.
You think it is a free market?
Mr. M arget. There is no case I know o f in which the government
will deliver gold to its nationals at a fixed price for domestic holding.
Senator M alone. They can if they want to ?
Mr. M arget, In practice they do not.
Senator M alone. In practice they do not generally do it?
Mr. M arget. That is right.




F IN A N C IA L

C O N D IT IO N

OF T H E

U N IT E D

STATE S

1459

(The information referred to follows:)
According to available information the following countries permit unrestricted
imports and exports of gold: Canada, Lebanon, Morocco, Switzerland, and
Uruguay.

Senator M a l o n e . D o you know, then, with these nationals in various
nations buying and selling gold, or nations buying and selling gold,
what the price has been, what has been paid per ounce for this gold
over the past 10 or 15 years ?
M r. M arget . O h , yes, s ir ; w e cou ld g iv e you a table on that. I
h ap pen to h ave w ith m e som ew here in these pap ers a p a p er on the
cu rren t fre e p rice s o f g o ld .

While I am fishing for the paper, the generalization that I would
make about the price of gold in these free markets is broadly this:
That—here it is—that in what I would call the effective free gold
markets, which are typified by, for example, London, the London free
gold market or the Zurich free gold market-----Senator M al o n e . The what?
M r. M arget . S w iss.
Senator M a l o n e . How many free gold markets are there i
Mr. M arget . Those are the two principal ones, Switzerland----Senator M a l o n e . How about Hong Kong?
Mr. M arget . There is a market in Hong Kong, too, and the general­

ization I was going to make—your question was, what is the price?
Senator M a l o n e . Generally speaking, over the past couple of
decades.
Mr. M arget . Well, that has varied very considerably.
Senator M al o n e . I understand that. That is what I want.
M r. M arget . I f you ask me over the past decade, it has been
varying from a very considerable premium over the $35 price to what
is now the state of affairs, which is that in London, for example, as of
now, as of July, for example, the dollar price of gold in the free market
is in fact $35. That has not been true throughout this period.
Senator M alo n e . How high did it go, and how low, over the past,
say, 20 years, if you know ?
Mr. M arget. Well, the London market opened only in the post­
war period.
Senator M a l o n e . Post-Second War?
Mr. M arget . Post-Second War, and only relatively recently, sir.
Senator M a l o n e . You have that information?
M r. M arget . I do not have the date, but I can give you the date. It
is within the last 2 or 3 years that they have opened it.
I say the price since that gold market has been opened has been, in
effect, around $35.
Senator M a l o n e . H ow high did it go during that last 2 or 3 years?
Mr. M arget . Not much higher. It has just been around—just a
little under, below-----Senator M a l o n e . When I was in South Africa, I think in 1948,
there was as high as a $75 per ounce market for gold in Europe.
Mr. M arget. Yes, sir.
Senator M alone. D o you know anything about these prices over

the past 24 years ?
Mr. M arget. We can—since they are in many cases unofficial prices,
they have to be approximate—but we can get you the price during this




1460

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

period of, shall I say, of distrust of the local currencies, and the pre­
mium was quite high.
Senator M alone. About how high?
Mr. M arget. Seventy dollars, a premium of as much as that.

I was going to— lest I mislead you, Senator, I would like to complete
my statement about what the current prices are.
Senator M alone. G o ahead.
Mr. M arget. I said that in the typical, the principal functioning
markets, namely, London and Zurich, Switzerland, the rate is in fact
effectively around $35.
Now, there are some divergencies as between other markets, which
are not so important because free import and export is not permitted.
For example, in Paris there is a market for bar gold, that is slightly
higher, that is $36.50; and indeed, in one case, but it is really an
exceptional case, namely, the case o f Bombay, the premium, the price,
is about $60. But that-----Senator M alone. Bombay, India?
M r . M a r g e t . I n In d ia , y e s , s ir.
Senator M alone. Is that $60 in American dollars, 60 American

dollars ?
Mr. M arget. That is the equivalent of 60 American dollars.
Senator M a l o n e , What do they use for money there? I w a s there
in 1948-----Mr. M arget. Rupees.
Senator M a l o n e . Rupees. That rupee varies q u it e widely, a n d
generally is getting cheaper?
Mr. M arget. It has shown some depreciation on the free market.
Senator M alone. What is it now, to the dollar, roughly ?
Mr. M arget. I do not have that figure here, but I would say it de­
pends on which free market. The black market, perhaps as much as
10 percent discount, or something of that kind. I would have to check
that.
Senator M alone. D o you know what the official rate is ?
Mr. M arget. Yes, sir. It is about five to the dollar.
Senator M alone. You think it would vary about 10 percent?
Mr. M arget. Yes. Mind you, these are black market quotations.
You will not find them officially quoted.
Senator M alone. I am familiar with what you mean there. I
understand perfectly.
And that is, generally they have an official rate, and some of them
have what they call a bank rate. It might be a little different than
that. And then they have a street rate. You just walk out on the
street and look uncertain where you are going, with American-cut
clothes, why, you can get just about anything you ask for the dollar.
That is about right; is it not ?
Mr. M arget. Yes.
Senator M alone. I remember in France in 1947, I think it was, I
think the official rate was 350 francs to the dollar.
Mr. M arget. That is right.
Senator M alone. That was quite a while ago.
I f you went out on the street, you got whatever you asked for it,
because they wanted that dollar in their little hot hands.
None of these countries, no country in the world is on the official
gold standard today, is it ?




F IN A N C IA L

C O N D IT IO N

OF TH E

U N IT E D

ST A T E ©

1461

Mr. M arget. In the sense of redeeming for domestic circulation
for its own nationals-----Senator M alone. Yes.
Mr. M arget. At a fixed price, there is none, sir.
Senator M alone. Are there any of them besides us—yes, you did

say, and you did, I think, Mr. Chairman, that these countries, and
you are furnishing me a table of the ones that do make up their foreign
balances in gold on request; you will give me a list of those nations?
Mr. M artin. That is right.
Senator M alone. And a list of the nations which do not do it, be­
cause there are so many of them it is pretty hard to remember the list.
Mr. M artin. Eight.
Senator M alone. Y ou understand, I want this information for the
record, since we will need it when we start adding it up.
Now, I would be very much interested in your statement—why are
we not on a gold standard ?
Well, I will ask that question first: Why are we not on a gold stand­
ard, if that would stop the inflation and keep the money somewhat
stable, or a metal standard, whatever you want to call it ?
Mr. M artin. Well, we got off the gold standard in the dislocations
that came following World War I ; and to get back on full redeemability of currency—and I hope some day we will get back on it—is
a pretty hazardous undertaking at a time when you have got irre­
sponsible countries, such as our Russian friends that you mentioned
earlier, but who might make irresponsible demands through individual
citizens in this country, if we were redeeming for individual citizens.
Senator M alone. Y ou are not doing that.
Mr. M artin. No, we are not, but I am saying if we did, they might
make difficulties for us that I do not see any particular reason for
us to run the risk of.
Now, over recent years, I think the management of our currency
and finances has been such that the risk would be at a minimum.
But we still have our Russian friends at all times as a threat, and
we have probably some of them stirring up individual citizens in this
country needlessly.
Senator M alone. Y ou mean our own citizens ?
Mr. M artin. Stirring up our citizens, yes, sir.
Senator M alone. I have a good idea who is stirring it up. But I
will not go into that with you now.
What do you think—do you think it is going to get any better in
the future, as far as our Russian friends are concerned ?
Mr. M artin. I really do not know, Senator.
Senator M alone. Do you think they are going to be less dangerous
when they increase their own supply of gold ?
Mr. M artin. N o ; I do not think they are going to be any less dan­
gerous if they owned gold. I hope that the world can look forward
to a more peaceful period at some time, but I do not have to much hope
of it at the present time.
Senator M alone. D o you have any idea that Russia is the only na­
tion which might give us trouble if they had enough gold to do it
with?
Mr. M artin. Well, I think all of the Iron Curtain countries would
cooperate with them.




1462

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Senator M alone* D o you remember where the “ Iron Curtain’’
phrase was created?
Mr, M artin . No; I am afraid I do not.
Senator M alone. I will tell you, and I think it is time some of our
American citizens start to analyze where they hear these catch words
and phrases,
Mr. M artin . Eight.
Senator M alone. Mr, Churchill created that catch phrase when he

made a speech for Mr. Truman in Missouri.
Mr. M artin . Westminster College, Fulton, Mo.
Senator M alone. You remember?
Mr. M artin . That is right.
Senator M alone. While we are on these catch words and phrases

by which we have run this country for 24 years, do you remember
where the “ dollar shortage” was created ?
Mr. M artin . Where the dollar-----Senator M alone. Where the phrase “ dollar shortage” was created.
Mr. M artin . No, I cannot say, offhand, that I do.
Senator M alone. It was created by the London bankers to sell a bill
of goods to our taxpayers that they should give them money. There
are two ways in which a nation can have a dollar shortage; there is
only one way y o u and I can have it.
When individuals spend more than they make each year, they have
a dollar shortage.

But a nation can have it in two ways: By spending more each
year than they earn, which are all doing, including ourselves, but we
can still sell bonds to our citizens for our shortage or by printing money
as you are allowed to do; but the foreign nations have a dollar short­
age by simply fixing a price on their money in terms of the dollar
higher than the market price and no one will take it at the official
rate.
It has been picking up the
ini
Have you been aware that almost every nation in the world fixes
a price on its money—higher than the market price in terms of the
dollar ? You have not been aware of that ?
Mr. M arget. Well-----Senator M alone. Wait just a minute, will you, please?
We will call on you in a minute,
Mr. M artin. I am not sure that I follow you there.
Senator M alone. I will ask it again.
Mr. M artin . Yes.
Senator M alone. D o you have knowledge that nearly every nation
in the world fixes a price—let us leave it at that now—on its own
money in terms of the dollar? You know that, do you not?
Mr. M ahtin. That is right.
^
Senator M alone, Well, are you aware that nearly all of them fix
a price above the market price of their money in terms of the dollar?
Mr. M artin . I do not know how you determine the market price on
that.

Senator M alone. It should be very easy for you. I went to Hong
Kong, a free port. I have seen all of the foreign nations. I even
went to Lithuania, There is hardly room to land a plane there.
In 1948, I walked up to a bank window in Hong Kong and laid




F IN A N C IA L

C O N D IT IO N

OF TH E

U N IT E D

STATE S

1463

down a dollar, and I got six Hong Kong dollars for it, I might be
off a little; it might have been 5V2 or 6%; and walked to another
window and laid down about 15 or 16 Hong Kong dollars and got
a British pound and, being a free market, I could spend it anywhere
in the world. Did you know that ?
Mr. M artin. Y es ; I did know that.
Senator M alone. All right. At that time, what do you think the
price of the British pound was fixed by Britain? That was 1948,
remember.
Mr. M artin. About $4.06.
Senator M a l o n e . $4.03. Your memory is good. Well, you could
buy it for $2.60 in Hong Kong, if my computations are correct,
or any other free market.
Mr. M artin. Sure.

Senator M alone. Well, there is a good deal of difference between
$2.60 and $4.03, is there not?
Mr. M artin. There is, indeed.
Senator M alone. Well, we were picking up the check for the dif­
ference with gifts of taxpayers’ cash to Britain. There was the
$3% billion loan in 1946. Do you remember that?
Mr. M artin. Yes.
Senator M alone. So-called loan; of course, it was a gift.
Mr. Martin. I was-----Senator M alone. I f I had been in the Senate I would have voted
against it. I was not here. I was here the next year, when Mr.
T
Marshall made his famous speech, and had a simple paragraph
that the Secretary of the Treasury wrote into it—the old man prob­
ably did not know it was in there—that we ought to pick up the
check for 3 years internationally. And the Prime Minister of
England took the ball on the first bounce and told us in 30 days
what it was going to cost us for 3 years; $17 billion. I was here
T
then, and I did not like it. That was in 1947. So, as soon as we ad*
journed, I went to Europe, and inspected almost every nation in
Europe. You are familiar with that transaction, are you not?
Mr. M artin. I am. You are talking about black-market transac­
tions.
Senator M alone. N o ; I am talking about walking right up to a
bank market at Hong Kong, and I suppose you can do it in any free
market country in the world, including Switzerland. I went into Italy
in 1947, and an Italian banker there—it was a branch of the Bank of
America, as a matter of fact—one of the bank managers that I con­
sulted, and he was literally going nuts, because he had a balance of
British pounds, £25 million of credit, and he thought his bank
was in good shape; and on paper it was.
However, he said the English blocked the currency; would not
honor the payments unless for goods purchased in England. He could
not spend it unless he spent it in England, and there was nothing in
England he wanted to buy, so he was just walking around in a circle,
tearing his hair, a rich man, and could not get a dime, about to get
fired, I think, because that had happened to him.
Now, is England the only one that blocked its currency?
Mr. M artin. No; there were other countries, Senator.




1464

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Senator M alone. D o you have some knowledge of such nations
over the last 10 or 12 years, say, the years during and since W orld
War II?
Mr. M artin. W e can give you a list of the countries.
Senator M alone. The ones that blocked their currencies at differ­
ent times ?
Mr, M artin , Right.
(The information referred to is as follow s:)
According to available information, the following countries have either c o m ­
pletely blocked foreign-held balances or imposed substantial restrictions on their
use at different times since 1939. Except where noted, controls were imposed
or were already in effect at the beginning of World W a r II. In recent years,
some countries have eliminated all restrictions, and most countries have sub­
stantially relaxed controls. Communist countries are not listed. Current limi­
tations on convertibility of foreign-held balances are shown in the insert for
page 2981.
Afghanistan
France
Argentina
Germany
Australia
Greece
Austria
Honduras
Belgium-Luxembourg
Hong Kong
Bolivia
Iceland
Brazil
India
Burma
Indonesia
Cambodia
Iran
Canada
Iraq
Ceylon
Ireland
Chile
Israel
Colombia
Italy
Costa Rica
Japan
Denm a r k
Jordan
Dominican Republic, 1942 Korea, 1946
Ecuador
Laos
Egypt
Lebanon
Ethiopia, 1942
Netherlands
Finland
N e w Zealand

Nicaragua
Norway
Pakistan, 1947
Paraguay
Peru, 1945
Philippines, 1949
Portugal, 1948
Spain
Sudan, 1956
Sweden
Switzerland
Taiwan, 1950
Thailand, 1942
Turkey
Union of South Africa
United Kingdom
Uruguay
Venezuela
Vietnam

Senator M alone, But you are aware that practically all these na­
tions fix a fictitious price in dollars on their currency— Canada does
not, because her dollar is worth more than ours, and that is because
they have more horsesense than we have. They do not give their
money away. They do not give anything away. We have financed
projects in Canada up to several hundred million dollars for our own
citizens and others with our taxpayers’ money. What is the Canadian
dollar worth now, in terms of the dollar, on the market?
Mr, M artin. About a dollar and six cents.
Senator M alone. Ours is getting a little cheaper all the time.
Mr. M artin. That is right.
Senator M alone, D o we have any prospect, as long as we keep
up our present unbusinesslike methods, to slow up the increased
premium on the Canadian dollar?
Mr, M artin . I do not know, Senator. The volume o f new investment, American money that is flowing into investment in Canada be­
cause of their more businesslike methods has been tremendous.
Senator M alone, D o you know how much it is ?
Mr. M artin. No; I do not. We could probably give it to you.
Mr. M arget. W e can give you some figures on that.



F IN A N C IA L

C O N D IT IO N

OF T H E

U N IT E D

STA TE ©

1465

Senator M alone. I wish you might. We added it up here—I tell
vtfc.you mi& do—we added it up with Burgess. There were
ht
$461^ billion now of American capital in foreign countries, and you
know our Department of Commerce, which is a very great organiza­
tion, built up by former Secretary Hoover, I knew him when lie was
m there, I think he did a marvelous job, and I think there have been
good secretaries since—however, they are now and have been spend­
ing a good part of their time promoting American investment abroad.
You know that, do you not ?
M r . M a r t in . T h a t is rig h t.

(The information referred to is as follows:)
United States outflow ( — ) to Canada
[In millions of dollars]

1952

Total net outflow (—) ............. ........

1953

1954

1955

1956 1

1957,

JanuaryMarch 1

—412

-423

-301

-962

-260

—425

-408

—425

-3 10

-967

-260

Direct investments............................
New issues..........................................
Redemptions.....................................
Other long-term, net...........................
Short-term, net-...................................

-420
-1 58
38
90
25

-413
-209
108
93
13

-469
-167
80
145
-2 3

-279
-3 8
160
-7 1
-8 2

-544
-379
99
-115
-2 8

-1 60
-8 7
9
-1 0
-1 2

-6

Long-term capital, outflow..................
Repayments........................................
Short-term, net....... .... .......................

3

Qoverament, net, total...............................

1

-431

Private, net, total.......................................

-4

2

-6
2

-8
11
-1

9

<>
*
(3
)

9

5

(?)
(*)

(*)

6

(*)
<>
*

*Preliminary.

* Less than $500,000.

Source: U. S. Department of Commerce, Survey of Current Business.

Senator M alone. The promotion of American capital invested
abroad by the Department of Commerce is in addition to the four
organizations, the Import-Export Bank, the International Bank—
the World Bank—the International Monetary Fund, and the Inter­
national Finance Corporation.
i Mr. M a r t i n . The International Monetary Fund and the Interna­
tional Finance Corporation.
Senator M alone. That is right.
And the one reason for their existence is to loan money, to encourage
American money to invest abroad, using the foreign cheap labor and
avoid American taxes and through our free trade policy import the
petals, textiles, and manufactured goods into this country in competi­
tion with the American higher wages workingmen and investors.
Mr. M artin. T o encourage; yes.
, Senator M alone. And we finance the Import-Export Bank exclu­
sively, up to $5 billion; is that not right ?
Mr. M artin. That is right.
Senator Malone. And we guarantee 35 percent of the capital for
each of the other three organizations; is that right?
Mr. M artin. Thatis roughly right for the International Bank—

yes, I would say that is about right.




1466

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Senator M a l o n e . That is about right for the three o f them. I f
there is any difference, will you detail such difference when you cor­
rect your testimony?
M r. M

a r t in .

R ig h t.

Senator M a l o n e . It is approximately correct.
M r . M a r t i n . That is right.
Senator M a l o n e . Now, there are 60 to 70 nations that are members
of each one of these three international organizations, each having
a member of the Board of Directors?
M r. M a r t i n . That is right.
Senator M a l o n e . The tnree international organizations besides the
Export-Import Bank, which is exclusively our own. A ll, however,
promoting, through loans, American investments abroad ?
M r. M

a r t in .

T h a t is r i g h t .

Senator M a l o n e . And those directors vote in accordance with that
nation’s stock of money put into the organization.
M r. M a r t i n . That is right.
Senator M a lo n e . It means that 6 5 percent o f the voting power is
in foreign nations’ hands and 35 percent in American hands or con­
trol, does it not?
M r. M a r t i n . That is right.
Senator M a l o n e . In other words, in encouraging American capital
investment and spending abroad, determining to whom the loans are
made and under what conditions the Board of Directors is 65 percent
foreign-controlled.
M r. M a r t i n . In those institutions; yes, sir.
Senator M a l o n e . Those three.
M r. M a r t i n . Yes, sir.
Senator M a l o n e . D o you believe— and you must have knowledge of
these countries before even W orld W a r I — do you have any reason to
believe that these small countries throughout Europe and Asia are
going to be any better off permanently unless we continue to divide
our own wealth with them? W e are now dividing our cash, gold
and markets with them.
The President organized the General Agreement on Tariffs and
Trade (G A T T ) in 1947 under the 1 9 3 4 Trade Agreements A ct and
transferred their operations to Geneva, Switzerland. A t this time 34
competitive foreign nations are dividing our markets between them
through continually lowering our duties or tariffs. A lso they pile up
dollar credits for which they can demand our gold through the
Marshall plan, E C A , mutual security, and so forth. That is how they
are better off.
Mr. M a r t i n . I think these smaller countries are developing new
products.
Senator M a l o n e . H o w do you mean, new products?
Mr. M a r t i n . Principally raw materials.
Senator M a l o n e . W nat are these raw materials?
M r. M

a r t in .

C o p p e r , le a d , z i n c , g o l d , s i l v e r — a l l o f t h e m i n e r a ls .

Senator M a l o n e . Tungsten ? And shut our own mines down.
Mr. M a r t i n . Tungsten.
Senator M a l o n e . They are mining these materials— minerals and
selling them in our market— and American investors using American
higher standard-of-living workingmen cannot compete with them.



F IN A N C IA L

C O N D IT IO N

OF T H E

U N IT E D

STATES

1467

Mr. M artin. Well, they are selling it not only here, but all through
the world.
Senator Malone. W e are the principal market in all of these min­
erals.
Mr. Martin. In some of these items, yes; not in-----Senator Malone. O f course, we are the principal market for all
minerals and the only guaranteed market price for gold.
Mr. Martin. W hy-----Mr. Marget. W e could give you-----Senator Malone. Just a minute. I am asking the chairman and the
chairman may turn to you.
Mr. Marget. Yes.
Mr. Martin. I could not call off— I have not given any thought to
it. I used to live in this field.
Senator Malone. Do you not know, as a matter of fact, we are the
principal market in the world, period and paragraph ?
Mr. M artin. We are a major market in the world, no question
about it.
Senator Malone. And is it not our market that is being divided ?
When we take our markets out of the pot at Geneva there will be
no Geneva— it is our markets they are after.
Mr. Martin. W ell, multilateral trade is not our market. I think
that we-----Senator Malone. It is our markets that they are dividing at Geneva
through “multilateral trade” agreements? I am very much interested
in your slant on the market division. The division of our markets
among the nations of the world is an integral part of the plan to
destroy us.
You see, our citizens of this country trust Congress, or did trust
Congress, and they almost worship the President, no matter who is
President, or the Members of Congress. But the people know that
something is wrong; however, they are not yet convinced that Con­
gress womd do these things to them. The monetary system is only one
facet of the whole plan to destroy or divide the wealth of this Nation.
W e went off the gold standard in 1933, and started a deliberate in­
flation cycle. To cheapen our dollar. To lower wages. To price
ourselves out of the world markets. W e started printing money.
In 1943, we passed a free trade bill, the 1943 Trade Agreements Act,
transferring the constitutional responsibility of Congress, article 1,
section 8, that says Congress is to regulate our foreign trade, to the
President, did we not ?
Mr. Martin. W e did.
Senator Malone. Giving the President full authority in that act to
transfer that responsibility of Congress to Geneva or to any point on
earth, did we not?
Mr. Martin. I do not think I follow you there.
Senator Malone. I will ask it again.
Mr. Martin. Yes.
W ell now, what is there in that bill that gives the President au­
thority to transfer?
Senator Malone. That is what I asked Mr. Dulles, the Secretary
of State. Mr. Dulles says the 1934 Trade Agreements Act (so-called
Reciprocal Trade) gave the President authority to transfer the con08638— 67— p t. S—




17

1468

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

stitutional responsibility of Congress to regulate foreign trade to
Geneva. The President made the transfer in 1947— did you know
thatf— transferred it to Geneva under the General Agreement on
Tariffs and Trade.
M r. M a r t i n . N o ; I am sorry. I was not fam iliar with that.
Senator M a l o n e . I think you ought to study it. Your job is only
a part of the plan and you are vitally affected by the 1934 Trade
Agreements Act and by the four organizations you have described
to encourage American capital to invest abroad.
I d o th in k - t h a t , u n le s s y o u u n d e r s t a n d i t , y o u a r e n o t q u i t e u p t o
it ; I am sorry.
M r . Martin.

I think it may be that I am not well up to the job,
Senator.
Senator M a l o n e . Y o u are up to your own particular job, but I
am trying to tell you that you are only one factor.
Now, in 1947, under the 1934 Trade Agreements Act (so-called Re­
ciprocal Trade) as extended, the President caused to be organized,
through the State Department, the General Agreement on Tariffs
and Trade. You heard of it ?
M r. M a k t i n . Y e s; that is right.
Senator M a l o n e . And you heard the State Department is respon­
sible for that; they claim it?
M r. M

a k t in .

R ig h t.

Senator M a l o n e . H e located the organization in Geneva. A ny for­
eign nation that passed muster— and remember, now, just what the
qualifications were— could join.
M r. M

a r t in .

R ig h t.

Senator M a l o n e . And then they were empowered, through the
General Agreement on Tariffs and Trade, to make multilateral agree­
ments on tariffs and trade, dividing our markets among themselves,
which they have done.
I have been in Geneva. I took the British secretary of the General
Agreement on Tariffs and Trade organization to lunch, and found
him to be a fine, congenial fellow, as he would be, and a Britisher,
as he would be, because there is where the whole division o f our wealth
is based.
Now, using the authority granted the President under the 1934
Trade Agreements A ct, the transfer to Geneva was made to operate
under the newly organized General Agreement on Tariffs and Trade.
You know that was done, do you not?
Mr. M a r t i n . That is right.
Senator M a l o n e . Secretary Dulles, sitting right where you are now,
in 1955, and under my direct questioning, said that the 1934 Trade
Agreements Act gave the President full authority to organize the
General Agreement on Tariffs and Trade and locate the operation
in Geneva.
Are you aware that he testified to that fact ?
Mr. M a r t i n . I may have been, Senator. I would have to refresh
myself.
Senator M a l o n e . I am reminding you; and, if you will check it,
I think it will be very helpful to you.
As a result of Mr. Dulles’ testimony, and other pressures, the Con­
gress did exactly, in 1955, what they have been doing for 24 years;



F IN A N C IA L

C O N D IT IO N

OF T H E

U N IT E D

STATES

1469

they extended the 1934 Trade Agreements Act for 3 more years— it
now expires in June of 1958.
I was able to persuade this committee to hold it to 1 year at one time.
I never did vote for it, because it is a free-trade act, and puts the
foreign cheap labor in direct competition with American workingmen
and investors. The original act in 1934 allowed the tariffs or duties
to be cut 50 percent. The second extension allowed an additional 50
percent, making the allowable duty cuts 75 percent.
In 1955, this Congress allowed them to cut it another 15 percent
under certain conditions, 5 percent a year. They are busily engaged
in doing that very thing in Geneva at this time.
Now, the 1934 Trade Agreements Act expires in June 1958, next
year, and I hope to God this Congress has the gumption and the guts
to let it expire. The regulation of our foreign trade through flexible
duty or tariff adjustment reverts to the Tariff Commission, an agent
of Congress, under the 1930 Tariff Act. That act directs the Tariff
Commission to determine the difference in the cost of production of
an article in this country and the product or a like article in the chief
competitive foreign nation, and recommend that as the duty or tariff,
which simply takes the profit out of the low-cost wages at the water’s
edge.
Now, it is a fact, is it not, that it is against the law for any of our
nationals, as we call the citizens of foreign nations, our own citizens
to have possession of gold ?
Mr. M a r t i n . Yes, unless they have it for adornment or for some­
thing of that sort.
Senator Malone. They can buy jewelry. They can also buy gold
from the Treasury for manufacturing purposes, under certain condi­
tions?
Mr. M artin . That is right.
Senator Malone. That is already in the record.
Do you know what those transactions amount to each year?
Mr. Martin. No ; I do not have the figures on it, but I can get them.
Senator Malone. I wish you would, and just for each year, say, 10
or 15 years.
Mr. Martin. Right.
(The information referred to is as follows:)
A table showing the sale of gold by the mint to United States industry and net
industrial consumption of gold by United States industry, 1947-55, has been
submitted by the Secretary of the Treasury and pubUshed on page 456, part 1
,
of these hearings.

Senator Malone. After the Treasury had sold the gold for this
purpose, presumably for ornaments and jewelry, what is known about
this gold afterwards, what becomes of it, whether it is sold or whether
it is melted up and sold again, or it goes out of the country as jewelry
and then might be melted up ?
Is anything known about it after it has been sold by the Treasury
for that purpose ?
Mr. M a r t i n . I think the Treasury does have some general idea of
what happens to it.
Senator Malone. Could you give me the regulation ?
Mr. Martin. Right.
Senator M a l o n e . J u s t as a matter of information,




1470

F IN A N C IA L

C O N D IT IO N

OF TH E

U N IT E D

STATES

Senator Malone. Y o u can insert it in the record. Now then, what
do you think would be the matter with allowing our nationals, as we
call them, in this country citizens, to have possession of gold and
transfer it among themselves, and if they sold it—first, just confine
it to the United States and our possessions. What would be the dis­
advantagesf
(The following waslater received for the record:)
SUKPART B— COWDITIONB UNDER W H IC H GOU> M

aY

B e ACQUIRED AN D H ELD , T B A N B -

ported, Melted ob Treated, Imported, Exported, ob E a r m a r k e d

§ 54.12 Conditions under which gold may be acquired, held, melted, etc. Gold
in any form may be acquired, held, transported, melted or treated, imported,
exported, or earmarked only to the extent permitted by and subject to the con­
ditions prescribed in the regulations in this part or licenses issued thereunder.
$54.13
Gold may be transported by carriers for per­
sons who are licensed to hold and transport such gold or who are permitted by
the regulations in this part to hold and transport gold without a license.
§ 54.14
. Gold in any form situuated outside of the United States may be acquired, transported, melted or
treated, or earmarked or held in custody for foreign or domestic account with­
out the necessity of holding a license.

Ta s ota no gld
r npr tio f o .

Glds a do ts eo th Uit dS te
o itu te u id f e n e ta s

Glds a dint eps es n o th Uite S te.
o itu te h os s io s f e n d ta s

8 54.15.
Gold in any
form (other than United States gold coin) situated in places subject to the
jurisdiction of the United States beyond the limits of the continental United
States m a y be acquired, transported, melted or treated, imported, exported, or
earmarked or held in custody for the account of persons other than residents of
the continental United States by persons not domiciled in the continental United
States:
,
That gold m a y be transported from the continental
United States only as authorized by §§ 54.25, 54.32, 54,33, or 54,34, or licenses is­
sued pursuant thereto.
$ 54.16 Fabricated gold. Fabricated gold as defined in § 54.4 m a y be ac­
quired, held, transported within the United States or imported without the
necessity of holding a license therefor. Fabricated gold m a y be exported only as
authorized in § 54.25 or in a license issued pursuant to that section.
§ 54.17 Metals containing gold. Metals containing not more than 5 troy
ounces of fine gold per short ton m a y be acquired, held, transported within the
United States, or imported without the necessity of holding a license therefor.
Such metals m a y be melted or treated, and exported only to the extent per­
mitted by and subject to the conditions prescribed in or pursuant to § § 54.21 to
54..27, inclusive.
§ 54.18 Unmelted scrap gold. Unmelted scrap gold m a y be acquired, held,
transported within the United States, or imported in amounts not exceeding at
any one time 50 fine troy ounces of gold content without the necessity of holding
a licence therefor. Persons holding licenses issued pursuant to paragraph (a) of
§ 54.25, or acquiring, transporting, importing or holding gold pursuant to g 54.21,
m a y not acquire, transport, import or hold any gold under authority of this
section.
§54.19 Gold in its natural state, (a) Gold in its natural state, as defined
in g 54.4, m a y be acquired, transported within the United States, imported, or
held in custody for domestic account only, without the necessity of holding a
license therefor,
(b)
Gold amalgam which results from the addition of mercury to gold in its
natural state, recovered from natural deposits in the United States or a place
subject to the jurisdiction thereof, m a y be heated to a temperature sufficient to
separate the mercury from the gold (but not to the melting temperature of
gold) without a license by the person w h o recovered the gold from such de­
posits or his duly authorized agent or employee. T h e retort sponge so re­
sulting m a y be held and transported by such person without a license: Pro­
vided, however, That no such person m a y hold at any one time an amount of
such retort sponge which exceeds in fine gold content 200 troy ounces. Such
retort sponge m a y be acquired from such persons:
(1) B y the United States;
(2) B y persons holding licenses issued pursuant to paragraph (a) of g 54.25;
(3) B y other persons provided that the aggregate amount of such retort sponge

Po idd hwvr
r v e o e e,




F IN A N C IA L

C O N D IT IO N

OF TH E

U N IT E D

STATES

1471

acquired and held by such other persons does not exceed at any one time 200
fine troy ounces of gold content.
(c) Persons acquiring retort sponge under paragraph (b) (3) of this section
are authorized to dispose of such retort sponge only to the United States and to
persons holding licenses issued pursuant to paragraph (a) of § 54.25.
(d) Except as provided in §§54.12 to 54.20, inclusive, and in §§54.32 and
54.33, gold in its natural state m a y be melted or treated or exported only to the
extent permitted by, and subject to the conditions prescribed in, or pursuant t ,
o
§§ 54.21 to 54.27, inclusive.
§ 54.20
. (a) Gold coin of recognized special value to collectors of
rare and unusual coin m a y be acquired and held, transported within the United
States, or imported without the necessity of holding a license therefor. Such
coin m a y be exported, however, only in accordance with the provisions of
§54.25.
(b) Gold coin made prior to April 5, 1933, is considered to be of recognized
special value to collectors of rare and unusual coin.
(c) Gold coin made subsequent to April 5 1933, is presumed not to be of rec­
,
ognized special value to coUectors of rare and unusual coin.

Rr ci
ae on

SUBPART 0— GOLD FOE INDUSTRIAL, PROFESSIONAL, AND ARTISTIC USE

F o nee e pio fo poes r,
ifty uc xmt n r r csos

§ 54.21
(a) Subject to the conditions
in paragraph (b) of this section, any person regularly engaged in an industry,
profession, or art w h o requires gold for legitimate, customary, and ordinary
use therein, may, without the necessity of obtaining a Treasury gold Ucense:
(1) To consign gold bullion, including semiprocessed gold, to other persons
authorized to hold and dispose of gold in such form and amount under the reg­
ulations in this part or a license issued pursuant hereto;
(2) Hold, transport, melt, and treat such gold;
(3) Furnish unmelted scrap gold to the United States, to persons operating
pursuant to §§ 54.18 or 54.21, or to the holder of a license issued pursuant to
paragraph (a) of § 54.25; and
(4) Furnish melted scrap gold to the United States or to the holder of a l ­
i
cense issued pursuant to paragraph (a) of §54.25 which authorizes the acqui­
sition of such melted scrap gold.
(b) The privileges of paragraph (a) of this section are granted subject to the
foUowing conditions:
(1) That the aggregate amount of such gold acquired, held, transported,
melted and treated, and imported, does not exceed, at any one time, 50 fine troy
ounces of gold content (not including gold which m a y be acquired, held, etc.,
without a license under any other section of this part, except § 54.18);
(2) That the aggregate amount of such gold acquired, held, transported,
melted and treated, and imported, does not exceed, in any calendar month 350
fine troy ounces of gold content (not including gold which m a y be acquired, held,
e c , without a license under any other section of this part, except § 54.18);
t.
(3) That such gold is acquired and held only for processing into fabricated
gold, as defined in § 54.4, by such person in the industry, profession, or art in
which he is engaged;and
(4) That full and exact records are kept and furnished in compliance with
< 54.26.
(c) Persons acquiring, holding, transporting, melting and treating, and im­
porting gold under authority of this section are not authorized;
(1) To consign gold bullion, including semi-processed gold, to other persons
processing, except that scrap gold may, for processing and return in semi­
processed form, be consigned to the holder of a license issued pursuant to para­
graph (a) of § 54.25, which authorizes the acquisition and melting and treating
of such gold.
(2) To furnish melted scrap gold to persons operating pursuant to the pro­
visions of this section or § 54.18.
(3) To dispose of gold held under authority of this section otherwise than in
the form of fabricated gold or scrap gold.
(d) Persons holding licenses issued pursuant to paragraph (a) of § 54.25 or
acquiring, holding, transporting, or importing gold pursuant to §54.18 may
W>t acquire, hold, transport, melt or treat, or import any gold under authority
of this section.
IJ&22 License* required. Except as permitted in §{54.12 to 54.20, incluMwet and 154JJ1, gold m a y be acquired and held, transported, melted or treated,

to
r




1472

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

imported, exported, or earmarked for industrial, professional, or artistic use only
to the extent permitted by licenses issued under § 54.25.
§ 54.23 Issuance of licenses or general authorizations. The Director of the
Mint m a y issue or cause to be issued licenses or other authorizations permitting
the acquisition and holding, transportation, melting and treating, importing and
exporting of gold which the Director is satisfied is required for legitimate and
customary use in industry, profession, or art by persons regularly engaged in
the business of furnishing or processing gold for industry, profession, or art, or
for sale to the United States.
§ 54.24 Applications. Every application for a Hcense under paragraph (a)
of § 54.25 shaU be m a d e on F o r m TG-12 (except that appUcations for export
licenses shaU be m a d e on F o r m TG-15) and shaU be filed in duplicate with the
Director of the Mint, Treasury Department, Washington, D. C. Every applicant
for a Hcense under paragraph (a) of § 54.25 shaU state in his application whether
or not any applications have been filed by or licenses issued to any partnership,
association, or corporation in which the applicant has a substantial interest or,
if the applicant is a partnership, association, or corporation, by or to a person
having a substantial interest in such partnership, association, or corporation.
The Director of the Mint shall not issue any license to any person if in the
Judgment of the Director more than one license for the same purpose will be held
for the principal use or benefit of the same persons or interests. A n y person
licensed under this subpart acquiring a principal interest in any partnership,
association, or corporation, holding a license under this subpart for this purpose,
shall immediately so inform the Director of the Mint.
§ 54.25 Licenses— (a) Licenses for the acquisition and holding, transporta­
tion, melting and treating, importing and disposition of gold. (1) Upo n receipt
of the application and after obtaining such additional information as m a y be
deemed advisable, the Director of the Mint, shall, if satisfied that gold is neces­
sary for the legitimate and customary requirements of the applicant’ industry,
s
profession, art, or business, and that the applicant is qualified in all respects to
conduct gold operations in full compliance with the provisions of this part and
the provisions of a Treasury gold license, issue or cause to be issued to the appli­
cant a Treasury gold license on the approved form for the kind of industry,
profession, art, or business in which the applicant is engaged.
(2) Licenses issued under this section m a y authorize the licensee to acquire
and hold not to exceed a m a x i m u m amount specified therein; to transport such
gold, melt or treat it to the extent necessary to meet the requirements of the
industry, profession, art, or business for which it was acquired and held, or
otherwise to carry out the purposes for which it is held under license; and to
import gold so long as the aggregate amount of aU gold held after such importa­
tion does not exceed the m a x i m u m amount authorized by the license to be held.
(3) Licenses issued under this paragraph do not permit the exportation or
transportation from the continental United States of gold in any form. Such
exportation or transportation is permitted only to the extent auhorized in para­
graph (b) of this section or in a separate license issued pursuant to such
paragraph.
(b)
Licenses and authorizations for the exporting of gold— (1) Semiprocessed
gold. Semiprocessed gold, as defined in § 54.4, m a y be exported or transported
from the continental United States only pursuant to a separate export license.
Such licenses shall be issued by the Director of the Mint upon application m a d e
on F o r m TG-15 establishing to the satisfaction of the Director that the gold
to be exported is semiprocessed gold and that the export or transport from the
continental United States is for a specific and customary industrial, professional,
or artistic use and not for the purpose of using or holding or disposing of such
semiprocessed gold beyond the limits of the continental United States as, or in
lieu of, money, or for the value of its gold content.
(2)
Fabricated gold. Fabricated gold, as defined in § 54.4, m a y be exported or
transported from the continental United States without the necessity of obtaining
a Treasury gold license: Provided, however, That the Bureau of the Census
Schedule B statistical classification number of each specific commodity to be
exported shall be plainly marked on the outside of the package or container, the
shipper’ export declaration shall contain a statement that such gold is fabricated
s
gold as defined in § 54.4 and is being exported pursuant to the authorization
contained in this subparagraph, and such additional documentation shall be
furnished as m a y be required by the Bureau of Customs or any other govern­
ment agency charged with the enforcement of laws relating to the exportation
of merchandise from the United States.




F IN A N C IA L

C O N D IT IO N

OF TH E

TO TTED

STATES

1473

(3) Rare coin. (i) Hare gold coin as defined in J 54.20, made prior to April
5 1933, m a y be exported or transported from the continental United States
,
without the necessity of obtaining a Treasury gold license: Provided, however,
That the shipper’ export declaration shall contain a statement that such coin is
s
rare gold coin and is being exported pursuant to the authorization contained
in this subparagraph and such additional documentation shall be furnished as
m a y be requested by the Bureau of Customs or any other government agency
charged with the enforcement of laws relating to the exportation of merchandise
from the United States.
(ii) Gold coin made subsequent to April 5 1933, m a y be exported or trans­
,
ported from the continental United States only under license on Form TGL-11
issued by the Director of the Mint. Application for such a license shall be
executed on Form T G —11 and filed with the Director of the Mint, Treasury
Department, Washington 25, D. C.
(4) Other exports of gold. Export licenses m a y also be issued upon applica­
tion made on Form TG-15B in the same manner as prescribed in subparagraph
(1) of this paragraph, authorizing the exportation of gold in any form for refining
or processing subject to the condition that the refined or processed gold (or the
equivalent in refined or processed gold) be returned to the United States, or
subject to such other conditions as the Director m a y prescribe.
§ 54.26 Investigations; records; subpoenas. (a) The Director of the Mint is
authorized to make or cause to be made such studies and Investigations, to
conduct such hearings, and to obtain such information as the Director deems
necessary or proper to assist in the consideration of any applications for licenses,
or in the administration and enforcement of the acts, the orders, and the
regulations in this part.
(b) Every person holding a license issued under paragraph (a) of §54.25, or
acquiring, holding, or disposing of gold pursuant to the authorizations in §§ 54.18
and 54.21, shall keep full and accurate records of all his operations and transac­
tions with respect to gold, and such records shall be available for examination by
a representative of the Treasury Department until the end of the fifth calendar
year (or if such person’ accounts are kept on a fiscal year basis, until the end of
s
the fifth fiscal year) following such operations or transactions. The records re­
quired to be kept by this section shall include the name, address, and Treasury
gold license number of each person from w h o m gold is acquired or to w h o m gold
is delivered, and the amount, date, description, and purchase or sales price of
each such acquisition and delivery, and any other records or papers required
to be kept by the terms of a Treasury Department gold license. If the person
from w h o m gold is acquired, or to w h o m gold is delivered, does not have a
Treasury gold license, such records shall show, in lieu of the license number
of such person, the section of the regulations in this part pursuant to which such
gold was held or acquired by such person. Such records shall also show all
costs and expenses entering into the computation of the total domestic value of
articles of fabricated or semiprocessed gold as defined in § 54.4.
(c) The Director of the Mint (or the officers and employees of the Bureau of
the Mint specifically designated by the Director) or any department or agency
charged with the enforcement of the acts, the orders, or the regulations in this
part, m a y require any person to permit the inspection and copying of records
and other documents and the inspection of inventories of gold and to furnish,
under oath or affirmation or otherwise, complete information relative to any
transaction referred to in the acts, the orders, or the regulations in this part
involving gold or articles manufactured from gold. The records which m a y be
required to be furnished shall include any records required to be kept by this
section and, to the extent that the production of such information is necessary
and appropriate to the enforcement of the provisions of the acts, the orders, and
the regulations in this part, or licenses issued thereunder, any other records,
documents, reports, books, accounts, invoices, sales li t , sales slips, orders,
ss
vouchers, contracts, receipts, bills of lading, correspondence, memoranda, papers,
and drafts, and copies thereof, either before or after the completion of the
transaction to which such records refer.
(d) The Director of the Mint m a y administer oaths and affirmations and may,
whenever necessary, require any person holding a license under § 54.25 or ac­
quiring, holding, or disposing of gold pursuant to the authorizations of $ 54.18
or 54£1, or any officer, director, or employee of such person, to appear and tes­
tify or to appear and produce any of the records specified in paragraph (c) of
this section, or both, at any designated place.




1474

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Rprs
eot.

1 54.27
Every person bolding a license issued pursuant to paragraph
(a ) of § 54.25 shall make reports on tbe appropriate report form specified in such
license for the six months’ periods ending on tbe last days of June and December,
respectively, and shall file such reports with the Director of tbe Mint, Treasury
Department, Washington 25, D . G. Reports shall be filed within twenty-five days
after the termination of tbe period for which snch reports are made.

M r . M a r t in . I think, in the last few years, there would have been
no disadvantage. I think the disadvantage would come if somebody
like our Russian friends stirred up a conversion from dollars into gold
on the part of individual citizens; that would be only a troublemaking operation.
Senator M a l o n e . How would it make trouble?
M r. M a r t i n . W ell, I think the mere conversion of dollars into gold
just for the sake of saying that you are safer that way would cause
trouble; do you not?
Senator Malone. No.
M r. M a r t i n . You do not?
Senator M a l o n e . I am for returning bo the gold standard, of
course, and using a little horsesense and taking the lead in that move.
W e are a powerful nation, and it has been the record over the years
that a powerful nation took the lead in establishing sound m oney; as
a matter of fact, we did do that ourselves one time, did we not? W as
it not 1889 ? Is that right ?
M r. M

a r t in .

A r o u n d t h a t t im e .

Senator M a l o n e . Probably our trouble in going on the gold stand­
ard now would be that we have given foreign nations dollar balances
that could demand all but about $6 billion of our $22.4 billion in gold.
W e did take the lead in going on the gold standard in 1889 or what­
ever year it was.
Mr. M a r t i n . That is right.
Senator M a l o n e . And is it not the fact that weaker nations follow ,
they do not lead?
M r. M a r tin . N o.
But you have a situation------Senator M a l o n e . Please answer me. Over the history, has it not
been the powerful nations which took the lead going on a metal
standard, or whatever was used for stabilizing money ?
Mr. M a r t i n . I think that is true.
Senator M a l o n e . Are we not the most powerful nation now ? Let
us leave Russia out for a minute. Are we not the most powerful
nation in the world ?
M r . M a r t i n . I t h in k w e are.
Senator M a l o n e . W ell, are we not, including Russia, too ?
M r . M a r t i n . I think we are, even including Russia. But I think
Russia is powerful enough to cause us real trouble in this.
Senator M a l o n e . I spent 2 y 2 months behind the so-called Iron Cur­
tain. W hile I was traveling more than 14,000 miles in Russia, they
would not even let our Ambassador out of Moscow, or any member
of the Embassy. I know Bulganin and Khrushchev better than I
know you, and I let them drink that “vulcanizer special” they call
vodka, and I took a few drinks of wine. Bulganin and Khrushchev
finally let me go into all of the 16 Socialist Republics. I am writing
a report on the Eastern Hemisphere that will be available to you.
There are two reports on the Western Hemisphere that are now
available to you. One of them is Senate Report 1627 of the 83d Con­
gress.
 The other one is Senate Document 83 o f the 84th Congress.


F IN A N C IA L

C O N D IT IO N

OF TH E

U N IT E D

STATES

1475

The first one covers the accessibility of critical materials in the
Western Hemisphere. The second one, the economic structure of each
of these 42 entities and nations, showing exactly how they manipu­
late the value of their currency in terms of dollars for trade advan­
tage; and how trade between the nations of the Western Hemisphere
can be facilitated and be made self-sufficient in the production of
critical materials for war or peace.
Mr. Martin. Did you get any indication from them as to the
amount of gold they had, the Russians, on your trip ?
Senator Malone. Not accurate information, but they can mine it
pretty fast.
Mr. Martin. Right.
Senator Malone. And, according to mining engineers, one of them,
as a matter of fact, the chief, ex-President Hoover, can tell you con­
siderable about one of the large deposits of gold in Siberia that one
of his companies owned at one time. There are tremendous mineral
deposits in Russia. All this poppycock that you are going to surround
them and keep them from industrial development, or arming them­
selves, is just that.
I went into the Urals, one of the greatest mineralized areas in the
world, and I saw mining machinery, some of the largest in the world
being “poured” there. I hope our report will be ready by the first of
the year.
And there will be no effective revolt. A ll that is poppycock. They
are living so much better than they were under the Czars, or that they
were 5 or 10 years ago.
But now back to our own citizens. Personally, I do not think Russia
is going to have any influence on any good American citizen, and
999%0 of them are good American citizens. The few traitors are not
the most dangerous. The many good, honest people who mouth
these catchwords and phrases that are created by the few traitors
and by foreign nations are really doing the most damage.
These catchwords and phrases, such as “dollar shortage,” “trade
not aid,” catch on and become popular to repeat.
You say you do not think Americans should be allowed to own
gold and buy it and sell it among themselves. Tell me, now, why,
again? I was not too clear on that answer. You only mentioned
Russia.
Mr. Martin. W ell, I mentioned the generally upset condition of
the world.
Senator M a l o n e . What has that to d o with it?
Mr. Martin. W ell, I think it has a lot to do with it. There are
gold markets that we have already referred to, in Paris, in London,
and in Switzerland. They are good gold markets.
There are gold markets in Kuwait-----Senator Malone. You mean for much above the $35 ?
Mr. Marttn. W ell, the trade that we are talking about would be
endeavoring to try to get more for the gold; otherwise, there would
be no particular point in-----Senator Malone. Let us confine this question right now to the
United States of America. Let us say they would have to have an
export permit to send it anyplace else, but among ourselves why could
We not take the lid off ana say you could not put me in jail if you
Caught me with a $5 goldpiece. You could now, could you not?




1476

FIN A N C IA L C O N D ITIO N OF T H E U N IT E D STA TES

M r. M a r t in . W e could now, yes.
Senator M a l o n e . A ll right, what is the reason we could not raise
that curtain?
Mr. M abtin. I do not think there is any reason why we cannot raise
that curtain. I think it is purely a policy question that it seems to
me it would be unwise to raise it.
Senator M a l o n e . W hy?
M r. M a b t i n . Because of the unsettled international situation.
Senator M a l o n e . W hat has that got to do with it, if you just buy
and sell and trade it in our own country ?
M r. M a b t i n . W ell, if you could hold it for just around the country,
it would not make any difference.
Senator M a l o n e . How could you export gold through the regular
channels without knowing it if you had to have an export permit.
M r . M a r t i n . W ell, it is a matter o f judgment, Senator. I would
think you would have great difficulty in controlling it, lim iting it.
Senator M a l o n e . You think our citizens would export it, regard­
less, and that is your only objection to it?
M r. M

a r t in

. T h a t is m y p r in c ip a l o b je c t io n .

Senator M a l o n e . Otherwise, if it could be controlled, you think,
as far as locally is concerned, that they ought to be able to own their
own gold if they produced it or bought it, and sell it for any price
it would bring, or sell it to the Government if they want to, for the
$35 an ounce. You would then know what our people thought it was
worth per ounce.
M r. M a r t i n . That is right. I would favor ultimately the redeemability of the currency in gold. I would not see any objection to it.
I would like to see us get there some day.
Senator M a l o n e . W hat do you mean my “some day” ?
M r. M a r t i n . I do not see it in the foreseeable future, because you
must remember we have been off o f the gold redeemability now for
over 20 years------Senator M a l o n e . How long; 24 years, is it not, 25 years?
M r. M a b t i n . Twenty-four years.
Senator M a l o n e . Next year it w ill be 26.
M r. M a r t i n . A ll right.
Senator M a l o n e . W hat has to happen?
M r. M

a r t in .

T

o

p u t us b a ck on it ?

Senator M a l o n e . Yes.
M r. M a b t i n . I think you have to have more stable world condi­
tions than you have today, and we have to be certain that we are
managing our monetary affairs in a way which will warrant confi­
dence, and I think we are making progress in that direction.
Senator Malone. There have been unsettled conditions in the world
for 2,000 years. Do you have any idea there has ever been a condi­
tion such as you describe in the world ?
M r. Martin. W ell, we know there have been periods which have
been less strenuous, I would say, than the present.
Senator Malone. W ell now, you must know this, but just for pur­
poses of the record I am going to refresh your memory. For 300
years, 2 or 3 or 4 European nations have controlled colonial systems
and quashed the revolts, have they not ?
M r. M a b t i n . That is right.



F IN A N C IA L

C O N D IT IO N

OF T H E

U N IT E D

STATE6

1477

Senator M alone. And they would send a warship or cruiser, for
example, if England had trouble in the Malayan States, you would
read m the paper a cruiser was on the way.
Mr. M artin. Yes.
Senator M alone. And the cruiser arrives in about a week, and they
throw a little grapeshot over in the jungle, and there is no more in­
surrection; is that not right? Do you not remember reading about
that in the old days?
Mr. M artin. Yes, sir.
Senator M alone. O f course you do.
The difference now is that the colonial system is deader than Julius
Caesar. We were the first Nation to break away from England’s co­
lonial system 180 years ago. Is that not right?
Mr. M a r t i n . Yes.
Senator M alone. Why did we break away from it? I guess you
would know that they would not allow us to build any manufacturing
plants or produce anything but raw materials. We sold them the raw
materials and were forced to buy their manufactured stuff, were we
not?
Mr. M artin. Right.
Senator M alone. We were treated exactly like the Malayan States
until our people got tired of it, and one day the so-called tea party
broke up the act. Isn’t that right ?
Mr. M artin . That is right.
Senator M alone. The tea tax did not cause it, but it was the last

insult that broke the camel’s back.
Mr. M artin . Y ou are probably right.
Senator M alone. It had been building up.

We were the first Nation to break away from the colonial system.
Mr. M artin. We were certainly one of the first.
Senator M alone. Well, was it not the well-disciplined colonial
system that kept an armed peace until World War I and you might
say up until World War II ?
Mr. M artin . Colonialism was a factor.
Senator M alone. What else was a factor?
Mr. M artin . I think the whole currents of world trade. I do not
think just colonialism.
Senator M alone. Do you not think the world trade was directed
largely through that colonial system ?
Mr. M artin. A large part of it but not all of it.
Senator M alone. Do you remember the history—when Spain lost
South America ?
They lost their South American colonies; did they not? They had
practically every nation in South America under their control except
Brazil; did they not ?
Mr. M arttn. Right.
Senator M alone. I have been in every nation in South America.

And most of the nations have a statue of a fellow named Bolivar.
Ever hear of him ?
Mr. M artin . Simon Bolivar.
Senator M a l o n e . That is right; and he rode a horse all over South
America arousing them against Spain, He is always on a horse, that
statue.




1478

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Mr. M a r t i n . Yes.
Senator M a l o n e . And they worship him; do they not ?
Mr. M a r t i n . R i g h t .
Senator M a l o n e . Because he freed them from Spain, that is what
they say. He is their George Washington; is he not ?
Mr. M a r t i n . He is a great national hero.
Senator M a l o n e . A l l right.
In Spain, why, Spain, since they lost South America, has no power
at a ll; do they ? Is that not right ?
M r. M

a r t in .

I w o u ld n o t g o th a t fa r .

Senator M a l o n e . Have you been in Spain ?
Mr, M a r t i n . Unfortunately I have not been in Spain.
Senator M a l o n e . I have. It is a terribly poor, proud little nation.
I t does not have anything. When it lost its colonies, it was deader
than Julius Caesar, and, of course, neither England nor France have
any more power than Spain now because they have lost their colonies.
They are still making a pretense to hold nations in A frica with mate­
rial and money we furnished them. France is using our money, and
the munitions we send there under a great clamor that we are saving
the world, to kill those colored people by the thousands in North ana
French W est A frica ; is that not right?
M r. M a r t i n . I do not------Senator M a l o n e . D o you not read the papers ?
M r. M a r t i n . I read the papers.

Senator M a l o n e .
M r. M

D o you not read about it ?
I r e a d a b o u t it .
M a l o n e . Where do you think they

a r t in .

Senator
are getting munitions
and money to carry on the fight in these colonial possessions?
M r. M a r t i n . I do not know.
Senator M a l o n e . I am simply telling you this because you are talk­
ing about stabilizations. It was stabilized under a colonial system—
the Far East, the Middle East, A frica, all divided between about 4
or 5 nations. And Spain in South America at one time. Is that not
right?
M r. M a r t i n . I will agree with you that things are not stable.

Senator M a l o n e . W ill you agree with me that they were stable;
whatever stabilizing effect they had was under a colonial system for
several hundred years?
M r . M a r t i n . There was some stability under that system ; yes.
Senator M a l o n e . That i s right.
Now, Africa was simply divided among 3 or 4 nations; was it not?
M r. M

a r t in .

R ig h t.

Senator M a l o n e . South Africa belonged to the Dutch. The B rit­
ish took it away from the Dutch. They fought each other, fought over
an area that did not belong to either one of them, of course.
I took occasion to visit every nation in A frica, which is a tedious
thing, starting in Egypt, Cairo, went up the N ile, stopped at each
of the nations— Khartoum where the English had their headquarters.
Khartoum; is that it ?
M r. M

a r t in .

K h a rtou m .

Senator M a l o n e . Khartoum. You are right. Talked to the B rit­
ish governor there. He was not expecting to see a Senator, I know,
and especially one like me that was not favorable to the colonial sys­
tems, but just trying to find out what was going on.




F IN A N C IA L

C O N D IT IO N

OF TH E

U N IT E D

ST A T E S

1479

I continued through the Lake Victoria country into Johannesburg,
the Cape, and back through the Belgian Congo, the Gold Coast, the
Ivory Coast, French West Africa, and Morocco into Portugal.
Mr. M artin . I envy you the trip. It must have been very interest­
ing.
Senator M alone. It was interesting; however, I did not make the
trip for social purposes. I made the trip to see and judge the indus­
trial development and possibilities. It is not easy since the people do
not talk your language.
But back to your idea of waiting for more stabilization before going
on the gold standard; it was stable under the 4 or 5 European Colonial
nations, France, England, Spain and Belgium— there is a Belgian
Congo you know. Africa was very stable for many, many genera­
tions under the Colonial-minded European nations. Do you think we
should return to the colonial system for stability? A t the moment
the colonial system is dead.
M r . M a r t i n . N o.
sy ste m .

I h o p e w e w i l l n e v e r g o b a c k t o th e c o lo n ia l

Senator M alone. Well, you must know that those little nations,
many of them, cannot make a living and exist if they were free.
M r. M

a r t in .

I t is g o i n g to b e d ifficu lt f o r th e m .

Senator M alone. It is not only going to be difficult, but impossible.
If we make our system work the influence of Russia on U in greatly
9
exaggerated. It is vastly overrated. My personal opinion is that if
all these American citizens who take the fifth amendment or refuse
to take the oath of allegiance to this country should be kept off the
Federal, State, municipal, or school payroll, we would be in little
danger. I f they can actually be disloyal without violating any law
of the United States of America that is their business, but they should
not be on a public payroll.
But that is where the influence of Russia is felt, if they have any,
through disloyal people in the public service.
Mr. M artin. I think that is one of the places.
Senator M alone. Of course it is, and we are just gutless wonders
letting them do it. In almost every other nation tney chop their
heads off or put them in jail and throw the key away.
This country may wake up quicker than you think.
Now, then, if the influence of Russia that you mention could be
minimized, do you see any reason why the people of the United States
within the borders should not own and buy and sell gold? You say
it is a commodity. W e have minimized the value of gold in trade.
Our Government since 1933 will not pay it to a national, a citizen of
our country, so why should they not establish a market for it in
this country ?
M r . M a r t i n * W e l l , I th in k th e p r e s e n t m a r k e t is a lit t le d iffe r e n t
o p e r a t io n , b u t I see n o r e a so n , a s id e f r o m th e in te r n a tio n a l re a so n — I
am o n l y g i v i n g y o u m y --------

# Senator M alone. That is only Russia you are talking about, Rus­
sian influence?
Mr. M artin . Russia and there may be others; it is Russia and her
satellites. I t is the division of the world.
Senator M alone. Are you now confining it to the Russian satellites?
Mr. M artin . Well, I do not want to confine it to anybody. I would.




1480

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

say any unstable area in the world is a source of pull, perhaps, on
gold.
Senator M a l o n e . How are you going to stabilize everything in the
world? You have England now as helpless as a babe in arms. For
300 years they lived on a colonial system, and it is gone and they have
twice as many people there as can ever eat regularly again unless they
can become the production center and sell to us with tneir cheap labor
under the free trade fostered at Geneva. Our high wage standard o f
living was developed under article 1, section 8 of the Constitution,
with Congress adjusting the duty to take the profit out of sweat­
shop labor at the water’s edge.
M r. M a r t i n . I do not think you and I are in disagreement on this
matter of redeemability. I t is j u s t a question of judgment as to when
exactly.
Senator M a lo n e. W hat has to happen ? W e are the strong Nation,
the Nation is a stable nation, or was before we started giving every­
thing we have which includes markets and cash and gold to foreign
nations. It can easily be made stable again if we stabilize our cur­
rency, quit giving our gold away, and let the 1934 Trade Agreements
A ct expire next year. I think Congress is about to take over its
constitutional responsibilities again. I only have one vote, but it
will be cast that way. There are 435 Members of the House. I think
the people are going to instruct them to get back on the job.

We are the most stable nation in the w orld; are we not ?
M r . M a r t i n . I hope we are.
Senator M a l o n e . Well, if we are not, it is our own fault, is it not,
through distributing our wealth to foreign nations ?
Mr. M a r t i n . That is right.

Senator M a l o n e . Then are we not the ones to take the lead in any
stabilization of currency?
Mr. M a r t i n . I think we are. And I think the only difference that
we have is this matter o f judgment as to whether now is the time.
You have traveled very extensively in Africa and pointed out very
clearly—I wish I could have taken that trip—the ferment and change
that is going on in that great continent.
Senator M a l o n e . That is only my judgment, you know. I was
trying to tell you what they thought of the price of gold.
Even in Johannesburg they wanted a free market for gold, but they
were also very certain that they wanted us to continue to guarantee
$35 for it.
Mr. Martin. That is right.
Senator M a l o n e . They were very friendly, and on further question­
ing they were not sure it would require very much additional gold to
satisfy the market above $35 per ounce.




F IN A N C IA L

C O N D IT IO N

OF T H E

U N IT E D

STATES

1481

They thought the price might come back very close to the $35 per
ounce if a free market were to be established. Speaking of chromite,
I could have gotten a concession to produce manganese and chromite
in South Africa. Their wages are about one-tenth or one-fifteenth of
American wages, and with this virtually free trade we have now
through the Geneva operations, the American market for chromite,
manganese, zinc, lead, and tungsten is furnished by foreign low-cost
labor. That is what is the matter with the domestic market, imports
from cheap labor countries ?
Mr. M artin . W ell, I would not say that imports are what is neces­
sarily wrong with our market.

Senator M a l o n e . What is wrong with it?
Mr. M a r t i n . I think you have to have efficient production and you
have to have, you have to deal in the price mechanism. I do not think
we can fix prices the world over. I Delieve this country can produce
more efficiently and effectively and meet competition.
Senator M alone. You do?
Mr. M artin. I do.
Senator M alone. M y friend, I know you are not going to study this
lesson, but I am going to give you one.
Mr. M artin. I appreciate it. I am glad to have it.

Senator M a l o n e . And that is when this American capital, $44.5
billion, that has gone into foreign nations, promoted by our own Deartment of Commerce and the four organizations financed largely
y American taxpayers go abroad with our machinery and know-how,
then the American working men and investors have no chance to com­
pete.

E

Mr. M artin . W e would be glad to put in the record a table we have
on this investment capital if vou would like to have it.

Senator M a l o n e . I already asked for that and you have agreed to
do that. That is right; is it not?
Mr. M a r g e t . Not that particular one, but we will be glad to do
that, Senator.
Senator M a l o n e . I asked for the American investments abroad and
understand that they were about $44.5 billion.
Mr. M artin. A little bit more than that. I did not understand
you to ask for that, but it gets up to nearly $50 billion.
Senator M a l o n e . Let u s clarify it now so there is no question
•
about it.
Mr. M artin . Fine.

Senator M

alone

.

That is what the committee needs.

M r. M artin . That is right.

Senator

M

alone

.

W e will be glad to put it in.

Total amount and by country.

Mr. M artin . Right.

Senator M a l o n e . That is to say, all investments, whether private
or Federal investment, and designate it in each case.




1482

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

(The information requested is as follows:)
United States investment abroad, by area
A. INTERNATIONAL INVESTMENT POSITION OP THE UNITED STATES
[In millions of dollars]
End of year
1952

1953

1954

1955

19561

I, Private investments;
Western Europe______ ____ _____
Western European dependencies..
Other Europe,.................................
Canada.............................................
Latin American Republics............
Otber foreign countries...................
International institutions...............

4,071
507
14
8,331
7,018
2,487
401

4,207
647
14
8,771
7,051
2,732
425

4,843
647
15
9,739
7,698
3,143
504

5,360
681
14
10,625
8,282
3,616
476

6,103
874
29
12,070
9,306
4,175
420

T o t a l...........................................

22,829

23,847

26,589

29,054

32,977

II. IT. S, Government credits and claims:
Western Europe.................. ...........
Western European dependencies..
Otber Europe...................................
Canada.............. ...............................
Latin American Republics.,........Other foreign countries..... .............
International institutions...............

8,839
60
329
15
586
1,147
3,448

9,767
63
320
19
930
1,175
3,446

9,564
35
316
15
960
1,285
3,445

9,592
30
304
7
1,010
1,507
3,443

9,625
21
298
3
1,104
1,958
3,476

Total............................................ .

14,424

15,720

15,620

15, 893

16,485

III, Total private and Government:
Western Europe_______ _________
Western European dependencies. _
Otber Europe................................. Canada................................... ........
Latin American Republics............
Other foreign countries...................
International institutions...............

12,910
567
343
8,346
7,604
3,634
3,849

13,974
710
334
8,790
7,981
3,907
3,871

14,407
682
331
9,754
8,658
4,42$
3,949

14,952
711
318
10,632
9,292
5,123
3,919

15,728
895
327
12,073
10,410
6,133
3,896

Total..............................................

37,253

39, 567

42,209

44,947

49,462

1 Preliminary.




F IN A N C IA L

C O N D IT IO N

OF TH E

U N IT E D

STATE S

1483

Uit dSa sinet e tara, b ae —Continued
n e t te vsmn bo d y ra
B. NET OUTFLOW ( - ) OF UNITED STATES CAPITAL

1952

1953

I. Private Investments:
Western Europe. .........................
Western European dependencies.
Other Europe....... .......... ............
Canada..........................................
Latin American Republics______
Other foreign countries.................
International institutions ............

-116
10

133
-81

-425
-418
-9 0
-119

1954

1955

19561

1957,
Jan.Mar.i

-408
162
-124
-59

-198
12
(J
>
-425
-501
-345
-164

-191
7
0
-310
-329
-303
-27

-742
-3 6
-1 5
-967
-826
-406
12

-144
-9
<
*)
—260
-206
-118
-6 2

Total..........................................

-1,158

-377

-1,621

-1,153

-2,980

-799

II. U. S. Government credits and claims:
Western Europe. .........................
Western European dependencies.
Other Europe................................
Canada..........................................
Latin American Republics..........
Other foreign countries.................
International institutions.............

-110
-3 0
3
-6
-6 5
-206
-6

151
-4
5
-4
-345
-2 5
2

203
7
4
2
-34
-90
1

-47
4
4
9
-5 3
-221
2

-58
2
3
5
-97
-448
-3 3

-7 5
<>
*
1
(*>
-1 3
-163

Total..........................................

-420

-220

93

-302

—
626

-250

n i. Total private and Government:
Western Europe...........................
Western European dependencies.
Other Europe...............................
Canada..........................................
Latin American Republics..........
Other foreign countries.................
International institutions.............

-226
-2 0
3
-431
-483
-296
-125

284
-8 5
6
-412
-183
-149
-57

5
19
4
-423
-535
-435
-163

-238
11
4
-301
-382
-524
-2 5

**800
-34
-1 2
-962
-923
-854
-21

-219
-9
1
-260
-219
“ 281
-6 3

Total..........................................

-1,578

-597

-1,528

-1,455

-3,606

-1,049

1 Preliminary.
* Less than $600,000.
Source: U. S. Department of Commerce, Survey of Current Business.

Senator M alone. Now, what kind of machinery and workers do you
think these American companies use in these foreign countries? Do
rou think we and our efficiency here with our $17, $18, and $19 a day
abor in mining zinc and lead and tungsten and about 15 other metals,
do you think our great efficiency would compete with the $2 labor, 50cents-a-day labor, and $2.50 labor with our machinery and know-how?
You said that, did you not?
Mr. M artin. I think over a period of years it is surprising how----Senator M alone. I am glad to get your point of view. You assume
they are not efficient I suppose.
Well, you are just two decades late. In every one of these countries
that I inspected, beginning in 1947 in Europe and ending last year, I
think, 1956 in Ireland. In 1955 I was in Russia, in the Iron Curtain
countries 2 months and a half, traveled 14,000 miles in Russia. I
thought I had to see our star boarders first, and then I just went in and
finished the job behind the so-called Iron Curtain. They would not
let our Ambassador leave Moscow. We have destroyed our ambassa­
dors by putting them on civil service. They do not dare cross a dic­
tator of a country or they may get sent home, and that is a black
mark and they do not get promoted to another grade in pay*

i

98683— 57— p t 8------ *18




1484

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

W e are back on this reason why we cannot own gold in this country
until we stabilize all these countries again. How many o f them do you
think have to be stabilized ?
M r. M a rtin . I do not think it is very many on that.
Senator M a lo n e. How m any?
Mr. M a r tin . Why, I should say 8 or 10.
Senator M a lo n e. W ho are they?
M r. M a r tin . Well, I would say France, Germany, Britain, Italy,
the Far East.
Senator M a lo n e . Far East, they do not even have an economic sys­
tem or a standard o f living there; did you know that ? They do not
know what you are talking about.
Is that what you are talking about?
M r. M a rtin . Well, I think that is part of the problem today, as long
as you have the East and the West, the division between the East and
the West. Have you traveled in the Far East, Senator?
Senator M a lo n e. Yes throughout China, Malayan States, and other
nations. I went through the oil plant at Abadan, Iran, in 1947 with
a fine-toothed comb. They were training Iranians in a school there
for jobs in the plant. About 350,000 Iranians were profiting by that
oil operation o f the British. The British were paying 18 to 20 cents
a barrel royalty and we were paying 50 or 60 cents just across the
line. Everybody knew the British were going to get run out o f Iran.
It was a question of time. So when it happened we paid the bill and
gave it back to them.
I in jected all of the oil areas in the Middle East. I stopped with
King Ibn Saud for a while. The old king.
M r. M ar tin . Can I ask you a question on this because I am in­
terested ?
Senator M a lo n e. Yes.
M r. M a rtin . D o you think there is less likelihood in the foreseeable

future o f these being a world war ? I do think we pretty well put that
back of us.
Senator M a lo n e. No. We are moving toward a world war only
because we insist upon controlling areas as near to Russia as Cuba is to
the United States. I f we had the gumption to make our system
work, which we are not doing at the moment—and simply retain the
lead in bombs and ability to deliver them—we would not have a
war in 50 years. We are destroying our currency through inflation,
the route of every unstable nation in the world. Germany went that
way until it required a wheelbarrow full o f money to buy a pair of
ham and eggs, so they pay their debts with worthless money, then took
a new start. That is the way we are now headed, and I think you
know it, unless we reestablish a sound basis for our money.
Do you know any way out except to reestablish the gold or metal
standard so that when you exchange money with a nation you receive
paper or credit representing the same number of grains of gold or
ounces of silver that our money represents.
You know that was a factor a long time; do you not ?
M r. M ar tin . Right.
Senator M a l o n e . Do you not have to reach that status again in

order to have fair dealing ?
M r. M a rtin . No. I think the important thing is to not have infla­
tion, which you and I are both against equally.




F IN A N C IA L

C O N D IT IO N

OF T H E

U N IT E D

STATES

1485

Senator M alone. How are you going to prevent it unless by return­
ing to the gold or metal standard ?
Mr. M artin . Well, you are going to prevent it, as I have been saying
in these hearings, by reducing your spending and increasing your sav­
ing and getting a better balance in your general activity than we have
had; and I think that the last few years we have been making a good bit
of progress; but you and I are not in disagreement on this redeemability of gold. It is merely a matter of judgment as to whether in the
foreseeable future—and you have traveled much more widely than I
have-----Senator M alone. This is your business. If you were talking engi­
neering and we were discussing foundations, dams, or electric power,
then I would take over.
But I have been in all of these foreign nations—I have seen them
manipulate the price of their currency for trade advantage. So when
I hear men like you talk, I can try to evaluate it.
Mr. M artin . Eight. I was just making the point that I would hope
that we can have ultimate redeemability of gold, but I do not think
it is likely in the foreseeable future, and I do not think we should run
the risk— that is just a matter of judgment— of returning to it imme­
diately as long as the war clouds that you foresee are as------Senator M alone. I do not foresee it if we have to settle all of the

problems of the world first. There has always been a war in Europe
and Asia. Many of these nations have never had an economic system
or a standard of living. There will be no war as long as we are able
to win any time it starts. That is the effective preventive, not dis­
tributing the taxpayers’ money all over the world and weakening our
own economic structure.
Mr. M artin . Right.
Senator M alone. I f we keep dividing tax money and the nations
of the world, we are asking for an economic slump and in that event
the foreign nations win without a war.
Mr. M artin. I am not unduly optimistic about the possibilities of
peace in the world at the moment.
Senator Malone. Peace ? Let us talk about our economic system.
If you make our system work, you do not have to buy anybody. They
^ill all be with you. But if our economic system does not work—
and at the moment I think you will agree with me it is not working
too well—then no one will be with you.
Mr. M artin. It is not working as well as it should, but I am a bit
toore optimistic about it than you are, Senator.
Senator M alone. Well, if you keep up 3 percent per year, then any
savings will decrease in value as they have the past 24 years. How
much was the inflation last year ?
Mr. M artin. It was over 3 percent.
Senator M alone. All right. How much was it the year before?

Mr. M artin .

It was not quite that much.

Senator M alone. How much was it beginning in 1933 until 1957?
It is admitted to be 53 percent. Could you prepare a table for the

record?
Mr. M artin .

f

I can get you a table on that, yes, for the record, but

ou and I are both opposed to inflation, and I want to do everything
can.




1486

F IN A N C IA L

C O N D IT IO N

OF

THE

U N IT E D

STATES

(The information requested is as follows:)
The Consumer Price Index of the Bureau of Labor Statistics for January 1933
was 55.1 percent of the 1947-49 average; in Ju ly 1957, the index was 120.8. This
is an increase of 119 percent. It might be mentioned, however, that the C PI at
the beginning of 1933 was down 24,6 percent from January 1930 and was at its
lowest level since July 1917.
The BLS index of wholesale prices for all commodities other than farm
products and foods was 48.1 in January 1933; in July 1957, it was 125.6. The
rise in these prices amounts to 161 percent. In early 1933, of course, wholesale
prices were also at very depressed levels.
The increase in average consumer prices from July 1956 to July 1957 was 3.2
percent; in the preceding year it was 2.0 percent. Average prices of all whole­
sale commodities rose 3.6 percent from mid-1956 to mid-1957, as compared
with 3.2 percent from mid-1955 to mid-1956. Excluding farm products and
foods, the rise in wholesale prices was 3,5 percent from July 1956 to July 1957;
in the preceding year these prices increased 4.2 percent. (See accompanying
table.)
Consumer and wholesale prices, July 1955, 1956, and 1957
[1947-49a»100]

July of each year

1056............................................................................ ........ .........
1Q56....................................................................................................
1067 _
........
.................. ..............................

Consumer
Price Index,
all items

114.7
117.0

10
2 .8

Wholesale
Wholesale
Price Index, Price Index,
all commod­ other than
ities
farm prod­
ucts and food
110.5
114.0
118.1

116.5
121.4
125.6

Percentage increases
1056-66_______
1956-57.......................................................... .................. .............. .
1956-57..............................................................................................

2
.0

3.2

6.3

3.2
3.6
6.9

4.2
3.5

7.8

Source: Bureau of Labor Statistics.

Senator M alon e. I think you are doing as good a job, and I think
the fine Secretary of the Treasury, Mr. Humphrey, did a wonderful
job of keeping that bunch of boxes—they are so high now nobody can
see the top of them—balanced. That is all he did while he was in
there, he did not cure anything; and you are never going to cure any­
thing until you again create a sound basis for our money system—
when you exchange our money with England, France, or the Argentine,
and the paper or the promise to pay represents the same number of
grains oi gold or ounces of silver that you give them, then you are
making progress.
Do you agree that you will never stop inflation or slow it up sub­
stantially until you do that?
M r. M a rtin . I am more optimistic about getting there than you
are.
Senator M alon e. I think you could do it right away if Congress had
not given away all our gold through foreign dollar balances built up
by gifts of taxpayers’ money. I certainly do not have to explain that
to you. We started with the $3.75 billion American money, to Eng­
land in 1946, did we not, then continued with the real giveaway plans ?
Mr. M artin , That was the British loan.
Senator M alon e. And you could take that money and build up
dollar balances with it.
Mr. M artin . Well, they bought goods with it.




F IN A N C IA L

C O N D IT IO N

OF TH E

U N IT E D

STATES

1487

Senator M alone. I did not ask that.
Mr. M artin . Well, they could have bought gold with it, but they
would have used the gold to buy goods.
Senator M alone. Well, now, England has $1,175 million piled
up in dollar balances, which you would pay them tomorrow if they
presented it ; would you not ?
Mr. M artin . That is right.
Senator M alone. How did they get it?
Mr. M artin . W ell, they got a lot of it by trade.
Senator M alone. Did they ?
Mr. M artin. Yes, sir.
Senator M alone. How much money do you suppose we have given

them since World War II ?
Mr. M artin . It is a very sizable amount.
Senator M alone. Much more than that—several billion dollars,

is it not?

Mr. M artin. Yes, it is more than that.
Senator M alone. The State Department says we have $15 billion
worth of trade. We always had 4 or 5 percent of our exportable
goods exported over the years. Today we have exported a less per­
centage of our exportable goods than we did when the 1934 trade
agreement was passed. Goods that are paid for, not goods you give
away. This silly stuff that we are manufacturing like tanks and
sending over there for foot soldiers, nobody is going to use in a third
world war. However, we are afraid to quit manufacturing it because
of unemployment there.
But if you deduct—and this Senate Report 1627, 83d Congress,
did that for you—deduct the amount of goods that we give them, and
deduct the money and subsidies we give the foreign nations, we are
now exporting a less percent of exportable goods than we were in
1934 when you passed the act.
Mr. M artin. I will be glad to check it, Senator.
Senator M alone. The Assistant Secretary of State was testifying
on the sugar bill extension, how much surplus we were allotting Cuba,
how much we are going to give Peru, how much to other nations.
I would have liked to see Cuba’s allocation slightly reduced in favor
of other nations.
During that cross-examination of the Assistant Secretary, I asked
him, for example, why the State Department was so adamant that we
keep such a large percentage of this surplus sugar coming from Cuba.
He said because Cuba buys our wheat. I said that is very inter­
esting. What price do we get for the wheat? Do we get our sup­
port price for it or the world price? There was some hesitation,
not much. He said they pay the world price for it. I said, when we
buy their sugar, do we pay the support price for the sugar or the
world price, where they sell the rest of their sugar and make money.
Considerable hesitation. He said we pay the support price for the
sugar. I figured right at that moment, and the record will show—that
every hundred pounds of wheat that we sent to Cuba costs our tax­
payers $1.35.
Did you ever hear of that ?

Mr. M a r t in . N o ; I did not.
Senator M a l o n e . Y o u are talking about trade in very learned terms
to me. I was in the engineering business 30 years before I came here,




1488

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

and I do understand those terms, and I know how to separate the
wheat from the chaff. W e are faking it to our taxpayers. We are
buying our foreign trade—subsidizing our exports. Secretary Ben­
son said that when we peddle our surplus grain at or below world
prices the nations which had been furnishing these foreign markets
write us off their list.
.
Now, you say, and I want to get this clear, you are for going back
on the gold standard at some uncertain future time when everything
irons out and it is all peaceful and nice in the world and there is no
danger o f a war, although there has never been such a period except
by force through the colonial system.
Mr. Maktin. W e are on a modified gold standard now, and I see
Senator M a lo n e. What is a modified gold standard? Keep that
out a minute and answer my first question. You are in favor of going
on a gold standard, not modified or anything, when the millennium
arrives; is that what you said f
M r. M a rtin . Ultimately; yes.
Senator M a lo n e. And that has nothing to do with 1 year, 2 years,
or 5, or 10, or 50 ?
Mr. M a rtin . That is right.
Senator M a lo n e. In the meantime, you are for what?
Mr M a rtin . In the meantime I think we are doing very well on
our present understanding that gold is the base of our currency. We
use it for all of our international transactions. W e purchase it freely
at $35 an ounce, and we permit it to go into jewelry and for legitimate
use by artisans through licenses by the Treasury.
Senator M a lo n e. And you pay give the foreign nations cash to
build up dollar balances. Then any dollar balance held by a nation
can without question be converted to gold by presenting them here.
You have already testified that the nationals of these nations who
hold dollar balances can with little trouble convert their dollar
balances into the nation’s dollar balances, central banks, or whatever
they' use for the purpose. Then such dollar balances submitted by
such foreign nations would be honored in gold. You could refuse the
payment in gold, I suppose, or could you ?
M r. M a rtin . Well, we could. I would hope we would not.
Senator M a lo n e. What would be the effect, in your opinion, if we
suddenly refused to honor these dollar balances in gold ?
M r. M a rtin . I think it would be most unfortunate and might pre­
cipitate a panic.
Senator M a lo n e. Well, this next panic will probably make the last
one look like a colt?
M r. M a rtin . It may very well.
Senator M a lon e. I believe that such refusal to pay in gold could
very well precipitate a panic, if we suddenly refuse to honor these
dollar balances.
Mr. M a rtin . I do not see any reason why we would not.
Senator M a lo n e. I f we did not pay in gold?
Mr. M a rtin . I f we did not.
Senator M a lo n e. That was a question?
Mr. M a rtin . In my judgment.
Senator M a lo n e. Well, your judgment is what I want. This is your
field and your judgment is important.




F IN A N C IA L

C O N D IT IO N

OF T H E

U N IT E D

STATES

1489

I think if a man becomes an authority in one field, like an engineer,
or a lawyer, he is pretty lucky.
Mr. M artin. Eight.
Senator M alone. And in private practice, you only have to do that

a couple of times and the sign comes down off the door because you
cannot pay the rent. So we learn better.
Working for the Government, very few people learn that important
lesson. They think when elected or appointed they suddenly know
everything, and it works as long as Congress picks up the check.
Now, it is a fact that pretty near any fool system works as long as
somebody picks up the check?
Mr. M artin. That is right.
Senator M alone. Who has been picking up the check interna­
tionally for the last, say, since the beginning of World War I ? What
nation has been picking up this check in exchanges and trade and
various other ways ?
Mr. M artin. I think the United States has been.
Senator M alone. That is one of the things that is the matter with
our debt; is it not?
Mr. M artin. That is one of the problems.
Senator M alone. How long do you think we can continue to do
that?
Mr. M artin. I think we have got to watch our step very carefully all
of the time.
Senator M alone. Well, are we?
Mr. M artin . I believe we are making progress.
Senator M alone. I am about to give you a little information on
that.
Mr. M artin. We would like to get it.
Senator M alone. There is a bill in here now that I do not myself
think will work. I have told the Secretary of the Interior that it will
not work.
It is the lead-zinc bill—the American mines are closed or closing.
The workingmen are on the street. You know that; do you not?
Mr. M artin. Yes.
Senator M alone. So the Secretary presented this long-range min­
eral plan that the administration talked about for 2 or 3 years. The
Secretary of the Interior presented it to the Senate Interior and In­
sular Affairs Committee, of which I am a member, the ranking Eepublican member, as a matter of fact. I listened to the Secretary saying
that they had figured out 17 cents for zinc and 14 for lead and that
when the price went below those amounts that 1, 2, or 3 cents a pound
tariff would be added—and would go off when the price went above
that amount. We have been all through that on copper. And there
is one advantage being older than anybody else—there are not very
many. But one of them is you have seen all these theorists come and
go and they do not worry you very much. They make their cycle
and disappear completely.
So when the Secretary got through, I said, does the White House
agree with this? He said they do. I said, Mr. Secretary, I am for
you. It will not work, but the reason I am for you, you are the first
man in 24 years who has broken through the “sound barrier” at the
White House and got them to admit that there must be a tariff or a
duty to make up the difference in the wages and costs of doing business,




1490

F IN A N C IA L

C O N D IT IO N

OF TH E

U N IT E D

STATES

including taxes, here and in the chief competing countries on each
product.
As long then as they have admitted principle, I am going with you,
because once you admit the principle, then it is only a question o f who
should do the job and the latitude they should have.
Would you say that?

Mr. Mabtin. I think so.
Senator M a l o n e . A ll Congress needs to do is to sit still on those
soft cushions and not extend the 1934 Trade Agreements Act when i t
expires in June o f 1958 and the American workingmen and investors
are back in business. The 1930 Tariff A ct must be amended then to
give the Tariff Commission the necessary latitude to adjust the flexible
import fee to take the profit out o f the sweatshop wages at the waters
edge.
T h e n d o y o u u n d e rs ta n d th a t i f y o u h a d n e v e r in te r fe r e d w ith th e
fle x ib le t a r if f a d ju s tm e n t in 1934, a n d h a d n o t c h e a p e n e d th e d o lla r
53 p e rc e n t, lo w e r in g to th a t e x te n t th e fix e d d u tie s o r t a r iffs y o u w o u ld
n o t n e e d th e a d ju s tm e n t n o w ?
M r . M a r t in . I follow you.

Senator M a lo n e. I believe it is nearer 65 percent that the dollar
has been cheapened when you consider the entire market range, never­
theless if you can keep people believing it is only 53 percent, that is
bad enough.
In any case what you did was to cut the tariffs a little more than half,
any fixed tariff; did you not?
M r . M a r t in . I assum e y o u a re r ig h t.
Senator M a l o n e . A ll right.
A ll we need in Washin^on—it might not be all we need but it is
the first thing we need—is a little common horse sense. And as far
as I am concerned, I have found very little of it here in the 11 years
I have been in the Senate, and I am sorry.
I w a n t to g e t y o u r id e a o f th e g o ld s ta n d a rd s tr a ig h t in th e re c o rd .
Y o u b e lie v e w e o u g h t to g o b a c k to a g o ld s ta n d a rd ju s t as soon as i t is
p o s s ib le , b u t y o u d o n o t s a y w h e th e r i t is to b e 1 o r 5 0 y e a rs ?
Mr. M a r t in . That is correct.
Senator M a l o n e . You believe 5 or 6 o f the principal nations of

Europe must be stabilized and getting back on a profitable basis before
it canlbe done ?
Mr. M a rtin . That is right.
Senator M a lo n e. O f course, that statement alone makes returning
to a sane money policy impossible for a century o f time, because these
nations are gone economically. They lived for 300 years on a colonial
slavery system. They have lost their colonies. The radio and air­
plane killed the colonial system.
We are now furnishing the money and military equipment to kill
the people in the colonial systems to subdue them. The greatest harm
done to this country was that somebody told us that there were definite
answers to all economic problems. I f we had any gumption at all,
we would know that there are no definite answers to all economic prob­
lems.
You do not think we ought to have a free market for gold ?
M r . M a r t in . Not at the present.
Senator M a lo n e. Where do you think the price of gold would go if
you had a free market tomorrow ? Just leave the law of supply and




F IN A N C IA L

C O N D IT IO N

OF TH E

U N IT E D

STATES

1491

demand alone so the Government would buy it at $35 if they brought
it in; if they did not, thev could sell or trade it to anybody.
Mr. M artin. I do not know, Senator.
Senator M alone. Would it go above or below $35 ?
Mr. M artin. It is a pure guess.
Senator M alone. In this country I am talking about now.
Mr. M artin. In this country, I think it would probably go below,

but I do not-----Senator M alone. What makes you think it would go below ?
Mr. M artin. Just guesswork.
Senator M alone. Well, I am going to give you a little more infor­

mation so that you can use it for guessing purposes.
Mr. M artin. Fine.
Senator M alone. There is only one mine in the United States of
any consequence that can profitably produce gold, and it is threatened
with a shutdown; now the mine is in North Dakota, the Homestead.
Mr. M artin. Homestead.
Senator Malone. That is right. Every other mine has closed down
unless they have a byproduct. The gold being produced now, you
will find, is a byproduct of copper or some other metal that they are
selling which helps in the price of that metal. They are not in the
gold-mining business at all except the Homestead. You have shut
mem all down through inflation. The Government made it illegal
to run a gold mine during World War II. Executive Order Lr-12,
shut down all the gold mines on the theory that the people who
are working in the mines would go to defense work. Of course, they
never saw a gold miner. You know that, do you not ?
Mr. M artin. That is right.
Senator M alone. They did not get 10 men for defense work under
the order but they shut the gold mines down, which was their objec­
tive. When I say they, I do not know exactly who they are, do you?
Mr. M artin. TOie gold miners, you mean ?
Senator M alone. N o. I know who the gold miners are. I am
acquainted with them. But who are the people who wanted us to
go off the gold standard and wanted us to quit mining gold ? Do you
mow anything about that?
Mr. M artin. N o.
Senator M alone. Y ou have no way of finding out, no sources of

information?
Mr. M a r t e n . No.
Senator M alone. Y ou do know you cannot produce gold profitably
now under the increased wages and the decreased purchasing power
of the dollar at $35, do you not ?
Mr. M artin. I have not gone into the production costs.
Senator M alone. If you are going to testify about gold, that the
gold might decrease in this country if we had a free market, you ought
to know something about the costs of mining, should you not?
M r . M a r t i n . About the production costs ? Well, I am just putting
it on the basis of supply ana demand.
v Senator M a l o n e . W e ll , th e r e is n o d e m a n d until you are using it for
fcumej^is there?
Mr. Martin. Well, there is some demand for it by artisans.

Senator M a l o n e . Y o u are selling that to them at $85?
Mr. M a r t i n . Bight




1492

F IN A N C IA L

C O N D IT IO N

OF

THE

U N IT E D

STATES

Senator M a l o n e . But you think it might go below that price ?
M r . M a r t in . I d o .
Senator M a l o n e , Why?
Mr. M artin. It is just my guess on supply and demand relations.
Senator M a l o n e , I was not talking about the world supply. I was
talking about the United States situation having a free market.
Mr. M a r t in . I do not think you can isolate gold in the United
States.
Senator M a l o n e . Y o u mean that if y o u let American citizens have
it, we might sell it to foreigners surreptitiously.
Mr. M a r t in . That is right.
Senator M a l o n e . Every other nation allows their citizens to have
it?
M r , M a r t in , Not all nations. Some do.
Senator M a l o n e . Y o u could sell it in any nation if you could o w n
it here?
Mr, M a r t in . Well, we promised a table, I think, Senator, indicat­
ing in which countries it was permitted to deal in gold. There are
many countries which do not permit it.
Senator M a l o n e . Why do you think that they could control their
nationals any more than you could control our own citizens? They
would probably deal internationally regardless. Do you think for­
eign nations could control their citizens better than we could our own ?
Mr. M arget. Well, sir, we are not speaking now— are we speaking
of a gold market, the existence of a gold market, or the convertibility
of gold, the redemption of gold ?
Senator M alone. You know exactly what we are talking about.
Let the $35 per ounce law stand so that an American may sell a n o u n c e
of gold for $35, but they could also sell it to each other for any price
offered.
Mr. M arget. You are speaking of a gold market. And your ques­
tion is why can other countries tolerate a gold market ?
Senator M alone. No, I did not ask that at all. The chairman just
testified if we had a free market here among ourselves we could not
keep our people from sending it out of the country; that is what you
saicL did you not?
Mr. M artin . That is right.
Senator M alone. I f we cannot keep our nationals from sending it
to a man in South Africa, how is South Africa going to keep a national
there from sending it to another nation ?
Mr, M arget. As a matter of fact, I do not think those export con­
trols are effective in those countries.
Senator M alone. Do you think there is quite a bit of it imported
here then ?
Mr. M arget. Well, it would have to come to the Treasury. I have
no information that it comes to private purchasers.
Senator M alone. How do you know that it could not be smuggled

into this country and never go to a bank ?
Mr. M arget. I do not know that it could not.
Senator M alone. Do you not think we could have a better system
than any other nation that you know about?
Mr. M arget. Y ou mean in terms of controls?
Senator M alone. Yes. You could control it from being shipped
internationally if any other nation could do it.




F IN A N C IA L

C O N D IT IO N

OF T H E

U N IT E D

STATES

1493

Mr. M arget. I suspect we do, as a matter of fact.
Senator M alone. Well, could not we, if we had a free market here

so that Jim can sell it to John for any price per ounce that John
wanted to pay—John might send some to his cousin in another nation—
you are afraid that you could stop the transaction. But no other
nation seems to be afraid of that procedure.
Mr. M arget. May I state what—this is not my own opinion but
what I have heard—some of my friends say their position is on the
gold market. They say this—now I am not saying whether it is
right or not, but I think this is the argument that ought to be faced—
they say if you start permitting a gold market, you have a situation
in which a gold premium would emerge, not necessarily tomorrow
but some other time. The price might go over $35 an ounce.
Senator M a l o n e . What would be the matter with that result?
Mr. M arget. Then, they say, there would then be great pressure on
the United States Government to keep that premium from rising,
that is to say to keep the dollar price going from above $35 an ounce,
so we would. have to take the next step, namely, internal gold re­
deemability.
Senator M alone. Y ou mean raise the price ?
Mr. M arget. No. They say you would have to pass from the free
gold market system, which is what we have been talking about, to
the next, what they would regard as the inevitable step, the “gold
standard” as you have been using the term, namely, internal gold
redeemability.
Senator M alone. What would be the matter with that procedure?
Mr. Marget. Well, the arguments are those which the chairman
has stated from his own standpoint as to what the risks might be.
If your question, Senator, is why does—why do the other countries
tolerate-----# Senator M alone. No. My question was not that at all. My ques­
tion is: How is it that foreign countries can control the export and
import of gold and allow their citizens to own it and buy and sell
it where we cannot, according to the testimony of the chairman?
Mr. M arget. I think we do in effect right now control the export
and import, under the existing restrictions. I do not know what de­
gree of success we would have if we had a free market.
What I was going to try to answer, Senator, was what I took to
be your question, namely, how is it that other countries take the risks
associated with permitting the existence of a free gold market.
Senator M alone. How can they do it ? How can they control the
export of gold if we cannot ?
Mr. M arget. I do not think they control the export of gold. I
do not think any Government is—;—
Senator M alone. Do you think it injures their system ?
Mr. M arget. That was the point I was going to come to.
The argument of those who do not want us to go to the gold mar­
ket, because they think it would lead to internal gold redeemability,
is this: That it does not make much difference, they say, whether a
small country, even like Switzerland, does or does not see a premium
develop in a free market on its currency, but the suggestion is that it
does make a great deal of difference to the United States; and that
therefore, the United States would be forced to take an action with




1494

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

respect to a free market which these small countries are not neces­
sarily forced to take.
I am merely stating the argument, Senator.
Senator M a l o n e . Y o u do not believe it yourself ?
Mr. M a r g o t . Well, it is a question o f judgment, honestly.

Senator M a l o n e . What is your judgment, as long
in g to you?
M r . M a r g e t . Honestly, I do not know the answer.

as we are talk­

Senator Malone, Well, I did not think you did.
Now, all these other little nations are running wild in manipulating

the price o f their currencyj are they not? They fix a price on their
moneys in Bolivia; three times its value, for example. When I was
there, a little nation, the Indians sitting out on the mesas herding
a few sheep or 6 or 7 llamas—they have nothing else in the world,
nothing visible to live upon. So the government manipulates its
currency value in terms o f the dollar for trade advantage.
When you got a dollar, if you are a trader there, the rule o f the
treasury or central bank was that you turned it in within 30 or 60
days, under penalty, at the price set by that central bank.
M r . M a r g e t . Yes.
Senator M a l o n e . Do you know what it was in 1954 when I was
there? Five hundred bolivianos is what you got for your little
dollar. You know what the market price on the street for a dollar
was ? Seventeen hundred bolivianos.
So they stole two-thirds of it in the first goaround, so profitable trade
with them was out o f the question.
Mr. M a r g e t . Eventually, it went up to 14,000, Senator.
Senator M a l o n e . A ll right. You know exactly what I am talking
about, and that is where the dollar is going one o f these days if we
just keep a managed currency long enough.
M r . M a r t in . We are trying to manage it so it will not go that far.
Senator M a l o n e . I know that you will pass out o f the picture one of
these days, and be gone and forgotten, just like all Senators and
Cabinet officials.
But while we are temporarily in these positions, my opinion is it
is necessary to leave a factual record.
Then as long as these people refuse to do anything but take ad­
vantage by fixing a fictitious price on their currency in terms o f the
dollar for trade advantages, you do not think we can go gack on the
gold standard?
M r . M a r t in . That is correct.
Senator M a l o n e . England manipulates the price o f the pound.
Nobody thinks it is worth $2.80 for a pound. It was only worth $2.60
in the Hong Kong free market when they held it at $4.03.
So as long as they do that, and they are going to do it forever until
we stop honoring or tolerating it, you just do not think we can return
to an honest currency in this country ?
Mr. M a r t in . I think we are making a move toward honest cur­
rency by managing. Now, we may abuse this management of the
currency, as you rightly say, but I think we are managing our affairs
pretty well.
Senator M a l o n e . I think you are doing a marvelous job under the
conditions. But no human being can manage it except with continued
inflation. You do not think you can stop inflation, do you ?




F IN A N C IA L

C O N D IT IO N

OP T H E

U N IT E D

STATES

1495

Mr. M artin. I do.
Senator M alone. When do you think it is going to be stopped?
Mr. M artin. I think before too long.
Senator M alone. Would you set a date ?
Mr. M arttn. N o ; I cannot set a date.
Senator M alone. Is it 2 years or 5 or 10 ?
Mr. M artin. I think we have got to stop it, and I think we will.
Senator M alone. How are you going to stop it ?
Mr. M artin. I think you are going to stop it by refusing to print
money, which is where the root of it comes from.
Senator M alone. Of course, you and I know that, but you have not

refused.
Mr. M artin. We have been doing the best we can.
Senator M alone. Well, I will get to that pretty soon.

I am going to ask you one of the $64,000 questions. The Secretary
was very careful to keep out of your business. I did not think he
should have, because I thought he should understand it, and I think
he did, but that was his judgment, and I bowed to it, because I like
him and I did not want to have any controversy with him.
He was very frank, eventually, that he set the interest on Govern­
ment bonds, that it was his responsibility. Of course, he made quite
a speech about it. Said he consulted a lot of people.
But in the last analysis, it was his sole judgment as to what interest
they should carry so that they would sell. Is that true ?
M r . M a r t in . T h a t is c o rre c t.
re s p o n s ib ility to set th e coupon.

W e co n s u lt w ith h im , b u t i t is h is

Senator M alone. After giving him all the best advice you can give
him, and he has talked to everybody else he cares to, eventually he
puts the finger on it, whether it is 5 or 6 percent or 2 percent, or what­
ever it is, or 10 ?
Mr. M artin. Unless he decides to do it at auction, that is, permit
the market to set it without setting a coupon rate.
; Senator M alone. Does he often do that?
Mr. M artin. He has done it increasingly in the last year or so, be­
cause it has been very difficult-----Senator M alone. What percentage of the bonds, of the $280 bil­

lion, or thereabouts, have been sola under those conditions?
Mr. M artin. Well, I would—about 10 percent.
Senator M alone. There you are. You see, it does not amount to
anything.
Ninety percent of the time, he does fix the interest on issues coming
up, after getting whatever advice he wants to get. I f he did not want
any advice, he still has authority to fix it, has he not ?
Mr. M artin. He fixes it by making a judgment on what the market
is.
Senator M alone. And he does not have to take anybody’s advice,
does he?
M r . M a r t in . N o; he does not.
Senator M alone. I will come to you. He finally did tell me that
you with your Board (seven men) determined how much money there
« to be in circulation. Is that true?

Mr. M a jb tin . The money supply is in our— one of our preroga­
is
tives.




1496

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Senator M a l o n e . Well, that “our” is used courteously, but it is
really in your hands, is it not*
Mr. M a b t in . That is right. We have the responsibility.
Senator M alone . Y ou are the Chairman?
Mr. M a b t in . Well, the Chairman alone cannot do it. I am just 1
man on a Board of 7.
Senator M a l o n e . H o w many Board members?
M r . M a r t in . There are 7 Board members, and each of the—there
are 12 Reserve banks and 24 branches.
Senator M a l o n e . Would you put a list of those banks in the record ?
M r . M a r t in . I w ill. I w ill put a list of the banks and the directors
of the banks.
(The information referred to is as follows:)
DIRECTORS OF FEDERAL RESERVE BANKS AND THEIR BRANCHES
[A majority of the directors of a branch are appointed by the board of
directors of the Federal Reserve bank and the remaining directors are
appointed by the Board. Directors appointed by the Board are indicated
by an asterisk]
F

ederal

R

eserve

B

an k

of

B

o sto n

Class A :
Harold I, Chandler, president, The Keene National Bank, Keene, N. H.
Oliver B. Ellsworth, president, Riverside Trust Co., Hartford, Conn.
William D. Ireland, president, Second Bank-State Street Trust Co., Boston,
Mass.
Class B :
Frederick S. Blackall, Jr., president and treasurer, the Taft-Peirce Manu­
facturing Co., Woonsocket, R. I.
Harry E. Umphrey, president, Aroostook Potato Growers, Inc., Presque Isle,
Maine.
Milton P. Higgins, president, Norton Co., Worcester, Mass.
Class C :
Robert C. Sprague (chairman), chairman and treasurer, Sprague Electric
Co., North Adams, Mass.
Harvey P. Hood, president, H. P. Hood & Sons, Inc., Boston, Mass.
James R. Killian, Jr., president (deputy chairman), Massachusetts Insti­
tute of Technology, Cambridge, Mass.
F

ederal

R

eserve

B

an k

of

N

ew

Y

ork

Class A :
Ferd I. Collins, president and trust officer, Bound Brook Trust Co., Bound
Brook, N. J.
Howard C. Sheperd, chairman of the board, The First National City Bank
of New York, New York, N. Y.
Charles W. Bitzer, president, City Trust Co., Bridgeport, Conn.
Class B :
Augustus C. Long, chairman, The Texas Co., New York, N. Y.
Clarence Francis, director, General Foods Corp., New York, N. Y.
Lansing P. Shield, president, the Grand Union Co., East Paterson, N. J.
Class C:
Forrest F. Hill, vice president (deputy chairman), the Ford Foundation,
New York, N. Y.
Franz Schneider, consultant to Newmont Mining Corp., New York, N. Y.
John E. Bierwirth, president (chairman), National Distillers & Chemical
Corp., New York, N. Y.
Buffalo branch:
Vernon Alexander, president, National Bank of Geneva, Geneva, N. Y.
Leland B. Bryan, president, First National Bank & Trust Co., Corning, N. Y.
Charles H. Diefendorf, chairman of the executive committee, the Marine
Trust Company of Western New York, Buffalo, N. Y.
♦Raymond E. Olson, president, Taylor Instrument Cos., Rochester, N. Y.
♦Ralph F. Peo, chairman and president, Houdaille Industries, Inc., Buffalo,
N. Y.



F IN A N C IA L

C O N D IT IO N

OF T H E

U N IT E D

STATES

1497

John W. Remington, president, Lincoln Rochester Trust Co., Rochester, N. Y.
♦Clayton G. White (dairy farmer) (chairman), Stow, N. Y.
F ede r a l R eserve B a n k of P h il a d e l p h i a

Class A :
W. Elbridge Brown, president and trust officer, Clearfield Trust Co.* Clear­
field, Pa.
Lindley S. Hurff, president and trust officer, the First National Bank of
Milton, Milton, Pa.
Geoffrey S. Smith, president, Girard Trust Corn Exchange Bank, Philadel­
phia, Pa.
Class B :
Bayard L. England, president, Atlantic City Electric Co., Atlantic City,
N. J.
Charles E. Oakes, president, Pennsylvania Power & Light Co., Allentown, Pa.
R. Russell Pippin, treasurer, E. I. du Pont de Nemours & Co., Inc., Wilming­
ton, Del.
Class C :
William J. Meinel (chairman), chairman of the board, Heintz Manufacturing
Co., Philadelphia, Pa.
Henderson Supplee, Jr., president (deputy chairman), the Atlantic Refining
Co., Philadelphia, Pa.
Lester V. Chandler, professor of economics, Princeton University, Princeton,
N.J.
F ed e r a l R e s erve B a n s : of C le v e l a n d

Class A :
Edison Hobstetter, president and chairman of the board, the Pomeroy Na­
tional Bank, Pomeroy, Ohio.
King E. Fauver, director, the Savings Deposit Bank & Trust Co., Elyria,
Ohio.
John A. Byerly, president, Fidelity Trust Co., Pittsburgh, Pa.
Class B :
Joseph B. Hall, president, the Kroger Co., Cincinnati, Ohio.
Charles Z. Hardwick, executive vice president, the Ohio Oil Co., Findlay,
Ohio.
George P. MacNichol, Jr., president, Libbey-Owens-Ford Glass Co., Toledo,
Ohio.
Class C :
Frank J. Welch, dean, College of Agriculture and Home Economics, Univer­
sity of Kentucky, Lexington, Ky.
Arthur B. Van Buskirk (chairman), vice president and governor, T. Mellon
& Sons, Pittsburgh, Pa.
Joseph H. Thompson, president (deputy chairman), the M. A. Hanna Co.,
Cleveland, Ohio.
Cincinnati branch:
Roger Drackett, president, the Drackett Co., Cincinnati, Ohio.
Bernard H. Geyer, president, the Second National Bank of Hamilton, Hamil­
ton, Ohio.
♦Anthony Haswell, president (chairman), the Dayton Malleable Iron Co.,
Dayton, Ohio.
♦W. Bay Irvine, president, Marietta College, Marietta, Ohio.
♦Ivan Jett (farmer), Georgetown National Bank Building, Georgetown, Ky.
Franklin A. McCracken, executive vice president and trust officer, the New­
port National Bank, Newport, Ky.
William A. Mitchell, president, the Central Trust Co., Cincinnati, Ohio*
Pittsburgh branch:
Frank C. Irvine, president, First National Bank in Tarentum, Tarentum, Pa.
John H. Lucas, chairman of the board, Peoples First National Bank S Trust
c
Co., Pittsburgh, Pa.
♦Douglas M. Moorhead (fanner), North East, Pa.
♦Ben Moreell, chairman of the board, Jones & Laughlin Steel Corp., Pitts­
burgh, Pa.
Sumner E. Nichols, president, Security-Peoples Trust Co., Brie, Pa.
♦John C. Warner, president (chairman), Carnegie Institute of Technology,
Pittsburgh, Pa.
Irving W. Wilson, president, Aluminum Company of America, Pittsburgh, Pa*




1498

F IN A N C IA L

C O N D IT IO N

OF

TH E

F e d e ra l R eserve B a n k

U N IT E D

STATSB

07 R i c h m o n d

Class A :

Daniel W, Bell, president and chairman of the board, American Security &
Trust Co., Washington, D. C,
Joseph E. Healy, president, the Citizens National Bank of Hampton, Hamp­
ton, Va,
Robert Gage, president, the Commercial Bank, Chester, S. C.
Class B :
Robert O. Huffman, president, Drexel Furniture Co., Drexel, N. C.
L. Vinton Hershey, president, Hagerstown Shoe Co., Hagerstown, Md,
W, A, L. Sibley, vice president and treasurer, Monarch Mills, Union, S. C.
Class C :

D. W, Colvard, dean of agriculture, North Carolina State College of Agri­
culture and Engineering, Raleigh, N. C.
John B. Woodward, Jr. (chairman), chairman of the board, Newport News
Shipbuilding & Dry Dock Co., Newport News, Va,
Alonzo G. Decker, Jr. (deputy chairman), executive vice president, the
Black Decker Manufacturing Co., Towson, Md.
Baltimore branch:
♦Gordon M. Cairns, dean of agriculture, University of Maryland, College
Park, Md.
♦William Purnell Hall (chairman), executive vice president, Maryland Ship­
building & Drydock Co., Inc., Baltimore, Md.
James M. McElroy, executive vice president, First National Bank, Baltimore,
Md.
Charles A. Piper, president, the Liberty Trust Co., Cumberland, Md,
John W. Stout, president, the Parkersburg National Bank, Parkersburg,
W. Va.
Stanley B. Trott, president, Maryland Trust Co., Baltimore, Md,
♦Clarence R. Zarfoss, vice president, Western Maryland Railway Co., Balti­
more, Md.
Charlotte branch:
♦William H, Grier (chairman), executive vice president, Rock Hill Printing
& Finishing Co., Rock Hill, S. C.
Charles D. Parker, president, First National Bank & Trust Co., Asheville,
N, C.
Ernest Patton, chairman of the board, the Peoples National Bank of Green­
ville, Greenville, S. C.
I. W. Stewart, president, the Commercial National Bank, Charlotte, N. C.
♦Paul T. Taylor, president, Taylor Warehouse Co., Winston-Salem, N. C,
G, G. Watts, president, the Merchants & Planters National Bank, Gaffney,
S. C.
♦T. Henry Wilson, president and treasurer, Henredon Furniture Industries,
Inc., Morganton, N. C.

&

F ed eral R eserve B a n k of A t l a n t a

Class A :
W. C. Bowman, chairman of the board, the First National Bank of Mont­
gomery, Montgomery, Ala.
William C. Carter, chairman and president, Gulf National Bank, Gulfport,
Miss.
Roland L. Adams, president, Bank of York, York, Ala.
Class B :
Pollard Turman, president, J. M. Tull Metal & Supply Co., Inc., Atlanta, Ga.
Donald Comer, chairman of the board, Avondale Mills, Birmingham, Ala,
Joseph T. Lykes, chairman and director, Lykes Bros. Steamship Co., Inc.,
Tampa, Fla.
Class C :
Henry G. Chalkley, Jr., president, the Sweet Lake Land & Oil Co., Lake
Charles, La.
Walter M. Mitchell, vice president (chairman), the Draper Corp., Atlanta,
Ga.
Harllee Branch, Jr., president (deputy chairman), the Southern Co., At­
lanta, Ga.



F IN A N C IA L

C O N D IT IO N

OF T H E

U N IT E D

STATES

1499

Birmingham branch:
♦Edwin C. Bottcher (farmer) (chairman), Post Office Drawer 385, Cullman,
Ala.
Robert M. Cleckler, president, First National Bank of Childersburg, Childersburg, Ala.
John R. Downing, executive vice president, Citizens-Farmers & Merchants
Bank, Brewton, Ala.
E. W. McLeod, president, the Morgan County National Bank, Decatur, Ala.
Malcolm A. Smith, first vice president, Birmingham Trust National Bank,
Birmingham, Ala.
♦John E. Urquhart, president, Woodward Iron Co., Woodward, Ala.
♦Adolph Weil, Sr., president, Weil Bros.-Cotton, Inc., Montgomery, Ala.
Jacksonville branch:
Linton E. Allen, chairman, the First National Bank at Orlando, Orlando, Fla*
W. E. Ellis, chairman and president, the Commercial Bank & Trust Co.,
Ocala, Fla.
James G. Garner, president and chairman, Little River Bank & Trust Co.,
Miami, Fla.
James L. Niblack, president, the First National Bank of Lake City, Lake City,
Fla.
♦J. Wayne Reitz, president (chairman), University of Florida, Gainesville,
Fla.
♦Harry M. Smith, president and manager, Winter Garden Ornamental
Nursery, Inc., Winter Garden, Fla.
♦McGregor Smith, chairman of the board and director, Florida Power &
Light Co., Miami, Fla.
Nashville branch:
Jo H. Anderson, president, Park National Bank of Knoxville, Knoxville,
Tenn.
Stewart Campbell, president, the Harpeth National Bank of Franklin,
Franklin, Tenn.
J. R. Kellam, Jr., executive vice president, Commerce Union Bank, Nash­
ville, Tenn.
♦Ernest J. Moench, president, Tennessee Tufting Co., Nashville, Tenn.
♦A. Carter Myers, treasurer (chairman), Knoxville Fertilizer Co., Knox­
ville, Tenn.
♦Frank B. Ward, dean, College of Business Administration, University of
Tennessee, Knoxville, Tenn.
C. L. Wilson, chairman and president, the Cleveland National Bank, Cleve­
land, Tenn.
New Orleans branch:
William J. Fischer, president, Progressive Bank Trust Co., New Orleans,
La.
♦Joel L. Fletcher, Jr., president, Southwestern Louisiana Institute, Lafay­
ette, La.
J. Spencer Jones, president, the Citizens National Bank in Hammond, Ham­
mond, La.
♦G.. H King, Jr., executive vice president, King Lumber Industries, Canton,
Miss.
D. U. Maddox, president, the Commercial National Bank A Trust Company
of Laurel, Laurel, Miss.
H. A. Pharr, president, the First National Bank of Mobile, Mobile, Ala.
♦E. E. Wild (rice grower) (chairman), Midland, La.

&

z

F e d e r a l R e s e r v e B a it k

of

C h ic a g o

Class A
Waiter J. Cummings, Chairman, Continental Illinois National Bank & Trust
Co. of Chicago, Chicago, 1 1
1.
Nugent R. Oberwortmann, president, the North Shore National Bank of
Chicago, Chicago, 1 1
1.
Vivian W. Johnson, president, First National Bank, Cedar Falls, Iowa
Class B :

Walter E. Hawkinson, vice president in charge of finance, and secretary,
Allis-Chalmers Manufacturing Co., Milwaukee, Wis.
William J. Grede, president, Grede Foundries, Inc., Milwaukee, Wis*
William A. Hanley, director, Eli Lilly & Co., Indianapolis, Ind.
9868S— 67— p t. S-------19




1500

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Class C :
Bert R. Prall (chairman), 558 Ridge Road, Winnetka, 111.
Robert P. Briggs, executive vice president, Consumers Power Co., Jackson,
Mich.
J. Stuart Russell, farm editor (deputy chairman), the Des Moines Register
& Tribune, Des Moines, Iowa
Detroit branch:
♦John A. Hannah, president (chairman), Michigan State University, East
Lansing, Mich.
Ira A. Moore, chairman of the board, Peoples National Bank of Grand Rapids,
Grand Rapids, Mich.
Howard P. Parshall, president, Bank of the Commonwealth, Detroit, Mich.
♦C. V. Patterson, executive vice president, the Upjohn Co., Kalamazoo, Mich.
Raymond T. Perring, president, the Detroit Bank & Trust Co., Detroit, Mich.
Ernest W. Potter, president, Citizens Commercial & Savings Bank, Flint,
Mich.
*J. Thomas Smith, president, Detroit Harvester Co., Detroit, Mich.
F ederal R eserve B a

n k of

St. L

o u is

Class A :
Phil E. Chappell, president, Planters Bank & Trust Co., Hopkinsville, Ky.
J. E. Etherton, president, the Carbondale National Bank, Carbondale, 111.
Kenton R. Cravens, president, Mercantile Trust Co., St. Louis, Mo.
Class B :
Leo J. Wieck, vice president and treasurer, the May Department Stores Co.,
St Louis, Mo.
S. J. Beauchamp, Jr., president, Terminal Warehouse Co., Little Rock, Ark.
Harold O, McCutchan, executive vice president, Mead Johnson & Co., Evans­
ville, Ind.
Class C :
Joseph H. Moore (farmer) (deputy chairman), Charleston, Mo.
J. H. Longwell, dean, College of Agriculture, University of Missouri, Colum­
bia, Mo.
Pierre B, McBride, president (chairman), Porcelain Metals Corp., Louisville,
Ky.
Little Rock branch:
Donald Barger, president, Peoples Exchange Bank, Russellville, Ark.
♦T, Winfred Bell, president, Bush-Caldwell Co., Little Rock, Ark.
E. C. Benton, president, Fordyce Bank & Trust Co., Fordyce, Ark.
H. C. McKinney, Jr., president, the First National Bank of El Dorado, El
Dorado, Ark.
♦Shuford R. Nichols (farmer, ginner, and cotton broker), Des Arc, Ark.
J. V, Satterfield, Jr., president, the First National Bank in Little Rock,
Little Rock, Ark.
♦A. Howard Stebbins, Jr. (chairman), Post Office Box 1413, Little Rock, Ark.
Louisville branch:
♦David F. Cocks (chairman), vice president and treasurer, Standard Oil Co.
(Kentucky), Louisville, Ky,
♦Philip Davidson, president, University of Louisville, Louisville, Ky.
Magnus J. Kreisle, president, the Tell City National Bank, Tell City, Ind.
W. .Scott McIntosh, president, State Bank of Hardinsburg, Hardinsburg, Ind.
M. C. Minor, president, the Farmers National Bank of Danville, Danville, Ky.
♦J. D. Monin, Jr. (farmer), Oakland, Ky.
Merle E. Robertson, chairman of the board and president, Liberty National
Bank & Trust Company of Louisville, Louisville, Ky.
Memphis branch:
♦Henry Banks (farmer), Clarkedale, Ark.
J. H. Harris, president, the First National Bank of Wynne, Wynne, Ark.
♦A, E. Hohenberg, president (chairman), Hohenberg Bros., Memphis, Tenn.
John A. McCall, president, the First National Bank of Lexington, Lexington,
Tenn.
♦John D. Williams, chancellor, the University of Mississippi, University,
Miss.
John K, Wilson, president, the First National Bank of West Point, West
Point, Miss.
(Vacancy.)



F IN A N C IA L

C O N D IT IO N

OF T H E

U N IT E D

STATES

1501

F e d eral R eserve B a n k of M in n e a p o l is

Class A :

Harold C. Refling, cashier, First National Bank in Bottineau, Bottineau,
N. Dak.
Joseph F. Ringland, president, Northwestern National Bank of Minneapolis,
Minneapolis, Minn.
Harold N. Thomson, vice president, Farmers
Merchants Bank, Presho,
S. Dak.
Class B :
Ray C. Lange, president, Chippewa Canning Co., Inc., Chippewa Falls, Wis.
Thomas G. Harrison, president, Super Valu Stores, Inc., Hopkins, Minn.
John E. Corette, president and general manager, Montana Power Co., Butte,
Mont.
Class C :
O. B. Jesness, head (deputy chairman), department of agricultural eco­
nomics, University of Minnesota Institute of Agriculture, St. Paul, Minn.
F. Albee Flodin, president and general manager, Lake Shore, Inc., Iron Moun­
tain, Mich.
Leslie N. Perrin, director (chairman), General Mills, Inc., Minneapolis, Min..
Helena branch:
A. W. Heidel, president, Powder River County Bank, Broadus, Mont
J. Willard Johnson, financial vice president and treasurer, Western Life
Insurance Co., Helena, Mont.
George N. Lund, chairman of the board and president, The First National
Bank of Reserve, Reserve, Mont.
♦Carl McFarland, president (chairman), Montana State Univeirslty, Mis­
soula, Mont.
♦George R. Milburn, manager, N Bar Ranch, Grass Range, Mont.

&

F e d eral R eserve B a n k of K a n s a s C i t y

Class A :

Harold Kountze, chairman of the board, the Colorado National Bank of
Denver, Denver, Colo.
W. S. Kennedy, president and chairman of the board, the First National
Bank of Junction City, Junction City, Kans.
W. L. Bunten, president, Goodland State Bank, Goodland, Kans.
Class B:
Max A. Miller (livestock rancher), Omaha, Nebr.
E. M. Dodds, chairman of the board, United States Cold Storage Corp.,
Kansas City, Mo.
K. S. Adams, chairman of the board, Phillips Petroleum Co., Bartlesville,
Okla.
Class C :

Joe W. Seacrest, president (deputy chairman), State Journal Co., Lincoln,
Nebr.
Raymond W. Hall, (chairman), vice president and director, Hallmark
Cards, Inc., Kansas City, Mo.
Oliver S. Willham, president, Oklahoma State University, Stillwater, Okla.
Denver branch:
Merriam B. Berger, vice president, the Colorado National Bank of Denver,
Denver, Colo.
Arthur Johnson, president, First National Bank in Raton, Raton, N. Mex.
Ralph S. Newcomer, executive vice president, First National Bank in Boulder,
Boulder, Colo.
♦Aksel Nielsen, president (chairman), the Title Guaranty Co., Denver, Colo.
♦Ray Reynolds, (cattle feeder and farmer), Longmont, Colo.
Oklahoma City branch:
♦Davis D. Bovaird, president (chairman), the Bovaird Supply Co., Tulsa,
Okla.
George R. Gear, president, the City National Bank of Guymon, Guymon,
Okla.
♦Phil H. Lowery (owner), Lowery Hereford Ranch, Loco, Okla.
R. Otis McClintock, chairman of the board, the First National Bank Trust
Co. of Tulsa, Tulsa, Okla.
C. L. Priddy, president, the National Bank of McAlester, McAlester, Okla.




&

1502

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATU S

Omaha branch:
C. Wheaton Battey, president, the Continental National Bank of Lincoln,
Lincoln, Nebr.
George J, Forbes (ranching and investments), Laramie, Wyo.
♦Manville Kendrick (rancher), Sheridan, Wyo.
William N. Mitten, chairman of the board, First National Bank of Fremont,
Fremont, Nebr.
*James L. Paxton, Jr., president (chairman), Paxton-Mitchell Co., Omaha,
Nebr.
F ederal R eserve B a n k of D a l l a s

Glass A :
Sam D. Young, president, El Paso National Bank, El Paso, Tex.
J. Edd McLaughlin, president, Security State Bank Trust Co., Balls, Tex.
John M. Griffith, president, the City National Bank of Taylor, Taylor, Tex.
Class B ;
D. A. Hulcy, chairman of the board, Lone Star Gas Co., Dallas, Tex.
J. B. Thomas, president and general manager and director, Texas Electric
Service Co., Fort Worth, Tex.
John R. Alford (industrialist and farmer), Henderson, Tex.
Class C:
Robert J, Smith, president (chairman), Slick Airways, Inc., Dallas, Tex.
Hal Bogle (rancher and feeder) (deputy chairman), Dexter, N. Mex.
(Vacancy).
El Paso branch:
F. W. Barton, president, the Marfa National Bank, Marfa, Tex.
John P. Butler, president, the First National Bank of Midland, Midland, Tex.
Floyd Childress, vice president, the First National Bank of Roswell, Ros­
well, N. Mex,
♦James A. Dick, president (chairman), James A. Dick Investment Co., El
Paso, Tex.
Thomas C. Patterson, vice president, El Paso National Bank, El Paso, Tex.
♦D. F. Stahmann, president, Stahmann Farms, Inc., Las Cruces, N. Mex.
♦E. J, Workman, president and director of research and development division,
New Mexico Institute of Mining and Technology, Socorro, N. Mex.
Houston branch:
I. F. Betts, president, the American National Bank of Beaumont, Beaumont,
Tex.
L. R. Bryan, Jr., vice chairman of the board and chairman of the executive
committee, Bank of the Southwest National Association, Houston, Tex.
W. B. Callan, president, the Victoria National Bank, Victoria, Tex.
♦A. E. Cudlipp, vice president and director, Lufkin Foundry & Machine
Corp., Lufkin, Tex.
♦John C. Flanagan, (chairman), vice president and general manager, Texas
distribution division, United Gas Corp., Houston, Tex.
S. Marcus Greer, vice chairman of the board, First City National Bank of
Houston, Houston, Tex.
♦Tyros R. Timm, head, department of agricultural economics and sociology,
Agriculture and Mechanical College of Texas, College Station, Tex.
♦Clarence E. Ayres, professor of economics, the University of Texas, Austin,
Tex.
J. W. Beretta, president, First National Bank of San Antonio, San Antonio,
Tex.
E. C. Breedlove, president, the First National Bank of Harlingen, Harlin­
gen, Tex.
Burton Dunn, chairman of the executive committee, Corpus Christi State
National Bank, Corpus Christi, Tex.
V. S. Marett, president, the Citizens National Bank of Gonzales, Gonzales,
Tex.
♦Alex R. Thomas (chairman), 1425 Wiltshire, San Antonio, Tex.
♦Harold Vagtborg, president, Southwest Research Institute, San Antonio,
Tex.

&

F e d e r a l R eserve B a n k o f S a n F r a n c is c o

Class A :

Carroll F. Byrd, president, the First National Bank of Willows, Willows,
Calif.
John A. Schoonover, president, the Idaho First National Bank, Boise, Idaho.
M. Vilas Hubbard, president and chairman of the board, Citizens Commercial
 Trust & Savings Bank of Pasadena, Pasadena, Calif.


F IN A N C IA L

C O N D IT IO N

OF T H E

TO TTED

STATES

1503

G la ss B :

Reese H. Taylor, chairman of the board, Union Oil Company of California,
Los Angeles, Calif.
Walter S. Johnson, chairman of the board, American Forest Products Corp.,
San Francisco, Calif.
N. Loyall McLaren, partner, Haskins & Sells, San Francisco, Calif.
Class C :
Philip I Welk, president, Preston-Shaffer Milling Co., Walla Walla, Wash.
.
Y. Frank Freeman, vice president (deputy chairman), Paramount Pictures
Corp., Hollywood, Calif.
A. H. Brawner (chairman), chairman of the board, W. P. Fuller & Co., San
Francisco, Calif.
Los Angeles branch
Anderson Borthwick, president, the First National Trust & Savings Bank of
San Diego, San Diego, Calif.
♦Leonard K. Firestone, president, Firestone Tire & Rubber Company of Cali­
fornia, Los Angeles, Calif.
Joe D. Paxton, chairman of the board, County National Bank & Trust Com*
pany of Santa Barbara, Santa Barbara, Calif.
James E. Shelton, chairman, Security-First National Bank of Los Angeles,
Los Angeles, Calif.
(Vacancy.)
Portland branch
♦Warren W. Braley, partner (chairman), Braley & Graham Buick, Portland,
Oreg.
J. H. McNally, president, the First National Bank of Bonners Ferry, Bon­
ners Ferry, Idaho.
John B. Rogers, president, the First National Bank of Baker, Baker, Oreg.
E. C. Sammons, president, the United States National Bank of Portland,
Portland, Oreg.
♦William H. Steiwer, Sr. (livestock and farming), Fossil, Oreg.
Salt Lake City branch:
Harry Eaton, president, Twin Falls, Bank & Trust Co., Twin Falls, Idaho.
George S. Eccles, president, First Security Bank of Utah, National Associa­
tion, Salt Lake City, Utah.
Russell S. Hanson, executive vice president, the First National Bank of
Logan, Logan, Utah.
♦Joseph Rosenblatt, president (chairman), the Eimco Corp., Salt Lake City,
Utah.
♦George W. Watkins, president, Snake River Equipment Co., Idaho Falls,
Idaho.
Seattle branch:
James Brennan, president, First National Bank in Spokane, Spokane, Wash.
♦Lyman J. Bunting, president, Rainier Fruit Co., Yakima, Wash.
Charles F. Frankland, president, the Pacific National Bank of Seattle,
Seattle, Wash.
S. B. Lafromboise, president, the First National Bank of Enumclaw, Enumclaw, Wash.
♦D. K. MacDonald (chairman), chairman of the board, D. K. MacDonald
& Co., Inc., Seattle, Wash.

Senator M a lo n e . D o those banks have a certain capitalization in
each area ?
Mr. M a r t i n . Each of the banks is formed as a corporation, and
all national banks have to belong to the System, and State member
banks can belong to the System, and the capital is made up of 6 per­
cent ; they purchase stock in the bank— 6 percent of their capital and
surplus.
Senator M a lo n e . Six percent of their own capital is the stock pur­
chased from you?
Mr. M a r tin . Purchased by the member banks in the Reserve banks.
Senator M a lo n e . In other words, the 12th district comprises what
&rea, is that the Far West?




1504

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

M r. M artin. That is right.
Senator M a lo n e . W hat States are included in it ?
M r . M a r t i n . W ashington, Oregon, California, Nevada, Idaho,
Utah— I can put the map in the record.
(The material referred to follow s:)




F IN A N C IA L

C O N D IT IO N

OF TH E

U N IT E D

STATES

1505

Number of member banka and capital of Federal Reserve banks, June S , 1957
O
Paid-In
capital of
Federal
Reserve
bank »

Federal Reserve district

Boston______
New York_
_
Philadelphia..
Cleveland___
Richmond___
Atlanta..........
Chicago.........
St. Louis____
MinneapolisKansas City—
Dallas______
San Francisco.

|17t 120,000
95.177.000
21.066.000
31.985.000
15.322.000
16.122.000
45.540.000
11.372.000
7,310,000
13.525.000
18,711000
39.443.000

Total...

332,696,000

1 Every member bank is required to subscribe to the Federal Reserve bank capital In an amount equal to
6 percent of its own capital and surplus and to pay in of its subscription; the balance is subject to call by
the Board of Governors of the Federal Reserve System.

Senator
here.
M r. M

M

alone

a r t in

.

I hope you will make that a part of the record

. V e r y g la d to .

Senator M a l o n e . T o be accepted and printed, published, along
with No. 2 volume or part 2; and also together with the names of the
banks, their location, their boards of directors, and what percentage
of stock they have purchased, what they own currently.
Mr. M artin . Eight.
Senator M a l o n e . It might be well if you could give a 1 0 - y e a r
period of variation; or is there any variation ?
Mr. M a r t i n . There is not a great deal of variation. It is largely
a growth factor.
(The information referred to is as follows:)
Paid-in capital of the 12 Federal Reserve banks combined on June SO 1948-51
,
[In thousands of dollars]
Paid-in
capital of
Federal
Reserve
banks 1

June 30—

1948
1949
1950
1951
1952

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

198,540
205,133
219,130
231,308
245,187

June 30—

1953.......... — ................— - ..............
1954-.................... ...... .............. .........
1955.....................................................
1956....................................................
1957............................ .......................

Pald>ln
capital of
Federal
Reserve
banks1
259,536
272,316
295,179
315,742
332,696

1 Every member bank is required to subscribe to the Federal Reserve bank capital In an amount equal
to 6 percent of its own capital and surplus and to pay in of its subscription; the balance Is subject to call
by the Board of Governors of the Federal Reserve System.




1506

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Senator M a lo n e . Let me ask you— I did ask you under another sub­
ject when we digressed momentarily— how much money is in circula­
tion at this point? Let us just include it here.
M r. M a k t in . Twenty-six and a half billion dollars.
M r. N o te s . That is Federal Reserves notes only. Thirty is closer
to the total circulation.
M r. M a k t in . Money in circulation consists of Federal Reserve
notes and coin and------Senator M a lo n e . That is silver coin?
M r . M a k t in . Yes.
Senator M a lo n e . Dollars and smaller coins?
M r . M a r t i n . Y e s; that is right. And the Treasury $1 and $2 bills,
which are Treasury currency.
I think the relation is about 85 percent of the currency in circula­
tion are Federal Reserve notes; about 9 percent, roughly, in 1- and
2-dollar bills, and about 6 percent in coin.
Senator M a lo n e . Could you not prepare a table with just a short
statement, and give us the detail on all of it? Because you are the
final authority.
M r. M a r t i n . I will be very glad to give you that.
Senator M a lo n e . It is not necessary we have it exactly right here,
if you will submit the table.
M r . M a r t i n . Right.
(The information referred to is as follow s:)




Circulation statem of United States money, June S , 1957
ent
O
Money held in the Treasury

Total amount

Total

Amount held
Reserve
as security
against
Held tor Federal
united
against gold
and silver
States
Reserve banks
certificates
notes (and
and agents
(and Treasury Treasury
notes of 1800)
notes of
1890)

All other
money

Total

Held by
Federal
Reserve
banks and

In circulation1

Amount

Per
cap­
ita*

55,363,063,257

« (19,129,100,255) •602,378,554 135,475,545,017 4,393,632,144 31,081,912.873 181.52

STATES

1507




24,388,565,215 156,039,431

UNTTED

Footnote* at end of table.

25t 146,983,200

O THE
P

Total June 30,1957___

CONDITION

Gold..................................... >$22,622,942,692 $22,622,942,692 $21,977,196, m $156,039,431
$489, 706,277
Gold certificates...................
(21,977,19ft, 984) * (19,129,100,255)
* * ($19,129,100,255)
$32,641,129 $0.19
$2,848.096,729 $2,815,555,600
Standard silver dollars.........
488,436,800
229,200,021
202,218,385
26,981, 636
252,606,859 1.48
259,235, 779
Silver bullion.......................
2,209,149,846
2,209,149,846
2,209,149,846
Silver certificates....... .......... *(2,410,228,345)
248,636,991 2,161,589,354 12.62
2,410,226,345
Treasury notes of 1890..........
1,141,886
.0
1
* (1,141,880]
1,141,886
Subsidiary silver..................
1,382,465,600
49, 787.640 1,315,324,941 7.68
17,343,019
17,343,019
1,365,112,581
Minor coin...........................
483,114,485
473,903.932 2.77
484,631,000
1,516, 515
1,516,515
9, 210. 553
United States notes............
321,148,399 1 8
.8
340,681,016
344,448,509
23, 300,110
2,232, 507
2,232,507
Federal Reserve notes..........
27,632,726,765
64,295, 715 27,568,431,040 1,239, 085,830 20,329,345, 210 153.76
64,295,715
Federal Reserve bank notes.
133,963,891
205,765
205,765
133,758,126
1 192, 250 132,565,876 .77
.
.36
National bank notes............
61,745,287
62,076,657
234,250
97,120
97,120
61,979,537

FINANCIAL

Kind of money

Money outside of the Treasury

1508

Circulation statement of United States moneyf June 80,1957— C o n tin u e d
Comparative totals of money in
circulation 1

Paper currency of each denomination in circulation, June 30,1957
Denomination

Silver cer­
tificates

$8,691,400
12, 614,174
3,474,155
4,875,150
1, 073, 750
1, 592, 500

$1,295,235,408
2, 824,157
769,978,888
92,644, 986
647, 910
151,485
90,520
7.000
9.000

United
States
notes

$293, 369 $5, 097, 839
177,202 73, 673,447
324, 530 232,186,440
221, 335
6, 548, 016
69,650
2, 430,432
1,300
201, 225
329.500
29,500
352.500
25,000
329,000

Federal
Reserve
notes

Federal Re­
serve bank
notes

National
bank
notes

$1,498,189
340,980
2,123, 512
10,176,445
27, 664, 750
31.613.500
59.148.500

$339,722
161,688
11,344, 860
19, 659,200
19, 933,140
4,396,400
6,740,150
86,500

Total

32, 541,129

2,161, 589, 354 1,141,

321,148,399

$1,085,923,970
6,477, 280, 440
9,921, 412,700
2, 656, 039, 400
5, 505,183,200
281, 498,500
389,382,000
3,135, 000
9,490, 000

26,329,345, 210 132,565, 876




29,040,077,141

30.1957
31.1957
30.1957
31.1956
30.1956
30,1955
30,1950
30,1945
30,1940
30,1935
30,1930
30,1925
31,1920
31,1917
30,1914
1,1879

Per
capita*

$31,081,912,873
30,836,348, 286
* 30, 518,977,498
m 31, 790, 236,326
>
30,715,188,963
30,229,323,246
27,156,290,042
26,746, 438,483
7,847, 601,324
5, 567,092, 519
4,521,987,962
4,815,207, 508
5,698,214,612
4,172,945,914
3,459,434,174
816,266,721

$181.52
* 180.35
178.75
187.38
» 182.64
182.91
179.03
191.61
59.46
43.75
36.74
41.57
53.18
40.49
34.90
16.76

notes of 1890—an equal dollar amount in standard silver dollars (these notes are being
canceled and retired on receipt); (iii) as security for outstanding silver certificates—
silver in bullion and standard silver dollars of a monetary value equal to the face
amount of such silver certificates; and (iv) as security for gold certificates—gold bullion
of a value at the legal standard equal to the face amount of such gold certificates.
Federal Reserve notes are obligations of the United States and a 1st lien on all the assets
of the issuing Federal Reserve bank. Federal Reserve notes are secured by the
deposit by the Federal Reserve bank concerned, with its Federal Reserve agent, of
a like amount of collateral consisting of such discounted or purchased paper as is eligible
under the terms of the Federal Reserve Act, or gold certificates, or direct obligations of
the United States. Each Federal Reserve bank must maintain reserves in gold
certificates of not less than 25 percent against its Federal Reserve notes in actual circu­
lation. Gold certificates deposited with Federal Reserve agents as collateral, and those
deposited with the Treasurer of the United States as a redemption fund, are counted
as part of the required reserve. Gold certificates as herein used includes credits with
the Treasurer of the United States payable in gold certificates. Federal Reserve bank
notes and national bank notes are in process of retirement.
Source: Treasury Department, Fiscal Service, Office of the Treasurer of the United
States.

STATES

r N ote.—There is maintained in the Treasury—(I) as a reserve for United States notes
and Treasury notes of 1890—$156,039,431 in gold bullion; (ii) as security for Treasury

61,745,287

2 ,0 0
10

June
M ay
Apr.
Dec.
June
June
June
June
June
June
June
June
Oct.
Mar.
June
Jan.

Amount

TNT D
J TE

* The money in circulation includes any paper currency held outside the continental
limits of the United States.
* Based on Bureau of the Census estimates of population.
* Does not include gold other than that held by the Treasury.
* These amounts are not included in the total, since the gold or silver held as security
against gold and silver certificates and Treasury notes of 1890 is included under gold,
standard silver dollars, and silver bullion, respectively.
8 This total includes credits with the Treasurer of the United States payable in gold
certificates in (1) the gold certificate fund, Board of Governors, Federal Reserve System,
In the amount of $18,283,837,300, and (2) the redemption fund for Federal Reserve notes
in the amount of $845,262,955.
* Includes $74,000,000 lawful money deposited as a reserve for postal savings deposits.
* The amount of gold and silver certificates and Treasury notes of 1890 should be
deducted from this amount before combining with total money held in the Treasury to
arrive at the total amount of money in the United States.
b Revised.
* Lowest amount since Dec, 31,1956.
» Highest amount to date.

$1,302,464,627
77,177,474
2,101,882, 200
6,615, 221, 822
9,984, 772, 756
2, 695,877, 465
5, 575, 396, 520
283,018,250
391,358,500
3, 235,000
0,610,000
62, 627

Date

O TE
F H

62,627

10 0 0
0, 0
10 0 0
2, 0

Fractional parts-.
Total.........

Treasury
notes of
1890

FINANCIAIi C N IT N
O D IO

$ ........ ........
1
$ ------------2
$5-______ _______
$0
1 ________
$20.......... ....
$50......... ........... .
$ 0 ..............
10
$500......................
$ ,0 0
1 0 _______
$5,000__________
$ 0 0 ______
1 ,0 0

Gold cer­
tificates

F IN A N C IA L

C O N D IT IO N

OF TH E

U N IT E D

STATE S

1509

Senator M a i / ) n e . What do you mean by redeemable notes, this $1
and whatever notes you mentioned that are redeemable; redeemable
in what?
Mr. M a r t i n . Well, all of our notes are redeemable.
Senator M a l o n e . In what ?
M r . M a r t in . T h e y a re backed--------

Senator M

alone

.

By what ?

M r . M a r t in . G o ld .

Senator M a l o n e . We have gone all through that. Let u s not d e ­
stroy that record, unless you want to start all over.
You have between 5 and 6 billion dollars worth of gold that you
can call your own, if you continued to honor everything that could be
turned into foreign nation dollar balances. Therefore, you do not
have the money to do it, and it does not back it.
We all knew that, but I wanted you to say it.
I do not want to destroy the record; just let it alone.
M r . M a r t in . A ll rig h t.

Senator M a l o n e . You would have to reaffirm the record if we t o o k
time out and went over it again.
M r . M a r t in . S u re .

Senator M a l o n e . All right.
In what, then, are these notes redeemable ? I have a few banknotes
here. I just got back from a trip so there cannot be many.
M r . M a r t in . W e ll, th e y a re le g a l te n d e r.

Senator M a l o n e . For what ?
Mr. M a r t i n . They are legal tender for all debts and for payment
of all obligations.
Senator M a l o n e . According to law.
Mr. M a r t i n . Right.
Senator M a l o n e . I have a note in my hand, I have not read it. It is
a $5 note, with Lincoln’s picture, and it says, “United States Note,
United States of America will pay to the bearer on demand five dol­
lars.” In what?
Mr. M a r t i n . Well, that is just the credit o f the United States
Senator M a l o n e . Y o u will give me another note just like it; will
you not?
Mr. M a r t i n . That is right, that you can use as legal tender.
Senator M a l o n e . But another note just like it is all I can get—no
gold or silver ?
Mr. M a r t i n . By law.
Senator M a l o n e . Y o u do not give me silver for this ?
Mr. M a r t i n . That is right. But you can get silver for that.
Senator M a l o n e . It does not say so.
M r . M a r t in . N o .

Senator M a l o n e . Would they have to pay in silver since the note
does not say so?
M r . M a r t i n . I do not know that they have to.
Senator M a l o n e . It j u s t s a y s “ United States of America, five dol­
lars,” on one side.
The other side, “ United States note. United States of America will
pay to the bearer on demand five dollars.” It does not say in gold,
copper, silver, tungsten, or anything else. I f they paid me in silver,
it would be just out of the goodness of their heart; would it not?
M r . M a r t in .




That is right.

1510

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

Senator M alone. They do not have to. I t w ill save time if you
would just let me know about this. So the Treasury would just give
me another p> of paper.
iece
This $10 b ill says the same thing.
This $1 b ill says “ Silver certificate, United States of America, one
dollar in silver payable to the bearer on demand.” I can demand
silver for this note; can I not?
M r . M a r t i n . T h a t is r i g h t .
S e n a to r M a l o n e . H o w m a n y o f th e se n o te s, a n d o f w h a t d e n o m in a ­
tio n s , a re th e r e in c ir c u la t io n ?
M r . M a b t i n . I w i l l h a v e t o g e t y o u t h e f ig u r e s .
M alone.

Senator
You can do that. I t is not important in the testi­
mony right now, but it is important to the record.
M r . M a r t i n . Eight.
(The information referred to is as follows:)
The only kind of United States currency as to which a holder can demand
redemption in silver is silver certificates.
There were $2,161,58S>,354 of these notes in circulation as of June 30, 1957.
The denominations are shown in the statement inserted at page 3068.

Senator M a l o n e . I have a hundred dollar b ill here. I never got
home with that much money before in my life. I t says: “Federal
Reserve Note, United States of America, No. B17242743A. W ill pay
to the bearer on demand one hundred dollars.”
Does that mean just another piece of paper if I turn it in?
Mr. M a r t i n . I t is a little bit more than just a piece of paper, but
that is so.
Senator M a l o n e . What makes it more than just a piece of paper if
that is all the United States Treasury w ill give me for it?
M r. M

a r t in .

I t i s l e g a l t e n d e r , b u t i t i s b a c k e d --------

Senator M a l o n e . But you w ill not give me anything but another
piece of paper for it.
M r. M

a r t in .

T h a t is r ig h t .
alo ne.
M r. M a r t in .

Senator M

I cannot demand silver, can I ?
I do not think you can demand silver for that, but I
think they would probably give you silver dollars if they had them.
Senator M a l o n e . But I cannot demand it and I certainly cannot
demand gold, because it is illegal to have gold in my possession ?
M r . M a b t i n . I think—well, I w ill not say you can----Senator M a l o n e . W ill you answer that specifically in the record?
I f I could go up to the Treasurer of the United States and demand 100
silver dollars for that b ill and get it, regardless? Is it the law or the
goodness of his heart if the Treasurer paid me in silver ? That is what
I want to know.
Mr. M a r t in . I do not know what the law on it is, but I w ill get you
the law on it, Senator.
Senator M a l o n e . How long have you beenhead of th is Board ?
Mr. M a r t in . I have beenhead of it since A pril 2,1951.
Senator M a l o n e . You do not know what the law is on this money
yet?
M r . M a r t i n . I do not.
Senator M a l o n e . Well, for your own information, as well as mine,
I think weought to make it of record, do you not ?
Mr. M a r t in . We w ill beglad to put the law in.



F IN A N C IA L

C O N D IT IO N

OP TH E

U N IT E D

STATES

1511

Senator Malone. All right, then put the law in the record-----M r . M a r t in . I h ave been o ve r th e la w m a n y tim es .

Senator Malone. Yes, I know that, and I do not blame you for not
remembering it. There are many things done here that are not thor­
oughly understood or they would not be done.
W o u ld y o u , th e n , m ake i t a p a r t o f th e re c o rd , th e am o u n t o f p a p e r
m o n ey in c irc u la tio n a n d th e k in d , an d w h a t i t is red eem able in b y
la w , i f a n y th in g — th e g re a te r p a r t is ju s t red eem ab le in m o re p ap e r?

Mr. Martin. All right.
Senator Malone. Whether it is in silver or just another piece of
paper.
Mr. Martin. All right.
(The information referred to is as follows:)
Under the Silver Purchase Act of 1934, silver certificates are “redeemable on
demand at the Treasury of the United States in standard silver dollars*'; and
silver certificates state on their face that there is on deposit in the Treasury of
the United States “one dollar in silver payable to the bearer on demand.” Con*
sequently, the holder of a silver certificate has a legal right to present it to the
Treasury and demand $1 in silver in return.
Federal Reserve notes were at one time redeemable in gold, but since 1934
the law has provided that they shall be redeemable in "lawful money.” This
means that the holder of a Federal Reserve note, upon presenting i either to the
t
Treasury or to a Federal Reserve bank, has a legal right to demand in return
only that which m a y be lawful money.
The term “lawful money” is generally regarded as meaning any medium of
exchange which frequently circulates from hand to hand as money under sanction
of law. There was a time when it was necessary to make a distinction between
“lawful money” and “legal tender.” Prior to 1933, only certain types of cur­
rency were declared by statute to be legal tender, that i , currency which a
s
creditor is legally obligated to accept in payment of a debt. At that time, Fed­
eral Reserve notes and silver certificates were not legal tender. However, by
the act of M a y 12,1933, as amended by public resolution of June f, 1933, it was
>
specificaUy provided that “aU coins and currencies of the United States (in­
cluding Federal Reserve notes and circulating notes of Federal Reserve banks
and national banking associations) heretofore or hereafter coined or issued*
shaU be legal tender for all debts, public and private, * •
Accordingly, while the holder of a Federal Reserve note who presents it for
redemption m a y ask for a particular type of currency in exchange, and while
the Treasury or the Federal Reserve bank may, if it desires to do so, comply
with that request, the holder of the note has no legal right to demand a particular
type of currency and must accept in exchange for the Federal Reserve note any
lawful money in circulation, whether coin, United States notes, sUver certificates,
or other Federal Reserve notes.

Senator Malone. I wish you would do something else. I asked the
Secretary about the law on the silver purchase. Will you check it and,
if the record does not already cover it adequately, will you do it?
Mr. M artin. Be very glad to.
Senator Malone. I lmow in 1934, I had some hand in it. I was
State engineer of my State at the time, and I was here on the proposed
Boulder Dam project act, now named Hoover Dam, and when we
were building that structure I was consultant to the Secretary of
Interior on power. I worked on silver money bill. The law finally
passed provided for the purchase of silver at a specified price up to
a certain percentage of the gold in the Treasury, was there not, and
that silver certificates would be issued redeemable in silver?
Mr. Marten. Correct.




1512

F IN A N C IA L

C O N D IT IO N

OF

TH E

U N IT E D

STATES

(The information referred to is as follows:)
T h e requested material regarding silver-purchase laws was read into the
record by the Secretary of the Treasury, and is to be found beginning at page
512 of part 1 of the printed hearing.

Senator M a lo n e . Explain the provisions of the law, including the
price.
Mr. M a r t i n . I would be very glad to.
Senator M a l o n e . If there has been any variation in price, note
it in the record.
Mr. M a r t i n . Right.
Senator M a lo n e . It is 9 0 y2 cents now, is it not?
Mr. M a r t i n . That is right.
Senator M a lo n e . Y o u have not yet purchased silver up to the
required percentage, have you?
M r. M

a r t in .

No.

Senator M a l o n e . So until you do that, you do purchase silver at the
established price whenever offered, domestic silver, is it not?
Mr. M a r t i n . That is right. I will review the entire silver purchase.
Senator M a lo n e . I will appreciate it. Part 3 will include your
testimony. I think you are doing a great service to the public in
completing this record.
Mr. M a r t i n . That is right.
Senator M a lo n e . There is a great public interest in just how our
economic system is managed. People are beginning to suspect that
the whole economic system is being juggled to fit a preconceived plan,
but they are still hazy about the plan.
More about money. Several hundred years ago different forms of
money were adopted. One hundred and eighty years ago, as far as
America is concerned, the United States Congress adopted a money
system, as the Constitution says it should.
M r . M a r t in . Y e s .
Senator M a lo n e . Why do you suppose this country and nations

generally used gold and silver for money or to back up the paper in
circulation ?
Mr. M a r t in . It was practice, and-----Senator M a lo n e . Practice over the centuries ?
M r . M a r t in . Over the centuries. And it was convenient. It was
easy to handle and easy to coin, and it had the qualities that were
adaptable to money.
Senator M a lo n e . About half of the world, roughly, had always
used silver for money; the other half of the countries used gold; had
they not?
Mr. M a r t in . That is right.
Senator M a l o n e . So far as the memory of man spans the history
o f nations.
Mr. M a r t in . Right.
Senator Malone. That is, the Orient and the Asiatic nations gen­
erally used silver; is that not right?
M r . M a r t i n . Right.
Senator Malone. And Europe and Africa—about half the world
had used gold; is that right ?
Mr. M a r t in . I think that is right.



F IN A N C IA L

C O N D IT IO N

OP T H E

U N IT E D

STATE S

1513

Senator M a l o n e . That was Europe, Africa, and many other areas.
Mr. Martin. About 50-50.
Senator M a l o n e . In these nations in the Orient, including China—
I was in Peking in 1948 when the Communists were 8 miles out—
you can buy anything with silver, whether it had the stamp o f any
nation on it or not.
Mr. M a r t i n . I do not think it is legal tender.
Senator M a l o n e . The legal tender may not be quite the term. The
people will take silver for anything you want to buy; would they
not?
Mr, Martin. Y o u can use silver, and he will probably take gold,
too.
Senator M a l o n e . Y o u know he will take silver, because they have
been doing it for 2,000 years of recorded history; do they not?
Mr. M a r t i n . Well, you know the same about gold.
Senator M a l o n e . Y o u do not in the Orient; do you ?
Mr. M a r t i n . Well, I am not as familiar with the Orient as you are,
but I think that gold-----Senator M a l o n e . Of course, they will take gold for money, but they
had little gold compared to the amount of silver for a couple o f
thousand years. If you have silver bullion, and they k n o w it is pure,
you can buy your way with; can you not ?
Mr. Martin. Eight.
Senator M a l o n e . Is that not one of the fundamentals?
Mr. M a r t i n . It is one of the fundamentals.
Senator M a l o n e . Y o u can buy anything with it; can you not?
Mr. M a r t i n . Eight.
Senator M a l o n e . They will take it because they have used it for
centuries.
Mr. M a r t i n . They will take it.
Senator M a l o n e . Is that not the reason we established silver a s
money as well as gold, because half of the world had used it for
centuries ?
Mr. M a r t i n . Anything that people will take can be money.
Senator M a l o n e . I s there not another reason, that both silver a n d
gold had a very limited production and, therefore, had an intrinsic
value as well ? The stamped value was generally in accordance with
the amount available and the rate of production ?
Mr. Martin. Correct.
Senator M a l o n e . You do know, like you do with gold, about how
much silver there is in the world and the rate of production ?
Mr. Marget. We do not have any figures here, sir. The difficulty
really is this: The reason why we can have a figure for gold, and we
do not have a figure for silver, is that in most cases the silver is not
legal tender, as the chairman said, and, therefore, even when we have
figures with respect to the amount of silver production, it runs in
terms of ounces rather than a certain number of dollars. It just fol­
lows from the fact it does not have a fixed price at the mint, so I am
afraid we cannot give you the figures. I do not know of any figures.
Senator M a l o n e . Y o u do have a fixed price at the mint ?
Mr. M a r g e t . In this country we have it at 90^ cents.




1514

F IN A N C IA L

C X > N I> m O N

OF T H E

U N IT E D

STATES

M r. M a l o n e . 90% cents at the mint. W hat yon said was not ex­
actly true. W e should know the approximate amount of silver in the
world and the rate of production.
M r. M a r g e t . I would say this, that, speaking generally, the silver
does not play the role that gold does in terms or a guaranteed fixed
price to all comers, regardless. I am just merely saying that as a fact.
Senator M a l o n e . W as that the reason we made it against the law
for an American citizen to own gold ?
M r . M arg et. N o, sir. I ju s t sta te t h a t w e a r e o n t h e g o ld s t a n d a r d ,
n o t o n a b im e ta llic s ta n d a r d , w h ic h w o u ld p e r m it a n y b o d y t o b r in g
a n y a m o u n t o f s i l v e r a n d b e g u a r a n t e e d a pri<ie>
Senator M a l o n e . W e are, of course, not on a gold standard. The

price of silver is guaranteed up to a certain percentage of gold held
in the Treasury. You have never reached that percentage, have you ?
M r . M a r g e t . W e l l , i t i s t h e l i m i t a t i o n t h a t c o n s t it u t e s t h e d i f f e r ­
e n ce b e tw e e n th is sy ste m w e h a v e a n d th e b im e ta llic sy ste m .
Senator M a l o n e , W ill you make a part o f the record here, so long

as you have definite ideas on it, what is the percentage of gold, that
you must buy the silver at 90% cents per ounce? W ill you just make
it a part of the record ?
M r. M a r g e t . Yes, sir.
Senator M a l o n e , And over the years, since we passed the Silver
A ct in 1934 the Treasury has purchased silver at the fixed price. I
helped pass the 1934 act.
(The information referred to follow s:)
The roles of gold and of silver In the United States monetary system differ
from each other as follows:
1.
.—The United States Treasury buys and sells gold in transactions with
United States producers and users, as well as with foreign governments and
central banks, at the fixed price of $35 per ounce, minus and plus a handling
charge of one-fourth of 1 percent. The Treasury buys silver from United States
producers at the fixed price of 90% cents, but is not generally prepared to buy
silver from foreign producers at this price, and it sells silver to United States
users at a price that may—and currently does—exceed the statutory buying price.
Consequently, the price of gold in this country—and generally on the world
market—does not deviate from the fixed price of $35 per ounce, but the market
price of silver may—and currently does—exceed the fixed price of 90% cents per
ounce in the United States, and may be either lower or higher than that price
on the world market.
2.
,—United States residents are not permitted
to acquire, transport, import, or export £old—except under Treasury license or
in amounts or forms that are economically insignificant. In contrast, they are
permitted to acquire, hold, transport, import, or export silver in any way they
wish. United States producers sell silver to the Treasury only when the price
offered by the Treasury (see above) is higher than the market price, or when
a sale to the Treasury is more convenient (e, g., because of the place of delivery)
than a sale in the free market.
3.
.—Gold is the statutory reserve of all Federal
Reserve notes, all Federal Reserve deposit liabilities, and certain minor types
of United States currency. Silver is used in the coinage of subsidiary coins and
silver dollars, and is the statutory reserve of silver certificates. On May 31,1957,
the face value of United States currency in circulation based on silver totaled
only $3.6 billion, while the face value of United States currency in circulation
based on gold totaled $26.4 billion, and Federal Reserve deposit liabilities totaled
$20.3 billion. Similarly, the value of silver held as reserve against currency in
the United States Treasury amounted to $2.4 billion, while the value of gold so
held amounted to $22.1 billion.
4.
.—Gold is internationally used as a residual means
of settling foreign balances; silver is not so used. For this reason, the United
States Treasury is prepared to buy and sell gold for legitimate monetary pur-

Pic
re

Fe dm fmr e tr natio s
r e o o akt a s c n

Mntayadr s r efu c n
o e r n ee v ntio

I ten tio a fu c n
n r a n l ntio s




F IN A N C IA L

C O N D IT IO N

OF T H E

U N IT E D

STATES

1515

poses in transactions with all friendly foreign governments and central banta,
and, in fact, such purchases and sales form the bulk of all gold transactions in
the United States; in contrast, the United States Treasury as a rule does not
engage in international silver transactions. Furthermore, the par values of
all major world currencies are based either directly on gold or on the statutory
gold parity of the United States dollar ($35 per ounce) ;the statutory silver value
of the dollar ($1.29 per ounce) does not play any international role.

Senator Malone. Let me repeat; I helped put it on the books. I
worked with former Senator Wheeler at that time. How long have
you been in Government ?
Mr. Marget* Relatively recently, as these things go.
Senator Malone. How long?
Mr. Marget. Counting my Army years —
Senator Malone. Leave those out. I was in the Army, too, but it
does not count for seniority in the Senate.
Mr. Marget. I have been in Washington since 1950. I have been
with the Federal Reserve Board since January 1950.
Senator Malone. What did you do before that?
Mr. Marget. Immediately before that, I was with the Marshall
plan organization in Paris.
Senator Malone. The what?
Mr. Marget. The Marshall plan organization in Paris; prior to that,
with the Army, and, before that, I was a university professor for many
years.
Senator Malone. Spending money for Uncle Sam all the time.
[Laughter.] I never voted for the Marshall plan; I never voted for
ECA. I stood on the Senate floor 4 hours on August 13, opposing
billions to Europe and Asia.
I had intended to talk about 20 minutes, but the longer I talked
the madder I got, remembering the puzzled look of the taxpayers
at home when they read that they must support foreign nations in the
interest of peace. Were you here all the time with the Marshall plan.
Mr. M arget. Actually, no. I was there. I was in Paris shortly
after it got organized. I might say, Senator, just as a matter of i>ersonal defense, that one of my jobs was trying to keep money from being
spent.
Senator Malone. Well, you were not very successful.
Mr. Marget. I will grant that. [Laughter.]
Senator Malone. I nope you are more successful in your present
job. But you can help me by giving me the actual record, separate
from your ideas. Give me your ideas, if you must, but I ao not
want them too mixed with the facts.
Mr. Marget. Right.
Senator Malone. I want to study the facts to adjust my own own
conclusions. My conclusions may be different from some other mem­
bers of the committee, but we ought to start with the same set of facts.
You agree with me?
Mr. Martin. I do.
Senator Malone. The only way to get facts is from men who have
them, and the Secretary of the Treasury has great confidence in you*
That is a compliment. So this $26.5 billion, I think we settled mat.
The Federal Reserve notes, that is where this 25 percent of gold
must be maintained; the coins, that is about $3.5 billion, which are
either silver, nickel, or copper^ and that is represented by those metals;
is that right?
98633— 57— p t. 8------- 20



1516

F IN A N C IA L C O N D IT IO N

OF T H E

U N IT E D

STATES

That is right.
Y o u are going to put that in the record?
M r . M a r t i n . I will put that all in the record; the breakdown.
(The following was subsequently received for the record:)

M r. M

a r t in

Senator

M

.

alone.

*

United States currency in circulation, June SO, 19571
[In millions of dollars]

Gold certificates___________________________________________________
33
Federal Reserve notes---------------------------------------------------------------------- 26,329
Standard silver dollars------------------------------------------------------- -------------253
Silver certificates and Treasury notes of 1890----------------------- !------------- 2,163
Subsidiary silver coin-------------------------------------- ------------------------------- 1,315
Minor coin_______________________________________________________
474
United States notes_________________________ ______________________
321
Federal Reserve banknotes-------------------------------------------------------------133
National banknotes_________________________________________________
62
Total______ _________________________________________________ 31.082
1 O utside T reasury and F ederal R eserve banks.
* T here are m aintained in the T reasury (1 ) as a reservoir fo r United S tates notes and
T reasury notes o f 1890, $156,039,431 in gold bu llion (2 ) as security fo r T rea su ry notes o f
1890, an equal dollar am ount in standard silver d ollars (these notes are being canceled
and retired on receip t) ; (3 ) as security fo r ou tstan d in g silver certificates, silver in bullion
and standard silver d ollars o f a m onetary value equal to the fa ce am ount o f such silver
c ertifica te s; and (4 ) as security fo r gold certificates, g old bullion o f a value a t the legal
standard equal to the fa ce am ount or such g old certificates. Federal R eserve notes are
obligation s o f the United States and a first lien on all these asserts o f the issu ing F ederal
Reserve bank. F ederal Reserve notes are secured by the deposit w ith Federal Reserve
agents o f a like am ount o f gold certificates o r o f gold certificates and such discou nted o r
purchased paper as is eligible under the term s o f the Federal Reserve A ct, or o f d irect
obligations o f the U nited States. E ach F ederal Reserve bank m ust m aintain a reserve in
gold certificates o f a t least 25 percent again st its Federal Reserve notes in actual circu la ­
tion. Gold certificates deposited w ith Federal Reserve agents as collateral, and those
deposited w ith the T reasurer o f the U nited S tates as a redem ption fu nd ,are counted as
reserve. Gold certificates, as herein used, Include cred its w ith the T reasurer o f the United
States payable in gold certificates. F ederal R eserve banknotes and n a tion a l banknotes
are in process o f retirem ent.

Senator M a l o n e . And, as a matter of fact, cold turkey, under cus­
tom of meeting foreign nation’s dollar balance with gold payments,
we do not have the 25 percent of gold to back up the $26.5 billion
according to law ; is that true ?
M r . M a r t i n . I f it w ere a ll d ra w n at one tim e.
Senator M a l o n e . Or over a reasonable period; we’d not have it ?
Mr. M a r t i n . That is right.
Senator M a l o n e . And so you would have to rush madly up to Con­
gress and it would have to reduce the required percentage. The gold
would be gone before you got here. That would be right; would it
not ?
Mr. M a r t i n , Well, if we had not paid it out, it would not be gone.
Senator M a l o n e . But you do not own it. It is like a banker calling
his deposits capitalization. You do not say that a bank could claim
the deposits simply because they were in the bank?
Mr. M a r t i n . N o , th a t is correct.
Senator M a l o n e . Why do you then claim we own the gold when the
foreign dollar balances can get it according to custom.
Mr. M a r t i n , I think it is correct in that sense.
Senator M a l o n e . I think it is deceiving Congress and the people,
because they had no idea that out of the nearly $70 billion in gifts
to foreign nations that they have built up credits to claim all but $5%
billion of the $24.2 billion that the United States owned in 1933.




FINANCIAL CONDITION OF THE UNITED STATES

1517

I want you to understand this is a most friendly cross examina­
tion, but the people have a right to know what the Congress and the
Treasury and the Federal Reserve Board have done with their money.
Mr. M a r t in . Right.
Senator M a l o n e . Personally, I think you have done as well as could
be done under the circumstances, which have been very bad, and
deliberately so starting in 1933 when we left the gold standard and
deliberately started an inflation period. It did not start yesterday.
Since that time Washington has swarmed with people giving away
Uncle Sam’s assets.
We have given about $107 billion. I f you would have subtracted
that amount from the national debt, it would not look so bad.
We buy these nations every year with taxpayers’ money—buying
agreements they will not keep.
I f we would concentrate on making our economic system work, and
remain strong instead of dividing our wealth, no nation would start
a war.
You know, nobody jumps on Jack Dempsey if they know who
he is. That danger of losing a fight is what does it. Do you agree?
Mr. M a r t in . I do.
Senator M a l o n e . What is the difference between nations and in­
dividuals?
Mr. M a r t in . Well, I cannot make a distinction on a personality
basis. I think some of the same elements exist; I agree with you on
that.
Senator M a l o n e . Well, the further you go, the more you are going
to think they are alike, and Russia or no other nation is about to start
a war with us while we can win it. You are dividing the American
markets of the workingmen and the small investors among the lowwage foreign nations.
You have milked them through their tax money, sending it to for­
eign nations.
1 have news for you. When this economic dip comes this time you
might wake up with the kind of government you think you are
fighting.
Do you have any idea I could be too wrong ?
Mr. M a r t in . A l l I can say, Senator, is I am going to do every­
thing within m y power----Senator M a l o n e . I know you will.
How often do you review the territory west of the Potomac River?
M r . M a r t in . I get out quite frequently.
Senator M a l o n e . D o you ever talk to anybody in business, or some­
one who has a job he is afraid of losing through loss of American
markets to foreign low-wage nations ?
Mr. M a r t in . I talk to quite a few of them.
Senator M a l o n e . I am glad you do.
I just returned from the west—I do that every month or oftener,
because if you do not see the people making a living the hard way
this Potomac fever is fatal.
In the beginning of your testimony you stated the objective of
the Federal Reserve System operation is to “ promote monetary credit
conditions that will foster sustained economic growth, together with
stability in the value of the dollar.”




1518

FINANCIAL CONDITION OF TEES UNITED STATUS

C a n y o u c it e s u c h sta te m e n t o f o b je c tiv e s in th e F e d e r a l R e s e rv e
A c t ? W h a t m a d e y o u d e c id e t h a t s h o u ld b e y o u r o b je c t iv e ?
M r . M a r t i n . I t h in k i f y o u re a d th e F e d e r a l R e se rv e A c t , a n d ta k e
it in c o n ju n c tio n w it h th e E m p lo y m e n t A c t o f 19 4 6 , w h ic h w a s a ls o
th e la w , t h a t th o se o b je c tiv e s a re q u it e e x p lic it .
S e n a to r M a lo n e . Y o u g o b e y o n d th e F e d e r a l R e s e rv e A c t . T h e
19 4 6 E m p lo y m e n t A c t is w h e re y o u g e t t h is o b je c tiv e . Y o u d id n o t
g e t it o u t o f th e F e d e r a l R e s e rv e A c t , d id y o u ?
M r . M a r t i n . W e ll, n o t lin e f o r lin e o u t o f it .
I su p p le m e n te d
it .
S e n a to r M a lo n e . Y o u re a d s o m e th in g in it t h a t is n o t th e r e ?
T h e n y o u c o u p le d it w it h th e 19 4 6 F u l l E m p lo y m e n t A c t . H o w lo n g
h a v e y o u been th e re ? S in c e 19 5 0 ?
M r . M a r tin . I h a v e b een th e re s in c e 1 9 5 1 .
S e n a to r M a lo n e . W a s th e p o lic y fo llo w e d b e fo re y o u , g e n e r a lly ,
th e sa m e ?
M r . M a r t i n . I t h in k so .
S e n a to r M a lo n e . S o th e C h a ir m a n b e fo re 19 4 6 , w a s d o in g p r a c t i­
c a lly th e sa m e t h in g — h a d th e sam e o b je c tiv e . T h a t w o u ld r e a lly
b e a d d in g a m a n a g e d e co n o m y to a m a n a g e d c u rre n c y . W h e re d id
h e g e t th e p o w e r to d o t h a t ?
M r . M a r t i n . I t h in k h e g o t it o u t o f th e b o d y o f th e te s tim o n y o n
th e la w , a n d th e e v o lu tio n o f t h in k in g , g e n e r a lly .
S e n a to r M a l o n e . T h e e v o lu tio n o f t h in k in g , b u t n o t a n a m e n d ­
m e n t o f th e la w .
M r . M a r t i n . N o t a specific a m en d m e n t o f th e law .
S e n a to r M a l o n e . W il l y o u ju s t c it e th e a u t h o r it y f o r w h a t m u st
h a v e been th e re a so n f o r a d o p tin g t h is a s a n o b je c tiv e , th e o b je c tiv e
o f th e S y s te m , w h ic h is to p ro m o te m o n e ta ry c o n d itio n s , a s y o u s a y ,
t h a t w ill fo s te r su s ta in e d g ro w th o f th e e co n o m y, to g e th e r w ith th e
s t a b ilit y o f th e d o lla r ?
T e ll m e ju s t w h e re t h a t o c c u rs in th e F e d e r a l R e s e rv e A c t .
I t is a v e ry s tra n g e a n d d a n g e ro u s p o w e r to p u t in to 1 m a n ’s h a n d s ,
o r in th e h a n d s o f a 7 -m a n b o a rd a ffe c tin g 17 0 m illio n p e o p le .
I t m a y com e a s a g re a t sh o c k to th e p e o p le to fin d y o u h a v e t h a t
p o w e r, o r e ve n to C o n g re s s th a t it g a v e y o u th e p o w e r, i f in f a c t a n y ­
t h in g sh o ck s th e M e m b e rs o f C o n g re s s . Y o u w ill p u t it in th e r e c o r d ;
w ill y o u n o t?
M r . M a r t i n . I w ill.
S e n a to r M a l o n e . T h e n y o u c a n t e ll m e f o r th e re c o rd h o w , t a k in g
th e tw o a c ts to g e th e r th a t y o u a r r iv e a t c o n c lu s io n th a t y o u c a n m a n ­
ag e th e c u rre n c y a n d th e e n tire eco n o m y to o . I t m a y sh o c k th e c o u n ­
t r y in to a sense o f r e s p o n s ib ilit y to fin d th a t y o u a re a lso m a n a g in g
th e e n tire e co n o m y. Y o u w ill p u t th e e x p la n a tio n in th e re c o rd .
M r . M a r t i n . I w ill.
( T h e in fo rm a tio n re fe rre d to f o llo w s :)

The Federal Reserve Act does not contain any provision specifically stating
that the objective of the Federal Reserve System is to promote conditions that
will foster sustained economic growth and stability in the value of tbe dollar.
However, this objective is implicit in the title of the act and in policy directives
contained in various provisions of the act; and, taking such directives together
with the declaration of policy contained in the Employment Act of 1946, it is
clear that the promotion of credit conditions conducive to economic growth and
the maintenance of the stability of the dollar is one of the most important ob­
jectives of the Federal Reserve System.




FINANCIAL CONDITION OF THE UNITED STATES

1519

The Federal Reserve Act is entitled “An act to provide for the establishment
of Federal Reserve banks, to furnish an elastic currency, to afford means of
rediscounting commercial paper, to establish a more effective supervision of
banking in the United States, and for other purposes.”
The law provides that discount rates shall be established by the Federal
Reserve banks, subject to review and determination by the Board of Governors,
“with a view of accommodating commerce and business” (12 U. S. C. 357).
The Board is authorized to change reserve requirements of member banks “in
order to prevent injurious credit expansion or contraction” (12 U. S. C. 462b).
The operations of the Federal Open Market Committee are subject to pro­
visions of the law which require that the time, character, and volume of all pur­
chases and sales in the open market “shall be governed with a view to accommo­
dating commerce and business and with regard to their bearing upon the general
credit situation of the country” (12 U. S. C. 263),
The board of directors of each Federal Reserve bank, in extending credit to
member banks, is enjoined to consider “the maintenance of sound credit condi­
tions, and the accommodation of commerce, industry, and agriculture” ; and each
Reserve bank is required to keep itself informed of the general character and
amount of the loans and investments of its member banks “with a view to ascer­
taining whether undue use is being made of bank credit for the speculative carry­
ing of or trading in securities, real estate, or commodities, or for any other pur­
pose inconsistent with the maintenance of sound credit conditions” (12 U. S. O.
301).
In prescribing margin requirements for purchasing and carrying securities,
the Board is required by the Securities Exchange Act of 1934 to consider
whether such requirements are “necessary or appropirate for the accommoda­
tion of commerce and industry, having due regard to the general credit situation
of the country” (15 U. S. C. 78g).
The various policy directives which have been given by Congress to the
Board, the Open Market Committee, and the Federal Reserve banks are more
fully discussed in Chairman Martin's replies to the 1952 questionnaire of the
Subcommittee on General Credit Control and Debt Management of the Joint
Committee on the Economic Report. These directives, as previously Indicated,
implicitly place upon the Federal Reserve System a responsibility for promoting
monetary and credit conditions conducive to economic growth and maintenance
of stability of the value of the dollar. That objective is supported by the
declaration of policy contained in section 2 of the Employment Act of 1946,
which reads as follows:
“Sec. 2. The Congress hereby declares that it is the continuing policy and
responsibility of the Federal Government to use all practicable 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 calcu­
lated to foster and promote free competitive enterprise and the general welfare,
conditions under which there will be afforded useful employment opportunities,
including self-employment, for those able, willing, and seeking to work, and to
promote maximum employment, production, and purchasing power** (15 U. S. C.

1021).

S e n a to r M a l o n e . A r e n o t th e b a sic p u rp o se s o f th is a c t s t a t e d in
th e lo n g t it le w h ic h re a d s :

An act to provide for the establishment of Federal Reserve banks, furnish an
elastic currency to afford means of rediscounting commercial paper, establish a
more effective supervision of banking in the United States and tar other pur*
poses—
an d a lso in sectio n 1 2 ( a ) , p a rt 3 , devoted to g e n e ra l p rin c ip le s , in
w h ic h it is s a id —

that time, character, and volume of all purchases of sales paper described
in section 14 of this act as eligible for open-market operations shall be
governed with a view to accommodating commerce and business with regard
to their bearing upon the general credit situation of the country.
N o w , is th a t w h a t it sa y s ?
M r. M

a r t in .




T h a t is what it says.

1520

FINANCIAL CONDITION OF T H E TJNTTED STATES

S e n a to r M a l o n e . A n d y o u b e lie v e t h a t ?
M r . M a r t i n . R ig h t .
S e n a to r M a l o n e . B u t

y o u r in te r p re t a t io n o f it is t h a t y o u m u s t
“p ro m o te m o n e ta ry c r e d it c o n d itio n s t h a t w ill fo s te r s u s ta in e d eco ­
n o m ic g ro w th ” ?
M r . M a r t i n . R ig h t .
S e n a to r M a l o n e . W o u ld it n o t be m o re d e s ira b le to s ta te t h a t th e
o b je c tiv e o f th e S y s te m is to m a in t a in th e in t e g r it y o f th e U n it e d
S ta te s d o lla r , it s h o n e sty a n d so u n d n e ss?
M r . M a r t i n . I t h in k y o u c o u ld h a v e sta te d it m o re e x p lic it ly th a n
in th e p re se n t a ct.
S e n a to r M a l o n e . Y o u t h in k it w o u ld be a g o o d a d d it io n to th e a c t ?
M r . M a r t in . I d o n o t th in k it w o u ld b e n e ce ss a ry .
I t h in k th e m o st n e c e ssa ry a m e n d m e n t is to m a k e c le a r w h a t I
b e lie v e to b e im p lic it in th e E m p lo y m e n t A c t , b u t th e re h a s been
som e q u e stio n a b o u t m a k in g e x p lic it th e s t a b ilit y o f th e d o lla r a s
w e ll a s d e v o tin g a ll o f o u r e n e rg ie s to p ro m o tin g e m p lo y m e n t, b e­
ca u se I d o n o t t h in k y o u c a n se p a ra te th e tw o .
S e n a to r M a l o n e . W h e n y o u p ro m o te e m p lo y m e n t, d o es it in d ic a t e
to y o u th a t y o u s h a ll p r in t m o n e y to m a k e it m o re a v a ila b le ?
M r . M a r t i n . N o , it does n o t.

Senator

M

alone.

To promote employment?

M r . M a r t i n . N o . T h e p h ra s e s m th e E m p lo y m e n t A c t “m a x i­
m u m p ro d u c tio n , m a x im u m e m p lo y m e n t, m a x im u m p u r c h a s in g
p o w e r” to m e h a v e to be---------S e n a to r M a l o n e . T ie d to a so u n d d o lla r ?

Mr. M a r t i n . That is right.
Senator M a l o n e . Your difficulty is that maintaining the honesty
and soundness of the dollar and promoting full employment may not
be compatible. Let me ask you, right at that point, if, as has been
the case during the past 24 years, 53-percent reduction in the pur­
chasing price of money is acknowledge^ have we not really stolen the
insurance value and the value of savings and lowered wages and
pensions to that extent ? Have we not done that ?
Mr. M a r t i n . I do not think our record is very good.
S e n a to r M a l o n e . Y ou do n o t t h in k w e s h o u ld d o th a t ?
M r . M a r t i n . I d o n o t.
S e n a to r M a l o n e . So m e c o m p la in b it t e r ly .
T h e a d m in is t r a t io n
c o m p la in s ab o u t th e r a is in g o f w a g e s, th e ris e in p e n sio n s.

Tne President has on his desk today a pension bill for utterly dis­
abled men, wheelchair cases, men who cannot walk.
We kicked it out of this committee, a 10-percent increase in those
pensions, so that they could eat, because of this inflation.
S o som e W h it e H o u s e sp o k e sm a n in d ic a te s h e m ig h t ve to it . T h e
P re s id e n t w ill n e v e r veto su c h a b ill i f he u n d e rs ta n d s it , b u t i f h e
d o es, it w ill p a ss o v e r h is ve to , because it is r ig h t .

We have continued the inflation.
I say “ we,” simply because o f my inability to stop it, since we took
over in 1953. I have never voted for free trade, billions to Europe,
or a raise in the debt limit. The inflation has continued; has it not?
M r . M a r t i n . Right.
S e n a to r M a l o n e . A n d th e re is no s ig n o f s la c k e n in g it u p , is th e re ?
M r. M a r t i n . I t h i n k s o m e p r o g r e s s h a s b e e n m a d e .
Se
n a to r M a l o n e . H o w ? T e ll u s a b o u t it .


FINANCIAL

CONDITION OF THE UNITED STATES

1521

Mr. M a r t in . I think, in the last couple of years, I think we have
brought the problems of inflation to the attention of the public. I
think-----Senator M a l o n e . There is no question about that.
The public is catching up with you. I agree with you, and maybe
you do not know it, but the people are getting ready to reverse the
trend.
Mr. M artin. Well, I am glad to hear it.

Senator M a l o n e . It might affect your job, because you have not
stopped it, either.
Mr. M a r t in . That is correct.
Senator M a l o n e . My personal opinion is, for whatever it is worth,
that we do not stop inflation, go oack on that gold standard; stop
this free trade with low-wage nations by refusing to extend the 1934
Trade Agreements Act in June next year; and stop this centralization
of power in Washington; if we do not accomplish these things in the
next 2 or 3 years, there will not be another Republican President in
the life of the youngest Republican voter today. That is how serious
it is, in my opinion.
They cannot touch you for 2 or 3 years.
Mr. M a r t in . Well, the Congress can abolish m y job.
Senator M a l o n e . What does the Constitution say about the coining
of money and the fixing of the value thereof ?
M r . M a r t in . The pow er is in the Constitution.
Senator M a l o n e . Where does it put it ?
Mr. M a r t in . It puts it in the Congress.
Senator M a l o n e . Where is it now ?
Mr. M a r t in . The Congress has delegated authority over the money
supply to the Federal Reserve System.
Senator M a l o n e . In the Federal System ?
Mr. M artin. That is right.

Senator M a l o n e . By virtue of the Federal Reserve Act?
Mr. M arhn . That is right.

Senator M a l o n e . But we can abolish or amend the Federal Reserve
Act any timewe want to.
Mr. M a r t in . That is right.
Senator M a l o n e . Well, do you think that is a good idea ?
Mr.

M a r t in .

To abolish it?

Senator M a l o n e . Yes.
Mr. M a r t in . No. We are trying to perform in the System so that
you will not want to abolish it.
Senator M a l o n e . But Congress has nothing to do with it unless
you amend the act, do they ?
We can talk to you, but we cannot do anything through it. Your
judgment cannot be questioned for anything done under that act, un­
less we amend it?
Mr. M a r t in . That is correct, but the act itself can be changed at
any time.
Senator M a l o n e . Of course it can. But at the moment, Congress
has not one iota of authority, except the authority to change the act,
in the coining of the money and the fixing of the value thereof, do
they?




1522

FINANCIAL CONDITION O f TH E UNITED WPATHB

M r. M a b t in . W ell, the Congress decided this was a problem, that
money w ill not manage itself, and so they set up this means of han­
dling i t
S e n a to r M a l o n e . T h e y d e c id e d , to o , t h a t w e s h o u ld d iv id e o u r
m a rk e ts w it h th e n a tio n s o f th e w o rld . T h r o u g h th e 19 8 4 T r a d e
A g re e m e n ts A c t th e y tra n s fe rre d th e c o n s tit u t io n a l r e s p o n s ib ilit y o f
C o n g re s s to f ix th e d u tie s , im p o s ts , a n d e x c ise s, to th e P r e s id e n t , w it h
f u ll a u t h o r it y to p u t it in G e n e v a , w h ic h h e d id d o in 19 4 7 ,
N o w 3 4 c o m p e titiv e fo re ig n n a tio n s a re b u s ily e n g a g e d in G e n e v a
d iv id in g th e m a rk e ts o f th e U n it e d S ta te s a m o n g th e m .
Y o u s a id y o u d id n o t k n o w t h a t , b u t y o u s h o u ld k n o w i t ?
M r . M a r t i n . I s a id I w o u ld s tu d y it . I d id k n o w it , S e n a to r, b u t
I h a v e n o t re v ie w e d it re c e n tly .
S e n a to r M a l o n e . Y o u d i d k n o w i t ?
M r. M a r t i n - . I d i d k n o w it .
S e n a to r M a l o n e . Y o u t h in k th e a c t t r a n s f e r r in g t h a t r e s p o n s ib ilit y
o f C o n g re s s to G e n e v a is a ll r ig h t . I t n o w e x p ire s in J u n e 19 5 8 ?
M r . M a r t i n . I w o u ld h a v e to g iv e it m o re s tu d y .
S e n a to r M a l o n e . I w is h y o u w o u ld , b e ca u se I t h in k w e a re g o in g
to see m o re o f y o u la t e r t h is y e a r o r e a r ly n e x t y e a r.
M r . M a b t i n . I a m a t y o u r s e rv ic e .
S e n a to r M a l o n e . I k n o w y o u a re .
I a m f r ie n d ly to w a rd y o u . L ik e G e o rg e H u m p h r e y , I t h in k y o u
a re d o in g th e b e st y o u c a n . W h o is re s p o n s ib le f o r th e m o n e y s y ste m ?
Y o u s a y C o n g re ss is re s p o n s ib le . W h a t d o es th e C o n s t it u t io n s a y
a b o u t i t ; d o y o u re m e m b e r ?
M r . M a b t i n . I h a v e n o t g o t th e C o n s t itu t io n .
S e n a to r M a l o n e . W o u ld y o u q u o te i t i n th e re c o rd e x a c t ly to g e th e r
w ith th e a c t ?
M r . M a b t i n . I w o u ld be g la d to q u o te th e C o n s t it u t io n f o r y o u ,
y e s.
( T h e in fo rm a t io n re fe rre d to f o llo w s :)

Among other powers, section 8 of article I of the Constitution of the United
States confers upon Congress the power "to coin money, regulate the value there­
of, * *
This provision, however, is not the sole basis for the power of
Congress to legislate with respect to monetary and credit matters. That power
is derived not only from the authority of Congress to coin money and regulate
the value thereof, but also from the following provisions of the same section of
the Constitution which authorizes Congress—
“To lay and collect taxes * * *.
“To borrow money on the credit of the United States.
“To regulate commerce with foreign nations, and among the several
States • •
S e n a to r M a l o n e . I w ill t e ll y o u w h a t it s a y s , b u t I w a n t y o u to
q uo te it b ecau se it w ill h a v e m o re w e ig h t. I t s a y s in a r t ic le X, s e c tio n
8, t h a t th e C o n g re ss s h a ll c o in th e m o n e y a n d f ix th e v a lu e th e re o f
a n d o f fo re ig n c o in . T h a t is w h a t it s a y s ; does it n o t ? I s C o n g re s s
d o in g it ?
M r . M a b t i n . I t h in k C o n g re s s is c e r t a in ly w a tc h in g th e F e d e r a l
R e se rv e S y ste m v e ry c a r e f u lly .
S e n a to r M a l o n e . I d o n o t t h in k th e y h a v e w a tc h e d it a t a l l . I
t h in k t h is is th e f irs t tim e C o n g re s s h a s lo o k e d a t it f o r 2 4 y e a rs .
M r . M a r t i n . T h a t is o n ly th e F in a n c e C o m m itte e , S e n a to r.
S e n a to r
Y e s ; I k n o w . W e h a v e d o n e n o t h in g a b o u t it ,
a n d w e a re d o in g n o th in g a b o u t f ix in g th e v a lu e o f f o r e ig n c o in .

Majx>ne.




FINANCIAL CONDITION OF THE UNITED STATE©

1523

All I would like to see, as long as we are off the gold standard, as
they are, is that when you buy their currency or trade with them,
you do it on the market value of their money in terms of the dollar.
Does that make any sense?
M r . M a r t in . It mates good sense.
Senator M a l o n e . We are not doing it, are we?
Mr. M a r t in . Well, I think, generally speaking, we are trying to.
Senator M a l o n e . How are you trying, diverting on that for a
minute?
M r . M a r t in . W e have been w orking as hard as we can tow ard
general convertibility o f currencies.
Senator M a l o n e . Of what ?
Mr. M a r t in . All currencies.
Senator M a l o n e . Of paper?
Mr. M a r t in . Yes. I am talking about paper.
Senator M a l o n e . H o w would you have the convertibility of paper,

and what would you convert it into, another piece of paper ?
Mr. M a r t in . We are talking in terms of—yes, to dollars.
Senator M a l o n e . Just another piece of paper?
M r . M a r t in . Y es. T h a t is, in the parlance we are talkin g, th at
is all that is required, as lon g as it is legal tender.
Senator M a l o n e . Why, of course. So any schoolboy could do that,

until it took a wheelbarrow load of it to buy a plate of ham and eggs.
Mr. M a r t in . As Mr. Marget points out, the International Monetary
Fund has been working hard to abolish the differential between the
black market and the official market, and we think that considerable
progress has been made.
Senator M a l o n e . Of all the nations of the world.
Now, did you borrow some gold from the World Bank not long ago?
M r . M a r t in . N o.

#Senator M a l o n e . About $100 million in gold, or something. Where
did you borrow it ?
M r . M arget . W e did not borrow any g old.
Senator M a l o n e . Let us not g et crosswise, because I

am going to ask
you to look that up.
M r . M a r t in . We can get you the full transaction.
Senator M a l o n e . Well, you know there w as a transaction?
M r . M a r t in . Oh, yes, indeed.
Senator M a l o n e . But jo u got the gold from the World Bank ?
Mr. M a r t in . That is right.
Senator M a l o n e . How did you get it ?
Mr. M a r t in . From the Monetary Fund. Not the World Bank.
Senator M a l o n e . That is a technicality. You knew where you got
it; you knew that, did you not ?
M r . M arget . When you said “ got it,” it is the sale of gold from the
Monetary Fund to the Treasury.
Senator M a l o n e . I am one of these people who asks questions until
I get the facts.
Mr. M a r t in . We want to give you all the facts in the world.
Senator M a l o n e . As a matter of f a c t , you do know there is not an
honest currency in the world, except Canada. Their dollar is priced
above ours in the market ?
M r . M a r t i n . Well, Senator, I could not say there is not an honest
currency in the world.




1524

FINANCIAL CONDITION OF THE UNITED STATES

S e n a to r M a l o n e . W e ll, th e y a re n o t h o n e st w h e n th e y f i x th e v a l u e o f
t h e ir c u rre n c y in te rm s o f tn e d o lla r h ig h e r th a n th e m a rk e t p r ic e .
M r . M a r t i n . W e ll, th e re a re m a n a g e d c u rre n c ie s a ll o v e r th e w o rld .

Senator M

alone.

Answer that question.

M r .M a r tin . W h a t?
S e n a to r M a l o n e . I t is n o t a n h o n e st c u rre n c y i f th e p r ic e fix e d i n
te rm s o f th e d o lla r , a c c o rd in g to t h e ir la w o r e x e c u tiv e d e cre e , is h ig h e r
th a n th e m a rk e t p r ic e ?
M r . M a r t i n . W e ll, th a t is a d e fin it io n t h a t y o u a re g iv in g . I t h in k
th e w o rd “h o n e st”---------S e n a to r M a l o n e . W e ll, y o u m a k e y o u r o w n d e fin it io n . W h a t is it ?

Mr. M a r t i n . Well, I say that the currency that is convertible, and
has a legal backing and can be used for legal tender in a country, is
perfectly sound as a currency.
Senator M a l o n e . I am talking about exchange in trade. F or exam­
ple, in Bolivia, when I was there in 1954, they said the dollar was
worth 500 bolivianos. When on the streets you can get 1,700, do you
say that is not a dishonest currency when they require all dollars to be
turned in to the central bank at that price ?
Mr. M a r t i n . I would say that is currency that is being depreciated.
I do not like to use the word “ honest” in that. I am not trying to
quibble with you, but I think it is the depreciation of the currency.
I do not like it at all, and you and I are in complete agreement.
Senator M a l o n e . It is a simple depreciation o f the currency. It i s
a way of fixing the value for trade advantage.
I f we want to trade badly enough with Bolivia, we make up the d if­
ference and call it a “ dollar shortage.” We give them an amount o f
money that makes the difference between the 500 and 1,700 bolivianos;
isn’t that about it ?
Mr. M artin . That is right.
S e n a to r M a l o n e . W h a t d o y o u c a ll th a t e x ce p t a d is h o n e s t c u rre n c y ?

I worked on the open range for ranchers in 1914, surveying and engi­
neering ; and I had a checkbook to buy a waterhole if we needed it, and
the price was right.
Finally, the rancher said, “I don’t mind buying them once, if they
would stay bought, but somebody else comes in and files on the spread
and you have to keep buying them every year.”
That was his objection, and it was the soundest thing anybody could
ever say; is it not?
Mr. M a r t i n . That is right.
S e n a to r M a l o n e . W e a re b u y in g th e m e v e ry y e a r ; a re w e n o t ?

What is that $3 billion or $4 billion foreign aid to be used for—to buy
them every year ?
I have never voted for billions o f taxpayers’ money to foreign na­
tions. I am opposed to buying treaties and agreements that will be
broken when the tugs tighten.
But, of course, your assistant would not have had that first job after
he got out of the Army if Congress had not passed the Marshall plan.
He might have to do to work. [Laughter.]
I would let all these people—these point 4 people—go back to work.
Ninety percent of them could not hold a job in private business. It is a
disgrace.
So you think it is an honest currency when nations fix a price on
their
 currency in terms of the dollar higher than the market price?


FINANCIAL CONDITION OF THE UNITED STATES

1525

M r . M a r t i n . I deplore depreciation o f the currency just as much as
you do, sir.
Senator M a l o n e . Would you think it is only depreciation of the

dollar if we said a dollar is worth a pound by law ? What would you
call it? Would you call it an honest dollar because a pound actually
is worth $2.10 or $2.20, so we could say, by act of Congress, or we gave
the President the power to say that a dollar is worth a pound.
Do you think that would be an honest dollar ?
M r . M a r t in . Y o u have to subject that to the test o f the market.
Senator M a l o n e . Well, if the market says that the pound is

worth
$2.20 and we passed a law saying that the dollar was equal to the
pound, would that be an honest dollar ?
Mr. M a r t in . I would not—I hate to use the word “honest,” but it
certainly-----Senator M a l o n e . What are we going to use in all this world mess ?
Maybe we ought to tell the people the truth once in a while. It would
not hurt and might help.
M r . M a r t in . I w ant to tell the truth.
Senator M a l o n e . Tell us what we ought to do. We might do that
sometime.
M r . M a r t in . I think it would be a mistake-----Senator M a l o n e . Do you think it would be a dishonest dollar ?
Mr. M a r t in . I think it would be a dollar that could not be main­
tained.
Senator M a l o n e . Well, you could maintain it if there was another
nation big and strong enough to pick up the difference, could you
not, and that is what we are doing, and we have been doing it now
for 12 years, picking up the difference between the market value and
the value the foreign nations fix on their currency; we pick up the
check.
The reason the system works is because we give them the money to
make up the difference; to pick up the check; do we not ?
M r . M a r t in . W e have been su p p lyin g some foreign aid.
Senator M a l o n e . Was that all you cared about it ? You

know more
than that. Why not give me an answer ?
Mr. M a r t in . Well, I simply cannot give you an answer that this
has been a dishonest operation.
Senator M a l o n e . You j ust hate to say that; do you not ?
Well, I do not. And if we fixed the value of the dollar and said
it was worth—well, you say now bolivianos are 14,000 to the dollar,
suppose we said in a law or gave the President power to say that a
dollar is worth 100,000, and on the streets it was 14,000, would you
say it was an honest dollar ?
M r . M a r t in . Y
decree.

ou

could not determine the value o f the dollar by

Senator M a l o n e . Congress can do it—we just have not done it—
and we have signed a contract with the Monetary Fund not to change
anything without their consent. However, foreign nations do it to us.
Mr. M a r t in . It changes all the time.
S e n a to r M a lo n e . The foreign nations do get away with it under
the p ro v is io n of the Monetary Fund exceptions on account of dollar
sh o rtag e o r dollar balances. And we gave them the $70 billion since
W o rld W a r I I w ith w h ic h to do it . Your man was with the Marshall




1526

FINANCIAIi CONDITION OF TBlB ffNlTlfl* BTATIS

plan giveaway. We give them the money. You know that, do you
not?
M r . M a b t i n . I n e v e r th o u g h t o f A r t h u r a s th e m a n w h o g a v e it
aw ay.
S e n a to r M a l o n e . O f c o u rse . H o w e lse w o u ld h e e a t, u n le s s so m e­
b o d y g a v e h im a jo b ? [ L a u g h t e r .]
N o w , t e ll m e. W e a re ju s t w a s tin g tim e . I k n o w y o u k n o w m o re
th a n th a t.
M r . M a r t i n . W e ll, I a m s o r r y , S e n a to r, b u t I c a n n o t a g re e w it h
y o u th a t t h is is a d ish o n e st tra n s a c tio n .
S e n a to r M a l o n e . I t is n o t d is h o n e s t to h a v e a d o lla r t u rn e d in f o r
500, w h e n th e re a re 1,7 0 0 c o m in g f o r i t : it is n o t d is h o n e s t?

M r.

M a b t in . Y o u a re ta lk in g a b o u t th e b o liv ia n o , n o w ; I a m ta lk ­

in g a b o u t th e d o lla r .
S e n a to r M a l o n e .

I a m a s k in g th e q u e stio n s.
W h y d o y o u n o t g e t th e n u m b e r o f b o liv ia n o s f o r th e d o lla r o r in
tra d e w h a t it is w o rth o n th e m a rk e t in tra d e , o r in te rm s o f g o ld
o r s ilv e r , in s te a d o f th e p r ic e fix e d b y th e c e n t ra l b a n k o f B o liv ia ?
M r . M a b t i n . I t h in k o v e r a p e rio d o f tim e th e v a lu e s a re d e te rm in e d
b y th e m a rk e t.
S e n a to r M a l o n e . Y o u m u st k n o w b e tte r th a n th a t. I t h a s n o t
h a p p e n e d sin c e W o r ld W a r I I a t a ll, a n d r e a lly sin c e w e w e n t o ff
th e g o ld s ta n d a rd . Y o u a re in th e b u sin e ss. Y o u a re to p m a n in th e
g re a t F e d e r a l E e s e rv e B o a rd . I a m ju s t a b y s ta n d e r. E v e n I k n o w
b e tte r th a n th a t.
W h a t d o y o u t h in k th e t r ic k p h ra s e “ d o lla r sh o rta g e ” w a s c re a te d
f o r b y th e L o n d o n b a n k e rs , th e c a tc h p h ra s e to s e ll o u r p e o p le th e
$ 1 7 b illio n M a r s h a ll p la n in 19 4 8 ? T h a t , y o u re m e m b e r, w a s g o in g
to be th e e n d o f a ll su c h g if t s — ju s t a s w a s th e $ 3 % b illio n to E n g la n d
in 19 4 6 th e f ir s t tim e .
D o y o u k n o w w h a t th e S e c re t a ry o f S ta te te s tifie d to r ig h t h e re
b e fo re th e c o m m itte e in 19 5 5 ? H e s a id it h a d to b e p e rm a n e n t. T h a t
is w h a t h e s a id , a n d y o u d id n o t k n o w t h a t ? T e ll m e, d id y o u ?
M r . M a b t i n . Y e s . W e ll, I k n e w th a t th e S e c re ta ry o f S ta t e w a s
u p h e re t e s t ify in g .
S e n a to r M a l o n e . D id y o u k n o w w h a t h e s a id ?
M r. M a b t i n . I h a v e n o t re v ie w e d h is te stim o n y .
S e n a to r M a l o n e . W ill y o u ta k e m y w o rd f o r it , th a t h e t h in k s it
o u g h t to be p e rm a n e n t? H e w a n ts it f o r 3 y e a rs no w — t h is y e a r.
Y o u d id n o t k n o w t h a t ?
M r . M a b t i n . Y o u a re t a lk in g a b o u t th e M a r s h a ll p la n ?
S e n a to r M a l o n e . A l l o f th e p la n s — fro m th e $ 3 % b illio n g if t to th e
In t e r n a t io n a l C o o p e ra tio n A d m in is t r a t io n ( I C A ) a ll to m a k e u p th e
d iffe re n c e c a lle d th e d o lla r sh o rta g e b y th e L o n d o n b a n k e rs .
Y o u d id n o t k n o w w h a t it w a s f o r ?
M r . M a r t i n . I fo llo w e d a ll o f th e d eb ate, a n d a ll o f th e d is c u s s io n
a s c a r e f u lly a s I c o u ld .
S e n a to r M a l o n e . W e ll, I w ill g iv e y o u a n id e a . T h e y w e re a n d
a re f ix in g th e p r ic e o f t h e ir m o n e y in te rm s o f th e d o lla r h ig h e r t h a n
th e m a rk e t p ric e . T h e ir m o n e y m e a n t n o th in g in g ra m s o f g o ld , o r
o unces o f s ilv e r . W e h a v e been g iv in g th e m g o ld f o r d o lla r b a l­
an ce s— a n d b illio n s to m a k e u p th e d iffe re n c e in th e v a lu e th e y a r b i­
t r a r ily f ix o n t h e ir m o n e y in te rm s o f th e d o lla r , an d th e fre e m a rk e t
p r ic e
.


FINANCIAL CONDITION OF THE UNITED STATES

1527

Do you know that with Marshall plan gift money they could buy
our gold, by building up dollar balances?
M r . M a r t in . Yes.
Senator M a l o n e . Then we deliberately gave our gold away, did
we not?
Mr. M a r t in . Some of the Marshall plan aid went into the reserves
of the foreign countries.
Senator M a l o n e . Well, it is not the Marshall plan now; it is Mutual
Security and ICA—International Cooperation Administration.
M r . M a r t in . Right.
Senator M a l o n e . I have news for you; this is exactly what happens:
our Government sent this money to foreign nations—who in turn
fix a price on their money in terms of the dollar greater than it is
worth on the open market, therefore they cannot get a dollar at the
market price for it; then they call it dollar shortage. You know that;
do you not?
Mr. M a r t in . Yes.
Senator M a l o n e . All right.
Senator B e n n e t t . This witness has been here for 3 hours and a
half, Senator. Do you want to give him a little recess?
Senator M a l o n e . Yes, I would like to.
Senator B e n n e t t . Off the record.
(Discussion off the record.)
Senator M a l o n e . By the stability in the value of the dollar in this
reference I made to your testimony, do you not refer to a stable index
of prices rather than the value of the dollar?
M r . M a r t in . Yes, I think so.
Senator M a l o n e . In other words, if it is going to be a managed
dollar, what you really mean is that you have no method of measuring
it on anything else, because you will not pay anybody but foreigners in
gold, you will not pay an American citizen in gold, you will put him
in jail if you find him with a piece of it in his pocket; that is right,
is it not?
Mr. M a r t in . That is right.
Senator B e n n e t t . Senator, for the record, did they n ot change
that, allowing him to have $1(X) worth ?
Senator M a l o n e . They may have, bu t it w ould only be a token
gesture.

Senator B e n n e t t . Would you like to ask the witness that?
Senator M a l o n e . Yes.
Did they change it, so that a small amount might be retained?
Senator B e n n e t t . A small amount; I think it was $100.
Senator M a l o n e . What was that change for, just so they could not
put you in jail if you had a pocketpiece?
M r . M a r t i n . I th in k so, under the rule o f reason.
Senator M a l o n e . What difference does it make for the purpose of
this examination?
M r . M a r t in . I do not think it is very pertinent.
Senator M al o n e . It makes no difference. You make a jail bird
out of an American citizen for having something that you gave away
free to a foreigner.
M r . M a r t in . That would be a mistake.
Senator M a l o n e . Well, we do it, do we not? Are we not giving the
money to them, money, handing it to them, as we did M&iihall plan




1528

FINANCIAL CONDITION OF THE UNITED STATES

money, as we did the E C A money, and 3 or 4 other funny names, and
through those giveaway organizations they built up a dollar balance?
Mr. M a r t i n . They d id .
Senator M a l o n e . A ll right.
And we give foreigners something then and make it a jail sentence
for an American to buy; is that right ?
M r . M a r t i n . We do. The Congress does i t as p a r t o f a p o lic y .
Senator M a l o n e . O f course, I do not blame you. Do you think I
am blaming you for this ?
M r . M a r t i n . I do not.
Senator M a l o n e . Y ou know better than that.
A ll I want you to be is frank and make a good record, so that a
fellow out there in the cow country, my country, who wants to read
this record, and some of them may do it, will have some idea o f what
is going on, and will not have to read a book, as your partner suggested.
I guess that is the reason most all o f these ex-Cabinet officers and
others have written books when they get out. They write a book,
nearly all of them. Very few read the books, and if they do, they
would not know anything about the subject, because the so-called
editors do not themselves know.
I f somebody would write a real book about this monetary system
and tell the truth, they would do a great service to this country. That
is what we are trying to do in the record.
Now, it is the index that you are tying all o f this to.
How many commodities are there in this index?
Mr. M a r t i n . Well, I do not know the index. Do you know the
price indexes that we use?
Mr. N o t e s . I assume he is referring to the consumer price index.
Mr. M a r t i n . Yes. W e are talking about purchasing power?
Senator M a l o n e . When you say it is worth 47 cents, as was testified
to here, 47.5, what is it based on, the commodity index ?
Mr. M a r t i n . We will put the description o f our index completely
in the record.
Senator M a l o n e . A ll right. That is all we need, just what it is,
how many commodities, and how you weight it.
Mr. M a r t i n . Right.
(The information referred to follow s:)
T h e C o n s u m e r P b ic e I n d e x

The Consumer Price Index prepared by the Bureau o f Labor Statistics meas­
ures the average change in price o f the goods and services bought by fam ilies
o f city wage earners and clerical workers. The complete title o f this index
popularly referred to as The Consumer Price Index, is Index o f Change in Prices
o f Goods and Services Purchased by City W age-Earner and Clerical-W orker
Families.
The index reflects retail price changes o f foods, clothing, h o u s e f u r n i s h i n g s
fuel, and other g oo d s; fees paid to doctors and dentists; prices in barbershops
and other service establishments; rents; rates charged fo r transportation
electricity, gas, and other utilities, etc. Prices are those charged to consumers’
including sales and excise taxes.
’
Prices for these goods and services are obtained in 46 cities so selected that
their populations are representative o f the entire population o f the 3,000 cities
in the United States. Prices in all 46 cities are then combined into the national
index.
The index measures the effect o f price changes on the cost o f the goods and
services in the fam ily “ market basket.” The contents o f the “market basket”—
t h a t is,
 the quantities and qualities o f goods and services that represent w h a t


FINANCIAL CONDITION OF THE UNITED STATES

1529

families bought in 1951-52—is assumed to remain the same, so that the change
in cost from month to month is the result of changes in prices. The index does
not purport to measure the changes in spending of families that result from
changes in their standards of living. It measures only the change in spending
caused by changes in prices*
The index covers approximately 300 items, with food and apparel accounting
for somewhat more than half of this number. A recent tabulation prepared by
the Bureau of Labor Statistics indicates the relative importance, in December
1956, of major groups of goods and services represented.
Composition of Consumer Price Index
Relative
Group
importance
All item s_______________________________________________________ 100.0
Food__________________________________________________________________
Apparel_________________________________________ ______________________

28.7
9 .2

Housing_______________________________________________________________

33.1

Rent______________________________________________________________
Other shelter--------------------------------------------------------------- -----------------Fuels, gas and electricity___________________________________________
Housefurnishings________________________________ _________________
Household operation_____________________________________________ —

5.9
12.4
3.2
6.2
5.4

Transportation________________________________________________________
11.2
Medical care___________________________________________________________
5.4
Personal care__________________________________________________________
2.2
Reading and recreation_________________________________________________
5.1
Other goods and services_______________________________________________
5.1
The price changes of the various items from 1 month to the next are weighted
by their relative importance in the preceding month. The calculating is done
for individual cities, and each city is weighted in proportion to the wage-earner
and clerical-worker population it represents in the index, based on 1950 census
figures.
Retail prices used in the calculation of the index are for detailed specifications
of goods and services, and include sales and excise taxes. When an article can
no longer be priced, a substitution is made (1) of another article which is
adequately described by the same specification, or (2) of an article serving the
same purpose but described by a different specification.
Revisions in the index have tended to improve its usefulness as a measure
of price changes affecting the families o f wage earners and clerical workers.
The most recent revision, in January 1953, consisted mainly in the addition of
small cities, the updating of the “market basket’' to a more recent and hence
more representative period, and an increase in the number of items priced.
Among the important uses o f the Consumer Price Index two have attracted
considerable attention. One is in connection with labor-management contracts
involving automatic wage adjustments to changes in the price index. The other
is the use of the index to estimate changes in “ purchasing power of the dollar."
The notion o f the “ purchasing power o f the dollar” is really just another
way o f looking at price changes. If, for example, measurements of prices show
a doubling o f average prices over a period o f time, the same fact may be stated
in terms of a reduction o f one-half in what the dollar will buy. Measurement
of changes in the dollar's purchasing power must be based on an index of average
changes in prices and the Consumer Price Index published by the Bureau of
Labor Statistics is probably the index most frequently used.
To calculate the purchasing power in 1956 of the 1929 dollar, one divides the
price index for 1929 (73.3) by the index for 1956 (116.2), which equals 0.631 or
63.1 cents. It is apparent that this is the reverse of the procedure to calculate
the change in consumer prices from 1929 to 1956—which would be 116.2 divided
by 73.3, an increase of 58.5 percent.
Calculated in the same fashion, the purchasing power in 1956 was 47.6 cents
for the 1933 dollar, 54.1 cents for the 1941 dollar and 82.2 cents for the 1947
dollar. Stated in terms of average change, prices in 1956 were 110.1 percent
higher than in 1933, 84.7 percent above 1941, and 21.7 percent above 1947.




1530

IDMNCLAIi OONI>mON OF THE UNITED STATES

Senator M a l o n e . Another thing was, a very smart tiling, y o n
now basing this index price o f the dollar on 1948, is that right?

a re

Mr. M artin. 1947-49.
Senator M a l o n e . What was the idea o f changing it from 1934,
make it look better?

to

Mr. M a r t i n . To bring it closer to contemporary times.
Senator M a l o n e . Sure.

_ I f you changed it to 1950, it would be still closer to contemporary
times and the index would probably show a purchasing power o f
around 80 percent or more, would it not? I t would look pretty
good. I guess you will do that one o f these days, will you not ? Y ou
can fool the young people and the older ones won’t count.
Mr. M a r t i n . W e put into the record that the stability from A p ril
1951 to April 1956 was pretty good, a pretty good record, generally
speaking.
Senator M a l o n e . What was it? What was the decrease in value
o f the dollar?
Mr. M a r t i n . It was about 1 percent a year during that period.

Senator M a l o n e . What has it been since then until now?
Mr. M a r t i n . Well, it has gone—it has gotten away from us there,
that is what I wastalking about earlier.
Senator M a l o n e . About 3 percent?
Mr. Martin. Yes; it is over 3 percent.
Senator M a l o n e . What has it been since we took over in 1952 until
today, that is what I am interested in getting into this record.
Mr. M a r t i n . I think we have got a table in the record already, but
we will put 1952 in.
’
Senator M a l o n e . That is all right, p u t it in the record.

Mr. M a r t i n . Certainly.

Senator M a l o n e . Complete the record.
Mr. Martin. We will be glad to.
(The document referred to follow s:)
I n D e c e m b e r 1 9 5 2 t h e B L S C o n s u m e r P r i c e I n d e x w a s 1 1 4 .1 p e r c e n t o f I t s
1 9 4 7 -4 9 a v e r a g e ; i n J u l y 1 9 5 7 i t w a s 1 2 0 .8 . I n t h i s p e r i o d , t h e n , a v e r a g e c o n ­
s u m e r p r i c e s r o s e 5 .9 p e r c e n t .
T h e w h o le s a le p r ic e in d e x f o r a ll c o m m o d it ie s
i n D e c e m b e r 1 9 5 2 w a s 1 0 9 .6 a n d i n J u l y 1 9 5 7 i t w a s 1 1 8 .1 ; t h i s i s a r i s e o f
7 .8 p e r c e n t
T h e in d e x o f w h o le s a le p r ic e s f o r c o m m o d it ie s o t h e r th a n f a r m
p r o d u c t s a n d f o o d s r o s e f r o m 1 1 2 .9 in D e c e m b e r 1 9 5 2 t o 1 2 5 .6 i n J u l y 1 9 5 7 o r
b y 1 1 .2 p e r c e n t
I n o th e r w o r d s , th e p u r c h a s in g p o w e r o f th e d o lla r f o r c it v
w a g e -e a r n e r a n d c le ric a l w o r k e r fa m ilie s (w h ic h i s th e g r o u p t o w h ic h t h e
O o n s u m e r P r i c e I n d e x r e l a t e s ) h a s d e c l i n e d 5.6 p e r c e n t i n t h e p a s t 4 % y e a r s
I n m a r k e t s f o r a l l w h o le s a l e c o m m o d i t i e s t h e p u r c h a s i n g p o w e r o f t h e d o l l a r
h a s d e c l i n e d 7 .2 p e r c e n t , a n d i n m a r k e t s f o r w h o le s a l e c o m m o d it i e s e x c l u d i n g
f a r m p r o d u c t s a n d f o o d s t h e d o l l a r n o w b u y s 10.1 p e r c e n t l e s s t h a n a t t h e e n d
o f 1952. M o s t o f th is p r ic e in c r e a s e h a s ta k e n p la c e in th e p a s t 2 y e a r s .

Senator M a l o n e . What do you say it is offhand f r o m 1952 to 1957
at the present tim e ?
Mr. M a r t i n . I think it would be 5 percent, about 5 percent.
Senator M a l o n e . W e l l , is that 5 years, four and a half?
M r . M a r t i n . That is from 1952 to 1957, which would be 5 years
Most of it is in the period from April 1956 to-----Senator M a l o n e . It is not 5 years, because 1957 is only half gone
It would be four and a half years, would it not ?

Mr. M a r t i n .

F o u r a n d a h a lf y e a rs.
sa y 5 percent?

Senator M a l o n e . You




FINANCIAL CONDITION OF THE UNITED STATES

1531

Mr. N o yes . Just about.
Senator M alon e . One and a quarter percent a y ear?
Mr. Noyes. There was practically none from 1953 to 1055.
Senator M a lo n e . I do not care about that. I am talking about
what we have done since we have been here. Is that higher or lower
than from 1934 to 1952 ?
Mr. R ie fle r . It would be lower.
M r . N o y e s . I t would be a lot lower than from 1934 to 1952; yes,
sir.

Senator M a lon e . Well, 1934 to 1952---- Mr. N oyes . Per year—wait a minute; I will have to cheek that, I
cannot figure that that fast, sir.
The index increased from 57 to 113 from 1934 to 1952, and that
is-----Senator B e n n e t t . It is double, if it were 114, it w ou ld be exactly
double.
Mr. N oyes . It has doubled in 18 years.
Senator M a lo n e . H ow much is that a year, then ?
Mr. N o yes . About 2 years----Mr. R iefler. It would be double in 35 years, if it were 2 percent,
so that it would probably be 3.
Senator M a lo n e . Two percent; so we cut it to about 1 y 2 percent
pe
1
Senator M alo n e . And it is getting bigger. The last year climbed to
3% percent. Have you any reason to suppose it is not going toj be
bigger next year?
Mr. M a r t in . I find these hearings encouraging, of course, as an
indication it will not get bigger.
Senator M alo n e . Hearings are not going to have anything to do
with it unless the top men change their ways.
Congress has nothing to do with the Federal Reserve Board unless
they amend the law. That is right, is it not?
Mr. M a r t in . Well, Congress, has a great deal to do with how much
is spent by the country.
Senator M a l o n e . I went all through that once with the Secretary,
and if you want to bring it up again? you may do it. The White
House dictates what Congress appropriates within 3 percent, accord­
ing to the 24-year record. We do not have the guts to do anything
about it.
M r . M a r t in . I w ill take y o u r w o r d f o r it.
Senator M a l o n e . N o . Look it up, and I will be very happy to have
your comment. I have commented on it a good many times on the
Senate floor and elsewhere.
Now, can a highly stabilized index of prices rest upon a multitude
of economic maladjustments, or would that result in an unstable index
of prices?
Mr. M a r t in . I do not know how good our index of prices is, con­
sumer prices.
Senator M a l o n e . I am talking about the change, not what you use
as a foundation or any criterion, and then, of course, that is only a
reference.
When you change from 1934 to 1947, why, you are just fooling the
public that much more, but it sounds a little better because the deterio98633—57—pt. 8----- 21




1532

FINANCIAL CONDITION OF THE UNITED STATES

ration is less. When you are ready, you can move it up to 1950, and
say that compared to 1950 we have an 80-percent dollar, and that will
sound even better.

It looks like we are improving it, but we are not, and I believe the
public is catching up with you, and if we do something about it soon,
there may beblood, political blood, all over the place.
M r . 1>£a r t i n . I h o p e w e w i ll ed u ca te th e p u b lic a n d th e y w i l l g e t
it e x a c tly .

Senator M a l o n e . Y o u do not need to educate the public. They are
10 years ahead of you already—you need to educate the officeholders.
M r. M

a b t in .

T h a t is fin e.

M r. M

a b t in .

Y

Senator M a l o n e . What you need to hold this inflation is a stand­
ard—an international yardstick—so that when you trade money with
a foreign nation, you trade on grains of gold and ounces of silver.
If you know a better standard than gold and silver, you have not
suggested a better way.
ou

c e rta in ly n eed sta n d a r d s.

Senator M a l o n e . N o w , you need what ?
M r . M a b t i n . Standards.
Senator M a l o n e . Good. You do, but you have none, doyou?
Mr. M a r t i n . Well, I think we have got som standards.
e
Senator M a l o n e . What are they ? I would be very much interested
in knowing about them.
Mr.

M a b t in .

I think gold is a standard.

Senator M a l o n e . A standard ? It is nothing but a commodity now.
You are not on a gold standard except with foreigners, after you give
them the paper dollars to buy gold.
You print money and give it to them, or give them the credit. Then
they can take that credit, or dollars, and come back and get the gold.
That is all you do.
You will put me in jail if I have over $100 o f it, or any American
citizen. That is right; is it not?
M r . M a r t i n . That is right; it is a relationship that you use.
Senator M a l o n e . What is your relationship, and how d o

you say
you are on a gold standard ? I just cannot go for that.
Mr. M a b t i n . Well, our relationship is to $35 an ounce, which is an
arbitrary-----Senator M a l o n e . That is right; you buy the gold for that, but you
know nobody in the United States can produce it for that, so you are
safe. Foreigners can produce it for $35 an ounce. You would, of
course, buy Russian gold if it came in ? You would buy it, would you
not?
Mr. M a r t i n . W e would buy it , probably.
Senator M a l o n e . Well, they can produce it at $35 per ounce. I
have information for y ou ; they do not pay very much in the way of
wages. They are paying about 700 or 800 rubles per month, and that,
according to the proper exchange o f 16 rubles to the dollar, would be
about $50.
M r . M a r t in . Rubles.
Senator M a l o n e . Rubles per month? and while it costs me $40 a day
to stay at a hotel and eat with my wife, they had a 4-to-l rate on a
dollar, just about as honest as Bolivia, not quite as honest as England,
but on the same principle.



FINANCIAL CONDITION OF THE TJNTTED STATES

1533

It is worth about 16, which would have made it about $10 or $12 a
day, and would have made some sense.
They are eating well, wearing warm clothes.
M r . M a r t in . T h e standard o f liv in g seems to be rising?

Senator M a l o n e . Yes. It is so much better than it was under the
czars, and much better than it was 5 to 10 years ago. There will be
no effective revolt.
Further, no one thinks about it, but the little Balkan countries have
never been free. They have been between Turkey, Germany, and
Russia about 2,000 years, and if you turned them loose, it is like
turning a minnow loose in a catfish pond—it is just a question of
which one gets him.
M r . M a r t in . E ig h t.

Senator M alo n e . Turkey controlled Bulgaria for 500 years. Swe­
den controlled Finland. Poland controlled Moscow. Turkey has
overrun the Georgian and Armenian Republics many times in the
last 100 years.
They have controlled each other all over these years. So now we
are going to furnish plenty of money so everybody is going to eat
well and be happy. That is everybody but our own people.
These index prices depend upon a number of factors, do they not,
including rate of production, but not on gold at all ?
I f you want to value your managed dollar, on the weighted price,
you might have a drought which would change the relationship, is that
not right ?
Mr. M a r t in . Well, the price of gold still remains at $35-----Senator M a l o n e . I am talking about the index prices. Gold price
has no effect since you cannot get it.
Mr. M a r t in . Well, the index has to be related to something, and
it is related to gold.
Senator M a l o n e . I agree with y o u , it m u st be related to some­
thing.
M r . M a r t in . I t is related to the price o f gold .
Senator M a lo n e . N o , it is not, except that the

price of the dollar
is related to the index price, and you will buy an ounce of gold if
somebody offers it, even if it is Russia, for $35, but you will not
let a citizen of this country have it—so it has no effect on commodity
prices. We went all through that, did we not ?
Mr. M a r t in . We did.
Senator M a l o n e . All right.
Then the index, the prices, what are there, approximately 35 or
40 of these commodities?
Mr. N oyes . Much more than that.
Senator M a l o n e . H ow many ?
Mr. R ie fle r . Well, the Wholesale Price Index now is several h u n ­
dred ; it has been revised.
(The following was subsequently received for the record:)
W

h o lesale

P r ic e I n d e x e s

*The Bureau o f Labor Statistics regularly compiles and Issues three measures
o f price movements in primary markets: (1) The comprehensive monthly Index;
(2) a weekly estimate of what the monthly index would he if all the prices in
the monthly index were coUected and tabulated each week; (3) a daily index
based on the prices o f 22 commodities traded on organized markets or exchanges.




1534

FmANCIAL CONDITION OF THK TEOT®D OTATB6
MONTHLY INDEX

The W holesale Price Index is a general purpose index designed to provide
a continuous monthly series showing price changes, singly and in combination,
fo r all commodities sold in primary markets o f the United States. The index is
based on a sample covering 2,000 separate commodities,
“ Wholesale” as used in the title o f this index refers to sales in large lots,
not to the prices paid or received by wholesalers, distributors, or jobbers. The
price data used in constructing this index are those which apply a t primary
market levels—that is, the first important commercial transaction fo r each
commodity. Most o f the quotations are the selling prices o f representative
manufacturers or producers, or prices quoted on organized exchanges or markets.
Transportation costs are included in the index only insofar as they are directly
included in the primary market price. Usually, prices are selected f. o. b. pro­
duction or central marketing points, in order to avoid direct reflection o f changes
in transportation costs in the index. Delivered prices are included only when
the customary practice o f the industry is to quote on this basis. Subsidies and
direct excise taxes are similarly excluded from the index as fa r as possible;
these are not considered part o f the “ price” as defined above for purposes o f the
Bureau’s index.
New items are not included in the index until they have become established
both technologically and in the market. During their first few years o f pro­
duction, the changes in the price o f such items m ay reflect product changes
rather than those price changes which the index is designed to measure. In the
developmental stage, too, the sales volume o f these new items is usually too
limited to influence the index appreciably.
In general, the prices used in the index are selected to conform with the
concept o f seller's net realization per unit o f precise specification. As fa r as
possible, the commodities are priced at the focal point o f price making. Machin­
ery, therefore, is priced f. o. b. fa cto ry ; grains on the organized exchanges;
fresh produce at central auction markets, etc. Net realization, as defined by
market practice, means actual sales of precisely defined commodities, less normal
discounts, in approximately similar quantities to sim ilar classes o f buyers— it
does not mean an average realized value per unit fo r a range o f sim ilar com­
modities, In other words, net realization means the price for a steel girder o f
precise size, shape, and quality to a precise class o f buyers at a precise shipping
point—not fo r a range o f girders, buyers, or shipping points.
The classification system o f the W holesale Price Index is essentially based
on products or commodities rather than on industry, source, or end use. It does
not exactly match either the Standard Industrial Classification, the Standard
Commodity Classification, or the United Nations Commodity Classification.
However, regroupings o f the current classification can be made which will
closely approximate any o f these three classifications. The basic index is
divided into 15 major groups and 88 subgroups.
The index can be recomputed in accordance with other classification systems.
A special regrouping for market analysis developed by the Federal Reserve is
published in the Board’s monthly chart book. A s currently constituted, the
indexes shown are, in effect, summaries o f the rather detailed “ economic sector”
indexes which were recently developed by the Bureau o f Labor Statistics.
As in all official United States index measures, the base period for the Bureau’s
Wholesale Price Index is the average o f of 3 years, 1947, 1948, and 1949. The
basic weights for the index are total transactions as reported in the Census o f
Manufactures for 1947, Data for agricultural and extractive industry products
were obtained from the Agriculture and Minerals Yearbooks fo r 1947: import
data cover the year 1947, as reported by the United States Department o f
Commerce.
It is the intention o f the Bureau o f Labor Statistics to review the entire
weighting pattern approximately every 5 years. Benchmark data from the 1954
Census o f Manufactures will be utilized when it becomes available. In 1955,
BLS introduced revised weights based largely on the limited information o f the
Census o f Manufactures Annual Surveys. In addition, the BLS reviews detailed
weights within the product classes and whenever necessary introduces new
weights at the beginning o f any year. New weights are not allowed to affect the
level of the index in the month in which the change is made, and index users are
notified of changes; an overlap index using the old weights is computed in order
to measure the effect o f the new weights. Beginning with the final Wholesale
Price Index for January 1955, weights are based on the average o f the estimated
dollar
 values of primary market transactions in the years 1952 and 1953.


FINANCIAL CONDITION OF THE UNITED STATES

1535

The relative importance of the major groups of the Wholesale Price Index in
December 1954 based on the latest weighting structure is shown in the following
table.
Composition of Wholesale Price Index
Relative
importance.
Group
December 195}
All commodities----------------------------------------------------------------------------------100.0
Farm products________________________________________________________ 10.8
Processed foods_______________________________________________________ 13.7
Textiles and apparel____________________________ _____________________
8.3
Hides, skins, and leather products____________________________________
1.4
Fuel, power, light materials__________________________________________
9.0
Chemicals and products_________________ ______________________________
6.5
Rubber and products__________________________________________________
1.8
Lumber and wood products____________________________________________
2.7
Pulp, paper, and products—-----------------------------------------------------------------3.7
Metals and metal products_____________________________________________ 13.6
Machinery and motive products_______________________________________
17.1
4.1
Furniture and household durables____________________________________ Nonmetallic minerals_________________________________________________
2.1
Tobacco manufactures and bottled beverages___________________________
2.4
2.8
Miscellaneous___________________________________________ _____ ________
WEEKLY INDEX

The weekly index represents the Bureau's best estimate o f what the compre­
hensive index would be if all 5,000 individual quotations for the approximately
2,000 series were collected each week, and if the complete index were calculated.
The weekly index is based on actual prices for fewer than 200 commodities and
estimated prices for all others. It is calculated as a percent change from the
latest monthly index and converted to index form for publication. As soon as a
comprehensive index is published for any month, all weekly indexes falling in
that month are replaced by the monthly index. No attempt is made to maintain
a continuous series by correcting these indexes.
DAILY INDEX

The Bureau of Labor Statistics, as part of its general program for maintain­
ing the currency of its various price indexes, maintains a daily index designed
to measure the price trend and movement of these commodities which, as a re­
sult of daily trading in fairly large volume of standardized qualities, are partic­
ularly sensitive to factors affecting spot markets and trade's estimates of cur­
rent and future economic forces and conditions. The daily index is based on the
prices of 22 commodities, including 9 foodstuffs and 13 industrial materials.
S e n a to r M a l o n e . W h a t is th e o th e r in d e x ?
M r . R ie fle r . T h e c o s t-o f-liv in g in d ex . I d o n o t k n o w , th ey h a ve
a g re a t m a n y p rice s in there.
S e n a to r M alo n e . Y o u are g o in g to g iv e m e b o th o f them f o r th e
re c o rd ?
M r . R iefler . Y e s.
S e n a to r M a l o n e . I am g la d it w as m en tion ed , an d h o w it ca n be
ch a n g ed .
M r . R ie fle r . B u t th ey h a v e a d d ed com m od itie s t o them o v e r the
years.
S e n a to r M a l o n e . A n d h o w y o u ch a n g e it b y a d d in g com m od ities
fr o m tim e to tim e. H o w o fte n d o y o u m ake th is com p u ta tion , m aybe
o n ce a y e a r o r tw ice a y e a r ? W h e n e v e r y o u d o ?
M r. M a r t in . R i g h t
S e n a to r M ^ l o 1 * B u t th e in d e x o f th ose p rices, w h a tever those
^
co m m o d itie s are, is a ffected b y a lo t o f th in g s besides a n y p r ic e o f
g o ld o r a n y th in g else, a r e th e y n o t? I m ean, th e ir p ro d u c tio n , the




1536

FINANCIAL CONDITION OF THE UNITED STATES

amount and rate o f production, and general economic conditions are
involved?
M r . M a r t i n . Yes, indeed.
Senator M a l o n e . Many factors?
Mr. M a r t i n . Many factors.
Senator M a l o n e . That is right.
Now, is not the concept o f economic equilibrium a better criterion
as to tne proper trends of an economic system than is a sustained
economic growth? In other words, is there not a better concept, is
not the concept o f economic equilibrium correct, to let there be a gold
standard, or something back o f it, so an American can share in it?
Would it not be better than trying to follow the will-o’-the-wisp o f
an index price that is affected by so many factors ?
M r . M a r t i n . Well, it is just a measurement that we use.
Senator M a l o n e . I know that. But what you are trying to do, and
I asked you that first, what you consider the objective to be, and you
said you judged the amount o f money in circulation to sustain economic
growth.
The objective o f the system is always the same, you said, to promote
monetary and credit conditions that would foster sustained economic
growth, and establish the stability in the value o f the dollar. I hope
we do not have to cover that again. It has nothing to do with the
index. You have tied a managed economy to the managed currency.
The index is probably the result, but whether conditions, and work­
ing conditions, are involved. There are so many other factors, too, are
there not?
Mr. M a r t i n . There are.
Senator M a l o n e . Y o u are going to tell us why you are trying to
manage the economic system as well as the currency, under what au­
thority, and whether the Federal Reserve Act gave you that authority.
M r . M a r t i n . Right.
Senator M a l o n e . N o w , you have said that price stability is essential
to that sustained economic growth.
Now, is not the nature o f business expansion such that prices tend to
rise, particularly if the expansion follows a business recession or a de­
pression?
Mr. M a r t i n . Yes, there is—I think you are trying to get the maxi­
mum stability here. This is not a precise mathematical formula.
Senator M a l o n e . Here i s where you and I part company, and I want
you to know that for the record.
M r. M

a r t in

. Y es.

Senator M a l o n e . And that is Congress should set down a principle
under which its citizens may operate. Then they according to their
individual judgment, can invest their money, sell their property or
stock and do anything they want to do with their money and time.
Cumulatively then the judgment o f 160 million people, maybe 170
million now, their collective judgment would, in that event, determine
the economic structure and conditions, if it were based on a principle
of law and not the judgment of one man or of seven men—to change
the rule while the ball is in motion, would it not ?
Mr. M a r t i n . In the overall.
Senator M a l o n e . Yes.
M r . M a r t i n . Yes.



FINANCIAL CONDITION OF THE UNITED STATES

1537

Senator M alo n e . What we are doing, w e have one man sitting here
as chairman of the Federal Reserve Board who is judging and making
decisions on how much money ought to be in circulation at a given time,
for something he^ is pleased to call “sustained economic growth”—
when that very objective may not be compatible with the real objectives
of the Board, stability in the value of the dollar.
Is that not a cause for instability in business rather than stability,
because after he has invested his money on his own judgment on a
principle, then you change the rules while the ball is in motion, and
he is dead?
Mr. M a r t in . I do not think we are very far apart, Senator.
Senator M alon e . Well, I am against anybody, any one man, or any
seven-man board, having the authority to turn the managed currency
into a managed economy—and nail down all the “safety valves” of a
free competitive economy.
I f a principle is adopted by Congress as to the amount or percentage
of gold or silver behind the money, any citizen can read and judge
his ousiness accordingly. Let the market be the barometer with the
principle of law behind it. However, under present conditions you
invest your money, then the Chairman of the Federal Reserve Board,
here in Washington, says that more or less money must be put in cir­
culation and the interest rate changes and breaks him. He could make
a profit paying 4 percent, but he is broke paying 5 or 6 percent.
So the man in Washington thinks it would promote stability of
industry if he would print another $1 billion; so he puts it out. That
is what you have testified to.
Mr. M a r t in . But if he prints another $1 billion, and thereby de­
preciates the currency----Senator M a l o n e . That is what you are doing; is it not ?
M r. M a r t in . N o ; I d o n o t th in k so.
Senator M a lo n e . Well, it has depreciated 53 percent in 24 years.
Mr. M a r t in . No, I think we are supplying some additions to the

money supply for growth in the economy, but I do not think we can
hope to have stability if we do not recognize what the price relation­
ships are.
Senator M alo n e . You are managing the economy as well as the cur­
rency. Who is “ we” in that regard ?
M r . M a r t in . Well, I mean everybody. I do not mean the Federal
Reserve Board here or the Congress.
Senator M a l o n e . Y ou are the one who does it; are you not ?
Mr. M a r t in . No.
Senator M a l o n e . Who does it? Who recognizes this great factor
that you need another $1 billion in circulation-----M r . M a r t in . I th in k -----Senator M a l o n e . Under the law ?
Mr. M a r t in . Well, under the law we have the responsibility for
managing the money supply.
Senator M a l o n e . Y ou nave the responsibility of reducing it or
increasing it; do you not ?
M r . M a r t i n . We have the responsibility.
Senator M a l o n e . Because you think that in 1946, they added a law
that added to the Federal Reserve law that allows you to judge the
amount of money they need in circulation to expand industry; do you
not?




1538

M r. M

FINANCIAL CONDITION OF TH E UNITED 9TATK8
abt t v

, N o.

I t h in k w e h a d th e a u t h o r it y b e fo re 19 4 6 .

Senator M a l o n e . But anyhow you have that authority now cou­
pling the two acts!
M r. M

a r t in .

B ig h t.

Senator M a l o n e . I f you judge the monetary system, the b u s i n e s s
system—economic system o f the country needs $1 billion more of
printed money or $2 billion more, $1 billion less or $2 billion less, you
can do that, can you not?
Mr. M a r t in . That is what a managed currency system is.
Senator M a l o n e . Y o u are in favor o f it?
Mr. M a r t in . Yes. I think the history o f the 1860’s, the 1870’s,
the 1880’s, during which the people finally agreed to accept the hazards
o f a managed currency in the Federal Resreve Act, were such, I think
we ought to put all the safeguards we can around the exercise o f
those hazards, but you and I disagree as to whether they are necessary.
Senator M a l o n e . The Federal Reserve A ct was passed in 1913;
and there is evidence that many people who thought the Federal Re­
serve Board was good in the beginning changed their minds, but too
late. I do not say there should not be a Board as yet—but they cer­
tainly should not manage the economy.
I am trying to complete this record so we can study it.
M r . M a r t i n . Right.
Senator M a l o n e . There will be 15 Senators sitting around the
table discussing the evidence after it is all in.
I will be one of them.
M r . M a r t i n . And if we should not be in existence, why, I a m the
f i r s t one-----Senator M a l o n e . Right now you raise considerable doubt whether
you should be.
Mr. M a r t i n . Well, it is entirely your prerogative to have those
doubts.
Senator M a l o n e . It is. You just answered the question to my sat­
isfaction that you now have the power to judge the adequacy of the
money supply in circulation, and that you can regulate it, reduce it, or
increase it in accordance with what you think may be the future
demands of the economic system.
Mr. M a r t i n . The Congress gave us that authority and the Con­
gress can take it away from us.
Senator M a l o n e . That is right. That is just what I wanted to
know.
Congress, of course, is to blame. They are to blame for free trade,
“ funny money,” and billions to Europe. They can blame nobody else.
You cannot blame the White House, because the Constitution does
not say that Congress, not the White House, has the power to appro­
priate money.
The Constitution says that the President shall report to the Con­
gress the state of the Nation; that is what it says.
M r. M

a r t in

. R ig h t.

Senator M a l o n e . And it does not say he shall write any legislation.
It does not say that you have to vote for anything he sends up here.
That is something thought up during the last 24 years. That was
not thought up under our administration, but we just have not had
the guts to stop it.



FINANCIAIi CONDITION OF THE UNITED STATES

1539

You have also stated here in the prior record, that the price stability
is essential to sustainable growth.
Now, in the nature of business expansion, such prices do tend to
rise, particularly if expansion follows a business recession or depres­
sion.
I asked you something about that before, but do you believe that
the Congress of the United States, and the Federal Eeserve Act of
1946 gave you full authority to judge, through your own Board as
to the amount of money in circulation, needed to support what you
called substainable economic growth ?
M r . M a r t in . I think that the Federal Eeserve Act, and the Em­
ployment Act, both, gave us that authority. I think we have a man­
aged currency, and the Congress can take it away if they want to.

Senator M a lo n e . And you have parlayed a m
anaged currency
into a m
anaged econom I am glad you are throwing it back in
y.
our teeth. You can docum it, a you said you would.
ent s

You also have said that inflation is the rising cost of living. Of
course, we just generally make that remark. But why confine the
inflation to a rising cost of living, rather than apply it to a rise in
prices in general, as measured by the index of so called wholesale
prices?
I f inflation is to mean a rise in the cost of living, why not use those
words, the latter words, and discard the confusing word “ inflation” ?
Is that dear what I am trying to ask you ?
Mr. M a r t in . Not quite.
Senator M alo n e . Let me go over that again.
Now, what do we call it? We call it inflation, and it covers a mul­
titude of sins.
That means when you buy a pound of meat, that should cost 50
cents a pound and it costs $1.25, and the wages are not quite up to it
that is an example of the cost of living.
We are living on a war economy now. That is the way we are
holding our standard of living.
$40 billion a year, $37 billion for the national defense spending,
and $3 billion or $4 billion or $5 billion, to go to foreign nations to
buy our goods. It is a good system, as long as somebody can pick up
the check, but folks at home are getting tired of it.
Now, this rising cost of living, why confine it then to inflation?
Why don’t we just call it, just use the rising cost of living so as to
indicate what the dollar is worth ?
Mr. M a r t in . I think that is perfectly proper.
Senator M alo n e . Y ou also indicated, or seemed to imply that sav­
ings should equal investment demands.
So long as the banks operate on a fractional reserve system, can
an investment properly exceed savings, so lone as the borrowers repay
the loans when they mature? Just what aid you mean that the
investments must equal the savings, if you did say that?
I have read the record you made.
M r . M a r t i n . I did not say that it should equal.
Senator M a l o n e * The investment demands, as I understood-----Mr. M a r t in . But I said you should not use bank credit, which is
using new money to replace, to take the place of a deficiency of sav­
ings when it comes to long-term investment




1540

FINANCIAL CONDITION OF THE UNITED STATES

Senator M a i -o n e . Why shouldn’t you, if I suddenly make up my
mind to go back into business, and I am able to go to a bank and can
sign my note to borrow $10,000, why could I not invest that in my
business again ? What is the matter with it ?
M r . M a r t in . W e ll, I th in k th e s im p le s t w a y o f p u t t in g i t is th e
d iffe r e n c e b e tw e e n lo n g -t e r m c a p it a l a n d s h o r t -te r m c a p it a l.

The banks, the commercial banks o f the country are in business,
they receive your deposits, as well as create deposits by maldng loans
to you, and they should not be using short self-liquidating paper.
They should not be using it to put up a factory or a building that
will require 20,25 years to pay out. That should come out o f savings.
Senator M a l o n e . That may be true? but suppose amortization pay­
ments take care of it—you are familiar with amortization?
Mr. M a r t i n . That is right.
Senator M a l o n e . A s all engineers and lawyers are—suppose we
put up a plant that is going to take 25 years at 4 percent a year, and
you Know we are going to pay 4 percent, or 3 percent interest, the
bank is willing to loan that money to me, or any other citizen, with
proper safeguards, like other signatures to the note. What is the
matter with it?
Mr. M a r t i n . I do not think that is what the bank is for. I think
you ought to go to the capital market and sell some bonds. I f you
want to engage in that type of activity, I think that when the bank
is using the deposits of all of us, and I think that it has to be in busi­
ness to turn this money over, I think what we are trying to do here
is to get some capital, which is capital formation, which comes from
the flow of savings.
Senator M a l o n e . A ll right.
Suppose I have good credit, I have savings of 25 percent, or what­
ever it is, back of this business. What makes your statement hold
water that you should not loan a man money when they know they
cannot lose on the loan, that they have their notes secured?
M r. M

a r t in

. Y o u w ill g e t th a t m o n e y in th e c a p ita l m a rk e t.

Senator M a l o n e . I used to build roads, and I would get a bond,
maybe I did not have that much property, or did not have savings,
and I had to put up bond for $150,000, then other signers o f the bond
would make it safe.
What is the matter with it?
Mr. M a r t i n . I do not say that it matters. I say there is a limit
beyond which you cannot stretch bank capital, and you can get this
money, and we have in this country—we are very fortunate in this
country in having a good capital market, a well-developed capital
market.
Senator M a l o n e . It is better since they found out if they leave it
in the bank it decreases in value every year; does it not ?
Mr. M a r t i n . The capital market?
Senator M a l o n e . Yes.
M r . M a r t i n . I think-----Senator M a l o n e . It would encourage people who sell securities,
because investors know they are going to lose money if they leave it
in the bank.
M r . M a r t i n . It is because we do not want you to lose money if you
leave it in the bank that we do not want the banks to engage indefi­
nitely-----


FINANCIAL CONDITION OF THE UNITED STATES

1541

Senator

M alo n e . Who is “ we” ?
M r. M a r t in . I am ta lk in g abou t everyone.
Senator M alo n e . Y ou are talking aoout the

Federal Reserve that
does not want people to do that; are you not ?
Mr. M a r t in . No, I am talking about a whole community.
Senator M al o n e . Did Congress say that in the a ct?
M r. M a r t in . Congress has not spelled out short-term and long­
term capital, but I think it is implicit in the Federal Reserve Act.
Senator M a lo n e . Tell me how ?
M r. M a r t in . I am going to tell you in this statement how, but I
think the statement today-----Senator M a lo n e . I understand that, and that you have the au ­
thority to keep the banks from making a safe loan on that basis, so
there is no chance of losing a depositor’s money at all, whether it is
10 days or 10 years.
But I referred you to a job, because I have gone through it many
times, and I did not have the money to put up a bond, but somebody
thought I knew how to build the road, and they were willing to sign
it, and they had the property, so they knew it was going to oe done.
So what happened ? The money was there. Whether it was $100,000, $200,000, $50,000, or whatever it was, it was there. What is the
matter with it?
Mr. M a r t i n . Supposing all the banks of the country had nothing
but 20-year loans ? Where would they get the money to pay off the
deposits